<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 23, 1997
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10
GENERAL FORM FOR REGISTRATION OF SECURITIES
PURSUANT TO SECTION 12(b) OR (g) OF
THE SECURITIES EXCHANGE ACT OF 1934
MIDAS GROUP, INC.
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 36-4180556
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
225 NORTH MICHIGAN AVENUE
CHICAGO, ILLINOIS 60611
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (312) 565-7500
Securities to be registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH
TO BE SO REGISTERED EACH CLASS IS TO BE REGISTERED
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Common Stock, $.001 par value New York Stock Exchange
Preferred Stock Purchase Rights New York Stock Exchange
Securities to be registered pursuant to Section 12(g) of the Act: None
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<PAGE>
MIDAS GROUP, INC.
INFORMATION INCLUDED IN INFORMATION STATEMENT
AND INCORPORATED BY REFERENCE INTO FORM 10
Certain information required to be included herein is incorporated by
reference to specifically identified portions of the body of the Information
Statement filed herewith as Exhibit 99 (the "Information Statement") or portions
of Annex C to the Information Statement ("Annex C"). None of the information
contained in the Information Statement (including the Annexes thereto) shall be
incorporated by reference herein or deemed to be a part hereof unless such
information is specifically incorporated by reference.
ITEM 1. BUSINESS
The information required by this Item is contained in the body of the
Information Statement under the caption "Summary -- Midas" and in Annex C under
the caption "Business," and such information is incorporated herein by
reference.
ITEM 2. FINANCIAL INFORMATION
The information required by this Item is contained in Annex C under the
captions "Midas Group Summary of Operations" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations," and such information
is incorporated herein by reference.
ITEM 3. PROPERTIES
The information required by this Item is contained in Annex C under the
caption "Properties" and such information is incorporated herein by reference.
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is contained in the body of the
Information Statement under the caption "Principal Shareholders of Each Company"
and in Annex C under the caption "Management -- Ownership of Midas Common Stock
by Management," and such information is incorporated herein by reference.
ITEM 5. DIRECTORS AND EXECUTIVE OFFICERS
The information required by this Item is contained in Annex C under the
captions "Management -- Directors" and "Management -- Executive Officers," and
such information is incorporated herein by reference.
ITEM 6. EXECUTIVE COMPENSATION
The information required by this Item is contained in Annex C under the
captions "Management -- Compensation of Directors" and "Management --
Compensation of Executive Officers," and such information is incorporated herein
by reference.
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is contained in the body of the
Information Statement under the caption "Arrangements Between Whitman and Each
of the Companies Relating to the Distribution," and in Annex C under the
captions "Financing" and "Midas Group Pro Forma Combined Financial Information"
and in Note 3 to the "Notes to Combined Financial Statements," and such
information is incorporated herein by reference.
ITEM 8. LEGAL PROCEEDINGS
The information required by this Item is contained in Annex C under the
caption "Business -- Regulatory Compliance and Legal Proceedings," and such
information is incorporated herein by reference.
2
<PAGE>
ITEM 9. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
The information required by this Item is contained in the body of the
Information Statement under the caption "The Distribution -- Listing and Trading
of the Common Stock of the Companies" and in Annex C under the caption
"Post-Distribution Dividend Policy," and such information is incorporated herein
by reference.
ITEM 10. RECENT SALES OF UNREGISTERED SECURITIES
On September 2, 1997, the Registrant sold 1,000 shares of its Common Stock
to Whitman Corporation for $1,000 in a transaction exempt from the registration
requirements of the Securities Act of 1933, as amended, by reason of the
provisions of Section 4(2) thereof relating to sales by an issuer not involving
any public offering.
ITEM 11. DESCRIPTION OF REGISTRANT'S SECURITIES TO BE REGISTERED
The information required by this Item is contained in the body of the
Information Statement under the captions "Description of Capital Stock of the
Companies" and "Certain Antitakeover Effects of Certain Charter and By-Law
Provisions, the Rights and Delaware Law," and such information is incorporated
herein by reference.
ITEM 12. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The information required by this Item is contained in the body of the
Information Statement under the caption "Liability and Indemnification of
Directors and Officers," and such information is incorporated herein by
reference.
ITEM 13. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this Item is contained in Annex C under the
caption "Midas Group Pro Forma Combined Financial Information" and in the
financial information listed on the Index to Historical Financial Information
appearing in Annex C on page C-31, and such information is incorporated herein
by reference.
ITEM 14. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 15. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements. The following financial statements are filed as a
part of this Registration Statement: (i) Pro Forma Combined Statements of Income
for the six months ended June 1997 and for the year ended December 1996; (ii)
Pro Forma Combined Balance Sheet as of June 1997; (iii) Combined Statements of
Income for the years ended December 1996, 1995 and 1994 and for the six months
ended June 1997 and 1996; (iv) Combined Balance Sheets as of December 1996 and
1995 and as of June 1997; and (v) Combined Statements of Cash Flows for the
years ended December 1996, 1995 and 1994 and for the six months ended June 1997
and 1996.
(b) Exhibits:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ --------------------------------------------------------------------------
<S> <C>
3(i) Certificate of Incorporation
3(ii) By-Laws
4* Form of Rights Agreement between the Registrant and First Chicago Trust
Company of New York, as Rights Agent
10.1* Form of Distribution and Indemnity Agreement by and among Whitman
Corporation, the Registrant and Midas International Corporation
10.2* Form of Tax Sharing Agreement among the Registrant, Midas International
Corporation and Whitman Corporation
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
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<S> <C>
10.3* Form of Revolving Credit Facility
10.4* Form of Midas Franchise and Trademark Agreement
10.5* Form of Stock Incentive Plan
10.6* Form of Change in Control Agreement
21* Subsidiaries of the Registrant
27* Financial Data Schedule
99 Information Statement
</TABLE>
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*To be filed by amendment.
4
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act of
1934, the registrant has duly caused this registration statement to be signed on
its behalf by the undersigned, thereunto duly authorized.
MIDAS GROUP, INC.
<TABLE>
<S> <C> <C>
By: R. LEE BARCLAY
------------------------------------------
R. Lee Barclay
EXECUTIVE VICE PRESIDENT AND CHIEF
FINANCIAL OFFICER
</TABLE>
Date: September 23, 1997
5
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ --------------------------------------------------------------------------
<S> <C>
3(i) Certificate of Incorporation
3(ii) By-Laws
4* Form of Rights Agreement between the Registrant and First Chicago Trust
Company of New York, as Rights Agent
10.1* Form of Distribution and Indemnity Agreement by and among Whitman
Corporation, the Registrant and Midas International Corporation
10.2* Form of Tax Sharing Agreement among the Registrant, Midas International
Corporation and Whitman Corporation
10.3* Form of Revolving Credit Facility
10.4* Form of Midas Franchise and Trademark Agreement
10.5* Form of Stock Incentive Plan
10.6* Form of Change in Control Agreement
21* Subsidiaries of the Registrant
27* Financial Data Schedule
99 Information Statement
</TABLE>
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*To be filed by amendment.
<PAGE>
CERTIFICATE OF INCORPORATION
OF
MIDAS GROUP, INC.
ARTICLE I
The name of the corporation (which is hereinafter referred to as the
"Corporation") is:
Midas Group, Inc.
ARTICLE II
The address of the Corporation's registered office in the State of Delaware
is The Corporation Trust Center, 1209 Orange Street in the City of Wilmington,
County of New Castle. The name of the Corporation's registered agent at such
address is The Corporation Trust Company.
ARTICLE III
The purpose of the Corporation shall be to engage in any lawful act or
activity for which corporations may be organized and incorporated under the
General Corporation Law of the State of Delaware.
ARTICLE IV
(A) AUTHORIZED CAPITAL STOCK. The total number of shares of capital stock
which the Corporation shall have authority to issue is 120,000,000, consisting
of 100,000,000 shares of common stock, with the par value of $.001 per share
("Common Stock"), and 20,000,000 shares of preferred stock, with the par value
of $.001 per share ("Preferred Stock").
(B) PREFERRED STOCK. The Preferred Stock may be issued from time to time in
one or more series. The Board of Directors is hereby authorized to create and
provide for the issuance of shares of Preferred Stock in series and, by filing a
certificate pursuant to the applicable law of the State of Delaware (hereinafter
referred to as a "Preferred Stock Designation"), to establish from time to time
the number of shares to be included in each such series, and to fix the
designation, powers, preferences and rights of the shares of each such series
and the qualifications, limitations or restrictions thereof.
The authority of the Board of Directors with respect to each series shall
include, but not be limited to, determination of the following:
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(i) The designation of the series, which may be by distinguishing
number, letter or title.
(ii) The number of shares of the series, which number the Board of
Directors may thereafter (except where otherwise provided in the Preferred
Stock Designation) increase or decrease (but not below the number of shares
thereof then outstanding).
(iii) Whether dividends, if any, shall be cumulative or noncumulative
and the dividend rate of the series.
(iv) The dates at which dividends, if any, shall be payable.
(v) The redemption rights and price or prices, if any, for shares of
the series.
(vi) The terms and amount of any sinking fund provided for the
purchase or redemption of shares of the series.
(vii) The amounts payable on, and the preferences, if any, of shares
of the series in the event of any voluntary or involuntary liquidation,
dissolution or winding up of the affairs of the Corporation.
(viii) Whether the shares of the series shall be convertible into
shares of any other class or series, or any other security, of the
Corporation or any other corporation, and, if so, the specification of such
other class or series of such other security, the conversion price or
prices or rate or rates, any adjustments thereof, the date or dates at
which such shares shall be convertible and all other terms and conditions
upon which such conversion may be made.
(ix) Restrictions on the issuance of shares of the same series or of
any other class or series.
(x) The voting rights, if any, of the holders of shares of the series.
(xi) Such other powers, preferences and relative, participating,
optional and other special rights, and the qualifications, limitations and
restrictions thereof as the Board of Directors shall determine.
(C) COMMON STOCK. The Common Stock shall be subject to the express terms of
the Preferred Stock and any series thereof. Each share of Common Stock shall be
equal to each other share of Common Stock. The holders of shares of Common Stock
shall be entitled to one vote for each such share upon all questions presented
to the stockholders.
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<PAGE>
(D) VOTE. Except as may be provided in this Certificate of Incorporation or
in a Preferred Stock Designation, or as may be required by applicable law, the
Common Stock shall have the exclusive right to vote for the election of
directors and for all other purposes, and holders of shares of Preferred Stock
shall not be entitled to receive notice of any meeting of stockholders at which
they are not entitled to vote.
(E) RECORD HOLDERS. The Corporation shall be entitled to treat the person
in whose name any share of its stock is registered on the stock transfer books
of the Corporation as the owner thereof for all purposes and shall not be bound
to recognize any equitable or other claim to, or interest in, such share on the
part of any other person, whether or not the Corporation shall have notice
thereof, except as expressly provided by applicable law.
ARTICLE V
The name and mailing address of the incorporator is as follows:
NAME MAILING ADDRESS
Mark E. Vainisi Sidley & Austin
One First National Plaza
Chicago, Illinois 60603
ARTICLE VI
The Board of Directors is hereby authorized to create and issue, whether or
not in connection with the issuance and sale of any of its stock or other
securities or property, rights entitling the holders thereof to purchase from
the Corporation shares of stock or other securities of the Corporation or any
other corporation. The times at which and the terms upon which such rights are
to be issued will be determined by the Board of Directors and set forth in the
contracts or instruments that evidence such rights. The authority of the Board
of Directors with respect to such rights shall include, but not be limited to,
determination of the following:
(A) The initial purchase price per share or other unit of the stock or
other securities or property to be purchased upon exercise of such rights.
(B) Provisions relating to the times at which and the circumstances under
which such rights may be exercised or sold or otherwise transferred, either
together with or separately from, any other stock or other securities of the
Corporation.
(C) Provisions which adjust the number or exercise price of such rights or
amount or nature of the stock or other securities or property receivable upon
exercise of such rights in the event of a combination, split or recapitalization
of any stock of the Corporation, a change in ownership of the Corporation's
stock or other securities or a reorganization, merger, consolidation, sale of
assets or other occurrence relating to the Corporation or any stock of the
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Corporation, and provisions restricting the ability of the Corporation to enter
into any such transaction absent an assumption by the other party or parties
thereto of the obligations of the Corporation under such rights.
(D) Provisions which deny the holder of a specified percentage of the
outstanding stock or other securities of the Corporation the right to exercise
such rights and/or cause the rights held by such holder to become void.
(E) Provisions which permit the Corporation to redeem or exchange such
rights.
(F) The appointment of a rights agent with respect to such rights.
Notwithstanding anything contained in this Certificate of Incorporation to
the contrary, the affirmative vote of at least 80 percent of the voting power of
the then outstanding Voting Stock (as defined below), voting together as a
single class, shall be required to amend or repeal, or adopt any provision
inconsistent with, this Article VI. For the purposes of this Certificate of
Incorporation, "Voting Stock" shall mean the outstanding shares of capital stock
of the Corporation entitled to vote generally in the election of Directors.
ARTICLE VII
(A) In furtherance and not in limitation of the powers conferred by law,
the Board of Directors is expressly authorized and empowered:
(i) to adopt, amend or repeal the By-Laws of the Corporation,
provided, however, that the By-Laws may also be altered, amended or
repealed by the affirmative vote of the holders of at least 80 percent of
the voting power of the then outstanding Voting Stock, voting together as a
single class; and
(ii) from time to time to determine whether and to what extent, and at
what times and places, and under what conditions and regulations, the
accounts and books of the Corporation, or any of them, shall be open to
inspection of stockholders; and, except as so determined, or as expressly
provided in this Certificate of Incorporation or in any Preferred Stock
Designation, no stockholder shall have any right to inspect any account,
book or document of the Corporation other than such rights as may be
conferred by applicable law.
(B) In addition to any other considerations which the Board of Directors
may lawfully take into account, in determining whether to take or to refrain
from taking corporate action on any matter, including proposing any matter to
the stockholders of the Corporation, the Board of Directors may take into
account the long-term as well as short-term interests of the Corporation and its
stockholders (including the possibility that these interests may be best served
by the continued independence of the Corporation), and the interests of
creditors, customers, employees
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<PAGE>
and other constituencies of the Corporation and its subsidiaries, including
the effect upon communities in which the Corporation and its subsidiaries do
business.
(C) The Corporation may in its By-Laws confer powers upon the Board of
Directors in addition to the foregoing and in addition to the powers and
authorities expressly conferred upon the Board of Directors by law.
Notwithstanding anything contained in this Certificate of Incorporation to the
contrary, the affirmative vote of the holders of at least 80 percent of the
voting power of the then outstanding Voting Stock, voting together as a single
class, shall be required to amend, repeal or adopt any provision inconsistent
with subparagraph (i) of paragraph (A) of this Article VII.
ARTICLE VIII
Subject to the rights of the holders of any series of Preferred Stock to
elect additional directors under specific circumstances or to consent to
specific actions taken by the Corporation, any action required or permitted to
be taken by the stockholders of the Corporation must be effected at a duly
called annual or special meeting of stockholders of the Corporation and may not
be effected by any consent in writing in lieu of a meeting of such stockholders.
Notwithstanding anything contained in this Certificate of Incorporation to the
contrary, the affirmative vote of the holders of at least 80 percent of the
voting power of the then outstanding Voting Stock, voting together as a single
class, shall be required to amend, repeal or adopt any provision inconsistent
with, this Article VIII.
ARTICLE IX
(A) Subject to the rights of the holders of any series of Preferred
Stock to elect additional directors under specific circumstances, the number
of directors of the Corporation shall be fixed in the manner prescribed in
the By-Laws of the Corporation and may be increased or decreased from time to
time in such a manner as may be prescribed by the By-Laws.
(B) Unless and except to the extent that the By-Laws of the Corporation
shall so require, the election of directors of the Corporation need not be by
written ballot.
(C) The directors, other than those who may be elected by the holders of
any series of Preferred Stock, shall be divided into three classes, as nearly
equal in number as possible, and designated as Class I, Class II and Class III.
Class I directors shall be initially elected for a term expiring at the 1999
annual meeting of stockholders, Class II directors shall be initially elected
for a term expiring at the 2000 annual meeting of stockholders, and Class III
directors shall be initially elected for a term expiring at the 2001 annual
meeting of stockholders. Members of each class shall hold office until their
successors are duly elected and qualified. At each succeeding annual meeting of
the stockholders of the Corporation, the successors of the class of directors
whose term expires at that meeting shall be elected by a plurality of the votes
of the shares of Voting Stock present in person or represented by proxy at such
meeting and entitled to vote on
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<PAGE>
the election of directors and shall hold office for a term expiring at the
annual meeting of stockholders held in the third year following the year of
their election, and until their successors are duly elected and qualified.
(D) Subject to the rights of the holders of any series of Preferred Stock,
any director may be removed from office at any time, but only for cause and only
by the affirmative vote of the holders of at least 80 percent of the voting
power of the then outstanding Voting Stock, voting together as a single class.
(E) Notwithstanding anything contained in this Certificate of Incorporation
to the contrary, the affirmative vote of the holders of at least 80 percent of
the voting power of the then outstanding Voting Stock, voting together as a
single class, shall be required to amend or repeal, or adopt any provision
inconsistent with, this Article IX.
ARTICLE X
No director of the Corporation shall be personally liable to the
Corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director, except for liability (i) for any breach of the director's
duty of loyalty to the Corporation or its stockholders, (ii) for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, (iii) under Section 174 of the General Corporation Law of the
State of Delaware, or (iv) for any transaction from which the director derived
an improper personal benefit. Any amendment or repeal of this Article X by the
stockholders shall not adversely affect any right or protection of a director of
the Corporation existing hereunder in respect of any act or omission occurring
prior to such amendment or repeal.
ARTICLE XI
Each person who is or was or had agreed to become a director or officer of
the Corporation, or each person who is or was serving or who had agreed to serve
at the request of the Board of Directors or an officer of the Corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise (including the heirs, executors,
administrators of estate of such person), shall be indemnified by the
Corporation in accordance with and pursuant to the By-Laws of the Corporation.
The Corporation may provide indemnification to employees and agents of the
Corporation to the extent provided by action of the Board of Directors pursuant
to the By-Laws. Without limiting the generality or the effect of the foregoing,
the Corporation may enter into one or more agreements with any person which
provide for indemnification greater or different than that provided in this
Article XI. Any amendment or repeal of this Article XI shall not adversely
affect any right or protection existing hereunder in respect of any act or
omission occurring prior to such amendment or repeal.
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ARTICLE XII
In furtherance and not in limitation of the powers conferred by law or
in this Certificate of Incorporation, the Board of Directors (and any
committee of the Board of Directors) is expressly authorized, to the extent
permitted by law, to take such action or actions as the Board of Directors or
such committee may determine to be reasonably necessary or desirable to (A)
encourage any individual, limited partnership, general partnership,
corporation or other firm or entity (a "person") to enter into negotiations
with the Board of Directors and management of the Corporation with respect to
any transaction which may result in a change in control of the Corporation
which is proposed or initiated by such person or (B) contest or oppose any
such transaction which the Board of Directors or such committee determines to
be unfair, abusive or otherwise undesirable with respect to the Corporation
and its business, assets or properties or the stockholders of the
Corporation, including, without limitation, the adoption of such plans or the
issuance of such rights, options, capital stock, notes, debentures or other
evidences of indebtedness or other securities of the Corporation, which
rights, options, capital stock, notes, debentures or other evidences of
indebtedness and other securities (i) may be exchangeable for or convertible
into cash or other securities on such terms and conditions as may be
determined by the Board of Directors or such committee and (ii) may provide
for the treatment of any holder or class of holders thereof designated by the
Board of Directors or any such committee in respect of the terms, conditions,
provisions and rights of such securities which is different from, and unequal
to, the terms, conditions, provisions and rights applicable to all other
holders thereof.
ARTICLE XIII
The Corporation reserves the right at any time and from time to time to
amend, alter, change or repeal any provision contained in this Certificate of
Incorporation, or any Preferred Stock Designation, and any other provisions
authorized by the laws of the State of Delaware at the time in force may be
added or inserted, in the manner now or hereafter prescribed herein or by
law; and all rights, preferences and privileges of whatsoever nature
conferred upon stockholders, directors or any other persons whomsoever by and
pursuant to this Certificate of Incorporation in its present form or as
hereafter amended are granted subject to the right reserved in this Article
XIII; provided, however, that any amendment or repeal of Article X or Article
XI of this Certificate of Incorporation shall not adversely affect any right
or protection existing hereunder in respect of any act or omission occurring
prior to such amendment or repeal; and provided further that no Preferred
Stock Designation shall be amended after the issuance of any shares of the
series of Preferred Stock created thereby, except in accordance with the
terms of such Preferred Stock Designation and the requirements of applicable
law.
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THE UNDERSIGNED, being the incorporator hereinbefore named, for the purpose
of forming a corporation pursuant to the General Corporation Law of the State of
Delaware, does make this certificate, hereby declaring and certifying that this
is my act and deed and the facts herein stated are true, and accordingly have
hereunto set my hand this 29th day of August, 1997.
