<PAGE> 1
Filed Pursuant to Rule 424(b)(3)
Registration No. 333-76971
PROSPECTUS
OFFER TO EXCHANGE ALL OUTSTANDING
11 1/4% SERIES C SENIOR SUBORDINATED NOTES DUE 2007
FOR
11 1/4% SERIES B SENIOR SUBORDINATED NOTES DUE 2007
OF
MMI PRODUCTS, INC.
We hereby offer, upon the terms and conditions described in this
prospectus, to exchange all of our outstanding 11 1/4% Series C Senior
Subordinated Notes due 2007 for our registered 11 1/4% Series B Senior
Subordinated Notes due 2007. The outstanding Series C notes and the registered
Series B notes are sometimes collectively referred to as the "notes." The Series
C notes were issued on February 12, 1999 and, as of the date of this prospectus,
an aggregate principal amount of $30.0 million is outstanding. The terms of the
registered Series B notes are identical to the terms of the outstanding Series C
notes, except that the registered Series B notes are registered under the
Securities Act of 1933 and will be freely transferable in accordance with the
transfer provisions of the indenture.
PLEASE CONSIDER THE FOLLOWING:
- You should carefully review the Risk Factors beginning on page 8 of this
prospectus.
- Our offer to exchange Series C notes for Series B notes will be open
until 5:00 p.m., New York City time, on June 1, 1999, unless we extend
the offer.
- You should also carefully review the procedures for tendering your Series
C notes beginning on page 43 of this prospectus.
- If you fail to tender your Series C notes, you will continue to hold
unregistered securities and your ability to transfer them could be
adversely affected.
- No public market currently exists for the notes. We do not intend to list
the Series B notes on any securities exchange and, therefore, no active
public market is anticipated.
INFORMATION ABOUT THE NOTES:
- The notes will mature on April 15, 2007.
- We will pay interest on the notes semi-annually on April 15 and October
15 of each year beginning October 15, 1999, at the rate of 11 1/4% per
annum.
- We have the option to redeem all or a portion of the notes on or after
April 15, 2002 at certain rates set forth on page 48 of this prospectus.
- We also have the option to redeem up to 35% of the aggregate principal
amount of the notes on or prior to April 15, 2000 at a price of 111.25%
of the principal amount of those notes with the net cash proceeds from a
public equity offering.
- The notes are unsecured obligations and are subordinated to our senior
indebtedness and effectively subordinated to all of the liabilities of
our subsidiary. Please be advised that, as of January 2, 1999, we had
approximately $35.4 million of senior indebtedness, $3.4 million of
subsidiary liabilities and a total of $120.0 million of senior
subordinated indebtedness, which excludes the $30.0 million of senior
subordinated indebtedness under the Series C Notes.
NEITHER THE SEC NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED
OF THE SERIES B NOTES OR PASSED UPON THE ADEQUACY OR ACCURACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------
April 30, 1999
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PROSPECTUS SUMMARY
This brief summary highlights selected information from the prospectus. It
does not contain all of the information that is important to you. We urge you to
carefully read the entire prospectus and the other documents to which it refers
to fully understand our company and the terms of the notes.
ABOUT OUR COMPANY
MMI PRODUCTS, INC.
515 West Greens Road, Suite 710
Houston, Texas 77067
(281) 876-0080
We are a leading manufacturer and distributor of products used in the
residential, commercial and infrastructure construction industries. We sell our
products along three principal product lines: fence, wire mesh and concrete
accessories, which accounted for 49.7%, 32.6% and 17.7% of our revenues,
respectively, for the twelve months ended January 2, 1999. We have established
leading market positions in each of these product lines by combining efficient
manufacturing, high quality products, broad product offerings and extensive
distribution capabilities. In addition, we benefit from raw material purchasing
efficiencies because the products in each of our three principal product lines
are produced primarily from the same raw material, steel rod.
Our fence product line includes chain link fence fabric, fittings and other
related products which are manufactured and distributed by us, as well as wood,
vinyl, aluminum and ornamental iron fence products which are primarily
manufactured by third parties and distributed by us. Our wire mesh product line
includes various classes of wire mesh, which serve as a structural reinforcing
grid for concrete construction, including concrete pipe, roads, bridges, runways
and sewage and drainage projects. Our concrete accessories product line consists
of over 2,000 specialized accessories used in concrete construction, including
products used to position and install steel reinforcing bar and wire mesh
reinforcing grid.
We have developed an extensive and well positioned distribution network,
consisting of 72 Company-operated distribution centers, located in 31 states.
Our distribution network services over 5,000 customers, including construction
contractors, fence wholesalers, industrial manufacturers, highway construction
contractors and fabricators of concrete reinforcing bar. No single customer
accounts for more than 5.0% of our revenues. In addition to serving customers
nationwide, our distribution centers and production facilities are well
positioned to serve areas of high population and construction growth. We
currently have manufacturing or distribution facilities in each of the ten
states with the largest projected increases in population through 2025. We
manufacture our products from 18 principal manufacturing facilities
strategically located throughout the United States.
Historically, a significant portion of our growth has been achieved through
acquisitions. Since 1989, we have completed 12 acquisitions, including eight in
the past four years, which have substantially increased our net sales, net
income and earnings before interest expense, income taxes, depreciation and
amortization and, for fiscal 1996, non-recurring expenses (EBITDA). In 1998, we
completed three acquisitions, including:
- On February 18, 1998, we acquired the assets and assumed certain
liabilities of The Burke Group L.L.C., a manufacturer of hardware devices
and a processor of chemicals used in the concrete construction industry.
This acquisition expanded the breadth of our concrete accessories product
line. The total purchase price was approximately $20.6 million, which was
funded by our credit facility. On September 4, 1998, we sold the chemical
processing operations included in the Burke acquisition for approximately
$3.6 million in cash.
- On March 2, 1998, we purchased substantially all of the assets of
Wholesale Fencing Supply, Inc. and affiliated entities for approximately
$2.1 million, of which $1.1 million was funded by our credit facility and
$1.0 million by a note payable to the seller. The acquired operations
include a
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manufacturer of ornamental iron fencing in Tacoma, Washington, and
distributors of fence products in Tacoma, Washington and two Oregon
locations.
- On October 6, 1998, we purchased all of the issued and outstanding
capital stock of Security Fence Supply Co., Inc. for approximately $24.4
million, which was funded by our credit facility. Immediately following
the purchase, we sold the real property acquired as a result of the
acquisition to the former principals of Security Fence Supply for
approximately $3.6 million in cash. The former principals of Security
Fence Supply then leased the property back to us for a term of five years
at approximate market rental rates. Security Fence Supply specializes in
commercial and industrial fencing. It manufactures chain link and vinyl
coated chain link fabric as well as ornamental iron and vinyl fence
products.
SUMMARY OF KEY TERMS OF THE EXCHANGE OFFER
Securities to be
Exchanged.................. On February 12, 1999, we issued $30.0 million
aggregate principal amount of Series C notes to
Bear, Stearns & Co. Inc., the initial purchaser, in
a transaction exempt from the registration
requirements of the Securities Act of 1933. The
terms of the Series B notes and the Series C notes
are substantially identical in all material
respects, except that the Series B notes will be
freely transferable by the holders of the Series B
notes in accordance with the transfer provision of
the indenture. For more details, see the section
entitled "Description of the Registered Notes."
The Exchange Offer......... You must properly tender your Series C notes and we
must accept them for exchange. We will exchange all
Series C notes that you tender and do not withdraw
by the expiration date of the exchange offer. If
you exchange your Series C notes we will issue
Series B notes to you on or promptly after the
expiration date.
Ability to Resell Series B
notes...................... We believe you may offer for resale, resell and
otherwise freely transfer the Series B notes
without registration or delivering a prospectus to
a buyer if:
- you acquire the Series B notes in the
ordinary course of your business;
- you are not participating, do not intend to
participate and have no arrangement or
understanding with any person to participate
in the distribution of Series B notes; and
- you are not related to us.
If this belief is inaccurate and you sell or
transfer any Series B note without delivering a
prospectus to a buyer or without an exemption from
the registration requirements of the Securities
Act, you may be responsible for monetary or other
damages under the Securities Act. We will not pay
these damages on your behalf.
Each broker-dealer that receives Series B notes for
its own account in exchange for Series C notes it
acquired as a result of market-making or other
trading activities, must acknowledge that it will
deliver a prospectus in connection with any resale
of the Series B notes. A broker-dealer may use this
prospectus for an offer to resell, resale or other
retransfer of the Series B notes issued to it in
the exchange offer.
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Exchange offers are not being made to:
- holders of Series C notes in any
jurisdiction in which the exchange offer or
its acceptance would not comply with the
securities or blue sky laws of that
jurisdiction; and
- holders of Series C notes who we control.
No Minimum Required........ There is no minimum amount of Series C notes that
you must tender in the exchange offer.
Procedures for Exchanging
Your Series C Notes........ If you wish to exchange your Series C notes, you
must transmit to U.S. Trust Company of Texas, N.A.,
our exchange agent, on or before the expiration
date either:
- a properly completed and executed letter of
transmittal, which we have provided to you
with this prospectus, or a facsimile of the
letter of transmittal, together with your
Series C notes and any other documentation
requested by the letter of transmittal; or
- a computer generated agent's message
transmitted by means of the Depositary Trust
Company's Automated Tender Offer Program
system.
Our exchange agent must receive this message and
form a part of a confirmation of book-entry
transfer in which you acknowledge and agree to be
bound by the terms of the letter of transmittal.
By agreeing to the letter of transmittal, you will
make those representations described on pages 41
and 42 under the heading "The Exchange
Offer -- Purpose and Effect."
Guaranteed Delivery
Procedures................. If you wish to exchange your Series C notes and
time will not permit the documents required by the
letter of transmittal to reach the exchange agent
before the expiration date of the exchange offer,
or you cannot complete the procedure for book-entry
transfer on a timely basis, you must exchange your
Series C notes according to the guaranteed delivery
procedures described on page 45 under the heading
"The Exchange Offer -- Guaranteed Delivery
Procedures."
Special Procedures for
Beneficial Owners.......... If you are a beneficial owner whose Series C notes
are registered in the name of a broker, dealer,
commercial bank, trust company or other nominee and
you wish to exchange your Series C notes, you
should contact the registered holder promptly and
instruct the registered holder to exchange the
Series C notes for you. If you wish to exchange
your Series C notes on your own behalf, you must
either make appropriate arrangements to register
ownership of the Series C notes in your name or
obtain a properly completed bond power from the
registered holder.
The transfer of registered ownership may take
considerable time and you may not be able to be
complete the transfer before the expiration date of
the exchange offer.
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Withdrawal Rights.......... Unless we extend the date, you may withdraw your
tendered Series C notes at any time before 5:00
p.m., New York City time, on the expiration date of
the exchange offer.
Exchange Agent............. The address, telephone number and facsimile number
for the exchange agent is:
U.S. Trust Company of Texas, N.A.
770 Broadway
13th Floor -- Corporate Trust Operations
New York, New York 10003-9598
Telephone: (800) 225-2398
Telecopy: (212) 420-6504
Please review the information beginning on page 41 under the heading "The
Exchange Offer" for more detailed information concerning the exchange offer.
SUMMARY OF KEY TERMS OF THE SERIES B NOTES
We will pay interest on the Series B notes in the same manner as the Series
C notes. You should be aware that the indenture that currently governs your
Series C notes is the same indenture that will govern the Series B notes, except
that there will be no restrictions on your sale of Series B notes. We urge you
to read the section entitled "Description of the Registered Notes" beginning on
page 47 for more information on the terms of the Series B notes.
The Issuer................. MMI Products, Inc., a wholly-owned subsidiary of
Merchants Metals Holding Company.
Total Amount of Series B
notes Offered.............. $30,000,000 in principal amount.
Maturity Date.............. April 15, 2007.
Yield and Interest......... We will pay cash interest at a rate of 11 1/4% on
each April 15 and October 15, beginning on October
15, 1999.
Optional Redemption........ We may redeem all or any portion of the Series B
notes at any time on or after April 15, 2002 at the
redemption prices described on page 48 of this
prospectus, plus accrued and unpaid interest, if
any, to the redemption date.
Optional Redemption after
Public Equity Offerings.... On or before April 15, 2000, we may redeem up to
35% of the aggregate principal amount of all
outstanding notes under the indenture at a cash
price of 111.25% of the principal amount of the
notes, plus accrued and unpaid interest and any
liquidated damages to the redemption date, with the
net cash proceeds of one or more public equity
offerings, as that term is defined on page 73.
Change of Control.......... If a change of control, as defined on page 66
occurs, we will be required to offer to purchase
the Series B notes from you at a purchase price
equal to 101% of their principal amount, plus
accrued and unpaid interest, if any, to the date of
repurchase. We cannot assure you that we will have
enough money to repurchase the Series B notes
following the occurrence of a change of control.
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Ranking.................... The notes are not secured by any of our assets and
will be subordinated to all of our senior
indebtedness. The notes are also effectively
subordinated to all of the liabilities of our
subsidiary.
Restrictive Covenants...... The indenture governing the Series B notes contains
covenants for your benefit which restrict our
ability, and the ability of our restricted
subsidiary, to, among other things:
- borrow additional money;
- pay dividends on or redeem our capital stock or
make other restricted payments or investments;
- sell assets;
- merge or consolidate with any other person; or
- effect a consolidation or merger.
Form of the Series B
Notes...................... We intend that the permanent global securities
representing our $150.0 million aggregate principal
amount of Series B notes currently outstanding be
revised or new global notes issued with the same
CUSIP number to represent the $30.0 million
aggregate principal amount of Series B notes to be
issued in the exchange offer. We will deposit them
with a custodian for the Depositary Trust Company
and register them in the name of a nominee of the
Depositary Trust Company, as depositary. The
Depositary Trust Company and its participants will
maintain records in book-entry form showing
beneficial interests in the Series B notes, and
transfers of those interests.
Use of Proceeds............ We will not receive any cash proceeds from the
issuance of the Series B notes pursuant to this
exchange offer.
RISK FACTORS
We urge you to carefully review the Risk Factors beginning on page 8 for a
discussion of factors you should consider before exchanging your Series C notes
for Series B notes or prior to purchasing Series B notes.
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SUMMARY SELECTED HISTORICAL AND UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA
In the table below, we provide you with selected summary historical and
unaudited pro forma consolidated financial data of the Company. We have prepared
this information from our audited consolidated financial statements for fiscal
years 1998, 1997, 1996 and 1995. Additionally, the table below provides pro
forma financial data that presents the Company's 1998 financial data as if the
acquisitions of Security Fence Supply and The Burke Group had been consummated
on January 4, 1998. The pro forma consolidated financial data has not been
audited. The unaudited pro forma consolidated financial data and pro forma
ratios are presented for informational purposes only and are not necessarily
indicative of the period presented, nor are they necessarily indicative of our
future results of operations.
When you read this summary selected historical and pro forma financial
data, it is important that you read with it the historical financial statements
and related notes in our annual and quarterly reports filed with the SEC, as
well as the section entitled "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
<TABLE>
<CAPTION>
PRO FORMA HISTORICAL
--------- -----------------------------------------
FISCAL YEAR
-----------------------------------------------------
1998 1998(1) 1997 1996(2) 1995(3)
--------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales............................... $418,355 $346,905 $283,402 $233,284 $442,701
Cost of sales........................... 350,961 295,999 238,439 196,123 370,048
-------- -------- -------- -------- --------
Gross profit............................ 67,394 50,906 44,963 37,161 72,653
Selling, general and administrative
expenses.............................. 31,874 24,843 23,143 19,196 34,726
Nonrecurring expenses -- stock
options(4)............................ -- -- 3,106 -- --
Other expenses (income), net............ (74) 147 721 166 (184)
Interest expense........................ 17,320 13,018 7,429 7,395 18,481
-------- -------- -------- -------- --------
Income before income taxes.............. 18,274 12,898 10,564 10,404 19,630
Provision for income taxes.............. 7,344 5,161 4,227 4,058 8,048
-------- -------- -------- -------- --------
Net income.............................. $ 10,930 $ 7,737 $ 6,337 $ 6,346 $ 11,582
======== ======== ======== ======== ========
CASH FLOW DATA:
Net cash provided by operating
activities............................ $ 15,161 $ 2,396 $ 15,491 $ 12,745
Net cash used in investing activities... (47,886) (4,976) (24,314) (14,741)
Net cash provided by financing
activities............................ 31,195 5,855 6,894 3,681
OTHER FINANCIAL DATA:
EBITDA(5)............................... $ 42,781 $ 31,423 $ 25,547 $ 21,613 $ 45,998
Depreciation and amortization........... 7,187 5,507 4,448 3,814 7,887
Capital expenditures.................... 10,226 4,560 3,545 2,246 10,649
Fixed charge ratio(6)................... 2.0x 1.9x 2.3x 2.3x 2.0x
</TABLE>
<TABLE>
<CAPTION>
JANUARY 2, 1999
---------------------------
HISTORICAL AS ADJUSTED(7)
---------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Working capital............................................. $ 58,854 $ 58,854
Total assets................................................ 220,226 221,230
Total long-term debt, including current maturities.......... 160,437 161,441
Stockholder's deficit....................................... (13,007) (13,007)
</TABLE>
- ---------------
(1) Includes historical results of operations of the net assets acquired in
February 1998 pursuant to the acquisition of The Burke Group for the period
from February 18, 1998 through January 2, 1999. Also includes the historical
results of operations of Security Fence Supply acquired in October 1998 for
the period from October 6, 1998 through January 2, 1999.
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(2) Includes historical results of operations of the net assets acquired
pursuant to the acquisition of the Sivaco/National Wire Group of Atlantic
Steel Industries, Inc. for the period from August 1, 1996 through December
28, 1996.
(3) Includes historical results of operations for the assets acquired in March
1995 pursuant to the acquisition of Semmerling Fence and Supply, Inc. and
Pioneer Fence and Pipe Supply, Inc. for the period from April 1, 1995
through December 30, 1995.
(4) In fiscal 1996, we recorded nonrecurring expenses resulting from the
modification of stock options granted in previous years as part of our and
Merchants Metals Holding Company's 1996 recapitalization. See Note 2 to the
audited consolidated financial statements.
(5) EBITDA represents net income before interest expense, income taxes,
depreciation and amortization and, for fiscal 1996, non-recurring expenses
(see Note 4 above). While EBITDA is not intended to represent cash flow from
operations as defined by generally accepted account principles ("GAAP") and
should not be considered as an indicator of operating performance or as an
alternative to cash flow as a measure of liquidity, as measured by GAAP, it
is included herein to provide additional information with respect to our
ability to meet future debt service, capital expenditures and working
capital requirements because we understand that financial institutions and
investors in our notes use EBITDA to determine current borrowing capacity
and to estimate long-term value of companies with recurring cash flows from
operations.
(6) For purposes of calculating the ratio of earnings to fixed charges, earnings
represent income before income taxes plus fixed charges. Fixed charges
consist of interest expense on all indebtedness plus the interest portion of
rental expense on noncancelable leases, which we estimate to be
representative of an interest factor, and amortization of deferred financing
costs.
(7) The as adjusted data reflects the application of our net proceeds from the
original offering to our January 2, 1999 balance sheet data.
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RISK FACTORS
In addition to information contained throughout this prospectus, we urge
you to carefully consider the following factors before deciding to exchange your
Series C notes for Series B notes or to purchase Series B notes.
WE HAVE A SUBSTANTIAL AMOUNT OF DEBT IN RELATION TO OUR STOCKHOLDER'S EQUITY.
We have, and will continue to have, a large amount of indebtedness when
compared to the equity of our stockholders. The terms of various indentures and
credit agreements that govern our indebtedness limit, but do not prohibit, the
incurrence of additional indebtedness.
Additionally, please be aware that:
- As of January 2, 1999, on a pro forma basis after giving effect to the
original offering of the Series C notes and the use of proceeds from that
offering, we would have had outstanding long-term indebtedness, including
current maturities, of approximately $161.4 million, and a stockholder's
deficit of $13.0 million.
The following chart shows certain important credit statistics and is
presented assuming we had completed the original offering as of the dates or at
the beginning of the periods specified below and applied the proceeds as
intended:
<TABLE>
<CAPTION>
AS ADJUSTED
AT JANUARY 2,
1999
-----------------
<S> <C>
Total indebtedness.......................................... $161,441
Stockholders' equity........................................ $(13,007)
Debt to equity ratio........................................ -12.3x
</TABLE>
<TABLE>
<CAPTION>
FOR THE
FISCAL YEAR ENDED
JANUARY 2, 1999
-----------------
<S> <C>
Ratio of earnings to fixed charges.......................... 2.0x
</TABLE>
Our large amount of indebtedness could have negative consequences,
including:
- impairment of our ability to obtain additional financing in the
future;
- a reduction of funds available to us for operations or for capital
expenditures because these funds must be used to pay our indebtedness;
- the possibility that we may experience an event of default under our
debt instruments that, if not cured or waived, could adversely affect
us;
- our ability to compete against other less leveraged companies may be
adversely affected; and
- our ability to withstand a downturn in our business or the economy
generally may be adversely affected.
THE SERIES B NOTES WILL BE SUBORDINATED TO OUR SENIOR INDEBTEDNESS.
As with the Series C notes, the Series B notes will be our general
unsecured obligations, subordinated in right of payment to all of our existing
and future senior indebtedness, including borrowings under our credit facility.
The Series B notes will also be effectively subordinated to all of the
liabilities of our subsidiary, Security Fence Supply. Security Fence Supply had
approximately $3.4 million of liabilities as of January 2, 1999. Additionally,
substantially all of our assets are pledged as collateral to secure our credit
facility. As a result of the subordination provisions contained in our
indenture, in the event of our liquidation or insolvency, our assets will be
available to pay obligations on the Series B notes only after all
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senior indebtedness has been paid in full, and therefore there may not be
sufficient assets remaining to pay amounts due on any or all of the Series B
notes then outstanding.
OUR SENIOR CREDIT FACILITY IMPOSES RESTRICTIONS ON US.
Our credit facility requires us to maintain specified financial ratios and
to meet certain financial tests. Additionally, it restricts, among other things,
our ability to:
- incur additional indebtedness;
- make acquisitions or asset dispositions;
- create or incur liens on any of our assets;
- make certain payments and dividends; and
- merge or consolidate, repurchase or redeem any of the Series B notes
before maturity.
Our failure to comply with these restrictions could lead to an event of
default under our credit facility and our other debt agreements, which would
have a material adverse effect on our ability to satisfy our obligations under
the notes.
WE MAY NOT HAVE THE ABILITY TO RAISE THE FUNDS NECESSARY TO FINANCE THE CHANGE
OF CONTROL OFFER REQUIRED BY THE INDENTURE.
Upon the occurrence of a change of control of our Company, as defined on
page 66, we will be required to offer to repurchase all or any part of the notes
outstanding under the indenture. Under the terms of our credit facility, we are
prohibited from repurchasing any of the Series B notes before their maturity.
Certain events involving a change of control might also result in an event of
default under our credit facility and other of our indebtedness that we may
incur in the future. An event of default under our credit facility or other
future indebtedness could result in an acceleration of this indebtedness, in
which case the subordination provisions of the Series B notes would require
payment in full, or provision therefor, of all senior indebtedness before we
could repurchase or make other payments in respect of the Series B notes. We
might not have sufficient resources to repurchase the Series B notes or to pay
our obligations if the indebtedness under our credit facility or other future
senior indebtedness were accelerated upon a change of control of our Company and
we might not be able to obtain the consent of the lenders under our credit
facility to enable us to repurchase the Series B notes which would constitute an
event of default under our indenture. The change of control provisions could
have anti-takeover effects and could delay, defer or prevent a merger, tender
offer or other takeover attempt.
OUR SALES ARE SUBJECT TO CONSTRUCTION INDUSTRY CYCLES.
Demand for our fence product line is heavily dependent on the level of
residential and commercial construction activity in the United States.
Construction activity is cyclical and is affected by the strength of the general
economy, by the strength of the regional economies and population fluctuations
in areas we serve and by other factors beyond our control, including
governmental expenditures, changes in interest rates and changes in banking and
tax laws.
Demand for our wire mesh product line is substantially dependent on
infrastructure projects, including roads, bridges, runways and sewage and
drainage projects. We believe that the majority of our sales of wire mesh in
fiscal 1998 was attributable to the infrastructure construction industry. Demand
for our concrete accessories product line also is dependent to a significant
extent on the infrastructure construction industry. We believe that almost half
of our sales of concrete accessories in fiscal 1998 was attributable to the
infrastructure construction industry. The infrastructure construction industry
is largely dependent on levels of government spending for these projects, which
in turn is subject to a variety of factors, including factors inherent in the
political process and limitations imposed by budgetary considerations.
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Demand for our concrete accessories product line also is dependent to a
significant extent on the commercial construction industry. We believe that over
half of our sales of concrete accessories in fiscal 1998 was attributable to the
commercial construction industry. Although we believe that the commercial
construction industry is somewhat less cyclical than the residential
construction industry, the commercial construction industry has experienced
periods of sharp decline, as evidenced by the severe decline that confronted the
entire construction industry during the early 1990s. Such a decline in the
future could have a material adverse effect on our business, consolidated
financial condition, results of operations and prospects.
OUR SALES ARE SUBJECT TO SEASONAL CYCLES.
Sales of our fence products have historically reflected significant
seasonality, with a substantial portion of our fence product line's sales
occurring in the period from mid-February through July. We believe that this
seasonality is significantly more pronounced in the residential fence market
than in the commercial fence market. We estimate that about half of our fence
product sales in fiscal 1998 was allocable to each of the commercial and
residential construction industries. With the exception of January and February,
which typically have represented "slow" months for the wire mesh and concrete
accessories product lines, our sales of wire mesh and concrete accessories have
tended to be distributed fairly evenly throughout the year. Although we believe
that the wire mesh and concrete accessories product lines, which focus on the
commercial and infrastructure construction industries, are less seasonal than
the fence product line even in the country's coldest regions, our wire mesh and
concrete accessories product lines may exhibit somewhat more pronounced
characteristics of seasonality as we expand our distribution network, through
acquisitions and openings, into areas of colder climates, which could have a
material adverse effect on our business, financial condition, results of
operations and prospects.
THE PRICE AND AVAILABILITY OF OUR RAW MATERIALS MAY FLUCTUATE.
Our principal raw material is steel rod. We purchase over 425,000 tons of
steel rod annually. More than half of our supply of steel rod is obtained from
overseas sources. Our ability to continue to acquire steel rod from overseas
sources on favorable terms may be adversely affected by fluctuations in foreign
currency exchange rates, foreign taxes, duties, tariffs, trade embargoes and
other import limitations. Because steel rod comprises a substantial portion of
our cost of goods sold (33% in fiscal 1998), any increase in steel rod cost
could have a material adverse effect on our business, financial condition,
results of operations or prospects. Although we have historically been able to
pass along increases in steel rod prices to our customers, there can be no
assurance that we will be successful in doing so in the future. A decrease in
our volume of raw material purchases could also result in us being unable to
secure volume purchase discounts that we have received in the past. Any of these
events could have a material adverse effect on our business, consolidated
financial condition, results of operations and prospects.
THE MARKETS IN WHICH WE COMPETE ARE HIGHLY COMPETITIVE.
Although we believe that we are an industry leader in each of our
respective product markets, we compete against many national and regional
competitors, some of whom have substantially greater financial resources than
us. The uniformity of products among competitors results in substantial pressure
on pricing and profit margins. While we believe that our purchasing power, our
nationwide distribution network and marketing capabilities and our manufacturing
efficiency allow us to competitively price our products, we may not be able to
maintain or increase our current market share for our products or compete
successfully in the future.
WE MAY NOT SUCCESSFULLY IDENTIFY FUTURE ACQUISITION CANDIDATES AND COMPLETE AND
MANAGE ACQUISITIONS.
Our ability to increase revenues and operating cash flow over time depends
in large part on our success in consummating future acquisitions on satisfactory
terms and successfully integrating the acquired companies or assets into our
operations. We may not grow as rapidly in the future through acquisitions as we
have in the past several years due, in part, to the decreasing number of
attractive acquisition targets in
10
<PAGE> 13
our existing product lines. We expect to finance acquisitions through existing
resources and operations. If these resources are insufficient to fund our
acquisition requirements, we will have to obtain additional debt or equity
financing. We may not be able to successfully obtain financing on terms we
consider acceptable. Moreover, although we frequently engage in discussions with
various parties regarding possible acquisitions, acquisition opportunities may
not continue to be available or, if available, these acquisitions may not be
able to be consummated on acceptable terms. Future acquisitions will also place
increasing demands on management and operational resources. Our future
performance will depend, in part, on our ability to manage expanding operations
and to adapt our operational systems to such expansions. We may not be
successful at effectively and profitably managing the integration of any future
acquisitions. Our failure to identify future acquisition candidates and to
complete and manage acquisitions could adversely affect our business,
consolidated financial condition, results of operations and prospects.
OUR PRINCIPAL STOCKHOLDERS HAVE SUBSTANTIAL INFLUENCE IN MANAGEMENT DECISIONS.
All of our outstanding capital stock is owned by Merchants Metals Holding
Company. MMI Products, L.L.C. owns 98.7% of Merchants Metals Holding. Holders of
units of MMI Products, L.L.C. generally control and direct any actions taken by
MMI Products, L.L.C. that relate to Merchants Metals Holding, our Company or the
business of Merchants Metals Holding and our Company. Citicorp Venture Capital,
Ltd., together with certain of its employees and certain other persons
affiliated or otherwise associated with Citicorp Venture Capital, own units
representing approximately 49% of the total voting power of MMI Products, L.L.C.
In addition, Citicorp Venture Capital and its affiliates may elect to convert
their units into units of another class representing approximately 85% of the
total voting power of MMI Products, L.L.C. Pursuant to a limited liability
company agreement, unit holders have agreed to vote their units so that one of
the three members of the board of directors of MMI Products, L.L.C. is selected
by Citicorp Venture Capital, one member is the Chief Executive Officer of our
Company and one member is selected jointly by Citicorp Venture Capital and
unitholders who are members of management. In addition, the limited liability
company agreement provides that certain transactions, including acquisitions of
businesses and the incurrence of indebtedness, on the part of MMI Products,
L.L.C. or any of its subsidiaries, including our Company, require the prior
consent of Citicorp Venture Capital. As a result of this unit ownership and the
provisions of the limited liability company agreement, Citicorp Venture Capital
and its affiliates and Citicorp Venture Capital exercise significant influence
over the management of our Company. The interests of Citicorp Venture Capital
and Citicorp Venture Capital and its affiliates as equity owners of MMI
Products, L.L.C. may differ from your interests and, as such, they may take
actions which may not be in your interest.
WE DEPEND ON OUR KEY PERSONNEL FOR OUR SUCCESS AND THE LOSS OF THEIR SERVICES
COULD HAVE A NEGATIVE IMPACT ON US.
Our success will depend, in large part, on the efforts, abilities and
experience of our executive officers and other key employees. The loss of the
services of one or more of such individuals could adversely affect our business,
consolidated financial condition, results of operations or prospects.
WE MAY INCUR ENVIRONMENTAL LIABILITY, WHICH COULD HAVE A MATERIAL ADVERSE EFFECT
ON OUR OPERATIONS.
We are subject to extensive and changing federal, state and local
environmental laws and regulations relating to, among other things, the storage,
handling, generation, treatment, emission, release, discharge and disposal of
certain substances and wastes. As a result, certain costs may be imposed on us.
Compliance with environmental laws and regulations increases our costs of doing
business. Environmental laws and regulations frequently change and we are unable
to predict the future costs or other future impact of environmental laws and
regulations on our operations. We could incur liabilities related to our
operations and properties under environmental laws and regulations, which could
adversely affect our business, consolidated financial condition, results of
operations and prospects.
11
<PAGE> 14
WE CANNOT ASSURE YOU THAT AN ACTIVE TRADING MARKET WILL DEVELOP FOR THE SERIES B
NOTES.
Before this exchange offer, there was no public market for the Series C
notes, although our outstanding $120.0 million aggregate principal amount of
Series B notes are publicly traded. We have been informed by Bear, Stearns that
it intends to continue to make a market in the Series B notes after the exchange
offer is completed. Bear Stearns may, however, cease its market-making at any
time. In addition, the liquidity of the trading market in the Series B notes,
and the market price quoted for these Series B notes, may be adversely affected
by changes in the overall market for high yield securities and by changes in our
financial performance or prospects or in the prospects for companies in our
industry generally. As a result, you cannot be sure that an active trading
market will develop for your Series B notes. We do not intend to apply for
listing or quotation of the Series B notes on any securities exchange or stock
market. To the extent that Series C notes are tendered and accepted in the
exchange offer, the market for the remaining untendered Series C notes among
investors qualified to purchase and sell those notes could be adversely
affected.
OUR BUSINESS AND OUR SUPPLIERS' BUSINESSES ARE DEPENDENT ON COMPUTER SYSTEMS.
ANY COMPUTER PROBLEMS DUE TO THE YEAR 2000 MAY ADVERSELY AFFECT OUR BUSINESS.
The result of computer programs being written using two digits rather than
four to define the applicable year is known as the "Year 2000" issue. Any of our
computer programs that have time-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000 which could result in a system
failure or miscalculations causing disruptions of operations.