/s/ Mark E. Vainisi
-----------------------------
Mark E. Vainisi, Incorporator
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BY-LAWS
OF
MIDAS GROUP, INC.
(September 2, 1997)
Incorporated under the Laws of the State of Delaware
ARTICLE I
OFFICES AND RECORDS
Section 1.1 Delaware Office
The principal office of Midas Group, Inc. (the "Corporation") in the State
of Delaware shall be located in the City of Wilmington, County of New Castle,
and the name and address of its registered agent is The Corporation Trust
Company, 1209 Orange Street, Wilmington, Delaware.
Section 1.2 Other Offices
The Corporation may have such other offices, either within or without the
State of Delaware, as the Board of Directors may from time to time designate or
as the business of the Corporation may from time to time require.
Section 1.3 Books and Records
The books and records of the Corporation may be kept outside the State of
Delaware at such place or places as may from time to time be designated by the
Board of Directors.
ARTICLE II
STOCKHOLDERS
Section 2.1 Annual Meeting
The annual meeting of stockholders of the Corporation shall be held at such
place, either within or without the State of Delaware, and at such time and date
as the Board of Directors, by resolution, shall determine for the purpose of
electing directors and for the transaction of such other business as may be
properly brought before the meeting. If the Board fails so to determine the
time, date and place of meeting, the annual meeting of stockholders shall be
held at the principal office of the Corporation on the first Thursday in May
commencing in 1999. If the date of the annual meeting shall fall upon a legal
holiday, the meeting shall be held on the next succeeding business day.
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Section 2.2 Special Meeting
Subject to the rights of the holders of any Preferred Stock (as defined in
the Certificate of Incorporation of the Corporation) to elect additional
directors under specific circumstances, special meetings of the stockholders may
be called only by the Board of Directors pursuant to a resolution adopted by a
majority of the total number of directors which the Corporation would have if
there were no vacancies (the "Whole Board").
Section 2.3 Place of Meeting
The Board of Directors may designate the place of meeting for any meeting
of the stockholders. If no designation is made by the Board, the place of
meeting shall be the principal office of the Corporation.
Section 2.4 Notice of Meeting
Written or printed notice, stating the place, day and hour of a meeting and
the purpose or purposes for which the meeting is called, shall be prepared and
delivered by the Corporation not less than ten days nor more than sixty days
before the date of the meeting, either personally or by mail, to each
stockholder of record entitled to vote at such meeting. If mailed, such notice
shall be deemed to be delivered when deposited in the United States mail with
postage thereon prepaid, addressed to the stockholder at such stockholder's
address as it appears on the stock transfer books of the Corporation. Only such
business shall be conducted at a special meeting of stockholders as shall have
been brought before the meeting pursuant to the Corporation's notice of meeting.
Any previously scheduled meeting of the stockholders may be postponed by
resolution of the Board of Directors upon public notice given prior to the time
previously scheduled for such meeting of stockholders.
Section 2.5 Quorum and Adjournment
Except as otherwise provided by law or by the Certificate of Incorporation,
the holders of a majority of the voting power of the outstanding shares of the
Corporation entitled to vote generally in the election of directors (the "Voting
Stock"), represented in person or by proxy, shall constitute a quorum at a
meeting of stockholders, except that when specified business is to be voted on
by a class or series voting as a class, the holders of a majority of the voting
power of the shares of such class or series shall constitute a quorum for the
transaction of such business. The chairman of the meeting or a majority of the
shares of Voting Stock so represented may adjourn the meeting from time to time,
whether or not there is such a quorum (or, in the case of specified business to
be voted on by a class or series, the chairman or a majority of the shares of
such class or series so represented may adjourn the meeting with respect to such
specified business). Notice need not be given of any such adjourned meeting if
the date, time and place thereof are announced at the meeting at which the
adjournment is taken. At the adjourned meeting any business may be transacted
which might have been transacted at the original meeting. If the adjournment is
for
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more than 30 days, or if after the adjournment a new record date is fixed for
the adjourned meeting, a notice of the adjourned meeting shall be given to
each stockholder of record entitled to vote at the adjourned meeting in
accordance with Section 2.4 of these By-Laws. The stockholders present at a
duly organized meeting may continue to transact business until adjournment,
notwithstanding the withdrawal of enough stockholders to leave less than a
quorum.
Section 2.6 Voting and Proxies
(A) VOTING RIGHTS OF OTHER CORPORATIONS. Voting Stock standing in the name
of another corporation and entitled to vote may be voted by such officer, agent
or proxy as the By-Laws or other internal regulations of such other corporation
may prescribe or, in the absence of such provision, as the Board of Directors or
comparable body of such other corporation may determine.
(B) VOTING RIGHTS OF FIDUCIARIES. Voting Stock standing in the name of a
deceased person, a minor, an incompetent or a debtor in a case under Title 11,
United States Code, and entitled to vote may be voted by an administrator,
executor, guardian, conservator, debtor-in-possession or trustee, as the case
may be, either in person or by proxy, without transfer of such shares into the
name of the official or other person so voting.
(C) VOTING RIGHTS OF PLEDGORS. A stockholder whose Voting Stock is pledged
shall be entitled to vote such stock unless on the transfer records of the
Corporation the pledgor has expressly empowered the pledgee to vote such shares,
in which case only the pledgee, or such pledgee's proxy, may represent such
shares and vote thereon.
(D) VOTING RIGHTS OF JOINT OWNERS. If Voting Stock is held of record in the
names of two or more persons, whether fiduciaries, members of a partnership,
joint tenants, tenants in common, tenants by the entirety or otherwise, or if
two or more persons have the same fiduciary relationship respecting the same
shares, unless the Secretary is given written notice to the contrary and is
furnished with a copy of the instrument or order appointing them or creating the
relationship wherein it is so provided, their acts with respect to voting shall
have the following effect: (i) if only one votes, such act binds all; (ii) if
more than one vote, the act of the majority so voting binds all; and (iii) if
more than one votes, but the vote is evenly split on any particular matter, each
faction may vote such Voting Stock proportionally, or any person voting the
shares, or a beneficiary, if any, may apply to the Court of Chancery of the
State of Delaware or such other court as may have jurisdiction to appoint an
additional person to act with the persons so voting such Voting Stock, which
shall then be voted as determined by a majority of such persons and the person
appointed by the Court. If the instrument so filed shows that any such tenancy
is held in unequal interests, a majority or even split for the purpose of this
subsection shall be a majority or even split in interest.
(E) THE CORPORATION'S RIGHTS RESPECTING THE VOTING STOCK. Voting Stock
belonging to the Corporation, or to another corporation a majority of the shares
entitled to vote in the election of
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directors of such other corporation of which are held by the Corporation,
shall not be voted at any meeting of stockholders and shall not be counted in
the total number of outstanding shares for the purpose of determining whether
a quorum is present. Nothing in this Section 2.6 shall limit the right of
the Corporation to vote shares of Voting Stock held by it in a fiduciary
capacity.
(F) PROXIES. At all meetings of stockholders, a stockholder may vote by
proxy executed in writing by the stockholder or as may be permitted by law, or
by such stockholder's duly authorized attorney-in-fact. Such proxy must be filed
with the Secretary of the Corporation or such stockholder's representative at or
before the time of the meeting. No such proxy shall be voted or acted upon after
three years from its date, unless the proxy provides for a longer period. A
duly executed proxy shall be irrevocable if it states that it is irrevocable and
if, and only as long as, it is coupled with an interest sufficient in law to
support an irrevocable power. A stockholder may revoke any proxy which is not
irrevocable by attending the meeting and voting in person or by filing with the
Secretary an instrument in writing revoking the proxy or another duly executed
proxy bearing a later date.
Section 2.7 Notice of Stockholder Business and Nominations
(A) ANNUAL MEETINGS OF STOCKHOLDERS. (1) Nominations of persons for
election to the Board of Directors of the Corporation and the proposal of
business to be considered by the stockholders may be made at an annual meeting
of stockholders (a) pursuant to the Corporation's notice of meeting delivered
pursuant to Section 2.4 of these By-Laws, (b) by or at the direction of the
Board of Directors or (c) by any stockholder of the Corporation who is entitled
to vote at the meeting, who complied with the notice procedures set forth in
clauses (2) and (3) of this paragraph (A) of this By-Law and who was a
stockholder of record at the time such notice was delivered to the Secretary of
the Corporation.
(2) For nominations or other business to be properly brought before an
annual meeting by a stockholder pursuant to clause (c) of paragraph (A)(1) of
this By-Law, the stockholder must have given timely notice thereof in writing to
the Secretary of the Corporation and such other business must otherwise be a
proper matter for stockholder action. To be timely, a stockholder's notice shall
be delivered to the Secretary at the principal office of the Corporation not
earlier than the close of business on the 90th calendar day nor later than the
close of business on the 70th calendar day prior to the date of the first
anniversary of the preceding year's annual meeting; provided, however, that in
the event that the date of an annual meeting is more than 30 calendar days
before or more than 70 calendar days after the date of the first anniversary of
the preceding year's annual meeting, notice by the stockholder to be timely must
be so delivered not earlier than the close of business on the 90th calendar day
prior to such annual meeting and not later than the close of business on the
later of (i) the 70th calendar day prior to such annual meeting and (ii) the
10th calendar day after the day on which public announcement of the date of such
annual meeting is first made by the Corporation. For the purpose of determining
whether a stockholder's notice shall have been delivered in a timely manner for
the 1999 annual meeting, the date of the first anniversary of the preceding
year's meeting shall be deemed to be May 7, 1999. Such
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stockholder's notice shall set forth (a) as to each person whom the
stockholder proposes to nominate for election or reelection as a director all
information relating to such person that is required to be disclosed in
solicitations of proxies for election of directors, or is otherwise required,
in each case pursuant to Regulation 14A under the Securities Exchange Act of
1934, as amended (the "Exchange Act"), and the regulations promulgated
thereunder, including such person's written consent to being named in the
proxy statement as a nominee and to serving as a director if elected; (b) as
to any other business that the stockholder proposes to bring before the
meeting, a brief description of the business desired to be brought before the
meeting, the reasons for conducting such business at the meeting and any
material interest in such business of such stockholder and the beneficial
owner, if any, on whose behalf the proposal is made; and (c) as to the
stockholder giving the notice and the beneficial owner, if any, on whose
behalf the nomination or proposal is made (i) the name and address of such
stockholder, as they appear on the Corporation's stock transfer books, and of
such beneficial owner and (ii) the class and number of shares of the
Corporation which are owned beneficially and of record by such stockholder
and such beneficial owner.
(3) Notwithstanding anything in the second sentence of paragraph (A)(2) of
this By-Law to the contrary, in the event that the number of directors to be
elected to the Board of Directors of the Corporation is increased and there is
no public announcement by the Corporation naming all of the nominees for
director or specifying the size of the increased Board of Directors made by the
Corporation at least 80 calendar days prior to the date of the first anniversary
of the preceding year's annual meeting, a stockholder's notice required by this
By-Law shall also be considered timely, but only with respect to nominees for
any new positions created by such increase, if it shall be delivered to the
Secretary at the principal office of the Corporation not later than the close of
business on the 10th calendar day after the day on which such public
announcement is first made by the Corporation. For the purpose of determining
whether a stockholder's notice shall have been delivered in a timely manner for
the 1999 annual meeting, the first anniversary of the preceding year's meeting
shall be deemed to be May 7, 1999.
(B) SPECIAL MEETINGS OF STOCKHOLDERS. Subject to the rights of the
holders of any Preferred Stock, only such business shall be conducted at a
special meeting of stockholders as shall have been brought before the meeting
pursuant to the Corporation's notice of meeting pursuant to Section 2.4 of
these By-Laws. Subject to the rights of the holders of any Preferred Stock,
nominations of persons for election to the Board of Directors may be made at
a special meeting of stockholders at which directors are to be elected
pursuant to the Corporation's notice of meeting (1) by or at the direction of
the Board or (2) by any stockholder of the Corporation who is entitled to
vote at the meeting, who complies with the notice procedures set forth in
this By-Law and who is a stockholder of record at the time such notice is
delivered to the Secretary of the Corporation. Nominations by stockholders of
persons for election to the Board may be made at such a special meeting of
stockholders if the stockholder's notice as required by paragraph (A)(2) of
this By-Law shall be delivered to the Secretary at the principal executive
offices of the Corporation not earlier than the close of business on the 90th
calendar day prior to such special meeting and not later than the close of
business on the later of (i) the 70th calendar day prior to
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such special meeting and (ii) the 10th calendar day after the day on which
public announcement is first made of the date of such special meeting and of
the nominees proposed by the Board of Directors to be elected at such meeting.
(C) GENERAL. (1) Subject to the rights of the holders of any Preferred
Stock, only persons who are nominated in accordance with the procedures set
forth in this By-Law shall be eligible to serve as directors and only such
business shall be conducted at a meeting of stockholders as shall have been
brought before the meeting in accordance with the procedures set forth in this
By-Law. Except as otherwise provided by law, the Certificate of Incorporation or
these By-Laws, the chairman of the meeting shall have the power and duty to
determine whether a nomination or any business proposed to be brought before the
meeting was made or proposed in accordance with the procedures set forth in this
By-Law and, if any proposed nomination or business is not in compliance with
this By-Law, to declare that such defective proposal or nomination shall be
disregarded.
(2) For purposes of this By-Law, "public announcement" shall mean
disclosure in a press release reported by the Dow Jones News Service, Associated
Press or comparable national news service or in a document publicly filed by the
Corporation with the Securities and Exchange Commission pursuant to Section 13,
14 or 15(d) of the Exchange Act.
(3) Notwithstanding the foregoing provisions of this By-Law, a stockholder
shall also comply with all applicable requirements of the Exchange Act and the
rules and regulations thereunder with respect to the matters set forth in this
By-Law. Nothing in this By-Law shall be deemed to affect any rights of
stockholders to request inclusion of proposals in the Corporation's proxy
statement pursuant to Rule 14a-8 under the Exchange Act.
Section 2.8 Stockholder Vote Required
Election of directors at all meetings of the stockholders at which
directors are to be elected shall be by written ballot. Subject to the rights
of the holders of any series of Preferred Stock to elect additional directors
under specific circumstances, directors shall be elected by a plurality of the
votes of the shares of Voting Stock present in person or represented by proxy at
the meeting and entitled to vote on the election of directors. Except as
otherwise provided by law, the Certificate of Incorporation or these By-Laws, in
all matters other than the election of directors, the affirmative vote of the
majority of the shares of Voting Stock present in person or represented by proxy
at the meeting and entitled to vote on the subject matter shall be the act of
the stockholders.
Section 2.9 Inspectors of Elections; Opening and Closing the Polls
(A) INSPECTORS OF ELECTION. The Board of Directors by resolution shall
appoint one or more inspectors, which inspector or inspectors may include
individuals who serve the Corporation in other capacities, including, without
limitation, as officers, employees, agents or representatives
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of the Corporation, to act at a meeting of stockholders and make a written
report thereof. One or more persons may be designated as alternate inspectors
to replace any inspector who fails to act. If no inspector or alternate has
been appointed to act, or if all inspectors or alternates who have been
appointed are unable to act at a meeting of stockholders, the chairman of the
meeting shall appoint one or more inspectors to act at the meeting. Each
inspector, before discharging his or her duties, shall take and sign an oath
faithfully to execute the duties of inspector with strict impartiality and
according to the best of his or her ability.
(B) DUTIES. The inspectors shall (i) ascertain the number of shares of
Voting Stock outstanding and the voting power of each, (ii) determine the number
of shares of Voting Stock present in person or by proxy at such meeting and the
validity of proxies and ballots, (iii) count all votes and ballots,
(iv) determine and retain for a reasonable period a record of the disposition of
any challenges made to any determination by the inspectors and (v) certify their
determination of the number of such shares present in person or by proxy at such
meeting and their count of all votes and ballots. The inspectors may appoint or
retain other persons or entities to assist them in the performance of their
duties.
(C) OPENING AND CLOSING THE POLLS. The chairman or secretary of the meeting
shall announce at the meeting the date and time of the opening and the closing
of the polls for each matter upon which the stockholders will vote at a meeting.
No ballots, proxies or votes, nor any revocations thereof or changes thereto,
shall be accepted by the inspectors after the closing of the polls unless the
Court of Chancery of the State of Delaware upon application by any stockholder
shall determine otherwise.
Section 2.10 Fixing Date of Determination of Stockholders of Record
(A) FIXING THE RECORD DATE. In order that the Corporation may determine the
stockholders entitled (i) to notice of or to vote at any meeting of stockholders
or any adjournment thereof, (ii) to receive payment of any dividend or other
distribution or allotment of any rights, (iii) to exercise any rights in respect
of any change, conversion or exchange of stock or (iv) to take, receive or
participate in any other action, the Board of Directors may fix a record date,
which shall not be earlier than the date upon which the resolution fixing the
record date is adopted by the Board and which (1) in the case of a determination
of stockholders entitled to notice of or to vote at any meeting of stockholders
or adjournment thereof, shall, unless otherwise required by law, be not more
than 60 nor less than ten days before the date of such meeting; and (2) in the
case of any other action, shall be not more than 60 days before such action.
(B) IF RECORD DATE IS NOT FIXED. If no record date is fixed, (i) the record
date for determining stockholders entitled to notice of or to vote at a meeting
of stockholders shall be at the close of business on the day next preceding the
day on which notice is given, and (ii) the record date for determining
stockholders for any other purpose shall be at the close of business on the day
on which the Board of Directors adopts the resolution relating thereto.
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(C) ADJOURNED MEETINGS. A determination of stockholders of record entitled
to notice of or to vote at a meeting of stockholders shall apply to any
adjournment of the meeting, but the Board of Directors may fix a new record date
for the adjourned meeting.
Section 2.11 List of Stockholders Entitled to Vote
The Secretary shall prepare, at least ten days before every meeting of
stockholders, a complete list of the stockholders entitled to vote at the
meeting, arranged in alphabetical order, and showing the address and the number
of shares registered in the name of each stockholder. Such list shall be open
to the examination of any stockholder, for any purpose germane to the meeting,
during ordinary business hours, for a period of at least ten days prior to the
meeting, either at a place within the city where the meeting is to be held,
which place shall be specified in the notice of meeting, or, if not so
specified, at the place where the meeting is to be held. The list shall also be
produced and kept at the time and place of the meeting during the whole time
thereof and may be inspected by any stockholder who is present. The stock
ledger shall be the only evidence as to who are the stockholders entitled to
examine the stock ledger, the list of stockholders or the books of the
corporation, or to vote in person or by proxy at any meeting of stockholders.
ARTICLE III
BOARD OF DIRECTORS
Section 3.1 General Powers
The business and affairs of the Corporation shall be managed by or under
the direction of its Board of Directors. In addition to the powers and
authorities by these By-Laws expressly conferred upon them, the Board may
exercise all such powers of the Corporation and do all such lawful acts and
things as are not by law or by the Certificate of Incorporation or by these
By-Laws required to be exercised or done by the stockholders.
Section 3.2 Number, Tenure and Qualifications
Subject to the rights of the holders of any series of Preferred Stock to
elect directors under specific circumstances, the number of directors shall be
fixed from time to time exclusively pursuant to a resolution adopted by a
majority of the Whole Board but shall consist of not less than three directors.
The directors, other than those who may be elected by the holders of any series
of Preferred Stock, or any other series or class of stock, shall be divided,
with respect to the time for which they severally hold office, into three
classes, as nearly equal in number as possible, with the term of office of the
first class to expire at the 1999 annual meeting of stockholders, the term of
office of the second class to expire at the 2000 annual meeting of stockholders
and the term of office of the third class to expire at the 2001 annual meeting
of stockholders. Each
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director shall hold office until his or her successor shall have been duly
elected and qualified. At each annual meeting of stockholders, commencing
with the 1999 annual meeting, (i) directors elected to succeed those
directors whose terms then expire shall be elected for a term of office to
expire at the third succeeding annual meeting of stockholders after their
election, with each director to hold office until his or her successor shall
have been duly elected and qualified or until his or her earlier death,
resignation or removal from office, and (ii) if authorized by a resolution of
the Board of Directors, a director may be elected to fill any vacancy on the
Board, regardless of how such vacancy shall have been created.
Section 3.3 Regular Meetings
A regular meeting of the Board of Directors may be held without other
notice than this By-Law immediately after, and at the same place as, each annual
meeting of stockholders. The Board may, by resolution, provide the time and
place for the holding of additional regular meetings without other notice than
such resolution.
Section 3.4 Special Meetings
Special meetings of the Board of Directors may be called by the Chairman,
the Secretary or two or more directors. The person or persons authorized to call
special meetings of the Board of Directors may fix the place and time of the
meetings.
Section 3.5 Notice
Notice of each special meeting of the Board shall be given by the
Secretary. Notice of each such meeting shall state the date, time and place
of the meeting, and shall be delivered to each director either personally or
by telephone, telegraph, cable, or similar means, at least twenty-four hours
before the time at which such meeting is to be held or mailed by first-class
mail, postage prepaid, addressed to the director at his residence or usual
place of business, at least five days before the day on which such meeting is
to be held. Neither the business to be transacted at, nor the purpose of, any
regular or special meeting of the Board need be specified in the notice of
such meeting, except for amendments to these By-Laws as provided under
Article IX hereof. A meeting may be held at any time without notice if all
the directors are present or if those not present waive notice of the meeting
in writing, either before or after such meeting.
Section 3.6 Quorum
A whole number of directors equal to at least one-third of the Whole Board
shall constitute a quorum for the transaction of business, but if at any meeting
of the Board there shall be less than a quorum present, a majority of the
directors present may adjourn the meeting from time to time without further
notice. The act of the majority of the directors present at a meeting at which a
quorum is present shall be the act of the Board of Directors. The directors
present at a
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duly organized meeting may continue to transact business until adjournment,
notwithstanding the withdrawal of enough directors to leave less than a
quorum.
Section 3.7 Vacancies
Subject to the rights of the holders of any series of Preferred Stock to
elect additional directors under specific circumstances, and unless the Board
of Directors otherwise determines, vacancies resulting from death,
resignation, retirement, disqualification, removal from office or other
cause, and newly created directorships resulting from any increase in the
authorized number of directors, may be filled only by the affirmative vote of
a majority of the remaining directors, though less than a quorum of the
Board, and each director so chosen shall hold office for a term expiring at
the annual meeting of stockholders at which the term of office of the class
to which he or she has been elected expires and until his or her successor
has been duly elected and qualified or until his or her earlier death,
resignation or removal from office. No decrease in the number of authorized
directors constituting the Whole Board shall shorten the term of any
incumbent director.
Section 3.8 Executive and Other Committees
The Board of Directors may, by resolution adopted by a majority of the
Whole Board, designate an Executive Committee to exercise, subject to
applicable provisions of law, all the powers of the Board in the management
of the business and affairs of the Corporation when the Board is not in
session, including without limitation the power to declare dividends, to
authorize the issuance of the Corporation's capital stock and to adopt a
certificate of ownership and merger pursuant to Section 253 of the General
Corporation Law of the State of Delaware, and may, by resolution similarly
adopted, designate one or more other committees. The Executive Committee and
each such other committee shall consist of two or more directors of the
Corporation. The Board may designate one or more directors as alternate
members of any committee, who may replace any absent or disqualified member
at any meeting of the committee. Any such committee may to the extent
permitted by law exercise such powers and shall have such responsibilities as
shall be specified in the designating resolution. In the absence or
disqualification of any member of such committee or committees, the member or
members thereof present at any meeting and not disqualified from voting,
whether or not constituting a quorum, may unanimously appoint another member
of the Board to act at the meeting in the place of any such absent or
disqualified member. Each committee shall keep written minutes of its
proceedings and shall report such proceedings to the Board when required.
A majority of any committee may determine its action and fix the time and
place of its meetings, unless the Board shall otherwise provide. Notice of such
meetings shall be given to each member of the committee in the manner provided
for in Section 3.5 of these By-Laws. The Board shall have power at any time to
fill vacancies in, to change the membership of, or to dissolve any such
committee. Nothing herein shall be deemed to prevent the Board from appointing
one or more committees consisting in whole or in part of persons who are not
directors of the
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Corporation; provided, however, that no such committee shall have or may
exercise any authority of the Board of Directors.
Section 3.9 Removal
Subject to the rights of the holders of any series of Preferred Stock to
elect additional directors under specific circumstances, any director, or the
entire Board of Directors, may be removed from office at any time, but only
for cause and only by the affirmative vote of the holders of at least 80
percent of the voting power of the then outstanding Voting Stock, voting
together as a single class.
Section 3.10 Telephonic Meetings
Directors, or any committee of directors designated by the Board, may
participate in a meeting of the Board or such committee by means of
conference telephone or similar communications equipment by means of which
all persons participating in the meeting can hear each other, and
participation in a meeting pursuant to this Section 3.10 shall constitute
presence in person at such meeting.
Section 3.11 Informal Action by Directors
Unless otherwise provided in the Certificate of Incorporation or these
By-Laws, any action required or permitted to be taken at any meeting of the
Board of Directors, or of any committee thereof, may be taken without a
meeting if all members of the Board or such committee, as the case may be,
consent thereto in writing (which may be in counterparts), and the written
consent or consents are filed with the minutes of proceedings of the Board or
such committee.
Section 3.12 Reliance upon Records
Every director, and every member of any committee of the Board of
Directors, shall, in the performance of his or her duties, be fully protected
in relying in good faith upon the records of the Corporation and upon such
information, opinions, reports or statements presented to the Corporation by
any of its officers or employees, or committees of the Board, or by any other
person as to matters the director or member reasonably believes are within
such other person's professional or expert competence and who has been
selected with reasonable care by or on behalf of the Corporation, including,
but not limited to, such records, information, opinions, reports or
statements as to the value and amount of the assets, liabilities and/or net
profits of the Corporation, or any other facts pertinent to the existence and
amount of surplus or other funds from which dividends might properly be
declared and paid, or with which the Corporation's capital stock might
properly be purchased or redeemed.
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Section 3.13 Interested Directors
A director who is directly or indirectly a party to a contract or
transaction with the Corporation, or is a director or officer of or has a
financial interest in any other corporation, partnership, association or other
organization which is a party to a contract or transaction with the Corporation,
may be counted in determining whether a quorum is present at any meeting of the
Board or a committee thereof at which such contract or transaction is considered
or authorized, and such director may participate in such meeting and vote on
such authorization if the material facts as to such director's relationship or
interest and as to the contract or transaction are disclosed or are known to the
Board or the committee, and the Board or committee in good faith authorizes the
contract or transaction by the affirmative votes of a majority of the
disinterested directors, even though the disinterested directors are less than a
quorum.
Section 3.14 Compensation
The Board of Directors shall have the authority to fix the compensation,
including fees and reimbursement of expenses, of directors for services to the
Corporation in any capacity, provided that no such payment shall preclude any
director from serving the Corporation in any other capacity and receiving
compensation therefor.
Section 3.15 Presumption of Assent
Unless otherwise provided by the laws of the State of Delaware, a director
who is present at a meeting of the Board of Directors or a committee thereof at
which action is taken on any matter shall be presumed to have assented to the
action taken unless his or her dissent shall be entered in the minutes of such
meeting or unless he or she shall file his or her written dissent to such action
with the person acting as secretary of such meeting before the adjournment
thereof or shall forward such dissent by registered mail to the Secretary
immediately after the adjournment of such meeting. Such right to dissent shall
not apply to a director who voted in favor of such action.
ARTICLE IV
OFFICERS
Section 4.1 Elected Officers
Unless otherwise determined by the Board of Directors, the officers of the
Corporation shall consist of the Chairman, the President, one or more Vice
Presidents, the Secretary, the Treasurer and the Controller. Any two or more
offices may be held by the same person. The Board may designate the Chairman or
the President as the Chief Executive Officer of the Corporation. Such officers
shall be elected from time to time by the Board to hold office until
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their respective successors shall have been duly elected and shall have
qualified, or until death, resignation or removal, as hereafter provided in
these By-Laws.
Section 4.2 Other Officers
The Board may from time to time elect, or the Chairman may appoint, such
other officers (including one or more Assistant Vice Presidents, Assistant
Secretaries, Assistant Treasurers, and Assistant Controllers) and such agents,
as may be necessary or desirable for the conduct of the business of the
Corporation. Such other officers and agents shall have such duties and shall
hold their offices for such terms as shall be provided in these By-Laws or as
may be prescribed by the Board or by the Chairman.
Section 4.3 Resignation and Removal
Any officer or agent of the Corporation may resign at any time by giving
a written notice of resignation to the Board of Directors, the Chairman, the
President or the Secretary. Any such resignation shall take effect at the
time specified therein or, if the time when it shall become effective shall
not be specified therein, immediately upon its receipt. Unless otherwise
specified therein, the acceptance of such resignation shall not be necessary
to make it effective. Any officer or agent of the Corporation may be
removed, either with or without cause, at any time, by a vote of the majority
of the Whole Board, or, except in the case of an officer or agent elected by
the Board, by the Chairman. Such removal shall be without prejudice to the
contractual rights, if any, of the person so removed.
Section 4.4 Vacancies
A vacancy in any office, whether arising from death, resignation,
removal or any other cause, may be filled for the unexpired portion of the
term of the office which shall be vacant in the manner prescribed in these
By-Laws for the regular election or appointment of such office.
Section 4.5 Chairman
The Chairman shall have the general control and management of the
business and affairs of the Corporation, under the direction of the Board of
Directors. He shall have power to select and appoint all necessary officers
and employees of the Corporation except such officers as under these By-Laws
are to be elected by the Board; to remove all appointed officers or employees
whenever he shall deem it necessary, and to make new appointments to fill the
vacancies; and to suspend from office for cause any elected officer, which
shall be forthwith declared in writing to the Board. The Chairman shall have
such other authority and shall perform such other duties as may be determined
by the Board.
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Section 4.6 President
The President shall have such authority and perform such duties relative
to the business and affairs of the Corporation as may be determined by the
Board of Directors or the Chairman. In the absence of the Chairman, the
President shall preside at meetings of the stockholders and of the directors.
If the Board shall not have elected a Chairman, the President shall have
such authority and shall perform such additional duties as in these By-Laws
is provided for the office of Chairman.
Section 4.7 Vice Presidents and Assistant Vice Presidents
Each Vice President and each Assistant Vice President shall have such
powers and perform all such duties as from time to time may be determined by
the Board of Directors, the Chairman, the President or the senior officer to
whom such officer reports.
Section 4.8 Secretary
The Secretary shall record the proceedings of all meetings of the Board
of Directors, the committees of the Board and the stockholders; shall see
that all notices are duly given in accordance with the provisions of these
By-Laws and as required by law; shall be custodian of the records and the
seal of the Corporation and, if necessary or appropriate, affix and attest
the seal to all documents to be executed on behalf of the Corporation under
its seal; shall see that the books, reports, statements, certificates and
other documents and records required by law to be kept and filed are properly
kept and filed; and in general, shall perform all the duties incident to the
office of Secretary and such other duties as from time to time may be
determined by the Board, the Chairman or the President.
Section 4.9 Treasurer
The Treasurer shall exercise general supervision over the receipt,
custody and disbursement of corporate funds. The Treasurer shall have such
further powers and duties as may be determined from time to time by the Board
of Directors, the Chairman or the President.
Section 4.10 Controller
The Controller shall be the chief accounting officer of the Corporation
and shall maintain adequate records of all assets, liabilities and
transactions of the Corporation; shall establish and maintain internal
accounting controls; and, in cooperation with the independent public
accountants selected by the Board of Directors, shall supervise internal
auditing. The Controller shall have such further powers and duties as may be
determined from time to time by the Board, the Chairman or the President.
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Section 4.11 Assistant Officers
Any Assistant Secretary, Assistant Treasurer, or Assistant Controller
elected or appointed as heretofore provided, shall perform the duties and
exercise the powers of the Secretary, Treasurer and Controller, respectively, in
their absence or inability to act, and shall perform such other duties and have
such other powers as the Board of Directors, the Chairman, the President, the
Secretary, the Treasurer, or the Controller (as the case may be), may from time
to time prescribe.
Section 4.12 Compensation
The compensation of the officers of the Corporation for their services as
such officers shall be fixed from time to time by the Board of Directors;
provided, however, that the Board may by resolution delegate to the Chairman the
power to fix compensation of non-elected officers and agents appointed by the
Chairman. An officer of the Corporation shall not be prevented from receiving
compensation by reason of the fact that such officer is also a director of the
Corporation, but any such officer who shall also be a director shall not have
any vote in the determination of such officer's compensation.
ARTICLE V
CONTRACTS AND PROXIES
Section 5.1 Contracts
Except as otherwise required by law, the Certificate of Incorporation or
these By-Laws, any contracts or other instruments may be executed and delivered
in the name and on behalf of the Corporation by such officer or officers
(including any assistant officer) of the Corporation as the Board of Directors
may from time to time direct. Such authority may be general or confined to
specific instances as the Board of Directors may determine. The Chairman, the
President or any Vice President may execute bonds, contracts, deeds, leases and
other instruments to be made or executed for or on behalf of the Corporation.
Subject to any restrictions imposed by the Board, the Chairman, the President or
any Vice President of the Corporation may delegate contractual power to others
under his jurisdiction, it being understood, however, that any such delegation
of power shall not relieve such officer of responsibility with respect to the
exercise of such delegated power.
Section 5.2 Proxies
Unless otherwise provided by resolution adopted by the Board of Directors,
the Chairman, the President or any Vice President may from time to time appoint
an attorney or attorneys or agent or agents of the Corporation, in the name and
on behalf of the Corporation, to cast the
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votes which the Corporation may be entitled to cast as the holder of stock or
other securities or interests in any other corporation or entity, any of
whose stock or other securities or interests may be held by the Corporation,
at meetings of the holders of the stock or other securities or interests, of
such other corporation or entity, or to consent in writing, in the name of
the Corporation as such holder, to any action by such other corporation or
entity, and may instruct the person or persons so appointed as to the manner
of casting such votes or giving such consent, and may execute or cause to be
executed in the name and on behalf of the Corporation and under its corporate
seal or otherwise, all such written proxies or other instruments as he may
deem necessary or proper in the premises.
ARTICLE VI
INDEMNIFICATION AND INSURANCE
(A) RIGHT TO INDEMNIFICATION. Each person who was or is made a party or
is threatened to be made a party to or is involved in any action, suit, or
proceeding, whether civil, criminal, administrative or investigative
(hereinafter a "proceeding"), by reason of the fact that he or she or a
person of whom he or she is the legal representative is or was a director or
officer of the Corporation or is or was serving at the request of the
Corporation as a director, officer, employee or agent of any other
corporation or of a partnership, joint venture, trust or other enterprise,
including service with respect to employee benefit plans, whether the basis
of such proceeding is alleged action in an official capacity as a director,
officer, employee or agent or in any other capacity while serving as a
director, officer, employee or agent, shall be indemnified and held harmless
by the Corporation to the fullest extent authorized by the General
Corporation Law of the State of Delaware as the same exists or may hereafter
be amended (but, in the case of any such amendment, only to the extent that
such amendment permits the Corporation to provide broader indemnification
rights than said law permitted the Corporation to provide prior to such
amendment), against all expense, liability and loss (including, without
limitation, attorneys' fees, judgments, fines, ERISA excise taxes or
penalties and amounts paid or to be paid in settlement) reasonably incurred
by such person in connection therewith and such indemnification shall
continue as to a person who has ceased to be a director, officer, employee or
agent and shall inure to the benefit of his or her heirs, executors and
administrators; provided, however, that except as provided in paragraph (B)
of this Article VI with respect to proceedings seeking to enforce rights to
indemnification, the Corporation shall indemnify any such person seeking
indemnification in connection with a proceeding (or part thereof) initiated
by such person only if such proceeding (or part thereof) initiated by such
person was authorized by the Board of Directors of the Corporation. The
Corporation may, by action of its Board of Directors, provide indemnification
to employees and agents of the Corporation with the same scope and effect as
the indemnification of directors and officers provided for in this paragraph
(A).
(B) RECOVERY OF UNPAID INDEMNIFICATION. If a claim under paragraph (A) of
this By-Law is not paid in full by the Corporation within 30 days after a
written claim has been received by the
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Corporation, the claimant may at any time thereafter bring suit against the
Corporation to recover the unpaid amount of the claim and, if successful in
whole or in part, the claimant also shall be entitled to be paid the expense
of prosecuting such claim. It shall be a defense to any such action (other
than an action brought to enforce a claim for expenses incurred in defending
any proceeding in advance of its final disposition where the required
undertaking, if any is required, has been tendered to the Corporation) that
the claimant has not met the standards of conduct which make it permissible
under the General Corporation Law of the State of Delaware for the
Corporation to indemnify the claimant for the amount claimed, but the burden
of proving such defense shall be on the Corporation. Neither the failure of
the Corporation (including its Board of Directors, independent legal counsel
or stockholders) to have made a determination prior to the commencement of
such action that indemnification of the claimant is proper in the
circumstances because he or she has met the applicable standard of conduct
set forth in the General Corporation Law of the State of Delaware, nor an
actual determination by the Corporation (including the Board of Directors,
independent legal counsel or stockholders) that the claimant has not met such
applicable standard of conduct, shall be a defense to the action or create a
presumption that the claimant has not met the applicable standard of conduct.
(C) CHANGE IN CONTROL. Following any "change in control" of the
Corporation of the type required to be reported under Item 1 of Form 8-K
promulgated under the Exchange Act, any determination as to entitlement to
indemnification shall be made by independent legal counsel selected by the
claimant which independent legal counsel shall be retained by the Board of
Directors on behalf of the Corporation.
(D) NON-EXCLUSIVITY OF RIGHTS. The right to indemnification and the
payment of expenses incurred in defending a proceeding in advance of its
final disposition conferred in this By-Law shall not be exclusive of any
other right which any person may have or hereafter acquire under any statute,
provision of the Certificate of Incorporation, By-Laws, agreement, vote of
stockholders or disinterested directors or otherwise.
(E) INSURANCE. The Corporation may maintain insurance, at its expense,
to protect itself and any director, officer, employee or agent of the
Corporation or another corporation, partnership, joint venture, trust or
other enterprise against any expense, liability or loss, whether or not the
Corporation would have the power to indemnify such person against such
expense, liability or loss under the General Corporation Law of the State of
Delaware.
(F) CONTRACTUAL RIGHT. The right to indemnification conferred in this
By-Law shall be a contract right and shall include the right to be paid by
the Corporation the expenses incurred in defending any such proceeding in
advance of its final disposition; provided, however, that if the General
Corporation Law of the State of Delaware requires, the payment of such
expenses incurred by a director or officer in his or her capacity as a
director or officer (and not in any other capacity in which service was or is
rendered by such person while a director or officer, including, without
limitation, service to an employee benefit plan) in advance of the final
disposition of a proceeding, shall be made only upon delivery to the
Corporation of an undertaking by or on
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behalf of such director or officer, to repay all amounts so advanced if it
shall ultimately be determined that such director or officer is not entitled
to be indemnified under this By-Law or otherwise.
(G) AMENDMENT OR REPEAL. Any amendment or repeal of this Article VI shall
not adversely affect any right or protection existing hereunder in respect of
any act or omission occurring prior to such amendment or repeal.
ARTICLE VII
STOCK CERTIFICATES AND TRANSFERS
(A) CERTIFICATED SHARES AND TRANSFERS. The interest of each stockholder
of the Corporation shall be evidenced by certificates for shares of stock in
such form as the appropriate officers of the Corporation may from time to
time prescribe, unless it shall be determined by, or pursuant to, a
resolution adopted by the Board of Directors that the shares representing
such interest be uncertificated. The shares of the stock of the Corporation
shall be transferred on the books of the Corporation by the holder thereof in
person or by such person's attorney, upon surrender for cancellation of
certificates for the same number of shares, with an assignment and power of
transfer endorsed thereon or attached thereto, duly executed, with such proof
of the authenticity of the signature as the Corporation or its agents may
reasonably require.
(B) ACCEPTED SIGNATURES. The certificates of stock shall be signed,
countersigned and registered in such manner as the Board of Directors may by
resolution prescribe, which resolution may permit all or any of the
signatures on such certificates to be in facsimile. In case any officer,
transfer agent or registrar who has signed or whose facsimile signature has
been placed upon a certificate has ceased to be such officer, transfer agent
or registrar before such certificate is issued, it may be issued by the
Corporation with the same effect as if he were such officer, transfer agent
or registrar at the date of issue.
ARTICLE VIII
MISCELLANEOUS PROVISIONS
Section 8.1 Fiscal Year
The fiscal year of the Corporation shall be the calendar year, unless
otherwise determined by resolution of the Board of Directors.
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Section 8.2 Dividends
The Board of Directors may from time to time declare, and the
Corporation may pay, dividends on its outstanding shares in the manner and
upon the terms and conditions provided by law and its Certificate of
Incorporation.
Section 8.3 Seal
The corporate seal shall have inscribed thereon the name of the
Corporation and the words "Corporate Seal, Delaware". The seal may be used
by causing it, or a facsimile thereof, to be impressed or affixed or
reproduced or otherwise.
ARTICLE IX
AMENDMENTS
These By-Laws may be amended, added to, rescinded or repealed at any
meeting of the Board of Directors or of the stockholders, provided notice of
the proposed change was given in the notice of the meeting and, in the case
of a meeting of the Board of Directors, in a notice given no less than
twenty-four hours prior to the meeting; provided, however, that, in the case
of amendments by stockholders, notwithstanding any other provisions of these
By-Laws or any provision of law which might otherwise permit a lesser vote or
no vote, but in addition to any affirmative vote of the holders of any
particular class or series of the stock required by law, the Certificate of
Incorporation or these By-Laws, the affirmative vote of the holders of at
least 80 percent of the voting power of the then outstanding Voting Stock,
voting together as a single class, shall be required to alter, amend or
repeal any provision of these By-Laws.
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<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT.
PRELIMINARY COPY DATED SEPTEMBER 23, 1997
INFORMATION STATEMENT
<TABLE>
<S> <C>
HUSSMANN INTERNATIONAL, INC. MIDAS GROUP, INC.