We have completed an assessment of our computer systems and will have to
modify or replace portions of our software so that our computer systems will
function properly with respect to dates in the year 2000 and beyond. We have
replaced our general ledger, accounts payable, accounts receivable, sales
analysis, and financial reporting systems with software that is year 2000
compliant. Year 2000 compliance in other systems is to be achieved through
modification of internally developed programs and is scheduled to be completed
by the third quarter of 1999. Changing the scope of the modification project or
enlisting third party resources to assist in the programming task will occur if
the scheduled completion date appears to be in jeopardy. As a result of upgrades
of our computer hardware and information systems previously planned for and
initiated in 1996, we do not expect that the incremental cost of correcting our
systems for Year 2000 compliance will be material.
We rely on third party suppliers for raw materials. We believe that our
suppliers do not depend heavily on equipment susceptible to Year 2000 problems,
although they do rely on delivery systems that may be susceptible to these
problems. Interruption of supplier operations due to Year 2000 issues could
adversely affect our operations. We have multiple suppliers of steel rod to
satisfy our production requirements, which is intended to provide a means of
managing any risk that might arise from a failure of transportation or other
systems that might prevent our suppliers from delivering materials we need, but
cannot eliminate the potential for disruption due to third party failure.
We do not expect any significant disruption in our operations in the event
that any of our suppliers or customers fail to achieve Year 2000 compliance.
However, if the software changes and modifications of existing software are not
made, or are not completed timely, the Year 2000 issue could adversely affect
our business, consolidated financial condition, results of operations and
prospects.
YOU SHOULD NOT PLACE UNDUE RELIANCE ON ANY OF OUR FORWARD-LOOKING STATEMENTS.
This prospectus contains certain forward-looking statements about our
consolidated financial condition, results of operations and business. You can
identify many of these statements by looking for words such as "believes,"
"expects," "may," "will," "should," "seeks," "pro forma," "anticipates" or
"intends" or the negative of any of these words, or any other similar words, or
by discussions of strategy or intentions.
These forward-looking statements are subject to numerous assumptions, risks
and uncertainties. Factors which may cause our actual results, performance or
achievements, to be materially different from
12
<PAGE> 15
any future results, performance or achievements expressed or implied by us in
those statements include the following:
- the competitive nature of our industry in general as well as our specific
market areas;
- changes in prevailing interest rates and the availability of and terms of
financing to fund the anticipated growth of our business;
- inflation;
- changes in costs of goods and services;
- economic conditions in general as well as in our specific market areas;
- changes in or our failure to comply with federal, state and/or local
government regulations;
- liability and other claims asserted against us;
- changes in our operating strategy or development plans;
- our ability to attract and retain qualified personnel;
- our ability to pay interest and principal on a very large amount of debt;
- labor disturbances;
- changes in our acquisition and capital expenditure plans; and
- the other factors described in this prospectus.
Because these statements are necessarily dependent upon assumptions,
estimates and dates that may be incorrect or imprecise and involve known and
unknown risks, uncertainties and other factors, you should not consider any of
the forward-looking statements included in this prospectus to be predictions of
future events. Given these uncertainties, you are cautioned not to place undue
reliance on any forward-looking statements. We do not undertake any
responsibility to update you on the occurrence of any unanticipated events or to
publicly announce the results of any revisions to any of the forward-looking
statements contained in this prospectus to reflect future events or
developments.
13
<PAGE> 16
USE OF PROCEEDS
We will not receive any cash proceeds from the issuance of the Series B
notes offered hereby. In consideration for issuing the Series B notes as
contemplated in this prospectus, we will receive in exchange Series C notes in
like principal amount, which will be cancelled and as such will not result in
any increase in our indebtedness. The exchange offer is intended to satisfy
certain of our obligations under a registration rights agreement.
The net proceeds from the original offering were approximately $31.1
million, including original issuance premium and after deducting discounts and
commissions to the initial purchaser and estimated offering expenses. We used
the net proceeds to repay existing indebtedness under our credit facility. Our
credit facility bears interest, at our option, at either the base rate announced
by Fleet National Bank plus 0.25% or a Eurodollar base rate plus 2.00%. As of
January 2, 1999, the average rate for all borrowings under the credit facility
was approximately 7.0%.
CAPITALIZATION
In the table below we provide you with, as of January 2, 1999, our actual
cash and capitalization and our consolidated cash and capitalization as adjusted
to give effect to the original offering and the use of proceeds therefrom as if
those transactions occurred on January 2, 1999. This table should be read in
conjunction with our consolidated financial statements and the notes thereto.
<TABLE>
<CAPTION>
JANUARY 2, 1999
----------------------
ACTUAL AS ADJUSTED
-------- -----------
(DOLLARS IN THOUSAND)
<S> <C> <C>
Cash and cash equivalents................................... $ 1,979 $ 1,979
======== ========
Long-term debt, including current maturities:
Revolving credit facility(c).............................. $ 35,422 $ 4,288
11 1/4% Series B Senior Subordinated Notes due 2007....... 120,000 152,138
Capital lease and other obligations....................... 5,015 5,015
Total long-term debt, including current
maturities...................................... 160,437 161,441
-------- --------
Stockholder's equity (deficit):
Common stock, $1 par value; 500,000 shares authorized;
252,000 shares issued and outstanding.................. 252 252
Additional paid-in capital................................ 13,009 13,009
Additional minimum pension liability...................... (221) (221)
Retained deficit.......................................... (26,047) (26,047)
-------- --------
Total stockholder's deficit....................... (13,007) (13,007)
-------- --------
Total capitalization.............................. $147,430 $148,434
======== ========
</TABLE>
14
<PAGE> 17
SELECTED FINANCIAL DATA
In the table below we provide you with selected historical financial data
of the Company. We have prepared this information using our audited consolidated
financial statements for the five years ended January 2, 1999. When you read
this selected financial data, it is important that you read it along with
Management's Discussion and Analysis of Financial Condition and Results of
Operations and our consolidated financial statements and the related notes,
included on page F-1 through F-20 of this prospectus.
<TABLE>
<CAPTION>
FISCAL YEARS
----------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales............................... $418,355 $346,905 $283,402 $233,284 $197,617
Gross profit............................ 67,394 50,906 44,963 37,161 34,144
Nonrecurring expenses(1)................ -- -- 3,106 -- --
Net income.............................. 10,930 7,737 6,337 6,346 7,512
BALANCE SHEET DATA (AT PERIOD END):
Working capital......................... $ 58,854 $ 50,308 $ 33,511 $ 36,563 $ 29,222
Total assets............................ 220,226 152,818 135,263 103,856 86,498
Total long-term debt and capital leases,
including current maturities.......... 160,437 123,867 55,278 49,485 44,454
Stockholder's equity (deficit).......... (13,007) (20,873) 28,534 15,606 9,260
CASH FLOW DATA:
Net cash provided by operating
activities............................ $ 15,161 $ 2,396 $ 15,491 $ 12,745 $ 11,516
Net cash used in investing activities... (47,886) (4,976) (24,314) (14,741) (2,452)
Net cash provided by (used in) financing
activities............................ 31,195 5,855 6,894 3,681 (8,891)
EBITDA(2)............................... $ 42,781 $ 31,423 $ 25,547 $ 21,613 $ 19,997
Cash dividends(3)....................... 1,292 57,105 -- -- 308
Ratio of Earnings to Fixed Charges(4)... 2.0x 1.9x 2.3x 2.3x 2.5x
</TABLE>
- ---------------
(1) In fiscal year 1996, we recorded nonrecurring expense resulting from the
modification of stock options granted in previous years as part of the
recapitalization of our company and Merchants Metals Holding. See Note 2 to
the audited consolidated financial statements.
(2) EBITDA represents net income before interest expense, income taxes,
depreciation and amortization and, for fiscal 1996, non-recurring expenses
(see Note 1 above). While EBITDA is not intended to represent cash flow from
operations as defined by generally accepted account principles ("GAAP") and
should not be considered as an indicator of operating performance or as an
alternative to cash flow as a measure of liquidity, as measured by GAAP, it
is included herein to provide additional information with respect to our
ability to meet future debt service, capital expenditures and working
capital requirements because we understand that financial institutions and
investors in our notes use EBITDA to determine current borrowing capacity
and to estimate long-term value of companies with recurring cash flows from
operations.
(3) Cash dividends of $308,000 in fiscal year 1994 represent amounts required to
redeem the equity interests in Merchants Metals Holding held by former
stockholders which had received equity interests in Merchants Metals Holding
upon the sale to our company of certain assets acquired for the fence
product line. In fiscal year 1997, $57.1 million was distributed to
Merchants Metals Holding for the redemption by Merchants Metals Holding of
certain of its equity interests. In fiscal year 1998, $1.3 million was
distributed to Merchants Metals Holding to finalize the 1997 redemption of
certain of its equity interests.
(4) For purposes of calculating the ratio of earnings to fixed charges, earnings
represent income before income taxes plus fixed charges. Fixed charges
consist of interest expense on all indebtedness plus the interest portion of
rental expense on noncancellable leases, which we estimate to be
representative of an interest factor, and amortization of deferred financing
costs.
15
<PAGE> 18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following is an analysis of our financial condition and results of
operations. This analysis should be read in conjunction with our consolidated
financial statements and the related notes included on page F-1 through F-20 of
this prospectus.
GENERAL
We are a leading manufacturer and distributor of products used in the
residential, commercial and infrastructure construction industries. Our
earnings, including business segment earnings, were as follows:
<TABLE>
<CAPTION>
FISCAL YEARS
---------------------------
1998 1997 1996
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Fence segment earnings.................................. $14,043 $11,290 $ 9,261
Concrete Construction Products segment earnings......... 22,315 14,980 12,289
Corporate(1)............................................ (764) (354) (3,557)
------- ------- -------
Earnings before interest and income taxes............... 35,594 25,916 17,993
Interest expense........................................ 17,320 13,018 7,429
------- ------- -------
Earnings before income taxes............................ 18,274 12,898 10,564
Income taxes............................................ 7,344 5,161 4,227
------- ------- -------
Net income.............................................. $10,930 $ 7,737 $ 6,337
======= ======= =======
</TABLE>
- ---------------
(1) Corporate represents only amortization of intangible assets and
non-recurring charges. Corporate general and administrative expenses are
allocated to the segments based upon proportional net sales.
On a consolidated basis our significant growth in net sales and earnings
result primarily from the following:
- business acquisitions;
- the expansion of our fence segment's distribution network;
- strong activity in the commercial and infrastructure construction
markets; and
- increase in market share.
Net sales increased 20.6% in 1998 and 22.4% in 1997. Net income increased
41.3% in 1998 and 22.1% in 1997. In 1998, the primary contribution to net income
growth was the increased sales of concrete accessory products. Our acquisition
of The Burke Group L.L.C. in early 1998 contributed additional sales of concrete
accessories which generally carry a higher gross profit margin than our other
products.
Interest expense increased $4.3 million in 1998 and $5.6 million in 1997.
The increase is primarily due to the issuance of $120 million 11.25% senior
subordinated notes in April 1997. If the proceeds from the issuance of the notes
had been available at the beginning of fiscal year 1997, pro forma interest
expense for fiscal year 1997 would have been $15.4 million. 1998 interest
expense is $1.9 million higher than 1997 pro forma interest due to an increase
in borrowings from our credit facility primarily for funding of acquisitions and
capital expenditures. Pro forma interest expense is based on the 11.25% rate on
the senior subordinated notes plus the amortization of deferred financing costs
over the life of the debt.
The effective income tax rate remained flat for fiscal years 1996 and 1997
and increased slightly in fiscal year 1998 as a result of the non-deductible
goodwill associated with our acquisition of Security Fence Supply Co., Inc. in
October 1998.
16
<PAGE> 19
FENCE SEGMENT
<TABLE>
<CAPTION>
FISCAL YEARS
------------------------------
1998 1997 1996
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Net sales............................................ $208,117 $177,640 $164,971
Gross profit......................................... 30,893 25,464 23,461
Gross profit margin.................................. 14.8% 14.3% 14.2%
SG&A and other expense............................... $ 16,850 $ 14,174 $ 14,200
Earnings before interest and income taxes............ 14,043 11,290 9,261
EBITDA............................................... 16,962 13,722 11,441
</TABLE>
Net Sales. Net sales increased 17.2% in 1998 and 7.7% in 1997. These
increases are primarily due to acquisitions and to the opening of new
distribution centers. Also contributing to 1998 increases were favorable weather
conditions and increased housing starts. Net sales for the fourth quarter of
1998 had a 16.0% increase over the fourth quarter 1997, exclusive of the
acquisition of Security Fence Supply in October 1998. Total fourth quarter
growth including three months of Security Fence Supply operations was 33.9%. The
opening of a new fence distribution center in January 1997 and an acquisition in
late 1997 contributed to the majority of the 1997 net sales increase.
Gross Profit. The fence segment's gross profit margin percentage has
remained relatively flat over the last three years. The increase in 1998 was
primarily due to lower steel rod prices and higher margin products introduced in
the fourth quarter from the Security Fence Supply acquisition.
Selling, general and administrative and other expense. Selling, general and
administrative and other expense increased 18.9% in 1998 and remained flat in
1997. Selling, general and administrative and other expense as a percentage of
sales was 8.1%, 8.0%, and 8.6% for 1998, 1997, and 1996. The increase in expense
in 1998 was principally due to business acquisitions and the opening of
distribution centers. Selling, general and administrative and other expense as a
percentage of sales was relatively flat in 1998 and 1997. The higher 1996 ratio
to sales was primarily the result of an increase in the allowance for doubtful
accounts.
CONCRETE CONSTRUCTION PRODUCTS SEGMENT
<TABLE>
<CAPTION>
FISCAL YEARS
------------------------------
1998 1997 1996
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Net sales............................................ $210,238 $169,265 $118,431
Gross profit......................................... 36,501 25,442 21,502
Gross profit margin.................................. 17.4% 15.0% 18.1%
SG&A and other expense............................... $ 14,186 $ 10,462 $ 9,213
Earnings before interest and income taxes............ 22,315 14,980 12,289
EBITDA............................................... 25,819 17,701 14,106
</TABLE>
Net Sales. Net sales increased 24.2% in 1998 and 42.9% in 1997. Increases
are primarily the result of acquisitions and strong activity in commercial and
infrastructure construction markets. In 1998, the acquisition of The Burke Group
contributed $23.9 million, a 14.1% increase in net sales. Also impacting 1998
was increased sales to the segment's largest customer, a company which has also
grown through acquisitions. Three acquisitions in the second half of 1996
contributed significantly to the 1997 sales increases. The mesh product line
provided the majority of the 1997 increase, 86.6%, which was principally due to
the full twelve month impact of two of the 1996 acquisitions. The concrete
accessory product line sales increase in 1997 was also primarily due to an
acquisition in the fourth quarter of 1996.
Gross Profit. Gross profit increased 43.5% in 1998 and 18.3% in 1997. Gross
profit margins increased to 17.4% in 1998 from 15.0% in 1997. The 1998 increase
in gross profit was primarily due to the increase in mix of higher margin
concrete accessories. This increase was partially offset by a slight decrease in
the
17
<PAGE> 20
mesh products margin due to fluctuations in raw material costs. Rapidly
declining costs of purchased steel rod and competitive pressure reduced mesh
prices early in 1998 when the company still held in inventory rod purchased at
higher costs in 1997. The 1997 gross profit margin decreased from 18.1% in 1996
to 15.0%. This decrease was principally due to increased sales of lower margin
products in both the mesh and concrete accessory lines, combined with the start
up of a new concrete accessory plant and the incurrence of higher raw material
costs.
Selling, general and administrative and other expense. Selling, general and
administrative and other expenses increased 35.6% in 1998 and 13.6% in 1997. As
a percentage of sales, selling, general and administrative and other expenses
was 6.7%, 6.2% and 7.8% in 1998, 1997, and 1996. The increase in selling,
general and administrative and other expenses was primarily due to the growth in
sales from acquisitions. The increase in selling, general and administrative and
other expenses as a percentage of sales in 1998 is principally due to the higher
selling costs related to The Burke Group concrete accessory products. The
decrease in selling, general and administrative and other expenses as a
percentage of sales in 1997 is due to growth in the made-to-order wire mesh
product line, which has a lower relative sales cost, and efficiencies achieved
from integrating acquired businesses into the segment's operations.
LIQUIDITY AND CAPITAL RESOURCES
Operating activities generated $15.2 million of cash in 1998, compared with
$2.4 million in 1997 and $15.5 million in 1996. Net income, adjusted for
non-cash items such as depreciation, amortization, and other non-cash charges,
provided $18.6 million in 1998, $16.2 million in 1997 and $13.9 million in 1996.
Net income adjusted for non-cash items was used primarily to support growth in
operating assets. Excluding acquired assets, accounts receivable and inventory
increased $20.5 million in 1998, $10.2 million in 1997 and $10.0 million in
1996. Additional cash was provided by an increase in payables and accrued
liabilities, especially in 1998, which had an increase of $17.7 million due to
internal growth in the business.
Investing activities used $47.9 million in 1998, $5.0 million in 1997 and
$24.3 million in 1996. In 1998 and 1996 the majority of this cash was used for
acquisitions. The three acquisitions in 1998 used $37.7 million and three
acquisitions in 1996 used $20.9 million. Capital expenditures for expansion,
improvement and replacement of property, plant and equipment were $10.2 million
in 1998, $4.6 million in 1997 and $3.5 million in 1996. Capital expenditures in
1998 included $3.2 million for a wire mesh plant facility, which replaced a
previously leased building and $1.9 million for rental equipment, a new product
line resulting from the acquisition of The Burke Group.
Financing activities provided $31.2 million in 1998 compared to $5.9
million in 1997 and $6.9 million in 1996. The increase in 1998 was due to the
funding of acquisitions, particularly the acquisition of Security Fence Supply
in October 1998. Financing cash flow in 1997 included the issuance of senior
subordinated notes and the use of their net proceeds.
Although earnings before interest expense, income taxes, depreciation and
amortization, (and non-recurring expenses in 1996) should not be considered in
isolation from, or as a substitute for, cash flow measures prepared in
accordance with generally accepted accounting principles or as a measure of a
company's liquidity, it is a widely accepted financial indicator of a company's
ability to incur and service debt. Our earnings before interest expense, income
taxes, depreciation and amortization, and non-recurring expenses were $42.8
million in 1998, $31.4 million in 1997 and $25.5 million in 1996. Our increase
in earnings before interest expense, income taxes, depreciation and
amortization, and non-recurring expenses is primarily the result of higher net
sales and gross profit resulting from acquisitions and other changes.
Senior Subordinated Notes. On April 16, 1997, we issued $120 million of
11.25% senior subordinated notes due 2007. The net proceeds of $116.0 million,
after fees and expenses, were used as follows:
- to distribute $57.1 million to Merchants Metals Holding for the
redemption by Merchants Metal Holding of certain of its equity
interests;
- to repay the entire $10 million principal amount, plus accrued
interest, on a senior subordinated secured note payable;
18
<PAGE> 21
- to repay our remaining indebtedness under our term loan facility of
$11.4 million; and
- to reduce our indebtedness under our revolving credit facility.
As a result of the issuance, our interest expense increased $4.3 million in
1998, approximately $2.4 million is from the full twelve month impact of the
notes, and $5.6 million in 1997. If the proceeds from the notes had been
available at the beginning of fiscal year 1997, pro forma interest expense for
fiscal year 1997 would have been $15.4 million, an increase of $2.4 million over
the $13.0 million actually incurred. Pro forma interest expense is based on the
11.25% rate on the notes, plus the amortization of deferred financing costs over
the life of the debt, less interest expense on debt that would have been
retired.
On February 12, 1999, we issued $30 million of Series C notes in a private
offering. The net proceeds were approximately $31.1 million, including original
issuance premium after expenses. The net proceeds were used to reduce our
borrowings under our revolving credit facility.
Our capital expenditure budget for fiscal year 1999 is $10.0 million, and
will be funded by the revolving credit facility.
In fiscal 1998, we made capital expenditures in excess of the limits
established in the revolving credit facility and we did not satisfy certain
reporting requirements to our lenders during fiscal 1998 and subsequent to year
end. We have obtained waivers from the lenders for each of these items. In March
1999, the revolving credit facility was amended to modify certain reporting
requirements through August 1999. We believe that we will be able to comply with
the amended reporting requirements and other restrictive covenants in the
revolving credit facility throughout our fiscal year 1999.
We expect that cash flows from operations and the borrowing availability
under our bank revolving credit facility will provide sufficient liquidity to
meet the following needs over the near term:
- normal operating requirements;
- capital expenditure plans;
- existing debt service; and
- business acquisition strategy.
We have pursued and intend to continue to pursue a strategy of business
acquisitions that will broaden our distribution network, complement or extend
our existing product lines or increase our production capacity. The borrowing
availability under our bank revolving credit facility is also expected to be
available to finance these acquisitions. It is possible that, depending upon our
future operating cash flows and the size of potential acquisitions, we will seek
additional sources of financing subject to limitations provided in our senior
subordinated notes indenture.
EFFECT OF INFLATION
The impact of inflation on our operations has not been significant in
recent years. There can be no assurance, however, that a high rate of inflation
in the future will not have an adverse effect on our operating results.
IMPACT OF YEAR 2000
State of Readiness. We completed an assessment and have completed, or are
in the process of modifying or replacing, portions of our software so that our
computer systems will function properly with respect to dates in the Year 2000
and beyond. In October 1998, we replaced the following systems with software
that is Year 2000 compliant:
- general ledger;
- accounts payable;
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<PAGE> 22
- accounts receivable;
- sales analysis; and
- financial reporting systems.
Year 2000 compliance in other systems is to be achieved through
modification of internally developed programs and is scheduled to be completed
by the third quarter of 1999.
Third Party Relationships. We do not expect any significant disruption of
operations in the event that any of our suppliers or customers fail to achieve
Year 2000 compliance.
Contingency Plans. Programming changes of internally developed systems may
require a reduction in the scope of modifications and/or the enlistment of third
party resources if the scheduled completion date appeared to be in jeopardy.
Specific contingency plans have been identified for all of the outstanding
projects.
Risks and Uncertainties. We believe that we will experience at most,
isolated and minor disruptions of business processes as a result of the Year
2000 issue based on the following:
- completion of several software and hardware replacement projects;
- internal plans for remaining system modification projects;
- limited exposure to reliance on third party Year 2000 compliance;
and
- completion of contingency plans.
These disruptions are not expected to have a material effect on our
business, consolidated financial position or results of operations. However, the
magnitude of all Year 2000 disturbances cannot be predicted. Failure to complete
these programs as planned could result in a system failure or miscalculations
causing disruptions of operations, including a temporary inability to process
transactions, send invoices, or engage in similar normal business activities,
all of which could have a material impact on our business, consolidated
financial position or results of operations.
Costs. Our growth in recent years has required system software and hardware
upgrades and improvements that were planned for and initiated in 1996. The costs
of the purchased software and hardware upgrades related to these projects
incurred through January 2, 1999 was approximately $700,000 and has been
capitalized in property, plant and equipment in the accompanying consolidated
balance sheets. We have also incurred costs of approximately $450,000 through
January 2, 1999 related to these projects for software implementation and for
modification of existing programs that has been expensed as incurred. In fiscal
year 1999, we expect to incur approximately $240,000 to complete these projects,
including Year 2000 specific modifications. Because the costs of software and
hardware upgrades were already being incurred, and planned modification of
internal systems is primarily for improvement and increased capacity, the actual
cost for Year 2000 specific upgrades and modifications is not expected to exceed
$100,000 and will be expensed as incurred.
NEW ACCOUNTING STANDARDS
As of January 4, 1998, we adopted Financial Accounting Standards Board
Statement No. 130, Reporting Comprehensive Income and Statement No. 131,
Disclosures about Segments of an Enterprise and Related Information.
Statement 130 establishes new rules for reporting and display of
comprehensive income and its components. The adoption of Statement 130, however,
had no impact on our consolidated net income or stockholder's equity. Prior year
financial statements have been reclassified to conform to the requirements of
Statement 130.
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Statement 131 establishes standards for the way that public business
enterprises report information about operating segments in annual financial
statements and requires that those enterprises report selected information about
operating segments in interim financial reports. Statement 131 also establishes
standards for related disclosures about products and services, geographic areas
and major customers. The adoption of Statement 131 did not affect our
consolidated results of operations or financial position.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are subject to market risk exposure related to changes in interest rates
on our revolving credit facility and our senior subordinated notes. Borrowings
under our revolving credit facility bear interest, at our option, at either the
bank's base rate plus 0.25 percent or the Eurodollar rate plus 1.5 percent. For
fiscal year 1998, the weighted average balance outstanding under this revolving
credit facility was $26.2 million. Based on this balance, a one percent change
in the interest rate would cause a change in interest expense of approximately
$262,000. We are exposed to changes in the fair value of our $120 million 11.25%
fixed rate senior subordinated notes. At January 2, 1999, the fair value of the
notes was approximately 108% of par, or $129.6 million. At January 3, 1998, the
fair value of the notes was approximately 109% of par, or $130.8 million.
Although the fair value of these notes has not fluctuated much, the variation in
fair value is a function of market interest rate changes and the investor
perception of the investment quality of the senior subordinated notes.
We also have exposure to price fluctuations associated with steel rod, our
primary raw material. We negotiate purchase commitments from one to nine months
in advance to limit our exposure to price fluctuation and to ensure availability
of the materials. Approximately 50% of our steel rod is purchased from foreign
sources.
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<PAGE> 24
BUSINESS
GENERAL
We are a Delaware corporation and are a wholly-owned subsidiary of
Merchants Metals Holding Company. We were organized in 1953. We were acquired by
Citicorp Venture Capital, Ltd. and members of our management in 1986.
We are a leading manufacturer and distributor of products used in the
residential, commercial and infrastructure construction industries. We have
established leading market positions in the fence and concrete construction
industries by combining:
- efficient manufacturing;
- high quality;
- broad product offerings; and
- extensive distribution capabilities.
We employ a combination of state-of-the-art and traditional production
methods to achieve cost efficiencies in our manufacturing processes. While our
manufacturing facilities are geared primarily toward high-volume, standardized
production to promote efficiencies, many of our manufacturing facilities are
capable of producing customized products in response to specific customer
requirements or applications that are unique to particular geographic regions of
the United States. Consequently, each plant is configured to serve as both a
high-volume producer of standard products and a job lot producer of specialty
products. We also benefit from raw material purchasing efficiencies because the
majority of manufactured products are produced from the same raw material.
We have developed an extensive and well positioned distribution network,
consisting of 72 company-operated distribution centers, located in 31 states.
Our distribution network services over 5,000 customers, including the following:
- construction contractors;
- fence wholesalers;
- industrial manufacturers;
- highway construction contractors; and
- fabricators of concrete reinforcing bar.
In addition to serving customers nationwide, distribution centers and
production facilities are well positioned to serve areas of high population and
construction growth. We currently have manufacturing or distribution facilities
in each of the ten states with the largest projected increases in population
through the year 2025. We manufacture our products from 18 principal
manufacturing facilities strategically located throughout the United States.
ACQUISITIONS
Historically, a significant portion of our growth has been achieved through
acquisitions. Since 1989, we have completed 12 acquisitions, including eight in
the past four years, which have substantially increased our net sales, net
income and EBITDA. We completed three acquisitions in 1998.
On February 18, 1998, we acquired the assets and assumed certain
liabilities of The Burke Group, a manufacturer of hardware devices and a
processor of chemicals used in the concrete construction industry. The
acquisition expanded the breadth of our concrete accessories product line. The
total purchase price was $20.6 million, which was funded by our revolving credit
facility. On September 4, 1998, we sold the
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chemical processing operations included in the acquisition of The Burke Group
for approximately $3.6 million in cash.
On March 2, 1998, we purchased substantially all of the assets of Wholesale
Fencing Supply and affiliated entities for approximately $2.1 million, of which
$1.1 million was funded by the revolving credit facility and $1.0 million by a
note payable to seller. The operations acquired include a manufacturer of
ornamental iron fencing in Tacoma, Washington, and distributors of fence
products in Tacoma, Washington, and two Oregon locations.
On October 6, 1998, we purchased all of the issued and outstanding capital
stock of Security Fence Supply Co. for approximately $24.4 million, which was
funded by our revolving credit facility. Immediately following the purchase, the
real property acquired as a result of the acquisition was sold to the former
principals of Security Fence Supply Co. for approximately $3.6 million in cash.
The former principals of Security Fence Supply Co. then leased the property back
to us for a term of five years at approximate market rental rates. Security
Fence Supply Co. specializes in commercial and industrial fencing. It
manufactures chain link and vinyl coated chain link fabric as well as ornamental
iron and vinyl fence products.
BUSINESS SEGMENTS
We report the results of our operations in two business segments: fence and
concrete construction products. Financial information for each business segment
is disclosed in Note 12 of the notes to our consolidated financial statements.
Both of our fence and concrete construction products segments share common
factors with respect to seasonality of business and raw materials.
Seasonality and Cyclicality. Our products are used in the residential,
commercial and infrastructure construction industries. These industries are both
cyclical and seasonal, and changes in demand for construction services have a
material impact on sales and profitability. Although we believe that a cyclical
downturn is inevitable, we have implemented the following strategies which we
believe will mitigate the impact of any downturn on our future operating results
and liquidity:
- increased the focus on products used in the commercial and
infrastructure construction industries, which historically have
been less cyclical than the residential construction industry;
- positioned our concrete construction products segment to benefit
from anticipated increases in infrastructure spending; and
- expanded our distribution network to serve diverse areas of high
population growth, as well as to limit the effects of any regional
economic downturns.
As a result of seasonality, the highest level of sales and profitability
occur during the times of the year when climatic conditions are most conducive
to construction activity. Accordingly, sales will typically be higher in the
second and third quarters.
Raw Materials. Our manufactured products are produced primarily from steel
rod. Because both business segments require large quantities of the same raw
material, we purchase steel rod in significantly larger quantities than would be
the case if the business segments were part of separate stand-alone enterprises.
Because of such large volume purchases, we believe that we typically purchase
steel rod at a cost below industry standard. Since steel rod cost comprises a
substantial portion of cost of goods sold, approximately 33% in fiscal year
1998, we believe these cost savings provide a significant competitive advantage.
In recent years, more than 50% of the steel rod purchased has been produced
overseas. Most of the purchases of foreign steel rod are made through Mannesmann
Pipe and Steel Corporation, which arranges the importation of rod from various
overseas sources. Major suppliers of steel rod in the United States include
Ameristeel, Atlantic Steel, Co-Steel Raritan, Keystone Steel, and North Star
Steel.
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We generally negotiate quantities and pricing on a quarterly basis for both
domestic and foreign steel rod purchases. Because all agreements for the
purchase of steel rod, whether foreign or domestic, are denominated in United
States dollars, there is no exposure to significant risks of fluctuations in
foreign currency exchange rates with respect to these agreements.
FENCE SEGMENT
The fence segment is made up of the following three operating entities:
- Merchants Metals;
- Security Fence Supply; and
- Anchor Die Cast.
Merchants Metals is headquartered in Houston, Texas with the operations
segregated and managed by geographic divisions. Security Fence Supply is a
manufacturer and distributor of a variety of fence products and is located in
Bladensburg, Maryland. Anchor Die Cast, a small manufacturer and distributor of
fence fittings, is located in Harrison, Arkansas. The fence segment contributed
49.7%, 51.2% and 58.2% of consolidated net sales in fiscal years 1998, 1997 and
1996.
Products. The fence segment manufactures the following products:
- galvanized and vinyl coated chain link fence fabric;
- a full line of aluminum die cast and galvanized pressed steel
fittings and vinyl coated colored pipe;
- ornamental iron fence products; and
- vinyl fencing.
These products are manufactured at seven principal facilities.
The segment also distributes a variety of fence products that it purchases
from third parties, including the following:
- pipe;
- tubing;
- wood;
- vinyl;
- aluminum and ornamental iron fence products;
- gates;
- hardware; and
- other related products.
The segment also assembles wooden fence panels for residential fences at
several of its facilities.
Fence products are used in a variety of applications. The chain link fence
products primarily serve as security fencing at residential, commercial and
governmental facilities, including the following:
- manufacturing and other industrial facilities;
- warehouses;
- schools;
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- airports;
- correctional institutions;
- military facilities;
- recreational facilities;
- swimming pools; and
- dog kennels.
Polyvinyl chloride color coated wire, together with vinyl coated colored
pipe, tubing and fittings, are used primarily for tennis courts and other
residential applications. The segment also offers other fence products that are
used primarily in the construction of wood, vinyl, aluminum or ornamental iron
fence systems, and in the construction of all sizes and styles of fence gates
for the residential and commercial markets.
In fiscal year 1998, approximately 46% of the fence segment sales
represented products manufactured by the segment. The remaining fence products
were purchased as finished goods from third parties for distribution. Purchases
of finished fence products are primarily from domestic manufacturers. We believe
that our full line of fence products provides a competitive advantage by
enabling us to provide one-stop shopping to our customers, thereby promoting
customer loyalty.
Production Process. The chain link fence manufacturing process is virtually
the same at each manufacturing facility. The dominant manufacturing process,
galvanized after weaving, involves three steps:
- wire drawing, which transforms steel rod into steel wire, primarily
ranging in thickness from 12.5 gauge (.095 inches) to 6.0 gauge
(.192 inches);
- weaving the wire into chain link fabric by automated fabric weaving
machines pre-set to a specific width (which ranges from three to 20
feet) of chain link fence fabric and to a specific "diamond" size
ranging from 3/8 inch to 2 3/8 inches; and
- coating the surface of the steel wire with zinc to provide, among
other things, corrosion protection.
The segment also produces other types of coated wire fabric, including
polyvinyl chloride coated, aluminum coated and galvanized before weaving. In
addition, vinyl coatings are applied to the pipe, tubing, and fittings used with
vinyl coated chain link fabric. Anchor Die Cast manufactures a full line of
aluminum die cast and galvanized pressed steel fittings.