COMMON STOCK COMMON STOCK
</TABLE>
This Information Statement is being furnished to shareholders of Whitman
Corporation ("Whitman") in connection with the distribution (the "Distribution")
by Whitman to its shareholders of all of the outstanding shares of common stock
of Hussmann International, Inc. ("Hussmann") and all of the outstanding shares
of common stock of Midas Group, Inc. ("Midas"). Hussmann and Midas are sometimes
individually referred to as a "Company" and collectively as the "Companies." The
shares of common stock of the Companies to be distributed in the Distribution
are sometimes referred to as the "Distributed Shares."
Each Company is a newly-formed, wholly-owned subsidiary of Whitman. Prior to
the Distribution, Whitman will contribute all of the outstanding shares of
common stock of Hussmann Corporation and Midas International Corporation to
Hussmann and Midas, respectively. Hussmann Corporation and Midas International
Corporation will be the principal operating subsidiaries of Hussmann and Midas,
respectively.
Whitman expects that the Distribution will be made in book-entry form on or
about [ , 1997] (the "Distribution Date"), to holders of record of common
stock, without par value, of Whitman ("Whitman Common Stock"), at the close of
business on [ , 1997] (the "Record Date"), on the basis of one share of common
stock of Hussmann ("Hussmann Common Stock") for every [ ] shares of Whitman
Common Stock held and one share of common stock of Midas ("Midas Common Stock")
for every [ ] shares of Whitman Common Stock held. Fractional interests in
Distributed Shares will also be distributed to Whitman shareholders in
book-entry form. However, cash will be paid in lieu of a fractional interest in
a Distributed Share to any holder who requests a certificate for Distributed
Shares or who would be entitled to less than one whole share of common stock of
either Company. NO CONSIDERATION WILL BE PAYABLE BY WHITMAN SHAREHOLDERS FOR THE
DISTRIBUTED SHARES, NOR WILL THEY BE REQUIRED TO SURRENDER OR EXCHANGE SHARES OF
WHITMAN COMMON STOCK OR TAKE ANY OTHER ACTION IN ORDER TO RECEIVE THE
DISTRIBUTED SHARES. Each Distributed Share will be accompanied by one Preferred
Stock Purchase Right ("Right") of the Company to which such Distributed Share
relates.
There is currently no public market for the common stock of either Company,
although it is expected that a "when-issued" trading market may develop on or
about the Record Date. The common stock of each Company has been approved for
listing on the New York Stock Exchange (the "NYSE"), subject to official notice
of issuance. Hussmann Common Stock will trade under the symbol "HSM" and Midas
Common Stock will trade under the symbol "MDS."
IN REVIEWING THIS INFORMATION STATEMENT, YOU SHOULD CAREFULLY CONSIDER THE
MATTERS DESCRIBED UNDER THE CAPTION "RISK FACTORS" COMMENCING ON PAGE 6.
---------------------
NO VOTE OF SHAREHOLDERS IS REQUIRED IN CONNECTION WITH
THE DISTRIBUTION. WE ARE NOT ASKING YOU FOR A PROXY
AND YOU ARE REQUESTED NOT TO SEND US A PROXY.
------------------------
THIS INFORMATION STATEMENT DOES NOT CONSTITUTE AN OFFER TO
SELL OR THE SOLICITATION OF AN OFFER TO BUY ANY SECURITIES.
The date of this Information Statement is [ ], 1997.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
Available Information.................................................................. 1
Summary................................................................................ 2
The Distribution..................................................................... 2
Hussmann............................................................................. 4
Midas................................................................................ 5
Risk Factors........................................................................... 6
No Recent Operating History as Independent Companies................................. 6
No Prior Market for the Common Stock of Either Company............................... 6
Limited Relevance of Historical Combined Financial Information....................... 6
Possibility of Substantial Sales of Common Stock of Either Company................... 7
Certain Antitakeover Effects......................................................... 7
Effects on Whitman Common Stock...................................................... 7
Certain Federal Income Tax Considerations............................................ 7
Introduction........................................................................... 8
The Distribution....................................................................... 8
Background and Reasons for the Distribution.......................................... 8
Manner of Effecting the Distribution................................................. 9
Whitman Dividend Reinvestment Plan................................................... 9
Listing and Trading of the Common Stock of the Companies............................. 10
Certain Federal Income Tax Consequences of the Distribution.......................... 10
Conditions; Termination.............................................................. 11
Opinions of Financial Advisor........................................................ 11
Principal Shareholders of Each Company................................................. 12
Arrangements Between Whitman and the Companies Relating to the Distribution............ 12
Distribution and Indemnity Agreements................................................ 12
Tax Sharing Agreements............................................................... 14
Description of Capital Stock of the Companies.......................................... 15
Authorized Capital Stock............................................................. 15
Common Stock......................................................................... 15
Preferred Stock...................................................................... 16
Rights Agreements.................................................................... 16
Certain Antitakeover Effects of Certain Charter and By-Law Provisions,
the Rights and Delaware Law........................................................... 18
Certificate of Incorporation and By-Laws............................................. 18
The Rights........................................................................... 22
Delaware Law......................................................................... 22
Liability and Indemnification of Directors and Officers................................ 22
Indemnification of Directors and Officers............................................ 23
Additional Information............................................................... 24
</TABLE>
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<TABLE>
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ANNEX A--INFORMATION ABOUT WHITMAN
Principal Business to Be Retained by Whitman........................................... A-1
Pre-Distribution Payments to Whitman................................................... A-1
Post-Distribution Dividend Policy...................................................... A-1
Whitman Corporation Pro Forma Condensed Consolidated Financial Information............. A-2
ANNEX B--INFORMATION ABOUT HUSSMANN
Business............................................................................... B-1
Overview............................................................................. B-1
Market Overview...................................................................... B-1
Strategy............................................................................. B-2
Products............................................................................. B-2
Product Development and Proprietary Information...................................... B-3
Manufacturing Operations............................................................. B-4
Sales and Marketing.................................................................. B-5
Competition.......................................................................... B-5
Customers............................................................................ B-5
Backlog and Seasonality.............................................................. B-6
Regulatory Compliance and Legal Proceedings.......................................... B-6
Employees............................................................................ B-6
Properties............................................................................. B-6
Financing.............................................................................. B-7
Post-Distribution Dividend Policy...................................................... B-7
Hussmann International Pro Forma Combined Financial Information........................ B-8
Hussmann International Summary of Operations........................................... B-13
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................................ B-14
Introduction......................................................................... B-14
Results of Operations--Six Months Ended June 30, 1997 Compared to Six Months Ended
June 30, 1996...................................................................... B-14
Results of Operations--1996 Compared to 1995......................................... B-15
Results of Operations--1995 Compared to 1994......................................... B-16
Liquidity, Financial Condition and Capital Resources................................. B-18
Future Change in Accounting Standards................................................ B-19
Management............................................................................. B-19
Directors............................................................................ B-19
Committees of the Board of Directors................................................. B-20
Compensation of Directors............................................................ B-21
Executive Officers................................................................... B-21
Ownership of Hussmann Common Stock by Management..................................... B-22
Compensation of Executive Officers................................................... B-23
1999 Annual Meeting of Shareholders.................................................... B-26
Hussmann International Historical Financial Information................................ B-27
</TABLE>
ii
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<TABLE>
<S> <C>
ANNEX C--INFORMATION ABOUT MIDAS
Business............................................................................... C-1
Overview............................................................................. C-1
Market Overview...................................................................... C-1
Strategy............................................................................. C-2
Franchises and the Midas System...................................................... C-2
Proprietary Information.............................................................. C-4
Manufacturing and Resale Operations.................................................. C-4
Competition.......................................................................... C-4
Customers............................................................................ C-5
Seasonality.......................................................................... C-5
Regulatory Compliance and Legal Proceedings.......................................... C-5
Employees............................................................................ C-5
Properties............................................................................. C-6
Financing.............................................................................. C-6
Post-Distribution Dividend Policy...................................................... C-6
Midas Group Pro Forma Combined Financial Information................................... C-7
Midas Group Summary of Operations...................................................... C-12
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................................ C-13
Introduction......................................................................... C-13
Fiscal Reporting Periods............................................................. C-13
Results of Operations--Six Months Ended June 1997 Compared to Six Months Ended June
1996............................................................................... C-14
Results of Operations--1996 Compared to 1995......................................... C-17
Results of Operations--1995 Compared to 1994......................................... C-20
Liquidity, Financial Condition and Capital Resources................................. C-22
Future Change in Accounting Standards................................................ C-24
Management............................................................................. C-24
Directors............................................................................ C-24
Committees of the Board of Directors................................................. C-24
Compensation of Directors............................................................ C-25
Executive Officers................................................................... C-25
Ownership of Midas Common Stock by Management........................................ C-26
Compensation of Executive Officers................................................... C-27
1999 Annual Meeting of Shareholders.................................................... C-30
Midas Group Historical Financial Information........................................... C-31
</TABLE>
iii
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AVAILABLE INFORMATION
Hussmann has filed with the Securities and Exchange Commission (the "SEC") a
Registration Statement on Form 10 (the "Hussmann Registration Statement") under
the Securities Exchange Act of 1934, as amended, and the rules promulgated
thereunder (the "Exchange Act"), with respect to the Hussmann Common Stock and
associated Rights described herein. Midas has filed with the SEC a Registration
Statement on Form 10 (the "Midas Registration Statement" and together with the
Hussmann Registration Statement, the "Registration Statements") under the
Exchange Act with respect to the Midas Common Stock and associated Rights
described herein. This Information Statement does not contain all of the
information set forth in the Registration Statements and the exhibits and
schedules thereto. For further information, reference is made hereby to the
Registration Statements, exhibits and schedules. Statements contained herein
concerning any document are not necessarily complete and, in each instance,
reference is made to the copy of such document filed as an exhibit to the
applicable Registration Statement. Each such statement is qualified in its
entirety by such reference. Copies of these documents may be inspected without
charge at the principal office of the SEC at 450 Fifth Street, N.W., Washington,
D.C. 20549, and at the Regional Offices of the SEC at 7 World Trade Center,
Suite 1300, New York, New York 10048 and Citicorp Center, Suite 1400, 500 West
Madison Street, Chicago, Illinois 60661. Copies of these documents may be
obtained from the SEC upon payment of the charges prescribed by the SEC and from
the SEC's Web site located at
http://www.sec.gov.
Following the Distribution, each Company will be required to comply with the
reporting requirements of the Exchange Act and will file annual, quarterly and
other reports with the SEC. Each Company will be subject to the proxy
solicitation requirements of the Exchange Act and, accordingly, will furnish
audited financial statements to its shareholders in connection with its annual
meetings of shareholders. Each Company will also file with the NYSE copies of
such reports, proxy statements and other information which then can be inspected
at the offices of the NYSE at 20 Broad Street, New York, New York 10005.
NO PERSON IS AUTHORIZED BY WHITMAN OR EITHER COMPANY TO GIVE ANY INFORMATION
OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS INFORMATION
STATEMENT, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED.
------------------------
AS USED HEREIN, UNLESS THE CONTEXT OTHERWISE CLEARLY REQUIRES: "HUSSMANN"
REFERS TO HUSSMANN INTERNATIONAL, INC. AND ITS CONSOLIDATED SUBSIDIARIES
IMMEDIATELY FOLLOWING THE DISTRIBUTION, INCLUDING, WITHOUT LIMITATION, HUSSMANN
CORPORATION, AND "MIDAS" REFERS TO MIDAS GROUP, INC. AND ITS CONSOLIDATED
SUBSIDIARIES IMMEDIATELY FOLLOWING THE DISTRIBUTION, INCLUDING, WITHOUT
LIMITATION, MIDAS INTERNATIONAL CORPORATION.
------------------------
THE FOLLOWING TRADEMARKS ARE MENTIONED IN THIS INFORMATION STATEMENT:
HUSSMANN, PROTOCOL AND IMPACT, WHICH ARE REGISTERED TRADEMARKS OF HUSSMANN
CORPORATION, AND MIDAS, HUTH AND IPC, WHICH ARE REGISTERED TRADEMARKS OF MIDAS
INTERNATIONAL CORPORATION. THE NAMES OF CERTAIN OTHER ENTITIES ARE MENTIONED IN
THIS INFORMATION STATEMENT AND ARE THE TRADEMARKS OR TRADE NAMES OF SUCH
ENTITIES.
1
<PAGE>
SUMMARY
THE FOLLOWING IS A SUMMARY OF CERTAIN INFORMATION CONTAINED ELSEWHERE IN
THIS INFORMATION STATEMENT. REFERENCE IS MADE TO, AND THIS SUMMARY IS QUALIFIED
IN ITS ENTIRETY BY, THE MORE DETAILED INFORMATION SET FORTH ELSEWHERE IN THIS
INFORMATION STATEMENT (INCLUDING THE ANNEXES HERETO).
THE DISTRIBUTION
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Distributing Company.............. Whitman Corporation, a Delaware corporation
Distributed Shares................ Based on the number of shares of Whitman Common Stock
outstanding on [ , 1997], Whitman expects to
distribute in the Distribution approximately [ ]
million shares of Hussmann Common Stock, together with the
associated Rights, and approximately [ ] million
shares of Midas Common Stock, together with the associated
Rights. See "The Distribution--Manner of Effecting the
Distribution."
Distribution Ratios............... One share of Hussmann Common Stock, together with the
associated Right, for every [ ] shares of Whitman
Common Stock held and one share of Midas Common Stock,
together with the associated Right, for every [ ]
shares of Whitman Common Stock held. See "The
Distribution--Manner of Effecting the Distribution."
Fractional Share Interests........ Fractional interests in Distributed Shares will be
distributed to Whitman shareholders in book-entry form.
However, cash will be paid in lieu of a fractional
interest in a Distributed Share to any holder who requests
a certificate for Distributed Shares or who would be
entitled to less than one whole share of common stock of
either Company. See "The Distribution--Manner of Effecting
the Distribution."
Federal Income Tax Consequences... Whitman has applied for a ruling from the Internal Revenue
Service to the effect that, for United States federal
income tax purposes, no gain or loss will be recognized by
holders of Whitman Common Stock upon receipt of
Distributed Shares in the Distribution, except with
respect to cash received in lieu of fractional interests
in Distributed Shares. See "The Distribution--Certain
Federal Income Tax Consequences of the Distribution."
Trading Market.................... There is currently no public market for the common stock
of either Company, although it is expected that a
"when-issued" trading market may develop on or about the
Record Date. The common stock of each Company has been
approved for listing on the NYSE, subject to official
notice of issuance. Hussmann Common Stock will trade under
the symbol "HSM" and Midas Common Stock will trade under
the symbol "MDS." See "The Distribution--Listing and
Trading of the Common Stock of the Companies."
Record Date....................... [ , 1997]
</TABLE>
2
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<TABLE>
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Distribution Date................. Commencing on or about [ , 1997], the Distribution
Date, the Distribution Agent will commence mailing
book-entry account statements reflecting ownership of the
Distributed Shares to holders of Whitman Common Stock on
the Record Date. No consideration will be payable by
Whitman shareholders for the Distributed Shares, nor will
they be required to surrender or exchange shares of
Whitman Common Stock or take any other action in order to
receive the Distributed Shares. See "The
Distribution--Manner of Effecting the Distribution."
Distribution Agent................ First Chicago Trust Company of New York
Conditions; Termination........... The Distribution is subject to certain conditions set
forth in the Distribution Agreements (as defined below).
Even if all such conditions are satisfied, the Board of
Directors of Whitman may, in its sole discretion,
terminate and abandon the Distribution at any time prior
to the Distribution Date. See "The
Distribution--Conditions; Termination."
Principal Business to Be Retained
by Whitman...................... After the Distribution, Whitman's principal business will
be the production and distribution of Pepsi-Cola and other
non-alcoholic beverage products by Pepsi-Cola General
Bottlers, Inc. See "Principal Business to Be Retained by
Whitman" in Annex A.
Post-Distribution Dividend
Policies........................ The payment and level of cash dividends by Whitman and
each of the Companies after the Distribution will be
subject to the discretion of their respective Boards of
Directors. Dividend decisions will be based upon a number
of factors, including the operating results and financial
requirements of Whitman and of each Company, as the case
may be. No determination has been made by the Board of
Directors of Whitman or the Board of Directors of either
Company with respect to the initial cash dividend that
would be paid commencing after the Distribution. However,
it is expected that the combined cash dividend that will
initially be paid by Whitman and the Companies will be at
an annual rate below the $0.46 per share annual dividend
rate currently paid by Whitman, and will be determined, in
part, by reference to dividend payment levels of entities
engaged in businesses comparable to the businesses in
which Whitman and each Company are engaged. See
"Post-Distribution Dividend Policy" in Annex A, Annex B
and Annex C.
</TABLE>
3
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HUSSMANN
<TABLE>
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Hussmann.......................... Hussmann manufactures, sells, installs and services
merchandising and refrigeration systems for the world's
commercial food industry. Products include refrigerated and
non-refrigerated display merchandisers, refrigeration
systems, beverage coolers, air handlers, condensers, coils
and walk-in storage coolers and freezers. Hussmann utilizes
advanced technology to create energy efficient products that
are designed to provide low life-cycle cost. Hussmann's wide
product line features high quality products intended to meet
the needs of a broad range of customers. Hussmann
Corporation was incorporated in Missouri in 1929. Hussmann
International, Inc. was incorporated in Delaware in August
1997 in connection with the Distribution. Hussmann's
principal executive offices are located at 12999 St. Charles
Rock Road, Bridgeton, Missouri 63044 and its telephone
number is (314) 291-2000. For further information concerning
Hussmann, see Annex B.
Pre-Distribution Payments to
Whitman......................... Prior to the Distribution Date, Hussmann will settle
intercompany debt owing to Whitman which at September 30,
1997 amounted to approximately $[ ] million and will pay a
cash dividend to Whitman amounting to approximately $[ ]
million. Such payments to Whitman will be financed from the
proceeds of new borrowings by Hussmann. See "Financing" in
Annex B.
Financial Information............. For Hussmann historical and pro forma financial information,
see Annex B. See "Hussmann International Summary of
Operations" in Annex B for Hussmann summary financial
information.
Management of Hussmann............ Immediately after the Distribution, Hussmann will continue
to be managed by substantially the same senior management as
currently manages Hussmann. See "Management" in Annex B.
Preferred Stock Purchase Rights... Certificates and book-entry credits issued in the
Distribution representing shares of Hussmann Common Stock
will also initially represent an equivalent number of the
associated Rights. See "Description of Capital Stock of the
Companies--Rights Agreements."
Certain Antitakeover Effects of
Certain Charter and By-Law
Provisions, the Rights and
Delaware Law.................... The Hussmann Certificate of Incorporation (the "Hussmann
Certificate of Incorporation") and By-Laws (the "Hussmann
By-Laws"), the Rights Agreement governing the Rights
associated with the Hussmann Common Stock and the General
Corporation Law of the State of Delaware ("Delaware Law")
contain provisions that could make more difficult a change
in control of Hussmann in a transaction not approved by the
Hussmann Board of Directors (the "Hussmann Board"). See
"Risk Factors--Certain Antitakeover Effects" and "Certain
Antitakeover Effects of Certain Charter and By-Law
Provisions, the Rights and Delaware Law."
Liability and Indemnification of
Directors and Officers.......... The Hussmann Certificate of Incorporation would eliminate
certain liabilities of Hussmann directors and officers in
connection with the performance of their duties and provide
for indemnification of Hussmann directors and officers to
the fullest extent permitted from time to time by Delaware
Law. See "Liability and Indemnification of Directors and
Officers."
Transfer Agent and Registrar...... First Chicago Trust Company of New York will be the Transfer
Agent and Registrar for Hussmann after the Distribution.
</TABLE>
4
<PAGE>
MIDAS
<TABLE>
<S> <C>
Midas............................. Midas provides retail automotive services through franchised
and Midas- operated stores in the U.S., Canada, France and
other locations in Europe, Australia, Southeast Asia, the
Middle East, Latin America and the Caribbean. Midas stores
offer exhaust, brake, suspension, air conditioning and
maintenance services. Midas also manufactures and sells
exhaust and other parts for the automotive aftermarket under
the Midas and IPC brand names. Domestic manufacturing plants
produce approximately 2,000 different types of mufflers and
3,200 types of exhaust and tail pipes to service
approximately 1,200 makes and models of automobiles. Midas
International Corporation was incorporated in Delaware in
1959. Midas Group, Inc. was incorporated in Delaware in
August 1997 in connection with the Distribution. Midas'
principal executive offices are located at 225 North
Michigan Avenue, Chicago, Illinois 60601 and its telephone
number is (312) 565-7500. For further information concerning
Midas, see Annex C.
Pre-Distribution Payments to
Whitman......................... Prior to the Distribution Date, Midas will settle
intercompany debt owing to Whitman which at September 30,
1997 amounted to approximately $[ ] million and will pay a
cash dividend to Whitman amounting to approximately $[ ]
million. Such payments to Whitman will be financed from the
proceeds of new borrowings by Midas. See "Financing" in
Annex C.
Financial Information............. For Midas historical and pro forma financial information,
see Annex C. See "Midas Group Summary of Operations" in
Annex C for Midas summary financial information.
Management of Midas............... Immediately after the Distribution, Midas will continue to
be managed by substantially the same senior management as
currently manages Midas. See "Management" in Annex C.
Preferred Stock Purchase Rights... Certificates and book-entry credits issued in the
Distribution representing shares of Midas Common Stock will
also initially represent an equivalent number of the
associated Rights. See "Description of Capital Stock of the
Companies--Rights Agreements."
Certain Antitakeover Effects of
Certain Charter and By-Law
Provisions, the Rights and
Delaware Law.................... The Midas Certificate of Incorporation (the "Midas
Certificate of Incorporation") and By-Laws (the "Midas
By-Laws"), the Rights Agreement governing the Rights
associated with the Midas Common Stock and the Delaware Law
contain provisions that could make more difficult a change
in control of Midas in a transaction not approved by the
Midas Board of Directors (the "Midas Board"). See "Risk
Factors-- Certain Antitakeover Effects" and "Certain
Antitakeover Effects of Certain Charter and By-Law
Provisions, the Rights and Delaware Law."
Liability and Indemnification of
Directors and Officers.......... The Midas Certificate of Incorporation would eliminate
certain liabilities of Midas directors and officers in
connection with the performance of their duties and provide
for indemnification of Midas directors and officers to the
fullest extent permitted from time to time by Delaware Law.
See "Liability and Indemnification of Directors and
Officers."
Transfer Agent and Registrar...... First Chicago Trust Company of New York will be the Transfer
Agent and Registrar for Midas after the Distribution.
</TABLE>
5
<PAGE>
RISK FACTORS
Shareholders should carefully consider and evaluate all of the information
set forth in this Information Statement, including the risk factors described
below. Each Company also cautions readers that, in addition to the historical
information included herein, this Information Statement includes certain
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995 that are based on its management's beliefs as well
as on assumptions made by and information currently available to its management.
When used in this Information Statement, the words "expect," "anticipate,"
"intend," "plan," "believe," "seek," "estimate," and similar expressions are
intended to identify such forward-looking statements. However, this Information
Statement also contains other forward-looking statements. Such forward-looking
statements involve known and unknown risks, including, but not limited to,
economic and market conditions, exchange rates, cost and availability of raw
materials, competitive activities or other business conditions. Although each
Company believes that its expectations with respect to the forward-looking
statements are based upon reasonable assumptions within the bounds of its
knowledge of its business and operations, there can be no assurance that actual
results, performance or achievements of either Company will not differ
materially from any future results, performance or achievements expressed or
implied by such forward-looking statements. Readers are cautioned not to put
undue reliance on forward-looking statements.
NO RECENT OPERATING HISTORY AS INDEPENDENT COMPANIES
Neither Company has any recent operating history as an independent public
company. While each Company has been profitable as part of Whitman, there is no
assurance that as an independent company profits will continue at the same
level. Each Company has historically relied on Whitman for various financial and
administrative services. After the Distribution, each Company will maintain its
own lines of credit and financial and administrative functions. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" in Annex B and Annex C.
NO PRIOR MARKET FOR THE COMMON STOCK OF EITHER COMPANY
There is currently no public market for the common stock of either Company.
Although the common stock of each Company has been approved for listing on the
NYSE, subject to official notice of issuance, there can be no assurance as to
the prices at which the common stock of either Company will trade. Until an
orderly trading market develops, the prices at which trading in such shares
occurs may fluctuate significantly. There can be no assurance that an active
trading market in the common stock of either Company will develop or be
sustained in the future.
The prices at which the common stock of each Company trades will be
determined by the marketplace and may be influenced by many factors, including,
among others, the performance and prospects of each Company, the depth and
liquidity of the market for such common stock, investor perception of each
Company and of their respective industries, the dividend policy of each Company,
general financial and other market conditions, and domestic and international
economic conditions. In addition, financial markets, including the NYSE, have
experienced extreme price and volume fluctuations that have affected the market
price of the shares of many companies and such fluctuations could be viewed as
unrelated or disproportionate to the operating performance of such companies.
Such fluctuations have also affected the share prices of many newly public
issuers. Such volatility and other factors may materially adversely affect the
market price of the common stock of either or both Companies.
See "The Distribution--Listing and Trading of the Common Stock of the
Companies."
LIMITED RELEVANCE OF HISTORICAL COMBINED FINANCIAL INFORMATION
The historical combined financial information included in Annex B and Annex
C may not necessarily reflect the results of operations, financial position and
cash flows of either Company in the future or the results of operations,
financial position and cash flows had either Company operated as an independent
company during the periods presented. The combined financial information
included herein does not reflect any changes that may occur in the funding and
operations of either Company as a result of the Distribution. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in
Annex B and Annex C.
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<PAGE>
POSSIBILITY OF SUBSTANTIAL SALES OF COMMON STOCK OF EITHER COMPANY
The Distribution will involve the distribution to Whitman shareholders of an
aggregate of approximately [ ] million shares of Hussmann Common Stock and
approximately [ ] million shares of Midas Common Stock, representing all of the
outstanding shares of common stock of each Company. It is expected that none of
the Distributed Shares will constitute "restricted securities" under the
Securities Act of 1933, as amended (the "Securities Act"), and, accordingly, the
Distributed Shares will be freely transferable, except for shares received by
persons who may be deemed to be "affiliates" of a Company under the Securities
Act. Neither Whitman nor either Company is able to predict whether substantial
amounts of common stock of the Companies will be sold in the open market
following the Distribution. Any sales of substantial amounts of the common stock
of either Company in the public market, or the perception that such sales might
occur, whether as a result of the Distribution or otherwise, could materially
adversely affect the market price of the common stock of either Company. See
"The Distribution--Listing and Trading of the Common Stock of the Companies."
CERTAIN ANTITAKEOVER EFFECTS
The Certificate of Incorporation and By-Laws of each Company, their
respective Rights Agreements and Delaware Law contain provisions that could make
more difficult a change in control of a Company in a transaction not approved by
its Board of Directors. Certain provisions of the Certificate of Incorporation
and the By-Laws of each Company, among other things: (i) divide the Board of
Directors into three classes, with each class serving for staggered three-year
terms; (ii) provide that a director may be removed only for cause and only upon
the affirmative vote of holders of at least 80% of the voting power of the then
outstanding shares of stock entitled to vote generally in the election of
directors ("Voting Stock"), voting together as a single class; (iii) provide
that only the Board of Directors may call special meetings of the shareholders;
(iv) prohibit shareholder action without a meeting; (v) provide that
shareholders must comply with certain advance notice procedures in order to
nominate candidates for election to the Board of Directors or bring other
business before an annual meeting of shareholders; and (vi) provide that
shareholders may amend the By-Laws or any of the foregoing provisions of the
Certificate of Incorporation only by the affirmative vote of the holders of at
least 80% of the voting power of the then outstanding shares of Voting Stock,
voting together as a single class. The Rights would cause substantial dilution
to a person or group that attempts to acquire a Company on terms not approved in
advance by such Company's Board of Directors. Delaware Law generally imposes
certain restrictions on mergers and other business combinations between a
Company and any holder of 15% or more of such Company's outstanding Voting Stock
if the holder's acquisition of such Voting Stock was not approved in advance by
such Company's Board of Directors. In addition, the stock incentive plan of each
Company is expected to contain provisions providing for the acceleration or
modification of benefits upon a change in control of such Company. Also, each
Company will enter into severance agreements, or similar arrangements, to
provide specified employees with certain benefits in the event of a change in
control. See "Certain Antitakeover Effects of Certain Charter and By-Law
Provisions, the Rights and Delaware Law" and "Management--Compensation of
Executive Officers--Termination Benefits" in Annex B and Annex C.
EFFECTS ON WHITMAN COMMON STOCK
After the Distribution, the Whitman Common Stock will continue to be listed
and traded on the NYSE, the Chicago Stock Exchange and the Pacific Stock
Exchange. As a result of the Distribution, the trading prices of Whitman Common
Stock will be lower than the trading prices of Whitman Common Stock immediately
prior to the Distribution. The combined trading prices of Whitman Common Stock,
Hussmann Common Stock and Midas Common Stock after the Distribution may be less
than, equal to or greater than the trading prices of Whitman Common Stock prior
to the Distribution. In addition, until the market has fully analyzed the
operations of Whitman without the businesses of the Companies, the prices at
which the Whitman Common Stock trades may fluctuate significantly.
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
Whitman has applied for a ruling (the "Tax Ruling") from the Internal
Revenue Service (the "IRS") to the effect that, among other things, for United
States federal income tax purposes, the Distribution will qualify as a tax-free
distribution under Section 355 of the Internal Revenue Code of 1986, as amended
(the "Code"). See "The
7
<PAGE>
Distribution--Certain Federal Income Tax Consequences of the Distribution." The
Tax Ruling will be based on certain factual representations and assumptions.
Neither Whitman nor either Company is aware of any facts or circumstances which
should cause such representations and assumptions to be untrue. The Tax Sharing
Agreements (as defined below) provide that neither Whitman nor either Company is
to take any action inconsistent with, nor fail to take any action required by,
the request for the Tax Ruling or the Tax Ruling unless required to do so by law
or the other party has given its prior written consent or, in certain
circumstances, a supplemental ruling permitting such action is obtained. Whitman
and each Company have agreed to indemnify each other with respect to any tax
liability resulting from their respective failures to comply with such
provisions. See "Arrangements Between Whitman and the Companies Relating to the
Distribution--Tax Sharing Agreements."
INTRODUCTION
On June 23, 1997, Whitman announced that its Board of Directors (the
"Whitman Board") had authorized management to proceed with a plan to spin-off
the Companies from Whitman. The spin-off will be effected through the
Distribution. It is expected that the Distribution Date will be [ ,
1997].
The principal executive offices of Hussmann are located at 12999 St. Charles
Rock Road, Bridgeton, Missouri 63044 and its telephone number is (314) 291-2000.
The principal executive offices of Midas are located at 225 North Michigan
Avenue, Chicago, Illinois 60601 and its telephone number is (312) 565-7500.
Whitman shareholders with inquiries relating to the Distribution should
contact First Chicago Trust Company of New York (the "Distribution Agent"),
telephone number (800) 446-2617 or Whitman Corporation, 3501 Algonquin Road,
Rolling Meadows, Illinois 60008, telephone number (847) 818-5000. First Chicago
Trust Company of New York will also be the transfer agent and registrar for the
Hussmann Common Stock and the Midas Common Stock following the Distribution.
THE DISTRIBUTION
BACKGROUND AND REASONS FOR THE DISTRIBUTION
Whitman was originally incorporated in 1962 under the name Illinois Central
Industries, Inc. for the purpose of becoming a holding company for the Illinois
Central Railroad. The corporate name was changed to IC Industries, Inc. in 1975,
and the present name of Whitman Corporation was adopted in 1988.
Between 1968 and 1986, Whitman effected a series of acquisitions aimed at
diversifying beyond the railroad business. Pepsi-Cola General Bottlers, Inc.
("Pepsi General") was acquired in 1970, Midas International Corporation was
acquired in 1972 and Hussmann Corporation was acquired in 1978 as part of
Whitman's acquisition of Pet Incorporated. In 1987 Whitman began a program of
strategic restructuring designed to transform itself into an enterprise more
focused on consumer goods and services. In 1988 Whitman sold its Pneumo Abex
Corporation aerospace and defense subsidiary, and in January 1989 Whitman spun
off its railroad operations to shareholders. Pet Incorporated was spun off in
April 1991, with Whitman retaining Pepsi General, Hussmann Corporation and Midas
International Corporation as its operating companies.
Over the past several years the Whitman Board has from time to time
considered splitting up Whitman as one of a number of strategic options.
However, despite the absence of any meaningful synergies among Whitman's three
operating companies, there did not appear to be any compelling reason to do so.
In recent periods, however, the confluence of several factors has made it
increasingly clear to Whitman management that a division of Whitman into three
separate and independent publicly-traded corporations is in the best interests
of Whitman and its shareholders. The Distribution is expected to achieve a
variety of important benefits for Whitman and each Company. Hussmann has been
adversely affected by its affiliation with Pepsi General through their common
ownership by Whitman. In Mexico and Latin America, the Coca-Cola Company has
ceased buying beverage coolers from Hussmann due to such affiliation, a
relationship which previously produced in excess of $20 million in annual sales.
Hussmann is optimistic that such business would be regained if it were an
independent company. Additionally, the automotive aftermarket service and repair
industry has undergone, and continues to undergo, significant changes in
products, technology, service formats and consumer needs. It is believed that,
with its own Board of Directors and separate management, Midas would be able to
bring greater
8
<PAGE>
focus and entrepreneurship to its business, without the diversions that are
characteristic of a conglomerate, in order to better respond to the changing
competitive environment.
As separate companies, Hussmann and Midas will be able to benefit from and
maximize the motivational impact of substantial stock-based compensation and
incentive programs linked to their respective businesses. This will also enhance
the ability of each Company to recruit senior management personnel with the
prospect of running a public company and of being rewarded with highly
responsive equity-based incentives.
Whitman and the Companies each expect to be able to access the capital
markets freely in order to finance their respective operations and expansion,
and each will enjoy the prestige and visibility of being a public company with
its shares listed on the NYSE. Additionally, significant ongoing savings are
expected to be achieved by the elimination of a layer of management at the
holding company level.
Whitman believes that, in addition to the benefits described above, the
Distribution will allow investors to better evaluate the merits of the separate
businesses of Whitman, Hussmann and Midas. This will enhance the likelihood that
each will achieve more appropriate market recognition of its performance.
MANNER OF EFFECTING THE DISTRIBUTION
On or prior to the Distribution Date, certificates representing the
Distributed Shares will be delivered to the Distribution Agent. Commencing on or
about the Distribution Date, the Distribution Agent will begin mailing
book-entry account statements reflecting ownership of the Distributed Shares to
holders of Whitman Common Stock as of the close of business on the Record Date
on the basis of one share of Hussmann Common Stock for every [ ] shares of
Whitman Common Stock held on the Record Date and one share of Midas Common Stock
for every [ ] shares of Whitman Common Stock held on the Record Date. Each
Distributed Share will be fully paid, nonassessable and free of preemptive
rights. See "Description of Capital Stock of the Companies."
Fractional interests in Distributed Shares will also be distributed to
Whitman shareholders in book-entry form. However, no certificates or scrip
representing a fractional interest in a Distributed Share will be distributed to
any shareholder who requests a certificate for Distributed Shares or who would
be entitled to less than one whole share of Hussmann Common Stock or Midas
Common Stock as part of the Distribution. In lieu of receiving a fractional
interest in a share of Hussmann Common Stock or Midas Common Stock, such Whitman
shareholder will receive cash for such fractional interest. The Distribution
Agent will, as soon as practicable after the Distribution Date, aggregate and
sell all such fractional interests at then prevailing trading prices and
distribute the net proceeds to shareholders entitled thereto. See "--Certain
Federal Income Tax Consequences of the Distribution."
The Distribution will not affect the number of, or the rights attaching to,
outstanding shares of Whitman Common Stock. Certificates representing
outstanding shares of Whitman Common Stock will continue to represent rights to
purchase shares of Whitman's Junior Participating Second Preferred Stock (Series
1) pursuant to the Rights Agreement dated as of January 20, 1989, between
Whitman and First Chicago Trust Company of New York, as Rights Agent. No
adjustment will be made to the purchase price payable upon exercise of such
rights or the number of shares of such Whitman Preferred Stock covered by each
right by virtue of the Distribution.
NO CONSIDERATION WILL BE PAYABLE BY WHITMAN SHAREHOLDERS FOR THE DISTRIBUTED
SHARES, NOR WILL THEY BE REQUIRED TO SURRENDER OR EXCHANGE SHARES OF WHITMAN
COMMON STOCK OR TAKE ANY OTHER ACTION IN ORDER TO RECEIVE THE DISTRIBUTED
SHARES.
WHITMAN DIVIDEND REINVESTMENT PLAN
Whitman has a dividend reinvestment and direct stock purchase plan (the
"Dividend Reinvestment Plan") pursuant to which shareholders may invest in
Whitman Common Stock by reinvesting quarterly cash dividends or by direct cash
investments. Shareholder accounts in the Dividend Reinvestment Plan also include
fractional interests in Whitman Common Stock. Hussmann Common Stock and Midas
Common Stock will be distributed to participants in the Dividend Reinvestment
Plan on the same basis as shareholders of record. Fractional interests in
Distributed Shares will be issued in respect of fractional interests in Whitman
Common Stock held under the Dividend Reinvestment Plan.
9
<PAGE>
On November [ ], 1997, the Whitman Board declared a regular quarterly cash
dividend in the amount of [ ] per share of Whitman Common Stock that will be
paid on January 1, 1998 to holders of record of Whitman Common Stock at the
close of business on December 15, 1997. The full amount of dividend payments
payable to participants in the Dividend Reinvestment Plan will be reinvested in
Whitman Common Stock pursuant to the Dividend Reinvestment Plan.
LISTING AND TRADING OF THE COMMON STOCK OF THE COMPANIES
There is currently no public market for the common stock of either Company,
although it is expected that a "when-issued" trading market may develop on or
about the Record Date. The common stock of each Company has been approved for
listing on the NYSE, subject to official notice of issuance. Hussmann Common
Stock will trade under the symbol "HSM" and Midas Common Stock will trade under
the symbol "MDS."
As of November 1, 1997, Whitman had [ ] shareholders of record. Except for
those shareholders who would be entitled to receive less than one share of
Hussmann Common Stock or Midas Common Stock, and assuming that each such
shareholder is a shareholder of record on the Record Date, each such shareholder
will become a shareholder of record of both Hussmann and Midas. For certain
information regarding options and other equity-based awards involving Hussmann
Common Stock or Midas Common Stock which may become outstanding after the
Distribution, see "Management--Compensation of Executive Officers" in Annex B
and Annex C.
It is expected that none of the Distributed Shares will constitute
"restricted securities" under the Securities Act and, accordingly, the
Distributed Shares will be freely transferable, except for shares received by
persons who may be deemed to be "affiliates" of a Company under the Securities
Act. Persons who may be deemed to be affiliates of a Company generally include
individuals or entities that control, are controlled by, or are under common
control with, such Company and may include certain officers and directors of
such Company as well as principal shareholders of such Company, if any. Persons
who are affiliates of a Company will be permitted to sell their shares of common
stock of such Company only pursuant to an effective registration statement under
the Securities Act or an exemption from the registration requirements of the
Securities Act, such as the exemption afforded by Rule 144 under the Securities
Act (relating to public sales).
See "Risk Factors--No Prior Market for the Common Stock of Either Company"
and "--Possibility of Substantial Sales of Common Stock of Either Company."
CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE DISTRIBUTION
The Distribution is intended to qualify as a tax-free distribution under
Section 355 of the Code and is conditioned upon receipt of the Tax Ruling to
that effect from the IRS. Whitman has applied to the IRS for the Tax Ruling in
which it has requested rulings generally to the effect that, among other things:
(1) No gain or loss will be recognized by (and no amount will otherwise
be included in the income of) Whitman shareholders on their receipt of
Distributed Shares.
(2) The holding period of the Distributed Shares received by Whitman
shareholders will include the holding period of the Whitman Common Stock
with respect to which the Distribution will be made, provided that such
Whitman Common Stock is held as a capital asset on the Distribution Date.
(3) The basis of the Whitman Common Stock and the Distributed Shares in
the hands of Whitman shareholders after the Distribution will be the same as
the aggregate basis of the Whitman Common Stock in the hands of Whitman
shareholders immediately before the Distribution. Such basis will be
allocated among the Whitman Common Stock and the Distributed Shares in
proportion to the fair market value of each on the Distribution Date.
Notwithstanding the requested rulings, the payment of cash in lieu of
fractional interests in the Distributed Shares will be treated for federal
income tax purposes as if such fractional interests were issued as part of the
Distribution and then redeemed by the Companies for the amount of the cash
payments. A Whitman shareholder will recognize gain or loss on such transaction
equal to the difference between the basis of the fractional interest (determined
in accordance with paragraph (3) above) and the amount of cash received.
10
<PAGE>
Treasury regulations under Section 355 of the Code require that each Whitman
shareholder who receives Distributed Shares pursuant to the Distribution attach
a statement to such shareholder's federal income tax return for the taxable year
in which such stock is received, which statement shows the applicability of
Section 355 of the Code to the Distribution. Whitman will provide its
shareholders with the information necessary to comply with this requirement.
The Tax Ruling will be based on certain factual representations and
assumptions by Whitman and each Company. Neither Whitman nor either Company is
aware of any present facts or circumstances which should cause such
representations and assumptions to be untrue. However, certain extraordinary
purchases of Whitman Common Stock, Hussmann Common Stock or Midas Common Stock,
events which are not within the control of Whitman or either Company, could
cause the Distribution not to qualify as tax-free. The Distribution Agreements
provide that, notwithstanding anything to the contrary therein or in the Tax
Sharing Agreements, if as a result of the acquisition of all or a portion of the
capital stock or assets of either Company the Distribution fails to qualify as a
tax-free distribution under Section 355 of the Code, then Hussmann or Midas, as
the case may be, will be liable for any and all increases in Tax (as defined in
the Tax Sharing Agreements) attributable thereto. See "Arrangements Between
Whitman and the Companies Relating to the Distribution--Tax Sharing Agreements."