Sales and Marketing; Principal Customers. The fence segment sells fence
products principally to fence wholesalers and residential and commercial
contractors. Although some sales of fence products are through home centers,
these sales are not a primary focus of our sales efforts. No one customer
accounted for more than 10% of the fence segment revenues in fiscal year 1998.
The segment's dedicated sales force consists of approximately 81 employees
whose sales territories cover the 48 contiguous states. Sales generally are made
through 53 regional distribution centers, seven of which are located at
manufacturing facilities, which are located in 30 states. Because customer
orders typically require rapid turn-around time, the distribution centers are
strategically located near customers' facilities. The segment also distributes
its fence products through a network of 338 authorized dealers located
throughout the country.
Competition. The fence segment's major national competitor is Master-Halco,
Inc., which has a more extensive distribution network than we have. We believe,
however, that our more extensive fence manufacturing capabilities provide an
advantage to some major accounts. The segment also competes with two strong
regional competitors, one of which operates primarily on the east coast, with
particular emphasis in Florida and the other operates only manufacturing
facilities, with no internal distribution
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network, primarily east of the Rocky Mountains. Our remaining competitors are
smaller regional manufacturers and wholesalers.
Although the ability to sell fence products at a competitive price is an
important competitive factor, we believe that other factors, such as perceived
quality of product and service and ability to deliver products to customers
quickly, are also important to our fence customers. We believe that our
reputation for quality and service, and our ability to deliver product quickly
due to the locations of our 53 fence distribution centers, enable us to obtain a
slight premium in our sales price for fence products, as compared to our
principal competitors.
CONCRETE CONSTRUCTION PRODUCTS SEGMENT
The concrete construction products segment is made up of two operating
entities: Ivy Steel and Wire and Meadow-Burke Products. Ivy Steel and Wire is
headquartered in Houston, Texas and Meadow-Burke Products is headquartered in
Tampa, Florida. Both companies segregate their management and operations by
geographic region. The concrete construction products segment contributed 50.3%,
48.8% and 41.8% of our consolidated net sales in fiscal years 1998, 1997 and
1996.
Products. Concrete construction products include various classes of wire
mesh, which serve as a structural reinforcing grid for concrete construction,
including the following:
- concrete pipe;
- roads;
- bridges;
- runways; and
- sewage and drainage projects.
In addition, the segment produces over 2,000 specialized accessories used
in concrete construction, including products used to position and install steel
reinforcing bar and wire mesh reinforcing grid.
The segment manufactures the following three principal classes of wire
mesh:
- commodity building mesh (Class B-2);
- pipe mesh (Class C); and
- structural mesh (Class D).
The wire mesh is produced from wire that ranges in size from 1/8-inch
diameter to 3/4-inch diameter, in both smooth and deformed patterns.
Class B-2 mesh is a commodity building mesh used in housing and light
commercial construction including driveways, slab foundations and concrete
walls. Class C mesh is used to construct reinforced concrete pipe for, among
other things, drainage and sewage systems and water treatment facilities. Ivy
Steel and Wire has been producing pipe mesh for over 40 years. Class D mesh is a
structural wire mesh that is designed as an alternative to steel reinforcing bar
for certain types of concrete construction, including roads, bridges and other
heavy construction projects. Structural mesh is marketed as a cost-effective
alternative to steel reinforcing bars. Although structural mesh has a higher
initial cost to the customer than does steel reinforcing bar, we believe that
the overall construction cost to the customer is generally lower if structural
mesh is used. The segment also manufactures galvanized strand wire which is used
by manufacturers and processors of all types of wire product, including
shelving, household and automotive products.
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The concrete accessory products include the following:
- supports for steel reinforcing bars and wire mesh;
- form ties and related products;
- basket assemblies, including welded and loose dowel basket
assemblies;
- anchors and inserts, including imbedded attachments and lifting
devices, composite structural wire members and prestress strand
hold down anchors; and
- bracing devices for holding in place tilt-up concrete walls.
Although the segment manufactures most of its concrete accessories, certain
products, such as plastic supports for steel reinforcing bar and certain types
of form ties, are purchased from third parties for distribution by the segment.
New products are continually introduced in an effort to provide a full line of
concrete accessories to customers.
Concrete accessories are used in a variety of applications. Supports are
used to position and to install steel reinforcing bars and wire mesh in the
construction of roads, bridges and other heavy construction projects. Welded and
loose dowel basket assemblies are used to reinforce joints between concrete
pieces in the paving of roads, highways, and runways. Anchors and inserts are
used to fasten and lift precast panels and floor panels in the construction of,
among other things, commercial buildings.
In fiscal year 1998, approximately 93% of the segments' sales represented
manufactured products. The remaining 7% of segment sales were purchased as
finished goods for resale through 22 regional distribution facilities.
Production Process. The concrete construction products segment manufactures
its products at 11 principal facilities, which are strategically located
throughout the United States.
Wire mesh is manufactured with wire that ranges in size from 1/8-inch
diameter to 3/4-inch diameter, in both smooth and deformed patterns. The wire
mesh is manufactured from low-carbon steel rod, which is cleaned by removing
"mill scale" by passing the rod through a series of pulleys that mechanically
descales the rod. The rod is then pulled through a die that reduces the area of
the rod approximately 30 percent. This "cold working" process produces wire that
is clean, uniform in diameter and nearly 100 percent stronger than the original
rod. The wire is then processed into the finished product using automatic
welding machines. This method of welding, known as electrical resistance
welding, produces a very strong welded joint without weakening the steel as much
as electrode welding.
Certain aspects of the production process vary depending on the class of
mesh being produced. Commodity building mesh generally is produced in roll and
sheet form and is made with small diameter wire. Pipe mesh generally is
custom-made to customer specifications. Additional steps in the process of
producing structural wire mesh often include the following
- bending the mesh to precise shapes;
- cutting the exact sizes; and
- preparing the surface to allow for the application of special
coatings.
The concrete accessory manufacturing process also consists of drawing steel
rod into wire which is then fed into automatic forming and resistance welding
machines which produce the finished product. Additional manufacturing processes
include:
- various punch press operations;
- threading;
- machining;
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- painting; and
- plastic and epoxy coating of products.
In addition to steel rod, which is the primary raw material for concrete
accessories, other raw materials are used such as:
- round bar stock;
- slit steel coils;
- reinforcing steel bars and paints;
- plastisol; and
- epoxy powder used for various coatings.
Sales and Marketing; Principal Customers. The segment principally sells its
products to the following persons:
- construction products distributors;
- industrial manufacturers, such as pre-casters of concrete products;
- large reinforcing bar fabricators;
- commercial building supply dealers; and
- construction contractors.
The specialized sales force for the wire mesh product line consists of
approximately 13 employees whose sales territories cover the 48 contiguous
states. Members of the wire mesh sales force generally have engineering
backgrounds which permit them to consult with customers regarding product
specifications. Because orders for wire mesh products typically do not require
the quick turn-around time that is required for concrete accessories, wire mesh
products are shipped directly from one of the six wire mesh manufacturing
facilities to the customer, generally in truckload quantities. Most wire mesh
production is in response to particular customer orders. Light wire mesh used
for residential construction, however, is produced in standard patterns in
anticipation of customer orders.
Our dedicated sales force for concrete accessories consists of
approximately 35 employees whose sales territories cover the 48 contiguous
states. Concrete accessories are distributed primarily through 16 regional
distribution centers, five of which are located at concrete accessories
manufacturing facilities. Because orders for concrete accessories typically
require rapid turn-around time, these distribution centers are strategically
located near customers' facilities.
No one customer accounted for more than 10% of the concrete construction
products segment revenues in fiscal year 1998.
Competition. The segment's major competitor for wire mesh is Insteel Wire
Products, Inc. The segment faces strong regional competitors in Midwestern,
Southeastern, and Mid-Atlantic states. There is also competition from smaller
regional manufacturers and wholesalers of wire mesh products.
The concrete accessories product line faces competition from several
significant competitors. Dayton-Superior Corporation is the leading full-line
national participant in the concrete accessories market, with a market share
greater than our market share. The segment also faces strong full-line
competition from a regional competitor and from two other significant
competitors, who offer a more limited number of products.
We believe that our ability to produce a greater variety of wire mesh
products in a wider geographical area provides an advantage to major accounts.
We believe that our willingness and ability to provide custom-made products that
fit our customers' individual needs provides us with a competitive advantage.
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For concrete accessories, we believe that price, extensive product selection and
ability to deliver product quickly are the principal competitive factors.
We believe that our raw material costs, which we believe are lower than
many of our competitors, enhance the segment's ability to compete effectively
with respect to product price in the concrete construction market.
REGULATION
Environmental Regulation. We are subject to extensive and changing federal,
state and local environmental laws including laws and regulations that:
- relate to air and water quality;
- impose limitations on the discharge of pollutants into the
environment; and
- establish standards for the treatment, storage, and disposal of
toxic and hazardous wastes.
Stringent fines and penalties may be imposed for non-compliance with these
environmental laws. In addition, environmental laws could impose liability for
costs associated with investigating and remediating contamination at our
facilities or at third-party facilities at which we have arranged for the
disposal treatment of hazardous materials.
Although we can give no assurances, we believe that we, and our operations,
are in compliance in all material respects with all environmental laws and we
are not aware of any non-compliance or obligation to investigate or remediate
contamination that could reasonably be expected to result in material liability.
Environmental laws continue to be amended and revised, however, to impose
stricter obligations. We cannot predict the effect that such future
requirements, if enacted, would have on us although we believe that these
regulations would be enacted over time and would affect the industry as a whole.
Health and Safety Matters. Our facilities and operations are governed by
laws and regulations, including the federal Occupational Safety and Health Act,
relating to worker health and workplace safety. We believe that appropriate
precautions are taken to protect employees and others from workplace injuries
and harmful exposure to materials handled and managed at our facilities. While
it is not anticipated that we will be required in the near future to expend
material amounts by reason of such health and safety laws and regulations, we
are unable to predict the ultimate cost of compliance with these changing
regulations.
EMPLOYEES
As of January 2, 1999, we had approximately 2,200 full time employees. We
are a party to seven collective bargaining agreements with five unions, of which
a total of 284 employees are members. These collective bargaining agreements
cover employees at the following facilities:
- Baltimore, Maryland;
- Tampa, Florida;
- Whittier, California;
- Hackensack, New Jersey;
- Chicago, Illinois; and
- Oregon, Ohio.
We consider our relations with our employees to be good.
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PROPERTIES
Our principal executive offices are located in approximately 11,000 square
feet of leased space in Houston, Texas.
Our operating facilities can be broken down into two categories,
manufacturing plants and distribution centers. The majority of the manufacturing
plants are owned by us. The majority of the distribution centers are leased from
third parties. The following table shows the facilities' general information by
operating segment:
<TABLE>
<CAPTION>
TYPE OF FACILITY STATES SIZE*
- ---------------- ------ ---------------------
<S> <C> <C>
Fence Manufacturing Plants.................................. 7 609,100 square feet
Fence Distribution Centers.................................. 30 537,974 square feet
Concrete Construction Products Manufacturing Plants......... 11 1,116,875 square feet
Concrete Construction Products Distribution Centers......... 11 149,567 square feet
</TABLE>
- ---------------
* Does not include square footage of outside storage and other outdoor areas.
LEGAL PROCEEDINGS
We are involved in various claims and lawsuits incidental to our business.
We do not believe that these claims and lawsuits in the aggregate will have a
material adverse affect on our business, consolidated financial condition and
results of operations.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table provides certain information regarding our directors
and executive officers, including their respective ages.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Julius S. Burns...................... 66 President and Chief Executive Officer, Director
Thomas F. McWilliams................. 56 Director
Carl L. Blonkvist.................... 62 Director
Robert N. Tenczar.................... 49 Vice President, Chief Financial Officer and Secretary
James M. McCall...................... 56 Vice President -- General Manager -- Mesh
Vice President -- General Manager -- Concrete
Davy J. Wilkes....................... 61 Accessories
Mike W. Weaver....................... 51 Vice President -- General Manager -- Fence
</TABLE>
Julius S. Burns has been President and Chief Executive Officer and a
director of our company since February 1989. Prior to February 1989, Mr. Burns
served as President and General Manager of Ivy Steel & Wire Company, Inc., a
predecessor to our company, for 13 years. Mr. Burns has 33 years of related
industry experience.
Thomas F. McWilliams has been a director of our company since 1992. Mr.
McWilliams is Managing Director of Citicorp Venture Capital, a small business
investment company, and has been affiliated with Citicorp Venture Capital since
1983. Mr. McWilliams is a member of Citicorp Venture Capital's three-person
investment committee. Mr. McWilliams is a director of Chase Brass Industries,
Inc., a metals processing company, Ergo Science Corporation, a pharmaceutical
product development company and various other private companies.
Carl L. Blonkvist has been a director of our company since April 1997. Mr.
Blonkvist is Senior Vice President of Operations for the Brinkmann Corporation
and has been affiliated with the Brinkmann Corporation since June 1996. Mr.
Blonkvist was Senior Vice President of Coca-Cola Foods from January 1994 to
April 1996, and was a Senior Partner of Computer Science Corporation, a
consulting firm, from 1991 to 1994. In 1984, Mr. Blonkvist formed Paragon
Consulting Group, a consulting firm specializing in operations strategy, which
was purchased by Computer Science Corporation in 1991.
Robert N. Tenczar has been Vice President, Chief Financial Officer and
Secretary of our company since May 1993. From 1985 to 1993, Mr. Tenczar was
employed by Baker Hughes Incorporated, Houston, Texas, his last assignment as
Vice President Finance of its EnviroTech Controls division.
James M. McCall has been employed with our company and its predecessors in
various management positions of increasing responsibility since 1975, most
recently as our Vice President -- General Manager -- Mesh since 1989. Mr. McCall
has 35 years of related industry experience.
Davy J. Wilkes has been employed by our company and its predecessors since
1974, most recently as our Vice President -- General Manager -- Concrete
Accessories since November 1992. Mr. Wilkes has 39 years of related industry
experience.
Mike W. Weaver has been employed by our company and its predecessors since
1971, most recently as our Vice President -- General Manager -- Fence since
September 1998. Mr. Weaver has 28 years of related industry experience.
Each director holds office until the next annual meeting of stockholders of
our company or until their successor is duly elected and qualified. All officers
are elected annually and serve at the direction of our board of directors. The
bylaws of our company provide for a three member board of directors. Directors
of our company are reimbursed for all expenses actually incurred for each board
meeting which they attend. One member of our board of directors receives a fee
of $2,000 per meeting he attends. The other members
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of the board of directors do not receive a fee for any meetings they attend. The
executive officers of our company are elected by the board of directors to serve
at the discretion of the board.
INDEMNIFICATION AND DIRECTORS
We have entered into indemnification agreements with certain of our
directors and executive officers pursuant to which we will indemnify these
persons against expenses, including attorney's fees, judgments, fines and
amounts paid in settlement incurred as a result of the fact that this person, in
his or her capacity as a director or officer, is made or threatened to be made a
party to any suit or proceeding. These persons will be indemnified to the
fullest extent now or hereafter permitted by the General Corporation Law of the
State of Delaware. The indemnification agreements also provide for the
advancement of certain expenses to these directors and officers in connection
with any suit or proceeding of this type.
EXECUTIVE COMPENSATION
The following table provides the compensation for fiscal years 1998 and
1997 awarded to, or earned by, the chief executive officer of our company and
the four other most highly compensated executive officers of our company whose
salary and bonus exceeded $100,000 for services rendered in all capacities.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION(1)
-----------------------
ANNUAL ALL OTHER
NAME AND PRINCIPAL POSITION SALARY BONUS COMPENSATION
- --------------------------- --------- ----------- ------------
<S> <C> <C> <C> <C>
Julius S. Burns................................... 1998 $275,040 $1,230,726 $28,399(2)
President and Chief Executive Officer; Director 1997 250,020 450,000 27,639(3)
James M. McCall................................... 1998 160,500 90,652 12,637(4)
Vice President -- General Manager -- Mesh 1997 150,000 90,000 10,759(4)
Robert N. Tenczar................................. 1998 136,940 78,012 6,956(5)
Vice President, Chief Financial Officer and 1997 125,480 69,840 5,733(5)
Secretary
Davy J. Wilkes.................................... 1998 132,850 77,652 16,378(6)
Vice President -- General Manager Concrete 1997 124,170 68,040 14,143(6)
Accessories
Mike W. Weaver.................................... 1998 131,090 55,710 7,461(7)
Vice President -- General Manager -- Fence
</TABLE>
- ---------------
(1) The named executive officers did not receive annual compensation not
properly categorized as salary or bonus, except for certain perquisites and
other personal benefits which are not shown because the aggregate amount of
compensation for each of the named executive officers during the fiscal year
did not exceed the lesser of $50,000 or 10% of total salary and bonus
reported for the executive officer.
(2) Represents an annual contribution to our pension plan.
(3) Represents a $1,344 annual contribution to our 401(k) plan and a $26,295
annual contribution to our pension plan.
(4) Represents $1,089 and $794 annual contributions to our 401(k) plan and
$11,548 and $9,965 annual contributions to our pension plan, in 1998 and
1997.
(5) Represents $1,029 and $763 annual contributions to our 401(k) plan and
$5,927 and $4,970 annual contributions to our pension plan, in 1998 and
1997.
(6) Represents $1,003 and $928 annual contributions to our 401(k) plan and
$15,375 and $13,215 annual contributions to our pension plan, in 1998 and
1997.
(7) Represents an $842 annual contribution to our 401(k) plan and a $6,619
annual contribution to our pension plan.
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<PAGE> 35
None of the executive officers named in the above table were granted
options to purchase any capital stock of Merchants Metals Holding during fiscal
years 1998 or 1997.
MERCHANTS METALS HOLDING COMPANY 1988 STOCK OPTION PLAN
Certain eligible employees and non-employee directors of our company and
Merchants Metals Holding may be granted options to purchase up to an aggregate
of 30,000 shares of Class A common stock pursuant to the Merchants Metals
Holding Company 1988 Stock Option Plan. The Merchant Metals Holding Company
Stock Option Plan is administered by that company's administration committee,
the members of which are appointed by the board of directors of Merchants Metals
Holding.
Presently, the members of the administration committee consists of the
current members of the board of directors of Merchants Metals Holding, which are
the same persons who constitute our board of directors.
The administration committee has the ability to determine, among other
things, which individuals will be granted options under the Merchants Metals
Holding Company Stock Option Plan and the committee has the ability to determine
the exercise price, the term, up to ten years, and the vesting schedule of the
options granted under the Merchants Metals Holding Company Stock Option Plan.
Any unexpired and unexercised options, or portions thereof, will be
forfeited if an employee ceases to be in our employ by reason of disability or
upon retirement and any unexercised options, or portions thereof, will terminate
on the date that is three months from the date of the employee's termination by
reason of disability or retirement, as applicable, unless the option expires by
its terms on an earlier date.
If an employee dies while in our employ, any options granted to the
employee pursuant to the Merchants Metals Holding Company Stock Option Plan will
be exercisable during the three month period beginning on the date following the
date of his death, unless it expires sooner under its terms. These options will
terminate at the end of the three month period to the extent such options were
not exercised during such three month period.
As of January 2, 1999, there were outstanding options to purchase 15,660
shares of Merchants Metals Holding Company Class A common stock at an exercise
price of $1.00 per share.
401(K) PLAN
We maintain the MMI Products, Inc. 401(k) Savings Plan. All of our
employees are eligible to participate in the plan after one year of employment.
Employees may elect to make pre-tax contributions, up to the applicable
statutory maximum limits, to the plan. We make matching contributions, subject
to statutory limits, in an amount equal to 25% of the employee's contributions,
up to 2% of the employee's compensation. In addition, we may make additional
contributions in such amounts as we may elect. Our contributions are vested at a
rate of 25% for each year of service.
PENSION PLAN
We maintain the MMI Products, Inc. Pension Plan, which is a money purchase
defined contribution plan. Our employees, other than employees covered by a
collective bargaining agreement, generally are eligible to participate in the
plan after one year of employment. We make annual contributions to the plan for
each eligible employee in accordance with a formula that is based on the
participant's age and level of compensation. The plan provides for 100% vesting
after five years of service.
EMPLOYMENT AGREEMENT
Julius S. Burns, our President and Chief Executive Officer, has entered
into an employment agreement with us that will expire, unless renewed, on
December 31, 1999. The agreement provides for a base salary of $250,000 per
year, which may be increased annually at the discretion of the board of
33
<PAGE> 36
directors, and a discretionary annual bonus based on performance criteria
established from time to time by the board of directors.
If Mr. Burns' employment is terminated as a result of his death or total
disability, then Mr. Burns, or his estate in the event of his death, will be
entitled to receive Mr. Burns' base salary accrued through the date of
termination of employment plus bonus payment prorated to the date of termination
based on Mr. Burns' bonus for the previous year.
If Mr. Burns' employment is terminated by us for cause, as that term is
defined in his employment agreement, Mr. Burns will be entitled to receive only
his base salary accrued through the date of termination of his employment. If
Mr. Burns' employment is terminated by us other than for cause, Mr. Burns will
be entitled to receive, as a lump sum payment, the amounts to which he, or his
estate, would have been entitled in the event of his death or total disability,
plus monthly severance equal to his base salary for the lesser of twelve months
or the remaining term of the employment agreement.
If Mr. Burns' employment is terminated by us within one year following a
change of control of our company, then, in addition to the compensation to which
Mr. Burns would be entitled in the event of termination other than for cause,
and in lieu of any other bonus payment, Mr. Burns will be entitled to receive a
bonus payment prorated for the lesser of twelve months or the remaining term of
his employment agreement.
PUT AGREEMENT
Upon Julius S. Burn's death, any common units of MMI Products, L.L.C.,
which owns approximately 98% of Merchants Metals Holding, that Mr. Burns owns
will automatically be exchanged for a like number of shares of Merchants Metals
Holding common stock. Mr. Burns has entered into the Amended and Restated Put
Agreement pursuant to which Mr. Burns' estate will have, upon satisfaction of
certain conditions, the option during the ninety day period following his death
to cause Merchants Metals Holding, or its designee, to repurchase the number of
shares of Merchants Metals Holding common stock held by Mr. Burns at the time of
his death as have a fair market value of up to $2.0 million. This right may be
exercised only if, at the time of Mr. Burns' death, any of the following
existed:
Mr. Burns was an employee of Merchants Metals Holding or any of its
subsidiaries;
Mr. Burns had either:
- retired at or after age 67;
- voluntarily terminated his employment with Merchants Metals Holding
or any of its subsidiaries for good reason, as that term is defined
in the put agreement, within six months following a change in
control, as that term is defined in the put agreement;
- been terminated by Merchants Metals Holding subsidiaries without
cause, as that term is defined in the put agreement; or
- otherwise retired with the consent of the board of directors of
Merchants Metals Holding; or
- Mr. Burns was no longer employed by Merchants Metals Holding due to
a disability recognized by the board of directors of Merchants
Metals Holding.
The purchase price to be paid by Merchants Metals Holding upon the exercise
of the put right will be payable through the application of proceeds payable
under certain life insurance contracts purchased by us, with a maximum aggregate
premium of up to $100,000, to provide funds to pay the maximum purchase price of
$2,000,000. The put agreement will terminate on December 31, 2000, unless it is
earlier terminated in accordance with its terms. Merchants Metals Holding, in
its sole discretion, may elect to terminate the put agreement, at any time
before Mr. Burns' death, if Mr. Burns is in material default of his obligations
under the non-competition agreement described below, between our company and Mr.
Burns.
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<PAGE> 37
NON-COMPETITION AGREEMENT
Julius S. Burns has entered into a non-competition agreement with us under
which he has agreed not to do any of the following:
- disclose, during or after the term of his employment, any of the
confidential information, as that term is defined in the
non-competition agreement, to any person or entity for any reason
or purpose whatsoever;
- solicit or induce for a period of two years following his
termination, any person employed by, or the agent of, our company
to terminate that person's contract of employment or agency with
our company; and
- compete with us in any business in which we are engaged in at the
date of his termination in any state in the United States of
America in which we have made sales during the twelve months
immediately preceding his termination for a period of two years
following his termination.
If Mr. Burns is terminated by our board of directors by written or oral
notice, Mr. Burns' non-competition restriction will apply only for a period of
one year, plus the number of months we elect to pay monthly severance payments
to Mr. Burns after the expiration of the one year period.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Our board of directors is responsible for determining executive officer
compensation. Julius S. Burns currently serves as both a director and the
President and Chief Executive Officer of our company.
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<PAGE> 38
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
We are a wholly owned subsidiary of Merchants Metals Holding. Approximately
98% of the capital stock of Merchant Metals Holding is owned by MMI Products,
L.L.C. No director or named executive officer owns shares of Merchants Metals
Holding capital stock. The following table and the accompanying footnotes
provide, as of January 2, 1999, the beneficial ownership of MMI Products,
L.L.C.'s equity interests by the following persons:
- each person who is known to us to own beneficially more than 5% of
either class of MMI Products, L.L.C.'s outstanding common units;
- each director and named executive officer; and
- all directors and officers as a group.
On all matters submitted to a vote of the members of MMI Products, L.L.C.,
holders of MMI Products, L.L.C. Class A common units are entitled to cast, in
the aggregate, 50.5% of the total number of votes and Class B common units are
entitled to cast, in the aggregate, 49.5% of the total number of votes entitled
to be cast by holders of all of the MMI Products, L.L.C. common units then
outstanding.
<TABLE>
<CAPTION>
NUMBER OF PERCENT OF CLASS PERCENTAGE OF TOTAL
COMMON UNITS OF COMMON UNITS VOTING POWER(2)
-------------------- ----------------- -------------------
CLASS A CLASS B(1) CLASS A CLASS B
------- ---------- ------- -------
<S> <C> <C> <C> <C> <C>
Julius S. Burns......................... 58,902 -- 52.2% -- 26.3%
c/o MMI Products, Inc.
515 W. Greens Rd., Ste. 710
Houston, Texas 77067
Thomas F. McWilliams.................... -- 17,014(3) -- 2.6% 1.3%
c/o Citicorp Venture Capital Ltd.
399 Park Avenue
14th Floor, Zone 4
New York, NY 10043
Robert N. Tenczar....................... 7,500 -- 6.6% -- 3.4%
c/o MMI Products, Inc.
515 W. Greens Rd., Ste. 710
Houston, Texas 77067
James M. McCall......................... 13,850 -- 12.3% -- 6.2%
c/o MMI Products, Inc.
515 W. Greens Rd., Ste. 710
Houston, Texas 77067
Davy J. Wilkes.......................... 10,450 -- 9.3% -- 4.7%
c/o Meadow Steel Products
5110 Santa Fe Road
Tampa, Florida 33619
Citicorp Venture Capital Ltd............ -- 497,473(4) -- 76.3% 37.8%
399 Park Avenue
14th Floor, Zone 4
New York, NY 10043
</TABLE>
36
<PAGE> 39
<TABLE>
<CAPTION>
NUMBER OF PERCENT OF CLASS PERCENTAGE OF TOTAL
COMMON UNITS OF COMMON UNITS VOTING POWER(2)
-------------------- ----------------- -------------------
CLASS A CLASS B(1) CLASS A CLASS B
------- ---------- ------- -------
<S> <C> <C> <C> <C> <C>
CCT Partners III........................ -- 87,789(5) -- 13.5% 6.7%
c/o Citicorp Venture Capital Ltd.
399 Park Avenue
14th Floor, Zone 4
New York, NY 10043
William T. Comfort...................... -- 34,154 -- 5.2% 2.6%
c/o Citicorp Venture Capital Ltd.
399 Park Avenue
14th Floor, Zone 4
New York, NY 10043
Michael W. Babcock...................... 7,520 -- 6.7% -- 3.4%
c/o Merchants Metals
71347 CR 23
New Paris, Indiana 46553
Michael Weaver.......................... 9,160 -- 8.1% -- 4.1%
4901 Langley Road
Houston, Texas 77093
All Directors and Executive............. 90,702 17,014 80.3% 2.6% 41.8%
Officers as a Group
</TABLE>
- ---------------
(1) Each MMI Products, L.L.C. Class B common unit is convertible at any time, at
the option of the holder, into one MMI Products, L.L.C. Class A common unit.
(2) Represents the total voting power represented by the MMI Products, L.L.C.
Class A common units or MMI Products, L.L.C. Class B common units held by
each of the indicated persons.
(3) Includes 4,006 MMI Products, L.L.C. Class B common units owned of record by
Alchemy, L.P., an affiliate of Mr. McWilliams.
(4) Does not include 87,789 MMI Products, L.L.C. Class B common units held by
CCT Partners III, an affiliate of Citicorp Venture Capital, as to which
Citicorp Venture Capital disclaims beneficial ownership.
(5) Does not include 497,473 MMI Products, L.L.C. Class B common units held by
Citicorp Venture Capital, an affiliate of CCT Partners III, as to which CCT
Partners III disclaims beneficial ownership.
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<PAGE> 40
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
THE RECAPITALIZATION
On December 13, 1996, our company and Merchants Metals Holding completed a
recapitalization transaction. The purposes of the recapitalization included the
following:
- the cash-out of stockholders of Merchants Metals Holding Company
that were no longer actively associated with Merchants Metals
Holding's business;
- the retirement of high coupon, as compared to current market rates,
debt and preferred stock; and
- the issuance of new Merchants Metals Holding common stock, or
options to acquire new Merchants Metals Holding common stock, to
members of management who had not previously owned Merchants Metals
Holding common stock, at affordable prices and without a dilutive,
both numerical and economic, impact on existing holders of
Merchants Metals Holding common stock.
In structuring the recapitalization, the board of directors of Merchants
Metals Holding used a valuation prepared by a nationally recognized accounting
firm. The valuation report determined that Merchants Metals Holding had an
enterprise value between $105 million and $115 million. This enterprise value
was then reduced by the implied value of the outstanding debt, principal plus
unpaid interest, and preferred stock, redemption price plus unpaid dividends, to
arrive at the range of implied value of common equity of $30,967,000 to
$40,967,000 for Merchants Metals Holding common stock prior to recapitalization.
At the mid-point, and after taking into account in-the-money options, the
valuation per share of Merchants Metals Holding common stock immediately prior
to the recapitalization was $39.57.
In connection with the recapitalization, and as result of a merger of a
newly formed company into Merchants Metals Holding, all of the old Merchants
Metals Holding common stock was either paid out in cash, at $39.57 per share, or
exchanged for new subordinated, non-convertible preferred stock with a
redemption price equal to the value of the exchanged Merchants Metals Holding
common stock. In addition, certain of our investors and management purchased new
shares of a new class of Merchants Metals Holding common stock for $1.00 per
share. Because all of the old Merchants Metals Holding common stock was either
cashed out or exchanged for new preferred stock with a redemption price equal to
the pre-recapitalization value of the old Merchants Metals Holding common stock,
the full common equity value of Merchants Metals Holding before the
recapitalization bears no relationship to the common equity value of Merchants
Metals Holding after the recapitalization. The value of the new class of
Merchants Metals Holding common stock issued in the recapitalization equaled the
cash proceeds received, $1.00 per share.
Immediately following the recapitalization, Merchants Metals Holding issued
new Merchants Metals Holding common stock options to certain employees for an
aggregate 17,890 shares of the new class of Merchants Metals Holding common
stock, which options vest over a four year period. Because Merchants Metals
Holding's board of directors did not intend for the new options to be
compensatory, the exercise price per share was set at $1.00, which represented
the fair market value per share of the new Merchants Metals Holding common stock
at the date of grant, consistent with the price paid for new shares of Merchants
Metals Holding common stock in the recapitalization.
Pursuant to the recapitalization, we repaid:
- approximately $192,000 of our subordinated indebtedness, plus
accrued but unpaid interest, held by Thomas F. McWilliams, one of
our directors; and
- approximately $14,250,000 of our subordinated indebtedness, plus
accrued but unpaid interest, held by Citicorp Venture Capital and
an affiliate of Citicorp Venture Capital.
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<PAGE> 41
Also pursuant to the recapitalization, as a result of the recapitalization
merger, the capital stock of Merchants Metals Holding outstanding before the
recapitalization merger was converted into the right to receive cash. As a
result:
- Citicorp Venture Capital became entitled to receive approximately
$37,355,000;
- Thomas F. McWilliams became entitled to receive approximately
$822,000;
- Julius S. Burns, our President and Chief Executive Officer, and one
of our directors, became entitled to receive approximately
$1,749,000;
- James M. McCall and Davy J. Wilkes, who are executive officers of
our company, became entitled to receive approximately $485,000 and
$373,000; and
- Michael W. Babcock and Michael Weaver, each of whom owns in excess
of 5% of the Merchants Metals Holding Class A common stock, became
entitled to receive approximately $182,000 and $63,000.
Immediately following the recapitalization merger, pursuant to the
recapitalization:
- Citicorp Venture Capital and an affiliate of Citicorp Venture
Capital purchased shares of Merchants Metals Holding Company common
stock and Merchants Metals Holding preferred stock for an aggregate
of approximately $46,709,000; and
- Thomas F. McWilliams, together with an affiliated limited
partnership, Julius S. Burns, Robert N. Tenczar, James M. McCall,
Davy J. Wilkes, Michael W. Babcock, Michael Weaver and William T.
Comfort purchased shares of Merchants Metals Holding common stock
and Merchants Metals Holding preferred stock for aggregate purchase
prices as follows:
<TABLE>
<S> <C>
Thomas F. McWilliams..................... $1,149,000
Julius S. Burns.......................... $1,487,000
Robert N. Tenczar........................ $ 8,000
James M. McCall.......................... $ 342,000
Davy J. Wilkes........................... $ 289,000
Michael W. Babcock....................... $ 150,000
Michael Weaver........................... $ 72,000
William T. Comfort....................... $1,279,000
</TABLE>
REDEMPTION OF MERCHANTS METALS HOLDING PREFERRED STOCK AND REPURCHASE OF STOCK
OPTIONS
A portion of the proceeds of the $120 million senior subordinated notes
issued on April 16, 1997 was used to distribute to Merchants Metals Holding
sufficient funds to permit Merchants Metals Holding to redeem all of the
outstanding Series A junior preferred stock, par value $.01 per share, of
Merchants Metals Holding and the Series B senior preferred stock, par value $.01
per share, of Merchants Metals Holding, and to repurchase certain options held
by Mannesmann Pipe and Steel Corporation and members of our management that were
exercisable for shares of Merchants Metals Holding Series A junior preferred
stock. The number of shares of Merchants Metals Holding Series A junior
preferred stock for which such options were exercisable increased automatically
as dividends accrued with respect to shares of outstanding Merchants Metals
Holding Series A junior preferred stock. Upon completion of the senior
subordinated notes offering, Thomas F. McWilliams, Julius S. Burns, James M.
McCall, Davy J. Wilkes, Citicorp Venture Capital, CCT Partners III, William T.
Comfort, Michael W. Babcock, and Michael
39
<PAGE> 42
Weaver received in the aggregate approximately the following sums for their
shares of Merchants Metals Holding preferred stock and their options:
<TABLE>
<S> <C>
Thomas F. McWilliams.................................... $ 1,170,000
Julius S. Burns......................................... $ 2,281,000
James M. McCall......................................... $ 539,000
Davy J. Wilkes.......................................... $ 411,000
Citicorp Venture Capital................................ $40,545,000
CCT Partners III........................................ $ 7,155,000
William T. Comfort...................................... $ 1,287,000
Michael W. Babcock...................................... $ 288,000
Michael Weaver.......................................... $ 143,000
</TABLE>
CONTRIBUTION OF MERCHANTS METALS HOLDING COMMON STOCK TO MMI PRODUCTS, L.L.C.
On June 12, 1997, in connection with the formation of MMI Products, L.L.C.,
holders of Merchants Metals Holding common stock representing more than 98% of
the voting power of Merchants Metals Holding contributed all of their respective
shares of Merchants Metals Holding common stock to MMI Products, L.L.C. in
exchange for the same number of MMI Products, L.L.C. common units. As a result
of the contribution, MMI Products, L.L.C. owns more than 98% of Merchants Metals
Holding common stock, representing more than 98% of the voting power of
Merchants Metals Holding.
40
<PAGE> 43
THE EXCHANGE OFFER
PURPOSE AND EFFECT
On February 12, 1999, we sold Series C notes to the initial purchaser,
Bear, Stearns. In connection with the sale of those notes, we entered into a
registration rights agreement with the initial purchaser. The registration
rights agreement requires that we use our best efforts to register the Series B
notes with the Securities and Exchange Commission and offer to exchange the new
Series B notes for your Series C notes. We want to advise you that a copy of the
registration rights agreement has been filed with the SEC as an exhibit to our
annual report for fiscal 1998 on Form 10-K and we strongly encourage you to read
the entire text of the registration rights agreement. We expressly qualify all
of our discussions of the registration rights agreement by the terms of the
agreement itself. Except as discussed below, upon the completion of the exchange
offer we will have no further obligations to register your notes.
We need certain representations from you before you can participate in the
exchange offer. In order to participate in the exchange offer, we require that
you represent to us that:
- you are acquiring the Series B notes in the ordinary course of your
business;
- neither you nor any other person is engaging in, or intends to
engage, in a distribution of the Series B notes;
- neither you nor any other person has an arrangement or
understanding with any person to participate in the distribution of
the Series B notes;
- neither you nor any other person is our "affiliate," which is
defined under Rule 405 of the Securities Act as a person that
directly, or indirectly through one or more intermediaries,
controls or is controlled by, or is under common control with, us;
and
- if you or any other person is a broker-dealer, you will receive
Series B notes for your own account, your Series B notes will be
acquired as a result of market-making activities or other trading
activities, and you will be required to acknowledge that you will
deliver a prospectus in connection with any resale of your Series B
notes.
You may be entitled to "shelf" registration rights. In accordance with the
registration rights agreement, we are required to file a shelf registration
statement covering your Series C notes for a continuous offering in accordance
with Rule 415 of the Securities Act. This means that we must file a second
registration statement to register your Series C notes if:
- we are not permitted to effect the exchange offer because of any
change in law or applicable interpretations of the staff of the
SEC; or
- we do not consummate the exchange offer by September 10, 1999.
In the event that we are obligated to file a shelf registration statement,
we will be required to keep the shelf registration statement effective until
February 11, 2001. Other than as described above, you will not have the right to
participate in the shelf registration or require that we register your notes in
accordance with the Securities Act.
If you participate in the exchange offer and make the representations
provided above, we believe you will be able to freely sell or transfer your
Series B notes. We base our belief upon existing interpretations by the SEC's
staff contained in several "no-action" letters to third-parties unrelated to us.
If you tender your Series C notes in the exchange offer for the purpose of
participating in a distribution of Series B notes, you cannot rely on this
interpretation by the SEC's staff and you must comply with the registration and
prospectus delivery requirements of the Securities Act in connection with a
secondary resale transaction. Each broker-dealer who receives Series B notes for
its own account in exchange for its Series C notes, whether the Series B notes
were acquired by that broker-dealer as a result of market-
41
<PAGE> 44
making activities or other trading activities, must acknowledge that the
broker-dealer will deliver a prospectus in connection with any resale of the
Series B notes.
You may suffer adverse consequences if you fail to exchange your Series C
notes. See "Risk Factors."
Following the completion of the exchange offer, except as provided above
and in the registration rights agreement we refer to, you will not have any
further registration rights and your Series C notes will continue to be subject
to certain restrictions on transfer. Accordingly, if you do not participate in
the exchange offer, your ability to sell your notes could be adversely affected.
TERMS OF THE EXCHANGE OFFER
We will accept any validly tendered notes which are not withdrawn prior to
5:00 p.m., New York City time, on the expiration date of the exchange offer. We
will issue $1,000 principal amount of Series B notes in exchange for each $1,000
principal amount of your Series C notes. You may tender some or all of your
notes in the exchange offer.
The form and terms of the Series B notes will be the same as the form and
terms of your notes except that:
- interest on the Series B notes will accrue from the last interest
payment date on which interest was paid on your Series C notes, or,
if no interest was paid, from the date of the original issuance of
your Series C notes; and
- the Series B notes have been registered under the Securities Act
and will not bear a legend restricting their transfer.
This prospectus, together with the letter of transmittal you received with
this prospectus, is being sent to you and to others believed to have beneficial
interests in the Series C notes. You do not have any appraisal or dissenters'
rights under the General Corporation Law of the State of Delaware or under the
indenture governing your notes. We intend to conduct the exchange offer in
accordance with the requirements of the Securities Exchange Act and the rules
and regulations of the SEC.
We will have accepted your validly tendered Series C notes when we have
given oral or written notice to the exchange agent. The exchange agent will act
as agent for the tendering holders for the purpose of receiving the Series B
notes from us. If the exchange agent does not accept any tendered Series C notes
for exchange because of an invalid tender or for any other valid reason, the
exchange agent will return the certificates, without expense, to the tendering
holder as promptly as practicable after the expiration date of the exchange
offer.
You will not be required to pay brokerage commissions, fees, or transfer
taxes in the exchange of your Series C notes. We will pay all charges and
expenses other than any taxes you may incur in connection with the exchange
offer.
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The exchange offer will expire at 5:00 p.m., New York City time, on June 1,
1999, unless we extend it. In any event, we will hold each exchange offer open
for at least thirty days. In order to extend the exchange offer, we will issue a
notice by press release or by other public announcement before 9:00 a.m., New
York City time, on the next business day after the previously scheduled
expiration date.
We reserve the right, in our sole discretion:
- to delay accepting your notes;
- to extend the exchange offer;
- to terminate the exchange offer if any of the conditions were not
satisfied by giving oral or written notice of delay, extension or
termination to the exchange agent; or
- to amend the terms of the exchange offer in any manner.
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<PAGE> 45
PROCEDURES FOR TENDERING YOUR NOTES
Only you may tender your notes in the exchange offer. Except as stated on
page 45 under the heading "The Exchange Offer -- Book Entry Transfer," to tender
in the exchange offer, you must:
- complete, sign and date the enclosed letter of transmittal, or a
copy of it;
- have the signature on the letter of transmittal guaranteed if
required by the letter of transmittal; and
- mail, fax or otherwise deliver the letter of transmittal or copy to
the exchange agent before the expiration date.
In addition, either:
- the exchange agent must receive certificates for your Series C
notes and the letter of transmittal before the expiration date; or
- the exchange agent must receive a timely confirmation of a
book-entry transfer of your Series C notes, if that procedure is
available, into the account of the exchange agent at the Depositary
Trust Company under the procedure for book-entry transfer described
below before the expiration date of the exchange offer; or
- you must comply with the guaranteed delivery procedures described
below.
For your Series C notes to be tendered effectively, the exchange agent must
receive a letter of transmittal and other required documents before the
expiration date of the exchange offer.
If you do not withdraw your tender before the expiration date, it will
constitute an agreement between you and us in accordance with the terms and
conditions in this prospectus and in the letter of transmittal.
The method of delivery to the exchange agent of your Series C notes, your
letter of transmittal, and all other required documents is at your election and
risk. Instead of delivery by mail, we recommend that you use an overnight or
hand delivery service. In all cases, you should allow sufficient time to assure
delivery to the exchange agent before the expiration date of the exchange offer.
Do not send either a letter of transmittal or your Series C notes directly to
us. You may request your broker, dealer, commercial bank, trust company, or
nominee to make the exchange on your behalf.
PROCEDURE IF THE SERIES C NOTES ARE NOT REGISTERED IN YOUR NAME
Any beneficial owner whose Series C notes are registered in the name of a
broker, dealer, commercial bank, trust company, or other nominee and who wishes
to tender the Series C notes in the exchange offer should contact the registered
holder promptly and instruct the registered holder to tender the Series C notes
on the beneficial owner's behalf. If the beneficial owner wishes to tender on
the owner's own behalf, the owner must, before completing and executing a letter
of transmittal and delivering the owner's Series C notes, either make
appropriate arrangements to register ownership of the Series C notes in the
beneficial owner's name or obtain a properly completed bond power or other
proper endorsement from the registered holder. We strongly urge you to act
immediately since the transfer of registered ownership may take considerable
time.
SIGNATURE REQUIREMENTS AND SIGNATURE GUARANTEES
Unless you are a registered holder who requests that the Series B notes be
mailed to you and issued in your name, or unless you are a member of, or
participant in, the Securities Transfer Agents Medallion Program, the New York
Stock Exchange Medallion Signature Program, the Stock Exchange Medallion
Program, or an "Eligible Guarantor Institution" within the meaning of Rule
17Ad-15 under the Securities Exchange Act, each an "Eligible Institution," you
must guarantee your signature on a letter of transmittal or a notice of
withdrawal by an Eligible Guarantor Institution.
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<PAGE> 46
If a trustee, executor, administrator, guardian, attorney-in-fact, officer
of a corporation, or other person acting in a fiduciary or representative
capacity signs the letter of transmittal or any notes or bond powers on your
behalf, that person must indicate their capacity when signing, and submit
satisfactory evidence to us with the letter of transmittal demonstrating their
authority to act on your behalf.
CONDITIONS TO THE EXCHANGE OFFER
We will decide all questions as to the validity, form, eligibility,
acceptance, and withdrawal of tendered Series C notes and our determination will
be final and binding on you. We reserve the absolute right to reject any and all
Series C notes not properly tendered or accept any Series C notes which would be
unlawful in the opinion of our counsel. We also reserve the right to waive any
defects, irregularities, or conditions of tender as to particular Series C
notes. Our interpretation of the terms and conditions of the exchange offer,
including the instructions in a letter of transmittal, will be final and binding
on all parties. You must cure any defects or irregularities in connection with
tenders of Series C notes as we shall determine. Although we intend to notify
holders of defects or irregularities with respect to tenders of Series C notes,
we, the exchange agent, or any other person will not incur any liability for
failure to give this notification. Tenders of Series C notes will not be deemed
to have been made until any defects or irregularities have been cured or waived.
Any Series C notes received by the exchange agent that are not properly tendered
and as to which defects or irregularities have not been cured or waived will be
returned by the exchange agent to the tendering holders, unless otherwise
provided in the letter of transmittal, as soon as practicable following the
expiration date of the exchange offer.
We reserve the right to purchase or to make offers for any Series C notes
that remain outstanding after the expiration date of the exchange offer or to
terminate the exchange offer and, to the extent permitted by law, purchase
Series C notes in the open market, in privately negotiated transactions or
otherwise. The terms of any of these purchases or offers could differ from the
terms of the exchange offer.
These conditions are for our sole benefit and we may assert or waive them
at any time or for any reason. Our failure to exercise any of our rights will
not be a waiver of our rights.
We will not accept for exchange any Series C notes tendered, and no Series
B notes will be issued in exchange for any Series C notes, if at the time any
stop order is threatened or in effect with respect to the registration statement
or the qualification of the indenture relating to the Series B notes under the
Trust Indenture Act. We are required to use every reasonable effort to obtain
the withdrawal of any stop order at the earliest possible time.
In all cases, issuance of Series B notes will be made only after timely
receipt by the exchange agent of certificates for Series C notes or a timely
book-entry confirmation of the Series C notes into the exchange agent's account
at DTC's book-entry transfer facility, a properly completed and duly executed
letter of transmittal or, with respect to DTC and its participants, electronic
instructions of the holder agreeing to be bound by the letter of transmittal,
and all other required documents. If we do not accept any tendered Series C
notes for a valid reason or if you submit Series C notes for a greater principal
amount than you desire to exchange, we will return the unaccepted or
non-exchanged Series C notes to you at our expense. In the case of Series C
notes tendered by book-entry transfer into the exchange agent's account at DTC's
book-entry transfer facility under the book-entry transfer procedures described
below, the non-exchanged Series C notes will be credited to an account
maintained with the book-entry transfer facility. This will occur as promptly as
practicable after the expiration or termination of the exchange offer for the
Series C notes.
Notwithstanding any other provision of the exchange offer, we will not be
required to accept for exchange, or to issue Series B notes in exchange for, any
notes and may terminate or amend the exchange offer if at any time before the
acceptance of the notes for exchange or the exchange of the Series B notes for
the Series C notes, we determine that the exchange offer violates applicable
law, any applicable interpretation of the staff of the SEC or any order of any
governmental agency or court of competent jurisdiction.
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<PAGE> 47
BOOK-ENTRY TRANSFER
The exchange agent will make requests to establish accounts at DTC's
book-entry transfer facility for purposes of the exchange offer within two
business days after the date of this prospectus. Any financial institution that
is a participant in the book-entry transfer facility's systems may make
book-entry delivery of Series C notes being tendered by causing the book-entry
transfer facility to transfer the Series C notes into the exchange agent's
account at the book-entry transfer facility in accordance with the appropriate
procedures for transfer. However, although delivery of Series C notes may be
effected through book-entry transfer at the book-entry transfer facility, a
letter of transmittal or copy thereof, with any required signature guarantees
and any other required documents, must, except as provided in the following
paragraph, be transmitted to and received by the exchange agent on or before the
expiration date of the exchange offer or the guaranteed delivery procedures
below must be complied with.
DTC's Automated Tender Offer Program (ATOP) is the only method of
processing the exchange offer through DTC. To accept the exchange offer through
ATOP, participants in DTC must send electronic instructions to DTC through DTC's
communication system instead of sending a signed, hard copy letter of
transmittal. DTC is obligated to communicate those electronic instructions to
the exchange agent. To tender notes through ATOP, the electronic instructions
sent to DTC and transmitted by DTC to the exchange agent must contain the
participant's acknowledgment of its receipt of and agreement to be bound by the
letter of transmittal for those notes.
GUARANTEED DELIVERY PROCEDURES
If a registered holder of Series C notes desires to tender any Series C
notes and the Series C notes are not immediately available, or time will not
permit the holder's Series C notes or other required documents to reach the
exchange agent before the expiration date of the exchange offer, or the
procedure for book-entry transfer cannot be completed on a timely basis, a
tender may be effected if:
- the tender is made through an Eligible Institution;
- before the expiration date of the exchange offer, the exchange
agent received from the Eligible Institution a properly completed
and duly executed letter of transmittal and Notice of Guaranteed
Delivery, in the form provided by us. The Notice of Guaranteed
Delivery must state the name and address of the holder of the
Series C notes and the amount of Series C notes tendered, that the
tender is being made and guaranteeing that within three New York
Stock Exchange trading days after the date of execution of the
Notice of Guaranteed Delivery, the certificates for all physically
tendered Series C notes, in proper form for transfer, or a
book-entry confirmation and any other documents required by the
applicable letter of transmittal will be deposited by the Eligible
Institution with the exchange agent; and
- the certificates for all physically tendered Series C notes, in
proper form for transfer, or a book-entry confirmation and all
other documents required by the applicable letter of transmittal
are received by the exchange agent within three New York Stock
Exchange trading days after the date of execution of the Notice of
Guaranteed Delivery.
WITHDRAWAL RIGHTS
You may withdraw your tender of Series C notes at any time before 5:00
p.m., New York City time, on the expiration date of the exchange offer.
For a withdrawal to be effective, a written or, for a DTC participant,
electronic ATOP transmission notice of withdrawal must be received by the
exchange agent at its address provided in this prospectus before 5:00 p.m., New
York City time, on the expiration date of the exchange offer.
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<PAGE> 48
The notice of withdrawal must:
- specify the name of the person who deposited the notes to be
withdrawn;
- identify the Series C notes to be withdrawn, including the
certificate number or numbers and principal amount of the Series C
notes;
- be signed by the holder in the same manner as the original
signature on the letter of transmittal by which the Series C notes
were tendered or be accompanied by documents of transfer sufficient
to have the trustee of the Series C notes register the transfer of
the Series C notes into the name of the person withdrawing the
tender; and
- specify the name in which any Series C notes are to be registered,
if different from that of the holder who tendered the Series C
notes.
We will determine all questions as to the validity, form, and eligibility
of any and our determination will be final and binding on all parties. Any
Series C notes withdrawn will not be considered to have been validly tendered.
We will return any Series C notes which have been tendered but not exchanged
without cost to the holder as soon as practicable after withdrawal, rejection of
tender, or termination of the exchange offer. Properly withdrawn Series C notes
may be retendered by following one of the above procedures before the expiration
date.
EXCHANGE AGENT
You should direct all executed letters of transmittal to the exchange
agent. U.S. Trust Company of Texas, N.A. is the exchange agent for the exchange
offer. Questions, requests for assistance and requests for additional copies of
the prospectus or a letter of transmittal should be directed to the exchange
agent addressed as follows:
<TABLE>
<CAPTION>
By Hand or Overnight Delivery
By Certified Mail By Hand: Before 4:30 p.m.:
<S> <C> <C>
U.S. Trust Company of Texas, N.A. U.S. Trust Company of Texas, N.A. U.S. Trust Company of Texas, N.A.
P.O. Box 841 111 Broadway 770 Broadway
Cooper Station Lower Level 13th Floor -- Corporate Trust
New York, New York 10276-0841 New York, New York 10006-1906 Operations
Attn: Corporate Trust Services Attn: Corporate Trust Services New York, New York 10003-9598
Attn: Corporate Trust Services
</TABLE>
For Information
by Telephone:
(800) 225-2398
FEES AND EXPENSES
We currently do not intend to make any payments to brokers, dealers, or
others to solicit acceptances of the exchange offer. The principal solicitation
is being made by mail. However, additional solicitations may be made in person
or by telephone by our officers and employees.
Our estimated cash expenses incurred in connection with the exchange offer
will be paid by us and are estimated to be approximately $0.1 million in the
aggregate. This amount includes fees and expenses of the trustee for the Series
B and Series C notes, accounting, legal, printing, and related fees and
expenses.
TRANSFER TAXES
If you tender Series C notes for exchange you will not be obligated to pay
any transfer taxes. However, if you instruct us to register Series B notes in
the name of, or request that your Series C notes not tendered or not accepted in
the exchange offer be returned to, a person other than you, you will be
responsible for the payment of any transfer tax owed.
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<PAGE> 49
DESCRIPTION OF THE REGISTERED NOTES
GENERAL
You can find the definitions of capitalized terms used in this description
and not otherwise defined under the subheading "Certain Definitions." In this
description, the word "Company" refers only to MMI Products, Inc. and "notes"
collectively refers to the Series B and Series C notes.
The Company will issue the notes under our existing indenture between the
Company and U.S. Trust Company of Texas, N.A., as trustee. The terms of the
notes include those stated in the indenture and those made part of the indenture
by reference to the Trust Indenture Act of 1939.
The following description is a summary of the provisions of the notes, the
indenture and the registration rights agreement that the Company believes to be
material and of interest to you. It does not restate those documents in their
entirety. We urge you to read the notes, the indenture and the registration
rights agreement because they, and not this description, define your rights as
holders of these notes. We have filed copies of the form of notes, the indenture
and the registration rights agreement as exhibits to our filings with the SEC.
BRIEF DESCRIPTION OF THE REGISTERED SERIES B NOTES
These notes:
(1) are general unsecured obligations of the Company;
(2) are subordinated in right of payment to the prior payment in full
of all Senior Indebtedness of the Company; and
(3) are senior in right of payment to all existing and future
subordinated Indebtedness of the Company.
The Company has one subsidiary, Security Fence Supply Co., which is a
Restricted Subsidiary under the indenture. If, in the future, the Company
creates or acquires any Subsidiaries, it is permitted to designate Subsidiaries
as either "Restricted Subsidiaries," which will be subject to all the provisions
of the indenture, or as "Unrestricted Subsidiaries," which generally will not be
subject to the provisions of the indenture.
PRINCIPAL, MATURITY AND INTEREST
The Company will issue new Series B notes in aggregate principal amount of
$30.0 million. The indenture allows us to issue up to an additional $50.0
million of notes in the future, as long as the Company satisfies the
requirements listed under the subheading "Certain Covenants -- Limitation on
Incurrence of Indebtedness and Issuance of Disqualified Stock." Restrictions
contained in the Credit Facility may also restrict our ability to issue
additional notes under the indenture.
The notes will be issued in registered form, without coupons, and in
denominations of $1,000 and integral multiples thereof.
The notes mature on April 15, 2007.
Interest on the notes accrues at the rate of 11.25% per year and is payable
semi-annually in arrears on April 15 and October 15 of each year, beginning on
October 15, 1999 in the case of the new Series B notes, to holders of record on
the immediately preceding April 1 and October 1.
Interest on the notes accrues from the most recent date to which interest
has been paid or, if no interest has been paid, from the date of original
issuance. Interest is computed on the basis of a 360-day year comprised of
twelve 30-day months.
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<PAGE> 50
METHODS OF RECEIVING PAYMENTS ON THE NOTES
If a holder gives wire transfer instructions to the Company, the Company
will make all principal, premium and interest payments on the notes in
accordance with those instructions. All other payments on the notes will be made
at the office or agency of the paying agent and registrar within the City and
State of New York unless the Company elects to make interest payments by check
mailed to the holders at their addresses shown in the register of holders of
notes.
PAYING AGENT AND REGISTRAR FOR THE NOTES
The trustee is the paying agent and registrar under the indenture. The
Company may act as paying agent or registrar under the indenture, and the
Company may change the paying agent or registrar without prior notice to the
holders of the notes.
OPTIONAL REDEMPTION
On or before April 15, 2000, the Company will be permitted to redeem up to
35% of the aggregate principal amount of the notes at a redemption price of
111.25% of the principal amount thereof, plus accrued and unpaid interest and
any Liquidated Damages to the redemption date with the net cash proceeds of one
or more underwritten public offerings of Capital Stock of the Company; provided,
however, that:
(1) at least $78.0 million aggregate principal amount of notes remain
outstanding immediately after the redemption;
(2) notice of the redemption is given not later than 30 days after the
closing of the Public Equity Offering; and
(3) each redemption occurs within 90 days after the date of the
closing of the Public Equity Offering.
After April 15, 2002, the Company may redeem the notes, at any time, in
whole or in part, upon not less than 30 nor more than 60 days' notice, at the
redemption prices, expressed as percentages of principal amount, shown below
plus accrued and unpaid interest, any Liquidated Damages to the applicable
redemption date, if redeemed during the twelve-month period beginning on April
15 of the years indicated below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
- ---- ----------
<S> <C>
2002...................................................... 105.625%
2003...................................................... 103.750%
2004...................................................... 101.875%
2005 and thereafter....................................... 100.000%
</TABLE>
SELECTION AND NOTICE
If less than all of the notes will be redeemed at any time, the trustee
will select notes for redemption as follows:
(1) if the notes are listed, in compliance with the requirements of
the principal national securities exchange on which the notes are
listed; or
(2) if the notes are not so listed, on a pro rata basis, by lot or
whatever method the trustee deems fair and appropriate, unless
otherwise provided in the indenture.
No notes of $1,000 or less will be redeemed in part. Notices of redemption
will be mailed by first class mail to each holder of notes to be redeemed at its
registered address. If any note is redeemed in part only, the notice of
redemption that relates to that note will state the portion of the principal
amount of the
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<PAGE> 51
note to be redeemed. A new note in principal amount equal to the unredeemed
portion of the note will be issued in the name of the holder upon cancellation
of the original note. Interest will cease to accrue on notes or portions of
notes called for redemption on and after the redemption date unless the Company
defaults in the payment of the redemption price, together with accrued and
unpaid interest and any Liquidated Damages to the redemption date.
MANDATORY REDEMPTION
Except as provided below under the subheading "Repurchase at the Option of
Holders," the Company will not be required to make mandatory redemption or
sinking fund payments with respect to the notes.
REPURCHASE AT THE OPTION OF HOLDERS UPON A CHANGE OF CONTROL
If a Change of Control occurs, the Company will be obligated to make an
offer (a "Change of Control Offer") to each holder of notes to repurchase all or
any part, equal to $1,000 or an integral multiple of $1,000, of the holder's
notes at a repurchase price in cash equal to 101% of the aggregate principal
amount of notes repurchased plus accrued and unpaid interest and any Liquidated
Damages (the "Change of Control Payment") to the date of repurchase (the "Change
of Control Payment Date"). Within 30 days following a Change of Control, the
Company will be required to mail, or cause to be mailed, a notice to each holder
describing the transaction or transactions that constitute the Change of Control
and the Change of Control Offer. The Change of Control Offer must remain open
for at least 30 and not more than 40 days, unless otherwise required by law. In
addition, the Company will be required to comply with the requirements of Rule
14e-1 under the Securities Exchange Act and any other securities laws and
regulations thereunder if those laws and regulations are applicable to the
repurchase of the notes as a result of a Change of Control.
On the Change of Control Payment Date, the Company will be required, to the
extent lawful, to
(1) accept for payment all notes or portions of notes tendered under
the Change of Control Offer;
(2) deposit with the paying agent an amount equal to the Change of
Control Payment in respect of all notes or portions of notes so
tendered,
(3) deliver or cause to be delivered to the trustee the notes so
accepted together with an Officers' Certificate stating the
aggregate principal amount of notes or portions of notes accepted
for payment by the Company.
The paying agent will be required to promptly mail the Change of Control
Payment to each holder of accepted notes and the trustee will promptly
authenticate and mail, or cause to be transferred by book-entry, to each holder
a new note equal in principal amount to any unpurchased portion of the notes
surrendered, if any; provided, however, that each new note will be in a
principal amount of $1,000 or an integral multiple of $1,000. The Company will
publicly announce the results of the Change of Control Offer on or as soon as
practicable after the Change of Control Payment Date.
With respect to the sale of assets referred to in the definition of a
"Change of Control," the phrase "all or substantially all" as used in the
indenture varies according to the facts and circumstances of the particular
transaction, has no clearly established meaning under New York law, which
governs the indenture, and is subject to judicial interpretation. Accordingly,
there may be a degree of uncertainty in ascertaining whether a particular
transaction would involve a disposition of "all or substantially all" of the
assets of a person and therefore it may be unclear whether a Change of Control
has occurred and whether a Change of Control Offer is required.
The Credit Facility prohibits the Company from purchasing any notes at any
time before their maturity. In addition, the Credit Facility provides that
certain Change of Control events with respect to the Company will constitute a
default under the Credit Facility. An event of default under the Credit
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<PAGE> 52
Facility could result in an acceleration of the indebtedness thereunder, in
which case the subordination provisions of the notes would require payment in
full of any Senior Indebtedness of the Company before repurchase or other
payments in respect of the notes. Any future credit agreements or other
agreements relating to Senior Indebtedness to which the Company becomes a party
will likely contain similar restrictions and provisions.
If a Change of Control occurs at a time when the Company is prohibited from
purchasing notes, the Company could seek the consent of its lenders to the
purchase of notes or could attempt to refinance the borrowings that contain that
prohibition. If the Company does not obtain a consent or repay those borrowings,
the Company will remain prohibited from purchasing notes. In each case, the
Company's failure to purchase tendered notes would constitute an Event of
Default under the indenture, which would, in turn, constitute a default under
the Credit Facility. Under those circumstances, the subordination provisions in
the indenture would likely restrict payments to the holders of notes as
described under the subheading "Subordination." None of the provisions relating
to a repurchase upon a Change of Control are waivable by the Board of Directors
of the Company or the trustee.
ASSET SALES
The Company will not be permitted to, and will not permit any of its
Restricted Subsidiaries to, engage in any Asset Sale, unless:
(1) the Company or the Restricted Subsidiary, as the case may be,
receives consideration at the time of the Asset Sale at least
equal to the fair market value, evidenced by a resolution of the
Board of Directors provided in an Officers' Certificate delivered
to the trustee, of the assets sold or otherwise disposed of;
(2) except in the case of Permitted Asset Swaps, at least 75% of the
consideration therefor received by the Company or the Restricted
Subsidiary is in the form of cash or Cash Equivalents; provided,
however, that the amount of any liabilities, as shown on the
Company's or the Restricted Subsidiary's most recent balance sheet
or in the related notes thereto, of the Company or the Restricted
Subsidiary, other than liabilities that are by their terms
subordinated in right of payment to the notes, that are assumed by
the transferee of any of those assets and any notes or other
obligations received by the Company or the Restricted Subsidiary
from the transferee that are immediately converted by the Company
or the Restricted Subsidiary into cash, to the extent of the cash
received, will be deemed to be cash for purposes of this
provision.
Within 360 days after the receipt of the Net Proceeds from an Asset Sale,
the Company will be permitted to apply the Net Proceeds to:
(1) permanently reduce Senior Indebtedness;
(2) permanently reduce Indebtedness of the Restricted Subsidiary that
sold properties or assets in the Asset Sale; or
(3) acquire properties and assets to replace the properties and assets
that were the subject of the Asset Sale or properties and assets
that will be used in the same or a similar line of business as the
Company was engaged in on the date of the indenture or reasonable
extensions, developments or expansions of the indenture or
ancillary activities.
Pending the final application of any Net Proceeds, the Company will be
permitted to invest Net Proceeds in any manner that is not prohibited by the
indenture. Any Net Proceeds from the Asset Sale that are not applied as provided
in the immediately preceding paragraph will be deemed to constitute "Excess
Proceeds." When the aggregate cumulative amount of Excess Proceeds exceeds $5.0
million, the Company will be required to make an offer to all holders of notes
(an "Asset Sale Offer") to purchase the maximum principal amount of notes that
may be purchased out of the Excess Proceeds, at an offer price in cash in an
amount equal to 100% of the principal amount of the notes plus accrued and
unpaid interest
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<PAGE> 53
and any Liquidated Damages to the date of purchase, in accordance with the
procedures provided in the indenture. If the aggregate amount of notes tendered
under an Asset Sale Offer is less than the Excess Proceeds, the Company may use
this deficiency for general corporate purposes in any manner provided by the
indenture. If the aggregate principal amount of notes surrendered exceeds the
amount of Excess Proceeds, the trustee will select the notes to be purchased on
a pro rata basis. Upon completion of this offer to purchase, the amount of
Excess Proceeds will be reset at zero.
The Asset Sale Offer must be commenced within 30 days following the first
date on which the Company has cumulative Excess Proceeds of at least $5.0
million and remain open for at least 30 and not more than 40 days, unless
otherwise required by applicable law. The Company is required to comply with the
requirements of Rule 14e-1 under the Securities Exchange Act and any other
securities laws and regulations thereunder to the extent such laws and
regulations are applicable in connection with the repurchase of notes under the
Asset Sale Offer. The agreements governing certain outstanding Senior
Indebtedness of the Company will require the Company and its Subsidiaries to
apply all proceeds from asset sales to repay in full outstanding obligations
under the Senior Indebtedness before the application of the proceeds to
repurchase Series C notes.
SUBORDINATION
The payment of principal of, premium, if any, interest and any Liquidated
Damages on the notes will be subordinated in right of payment, as provided in
the indenture, to the prior payment in full of all Senior Indebtedness, whether
outstanding on the date of the indenture or incurred after that date.