Should the Distribution ultimately be determined not to qualify under
Section 355 of the Code, Whitman shareholders would be required to recognize
ordinary dividend income upon their receipt of Distributed Shares (including
fractional shares) in an amount equal to the fair market value of such
Distributed Shares on the Distribution Date. Whitman shareholders would have a
tax basis for such Distributed Shares equal to such fair market value, and their
tax basis for their Whitman Common Stock generally would not be affected.
Whitman would recognize a gain upon the Distribution equal to the excess, if
any, of the fair market value of the Distributed Shares over Whitman's tax basis
in the Distributed Shares.
THE FOREGOING SUMMARY OF THE FEDERAL INCOME TAX CONSEQUENCES OF THE
DISTRIBUTION IS FOR GENERAL INFORMATION ONLY AND MAY NOT APPLY TO WHITMAN
SHAREHOLDERS WHO ACQUIRED THEIR SHARES IN CONNECTION WITH THE GRANT OF
RESTRICTED STOCK OR OTHERWISE AS COMPENSATION, WHO ARE NOT CITIZENS OR RESIDENTS
OF THE UNITED STATES, OR WHO ARE OTHERWISE SUBJECT TO SPECIAL TREATMENT UNDER
THE CODE. ALL WHITMAN SHAREHOLDERS SHOULD CONSULT THEIR OWN TAX ADVISORS AS TO
THE PARTICULAR TAX CONSEQUENCES OF THE DISTRIBUTION TO THEM, INCLUDING THE
APPLICATION OF LOCAL, STATE AND FOREIGN TAX LAWS.
CONDITIONS; TERMINATION
The Distribution is subject to certain conditions set forth in the
Distribution Agreements, including receipt of the Tax Ruling and the opinions of
Whitman's financial advisor described below. Even if all such conditions are
satisfied, the Whitman Board may, in its sole discretion, terminate and abandon
the Distribution at any time prior to the Distribution Date.
OPINIONS OF FINANCIAL ADVISOR
Whitman has engaged Credit Suisse First Boston Corporation ("Credit Suisse
First Boston") as its financial advisor in connection with the Distribution.
Whitman has requested Credit Suisse First Boston to render opinions to the
Whitman Board that (i) the Distribution would not have a material adverse effect
on the financial viability of Whitman, Hussmann or Midas during the period
immediately following the Distribution through the end of calendar year 1999 and
(ii) the Distribution is fair to Whitman's shareholders from a financial point
of view. For purposes of the opinions referred to in clause (i) above, the term
"financial viability" will mean and refer exclusively to the ability of Whitman,
Hussmann and Midas to finance their respective currently anticipated operating
and capital requirements (as projected in the financial forecasts prepared by
the management of Whitman and delivered to Credit Suisse First Boston prior to
the delivery of its opinions) following the Distribution through the end of
calendar year 1999.
It is a condition to the Distribution that the Whitman Board receive the
foregoing opinions. It is anticipated that Credit Suisse First Boston will
render such opinions immediately prior to the time that the Whitman Board takes
final action to effect the Distribution.
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<PAGE>
Credit Suisse First Boston will receive customary fees, including
reimbursement of certain out-of-pocket expenses, for its services as financial
advisor related to the Distribution, a portion of which is contingent upon the
consummation of the Distribution. Whitman has agreed to indemnify Credit Suisse
First Boston against certain liabilities and expenses in connection with its
services as financial advisor.
Credit Suisse First Boston and its affiliates have acted, and may in the
future act, as an underwriter for, and have participated as members of
underwriting syndicates with respect to, offerings of Whitman securities. Credit
Suisse First Boston has received fees from Whitman in the past for these
services. Additionally, Whitman currently has a $40 million term loan
outstanding from Credit Suisse, which is an affiliate of Credit Suisse First
Boston.
PRINCIPAL SHAREHOLDERS OF EACH COMPANY
Whitman currently owns all of the outstanding shares of common stock of each
Company. Whitman will not own any shares of common stock of either Company
immediately following the Distribution. As of the date hereof and based solely
on a review of statements on Schedule 13G filed by Cooke & Bieler, Inc. and FMR
Corp., respectively, with the SEC reflecting their ownership of Whitman Common
Stock as of December 31, 1996, no other person is known by Whitman to be the
beneficial owner of more than 5% of the Whitman Common Stock. Assuming that
Cooke & Bieler, Inc. and FMR Corp. hold the shares of Whitman Common Stock set
forth below on the Record Date, the percentages set forth below also represent
their respective percentage ownership of each Company immediately after the
Distribution.
<TABLE>
<CAPTION>
NUMBER OF SHARES
AND NATURE OF
BENEFICIAL PERCENT
NAME AND ADDRESS OWNERSHIP OF CLASS
- ------------------------------------------------------------------ ------------------- -----------
<S> <C> <C>
Cooke & Bieler, Inc............................................... 5,481,800(a) 5.30%
1700 Market, Suite 3222
Philadelphia, Pennsylvania 19103
FMR Corp.......................................................... 5,577,696(b) 5.38%
82 Devonshire Street
Boston, Massachusetts 02109
</TABLE>
- ------------------------
(a) Cooke & Bieler, Inc. reported sole voting power as to 4,260,900 shares,
sole dispositive power as to 5,400,500 shares, and no voting power or
dispositive power as to the remainder of the shares held by it.
(b) Through its subsidiaries, Fidelity Management & Research Company and
Fidelity Management Trust Company, FMR Corp. reported sole voting power as
to 248,594 shares, no voting power as to the remainder of such shares, and
sole dispositive power as to all 5,577,696 shares held by it.
ARRANGEMENTS BETWEEN WHITMAN AND THE COMPANIES RELATING TO THE DISTRIBUTION
For the purpose of effecting the Distribution and governing certain of the
relationships between Whitman and each Company after the Distribution, Whitman
and the Companies have entered into the various agreements described below.
THE AGREEMENTS SUMMARIZED BELOW HAVE BEEN FILED AS EXHIBITS TO THE
REGISTRATION STATEMENTS, AND THE FOLLOWING SUMMARIES ARE QUALIFIED IN THEIR
ENTIRETY BY REFERENCE TO THE AGREEMENTS AS FILED. SEE "AVAILABLE INFORMATION."
DISTRIBUTION AND INDEMNITY AGREEMENTS
Whitman has entered into a separate Distribution and Indemnity Agreement
(each, a "Distribution Agreement") with each Company providing for, among other
things, the principal corporate transactions required to effect the Distribution
and certain other agreements governing the relationship between Whitman and each
Company with respect to or as a result of the Distribution.
The Distribution Agreements provide that (i) Whitman will indemnify each
Company against any liabilities arising out of the businesses conducted or to be
conducted by Whitman or any subsidiary of Whitman and any
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<PAGE>
previously-owned division, subsidiary or affiliate of Whitman (other than such
Company); (ii) Hussmann will indemnify Whitman against any liabilities arising
out of businesses conducted or to be conducted by Hussmann or any subsidiary of
Hussmann and any previously-owned division, subsidiary or affiliate of Hussmann;
and (iii) Midas will indemnify Whitman against any liabilities arising out of
businesses conducted or to be conducted by Midas or any subsidiary of Midas and
any previously-owned division, subsidiary or affiliate of Midas; PROVIDED,
HOWEVER, that neither Whitman nor either Company will have any liability to each
other for taxes except as provided in the Tax Sharing Agreements. The
indemnities will be limited to the extent that the indemnitee receives insurance
proceeds or a tax benefit with respect to the claimed loss.
The Distribution Agreements set forth a series of steps required in order to
separate from Whitman, prior to the Distribution, any assets that are related to
the respective businesses of the Companies. Such steps involve, among other
things, the transfer to Hussmann and Midas, respectively, of Hussmann
Corporation and Midas International Corporation and certain foreign businesses
conducted by Hussmann Corporation and Midas International Corporation which are
held by a Netherlands company owned by Whitman.
The Distribution Agreements provide that, except as otherwise set forth
therein or in the Tax Sharing Agreements, all costs and expenses arising on or
prior to the Distribution Date in connection with the Distribution will be paid
by Whitman, other than (i) costs related to each Company's new financing
arrangements, to the listing of the common stock of each Company on the NYSE and
to printing new stock certificates, (ii) fees of rating agencies for rating each
Company's securities, (iii) two-thirds of the legal fees for the Distribution,
(iv) the accounting and audit fees related to the Distribution, (v) fees of
outside consultants retained by the Companies and (vi) two-thirds of the cost of
printing and distributing the Registration Statements and this Information
Statement.
Each Distribution Agreement also provides that each party thereto will
indemnify the other party in the event of certain liabilities arising under the
Exchange Act.
In connection with certain employee compensation and benefit matters, each
Distribution Agreement provides that, with certain exceptions, each Company and
its subsidiaries will be responsible for all liabilities to, or under benefit
plans or programs with respect to, any current, former and future employee (and
their dependents and beneficiaries) of such Company or any of its subsidiaries
prior to, on and after the Distribution ("Separated Employees"). Further, except
as specifically provided therein, the Distribution Agreements will not affect
any employee benefit plan or compensation arrangement (i) of Whitman in respect
of employees of Whitman and its subsidiaries who are not Separated Employees or
(ii) of either Company or their respective subsidiaries which were maintained by
either Company or their respective subsidiaries prior to the Distribution Date.
The Distribution Agreements generally provide that options to purchase
Whitman Common Stock that are held by Separated Employees will, unless exercised
prior to the Distribution Date, be exchanged for new options of equivalent value
granted under the Hussmann Stock Incentive Plan or the Midas Stock Incentive
Plan, as applicable. Restricted shares of Whitman Common Stock held by Separated
Employees will, similarly, be exchanged for restricted shares of equivalent
value of Hussmann Common Stock or Midas Common Stock, as the case may be.
The Distribution Agreements further provide that each Company will
establish, as of the Distribution Date, a funded welfare benefit plan and trust
identical to the Whitman Corporation Group Benefits Plan (the "Whitman Benefit
Plan") and the Whitman Corporation Welfare Benefit Trust (the "Whitman Benefit
Trust") on behalf of Separated Employees of such Company and its subsidiaries,
and will cause such plan and trust to assume all liabilities under the Whitman
Benefit Plan and Whitman Benefit Trust relating to such Separated Employees.
Whitman will cause the Whitman Benefit Trust, which currently funds incurred but
not reported liabilities of the Whitman Benefit Plan, to allocate assets to the
welfare benefit plans and trusts of Hussmann and Midas attributable to such
liabilities for Separated Employees of each Company and its subsidiaries not
otherwise paid pursuant to the Whitman Benefit Plan.
In addition, the Companies will establish, as of the Distribution Date, four
defined contribution plans: the Hussmann Retirement Savings Plan, the Hussmann
Master Retirement Savings Plan, the Midas Retirement Savings Plan and the Midas
Master Retirement Savings Plan (collectively, the "New Savings Plans") and
related trusts substantially similar to the defined contribution plans currently
maintained by Whitman (the "Whitman Retirement Savings Plans") and related trust
(the "Whitman Trust"), with the exception that the New Savings Plans
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<PAGE>
adopted by Midas and its subsidiaries will contain an employee stock ownership
plan feature. The New Savings Plans will cover, and each Company will cause its
applicable New Savings Plans to assume all liabilities under the Whitman
Retirement Savings Plans and the Whitman Benefit Trust with respect to, (i) all
Separated Employees who, immediately prior to the Distribution Date, are
participants in the Whitman Retirement Savings Plans and (ii) any former or
disabled employees, and beneficiaries of deceased employees or former employees,
of the Companies and their respective subsidiaries who, immediately prior to the
Distribution Date, have or have accrued a right to account balances in the
Whitman Retirement Savings Plans and who are not employed by Whitman or its
subsidiaries after the Distribution Date (such persons being referred to as the
"Hussmann Participants" and "Midas Participants," respectively). Following the
Distribution, Whitman will cause the Whitman Trust to transfer to the trusts
established for the New Savings Plans assets with a value equal to the value of
the account balances of, and liabilities with respect to, the Hussmann
Participants and Midas Participants, respectively, not otherwise distributed or
to be distributed pursuant to the Whitman Retirement Savings Plans.
Pursuant to the Distribution Agreements, each Company will continue,
effective on the Distribution Date, its qualified defined benefit pension plans
(the "Hussmann Pension Plans" and "Midas Pension Plans," respectively), which
are presently being funded by the Whitman Defined Benefit Master Trust (the
"Pension Trust"), for current and former employees (and beneficiaries of current
and former employees) of the Companies and their respective subsidiaries.
Following the Distribution, Whitman will cause the Pension Trust to transfer to
a successor trustee established under the Hussmann Pension Plans and Midas
Pension Plans a portion of the investments in the Pension Trust equal in value
to the assets of the Hussmann Pension Plans and Midas Pension Plans,
respectively.
Neither Company is required to maintain any specific employee benefit plan
and each Company may amend or terminate any employee benefit plan in accordance
with its terms or applicable law.
The Distribution Agreements provide that then existing Change in Control
Agreements between Whitman or any subsidiary and any Separated Employee will be
terminated as of the Distribution Date and Hussmann and Midas will execute new
agreements with such employees in the form described in
"Management--Compensation of Executive Officers--Termination Benefits" in Annex
B and Annex C.
TAX SHARING AGREEMENTS
Hussmann and Midas have been and will continue to be included in the
consolidated U.S. Federal income tax returns of Whitman through and including
the Distribution Date. Whitman has previously entered into certain Tax
Allocation Agreements (collectively, the "Tax Allocation Agreements") with
Hussmann Corporation and Midas International Corporation with respect to U.S.
Federal income taxes. The Tax Allocation Agreements provide, among other things,
that if Hussmann Corporation or Midas International Corporation, respectively,
leave the consolidated group, such agreements will terminate and Hussmann
Corporation and Midas International Corporation, respectively, will not be
entitled to the value of any tax benefits that it may have made available to the
Whitman consolidated group while included in such group.
As part of the plan of Distribution, Hussmann International, Inc. and
Hussmann Corporation, and Midas Group, Inc. and Midas International Corporation,
respectively, have entered into separate agreements with Whitman (the "Tax
Sharing Agreements") which replace the Tax Allocation Agreements. The Tax
Sharing Agreements provide that in order to avoid adversely affecting the
intended tax consequences of the Distribution, Hussmann and Midas, respectively,
shall not during the three-year period following the Distribution Date (i) cease
to engage in an active trade or business within the meaning of the Code, (ii)
issue or redeem any shares of Hussmann Common Stock or Midas Common Stock,
respectively, except for certain issuances and redemptions for the benefit of
Hussmann or Midas employees, or (iii) liquidate or merge with any other
corporation, unless either (a) an opinion is obtained from counsel to Hussmann
or Midas, as the case may be, which counsel shall be satisfactory to Whitman, or
(b) a supplemental ruling is obtained from the IRS, in either case to the effect
that such act or omission would not adversely affect the U.S. Federal income tax
consequences, as set forth in the Tax Ruling, of the Distribution to any of
Whitman, its shareholders, Hussmann or Midas. Hussmann and Midas, respectively,
do not expect that these limitations will significantly inhibit their activities
or their ability to respond to unanticipated developments. In addition, the Tax
Sharing Agreements provide that, if as a result of any transaction occurring
after the Distribution Date involving either the stock, assets or debt, or any
combination thereof, of either Hussmann or any of its subsidiaries, or, of Midas
or any of its subsidiaries, respectively, the Distribution fails to
14
<PAGE>
qualify as tax-free under Section 355 of the Code, Hussmann or Midas, as the
case may be, will indemnify Whitman for all taxes, including penalties and
interest, incurred by Whitman by reason of the Distribution. The Tax Sharing
Agreements further provide that if the Distribution fails to qualify as tax-free
under Section 355 of the Code as a result of any transaction occurring on or
before the Distribution Date and involving the stock, assets or debt, or any
combination thereof, of Hussmann or any of its subsidiaries, or Midas or any of
its subsidiaries, then Whitman, and not Hussmann or Midas shall be liable for
such taxes described above. See "The Distribution--Certain Federal Income Tax
Consequences of the Distribution."
The Tax Sharing Agreements generally provide that Hussmann and Midas will be
liable for all Federal, state, local and foreign tax liabilities, including any
such liabilities resulting from the audit or other adjustment to previously
filed tax returns, which are attributable to Hussmann's businesses and Midas'
businesses, respectively, and that Whitman will be responsible for all such
taxes attributable to the businesses being retained by Whitman. Whitman has
agreed to be responsible for any taxes attributable to the transfer, in
connection with the Distribution, to Hussmann and its subsidiaries and to Midas
and its subsidiaries, respectively, from Whitman and its subsidiaries of any
foreign assets or stock of foreign corporations, as described in "Distribution
and Indemnity Agreements."
DESCRIPTION OF CAPITAL STOCK OF THE COMPANIES
AUTHORIZED CAPITAL STOCK
The authorized capital stock of Hussmann consists of 150,000,000 shares of
Hussmann Common Stock, par value $.001 per share, and 20,000,000 shares of
preferred stock, par value $.001 per share (the "Hussmann Preferred Stock"). The
authorized capital stock of Midas consists of 100,000,000 shares of Midas Common
Stock, par value $.001 per share, and 20,000,000 shares of preferred stock, par
value $.001 per share (the "Midas Preferred Stock"). No shares of Hussmann
Preferred Stock or Midas Preferred Stock will be issued in connection with the
Distribution. The Distribution will involve the distribution to Whitman
shareholders of an aggregate of approximately [ ] million shares of Hussmann
Common Stock and approximately [ ] million shares of Midas Common Stock,
representing all of the outstanding shares of common stock of each Company. Each
Distributed Share will be fully paid, nonassessable and free of preemptive
rights.
THE FOLLOWING SUMMARY DESCRIPTION OF THE CAPITAL STOCK OF HUSSMANN AND MIDAS
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE CERTIFICATE OF INCORPORATION OF
HUSSMANN AND MIDAS (THE "CERTIFICATE OF INCORPORATION") AND THE BY-LAWS OF
HUSSMANN AND MIDAS (THE "BY-LAWS"), WHICH ARE FILED AS EXHIBITS TO THE
REGISTRATION STATEMENTS. SEE "AVAILABLE INFORMATION."
COMMON STOCK
Holders of common stock of each Company are entitled to one vote for each
share held on all matters submitted to a vote of shareholders, including
elections of directors, and except as otherwise required by law or as may be
applicable to any series of preferred stock of such Company, the holders of such
common stock will possess all voting power of such Company. Holders of common
stock of each Company do not have cumulative voting rights in the election of
directors and do not have preemptive, subscription, redemption, sinking fund or
conversion rights. Subject to preferences that may be applicable to holders of
any outstanding shares of any preferred stock of a Company, holders of common
stock of each Company are entitled to such dividends as may be declared by the
Board of Directors of such Company out of funds legally available therefor. Upon
any liquidation, dissolution or winding-up of a Company, the assets legally
available for distribution to shareholders are distributable ratably among the
holders of common stock of such Company at that time outstanding, subject to
prior distribution rights of creditors of such Company and to the preferential
rights of any outstanding shares of preferred stock of such Company.
15
<PAGE>
PREFERRED STOCK
Under the Certificate of Incorporation of each Company, the Board of
Directors of such Company may authorize the issuance of preferred stock of such
Company, in one or more series, and to determine, with respect to any such
series, the designations, voting powers, preferences and rights of such series,
and such qualifications, limitations or restrictions thereof, as the Board of
Directors of such Company shall determine. See "Certain Antitakeover Effects of
Certain Charter and By-Law Provisions, the Rights and Delaware Law--Certificate
of Incorporation and By-Laws." The Board of Directors of each Company will
designate a series of preferred stock in connection with the adoption of such
Company's Rights Agreement. See "--Rights Agreements."
RIGHTS AGREEMENTS
On or prior to the Distribution Date, it is expected that the Board of
Directors of each Company will adopt a Rights Agreement (each, a "Rights
Agreement") between such Company and First Chicago Trust Company of New York
(the "Rights Agent") and cause to be issued one Preferred Stock Purchase Right
(a "Right") with each share of common stock of such Company issued to holders of
Whitman Common Stock in the Distribution.
Each Right will enable the registered holder to purchase from the Company
which issued such Right one one-hundredth of a share of Series A Junior
Participating Preferred Stock of such Company (a "Preferred Share") at a
specified price per one one-hundredth of a Preferred Share (the "Purchase
Price"), subject to adjustment. The initial Purchase Price in respect of the
Rights of each Company will be determined by the Board of Directors of such
Company prior to the Distribution Date. The terms of the Rights will be set
forth in the Rights Agreement.
THE DESCRIPTION SET FORTH BELOW IS INTENDED AS A SUMMARY ONLY AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE RIGHTS AGREEMENT, THE FORM OF
WHICH IS FILED AS AN EXHIBIT TO THE REGISTRATION STATEMENTS. SEE "AVAILABLE
INFORMATION."