The holders of Senior Indebtedness of the Company will be entitled to
receive payment in full in of all Obligations due in respect of Senior
Indebtedness, including interest after the commencement of any proceeding at the
rate specified in the applicable Senior Indebtedness instrument, in cash or Cash
Equivalents before the holders of notes will be entitled to receive any payment
with respect to the notes upon any distribution to creditors of the Company:
(1) in a liquidation or dissolution of the Company;
(2) in a bankruptcy; reorganization, insolvency, receivership or similar
proceeding relating to the Company or its property;
(3) in an assignment for the benefit of creditors; or
(4) in any marshaling of the Company's assets and liabilities.
Until all Obligations with respect to Senior Indebtedness are paid in full,
any distribution to which the holders of notes would be entitled will be made to
the holders of Senior Indebtedness; provided, however, that notwithstanding the
preceding paragraph, holders of notes may receive:
(1) Capital Stock, other than Disqualified Stock;
(2) securities that are subordinated at least to the same extent as the
notes to Senior Indebtedness and to any securities issued in
exchange for Senior Indebtedness; and
(3) payments made from the trust described under the subheading "Legal
Defeasance and Covenant Defeasance."
The Company also will not be permitted to make any payment in respect of
the notes, except in subordinated securities or from the trust if:
(1) a default in the payment of the principal of, premium or interest on
Designated Senior Indebtedness occurs and is continuing beyond any
applicable period of grace; or
(2) any other default occurs and is continuing with respect to any
Designated Senior Indebtedness that permits holders of the
Designated Senior Indebtedness as to which the default relates to
accelerate its maturity and the trustee receives a written notice of
the
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<PAGE> 54
default (a "Payment Blockage Notice") from the holders of the
Designated Senior Indebtedness.
Payments on the notes will be permitted to be made and will be resumed:
(1) in the case of a payment default, upon the date on which that
default is cured or waived or otherwise has ceased to exist; and
(2) in case of any other default, the earlier of the date on which the
other default is cured or waived or otherwise has ceased to exist or
179 days after the date on which the applicable Payment Blockage
Notice is received, unless, in the case of either clause (1) or this
clause (2), the maturity of any Designated Senior Indebtedness has
been accelerated, and that acceleration remains in full force and
effect.
No new period of payment blockage may be commenced within 360 days after
the receipt by the trustee of any prior Payment Blockage Notice. No non-payment
default that existed or was continuing on the date of delivery of any Payment
Blockage Notice to the trustee will be, or be made, the basis for a subsequent
Payment Blockage Notice. Following the expiration of any period during which the
Company is prohibited from making payments on the notes pursuant to a Payment
Blockage Notice, the Company will be obligated to resume making any and all
required payments in respect of the notes, including any missed payments, unless
the maturity of any Designated Senior Indebtedness has been accelerated, and
that acceleration remains in full force and effect.
The Company must promptly notify holders of Senior Indebtedness if payment
of the notes is accelerated because of an Event of Default.
As a result of the subordination provisions described above, if there is a
liquidation or insolvency, holders of notes may recover less ratably than
creditors of the Company who are holders of Senior Indebtedness. After giving
effect to the original offering, the principal amount of outstanding Senior
Indebtedness as of January 2, 1999 was approximately $4.3 million (excluding
Capital Lease Obligations and other Senior Indebtedness). The amount of
additional Indebtedness, including Senior Indebtedness, that the Company and its
Restricted Subsidiaries can incur is limited as described under the subheading
"Certain Covenants -- Limitation on the Incurrence of Indebtedness and Issuance
of Disqualified Stock."
CERTAIN COVENANTS
Limitation on Restricted Payments. The Company will not be permitted to,
and will not permit any of its Restricted Subsidiaries to, directly or
indirectly:
(1) declare or pay any dividend or make any distribution on account of
Equity Interests, other than:
(a) dividends or distributions payable in Equity Interests, other
than Disqualified Stock, of the Company; or
(b) dividends or distributions payable to the Company or a Wholly
Owned Subsidiary of the Company that is a Restricted Subsidiary;
(2) purchase, redeem or otherwise acquire or retire for value any Equity
Interests of the Company or any Affiliate of the Company, other than
any Equity Interests owned by the Company or a Wholly Owned
Subsidiary of the Company that is a Restricted Subsidiary;
(3) purchase, redeem, repay, defease or otherwise acquire or retire for
value any Indebtedness that is subordinated in right of payment to
the notes;
(4) make any Investment, other than a Permitted Investment; or
(5) make any payment of any amount currently recorded by the Company as
payable to Holding in respect of the undistributed merger
consideration relating to the recapitalization.
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All payments and other actions listed above are collectively referred to as
"Restricted Payments," unless, at the time of and after giving effect to the
Restricted Payment:
(1) no Default or Event of Default shall have occurred and be continuing
or would occur as a consequence thereof;
(2) the Company would, at the time of the Restricted Payment and after
giving pro forma effect thereto as if the Restricted Payment had
been made at the beginning of the applicable four-quarter period,
have been permitted to incur at least $1.00 of additional
Indebtedness pursuant to the Fixed Charge Coverage Ratio test
provided in the first paragraph of the covenant described below
under the subheading "Limitation on the Incurrence of Indebtedness
and Issuance of Disqualified Stock"; and
(3) the Restricted Payment, the amount of any payment, if other than
cash, to be determined in good faith by the Board of Directors,
whose determination shall be conclusive and evidenced by a
resolution in an Officers' Certificate delivered to the trustee,
together with the aggregate of all other Restricted Payments made
by the Company and its Restricted Subsidiaries after the date of
the indenture, including Restricted Payments permitted by the next
succeeding paragraph other than pursuant to clause (3) and clause
(4) thereof, will not exceed the sum of:
(a) 50% of the Consolidated Net Income of the Company for the
period, taken as one accounting period, beginning on the first
day of the Company's second fiscal quarter in fiscal 1997 and
ending on the last day of the Company's most recently ended
fiscal quarter for which internal financial statements are
available at the time of the Restricted Payment, or, if the
Consolidated Net Income for that period is a deficit, 100% of
the deficit as a negative number, plus
(b) 100% of the aggregate net cash proceeds received by the Company
from the issuance or sale since the date of initial issuance of
the notes of Equity Interests of the Company or of debt
securities of the Company that have been converted into Equity
Interests, other than Equity Interests (or convertible debt
securities) sold to a Subsidiary of the Company and other than
Disqualified Stock or debt securities that have been converted
into Disqualified Stock; plus
(c) the aggregate cash received by the Company as capital
contributions to the Company after the date of initial issuance
of the notes, other than from a Subsidiary; plus
(d) any cash received by the Company after the date of initial
issuance of the notes as a dividend or distribution from any of
its Unrestricted Subsidiaries or from the sale of any of its
Unrestricted Subsidiaries less the cost of disposition and
taxes, if any, but in each case excluding any of these amounts
included in Consolidated Net Income.
The foregoing provisions will not prohibit:
(1) the payment of any dividend within 60 days after the date of
declaration thereof, if at the date of declaration the payment
would have complied with the provisions of the indenture;
(2) the redemption, repurchase, retirement or other acquisition of any
Equity Interests of the Company, or the defeasance, redemption or
repurchase of subordinated Indebtedness in exchange for, or out of
the proceeds of, the substantially concurrent sale, other than to
a Subsidiary of the Company of Equity Interests of the Company,
other than any Disqualified Stock, or out of the net proceeds of a
substantially concurrent cash capital contribution received by the
Company; provided, however, that the amount of any of these
proceeds that are utilized for any redemption, repurchase,
retirement, defeasance or other acquisition will be excluded from
clause (3)(b) of the preceding paragraph;
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(3) the repayment, defeasance, redemption or repurchase of subordinated
Indebtedness with the net proceeds from an incurrence of Refinancing
Indebtedness in a Permitted Refinancing;
(4) the purchase, redemption or retirement by the Company of shares of
its common stock held by an employee or former employee of the
Company or any of its Restricted Subsidiaries issued under the
Management Plans pursuant to the terms of those Management Plans;
provided, however, that:
(a) the purchase, redemption or retirement results from the
retirement, termination of employment, death or disability, as
defined in the relevant Management Plan, of the employee or
former employee; and
(b) the amount of any of these payments does not exceed $2.0 million
in the aggregate;
(5) the payment of dividends to Holding in an amount equal to the amount
required by Holding to pay federal, state and local income taxes to
the extent these income taxes are attributable to the income of the
Company;
(6) distributions of up to $500,000 annually to Holding to pay its bona
fide operating expenses;
(7) distributions to Holding from the proceeds of the Offering in an
amount sufficient to permit Holding to consummate the transactions
described under caption "Use of Proceeds" in the prospectus;
(8) payments to purchase a life insurance policy, and the use of the
proceeds from a life insurance policy, to fund the Company's
obligations under the Burns Put Agreement;
(9) distributions to Holding of an amount equal to those amounts as may
be necessary to fund a final judgment, final arbitration or
mediation award or final settlement of pending litigation of Holding
related to the Recapitalization, and to pay reasonable expenses,
including legal fees, in connection with that litigation;
(10) any Investment made with the proceeds of a substantially concurrent
sale, other than to a Restricted Subsidiary of the Company, of
Capital Stock of the Company, other than Disqualified Stock;
provided, however, the proceeds of the sale will not be, and have
not been, included in clause (3) of the preceding paragraph;
(11) the repayment in full of all Obligations in respect of the
Mannesmann Senior Subordinated Debt outstanding as of the date of
the indenture; or
(12) other restricted payments of up to $1.0 million; provided, however,
that at the time of, and after giving effect to, any Restricted
Payment permitted under clauses (1), (2), (3) and (4) no Default or
Event of Default will have occurred and be continuing; provided,
further, that the Restricted Payments described in clauses (7), (8),
(9) and (11) will not be counted in computing the aggregate amount
of all Restricted Payments made under the indenture.
For purposes of the foregoing calculations, the amount of any Investment
that constitutes a Restricted Payment will be equal to the greater of:
(1) the net book value of that Investment; and
(2) the fair market value of that Investment, in each case as certified
by a resolution of the independent directors of the Company if the
book value or fair market value of that investment exceeds $1.0
million.
Not later than the date of making any Restricted Payment, the Company will
deliver to the trustee an Officers' Certificate stating that the Restricted
Payment is permitted and providing the basis upon which the calculations
required by the covenant entitled "Limitation on Restricted Payments" were
computed. These calculations may be based upon the Company's latest available
financial statements.
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Limitation on the Incurrence of Indebtedness and Issuance of Disqualified
Stock. The Company will not be permitted to, and will not permit any of its
Restricted Subsidiaries to, directly or indirectly, create, incur, issue,
assume, guarantee or otherwise become directly or indirectly liable with respect
to (collectively, "incur") any Indebtedness, including Acquired Debt, and that
the Company will not issue any Disqualified Stock and will not permit any of its
Restricted Subsidiaries to issue any shares of preferred stock; provided,
however, that the Company may incur Indebtedness if the Fixed Charge Coverage
Ratio for the Company's most recently ended four full fiscal quarters for which
internal financial statements are available immediately preceding the date on
which the additional Indebtedness is incurred, determined on a pro forma basis
in accordance with Article 11 of Regulation S-X under the Securities Act, or any
successor provision, as if the additional Indebtedness had been incurred at the
beginning of that four-quarter period, would have been greater than 2.00 to
1.00.
The provisions of the first paragraph of this covenant will not apply to
the incurrence of any of the following (collectively, "Permitted Debt"):
(1) the incurrence by the Company of Indebtedness under the Credit
Facility in an aggregate principal amount not to exceed the
Borrowing Base Amount;
(2) the incurrence by the Company of additional Indebtedness in
respect of Capital Lease Obligations or Purchase Money Obligations
in an aggregate principal amount not to exceed $10.0 million at
any time outstanding;
(3) the incurrence by the Company of Existing Indebtedness;
(4) the incurrence by the Company of Indebtedness represented by the
notes and the indenture;
(5) the incurrence by the Company of Hedging Obligations; provided,
however, that the notional principal amount of any Interest Rate
Agreement does not exceed the principal amount of the Indebtedness
to which that agreement relates; provided, further, that any
Currency Agreement does not increase the outstanding loss
potential or liabilities other than as a result of fluctuations in
foreign currency exchange rates;
(6) the incurrence by the Company of Indebtedness to any of its Wholly
Owned Subsidiaries that is a Restricted Subsidiary, and
Indebtedness of any Wholly Owned Subsidiary of the Company that is
a Restricted Subsidiary to the Company or any of its Wholly Owned
Subsidiaries that is a Restricted Subsidiary (the Indebtedness
incurred pursuant to this clause (6) being hereinafter referred to
as "Intercompany Indebtedness"); provided, however, that in the
case of Indebtedness of the Company those obligations will be
unsecured and subordinated in all respects to the Company's
obligations under the notes; provided, further, that an incurrence
of Indebtedness will be deemed to have occurred upon:
(a) any sale or other disposition of Intercompany Indebtedness to a
Person other than the Company or any of its Restricted
Subsidiaries;
(b) any sale or other disposition of Equity Interests of any
Restricted Subsidiary of the Company which holds Intercompany
Indebtedness such that the Restricted Subsidiary ceases to be a
Restricted Subsidiary after the sale or other disposition; or
(c) designation of a Restricted Subsidiary as an Unrestricted
Subsidiary.
(7) in addition to Indebtedness specified in clauses (1) through (6)
above and clause (8) below, additional Indebtedness in an
aggregate principal amount not to exceed $15.0 million at any time
outstanding; and
(8) the incurrence by the Company of Indebtedness issued in exchange
for, or the proceeds of which are used to extend, refinance,
renew, replace, defease or refund Indebtedness incurred pursuant
to the Fixed Charge Coverage Ratio test provided in the first
paragraph of this
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covenant or pursuant to clauses (3) or (4) of this covenant in whole
or in part (the "Refinancing Indebtedness"); provided, however, that:
(a) the aggregate principal amount of the Refinancing Indebtedness
will not exceed the aggregate principal amount of Indebtedness
so extended, refinanced, renewed, replaced, defeased or
refunded;
(b) the Refinancing Indebtedness will have a Weighted Average Life
to Maturity equal to or greater than the Weighted Average Life
to Maturity of the Indebtedness being extended, refinanced,
renewed, replaced, defeased or refunded;
(c) if the Indebtedness being extended, refinanced, renewed,
replaced, defeased or refunded is pari passu with or
subordinated in right of payment to the notes, the Refinancing
Indebtedness shall be pari passu with or subordinated, as the
case may be, in right of payment to the notes on terms at least
as favorable to the holders of notes as those contained in the
documentation governing the Indebtedness being extended,
refinanced, renewed, replaced, defeased or refunded (any
extension, refinancing, renewal, replacement, defeasance or
refunding is referred to as a "Permitted Refinancing").
Limitation on Liens. The Company will not be permitted to, and will not
permit any of its Restricted Subsidiaries to, directly or indirectly, create,
incur, assume or suffer to exist any Lien on any asset now owned or subsequently
acquired or on any income or profits therefrom or assign or convey any right to
receive income therefrom, except for Permitted Liens.
Limitation on Dividends and Other Payment Restrictions Affecting
Subsidiaries. The Company will not be permitted to, and will not permit any of
its Restricted Subsidiaries to, directly or indirectly, create or otherwise
cause or suffer to exist or become effective any consensual encumbrance or
restriction on the ability of any Restricted Subsidiary to:
(1) pay dividends or make any other distributions to the Company or
any of its Restricted Subsidiaries
(a) on its Capital Stock; or
(b) with respect to any other interest or participation in, or
measured by, its profits;
(2) pay any indebtedness owed to the Company or any of its Restricted
Subsidiaries;
(3) make loans or advances to the Company or any of its Restricted
Subsidiaries; or
(4) transfer any of its properties or assets to the Company or any of
its Restricted Subsidiaries, except for any encumbrances or
restrictions existing under or by reason of:
(a) Existing Indebtedness as in effect on the date of the
indenture;
(b) the indenture and the notes;
(c) applicable law;
(d) any instrument governing Indebtedness or Capital Stock of a
Person acquired by the Company or any of its Restricted
Subsidiaries as in effect at the time of the acquisition,
except to the extent the Indebtedness was incurred in
connection with or in contemplation of the acquisition, which
encumbrance or restriction is not applicable to any Person, or
the properties or assets of any Person, other than the Person,
or the property or assets of the Person, so acquired;
(e) customary nonassignment provisions in leases entered into in
the ordinary course of business and consistent with past
practices;
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(f) Purchase Money Obligations for property acquired in the
ordinary course of business that impose restrictions of the
nature described in clause (4) above on the property so
acquired; or
(g) Refinancing Indebtedness; provided, however, that the
restrictions contained in the agreements governing the
Refinancing Indebtedness are no more restrictive with respect
to the provisions provided in clauses (1), (2), (3) and (4)
above than those contained in the agreements governing the
Indebtedness being refinanced.
Limitation on Merger, Consolidation or Sale of Assets. The Company will not
be permitted to consolidate or merge with or into, whether or not the Company is
the surviving corporation, or sell, assign, transfer, lease, convey or otherwise
dispose of all or substantially all of its properties or assets in one or more
related transactions, to another Person or entity unless:
(1) the Company is the surviving corporation or the Person formed by
or surviving any consolidation or merger, if other than the
Company, or to which such sale, assignment, transfer, lease,
conveyance or other disposition will have been made is a
corporation organized or existing under the laws of the United
States, any state thereof or the District of Columbia;
(2) the Person formed by or surviving any consolidation or merger, if
other than the Company, or the Person to which a sale, assignment,
transfer, lease, conveyance or other disposition will have been
made assumes all the obligations of the Company under the notes
and the indenture pursuant to a supplemental indenture in a form
reasonably satisfactory to the trustee;
(3) immediately before or immediately after giving effect to the
transaction no Default or Event of Default will have occurred and
be continuing; and
(4) the Company or any Person formed by or surviving any consolidation
or merger, or to which a sale, assignment, transfer, lease,
conveyance or other disposition will have been made will, at the
time of the transaction and after giving pro forma effect to the
transaction as if it had occurred at the beginning of the
applicable four-quarter period, be permitted to incur at least
$1.00 of additional Indebtedness under the Fixed Charge Coverage
Ratio test provided in the covenant entitled "Limitation on
Incurrence of Indebtedness and Issuance of Disqualified Stock."
Limitation on Transactions with Affiliates. The Company will not be
permitted to, and will not permit any of its Restricted Subsidiaries to,
directly or indirectly, sell, lease, license, transfer or otherwise dispose of
any of its properties or assets to, or purchase any property or assets from, or
enter into any contract, agreement, understanding, loan, advance or guarantee
with, or for the benefit of, any Affiliate (each of the foregoing, an "Affiliate
Transaction"), unless:
(1) the Affiliate Transaction is on terms that are no less favorable
to the Company or the relevant Restricted Subsidiary than those
that would have been obtained in a comparable arms' length
transaction by the Company or the Restricted Subsidiary with an
unrelated Person; and
(2) the Company delivers to the trustee:
(a) with respect to any Affiliate Transaction involving aggregate
payments in excess of $1.0 million, a resolution of the Board
of Directors provided in an Officers' Certificate certifying
that the Affiliate Transaction complies with clause (1) above
and that the Affiliate Transaction has been approved by a
majority of the disinterested members, if any, of the Board of
Directors; and
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(b) with respect to any Affiliate Transaction involving aggregate
payments in excess of $5.0 million, an opinion as to the
fairness to the Company or the Restricted Subsidiary from a
financial point of view issued by a nationally recognized
independent financial advisor.
The following items will not be deemed to be Affiliate Transactions and,
therefore, will not be subject to the provisions of the prior paragraph:
(1) any reasonable fees and compensation provided to, and indemnity
provided on behalf of, officers, directors and employees of the
Company and its Restricted Subsidiaries as determined in good
faith by the Board of Directors of the Company;
(2) transactions between or among the Company and its Wholly Owned
Subsidiaries that are Restricted Subsidiaries;
(3) Restricted Payments permitted by the covenant entitled "Limitation
on Restricted Payments";
(4) loans in aggregate amount not to exceed $1,000,000 at any time
outstanding to employees of the Company and its Restricted
Subsidiaries in the ordinary course of business which are approved
by the Board of Directors of the Company; and
(5) the consummation of the transactions described under the caption
"Use of Proceeds" in this prospectus.
Limitation on Guarantees by Subsidiaries. The Company will not permit any
Restricted Subsidiary, directly or indirectly, by way of the pledge of any
intercompany note or otherwise, to assume, guarantee or in any other manner
become liable with respect to any Indebtedness of any Person other than
Indebtedness under the Credit Facility or Indebtedness incurred pursuant to
Hedging Obligations incurred pursuant to the "Limitation on Incurrence of
Indebtedness and Issuance of Disqualified Stock" covenant unless:
(1) such Restricted Subsidiary simultaneously executes and delivers a
supplemental indenture to the indenture, providing a guarantee of
payment of the Securities by the Restricted Subsidiary in the form
required by the indenture; and
(2) (a) if any such assumption, guarantee or other liability of such
Restricted Subsidiary is provided in respect of Senior
Indebtedness, the guarantee or other instrument provided by the
Restricted Subsidiary in respect of the Senior Indebtedness may be
superior to the Guarantee under subordination provisions no less
favorable to the holders of the notes than those contained in the
indenture, and (b) if the assumption, guarantee or other liability
of the Subsidiary is provided in respect of Indebtedness that is
expressly subordinated to the notes, the guarantee or other
instrument provided by the Restricted Subsidiary in respect of the
subordinated Indebtedness will be subordinated to the Guarantee
pursuant to subordination provisions not less favorable to the
holders of the notes than those contained in the indenture.
Notwithstanding the foregoing, any Guarantee of the notes by a Restricted
Subsidiary will provide by its terms that it will be automatically and
unconditionally released and discharged, without any further action required on
the part of the trustee or any holder, upon:
(1) the unconditional release of the Restricted Subsidiary from its
liability in respect of the Indebtedness in connection with which
the Guarantee was executed and delivered pursuant to the preceding
paragraph; or
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(2) any sale or other disposition, by merger or otherwise, to any
Person that is not a Restricted Subsidiary of the Company, of all
of the Company's Capital Stock in, or all or substantially all of
the assets of, that Restricted Subsidiary; provided, however,
that:
(a) the sale of disposition of the Capital Stock or assets is
otherwise in compliance with the terms of the indenture; and
(b) the assumption, guarantee or other liability of the Subsidiary
has been released by the holders of the other Indebtedness of
the Company or its Restricted Subsidiaries so guaranteed.
Limitation on Layering Debt. The indenture provides that the Company will
not incur, create, issue, assume, guarantee or otherwise become liable for any
Indebtedness that is subordinate or junior in right of payment to any Senior
Indebtedness of the Company and senior in any respect in right of payment to the
notes.
Limitation on Issuance and Sale of Stock of Restricted Subsidiaries. The
Company is not permitted to, and will not permit any of its Restricted
Subsidiaries, to:
(1) transfer, convey, sell or otherwise dispose of any shares of
Capital Stock of any Restricted Subsidiary of the Company, other
than to the Company or a Wholly Owned Subsidiary that is a
Restricted Subsidiary of the Company, except that the Company and
its Restricted Subsidiaries may, in any single transaction, sell
all, but not less than all, of the issued and outstanding Capital
Stock of a Restricted Subsidiary to any Person, subject to
complying with the provisions of the indenture described under the
subheading "Repurchase at Option of Holders -- Asset Sales" above;
and
(2) issue shares of Capital Stock of a Restricted Subsidiary, other
than directors' qualifying shares, or securities convertible into,
or warrants, rights or options to subscribe for or purchase shares
of, Capital Stock of a Restricted Subsidiary of the Company to any
Person other than to the Company or a Wholly Owned Subsidiary that
is a Restricted Subsidiary of the Company.
REPORTS
Whether or not required by the rules and regulations of the SEC, so long as
any notes are outstanding, the Company will furnish to the holders of notes:
(1) all quarterly and annual financial information that would be
required to be contained in a filing with the SEC on Forms 10-Q
and 10-K if the Company were required to file those Forms,
including a "Management's Discussion and Analysis of Financial
Condition and Results of Operations" that describes the financial
condition and results of operations of the Company and its
Subsidiaries and, with respect to the annual information only, a
report thereon by the Company's independent auditor; and
(2) all reports that would be required to be filed with the SEC on
Form 8-K if the Company were required to file those reports. All
of these reports must be delivered to the holders and the trustee
not more than 15 days after the date on which the related Form
would be required to be filed with the SEC. In addition, whether
or not required by the rules and regulations of the SEC, the
Company will file a copy of all of this information with the SEC
for public availability, unless the SEC will not accept this
filing, and make this information available to investors or
prospective investors who request it in writing.
PAYMENTS FOR CONSENT
Neither the Company nor any of its Subsidiaries will be permitted to,
directly or indirectly, pay or cause to be paid any consideration, whether by
way of interest, fee or otherwise, to any holder of any notes
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for or as an inducement to any consent, waiver or amendment of any terms or
provisions of the notes unless that consideration is offered to be paid or
agreed to be paid to all holders of the notes that consent, waive or agree to
amend in the time frame provided in solicitation documents relating to the
consent, waiver or agreement.
EVENTS OF DEFAULT AND REMEDIES
Each of the following will constitute an Event of Default under the
indenture:
(1) default for 30 days in the payment when due of interest on, or any
Liquidated Damages with respect to, any of the notes, whether or
not prohibited by the subordination provisions of the indenture;
(2) default in payment when due, whether at maturity, upon redemption
or repurchase, or otherwise, of the principal of or premium, if
any, on any of the notes, whether or not prohibited by the
subordination provisions of the indenture;
(3) failure by the Company to comply with the provisions described
under the covenants "Change of Control," "Asset Sales" and
"Merger, Consolidation or Sale of Assets";
(4) failure by the Company or any Restricted Subsidiary for 30 days
after notice to comply with any of its covenants or agreements in
the indenture or the notes other than those referred to in clauses
(1), (2) and (3) above;
(5) default under any mortgage, indenture or instrument under which
there may be issued or by which there may be secured or evidenced
any Indebtedness for money borrowed by the Company or any of its
Restricted Subsidiaries, or the payment of which is guaranteed by
the Company or any of its Restricted Subsidiaries, whether that
Indebtedness or guarantee now exists, or is created after the date
of the indenture, which default:
(a) is caused by a failure to pay principal of that Indebtedness
when due and before the expiration of the grace period provided
in that Indebtedness (a "Payment Default"); or
(b) results in the acceleration of that Indebtedness before its
express maturity and, in each case described in clauses (a) and
(b) of this subsection (5), the principal amount of any
Indebtedness, together with the principal amount of any other
Indebtedness under which there has been a Payment Default or
the maturity of which has been so accelerated, aggregates $5.0
million or more;
(6) failure by the Company or any of its Restricted Subsidiaries to
pay final judgments aggregating in excess of $5.0 million, which
judgments are not paid, discharged or stayed for a period of 60
days after their entry; and
(7) certain events of bankruptcy or insolvency with respect to the
Company or any of its Restricted Subsidiaries.
If any Event of Default occurs and is continuing, the trustee or the
holders of at least 25% in principal amount of the then outstanding Series C
notes may declare all of the principal amount of the notes, accrued and unpaid
interest on the notes and all other Obligations thereunder to be due and payable
immediately; provided, however, that the declaration of acceleration may be
rescinded under certain circumstances specified in the indenture.
Notwithstanding the preceding sentence in the case of an Event of Default
arising from certain events of bankruptcy or insolvency with respect to the
Company or its Restricted Subsidiaries, all Series C notes will become due and
payable without further action or notice. Holders of the notes may not enforce
the indenture or the notes except as provided in the indenture. Subject to
certain limitations, holders of a majority in principal amount of the then
outstanding Series C notes may direct the trustee in its exercise of any trust
or power. The trustee may withhold from holders of the notes notice of any
continuing Default or Event of Default, except a Default or Event of Default
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relating to the payment of principal, premium, interest or any Liquidated
Damages, if the trustee determines that withholding the notice is in their
interest.
In the case of any Event of Default occurring by reason of any willful
action, or inaction, taken, or not taken, by or on behalf of the Company with
the intention of avoiding payment of the premium that the Company would have had
to pay if the Company then had elected to redeem the notes under the optional
redemption provisions of the indenture, an equivalent premium shall also become
and be immediately due and payable to the extent permitted by law upon the
acceleration of the notes. If an Event of Default occurs before April 15, 2002,
by reason of any willful action, or inaction, taken, or not taken, by or on
behalf of the Company with the intention of avoiding the prohibition on
redemption of the notes before that date, then the premium specified in the
indenture will also become immediately due and payable to the extent permitted
by law upon the acceleration of the notes.
The holders of a majority in aggregate principal amount of the notes then
outstanding by notice to the trustee may on behalf of the holders of all of the
notes waive any existing Default or Event of Default and its consequences under
the indenture except a continuing Default or Event of Default in the payment of
principal, premium, interest or any Liquidated Damages on the notes.
The Company is required to deliver to the trustee annually a statement
regarding compliance with the indenture, and the Company is required, upon its
becoming aware of any Default or Event of Default, to deliver to the trustee a
statement specifying any Default or Event of Default.
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS
No past, present or future director, officer, employee, agent or
stockholder of the Company, as such, shall have any liability for any
obligations of the Company under the notes, the indenture or for any claim based
on, in respect of, or by reason of, any obligations or their creation. Each
holder of notes by accepting a note waives and releases all of this liability.
The waiver and release are part of the consideration for the issuance of the
notes. This waiver may not be effective to waive liabilities under the federal
securities laws and it is the view of the SEC that a waiver is against public
policy.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
The Company will be permitted to, at its option and at any time, elect to
have all of its obligations discharged with respect to the Series C notes
("Legal Defeasance") except for:
(1) the rights of holders of Series C notes to receive payments in
respect of the principal of, premium, if any, interest and any
Liquidated Damages on the notes when those payments are due;
(2) the Company's obligations with respect to the notes concerning
issuing temporary notes, registration of notes, mutilated,
destroyed, lost or stolen notes and the maintenance of an office
or agency for payment and money for security payments held in
trust;
(3) the rights, powers, trusts, duties and immunities of the trustee,
and the Company's obligations in connection therewith; and
(4) the Legal Defeasance provisions of the indenture.
In addition, the Company will be permitted to, at its option and at any
time, elect to have the obligations of the Company released with respect to
certain covenants that are described in the indenture ("Covenant Defeasance")
and thereafter any omission to comply with those obligations will not constitute
a Default or Event of Default with respect to the notes. If Covenant Defeasance
occurs, certain events, not including nonpayment, bankruptcy, receivership,
rehabilitation and insolvency events, described under the subheading "Events of
Default" will no longer constitute an Event of Default with respect to the
notes.
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In order to exercise either Legal Defeasance or Covenant Defeasance:
(1) the Company will be required to irrevocably deposit with the
trustee, in trust, for the benefit of the holders of the notes,
cash in U.S. dollars, non-callable Government Securities, or a
combination thereof, in such amounts as will be sufficient, in the
opinion of a nationally recognized firm of independent certified
public accountants, to pay the principal of, premium, if any,
interest and any Liquidated Damages on the Series C notes on the
stated maturity or on the applicable redemption date, as the case
may be;
(2) in the case of Legal Defeasance, the Company will have delivered
to the trustee an opinion of counsel from nationally recognized
tax counsel reasonably acceptable to the trustee confirming that:
(a) the Company has received from, or there has been published by,
the Internal Revenue Service a ruling; or
(b) since the date of the indenture, there has been a change in the
applicable federal income tax law, in either case to the effect
that, and based thereon, the opinion of counsel will confirm
that, the holders of the Series C notes will not recognize
income, gain or loss for federal income tax purposes as a
result of the Legal Defeasance and will be subject to federal
income tax on the same amounts, in the same manner and at the
same times as would have been the case if the Legal Defeasance
had not occurred;
(3) in the case of Covenant Defeasance, the Company will have
delivered to the trustee an opinion of counsel from nationally
recognized tax counsel reasonably acceptable to the trustee
confirming that the holders of the Series C notes will not
recognize income, gain or loss for federal income tax purposes as
a result of the Covenant Defeasance and will be subject to federal
income tax on the same amounts, in the same manner and at the same
times as would have been the case if the Covenant Defeasance had
not occurred;
(4) no Default or Event of Default will have occurred and be
continuing on the date of the deposit or insofar as Events of
Default from bankruptcy or insolvency events are concerned, at any
time in the period ending on the 91st day after the date of
deposit;
(5) the Legal Defeasance or Covenant Defeasance will not result in a
breach or violation of, or constitute a default under any material
agreement or instrument, other than the indenture, to which the
Company or any of its Restricted Subsidiaries is a party or by
which the Company or any of its Restricted Subsidiaries is bound;
(6) the Company will have delivered to the Trustee an opinion of
counsel to the effect that after the 91st day following the
deposit, the trust funds will not be subject to the effect of any
applicable bankruptcy, insolvency, reorganization or similar laws
affecting creditors' rights generally;
(7) the Company will have delivered to the trustee an Officers'
Certificate stating that the deposit was not made by the Company
with the intent of preferring the holders of notes over the other
creditors of the Company with the intent of defeating, hindering,
delaying or defrauding creditors of the Company; and
(8) the Company will have delivered to the trustee an Officers'
Certificate and an opinion of counsel, each stating that the
Company has complied with all conditions precedent provided for
relating to the Legal Defeasance or the Covenant Defeasance.
TRANSFER AND EXCHANGE
A holder will be permitted to transfer or exchange notes in accordance with
the indenture. The registrar and the trustee will be permitted to require a
holder, among other things, to furnish appropriate endorsements and transfer
documents and the Company will be permitted to require a holder to pay any
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taxes and fees required by law or permitted by the indenture. The Company is not
required to transfer or exchange any note selected for redemption. Also, the
Company is not required to transfer or exchange any note for a period of 15 days
before a selection of notes to be redeemed. The registered holder of a note will
be treated as its owner for all purposes.
AMENDMENT, SUPPLEMENT AND WAIVER
Except as provided in the next two succeeding paragraphs and in the
indenture, the Company will be permitted to amend or supplement the indenture or
the notes with the consent of the holders of at least a majority in principal
amount of the notes then outstanding, including consents obtained in connection
with a tender offer or exchange offer for notes, and any existing default or
compliance with any provision of the indenture or the notes may be waived with
the consent of the holders of a majority in principal amount of the then
outstanding Series C notes, including consents obtained in connection with a
tender offer or exchange offer for notes.
With respect to any notes held by a non-consenting holder, without the
consent of each holder affected, an amendment or waiver will not be permitted
to:
(1) reduce the principal amount of notes whose holders must consent to
an amendment, supplement or waiver;
(2) reduce the principal of or change the fixed maturity of any note
or alter the provisions with respect to the redemption of the
notes (other than provisions relating to the covenant described
above under the subheading "Asset Sales") or reduce the prices at
which the Company will offer to purchase the notes, pursuant to
the covenants described under the subheading "Repurchase at the
Option of Holders";
(3) reduce the rate of or change the time for payment of interest on
any note;
(4) waive a Default or Event of Default in the payment of principal of
or premium, if any, interest or any Liquidated Damages on the
notes (except a rescission of acceleration of the notes by the
holders of at least a majority in aggregate principal amount of
the notes and a waiver of the payment default that resulted from
the acceleration);
(5) make any note payable in money other than that stated in the
notes;
(6) make any change in the provisions of the indenture relating to
waivers of past Defaults or the rights of holders of notes to
receive payments of principal of or premium, if any, interest or
Liquidated Damages on the notes;
(7) waive a redemption payment with respect to any note;
(8) make any change to the subordination provisions of the indenture
that adversely affects holders of notes; or
(9) make any change in the foregoing amendment and waiver provisions.
Notwithstanding the foregoing, without the consent of any holder of notes,
the Company and the trustee may amend or supplement the indenture or the notes:
(1) to cure any ambiguity, defect or inconsistency;
(2) to provide for uncertificated notes in addition to or in place of
certificated notes;
(3) to provide for the assumption of the Company's obligations to
holders of the notes in the case of a merger or consolidation;
(4) to make any change that would provide any additional rights or
benefits to the holders of the notes or that does not adversely
affect the legal rights under the indenture of any holder; or
(5) to comply with requirements of the SEC in order to effect or
maintain the qualification of the indenture under the Trust
Indenture Act.
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THE TRUSTEE
The trustee under the indenture has been appointed by the Company as
registrar and paying agent with respect to the notes.
The indenture contains certain limitations on the rights of the trustee,
should it become a creditor of the Company, to obtain payment of claims in
certain cases, or to realize on certain property received in respect of any
claim as security or otherwise. The trustee will be permitted to engage in other
transactions; however, if it acquires any conflicting interest it must eliminate
such conflict within 90 days, apply to the SEC for permission to continue or
resign.
The holders of a majority in principal amount of the then outstanding
Series C notes will have the right to direct the time, method and place of
conducting any proceeding for exercising any remedy available to the trustee,
subject to certain exceptions. The indenture provides that if a Default or an
Event of Default occurs, which will not be cured, the trustee will be required,
in the exercise of its power, to use the degree of care of a prudent man in the
conduct of his own affairs. Subject to those provisions, the trustee will be
under no obligation to exercise any of its rights or powers under the indenture
at the request of any holder of notes, unless that holder will have offered to
the trustee security and indemnity satisfactory to it against any loss,
liability or expense.
CERTAIN DEFINITIONS
Provided below are certain defined terms used in the indenture. Reference
is made to the indenture for a full description of all these terms, as well as
any other capitalized terms used in this "Description of the Series B Notes" for
which no definition is provided.
"Acquired Debt" means, with respect to any specified Person:
(1) Indebtedness of any other Person existing at the time the other
Person merged with or into or became a Restricted Subsidiary of
the specified Person, including Indebtedness incurred in
connection with, or in contemplation of, the other Person merging
with or into or becoming a Restricted Subsidiary of the specified
Person; and
(2) Indebtedness secured by a Lien encumbering any asset acquired by
the specified Person.
"Affiliate" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with the specified Person. For purposes of this definition, "control"
(including, with correlative meanings, the terms "controlling," "controlled by"
and "under common control with"), as used with respect to any Person, will mean
the possession, directly or indirectly, of the power to direct or cause the
direction of the management or policies of the Person, whether through the
ownership of voting securities, by agreement or otherwise; provided, however,
that beneficial ownership of 10% or more of the voting securities, or the
equivalents, of a Person will be deemed to be control.
"Asset Sale" means any sale, transfer or other disposition (including by
merger, consolidation or sale-and-leaseback transaction) of:
(1) shares of Capital Stock of a Subsidiary of the Company, other than
directors' qualifying shares; or
(2) property or assets of the Company or any Restricted Subsidiary of
the Company other than in the ordinary course of business.
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Notwithstanding the foregoing, none of the following will be deemed to be
an Asset Sale:
(1) any sale, transfer or other disposition of shares of Capital
Stock, property or assets by a Restricted Subsidiary of the
Company to the Company or to any Restricted Subsidiary that is a
Wholly Owned Subsidiary of the Company;
(2) any sale, transfer or other disposition of defaulted receivables
for collection or any sale, transfer or other disposition of
property of assets in the ordinary course of business;
(3) any isolated sale, transfer or other disposition that does not
involve aggregate consideration in excess of $500,000
individually;
(4) the grant in the ordinary course of business of any non-exclusive
license of patents, trademarks, registrations therefor and other
similar intellectual property;
(5) any Lien (or foreclosure thereon) securing Indebtedness to the
extent that the Lien is granted in compliance with the covenant
provided under the subheading "Limitation on Liens" above;
(6) any Restricted Payment permitted by the covenant provided under
the subheading "Limitation on Restricted Payments" above;
(7) any disposition of assets or property in the ordinary course of
business to the extent such assets are obsolete, worn-out or no
longer useful in the Company's or any Restricted Subsidiaries'
business;
(8) the sale, lease, conveyance or other disposition of all or
substantially all of the assets of the Company as permitted by the
covenant provided under the subheading "Limitation on Merger,
Consolidation or Sale of Assets" above; provided, however, that
the assets not so sold, leased, conveyed, disposed of or otherwise
transferred will be deemed an Asset Disposition; or
(9) any disposition that constitutes a Change of Control.
"Borrowing Base Amount" means, as to the Company, the sum of
(1) 50% of Finished Goods Inventory; plus
(2) 65% of Raw Materials Inventory; plus
(3) 85% of Receivables, determined on a consolidated basis in
accordance with GAAP.
"Burns Put Agreement" means the Amended and Restated Put Agreement dated as
of December 13, 1996, by and between Julius S. Burns and Holding, as in effect
on the date of the indenture.
"Capital Lease Obligation" means, at the time any determination thereof is
to be made, the amount of the liability in respect of a capital lease that would
at that time be required to be capitalized on a balance sheet in accordance with
GAAP.
"Capital Stock" means:
(1) any and all shares, interests, participations, rights or other
equivalents, however designated, of corporate stock;
(2) in the case of a partnership, partnership interests, whether
general or limited; and
(3) any other interest or participation that confers on a Person the
right to receive a share of the profits and losses of, or
distributions of assets of, the issuing Person.
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"Cash Equivalents" means:
(1) United States dollars;
(2) securities issued or directly and fully guaranteed or insured by
the United States government or any agency or instrumentality
thereof having maturities of not more than six months from the
date of acquisition;
(3) certificates of deposit and Eurodollar time deposits with
maturities of six months or less from the date of acquisition,
bankers' acceptances with maturities not exceeding six months and
overnight bank deposits, in each case with any domestic commercial
bank having capital and surplus in excess of $500 million;
(4) repurchase obligations with a term of not more than seven days for
underlying securities of the types described in clauses (2) and
(3) entered into with any financial institution meeting the
qualifications specified in clause (3) above;
(5) commercial paper having the highest rating obtainable from Moody's
Investors Service, Inc. or Standard & Poor's Corporation and in
each case maturing within six months after the date of
acquisition; and
(6) shares of any money market mutual fund, or similar fund, in each
case having assets in excess of $500 million, which invests solely
in investments of the types described in clauses (1) through (5)
above.
"Change of Control" means the occurrence of any of the following:
(1) the sale, lease, transfer, conveyance or other disposition, in one
transaction or a series of related transactions, directly or
indirectly, of all or substantially all of the assets of the
Company and its Restricted Subsidiaries to any Person or group, as
that term is used in Sections 13(d) and 14(d) of the Securities
Exchange Act or any successor provisions thereto (a "Group");
(2) the adoption of a plan relating to the liquidation or dissolution
of the Company;
(3) any Person or Group, other than Permitted Holders, is or becomes
the "beneficial owner," as defined in Rules 13d-3 and 13d-5 under
the Securities Exchange Act or any successor provisions thereto,
except that a Person will be deemed to have "beneficial ownership"
of all shares that any such Person has the right to acquire,
whether the right is exercisable immediately or only after the
passage of time, directly or indirectly, of more than 50% of the
total voting power of the Voting Stock of the Company (or of the
Company's successor in the event of a merger or consolidation); or
(4) the first day on which a majority of the members of the Board of
Directors of the Company are not Continuing Directors.
"Commodity Agreement" means any commodity futures contract, commodity
option or other similar agreement or arrangement entered into by the Company or
any of its Restricted Subsidiaries designed to protect the Company or any of its
Restricted Subsidiaries against fluctuations in the price of commodities
actually used in the ordinary course of business of the Company and its
Restricted Subsidiaries.
"Consolidated Cash Flow" means, with respect to any Person for any period,
the Consolidated Net Income of the Person for the period, plus:
(1) an amount equal to any extraordinary, non-recurring or unusual loss
plus any net loss realized in connection with an Asset Sale, to the
extent those losses were deducted or otherwise excluded in computing
Consolidated Net Income; plus
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(2) provision for taxes based on income or profits of the Person and its
Restricted Subsidiaries for the period, to the extent the provision
for taxes was deducted or otherwise excluded in computing
Consolidated Net Income; plus
(3) Consolidated Interest Expense of the Person less consolidated
interest income for the period, to the extent that amount was
deducted or otherwise excluded in computing Consolidated Net Income;
plus
(4) depreciation and amortization (including amortization of goodwill,
amortization of deferred debt expense and other intangibles and
amortization of deferred compensation in respect of non-cash
compensation but excluding amortization of prepaid cash expenses
that were paid in a prior period) and other non-cash charges of the
Person and its Restricted Subsidiaries for the period, to the extent
that depreciation and amortization were deducted or otherwise
excluded in computing Consolidated Net Income; plus
(5) an amount equal to all premiums on prepayments of debt, in each
case, for the period without duplication on a consolidated basis and
determined in accordance with GAAP.
Notwithstanding the foregoing, the provision for taxes, and the
depreciation and amortization and other non-cash charges of, a Restricted
Subsidiary will be added to Consolidated Net Income to compute Consolidated Cash
Flow only to the extent (and in the same proportion) the Net Income of such
Restricted Subsidiary was included in calculating the Consolidated Net Income of
the Person and only if a corresponding amount would be permitted at the date of
determination to be distributed by dividend to the Person by a Restricted
Subsidiary without prior approval (that has not been obtained), pursuant to the
terms of its charter and all agreements, instruments, judgments, decrees,
orders, statues, rules and governmental regulations applicable to the Restricted
Subsidiary or its stockholders.
"Consolidated Interest Expense" means, with respect to any Person for any
period, the aggregate consolidated interest, whether expensed or capitalized,
paid, accrued or scheduled to be paid or accrued, of the Person and its
Restricted Subsidiaries for the period, including:
(1) amortization of original issue discount and deferred financing costs
and non-cash interest payments and accruals;
(2) the interest portion of all deferred payment obligations, calculated
in accordance with the effective interest method; and
(3) the interest component of any payments associated with Capital Lease
Obligations and net payments (if any) pursuant to Hedging
Obligations, in each case, to the extent attributable to the period,
but excluding:
(a) commissions, discounts and other fees and charges incurred with
respect to letters of credit and bankers' acceptances financing;
and
(b) any interest expense on Indebtedness of another Person that is
Guaranteed by the Person or secured by a Lien on assets of the
Person determined in accordance with GAAP.
Consolidated Interest Expense of the Company will not include any
prepayment premiums or amortization of original issue discount or deferred
financing costs, to the extent those amounts are incurred as a result of the
prepayment on the date of the indenture of any Indebtedness of the Company with
the proceeds of the notes.
"Consolidated Net Income" means, with respect to any Person for any period,
the aggregate of the Net Income of the Person and its Restricted Subsidiaries
for the period on a consolidated basis,
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determined in accordance with GAAP, adjusted to exclude (only to the extent
included and without duplication):
(1) all gains which are extraordinary, unusual or are non-recurring,
including any gain from the sale or other disposition of assets
outside the ordinary course of business or from the issuance or sale
of capital stock;
(2) all gains resulting from currency or hedging transactions;
(3) the Net Income of any Person acquired in a pooling of interests
transaction for any period before the date of such acquisition;
(4) depreciation, amortization or other expenses recorded as a result of
the application of purchase accounting in accordance with Accounting
Principles Board Opinion Nos. 16 and 17; and
(5) the cumulative effect of a change in accounting principles;
provided, however, that:
(a) the Net Income of any Person that is not a Subsidiary or that
is accounted for by the equity method of accounting will be
included only to the extent of the amount of cash dividends or
cash distributions actually paid to the referent Person or a
Wholly Owned Subsidiary thereof that is a Restricted
Subsidiary; and
(b) the Net Income of any Person that is an Unrestricted Subsidiary
will be included only to the extent of the amount of cash
dividends or cash distributions paid to the referent Person or
a Restricted Subsidiary thereof.
"Continuing Director" means, as of any date of determination, any member of
the Board of Directors of the Company who:
(1) was a member of the Board of Directors on the date of the indenture;
(2) was nominated for election or elected to the Board of Directors with
the affirmative vote of a majority of the Continuing Directors who
were members of the Board at the time of the nomination or election;
or
(3) is a designee of Citicorp Venture Capital or its Related Persons or
Affiliates.
"Credit Facility" means the Amended and Restated Loan and Security
Agreement, dated as of December 13, 1996, by and among the Company, Fleet
Capital Corporation, as a lender and collateral agent, and Transamerica Business
Credit Corporation, including any related notes, guarantees, collateral
documents, instruments and agreements executed in connection therewith, and in
each case as amended, modified, renewed, refunded, replaced or refinanced from
time to time.
"Currency Agreement" means any foreign exchange contract, currency swap
agreement or other similar agreement or arrangement designed to protect the
Company or any of its Restricted Subsidiaries in the ordinary course of business
against fluctuation in the values of the currencies of the countries, other than
the United States, in which the Company or its Restricted Subsidiaries conduct
business.
"Default" means any event or condition that is, or with the passage of time
or the giving of notice, or both, would be, an Event of Default.
"Designated Senior Indebtedness" means the Obligations of the Company with
respect to the Credit Facility and any other Senior Indebtedness of the Company
permitted under the indenture the principal amount of which at original issuance
is $5.0 million or more, other than Senior Indebtedness that is comprised of
Hedging Obligations owing to a Person that is not a party to the Credit
Facility.
"Disqualified Stock" means any Capital Stock which, by its terms, or by the
terms of any security into which it is convertible or for which it is
exchangeable, or upon the happening of any event, matures or is mandatorily
redeemable, under a sinking fund obligation or otherwise, or is redeemable or is
convertible
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or exchangeable for Indebtedness at the option of the holder thereof, in whole
or in part, on or before April 15, 2007. Notwithstanding the preceding sentence,
any Capital Stock that would not constitute Disqualified Stock because holders
thereof have the right to require the Person to repurchase or redeem the Capital
Stock upon the occurrence of an "asset sale" or "change of control" occurring
before the stated maturity of the notes will not constitute Disqualified Stock
if:
(1) the "asset sale" or "change of control" provisions applicable to the
Capital Stock are no more favorable to the holders of the Capital
Stock than the provisions in favor of holders of notes provided
under the "Asset Sale" and "Change of Control" covenants, as the
case may be;
(2) the Capital Stock specifically provides that the Person will not
repurchase or redeem any stock pursuant to such provision before the
Company's repurchase of the notes as are required to be repurchased
under the "Asset Sale" and "Change of Control" covenants; and
(3) Capital Stock is redeemable within 90 days of the "asset sale" or
"change of control" events applicable to the Capital Stock.
"Equity Interests" means Capital Stock and all warrants, options or other
rights to acquire Capital Stock, but excluding any debt security that is
convertible into, or exchangeable for, Capital Stock.
"Existing Indebtedness" means Indebtedness of the Company and its
Subsidiaries, other than the Credit Facility, in existence on the date of the
indenture, until those amounts are repaid.
"Fair Market Value" means, with respect to any asset, the price (after
taking into account any liabilities relating to such assets) which could be
negotiated in an arm's-length free market transaction, for cash, between a
willing seller and a willing buyer, neither of which is under pressure or
compulsion to complete the transaction; provided, however, that the Fair Market
Value of any such asset or assets shall be determined by the Board of Directors
of the Company, acting in good faith and by unanimous resolution, and which
determination shall be evidenced by an Officers' Certificate delivered to the
Trustee.
"Finished Goods Inventory" means, with respect to the Company, the
consolidated finished goods inventory of the Company, net of reserves,
determined in accordance with GAAP.
"Fixed Charge Coverage Ratio" means, with respect to any Person for any
period, the ratio of the Consolidated Cash Flow of that Person for the period to
the Fixed Charges of that Person for the period. If the Company or any of its
Restricted Subsidiaries incurs, assumes, guarantees or redeems any Indebtedness,
other than revolving credit borrowings, or if the Company issues or redeems any
preferred stock, in each case after the commencement of the period for which the
Fixed Charge Coverage Ratio is being calculated but before the date of the event
for which the calculation of the Fixed Charge Coverage Ratio is made (the
"Transaction Date"), then the Fixed Charge Coverage Ratio will be calculated
giving pro forma effect to the incurrence, assumption, guarantee or redemption
of Indebtedness, or the issuance or redemption of preferred stock, as if the
same had occurred at the beginning of the applicable reference period. For
purposes of making the computation referred to above, acquisitions (including
all mergers and consolidations), dispositions and discontinuances of operations
that have been made by the Company or any of its Restricted Subsidiaries during
the reference period or after the reference period and on or before the
Transaction Date will be calculated on a pro forma basis assuming that all
acquisitions, dispositions and discontinuances of operations had occurred on the
first day of the reference period; provided, however, that Fixed Charges will be
reduced by amounts attributable to operations that are disposed of or
discontinued only to the extent that the obligations giving rise to the Fixed
Charges would no longer be obligations contributing to the Company's Fixed
Charges after the Transaction Date. Calculations of pro forma amounts in
accordance with this definition will be done in accordance with Article 11 of
Regulation S-X under the Securities Act or any successor provision.
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"Fixed Charges" means, with respect to any Person for any period, the sum,
without duplication, of
(1) Consolidated Interest Expense;
(2) commissions, discounts and other fees and charges incurred with
respect to letters of credit and bankers' acceptances financing;
(3) any interest expense on Indebtedness of another Person that is
Guaranteed by that Person or secured by a Lien on assets of that
Person; and
(4) the product of
(a) all cash or non-cash dividend payments on any series of
preferred stock of any Restricted Subsidiary of that Person
(other than preferred stock of that Person); times
(b) a fraction, the numerator of which is one and the denominator
of which is one minus the then current combined federal, state
and local statutory tax rate of that Person, expressed as a
decimal, determined, in each case, on a consolidated basis and
in accordance with GAAP.
"GAAP" means generally accepted accounting principles provided in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in any other statements by any other
entity as have been approved by a significant segment of the accounting
profession, which are in effect in the United States on the date of the
indenture.
"Guarantee" means a guarantee (other than by endorsement of negotiable
instruments for collection in the ordinary course of business), direct or
indirect, in any manner (including letters of credit and reimbursement
agreements in respect thereof), of all or any part of any Indebtedness.
"Hedging Obligations" means, with respect to any Person, the obligations of
the Person under Interest Rate Agreements, Currency Agreements and Commodity
Agreements.
"Holding" means Merchants Metals Holding Company, a Delaware corporation.
"Indebtedness" means, with respect to any Person, any indebtedness of the
Person, whether or not contingent, in respect of borrowed money or evidenced by
bonds, notes, debentures or similar instruments or letters of credit (or
reimbursement agreements in respect thereof) or bankers' acceptances or
representing Capital Lease Obligations or the balance deferred and unpaid of the
purchase price of any property or representing any Hedging Obligations, except
any such balance that constitutes an accrued expense or trade payable, if and to
the extent any of the foregoing indebtedness (other than letters of credit and
Hedging Obligations) would appear as a liability upon a balance sheet of the
Person prepared in accordance with GAAP, as well as all indebtedness of others
secured by a Lien on any asset of the Person (whether or not such indebtedness
is assumed by the Person) and, to the extent not otherwise included, the
Guarantee of any Indebtedness of the Person or any other Person.
"Interest Rate Agreement" means any interest rate swap agreement, interest
rate cap agreement, interest rate collar agreement or other similar agreement or
arrangement entered into by the Company or any of its Restricted Subsidiaries
designed to protect the Company or any of its Restricted Subsidiaries in the
ordinary course of business against fluctuations in interest rates.
"Investments" means, with respect to any Person, all investments by that
Person in other Persons, including Affiliates, in the forms of direct or
indirect loans, including Guarantees, advances or capital contributions
(excluding commission, travel and similar advances to officers and employees
made in the ordinary course of business), purchases or other acquisitions for
consideration of Indebtedness, Equity Interests or other securities and all
other items that are or would be classified as investments on a balance sheet
prepared in accordance with GAAP.
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"Lien" means, with respect to any asset, any mortgage, lien, pledge,
charge, security interest or encumbrance of any kind in respect of the asset,
whether or not filed, recorded or otherwise perfected under applicable law
(including any conditional sale or other title retention agreement, any lease in
the nature thereof, any option or other agreement to sell or give a security
interest in and any filing of or agreement to give any financing statement under
the Uniform Commercial Code (or equivalent statutes) of any jurisdiction.)
"Liquidated Damages" means all liquidated damages then owing pursuant to
the Registration Rights Agreement.
"Management Holders" means any current or past full-time members of senior
management of the Company who acquire stock of the Company through management
stock purchase or option plans.
"Management Plans" means the Merchants Metals Holding Company 1988 Stock
Option Plan, as that plan may be amended from time to time, or any other similar
compensation plans which may be adopted by the Company or Holding.
"Net Income" means, with respect to any Person, the net income (loss) of
such Person, determined in accordance with GAAP and before any reduction in
respect of preferred stock dividends, excluding, however:
(1) any gain (but not loss), together with any related provision for
taxes on the gain (but not loss), realized in connection with any
sale of assets (including dispositions pursuant to sale/leaseback
transactions) or the disposition of any securities or the
extinguishment of any Indebtedness of the Person or any of its
Restricted Subsidiaries; and
(2) any extraordinary gain (but not loss), together with any related
provision for taxes on the extraordinary gain (but not loss).
"Net Proceeds" means the aggregate amount of consideration received by the
Company or any of its Restricted Subsidiaries in respect of any Asset Sale in
the form of cash or Cash Equivalents (including any cash received upon the sale
or other disposition of any non-cash consideration received in any Asset Sale),
net of the direct costs relating to the Asset Sale, including legal, accounting
and investment banking fees, and sales commissions, and any relocation expenses
incurred as a result thereof, taxes paid or payable as a result thereof, in each
case after taking into account any available tax credits or deductions and any
tax sharing arrangements, and amounts required to be applied to the repayment of
Indebtedness secured by a Lien on the asset or assets (including Equity
Interests) the subject of the Asset Sale and any reserve for adjustment in
respect of the sale price of the asset or assets.
"Non-Recourse Debt" means Indebtedness:
(1) as to which neither the Company nor any of its Restricted
Subsidiaries:
(a) provides credit support of any kind, including any undertaking,
agreement or instrument that would constitute Indebtedness;
(b) is directly or indirectly liable, as guarantor or otherwise; or
(c) constitutes the lender;
(2) no default with respect to which, including any rights that the
holders thereof may have to take enforcement action against an
Unrestricted Subsidiary, would permit (upon notice, lapse of time
or both) any holder of any other Indebtedness of the Company or
any of its Restricted Subsidiaries to declare a default on the
other Indebtedness or cause the payment thereof to be accelerated
or payable before its stated maturity; and
(3) as to which the lenders have been notified in writing that they
will not have any recourse to the stock or assets of the Company
or any of its Restricted Subsidiaries.
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"Obligations" means any principal, premium, interest (including
post-petition interest), penalties, fees, indemnifications, reimbursements,
damages and other liabilities payable under the documentation governing any
Indebtedness.
"Officers' Certificate" means, with respect to any Person, a certificate
signed by the Chief Executive Officer or President and the Chief Financial
Officer or chief accounting officer of that Person.
"Permitted Asset Swap" means any one or more transactions in which the
Company or any of its Restricted Subsidiaries exchanges assets for consideration
consisting of cash and/or assets used or useful in the business of the Company
and conducted on the date of the indenture or reasonable extensions,
developments or expansions thereof or activities ancillary thereto or other
assets in an amount less than 15% of the fair market value of the transaction or
transactions.
"Permitted Holders" means Citicorp Venture Capital Ltd. and its Related
Persons and Affiliates and the Management Holders and their Related Persons and
Affiliates.
"Permitted Investments" means:
(1) any Investment in the Company or in a Wholly Owned Subsidiary of
the Company that is a Restricted Subsidiary;
(2) any Investment in Cash Equivalents;
(3) Investments by the Company or any Restricted Subsidiary of the
Company in a Person, if as a result of that Investment
(a) that Person becomes a Wholly Owned Subsidiary of the Company
that is a Restricted Subsidiary; or
(b) that Person is merged, consolidated or amalgamated with or
into, or transfers or conveys substantially all of its assets
to, or is liquidated into, the Company or a Wholly Owned
Subsidiary of the Company that is a Restricted Subsidiary;
(4) any Investment made as a result of the receipt of non-cash
consideration from an Asset Sale that was made in compliance with
the covenant provided under the subheading "Repurchase at the
Option of Holders -- Asset Sales."
"Permitted Liens" means:
(1) Liens in favor of the Company;
(2) Liens securing Senior Indebtedness of the Company that was
permitted to be incurred pursuant to the indenture;
(3) Liens on property of a Person existing at the time the Person is
merged into or consolidated with the Company or any Restricted
Subsidiary of the Company, provided, however, that the Liens were
not created in contemplation of the merger or consolidation and
do not extend to any assets other than those of the Person merged
into or consolidated with the Company or the Restricted
Subsidiary;
(4) Liens on property existing at the time of acquisition thereof by
the Company or any Restricted Subsidiary of the Company;
provided, however, that such Liens were not created in
contemplation of the acquisition;
(5) Liens to secure the performance of statutory obligations, surety
or appeal bonds, performance bonds or other obligations of a like
nature incurred in the ordinary course of business;
(6) Liens existing on the date of the indenture;
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(7) Liens for taxes, assessments or governmental charges or claims
that are not yet delinquent or that are being contested in good
faith by appropriate proceedings promptly instituted and
diligently concluded, provided, however, that any reserve or
other appropriate provision, if any, as shall be required in
conformity with GAAP will have been made therefor;
(8) Liens imposed by law, such as mechanics', carriers',
warehousemen's, materialmen's and vendors' Liens, incurred in
good faith in the ordinary course of business with respect to
amounts not yet delinquent or being contested in good faith by
appropriate proceedings if a reserve or other appropriate
provisions, if any, will be required by GAAP will have been made
therefor;
(9) zoning restrictions, easements, licenses, covenants,
reservations, restrictions on the use of real property or minor
irregularities of title incident thereto that do not, in the
aggregate, materially detract from the value of the property or
the assets of the Company or impair the use of the property in
the operation of the Company's business;
(10) judgment Liens to the extent that the judgments do not cause or
constitute a Default or an Event of Default;
(11) Liens to secure the payment of all or a part of the purchase
price of property or assets acquired or constructed in the
ordinary course of business on or after the date of the
indenture, provided, however, that:
(a) such property or assets are used in the same or a similar line
of business as the Company was engaged in on the date of the
indenture;
(b) at the time of incurrence of any such Lien, the aggregate
principal amount of the obligations secured by the Lien will
not exceed the cost of the assets or property (or portions
thereof) so acquired or constructed;
(c) each such Lien will encumber only the assets or property (or
portions thereof) so acquired or constructed and will attach
to the property within 120 days of the purchase or
construction thereof; and
(d) any Indebtedness secured by the Lien will have been permitted
to be incurred under the "Limitation on the Incurrence of
Indebtedness and Issuance of Disqualified Stock" covenant;
(12) precautionary filings of any financial statement under the
Uniform Commercial Code (or equivalent statutes) of any
jurisdiction made in connection with Capital Lease Obligations
permitted to be incurred under the "Limitation on the Incurrence
of Indebtedness and Issuance of Disqualified Stock" covenant,
provided, however; that the Lien does not violate clauses (a),
(b) and (c) of clause (11) hereof; and
(13) Liens incurred in the ordinary course of business securing assets
having a fair market value not in excess of $500,000 in the
aggregate.
"Person" means an individual, limited or general partnership, corporation,
limited liability company, association, unincorporated organization, trust,
joint stock company or joint venture, or a government or any agency or political
subdivision thereof.
"Public Equity Offering" means a bona fide underwritten sale to the public
of Common Stock of the Company pursuant to a registration statement (other than
on Form S-8 or any other form relating to securities issuable under any benefit
plan of the Company) that is declared effective by the SEC.
"Purchase Money Obligations" of any Person means any obligations of that
Person or any of its Restricted Subsidiaries to any seller or any other Person
incurred or assumed in connection with the purchase of real or personal property
to be used in the business of that Person or any of its subsidiaries within 180
days of the incurrence or assumption.
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"Raw Materials Inventory" means, with respect to the Company, the
consolidated, raw materials and work-in-process inventory of the Company, net of
reserves, determined in accordance with GAAP.
"Recapitalization" means the recapitalization transaction relating to
Holding and the Company consummated on December 13, 1996.
"Receivables" means the consolidated trade receivables of the Company, net
of the allowance for doubtful accounts, as determined in accordance with GAAP.
"Registration Rights Agreement" means the Registration Rights Agreement,
dated as of the date of the indenture, between the Company and the initial
purchaser.
"Related Person" of any Person means any other Person directly or
indirectly owning 5% or more of the outstanding Common Stock of that Person or,
in the case of a Person that is not a corporation, 5% or more of the equity
interests in that Person or 5% or more of the combined voting power of the
Voting Stock of that Person.
"Restricted Subsidiary" means:
(1) any Subsidiary of the Company (other than a Subsidiary that is
also a Subsidiary of an Unrestricted Subsidiary) organized or
acquired after the date of the indenture, unless the Subsidiary
will have been designated as an Unrestricted Subsidiary by
resolution of the Board of Directors as provided in and in
compliance with the definition of "Unrestricted Subsidiary"; and
(2) any Unrestricted Subsidiary which is designated as a Restricted
Subsidiary by the Board of Directors of the Company; provided,
however, that immediately after giving effect to the designation
referred to in clause (2), no Default or Event of Default will
have occurred and be continuing and the Company could incur at
least $1.00 of additional Indebtedness under the first paragraph
under the "Limitation on Incurrence of Indebtedness and Issuance
of Disqualified Stock" covenant. The Company will evidence any
designation to the trustee by promptly filing with the trustee an
Officers' Certificate certifying that the designation has been
made and stating that the designation complies with the
requirements of the immediately preceding sentence.
"Senior Indebtedness" means, with respect to the Company:
(1) the Obligations of the Company with respect to the Credit
Facility; and
(2) any other Indebtedness permitted to be incurred by the Company
under the terms of the indenture, unless the instrument under
which the Indebtedness is incurred expressly provides that it is
pari passu with or subordinated in right of payment to the notes.
Notwithstanding anything to the contrary in the foregoing, Senior
Indebtedness will not include:
(a) any obligation of the Company to, in respect of or imposed by
any environmental, landfill, waste management or other
regulatory governmental agency, statute, law or court order;
(b) any liability for federal, state, local or other taxes owed or
owing by the Company;
(c) any Indebtedness of the Company to any of the Company's
Subsidiaries or other Affiliates;
(d) any trade payables; or
(e) any Indebtedness that is incurred in violation of the indenture
on or after the date of the indenture.
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"Subsidiary" means, with respect to any Person:
(1) any corporation, association or other business entity of which
more than 50% of the total voting power of shares of Capital Stock
entitled, without regard to the occurrence of any contingency, to
vote in the election of directors, managers or trustees thereof is
at the time owned or controlled, directly or indirectly, by the
Person or one or more of the other Subsidiaries of that Person or
a combination thereof; and
(2) any partnership, the sole general partner or the managing general
partner of which is the Person or a Subsidiary of the Person, or
the only general partners of which are the Persons or one or more
Subsidiaries of the Person or any combination thereof.