Until the earlier to occur of (i) ten days following a public announcement
that a person or group of affiliated or associated persons has acquired
beneficial ownership of 15% or more of the outstanding shares of common stock of
the Company (an "Acquiring Person") or (ii) ten business days (or such later
date as may be determined by action of the Board of Directors of the Company
prior to such time as any person or group of affiliated or associated persons
becomes an Acquiring Person) following the commencement of a tender offer or
exchange offer the consummation of which would result in the beneficial
ownership by a person or group of affiliated or associated persons of 15% or
more of the outstanding shares of common stock of the Company (the earlier of
(i) and (ii) being the "Rights Distribution Date"), the Rights will be
evidenced, with respect to any shares of common stock of the Company outstanding
as of the Record Date, by the certificates or book-entry credits representing
such shares.
The Rights Agreement provides that, until the Rights Distribution Date (or
earlier redemption or expiration of the Rights), (i) the Rights will be
transferred only in connection with the transfer of shares of common stock of
the Company, (ii) new common stock certificates issued after the Record Date
upon transfer or new issuance of common stock of the Company will contain a
notation incorporating the Rights Agreement by reference and (iii) the transfer
of any outstanding shares of common stock of either Company will also constitute
the transfer of the Rights associated therewith. As soon as practicable
following the Rights Distribution Date, separate certificates or book-entry
statements evidencing the Rights ("Rights Certificates") will be mailed to
holders of record of common stock of the Company as of the close of business on
the Rights Distribution Date and such separate Rights Certificates or book-entry
credits reflected on such statements alone will evidence the Rights.
The Rights will not be exercisable until the Rights Distribution Date. The
Rights will expire on [ ], 2007 (the "Final Expiration Date"), unless
the Final Expiration Date is extended or unless the Rights are earlier redeemed
or exchanged by the Company, in each case, as described below.
The Purchase Price payable, and the number of Preferred Shares or other
securities or property issuable, upon exercise of the Rights are subject to
adjustment from time to time to prevent dilution (i) in the event of a stock
dividend on, or a subdivision, combination or reclassification of, the Preferred
Shares, (ii) upon the grant to holders of the Preferred Shares of certain rights
or warrants to subscribe for or purchase the Preferred Shares at a price, or
securities convertible into the Preferred Shares with a conversion price, less
than the then-current market price per share of the Preferred Shares, or (iii)
upon the distribution to holders of the Preferred Shares of evidences of
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<PAGE>
indebtedness, cash (other than a regular quarterly cash dividend out of the
earnings or retained earnings of the Company), assets (other than a dividend
payable in Preferred Shares) or of subscription rights or warrants (other than
those referred to above).
The number of outstanding Rights and the number of one one-hundredths of a
Preferred Share issuable upon exercise of each Right are also subject to
adjustment in the event of a stock split of the common stock of the Company or a
stock dividend on the common stock of the Company payable in common stock of the
Company or subdivisions, consolidations or combinations of the common stock of
the Company occurring, in any such case, prior to the Rights Distribution Date.
Preferred Shares purchasable upon exercise of the Rights will not be
redeemable. Each Preferred Share will be entitled to a minimum preferential
quarterly dividend payment of $1.00 per share but will be entitled to an
aggregate dividend of 100 times the dividend declared per share of common stock
of the Company. In the event of liquidation, the holders of the Preferred Shares
will be entitled to an aggregate payment of 100 times the payment made per share
of common stock of the Company (with a minimum preferential payment of $100 per
share). Each Preferred Share will have 100 votes, voting together with the
common stock of the Company. Finally, in the event of any consolidation, merger
or other transaction in which shares of common stock of the Company are
exchanged, each Preferred Share will be entitled to receive 100 times the amount
received per share of common stock of the Company. The Rights will be protected
by customary antidilution provisions.
Because of the nature of the dividend, liquidation and voting rights, the
value of the one one-hundredth of a Preferred Share purchasable upon exercise of
each Right should approximate the value of one share of common stock of the
Company.
In the event that any person or group of affiliated or associated persons
becomes an Acquiring Person, proper provision shall be made so that each holder
of a Right, other than Rights beneficially owned by the Acquiring Person (which
will thereafter be void), will thereafter have the right to receive upon
exercise that number of shares of common stock of the Company having a market
value of two times the exercise price of the Right. In the event that the
Company is acquired in a merger or other business combination transaction or 50%
or more of its consolidated assets or earning power are sold after a person or
group of affiliated or associated persons has become an Acquiring Person, proper
provision will be made so that each holder of a Right will thereafter have the
right to receive, upon the exercise thereof at the then-current exercise price
of the Right, that number of shares of common stock of the acquiring company
which at the time of such transaction will have a market value of two times the
exercise price of the Right.
At any time after any person or group of affiliated or associated persons
becomes an Acquiring Person and prior to the acquisition by such person or group
of 50% or more of the outstanding shares of common stock of the Company, the
Board of Directors of the Company may exchange the Rights (other than Rights
owned by such person or group which will have become void), in whole or in part,
at an exchange ratio of one share of common stock of the Company, or one
one-hundredth of a Preferred Share (or of a share of a class or series of
preferred stock of the Company having equivalent rights, preferences and
privileges), per Right (subject to adjustment).
With certain exceptions, no adjustment in the Purchase Price will be
required until cumulative adjustments amount to at least 1% of the Purchase
Price. No fractional Preferred Shares will be issued (other than fractions which
are integral multiples of one one-hundredth of a Preferred Share, which may, at
the election of the Company, be evidenced by depositary receipts) and, in lieu
thereof, an adjustment in cash will be made based on the market price of the
Preferred Shares on the last trading day prior to the date of exercise.
In general, the Company may redeem the Rights in whole, but not in part, at
a price of $.01 per Right (payable in cash, common stock of the Company or other
consideration deemed appropriate by the Board of Directors of the Company) at
any time until ten days following the first public announcement that a person or
group of affiliated or associated persons has become an Acquiring Person.
Immediately upon the action of the Board of Directors of the Company authorizing
any redemption, the Rights will terminate and the only right of the holders of
Rights will be to receive the redemption price.
The terms of the Rights may be amended by the Board of Directors of the
Company without the consent of the holders of the Rights, including an amendment
to change the 15% thresholds described above to be not less than
17
<PAGE>
10% nor more than 20%, except that from and after such time as any person or
group of affiliated or associated persons becomes an Acquiring Person no such
amendment may adversely affect the interests of the holders of the Rights.
Until a Right is exercised, the holder thereof, as such, will have no rights
as a shareholder of the Company, including, without limitation, the right to
vote or to receive dividends.
CERTAIN ANTITAKEOVER EFFECTS OF CERTAIN CHARTER AND BY-LAW PROVISIONS, THE
RIGHTS AND DELAWARE LAW
CERTIFICATE OF INCORPORATION AND BY-LAWS
The Certificate of Incorporation and the By-Laws of each Company contain
certain provisions that could make more difficult the acquisition of such
Company by means of a tender offer, proxy contest or otherwise.
THE FOLLOWING SUMMARY DESCRIPTION IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO THE CERTIFICATE OF INCORPORATION AND BY-LAWS OF HUSSMANN AND MIDAS, WHICH ARE
FILED AS EXHIBITS TO THE REGISTRATION STATEMENTS. SEE "AVAILABLE INFORMATION."
CLASSIFIED BOARD OF DIRECTORS. The Certificate of Incorporation and By-Laws
provide that the board of directors will be divided into three classes of
directors, with the classes to be as nearly equal in number as possible.
Immediately after the Distribution, the Hussmann Board will consist of the
persons referred to in "Management-- Directors" contained in Annex B and the
Midas Board will consist of the persons referred to in "Management-- Directors"
contained in Annex C. The Certificate of Incorporation and the By-Laws provide
that, of the initial directors of each Company, approximately one-third will
continue to serve until the 1999 Annual Meeting of Shareholders, approximately
one-third will continue to serve until the 2000 Annual Meeting of Shareholders,
and approximately one-third will continue to serve until the 2001 Annual Meeting
of Shareholders.
The classification of directors will have the effect of making it more
difficult for shareholders to change the composition of the board of directors
of a Company. At least two annual meetings of shareholders, instead of one, will
generally be required to effect a change in a majority of the board of directors
of a Company. Such a delay may help ensure that the directors of a Company, if
confronted by a holder attempting to force a proxy contest, a tender or exchange
offer or an extraordinary corporate transaction, would have sufficient time to
review the proposal as well as any available alternatives to the proposal and to
act in what they believe to be the best interest of the Company. The
classification provisions will apply to every election of directors, however,
regardless of whether a change in the composition of the board of directors
would be beneficial to a Company and its shareholders and whether a majority of
the shareholders of such Company believe that such a change would be desirable.
The classification provisions could also have the effect of discouraging a
third party from initiating a proxy contest, making a tender offer or otherwise
attempting to obtain control of a Company, even though such an attempt might be
beneficial to such Company and its shareholders. The classification of the board
of directors could thus increase the likelihood that incumbent directors will
retain their position.
NUMBER OF DIRECTORS; REMOVAL; FILLING VACANCIES. The Certificate of
Incorporation provides that, subject to any rights of holders of preferred stock
to elect additional directors under specific circumstances, the number of
directors will be fixed in the manner provided in the By-Laws. The By-Laws
provide that, subject to any rights of holders of preferred stock to elect
directors under specified circumstances, the number of directors will be fixed
from time to time exclusively pursuant to a resolution adopted by directors
constituting a majority of the total number of directors that a Company would
have if there were no vacancies on the board of directors of such Company (the
"Whole Board"), but must consist of not less than three directors. In addition,
the By-Laws provide that, subject to any rights of holders of preferred stock,
and unless the board of directors otherwise determines, any vacancies, or newly
created directorships, will be filled only by the affirmative vote of a majority
of the remaining directors, though less than a quorum. Accordingly, absent an
amendment to the By-Laws, the board of directors of a Company could prevent any
shareholder from enlarging the board of directors of such Company and filling
the new directorships created thereby with such shareholder's own nominees.
18
<PAGE>
Under the Delaware Law, unless otherwise provided in the Certificate of
Incorporation, directors serving on a classified board may only be removed by
the shareholders for cause. In addition, the Certificate of Incorporation and
the By-Laws provide that directors may be removed only for cause and only upon
the affirmative vote of holders of at least 80% of the voting power of the then
outstanding shares of Voting Stock, voting together as a single class.
NO SHAREHOLDER ACTION BY WRITTEN CONSENT; LIMITATIONS ON CALL OF SPECIAL
MEETINGS. The Certificate of Incorporation and the By-Laws provide that,
subject to the rights of any holders of preferred stock to elect additional
directors under specific circumstances, shareholder action can be taken only at
an annual or special meeting of shareholders and prohibit shareholder action by
written consent in lieu of a meeting. The By-Laws provide that, subject to the
rights of holders of any series of preferred stock to elect additional directors
under specific circumstances, special meetings of shareholders can be called
only by the board of directors of a Company pursuant to a resolution adopted by
a majority of the Whole Board. Shareholders are not permitted to call a special
meeting or to require that the board of directors call a special meeting of
shareholders. Moreover, the business permitted to be conducted at any special
meeting of shareholders is limited to the business brought before the meeting
pursuant to the notice of special meeting given by a Company.
The provisions of the Certificate of Incorporation and the By-Laws
prohibiting shareholder action by written consent may have the effect of
delaying consideration of a shareholder proposal until the next annual meeting
unless a special meeting is called by a majority of the Whole Board. These
provisions would also prevent the holders of a majority of the voting power of
the Voting Stock from unilaterally using the written consent procedure to take
shareholder action. Moreover, a shareholder could not force shareholder
consideration of a proposal over the opposition of the board of directors by
calling a special meeting of shareholders prior to the time a majority of the
Whole Board believes such consideration to be appropriate.
ADVANCE NOTICE PROVISIONS FOR SHAREHOLDER NOMINATIONS AND SHAREHOLDER
PROPOSALS. The By-Laws establish an advance notice procedure for shareholders
to make nominations of candidates for election as directors, or bring other
business before an annual meeting of shareholders of a Company (the "Shareholder
Notice Procedure"). The Shareholder Notice Procedure provides that only persons
who are nominated by, or at the direction of, the board of directors of a
Company, or by a shareholder who has given timely written notice to the
Secretary of such Company prior to the meeting at which directors are to be
elected, will be eligible for election as directors of such Company. The
Shareholder Notice Procedure also provides that at an annual meeting only such
business may be conducted as has been brought before the meeting by, or at the
direction of, the board of directors of a Company or by a shareholder who has
given timely written notice to the Secretary of a Company of such shareholder's
intention to bring such business before such meeting.
Under the Shareholder Notice Procedure, notice of a shareholder nomination
or other business to be brought before an annual meeting will be timely only if
it is delivered to a Company not earlier than the close of business on the 90th
calendar day nor later than the close of business on the 70th calendar day prior
to the first anniversary of the preceding year's annual meeting of such Company
(except that if the date of the annual meeting is more than 30 calendar days
before or more than 70 calendar days after such anniversary date, notice by the
shareholder to be timely must be delivered to such Company not earlier than the
close of business on the 90th calendar day prior to such annual meeting and not
later than the close of business on the later of (i) the 70th calendar day prior
to such annual meeting and (ii) the 10th calendar day after public announcement
is first made by such Company of the date of such annual meeting).
Notwithstanding the foregoing, in the event that the number of directors to be
elected to such Company's board of directors is increased and there is no public
announcement by a Company naming all of the nominees for directors or specifying
the size of the increased board of directors made by such Company at least 80
calendar days prior to the first anniversary of the preceding year's annual
meeting, a shareholder's notice will be timely, but only with respect to
nominees for any new positions created by such increase, if it is delivered to
such Company not later than the close of business on the 10th calendar day after
such public announcement is first made by such Company. Under the Shareholder
Notice Procedure, notice of a shareholder nomination to be made at a special
meeting at which directors are to be elected will be timely only if it is
delivered to a Company not earlier than the close of business on the 90th
calendar day prior to such special meeting and not later than the close of
business on the later of (i) the 70th calendar day prior to such special meeting
and (ii) the 10th calendar day after public announcement is first made by such
Company of the date of such special meeting and of the nominees
19
<PAGE>
proposed by such Company's board of directors to be elected at such special
meeting. For the purpose of determining whether a shareholder's notice is timely
delivered for the 1999 annual meeting, the first anniversary of the preceding
year's annual meeting is deemed to be May 7, 1999. See "1999 Annual Meeting of
Shareholders" in Annex B and Annex C.
Under the Shareholder Notice Procedure, a shareholder's notice to a Company
proposing to nominate a person for election as a director must contain certain
information including, without limitation, the identity and address of the
nominating shareholder, the class and number of shares of stock of such Company
which are owned by such shareholder, and all information regarding the proposed
nominee that would be required to be included in a proxy statement soliciting
proxies for the proposed nominee. A shareholder's notice relating to the conduct
of business other than the nomination of directors must contain certain
information about such business and about the proposing shareholders, including,
without limitation, a brief description of the business the shareholder proposes
to bring before the meeting, the reasons for conducting such business at such
meeting, the name and address of such shareholder, the class and number of
shares of stock of such Company beneficially owned by such shareholder, and any
material interest of such shareholder in the business so proposed. If the
Chairman or other officer presiding at a meeting determines that a person was
not nominated or other business was not brought before the meeting in accordance
with the Shareholder Notice Procedure, such person will not be eligible for
election as a director or such business will not be conducted at such meeting,
as the case may be.
Although the By-Laws do not give the board of directors any power to approve
or disapprove shareholder nominations for the election of directors or proposals
for action, they may have the effect of precluding a contest for the election of
directors or the consideration of shareholder proposals if the proper procedures
are not followed, and of discouraging or deterring a third party from conducting
a solicitation of proxies to elect its own slate of directors or to approve its
own proposal, without regard to whether consideration of such nominees or
proposals might be harmful or beneficial to a Company and its shareholders.
PREFERRED STOCK. The Certificate of Incorporation authorizes the board of
directors of a Company to establish one or more series of preferred stock and to
determine, with respect to any series of preferred stock, the terms and rights
of such series, including (i) the designation of the series, (ii) the number of
shares of the series, which number the board of directors of such Company may
thereafter (except where otherwise provided in the related Preferred Stock
Designation) increase or decrease (but not below the number of shares thereof
then outstanding), (iii) whether dividends, if any, will be cumulative or
noncumulative and the dividend rate of the series, (iv) the dates at which
dividends, if any, will be payable, (v) the redemption rights and price or
prices, if any, for shares of the series, (vi) the terms and amounts of any
sinking fund provided for the purchase or redemption of shares of the series,
(vii) the amounts payable on shares of the series in the event of any voluntary
or involuntary liquidation, dissolution or winding up of the affairs of such
Company, (viii) whether the shares of the series will be convertible into shares
of any other class or series, or any other security, of such Company or any
other corporation, and, if so, the specification of such other class or series
or such other security, the conversion price or prices or rate or rates, any
adjustments thereof, the date or dates as of which such shares shall be
convertible and all other terms and conditions upon which such conversion may be
made, (ix) restrictions on the issuance of shares of the same series or of any
other class or series, and (x) the voting rights, if any, of the holders of such
series.
The authorized shares of preferred stock of a Company, as well as shares of
common stock of such Company, will be available for issuance without further
action by the shareholders of such Company, unless such action is required by
applicable law or the rules of any stock exchange or automated quotation system
on which such Company's securities may be listed or traded. The NYSE currently
requires shareholder approval as a prerequisite to listing shares in several
instances, including in certain situations where the present or potential
issuance of shares could result in an increase in the number of shares of common
stock or in the voting power outstanding of 20% or more.
Although the board of directors of each Company has no intention at the
present time of doing so, a Company could issue a series of preferred stock that
could, depending on the terms of such series, impede the completion of a merger,
tender offer or other takeover attempt. The board of directors of a Company will
make any determination to issue such shares based on its judgment as to the best
interests of such Company and its shareholders. The board of directors of a
Company, in so acting, could issue preferred stock having terms that could
discourage an acquisition attempt through which an acquirer may be able to
change the composition of such board of directors, including a
20
<PAGE>
tender offer or other transaction that some, or a majority, of such Company's
shareholders might believe to be in their best interests or in which
shareholders might receive a premium for their stock over the then-current
market price of such stock.
RIGHTS TO PURCHASE SECURITIES AND OTHER PROPERTY. The Certificate of
Incorporation authorizes the board of directors of a Company to create and issue
rights entitling the holders thereof to purchase from such Company shares of
stock or other securities of such Company or any other corporation. The times at
which and terms upon which such rights are to be issued would be determined by
the board of directors of such Company and set forth in the contracts or other
instruments that evidence such rights. The authority of the board of directors
with respect to such rights includes, but is not limited to, determination of
(i) the initial purchase price per share or other unit of the stock or other
securities or property to be purchased upon exercise of such rights, (ii)
provisions relating to the times at which and the circumstances under which such
rights may be exercised or sold or otherwise transferred, either together with
or separately from any other stock or other securities of such Company, (iii)
provisions that adjust the number or exercise price of such rights or amount or
nature of the stock or other securities or property receivable upon exercise of
such rights in the event of a combination, split or recapitalization of any
stock of such Company, a change in ownership of such Company's stock or other
securities or a reorganization, merger, consolidation, sale of assets or other
occurrence relating to such Company or any stock of such Company, and provisions
restricting the ability of such Company to enter into any such transaction
absent an assumption by the other party or parties thereto of the obligations of
such Company under such rights, (iv) provisions that deny the holder of a
specified percentage of the outstanding stock or other securities of such
Company the right to exercise such rights and/or cause such rights held by such
holder to become void, (v) provisions that permit such Company to redeem or
exchange such rights, and (vi) the appointment of the rights agent with respect
to such rights. This provision is intended to confirm the board of directors'
authority to issue rights to purchase shares of stock or other securities of
such Company or any other corporation. See "Description of Capital Stock of the
Companies--Rights Agreements."
AMENDMENT OF CERTAIN PROVISIONS IN THE CERTIFICATE OF INCORPORATION AND
BY-LAWS. Under Delaware Law, the shareholders of a corporation have the right
to adopt, amend or repeal the by-laws and, with the approval of the board of
directors, the certificate of incorporation of a corporation. In addition, under
Delaware Law if the certificate of incorporation so provides, the by-laws may be
adopted, amended or repealed by the board of directors. The Certificate of
Incorporation provides that the affirmative vote of the holders of at least 80%
of the voting power of the outstanding shares of Voting Stock, voting together
as a single class, is required to amend provisions of the Certificate of
Incorporation relating to: the prohibition of shareholder action without a
meeting; the number, election and term of directors; the removal of directors;
the issuance of rights; and the adoption, amendment or repeal of the By-Laws by
the board of directors or by the affirmative vote of the holders of at least 80%
of the voting power of the outstanding shares of Voting Stock, voting together
as a single class. The vote of the holders of a majority of the voting power of
the outstanding shares of Voting Stock is required to amend all other provisions
of the Certificate of Incorporation. The Certificate of Incorporation further
provides that the By-Laws may be amended by the board of directors or by the
affirmative vote of the holders of at least 80% of the voting power of the
outstanding shares of Voting Stock, voting together as a single class. These 80%
voting requirements will have the effect of making more difficult any amendment
by shareholders of the By-Laws or of any of the provisions of the Certificate of
Incorporation described above, even if a majority of the shareholders of a
Company believe that such amendment would be in their best interests.