"Unrestricted Subsidiary" means, until such time as any of the following
will be designated as a Restricted Subsidiary of the Company by the Board of
Directors of the Company as provided in and in compliance with the definition of
"Restricted Subsidiary;"
(1) any Subsidiary of the Company or of a Restricted Subsidiary of the
Company organized or acquired after the date of the indenture that
is designated concurrently with its organization or acquisition as
an Unrestricted Subsidiary by resolution of the Board of Directors
of the Company;
(2) any Subsidiary of any Unrestricted Subsidiary; and
(3) any Restricted Subsidiary of the Company that is designated as an
Unrestricted Subsidiary by resolution of the Board of Directors of
the Company, provided, however, that:
(a) immediately after giving effect to the designation, no Default
or Event of Default will have occurred and be continuing;
(b) any such designation will be deemed, at the election of the
Company at the time of the designation, to be either, but not
both, the making of a Restricted Payment at the time of the
designation in an amount equal to the Investment in the
Subsidiary subject to the restrictions contained in the
"Limitation on Restricted Payments" covenant or the making of
an Asset Sale at the time of the designation in an amount equal
to the Investment in such Subsidiary subject to the
restrictions contained in the "Asset Sales" covenant; and
(c) the Subsidiary or any of its Subsidiaries does not own any
Capital Stock or Indebtedness of, or own or hold any Lien on
any property of, the Company or any other Subsidiary of the
Company that is not a Subsidiary of the Subsidiary to be so
designated.
A Person may be designated as an Unrestricted Subsidiary only if and for so
long as that Person:
(1) has no Indebtedness other than Non-Recourse Debt;
(2) is a Person with respect to which neither the Company nor any of
its Restricted Subsidiaries has any direct or indirect obligation:
(a) to subscribe for additional Equity Interests; or
(b) to make any payment to maintain or preserve that Person's
financial condition or to cause that Person to achieve any
specified levels of operating results; and
(3) has not guaranteed or otherwise directly or indirectly provided
credit support for any Indebtedness of the Company or any of its
Restricted Subsidiaries. The Company will evidence any designation
pursuant to clause (1) or (3) of the preceding paragraph to the
trustee by filing with the trustee within 45 days of the
designation an Officers' Certificate
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certifying that the designation has been made and, in the case of
clause (3) of the preceding paragraph, the related election of the
Company in respect thereof.
"Voting Stock" means any class or classes of Capital Stock pursuant to
which the holders thereof have the general voting power under ordinary
circumstances to elect at least a majority of the board of directors, managers,
general partners or trustees of any Person (irrespective of whether or not, at
the time, Capital Stock of any other class or classes will have, or might have,
voting power by reasons of the happening of any contingency) or, with respect to
a partnership, whether general or limited, any general partner interest in such
partnership.
"Weighted Average Life to Maturity" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing:
(1) the sum of the products obtained by multiplying:
(a) the amount of each then remaining installment, sinking fund,
serial maturity or other required payments of principal,
including payment at final maturity, in respect thereof by
(b) the number of years (calculated to the nearest one-twelfth)
that will elapse between that date and the making of the
payment; by
(2) the then outstanding principal amount of the Indebtedness.
"Wholly Owned Subsidiary" of any Person means a Subsidiary of the Person
100% of the outstanding Capital Stock or other ownership interests of which,
other than directors' qualifying shares, will be at the time beneficially owned
by the Person either directly or indirectly through Wholly Owned Subsidiaries.
FRAUDULENT CONVEYANCE
Under applicable provisions of the United States Bankruptcy Code or
comparable provisions of state fraudulent transfer or conveyance laws, if we, at
the time we issue the Series B notes being offered:
- incurred the indebtedness with the intent to hinder, delay or
defraud creditors;
- received less than reasonably equivalent value or fair
consideration for the issuance of the Series B notes; and
- were insolvent at the time of the incurrence, were rendered
insolvent by reason of the incurrence, and the application of
proceeds therefrom, were engaged or were about to engage in a
business or transaction for which the assets remaining with our
Company constituted unreasonably small capital to carry on our
business, or intended to incur, or believed that we would incur,
debts beyond our ability to pay the debts as they mature, then, in
each such case, a court of competent jurisdiction could hold that
our issuance of the Series B notes constituted a fraudulent
conveyance and permit us to avoid, in whole or in part, the Series
B notes or, in the alternative, subordinate the Series B notes to
our existing and future indebtedness.
The measure of insolvency varies although we would generally be considered
insolvent if:
- the sum of our debts, including contingent liabilities, exceeded
all of our assets at fair valuation;
- the present fair saleable value of our assets was less than the
amount that would be required to pay the probable liability on our
existing debts, including contingent liabilities, as they become
absolute and matured; or
- we could not pay our debts as they become due.
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We believe that, for purposes of the United States Bankruptcy Code and
state fraudulent transfer or conveyance laws, the Series B notes are being
issued without the intent to hinder, delay or defraud creditors and for proper
purposes and in good faith, and that we, after the issuance of the Series B
notes and the application of proceeds therefrom, will be solvent, will have
sufficient capital for carrying on our business and will be able to pay our
debts as they mature. There can be no assurance, however, that a court passing
on such questions would agree with our conclusions.
BOOK-ENTRY, DELIVERY AND FORM
Except as provided in the next paragraph, the notes to be resold as
provided herein will initially be issued in the form of one or more Global Notes
(the "Global Notes"). The Global notes will be deposited on the date of the
closing of the sale of the notes offered hereby (the "Closing Date") with, or on
behalf of, the Depositary and registered in the name of Cede & Co., as nominee
for the Depositary (such nominee being referred to herein as the "Global Note
Holder").
Notes that are issued as described below under the subheading "Certificated
Securities" will be issued in registered form (the "Certificated Securities").
Upon the transfer of Certificated Securities, the Certificated Securities may,
unless the Global Notes have previously been exchanged for Certificated
Securities, be exchanged for an interest in a Global Note representing the
principal amount of notes being transferred.
The Depositary is a limited-purpose trust company which was created to hold
securities for its participating organizations (collectively, the "Participants"
or the "Depositary's Participants") and to facilitate the clearance and
settlement of transactions in the securities between Participants through
electronic book-entry changes in accounts of its Participants. The Depositary's
Participants include securities brokers and dealers, including the initial
purchaser of the notes, banks and trust companies, clearing corporations and
certain other organizations. Access to the Depositary's system is also available
to other entities such as banks, brokers, dealers and trust companies
(collectively, the "Indirect Participants" or the "Depositary's Indirect
Participants") that clear through or maintain a custodial relationship with a
Participant, either directly or indirectly. Persons who are not Participants may
beneficially own securities held by or on behalf of the Depositary only through
the Depositary's Participants or the Depositary's Indirect Participants.
The Company expects that pursuant to procedures established by the
Depositary:
(1) upon deposit of the Global Notes, the Depositary will credit the
accounts of Participants designated by the initial purchaser of
the notes with portions of the principal amount of the Global
Notes; and
(2) ownership of the notes evidenced by the Global Notes will be shown
on, and the transfer of ownership thereof will be effected only
through, records maintained by the Depositary (with respect to the
interests of the Depositary's Participants), the Depositary's
Participants and the Depositary's Indirect Participants.
Prospective purchasers are advised that the laws of some states
require that certain Persons take physical delivery in definitive
form of securities that they own. Consequently, the ability to
transfer notes evidenced by the Global Notes will be limited to
such extent. For certain other restrictions on the transferability
of the notes, see "Notice to Investors."
So long as the Global Note Holder is the registered owner of any notes, the
Global Note Holder will be considered the sole owner or holder of such notes
outstanding under the indenture. Beneficial owners of notes evidenced by the
Global Note will not be considered the owners or holders thereof under the
indenture for any purpose, including with respect to the giving of any
directions, instructions or approvals to the trustee thereunder. The ability of
a Person having a beneficial interest in notes represented by a Global Note to
pledge that interest to Persons or entities that do not participate in the
Depositary's system or to otherwise take actions in respect of that interest,
may be affected by the lack of a physical certificate evidencing that interest.
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None of the Company nor the trustee will have any responsibility or
liability for any aspect of the records relating to or payments made on account
of notes by the Depositary, or for maintaining, supervising or reviewing any
records of the Depositary relating to the notes.
Payments in respect of the principal of, premium, if any, interest and any
Liquidated Damages on any notes registered in the name of a Global Note Holder
on the applicable record date will be payable by the trustee to or at the
direction of such Global Note Holder in its capacity as the registered holder
under the indenture. Under the terms of the indenture, the Company and the
trustee may treat the Persons in whose names the notes, including the Global
Notes, are registered as the owners thereof for the purpose of receiving the
payments and for any and all other purposes whatsoever. Consequently, none of
the Company nor the trustee has or will have any responsibility or liability for
the payment of the amounts to beneficial owners of notes (including principal,
premium, if any, interest and any Liquidated Damages).
The Company believes, however, that it is currently the policy of the
Depositary to immediately credit the accounts of the relevant Participants with
such payment, in amounts proportionate to their respective holdings in principal
amount of beneficial interests in the relevant security as shown on the records
of the Depositary. Payments by the Depositary's Participants and the
Depositary's Indirect Participants to the beneficial owners of notes will be
governed by standing instructions and customary practice and will be the
responsibility of the Depositary's Participants or the Depositary's Indirect
Participants.
CERTIFICATED SECURITIES
Subject to certain conditions, any Person having a beneficial interest in a
Global Note may, upon request to the Company or the trustee, exchange his
beneficial interest for notes in the form of definitive notes. Upon such an
issuance, the trustee is required to register the notes in the name of, and
cause the same to be delivered to, the Person or Persons. All of these
definitive notes would be subject to the legend requirements described in this
prospectus under the heading "Notice to Investors." In addition, if:
(1) the Company notifies the trustee in writing that the Depositary is
no longer willing or able to act as a depositary and the Company
is unable to appoint a qualified successor within 90 days; or
(2) the Company, at its option, notifies the trustee in writing that
it elects to cause the issuance of notes in the form of definitive
notes under the indenture, then, upon surrender by the relevant
Global Note Holder of its Global Note, notes in this form will be
issued to each Person that the Depositary identifies as the
beneficial owner of the related notes.
Neither the Company nor the trustee will be liable for any delay by the
Depositary in identifying the beneficial owners of the related notes and each
Person may conclusively rely on, and will be protected in relying on,
instructions from the Depositary for all purposes (including with respect to the
registration and delivery, and the respective principal amounts, of the notes to
be issued).
SAME-DAY SETTLEMENT AND PAYMENT
The indenture requires that payments in respect of the notes (including
principal, premium, if any, interest and any Liquidated Damages) be made by wire
transfer of immediately available funds to the accounts specified by the Global
Note Holder. Secondary trading in long-term notes and debentures of corporate
issuers is generally settled in clearing-house or next-day funds. In contrast,
the notes are eligible to trade in the PORTAL Market and to trade in the
Depositary's Next-day Funds Settlement System, and any permitted secondary
market trading activity in the notes will therefore be required by the
Depositary to be settled in immediately available funds. The Company expects
that secondary trading in the Certificated Notes also will be settled in
immediately available funds.
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CERTAIN U.S. FEDERAL INCOME TAX CONSIDERATIONS
The following is a discussion of the material federal income tax
considerations relevant to the exchange of Series C notes for Series B notes.
The discussion is based upon the Internal Revenue Code of 1986, Treasury
regulations, Internal Revenue Service rulings and pronouncements, and judicial
decisions now in effect, all of which are subject to change at any time by
legislative, judicial or administrative action. Any of these changes may be
applied retroactively in a manner that could adversely affect you as a holder of
the Series B notes. The description does not consider the effect of any
applicable foreign, state, local or other tax laws or estate or gift tax
considerations.
EACH HOLDER SHOULD CONSULT HIS OWN TAX ADVISOR AS TO THE PARTICULAR TAX
CONSEQUENCES TO IT OF EXCHANGING OLD NOTES FOR NEW NOTES, INCLUDING THE
APPLICABILITY AND EFFECT OF ANY STATE, LOCAL OR FOREIGN TAX LAWS.
EXCHANGE OF SERIES C NOTES FOR SERIES B NOTES
The exchange of Series C notes for Series B notes pursuant to the exchange
offer should not constitute a sale or an exchange for federal income tax
purposes. You will have a basis for the Series B notes equal to the basis of
your Series C notes and your holding period for the Series B notes will include
the period during which your Series C notes. Accordingly, this exchange should
have no federal income tax consequences to you.
PLAN OF DISTRIBUTION
Based on an interpretation by the staff of the SEC provided in no-action
letters issued to third parties in similar transactions, we believe that Series
B notes issued in the exchange offer in exchange for Series C notes may be
offered for resale, resold and otherwise transferred by holders, other than any
holder that is our "affiliate" within the meaning of Rule 405 under the
Securities Act, without compliance with the registration and prospectus delivery
provisions of the Securities Act. However, this applies only if Series B notes
are acquired in the ordinary course of the holders' business and the holders
have no arrangement with any person to participate in the distribution of the
Series B notes. We refer you to the "Morgan Stanley & Co. Inc." SEC No-Action
Letter available June 5, 1991, "Exxon Capital Holdings Corporation" SEC
No-Action Letter available May 13, 1988 and "Shearman & Sterling" SEC No-Action
Letter available July 2, 1993 for support of our belief.
Each broker-dealer that receives Series B notes for its own account in the
exchange offer must acknowledge that it will deliver a prospectus with any
resale of the Series B notes. This prospectus may be used by a broker-dealer in
connection with resales of Series B notes received in exchange for Series C
notes where such Series C notes were acquired as a result of market-making
activities or other trading activities. We have agreed that, for a period of 180
days after the expiration date of the exchange offer, we will make this
prospectus, as amended or supplemented, available to any broker-dealer for use
in connection with any such resale. In addition, until July 30, 1999, all
dealers effecting transactions in the Series B notes may be required to deliver
this prospectus.
New notes received by broker-dealers for their own account in the exchange
offer may be sold from time to time in one or more transactions in the
over-the-counter market, in negotiated transactions, through the writing of
options on the Series B notes or a combination of these methods of resale, at
market prices prevailing at the time of resale, at prices related to the
prevailing market prices or negotiated prices. Any resale may be made directly
to purchasers or to or through brokers or dealers who may receive compensation
in the form of commissions or concessions from any such broker-dealer or the
purchasers of any of the Series B notes. Any broker-dealer that resells Series B
notes that were received by it for its own account and any broker or dealer that
participates in a distribution of Series B notes may be deemed to be an
underwriter within the Securities Act, and any profit on any resale of Series B
notes, commissions or concessions received by any of these persons may be
underwriting compensation under the Securities Act.
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The letter of transmittal states that by acknowledging that it will deliver and
by delivering a prospectus meeting the requirements of the Securities Act, a
broker-dealer will not be admitting that it is an underwriter within the meaning
of the Securities Act.
We have agreed to pay all expenses incident to the exchange offer,
including the expenses of one counsel for the holders of the Series C notes,
other than commissions or concessions of any broker-dealers. We have agreed to
indemnify holders of the notes, including any broker-dealers, against some
liabilities, including some liabilities under the Securities Act.
LEGAL MATTERS
Weil, Gotshal & Manges LLP, Dallas, Texas and New York, New York will pass
upon the legal matters on the validity of the Series B notes being offered
hereby.
EXPERTS
Ernst & Young LLP, independent auditors, have audited our consolidated
financial statements and schedule at January 2, 1999, and January 3, 1998, and
for each of the three fiscal years in the period ended January 2, 1999, as set
forth in their report. We have included our financial statements and schedule in
the prospectus and elsewhere in the registration statement in reliance on Ernst
& Young LLP's report, given on their authority as experts in accounting and
auditing.
Ernst & Young LLP, independent auditors, have audited the consolidated
financial statements of Security Fence Supply Co., Inc. and subsidiary at July
31, 1998 and for the ten-month period ended July 31, 1998, as set forth in their
report. We have included the financial statements of Security Fence Supply Co.,
Inc. and subsidiary in the prospectus and elsewhere in the registration
statement in reliance on Ernst & Young LLP's report, given on their authority as
experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We file (File No. 333-29141) annual, quarterly and special reports, proxy
statements and other information with the SEC. You may read and copy any
reports, statements and other information filed by us at the SEC's public
reference room, at 450 Fifth Street, N.W., Washington, D.C., as well as at
public reference rooms in New York, New York and Chicago, Illinois. Please call
(800) SEC-0330 for further information on the public reference rooms. Our
filings are also available to the public from commercial document retrieval
services and at the web site maintained by the SEC at http://www.sec.gov.
We have filed a Registration Statement on Form S-4 to register with the SEC
the Series B notes to be issued in exchange for the Series C notes. This
prospectus is part of that Registration Statement. As allowed by the SEC's
rules, this prospectus does not contain all of the information you can find in
the Registration Statement or the exhibits to the Registration Statement.
80
<PAGE> 83
INDEX TO MMI PRODUCTS, INC. AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Auditors.............................. F-2
Consolidated Balance Sheet at fiscal year end 1998 and
1997...................................................... F-3
Consolidated Statement of Operations for fiscal years 1998,
1997 and 1996............................................. F-4
Consolidated Statement of Changes in Stockholder's Equity
(Deficit) for fiscal years 1998, 1997 and 1996............ F-5
Consolidated Statement of Cash Flows for fiscal years 1998,
1997 and 1996............................................. F-6
Notes to Consolidated Financial Statements.................. F-7
</TABLE>
INDEX TO SECURITY FENCE SUPPLY CO., INC. AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Auditors.............................. F-21
Consolidated Balance Sheet at July 31, 1998................. F-22
Consolidated Statement of Income for the ten-month period
ended July 31, 1998....................................... F-23
Consolidated Statement of Stockholders' Equity for the
ten-month period ended July 31, 1998...................... F-24
Consolidated Statement of Cash Flows for the ten-month
period ended July 31, 1998................................ F-25
Notes to Consolidated Financial Statements.................. F-26
</TABLE>
INDEX TO MMI PRODUCTS, INC. PRO FORMA
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<S> <C>
Consolidated Statement of Operations........................ P-2
Notes to Consolidated Statement of Operations............... P-3
</TABLE>
F-1
<PAGE> 84
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholder
MMI Products, Inc.
We have audited the accompanying consolidated balance sheets of MMI
Products, Inc. and subsidiary as of January 2, 1999 and January 3, 1998, and the
related consolidated statements of operations, stockholder's equity (deficit)
and cash flows for each of the three fiscal years in the period ended January 2,
1999. Our audits also included the financial statement schedule listed in the
index at Item 21(b). These financial statements and schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of MMI Products,
Inc. and subsidiary at January 2, 1999 and January 3, 1998, and the consolidated
results of their operations and their cash flows for each of the three fiscal
years in the period ended January 2, 1999, in conformity with generally accepted
accounting principles. Also in our opinion, the related financial statement
schedule, when considered in relation to the basic financial statements taken as
a whole, presents fairly in all material respects the information set forth
therein.
/s/ ERNST & YOUNG LLP
Houston, Texas
March 31, 1999
F-2
<PAGE> 85
MMI PRODUCTS, INC.
CONSOLIDATED BALANCE SHEET
ASSETS
<TABLE>
<CAPTION>
JANUARY 2, JANUARY 3,
1999 1998
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 1,979 $ 3,509
Accounts receivable, net of allowance for doubtful
accounts of $1,926 and $1,876, respectively............ 58,633 38,940
Inventories............................................... 62,347 48,938
Income tax receivable..................................... -- 1,710
Deferred income taxes..................................... 1,495 1,178
Prepaid expenses.......................................... 1,443 1,206
-------- --------
Total current assets.............................. 125,897 95,481
Property, plant and equipment
Land...................................................... 4,814 4,814
Buildings and improvements................................ 17,890 16,473
Machinery and equipment................................... 69,669 50,343
-------- --------
92,373 71,630
Less accumulated depreciation............................. 31,456 25,712
-------- --------
Property, plant and equipment, net................ 60,917 45,918
Intangible assets........................................... 29,123 5,831
Deferred charges and other assets........................... 4,289 5,588
-------- --------
Total assets...................................... $220,226 $152,818
======== ========
LIABILITIES AND STOCKHOLDER'S DEFICIT
Current liabilities:
Accounts payable.......................................... $ 50,328 $ 27,276
Accrued interest.......................................... 3,238 3,172
Accrued liabilities....................................... 11,175 10,025
Income tax payable........................................ 672 --
Due to Holding, net....................................... -- 3,573
Current maturities of long-term obligations............... 1,630 1,127
-------- --------
Total current liabilities......................... 67,043 45,173
Long-term obligations....................................... 158,807 122,740
Deferred income taxes and other long-term liabilities....... 7,383 5,778
Commitments and contingencies
Stockholder's deficit
Common stock, $1 par value; 500,000 shares authorized;
252,000 shares issued and outstanding.................. 252 252
Additional paid-in capital................................ 13,009 14,711
Accumulated other comprehensive income, net of tax of $148
and $105, respectively................................. (221) (151)
Retained deficit.......................................... (26,047) (35,685)
-------- --------
Total stockholder's deficit....................... (13,007) (20,873)
-------- --------
Total liabilities and stockholder's deficit....... $220,226 $152,818
======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
<PAGE> 86
MMI PRODUCTS, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
--------------------------------------
JANUARY 2, JANUARY 3, DECEMBER 28,
1999 1998 1996
---------- ---------- ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Net sales.................................................. $418,355 $346,905 $283,402
Cost of sales.............................................. 350,961 295,999 238,439
-------- -------- --------
Gross profit............................................. 67,394 50,906 44,963
Selling, general and administrative expense................ 31,874 24,843 23,143
Nonrecurring expense -- stock options (Note 2)............. -- -- 3,106
Other (income) expense, net................................ (74) 147 721
-------- -------- --------
Income before interest and income taxes.................... 35,594 25,916 17,993
Interest expense:
Affiliates............................................... -- -- 2,046
Other.................................................... 17,320 13,018 5,383
-------- -------- --------
17,320 13,018 7,429
-------- -------- --------
Income before income taxes................................. 18,274 12,898 10,564
Provision for income taxes................................. 7,344 5,161 4,227
-------- -------- --------
Net income....................................... $ 10,930 $ 7,737 $ 6,337
======== ======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
<PAGE> 87
MMI PRODUCTS, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY (DEFICIT)
<TABLE>
<CAPTION>
TOTAL
ADDITIONAL RETAINED OTHER STOCKHOLDER'S
COMMON PAID-IN EARNINGS COMPREHENSIVE EQUITY
STOCK CAPITAL (DEFICIT) INCOME (DEFICIT)
------ ---------- --------- ------------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Balance at December 30, 1995......... $252 $ 8,008 $ 7,346 $ -- $ 15,606
Net income......................... -- -- 6,337 -- 6,337
Contribution of capital
-- Recapitalization (Note 1).... -- 3,485 -- -- 3,485
-- stock options (Note 2)....... -- 3,106 -- -- 3,106
---- ------- -------- ----- --------
Balance at December 28, 1996......... 252 14,599 13,683 -- 28,534
Net income......................... -- -- 7,737 -- 7,737
Additional minimum pension
liability....................... -- -- -- (151) (151)
---- ------- -------- ----- --------
Comprehensive income............... -- -- -- -- 7,586
---- ------- -------- ----- --------
Contribution of capital............
-- stock options................ -- 112 -- -- 112
Distribution to Holding............ -- -- (57,105) -- (57,105)
---- ------- -------- ----- --------
Balance at January 3, 1998........... 252 14,711 (35,685) (151) (20,873)
Net income......................... -- -- 10,930 -- 10,930
Additional minimum pension
liability....................... -- -- -- (70) (70)
---- ------- -------- ----- --------
Comprehensive income............... -- -- -- -- 10,860
---- ------- -------- ----- --------
Adjustment to 1996 Contribution of
capital (Note 1)................ -- (1,702) -- -- (1,702)
Dividend to Holding (Note 1)....... -- -- (1,292) -- (1,292)
---- ------- -------- ----- --------
Balance at January 2, 1999........... $252 $13,009 $(26,047) $(221) $(13,007)
==== ======= ======== ===== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
<PAGE> 88
MMI PRODUCTS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
--------------------------------------
JANUARY 2, JANUARY 3, DECEMBER 28,
1999 1998 1996
---------- ---------- ------------
(IN THOUSANDS)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income................................................ $ 10,930 $ 7,737 $ 6,337
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization........................... 7,187 5,507 4,448
Nonrecurring expenses -- stock options.................. -- -- 3,106
Provision for losses on accounts receivable............. 234 -- 879
Deferred income taxes................................... 340 2,886 (1,088)
(Gain) loss on sale of equipment........................ (81) (22) 193
Other................................................... -- 112 --
Changes in operating assets and liabilities, net of
effects of acquired businesses:
Increase in accounts receivable......................... (12,914) (3,139) (8,339)
Increase in inventories................................. (7,546) (7,029) (1,668)
Decrease in prepaid expenses and other assets........... 333 272 2,068
Increase in accounts payable and accrued liabilities.... 17,701 1,109 9,762
Increase (decrease) in income taxes..................... 2,629 (2,800) 372
Decrease in deferred interest payable -- affiliates..... -- -- (6,389)
Increase (decrease) in due to Holding................... (3,652) (2,237) 5,810
--------- -------- ---------
Net cash provided by operating activities....... 15,161 2,396 15,491
--------- -------- ---------
INVESTING ACTIVITIES:
Capital expenditures.................................... (10,226) (4,560) (3,545)
Proceeds from sale of equipment......................... 52 101 89
Acquisitions, net of cash acquired...................... (37,721) (552) (20,858)
Other................................................... 9 35 --
--------- -------- ---------
Net cash used in investing activities........... (47,886) (4,976) (24,314)
--------- -------- ---------
FINANCING ACTIVITIES:
Proceeds from long-term obligations..................... 187,316 157,854 122,033
Payments on long-term obligations....................... (153,127) (90,943) (103,824)
Payments on subordinated notes payable -- affiliates.... -- -- (14,800)
Contribution of capital from Holding.................... (1,702) -- 3,485
Dividend to Holding..................................... (1,292) -- --
Distribution to Holding................................. -- (57,105) --
Debt offering costs..................................... -- (3,951) --
--------- -------- ---------
Net cash provided by financing activities....... 31,195 5,855 6,894
--------- -------- ---------
Net change in cash and cash equivalents......... (1,530) 3,275 (1,929)
Cash and cash equivalents, beginning of period............ 3,509 234 2,163
--------- -------- ---------
Cash and cash equivalents, end of period.................. $ 1,979 $ 3,509 $ 234
========= ======== =========
Supplemental Cash Flow Information:
Supplemental disclosure of noncash investing activities
Issuance of capital lease obligations for capital
expenditures......................................... $ 1,385 $ 1,678 $ 1,443
Cash paid for interest.................................. $ 16,721 $ 10,441 $ 13,530
Cash paid for income taxes.............................. $ 4,371 $ 4,822 $ 4,938
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-6
<PAGE> 89
MMI PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 2, 1999
1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
The consolidated financial statements include the accounts of MMI Products,
Inc. and its wholly-owned subsidiary, Security Fence Supply Co. Inc. (since its
acquisition on October 6, 1998) (collectively, "MMI" or the "Company"). MMI
Products, Inc. is a wholly-owned subsidiary of Merchants Metals Holding Company
("Holding") which is substantially wholly-owned by MMI Products, L.L.C. MMI is a
manufacturer and distributor of products used in the residential, commercial and
infrastructure construction industries within the United States. The
manufactured products in each of MMI's product lines are produced primarily from
the same raw material, steel rod. MMI's customers include contractors, fence
wholesalers, industrial manufacturers, highway construction contractors and
fabricators of reinforcing bar.
On December 13, 1996, MMI and Holding completed a recapitalization
transaction (the "Recapitalization"). Pursuant to the Recapitalization, (i)
Holding made an additional capital contribution to MMI of approximately $3.5
million in cash and loaned MMI approximately $5.8 million, (ii) MMI borrowed an
additional $5.0 million in senior subordinated secured notes payable from a
supplier and an additional $1.0 million in other long-term debt, and (iii) MMI
repaid the full amount of subordinated notes payable to affiliates of $14.8
million plus accrued interest.
A former stockholder of Holding exercised its appraisal rights and filed a
lawsuit against Holding with respect to the value of the common and preferred
stock redeemed in connection with the Recapitalization. In January 1997, Holding
paid the stockholder $2.2 million with respect to the value of the preferred
stock, the original value offered in the Recapitalization. In October 1998,
Holding paid $6.45 million, including accrued interest of $1.04 million, to
settle the value of the common stock redeemed. The $1.7 million increase in the
original value offered in the Recapitalization has been charged to Additional
Paid-in-Capital to reflect finalization of the December 1996 change in capital
contributions by Holding. MMI declared a dividend of $1.3 million to Holding
during the fourth quarter of 1998 to settle the interest and legal expenses paid
on Holding's behalf by MMI. The $6.45 million settlement was funded by MMI's
revolving credit facility and had no effect on the operating results of MMI.
On April 16, 1997, MMI issued $120 million of senior subordinated notes due
2007. The net proceeds of $116.0 million, after fees and expenses, were used (i)
to distribute $57.1 million to Holding for the redemption by Holding of certain
of its equity interests, (ii) to repay the entire $10 million principal amount,
plus accrued interest, on an MMI senior subordinated secured note payable, (iii)
to repay MMI's remaining indebtedness under a term loan facility of $11.4
million and (iv) to reduce MMI's indebtedness under the revolving credit
facility. See Note 7.
FISCAL YEAR
MMI follows a 52-53 week fiscal year ending on the Saturday closest to
December 31st. The 1998, 1997, and 1996 fiscal years refer to the fifty-two week
period ended January 2, 1999, the fifty-three week period ended January 3, 1998
and the fifty-two week period ended December 28, 1996, respectively.
REVENUE RECOGNITION
MMI records sales when its products are shipped.
F-7
<PAGE> 90
MMI PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
CASH AND CASH EQUIVALENTS
MMI considers all demand deposits and time deposits with original
maturities of three months or less when purchased to be cash equivalents.
INVENTORIES
Inventories are valued at the lower of average cost or market.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at historical cost except for
assets acquired in business combinations which are recorded at fair market value
at the date of acquisition. 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................................... 10 to 31 years
Machinery and equipment..................................... 2 to 20 years
</TABLE>
Depreciation expense was $6,423,000, $5,153,000 and $3,997,000 for fiscal years
1998, 1997 and 1996, respectively.
Major capital upgrades are capitalized. Maintenance, repairs and minor
upgrades are expensed as incurred. Gains and losses from dispositions are
included in the results from operations.
MMI leases certain machinery and equipment under capital leases. Assets
recorded under capital leases are amortized over the lives of the respective
leases with the related amortization included in depreciation expense. Assets
under these obligations, totaling $3,574,000 and $3,427,000 (net of accumulated
amortization of $3,560,000 and $2,344,000) at January 2, 1999 and January 3,
1998, respectively, are included in property, plant and equipment in the
accompanying consolidated balance sheets.
GOODWILL
Goodwill represents the excess cost of companies acquired over the fair
value of their net identifiable assets. Goodwill is being amortized on a
straight-line basis over periods ranging from 20 to 40 years. The carrying value
of goodwill, as well as the related amortization periods, is periodically
evaluated to determine whether adjustments to the carrying value or related
lives are required. This evaluation is based on MMI's projection of undiscounted
cash flows of the acquired operations over the remaining amortization period. To
the extent such projections indicate that future undiscounted cash flows are not
sufficient to recover the carrying amounts of the related goodwill, the
underlying assets are written down by charges to expense so that the carrying
amount is equal to fair value, primarily determined based on future discounted
cash flows.
F-8
<PAGE> 91
MMI PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
IMPAIRMENT OF LONG-LIVED ASSETS
The carrying values of long-lived assets, principally identifiable
intangibles, property, plant and equipment and any related goodwill, are
reviewed for potential impairment when events or changes in circumstances
indicate that the carrying amount of such assets may not be recoverable, as
determined based on the estimated future undiscounted cash flows. If such assets
are considered to be impaired, the carrying value of the related assets would be
reduced to their estimated fair value.
CONCENTRATION OF CREDIT RISK
Financial instruments that could potentially subject MMI to concentrations
of credit risk are accounts receivable. MMI continuously evaluates the
creditworthiness of its customers and generally does not require collateral. No
customer accounted for 10% or more of consolidated revenues for fiscal years
1998, 1997 or 1996.
FAIR VALUE OF FINANCIAL INSTRUMENTS
MMI 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 January 2, 1999
and January 3, 1998. The estimated fair value of MMI's long-term debt is
approximately $129.6 million and $130.8 million at January 2, 1999 and January
3, 1998, respectively, based on the quoted market price.
RECLASSIFICATIONS
Certain reclassifications have been made to the 1996 and 1997 financial
statements in order to conform to the 1998 presentation.
NEW ACCOUNTING STANDARDS
As of January 4, 1998, MMI adopted Financial Accounting Standards Board
Statement No. 130, Reporting Comprehensive Income (Statement 130) and Statement
No. 131, Disclosures about Segments of an Enterprise and Related Information
(Statement 131).
Statement 130 establishes new rules for reporting and display of
comprehensive income and its components; however, the adoption of Statement 130
had no impact on MMI's consolidated net income or shareholder's equity. Prior
year financial statements have been reclassified to conform to the requirements
of Statement 130.
Statement 131 establishes standards for the way that public business
enterprises report information about operating segments in annual financial
statements and requires that those enterprises report selected information about
operating segments in interim financial reports. Statement 131 also establishes
standards for related disclosures about products and services, geographic areas,
and major customers. The adoption of Statement 131 did not affect MMI's
consolidated results of operations or financial position. See Note 12.
2. NONRECURRING EXPENSES -- STOCK OPTIONS
Effective December 13, 1996 in connection with the Recapitalization, MMI
incurred nonrecurring charges relating to Holding's stock options granted in
previous years to certain employees and a supplier of MMI. The aggregate effect
of these expenses was $3.1 million for fiscal year 1996.
Under Holding's 1988 Stock Option Plan, certain employees of MMI received
noncompensatory stock options for shares of Holding common stock. The options
expired generally 10 years from the date of grant. None of these options were
exercised. Effective December 13, 1996, Holding amended the 1988
F-9
<PAGE> 92
MMI PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Stock Option Plan to convert the outstanding options for common stock into
options for a total of 22,895 shares of Holding's junior series preferred stock.
As a result of the amendment, which changed the underlying securities of the
options and resulted in a new measurement date, MMI accrued $2.1 million in
compensation expense in 1996. On April 16, 1997, MMI redeemed all of the
outstanding options for Holding's junior series preferred stock held by
employees for a total value of $2.2 million.
In 1989, in connection with issuing a senior subordinated secured note to a
supplier, Holding granted the supplier stock options for shares of Holding
common stock which were to expire December 31, 1996. None of these options were
exercised. Effective December 13, 1996, Holding amended the supplier's option
agreement in connection with the Recapitalization to extend the expiration date
of the options three years and to convert the options for common stock into
options for 9,893 shares of Holding's junior series preferred stock. As a
result, MMI accrued $964,000 in expense in 1996. On April 16, 1997, MMI redeemed
all of the outstanding options held by this supplier for a total value of
$998,000.
3. ACQUISITIONS OF BUSINESSES
During fiscal year 1998, MMI made the acquisitions set forth below, each of
which has been accounted for under the purchase method of accounting. The
accompanying consolidated financial statements include the operating results of
each of the acquired businesses from the date of the acquisition.
In February, 1998, MMI acquired certain net assets of The Burke Group
L.L.C. ("Burke"), a manufacturer of hardware devices and processor of chemicals
used in the concrete construction industry with facilities in Converse, Texas
and Long Beach, California. The purchase price was $20.6 million with assets
acquired of $12.1 million and liabilities assumed of $3.4 million. The excess of
the purchases price over the fair value of the net assets acquired was $11.9
million and is being amortized over 40 years. In September 1998, MMI sold the
chemical processing business for approximately $3.6 million in cash, the book
value of the net assets sold.
In March 1998, MMI acquired certain assets of a fence manufacturer and
distributor for $2.1 million, of which $1.1 million was funded by the revolving
credit facility and $1.0 million by a note payable to seller.
In October 1998, MMI acquired all of the issued and outstanding capital
stock of Security Fence Supply Co., Inc. ("Security"), for cash of approximately
$24.4 million. Immediately following the purchase, MMI sold the real property
acquired to the former principals of Security for $3.6 million and leased it
back for a term of five years at rates which approximate market. Security is a
manufacturer of commercial and industrial fencing located in Bladensburg,
Maryland. Assets acquired were $13.8 million and liabilities assumed were $4.1
million. The excess of the purchase price over the fair value of the net assets
acquired was $11.1 million and is being amortized over 40 years.
The following table reports the unaudited pro forma consolidated results of
operations as though Burke and Security had been acquired as of the beginning of
fiscal year 1997:
<TABLE>
<CAPTION>
FISCAL YEARS
-------------------
1998 1997
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Net sales................................................... $442,701 $404,274
Gross profit................................................ 72,653 64,410
Net income.................................................. 11,582 8,663
</TABLE>
F-10
<PAGE> 93
MMI PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. INVENTORIES
Inventories consisted of the following:
<TABLE>
<CAPTION>
JANUARY 2, JANUARY 3,
1999 1998
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Raw materials............................................... $17,024 $11,188
Work-in-process............................................. 1,150 255
Finished goods.............................................. 44,173 37,495
------- -------
$62,347 $48,938
======= =======
</TABLE>
MMI has a procurement agreement with a purchasing agent who brokers
purchases of imported steel rod. The agreement requires MMI to purchase from the
agent an average of 100,000 tons of steel rod annually through fiscal year 2001.
During fiscal years 1998, 1997 and 1996, 46%, 65% and 63%, respectively, of
MMI's steel rod purchases were from this supplier. At January 2, 1999,
approximately $9.9 million of steel rod inventory owned by this agent had been
consigned for MMI's use. Actual steel rod purchase commitments at January 2,
1999, for this supplier, and others was approximately $27 million.
5. INTANGIBLE ASSETS
Intangible assets consisted of the following:
<TABLE>
<CAPTION>
JANUARY 2, JANUARY 3,
1999 1998 ESTIMATED LIVES
---------- ---------- ---------------
(IN THOUSANDS)
<S> <C> <C> <C>
Goodwill.......................................... $29,997 $6,597 20-40 years
Customer lists and other.......................... 2,451 1,760 3-20 years
------- ------
32,448 8,357
Less accumulated amortization..................... 3,325 2,526
------- ------
Intangible assets, net............................ $29,123 $5,831
======= ======
</TABLE>
Intangible assets are amortized on a straight-line basis over their
respective estimated lives (the period when benefits are expected to be
derived). Total amortization expense for fiscal years 1998, 1997 and 1996 was
$764,000, $354,000 and $451,000, respectively.
6. ACCRUED LIABILITIES
Accrued liabilities consisted of the following:
<TABLE>
<CAPTION>
JANUARY 2, JANUARY 3,
1999 1998
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Accrued compensation........................................ $ 5,114 $ 3,472
Accrued insurance........................................... 1,606 2,254
Accrued retirement benefits................................. 1,356 1,553
Other accrued liabilities................................... 3,099 2,746
------- -------
$11,175 $10,025
======= =======
</TABLE>
F-11
<PAGE> 94
MMI PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. LONG-TERM DEBT
Long-term debt, including capital lease obligations, consisted of the
following:
<TABLE>
<CAPTION>
JANUARY 2, JANUARY 3,
1999 1998
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Revolving credit facility................................... $ 35,422 $ --
11.25% Senior subordinated notes, due 2007, interest payable
semi-annually in arrears on April 15 and October 15....... 120,000 120,000
Capital lease obligations................................... 4,019 3,867
Other notes payable......................................... 996 --
-------- --------
160,437 123,867
Less current maturities..................................... 1,630 1,127
-------- --------
Long-term obligations....................................... $158,807 $122,740
======== ========
</TABLE>
11.25% SENIOR SUBORDINATED NOTES
On April 16, 1997, MMI issued $120 million of senior subordinated notes due
2007. The net proceeds of $116.0 million, after fees and expenses, were used (i)
to distribute $57.1 million to Holding for the redemption by Holding of certain
of its equity interests, (ii) to repay the entire $10.0 million principal
amount, plus accrued interest, on a senior subordinated secured note payable,
(iii) to repay MMI's remaining indebtedness under a term loan facility of $11.4
million and (iv) to reduce MMI's indebtedness under the revolving credit
facility. The senior subordinated notes are general unsecured obligations of MMI
and are subordinated to MMI's revolving credit facility.
On February 9, 1999, MMI issued in a private offering, $30 million of
senior subordinated notes due 2007. This is a second series of the subordinated
notes issued on April 16, 1997. The net proceeds were approximately $31.1
million, including original issuance premium after expenses.
REVOLVING CREDIT FACILITY
MMI's revolving credit facility provides for maximum borrowings of $48.5
million (due December 2001) with interest payable at the bank's base rate plus
0.25 percent or Eurodollar rate plus 1.5 percent (the bank's base rate plus 0.25
percent or Eurodollar rate plus 2.0 percent at January 3, 1998). Approximately
$33 million of MMI's outstanding borrowings at year end are subject to interest
rate swap agreements maturing from February 24, 1999 through April 9, 1999. As
of January 2, 1999, the average interest rate was 7.01 percent. MMI is required
to pay a commitment fee of 1/2 of 1.0 percent of the unused portion of the
credit facility on a monthly basis. The revolving credit facility is secured by
all assets and stock of MMI and guaranteed by Holding. Borrowing availability
under the revolving credit facility at January 2, 1999, after taking into
account borrowing base restrictions and outstanding letters of credit, was $46.1
million. MMI had outstanding letters of credit (which cannot exceed $20 million)
totaling $2.4 million and $1.1 million at January 2, 1999 and January 3, 1998,
respectively.
The terms of the revolving credit facility contain, among other provisions,
affirmative and negative covenants that require MMI to maintain certain
financial ratios, limit the amount of additional indebtedness, limit the
creation or existence of liens and set certain restrictions on acquisitions,
mergers and sales of assets. MMI's distribution of dividends to Holding is not
permitted under the revolving credit facility other than in limited
circumstances as set forth in the loan agreement. The 1998 dividend to Holding
was permitted under the terms of the revolving credit facility as it related to
expenses paid on behalf of Holding in final settlement of the 1996
Recapitalization discussed in Note 1.
F-12
<PAGE> 95
MMI PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In fiscal 1998, MMI made capital expenditures in excess of the limits
established in the revolving credit facility and did not satisfy certain
reporting requirements to the lenders during fiscal 1998 and subsequent to year
end. MMI has obtained waivers from the lenders for each of these items. In March
1999, the revolving credit facility was amended to modify certain reporting
requirements through August 1999. MMI believes that it will be able to comply
with the amended reporting requirements and other restrictive covenants in the
revolving credit facility throughout its fiscal year 1999.
Scheduled maturities of long-term debt, including capital lease
obligations, are as follows:
<TABLE>
<CAPTION>
LONG-TERM DEBT CAPITAL LEASES
-------------- --------------
(IN THOUSANDS)
<S> <C> <C>
1999..................................................... $ 332 $1,551
2000..................................................... 332 1,419
2001..................................................... 35,754 1,001
2002..................................................... -- 525
2003 and thereafter...................................... 120,000 99
-------- ------
156,418 4,595
Less amount representing interest........................ -- 576
-------- ------
$156,418 $4,019
======== ======
</TABLE>
On or prior to April 15, 2000, MMI may, at its option, redeem at any time
or from time to time up to 35% of the aggregate original principal amount of the
senior subordinated notes issued at a redemption price equal to 111.25% of the
principal amount thereof, plus accrued and unpaid interest and liquidated
damages, if any, thereon to the redemption date, with the net cash proceeds of
one or more public equity offerings; provided, however, that at least $78.0
million in aggregate principal amount of the senior subordinated notes remain
outstanding following each such redemption and such redemption shall occur not
later than 60 days after the date of the closing of any such public equity
offering.
The senior subordinated notes will be redeemable at the option of MMI, in
whole or in part, at any time on or after April 15, 2002 at the redemption
prices (expressed as percentages of principal amount) set forth below plus
accrued and unpaid interest and liquidated damages, if any, thereon to the
applicable redemption date, if redeemed during the twelve-month period beginning
on April 15 of the years indicated below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
- ---- ----------
<S> <C>
2002........................................................ 105.625%
2003........................................................ 103.750%
2004........................................................ 101.875%
2005 and thereafter......................................... 100.000%
</TABLE>
F-13
<PAGE> 96
MMI PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. OPERATING LEASES
MMI leases warehouse and office space and certain machinery and equipment
under operating leases. Future minimum lease payments on noncancelable operating
leases with remaining terms of one or more years consisted of the following at
January 2, 1999 (in thousands):
<TABLE>
<S> <C>
1999........................................................ $ 3,607
2000........................................................ 3,045
2001........................................................ 2,049
2002........................................................ 1,144
2003 and thereafter......................................... 1,042
-------
Total............................................. $10,887
=======
</TABLE>
Total rental expense for fiscal years 1998, 1997 and 1996 was $5,103,000,
$4,225,000 and $3,572,000, respectively.
9. EMPLOYEE BENEFIT PLANS
DEFINED CONTRIBUTION PLANS
401(k) Plan. MMI maintains the MMI Products, Inc. 401(k) Savings Plan (the
"401(k) Plan"). All Company employees are eligible to participate in the 401(k)
Plan after one year of employment. Employees may elect to make pre-tax
contributions up to the applicable statutory maximum limits to the 401(k) Plan.
MMI makes matching contributions (subject to statutory limits) in an amount
equal to 25% of the employee's contributions up to 2% of the employee's
compensation. In addition, MMI may make additional contributions in such amounts
as it may elect. Company contributions are vested over four years at a rate of
25% for each year of service.
Pension Plan. MMI maintains the MMI Products, Inc. Pension Plan (the
"Pension Plan"), which is a money purchase defined contribution plan. Employees
of MMI (other than employees covered by a collective bargaining agreement)
generally are eligible to participate in the Pension Plan after one year of
employment.
MMI makes annual contributions to the Pension Plan for each eligible
employee in accordance with a formula that is based on the participant's age and
level of compensation. The Pension Plan provides for 100% vesting after five
years of service.
MMI's contributions to the 401(k) Plan and the Pension Plan for fiscal
years 1998, 1997 and 1996 were $1,385,000, $1,285,000 and $1,042,000,
respectively.
F-14
<PAGE> 97
MMI PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DEFINED BENEFIT PLANS
MMI maintains a retirement plan which covers certain employees under a
collective bargaining agreement. Plan benefits are based primarily on years of
service. It is the policy of MMI to fund this plan currently based upon
actuarial determinations, and applicable tax regulations.
<TABLE>
<CAPTION>
FISCAL YEARS
---------------
1998 1997
------ ------
(IN THOUSANDS)
<S> <C> <C>
RECONCILIATION OF BENEFIT OBLIGATION
Obligation at beginning of year............................. $2,142 $1,817
Service cost................................................ 65 61
Interest cost............................................... 157 133
Plan amendments............................................. 0 107
Actuarial loss.............................................. 387 138
Benefit payments............................................ (329) (114)
Settlements................................................. (189) 0
------ ------
Obligation at end of year................................... 2,233 2,142
------ ------
RECONCILIATION OF FAIR VALUE OF PLAN ASSETS
Fair value of plan assets at beginning of year.............. 1,437 1,178
Actual return on plan assets................................ 137 111
Employer contributions...................................... 407 311
Actuarial gain (loss)....................................... 286 (49)
Benefit payments............................................ (329) (114)
Settlements................................................. (246) 0
------ ------
Fair value of plan assets at end of year(1)................. 1,692 1,437
------ ------
FUNDED STATUS
Funded status at end of year................................ (541) (705)
Unrecognized prior-service cost............................. 96 107
Unrecognized loss........................................... 369 256
------ ------
Net amount recognized....................................... $ (76) $ (342)
------ ------
</TABLE>
- ---------------
(1) Plan assets are comprised of various equity, debt and government securities.
The following table provides the amounts recognized in the statement of
financial position:
<TABLE>
<CAPTION>
JANUARY 2, JANUARY 3,
1999 1998
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Accrued benefit liability................................... $(541) $(705)
Intangible asset............................................ 96 107
Accumulated other comprehensive income...................... 369 256
----- -----
Net amount recognized....................................... $ (76) $(342)
===== =====
</TABLE>
F-15
<PAGE> 98
MMI PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The plan's accumulated benefit obligation was $2,233 and $2,142 for fiscal
years 1998 and 1997, respectively.
<TABLE>
<CAPTION>
FISCAL YEARS
--------------
1998 1997
------ -----
(IN THOUSANDS)
<S> <C> <C>
Service cost................................................ $ 65 $ 61
Interest cost............................................... 157 133
Expected return on plan assets.............................. (137) (62)
Amortization of prior-service cost.......................... 11 0
Amortization of net (gain) loss............................. 5 (49)
----- ----
Net periodic benefit cost................................... $ 101 $ 83
===== ====
</TABLE>
The amount included within other comprehensive income arising from changes
in the additional minimum pension liability was $70,000 and $151,000 for fiscal
years 1998 and 1997, respectively.
The prior-service costs are amortized on a straight-line basis over the
average remaining working lifetime of participants. Gains and losses in excess
of 10% of the greater of benefit obligation and the market-related value of
assets are amortized over the average remaining working lifetime of participants
expected to receive benefits.
<TABLE>
<CAPTION>
FISCAL YEARS
-------------
1998 1997
----- -----
<S> <C> <C>
Weighted average assumptions:
Discount rate............................................. 7.00% 7.50%
Expected long-term rate of return on assets............... 8.50% 8.50%
</TABLE>
MMI also contributes to certain multi-employer, defined benefit plans
covering certain employees under other collective bargaining agreements. Total
expenses for these plans were $280,000, $245,000 and $125,000 for fiscal years
1998, 1997 and 1996, respectively.
STOCK OPTIONS
On December 13, 1996, Holding issued noncompensatory options for 17,890
shares of Holding common stock to certain employees of MMI. These options,
exercisable for $1 per share, the fair value of the common stock at the date of
grant, vest over a four-year period and expire five years from the date of
grant. On June 27, 1997, Holding issued noncompensatory options for 1,000 shares
of Holding common stock to a director of MMI, such options having the identical
terms as those issued to employees on December 13, 1996. During 1997, Holding
issued 3,230 shares of common stock pursuant to exercises of stock options. In
1998, no options were issued or exercised.
Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation (SFAS 123) establishes alternative methods of accounting and
disclosure for employee stock-based compensation arrangements. MMI uses the
intrinsic value method of accounting as prescribed by Accounting Principles
Board Opinion No. 25, Accounting for Stock Issued to Employees, for Holding's
stock options granted to MMI's employees. This method does not result in the
recognition of compensation expense when employee stock options are granted if
the exercise price of the option equals or exceeds the fair market value of the
stock at the date of grant.
If the accounting provisions of SFAS 123 had been used in fiscal years
1996, 1997, and 1998, earnings would not have been materially different than
reported. Further, based on current and anticipated
F-16
<PAGE> 99
MMI PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
use of stock options by Holding, it is not envisioned that the impact of the
accounting provisions of SFAS 123 would be material in any future period.
10. INCOME TAXES
Significant components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
FISCAL YEARS
-------------------------
1998 1997 1996
------ ------ -------
(IN THOUSANDS)
<S> <C> <C> <C>
Current:
Federal................................................. $5,759 $1,871 $ 4,206
State and local......................................... 1,245 404 1,109
------ ------ -------
7,004 2,275 5,315
Deferred:
Federal................................................. 280 2,412 (845)
State and local......................................... 60 474 (243)
------ ------ -------
340 2,886 (1,088)
------ ------ -------
Total........................................... $7,344 $5,161 $ 4,227
====== ====== =======
</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. Net deferred tax
liabilities increased $1,034,000 in fiscal year 1998 due to the Security Fence
acquisition. As of December 30, 1995, MMI had a minimum tax credit carryforward
of $1,031,000, which reduced 1996 federal regular income taxes.
Significant components of MMI's deferred tax liabilities and assets are as
follows:
<TABLE>
<CAPTION>
JANUARY 2, JANUARY 3,
1999 1998
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax liabilities:
Tax over book depreciation................................ $5,049 $4,259
Trade receivables valuation............................... 837 1,116
Other..................................................... 2,107 1,285
------ ------
Total deferred tax liabilities.............................. 7,993 6,660
Deferred tax assets:
Inventory valuation....................................... 771 752
Allowance for doubtful accounts........................... 715 695
Self-insurance accruals................................... 667 709
Other..................................................... 417 410
------ ------
Total deferred tax assets................................... 2,570 2,566
------ ------
Net deferred tax liabilities...................... $5,423 $4,094
====== ======
</TABLE>
F-17
<PAGE> 100
MMI PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The reconciliation of income tax computed at the U.S. federal statutory tax
rate to income tax expense is as follows for fiscal years 1998, 1997 and 1996:
<TABLE>
<CAPTION>
FISCAL YEARS
------------------------
1998 1997 1996
------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
Tax at U.S. statutory rate................................. $6,396 $4,514 $3,697
State and local income taxes, net of federal benefit....... 844 572 512
Other, net................................................. 104 75 18
------ ------ ------
Total............................................ $7,344 $5,161 $4,227
====== ====== ======
</TABLE>
11. CONTINGENCIES
MMI is involved in a number of legal actions arising in the ordinary course
of business. MMI believes that the various asserted claims and litigation in
which it is involved will not materially affect its financial position or future
operating results, although no assurance can be given with respect to the
ultimate outcome of any such claim or litigation.
12. SEGMENT REPORTING
MMI has five operating units that are aggregated into two reportable
segments; Fence and Concrete Construction Products. The Fence Segment has three
operating units that offer similar products and services. The Concrete
Construction Products Segment has two operating units that offer complimentary
products and services within the concrete construction industry.
Fence Segment. The Fence Segment manufactures chain link fence fabric, a
full line of aluminum die cast and galvanized pressed steel fittings, ornamental
iron products, PVC color coated wire and vinyl coated color pipe, tubing and
fittings. In addition, the segment also distributes a variety of fence products
including pipe, tubing, wood, vinyl, aluminum, and ornamental iron fence
products, gates, hardware, and other related products. The fence products are
used in a variety of residential and commercial applications.
Concrete Construction Products Segment. The Concrete Construction Products
Segment manufactures wire mesh and a variety of concrete accessories. Concrete
accessories include supports for steel reinforcing bars and wire mesh, form
ties, basket assemblies, anchors and inserts. The concrete construction products
are used in the construction of roads, bridges and other heavy construction
projects including commercial buildings.
The accounting policies of the reportable segments are the same as those
described in Note 1 of the Notes to Consolidated Financial Statements. MMI
evaluates the performance of its operating segments based upon income before
interest expense, income taxes, depreciation, amortization and nonrecurring
items.
Summarized financial information concerning the reportable segments is
shown in the following table. The Corporate column for earnings before interest
and income taxes represents only amortization of
F-18
<PAGE> 101
MMI PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
intangibles and nonrecurring items. Corporate general and administrative
expenses are allocated to the segments based upon proportional net sales.
<TABLE>
<CAPTION>
FISCAL YEAR 1998
----------------------------------------------
CONCRETE
FENCE CONSTRUCTION CORPORATE TOTAL
-------- ------------ --------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
External sales................................... $208,117 $210,238 $ -- $418,355
Earnings before interest and income taxes........ 14,043 22,315 (764) 35,594
Interest expense................................. -- -- 17,320 17,320
Income taxes..................................... -- -- 7,344 7,344
Net income....................................... 14,043 22,315 (25,428) 10,930
Depreciation..................................... 2,919 3,504 -- 6,423
EBITDA(1)........................................ 16,962 25,819 -- 42,781
Segment Assets(2)................................ 89,304 92,700 38,222 220,226
Capital Expenditures............................. 1,606 8,325 295 10,226
</TABLE>
<TABLE>
<CAPTION>
FISCAL YEAR 1997
----------------------------------------------
CONCRETE
FENCE CONSTRUCTION CORPORATE TOTAL
-------- ------------ --------- --------
<S> <C> <C> <C> <C>
External sales................................... $177,640 $169,265 $ -- $346,905
Earnings before interest and income taxes........ 11,290 14,980 (354) 25,916
Interest expense................................. -- -- 13,018 13,018
Income taxes..................................... -- -- 5,161 5,161
Net income....................................... 11,290 14,980 (18,533) 7,737
Depreciation..................................... 2,432 2,721 -- 5,153
EBITDA(1)........................................ 13,722 17,701 -- 31,423
Segment Assets(2)................................ 63,200 69,683 19,935 152,818
Capital Expenditures............................. 1,277 3,126 157 4,560
</TABLE>
<TABLE>
<CAPTION>
FISCAL YEAR 1996
----------------------------------------------
CONCRETE
FENCE CONSTRUCTION CORPORATE TOTAL
-------- ------------ --------- --------
<S> <C> <C> <C> <C>
External sales................................... $164,971 $118,431 $ -- $283,402
Nonrecurring expenses(3)......................... -- -- 3,106 3,106
Earnings before interest and income taxes........ 9,261 12,289 (3,557) 17,993
Interest expense................................. -- -- 7,429 7,429
Income taxes..................................... -- -- 4,227 4,227
Net income....................................... 9,261 12,289 (15,213) 6,337
Depreciation..................................... 2,180 1,817 -- 3,997
EBITDA(1)........................................ 11,441 14,106 -- 25,547
Segment Assets(2)................................ 57,734 63,658 13,871 135,263
Capital Expenditures............................. 1,295 1,839 411 3,545
</TABLE>
- ---------------
(1) EBITDA is defined as the sum of income before interest expense, income
taxes, depreciation and amortization, and certain nonrecurring expenses (see
note (3) below). EBITDA is presented because it is a widely accepted
financial indicator of a company's ability to service and incur debt. EBITDA
should not be considered in isolation from or as a substitute for net income
or cash flow measures prepared in accordance with generally accepted
accounting principles or as a measure of a company's profitability or
liquidity.
F-19
<PAGE> 102
MMI PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(2) Segment assets include substantially all accounts receivable, inventory and
property, plant and equipment. Corporate assets include all other components
of total consolidated assets.
(3) Nonrecurring expense resulting from the modification of stock options
granted in previous years as part of recapitalization of MMI and Holding.
13. QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
1998 (BY FISCAL QUARTER)
----------------------------------------
1 2 3 4
------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Net sales................................... $86,308 $116,181 $114,062 $101,804
Gross profit................................ 12,041 18,829 19,233 17,291
Net income.................................. 389 3,897 4,236 2,408
</TABLE>
<TABLE>
<CAPTION>
1997 (BY FISCAL QUARTER)
----------------------------------------
1 2 3 4
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net sales................................... $69,587 $99,044 $94,698 $83,576
Gross profit................................ 9,161 15,266 14,383 12,096
Net income.................................. 832 3,634 2,722 549
</TABLE>
F-20
<PAGE> 103
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
F-21
<PAGE> 104
SECURITY FENCE SUPPLY CO., INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
JULY 31, 1998
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
ASSETS
<TABLE>
<S> <C>
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.
F-22
<PAGE> 105
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.
F-23
<PAGE> 106
SECURITY FENCE SUPPLY CO., INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
UNREALIZED GAIN ON TOTAL
COMMON AVAILABLE-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.
F-24
<PAGE> 107
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.
F-25
<PAGE> 108
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.
F-26
<PAGE> 109
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>
F-27
<PAGE> 110
SECURITY FENCE SUPPLY CO., INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (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.
F-28
<PAGE> 111
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.
F-29
<PAGE> 112
MMI PRODUCTS, INC.
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
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 the former principals and leased back to the Company. The net cash
outlay of $20.6 million was funded by the Company's revolving credit facility.
On February 18, 1998, we acquired the assets and assumed certain
liabilities of The Burke Group L.L.C., a manufacturer of hardware devices and a
processor of chemicals used in the concrete construction industry. The total
purchase price was approximately $20.6 million, which was funded by our credit
facility. On September 4, 1998, we sold the chemical processing operations
included in the Burke acquisition for approximately $3.6 million in cash.
These acquisitions have been accounted for using the purchase method of
accounting.
The following unaudited pro forma condensed consolidated statement of
operations for the year ended January 2, 1999 gives effect to the purchases as
if they had occurred at the beginning of the period presented. The Company has
included The Burke Group in the pro forma data for informational purposes even
though not required under Rule 11-01 of Regulation S-X promulgated under the
Securities Act of 1933 as the acquisition was not "significant" as that term is
defined under Rule 3-05 of Regulation S-X.
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 transactions
been completed at the beginning of the period 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.
P-1
<PAGE> 113
MMI PRODUCTS, INC.
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
FOR THE YEAR ENDED JANUARY 2, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
MMI SECURITY(1) BURKE
PRODUCTS, INC. FENCE GROUP(2) ADJUSTMENTS PRO FORMA
-------------- ----------- -------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Net sales......................... $418,355 $21,966 $2,380 $ -- $442,701
Cost of sales..................... 350,961 17,229 1,690 10(a)
158(b) 370,048
-------- ------- ------ ------ --------
Gross profit.................... 67,394 4,737 690 (168) 72,653
Selling, general and
administrative expenses......... 31,874 2,709 436 (618)(c) 34,401
240(d) 240
85(e) 34,726
Other (income) expense, net....... (74) (109) 33 (34)(f) (184)
-------- ------- ------ ------ --------
Income before interest and income
taxes........................... 35,594 2,137 221 159 38,111
Interest expense.................. 17,320 11 47 1,103(g) 18,481
-------- ------- ------ ------ --------
Income before income taxes........ 18,274 2,126 174 (944) 19,630
Provision for income taxes........ 7,344 829 -- (125)(h) 8,048
-------- ------- ------ ------ --------
Net income.............. $ 10,930 $ 1,297 $ 174 $ (819) $ 11,582
======== ======= ====== ====== ========
</TABLE>
- ---------------
(1) Reflects results for the nine-month period November 1, 1997 to July 31, 1998
(unaudited).
(2) Reflects results for the one-month period January 1, 1998 to January 31,
1998 (unaudited). The Company has included The Burke Group in the pro forma
data for informational purposes even though not required under Rule 11-01 of
Regulation S-X promulgated under the Securities Act of 1933 as the
acquisition was not "significant" as that term is defined under Rule 3-05 of
Regulation S-X.
The accompanying notes are an integral part of the unaudited pro forma
condensed consolidated statement of operations.
P-2
<PAGE> 114
MMI PRODUCTS, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
STATEMENT OF OPERATIONS
1. BASIS OF PRESENTATION
The accompanying unaudited pro forma condensed consolidated statement of
operations (the "Pro Forma Financial Statements") are based on adjustments to
the historical consolidated financial statement of operations of MMI Products,
Inc. (the "Company") to give effect to the acquisitions described in Note 2. The
pro forma condensed consolidated statement of operations assumes the
acquisitions were consummated as of the beginning of the period presented. The
pro forma condensed consolidated statement of operations is not necessarily
indicative of results that would have occurred had the acquisitions been
consummated as of the beginning of the period 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 2, 1999
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 acquisitions (other than
any synergies anticipated by the Company, and any nonrecurring charges directly
attributable to the purchases 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. ACQUISITIONS
On February 18, 1998, we acquired the assets and assumed certain
liabilities of The Burke Group L.L.C., a manufacturer of hardware devices and a
processor of chemicals used in the concrete construction industry. This
acquisition expanded the breadth of our concrete accessories product line. The
total purchase price was approximately $20.6 million, which was funded by our
credit facility. On September 4, 1998, we sold the chemical processing
operations included in the Burke acquisition for approximately $3.6 million in
cash.
On October 6, 1998, we purchased all of the issued and outstanding capital
stock of Security Fence Supply Co., Inc. for approximately $24.4 million, which
was funded by the credit facility. Immediately following the purchase, we sold
the real property acquired as a result of the acquisition to the former
principals of Security Fence Supply for approximately $3.6 million in cash. The
former principals of Security Fence Supply then leased the property back to us
for a term of five years at approximate market rental rates. Security Fence
specializes in commercial and industrial fencing. It manufactures chain link and
vinyl coated chain link fabric as well as ornamental iron and vinyl fence
products.
3. ADJUSTMENTS OF HISTORICAL FINANCIAL STATEMENTS
The following pro forma adjustments have been made to the historical
condensed statements of operations of the Company as if the acquisitions were
consummated at the beginning of the period presented:
(a) To reflect the change in depreciation expense resulting from the
purchase accounting step-up from the acquisitions.
P-3
<PAGE> 115
MMI PRODUCTS, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
STATEMENT OF OPERATIONS -- (CONTINUED)
(b) 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.
(c) 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.
(d) To reflect amortization of goodwill related to the acquisitions
which is being amortized on a straight-line basis over 40 years.
(e) To reflect amortization of a non-compete agreement with one of the
former principals of Security Fence Supply, which is being amortized
on a straight-line basis over the term of the agreement, 5 years.
(f) To reduce expenses for various management services allocated to The
Burke Group by its former parent prior to the acquisition.
(g) To reflect interest expense on the borrowings to fund the purchases
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 acquisitions.
(h) To reflect the change in consolidated income taxes based on the
Company's expected effective tax rate after the acquisitions.
P-4
<PAGE> 116
------------------------------------------------------
------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS AND,
IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE AN
OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, ANY SECURITY OTHER THAN THE
SECURITIES TO WHICH IT RELATES, OR ANY OFFER TO SELL OR A SOLICITATION OF AN
OFFER TO BUY THE SECURITIES IN ANY JURISDICTION WHERE, OR TO ANY PERSON TO WHOM,
IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE
ANY IMPLICATION THAT THERE HAS NOT BEEN ANY CHANGE IN THE FACTS SET FORTH IN
THIS PROSPECTUS OR IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary................... 1
Risk Factors......................... 8
Use of Proceeds...................... 14
Capitalization....................... 14
Selected Financial Data.............. 15
Management's Discussion and Analysis
of Financial Condition and Results
of Operations...................... 16
Business............................. 22
Management........................... 31
Security Ownership of Certain
Beneficial Owners and Management... 36
Certain Relationships and Related
Transactions....................... 38
The Exchange Offer................... 41
Description of the Registered
Notes.............................. 47
Certain U.S. Federal Income Tax
Considerations..................... 79
Plan of Distribution................. 79
Legal Matters........................ 80
Experts.............................. 80
Where You Can Find More
Information........................ 80
Index to Financial Statements........ F-1
Unaudited Pro Forma Financial
Information........................ P-1
</TABLE>
------------------
UNTIL JULY 30, 1999, ALL DEALERS THAT EFFECT TRANSACTIONS IN THE NEW NOTES,
WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A
PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A
PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
------------------------------------------------------
------------------------------------------------------
------------------------------------------------------
------------------------------------------------------
OFFER TO EXCHANGE ALL
OUTSTANDING
11 1/4% SERIES C
SENIOR SUBORDINATED
NOTES DUE 2007
FOR
11 1/4% SERIES B
SENIOR SUBORDINATED
NOTES DUE 2007
MMI PRODUCTS, INC.
--------------------
PROSPECTUS
--------------------
April 30, 1999
------------------------------------------------------
------------------------------------------------------