OTHER PROVISIONS. The Certificate of Incorporation expressly authorizes the
board of directors of a Company to take such action as it may determine to be
reasonably necessary or desirable to encourage any person or entity to enter
into negotiations with such board of directors and management of such Company
respecting any transaction which may result in a change in control of such
Company, and to contest or oppose any such transaction which such board of
directors determines to be unfair, abusive or otherwise undesirable to such
Company, its businesses or shareholders. In this connection, the Certificate of
Incorporation specifically permits the board of directors of a Company to adopt
plans or to issue securities of such Company (including common stock or
preferred stock of such Company, rights or debt securities), which securities
may be exchangeable or convertible into cash or other securities on such terms
as such board of directors determines and may provide for differential and
unequal treatment of different holders or classes of holders. The existence of
this authority or the actions which may be
21
<PAGE>
taken by the board of directors of a Company pursuant thereto may deter
potential acquirers from proposing unsolicited transactions not approved by the
board of directors and might enable the board of directors to hinder or
frustrate such a transaction if proposed. These provisions are included in the
Certificate of Incorporation to confirm and support the authority of the board
of directors of a Company to take the various actions authorized thereby. The
Certificate of Incorporation is also designed to enable the board of directors
of a Company to utilize such other tactics or mechanisms as are developed in the
future to carry out the general authorization set forth therein.
THE RIGHTS
The Rights will have certain anti-takeover effects. The Rights will cause
substantial dilution to a person or group that attempts to acquire a Company on
terms not approved by the board of directors of such Company. The Rights should
not interfere with any merger or other business combination approved by the
board of directors of a Company because the Rights may be redeemed by such
Company until the tenth day following the first public announcement that a
person or group of affiliated or associated persons has become an Acquiring
Person.
DELAWARE LAW
Section 203 of the Delaware Law provides that, subject to certain exceptions
specified therein, a corporation shall not engage in any business combination
with any interested stockholder for a three-year period following the date that
such stockholder becomes an interested stockholder unless (i) prior to such
date, the board of directors of the corporation approved either the business
combination or the transaction which resulted in the stockholder becoming an
interested stockholder; (ii) upon consummation of the transaction which resulted
in the stockholder becoming an interested stockholder, the interested
stockholder owned at least 85% of the voting stock of the corporation
outstanding at the time the transaction commenced (excluding certain shares); or
(iii) on or subsequent to such date, the business combination is approved by the
board of directors of the corporation and by the affirmative vote of at least
66 2/3% of the outstanding voting stock which is not owned by the interested
stockholder. Except as specified in Section 203 of the Delaware Law, an
"interested stockholder" is defined to include (x) any person that is the owner
of 15% or more of the outstanding voting stock of the corporation, or is an
affiliate or associate of the corporation and was the owner of 15% or more of
the outstanding voting stock of the corporation, at any time within three years
immediately prior to the relevant date and (y) the affiliates and associates of
any such person.
Under certain circumstances, Section 203 of the Delaware Law makes it more
difficult for a person who would be an interested stockholder to effect various
business combinations with a corporation for a three-year period, although the
stockholders may elect to exclude a corporation from the restrictions imposed
thereunder. The Certificate of Incorporation does not exclude a Company from the
restrictions imposed under Section 203 of the Delaware Law. It is anticipated
that the provisions of Section 203 of the Delaware Law may encourage companies
interested in acquiring a Company to negotiate in advance with the board of
directors of such Company, since the stockholder approval requirement would be
avoided if a majority of the directors then in office approves either the
business combination or the transaction which results in the stockholder
becoming an interested stockholder.
LIABILITY AND INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Certificate of Incorporation provides that a director of a Company will
not be personally liable to such Company or its shareholders for monetary
damages for breach of fiduciary duty as a director, except for liability (i) for
any breach of the director's duty of loyalty to such Company or its
shareholders, (ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) under Section 174 of
the Delaware Law, which concerns unlawful payments of dividends, stock purchases
or redemptions, or (iv) for any transaction from which the director derived an
improper personal benefit.
While the Certificate of Incorporation provides directors with protection
from awards for monetary damages for breaches of their duty of care, it does not
eliminate such duty. Accordingly, the Certificate of Incorporation will have no
effect on the availability of equitable remedies such as an injunction or
rescission based on a director's breach of his or her duty of care. The
provisions of the Certificate of Incorporation described above apply to an
officer of a Company only if he or she is a director of such Company and is
acting in his or her capacity as director, and do not apply to officers of a
Company who are not directors.
22
<PAGE>
INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Certificate of Incorporation provides that each person who is or was or
had agreed to become a director or officer of a Company, or each person who is
or was serving or who had agreed to serve at the request of the board of
directors of such Company or an officer of such Company as a director, officer
or employee or agent of another corporation, partnership, joint venture, trust
or other enterprise (including the heirs, executors, administrators or estate of
such person), will be indemnified by such Company, in accordance with and
pursuant to the By-Laws. In addition, a Company may provide indemnification to
its employees and agents to the extent provided by action of its board of
directors pursuant to the By-Laws. A Company may also enter into one or more
agreements with any person providing for indemnification greater or different
than that provided in the Certificate of Incorporation.
The By-Laws provide that each person who was or is made a party or is
threatened to be made a party to or is involved in any action, suit, or
proceeding, whether civil, criminal, administrative or investigative (a
"Proceeding"), by reason of the fact that he or she or a person of whom he or
she is the legal representative is or was a director or officer of a Company or
is or was serving at the request of such Company as a director, officer,
employee or agent of another corporation or of a partnership, joint venture,
trust or other enterprise, including service with respect to employee benefit
plans, whether the basis of such Proceeding is alleged action in an official
capacity as a director, officer, employee or agent or in any other capacity
while serving as a director, officer, employee or agent, will be indemnified and
held harmless by such Company to the fullest extent authorized by Delaware law
as the same exists or may in the future be amended (but, in the case of any such
amendment, only to the extent that such amendment permits such Company to
provide broader indemnification rights than said law permitted such Company to
provide prior to such amendment), against all expense, liability and loss
(including attorneys' fees, judgments, fines, excise taxes under the Employee
Retirement Income Security Act of 1974 or penalties and amounts paid in
settlement) reasonably incurred or suffered by such person in connection
therewith and such indemnification will continue as to a person who has ceased
to be a director, officer, employee or agent and will inure to the benefit of
his or her heirs, executors and administrators; PROVIDED, HOWEVER, that except
as described in the following paragraph with respect to Proceedings to enforce
rights to indemnification, such Company will indemnify any such person seeking
indemnification in connection with a Proceeding (or part thereof) initiated by
such person only if such Proceeding (or part thereof) was authorized by the
board of directors of such Company. A Company's board of directors may provide
indemnification to employees and agents of such Company to the same extent as
provided to directors and officers of such Company.
Pursuant to the By-Laws, if a claim described in the preceding paragraph is
not paid in full by such Company within thirty days after a written claim has
been received by such Company, the claimant may at any time thereafter bring
suit against such Company to recover the unpaid amount of the claim and, if
successful in whole or in part, the claimant will also be entitled to be paid
the expense of prosecuting such claim. The By-Laws provide that it will be a
defense to any such action (other than an action brought to enforce a claim for
expenses incurred in defending any Proceeding in advance of its final
disposition where the required undertaking, if any is required, has been
tendered to such Company) that the claimant has not met the standards of conduct
which make it permissible under the Delaware Law for such Company to indemnify
the claimant for the amount claimed, but the burden of proving such defense will
be on such Company. Neither the failure of a Company (including the board of
directors of such Company, independent legal counsel or shareholders) to have
made a determination prior to the commencement of such action that
indemnification of the claimant is proper in the circumstances because he or she
has met the applicable standard of conduct set forth in the Delaware Law, nor an
actual determination by such Company (including the board of directors of such
Company, independent legal counsel or shareholders) that the claimant has not
met such applicable standard of conduct, will be a defense to the action or
create a presumption that the claimant has not met the applicable standard of
conduct.
The By-Laws provide that the right to indemnification and the payment of
expenses incurred in defending a Proceeding in advance of its final disposition
conferred in the By-Laws will not be exclusive of any other right which any
person may have or may in the future acquire under any statute, provision of the
Certificate of Incorporation, the By-Laws, agreement, vote of shareholders or
disinterested directors or otherwise. The By-Laws permit a Company to maintain
insurance, at its expense, to protect itself and any director, officer, employee
or agent of such Company or another corporation, partnership, joint venture,
trust or other enterprise against any expense, liability or loss, whether or not
such Company would have the power to indemnify such person against such
23
<PAGE>
expense, liability or loss under the Delaware Law. Each Company intends to
obtain liability insurance providing coverage to its directors and officers.
The By-Laws provide that the right to indemnification conferred therein is a
contract right and includes the right to be paid by a Company the expenses
incurred in defending any such Proceeding in advance of its final disposition,
except that if the Delaware Law requires, the payment of such expenses incurred
by a director or officer in his or her capacity as a director or officer (and
not in any other capacity in which service was or is rendered by such person
while a director or officer, including, without limitation, service to an
employee benefit plan) in advance of the final disposition of a Proceeding, will
be made only upon delivery to such Company of an undertaking by or on behalf of
such director or officer, to repay all amounts so advanced if it is ultimately
determined that such director or officer is not entitled to be indemnified under
the By-Laws or otherwise.
ADDITIONAL INFORMATION
The Delaware Law provides that a contract between a corporation and a
director thereof is not void or voidable solely because the interested director
is present at the meeting authorizing the contract if the material facts
relating to the contract are known to the board of directors and the board of
directors in good faith authorizes the contract by the affirmative vote of a
majority of the disinterested directors, or the material facts relating to the
contract are known to the shareholders and the shareholders in good faith
authorize the contract, or the contract is fair to the corporation at the time
it is authorized or approved.
24
<PAGE>
ANNEX A -- INFORMATION ABOUT WHITMAN
PRINCIPAL BUSINESS TO BE RETAINED BY WHITMAN
After the Distribution, Whitman's principal business will be the production
and distribution of Pepsi-Cola and other non-alcoholic beverage products by
Pepsi General. Whitman will also continue to own certain other assets, including
undeveloped real estate, most of which is located in downtown Chicago, a finance
leasing portfolio pursuant to which Whitman is the lessor of certain railroad
locomotives and freight cars, and an investment in the common stock of
Northfield Laboratories Inc. Whitman will also remain liable as an indemnitor
for certain environmental and other liabilities associated with previously sold
businesses, including principally those relating to Pneumo Abex Corporation.
PRE-DISTRIBUTION PAYMENTS TO WHITMAN
Prior to the Distribution Date, Hussmann and Midas will settle intercompany
debt owing to Whitman which as of September 30, 1997 amounted to approximately
$[ ] million in the aggregate and will pay cash dividends amounting to
approximately $[ ] million in the aggregate. Whitman intends to use a
portion of the proceeds from the repayment of intercompany loans and cash
dividends to be received by it from Hussmann and Midas in connection with the
Distribution to retire certain outstanding indebtedness. See "Financing" in
Annex B and Annex C. The balance of the proceeds from such repayments and
dividends may be used for general corporate purposes.
POST-DISTRIBUTION DIVIDEND POLICY
The payment and level of cash dividends by Whitman after the Distribution
will be subject to the discretion of the Whitman Board. Dividend decisions will
be based upon a number of factors, including Whitman's operating results and
financial requirements. No determination has been made by the Whitman Board with
respect to the initial cash dividend that would be paid after the dividend
payable on January 1, 1998. However, it is expected that the cash dividend
initially paid by Whitman following the Distribution will be at an annual rate
below the $0.46 per share annual dividend rate currently in effect and will be
determined, in part, by reference to dividend payment levels of entities engaged
in the soft drink and other beverage business comparable to the businesses in
which Pepsi General is engaged.
A-1
<PAGE>
WHITMAN CORPORATION AND SUBSIDIARIES
INTRODUCTION TO PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
The unaudited Pro Forma Condensed Consolidated Statements of Income of
Whitman and its subsidiaries for the six months ended June 30, 1997 and for the
year ended December 31, 1996 present the pro forma condensed consolidated
results of the continuing operations of Whitman, assuming that the transactions
contemplated by the Distribution, including the borrowings to be incurred by
Hussmann International and the Midas Group in connection with the Distribution,
had been completed as of the beginning of the respective periods, and include
all material adjustments necessary to restate Whitman's historical results. The
adjustments required to reflect such transactions are set forth in the "Pro
Forma Adjustments" column. In addition, the Pro Forma Condensed Consolidated
Statements of Income reflect the reclassifications of Hussmann International and
the Midas Group to discontinued operations.
The unaudited Pro Forma Condensed Consolidated Balance Sheet of Whitman and
its subsidiaries as of June 30, 1997, presents the pro forma condensed
consolidated financial position of Whitman, assuming that the transactions
contemplated by the Distribution described in the preceding paragraph had been
completed as of that date. The adjustments required to reflect such transactions
are set forth in the "Pro Forma Adjustments" column. In addition, the Pro Forma
Condensed Consolidated Balance Sheet reflects the reclassifications of Hussmann
International and the Midas Group to discontinued operations.
The historical amounts are derived from the historical financial statements
of Whitman. The unaudited pro forma condensed consolidated financial information
of Whitman should be read in conjunction with the historical financial
statements and related notes of Whitman included in its 1996 annual report on
Form 10-K and its most recent quarterly report on Form 10-Q filed with the SEC
(File No. 1-04710), copies of which are available from Whitman. The pro forma
financial information presented is for informational purposes only and may not
necessarily reflect future results of operations or financial position of
Whitman or what the results of operations or financial position of Whitman would
actually have been had Hussmann International and the Midas Group operated as
independent companies during the periods shown.
A-2
<PAGE>
WHITMAN CORPORATION AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
(UNAUDITED AND IN MILLIONS)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED JUNE 30, 1997
---------------------------------------------------------------------
RECLASSIFY
HUSSMANN RECLASSIFY
INTERNATIONAL MIDAS GROUP
TO DISCONTINUED TO DISCONTINUED PRO FORMA
HISTORICAL OPERATIONS OPERATIONS ADJUSTMENTS PRO FORMA
--------- --------------- --------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Sales and revenues............................ $ 1,477.7 $ (449.4) $ (302.3) $ -- $ 726.0
Costs of goods sold........................... 957.1 (366.1) (140.6) -- 450.4
--------- ------ ------- ----------- -----------
Gross profit................................ 520.6 (83.3) (161.7) -- 275.6
Selling, general and administrative
expenses.................................... 369.2 (51.6) (126.1) (3.5) (a) 188.0
Amortization expense.......................... 10.3 (0.8) (1.6) -- 7.9
--------- ------ ------- ----------- -----------
Operating income............................ 141.1 (30.9) (34.0) 3.5 79.7
Interest income (expense), net................ (33.6) 8.7 4.3 2.2(b) (18.4)
Other income (expense), net................... (10.6) (0.1) 0.2 -- (10.5)
Whitman charges............................... -- 14.2 9.0 (23.2) (c) --
--------- ------ ------- ----------- -----------
Income before income taxes.................. 96.9 (8.1) (20.5) (17.5) 50.8
Income tax provisions......................... 40.2 (3.2) (8.8) (6.7) (d) 21.5
--------- ------ ------- ----------- -----------
Income before minority interest............. 56.7 (4.9) (11.7) (10.8) 29.3
Minority interest............................. 7.5 0.1 -- -- 7.6
--------- ------ ------- ----------- -----------
Income from continuing operations $ 49.2 $ (5.0) $ (11.7) $ (10.8) $ 21.7
--------- ------ ------- ----------- -----------
--------- ------ ------- ----------- -----------
</TABLE>
See accompanying notes to pro forma financial information.
A-3
<PAGE>
WHITMAN CORPORATION AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
(UNAUDITED AND IN MILLIONS)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1996
----------------------------------------------------------------------
RECLASSIFY
HUSSMANN
INTERNATIONAL RECLASSIFY
TO MIDAS GROUP
DISCONTINUED TO DISCONTINUED PRO FORMA
HISTORICAL OPERATIONS OPERATIONS ADJUSTMENTS PRO FORMA
--------- -------------- --------------- ------------- -----------
<S> <C> <C> <C> <C> <C>
Sales and revenues............................ $ 3,111.3 $ (1,005.7) $ (604.2) $ -- $ 1,501.4
Cost of goods sold............................ 2,008.0 (801.8) (281.8) -- 924.4
--------- -------------- ------ ------ -----------
Gross profit................................ 1,103.3 (203.9) (322.4) -- 577.0
Selling, general and administrative
expenses.................................... 716.7 (108.6) (241.3) (7.0) (a) 359.8
Amortization expense.......................... 20.0 (1.5) (3.1) -- 15.4
--------- -------------- ------ ------ -----------
Operating income............................ 366.6 (93.8) (78.0) 7.0 201.8
Interest income (expense), net................ (65.3) 15.9 8.5 6.0(b) (34.9)
Other income (expense), net................... (25.6) (0.8) 0.7 -- (25.7)
Whitman charges............................... -- 26.7 17.2 (43.9) (c) --
--------- -------------- ------ ------ -----------
Income before income taxes.................. 275.7 (52.0) (51.6) (30.9) 141.2
Income tax provisions......................... 117.2 (17.6) (21.2) (11.7) (d) 66.7
--------- -------------- ------ ------ -----------
Income before minority interest............. 158.5 (34.4) (30.4) (19.2) 74.5
Minority interest............................. 19.1 (0.3) -- -- 18.8
--------- -------------- ------ ------ -----------
Income from continuing operations........... $ 139.4 $ (34.1) $ (30.4) $ (19.2) $ 55.7
--------- -------------- ------ ------ -----------
--------- -------------- ------ ------ -----------
</TABLE>
See accompanying notes to pro forma financial information.
A-4
<PAGE>
WHITMAN CORPORATION AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
(UNAUDITED AND IN MILLIONS)
<TABLE>
<CAPTION>
JUNE 30, 1997
---------------------------------------------------------------------
RECLASSIFY
HUSSMANN RECLASSIFY
INTERNATIONAL MIDAS GROUP
TO DISCONTINUED TO DISCONTINUED PRO FORMA
HISTORICAL OPERATIONS OPERATIONS ADJUSTMENTS PRO FORMA
--------- --------------- --------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
ASSETS:
Current assets:
Cash and cash equivalents................... $ 59.7 $ (39.9) $ (10.5) $ -- $ 9.3
Short-term investments...................... -- -- -- 150.0(e) 150.0
Receivables, net............................ 386.7 (168.7) (76.1) -- 141.9
Inventories, net............................ 345.1 (166.0) (94.2) -- 84.9
Other current assets........................ 72.5 (4.0) (15.0) -- 53.5
Net current assets of companies
held for disposition...................... -- 230.2 116.9 (347.1) (f) --
--------- ------ ------- ----------- -----------
Total current assets...................... 864.0 (148.4) (78.9) (197.1) 439.6
Property and equipment, net................... 754.6 (148.8) (212.6) -- 393.2
Intangible assets, net........................ 559.8 (42.6) (49.4) -- 467.8
Net non-current assets of companies held for
disposition................................. -- 187.5 249.3 (436.8) (f) --
Investments and other assets.................. 269.2 (32.2) (27.3) -- 209.7
--------- ------ ------- ----------- -----------
Total assets.............................. $ 2,447.6 $ (184.5) $ (118.9) $ (633.9) $ 1,510.3
--------- ------ ------- ----------- -----------
--------- ------ ------- ----------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY:
Current liabilities:
Short-term debt, including current portion
of long-term debt......................... $ 95.0 $ (7.9) $ (3.1) $ -- $ 84.0
Accounts and dividends payable.............. 282.3 (101.4) (41.8) -- 139.1
Other current liabilities................... 163.8 (39.1) (34.0) -- 90.7
--------- ------ ------- ----------- -----------
Total current liabilities................. 541.1 (148.4) (78.9) -- 313.8
Long-term debt................................ 866.3 (1.9) (18.8) (300.0) (e) 545.6
Deferred income taxes and other liabilities... 171.4 (26.2) (21.2) -- 124.0
Minority interest............................. 244.6 (8.0) -- (20.3) (g) 216.3
Shareholders' equity.......................... 624.2 -- -- (313.6) (h) 310.6
--------- ------ ------- ----------- -----------
Total liabilities and shareholders'
equity.................................. $ 2,447.6 $ (184.5) $ (118.9) $ (633.9) $ 1,510.3
--------- ------ ------- ----------- -----------
--------- ------ ------- ----------- -----------
</TABLE>
See accompanying notes to pro forma financial information.
A-5
<PAGE>
WHITMAN CORPORATION AND SUBSIDIARIES
NOTES TO PRO FORMA FINANCIAL INFORMATION
(a) To record the estimated reduction in general and administrative expenses
that would have been realized by Whitman subsequent to the Distribution.
(b) To record the assumed reduction in interest expense arising from the
repayment of indebtedness and the increase in short-term investments held by
Whitman using the funds received from Hussmann International and the Midas
Group. It is assumed the indebtedness repaid had an average interest rate of
7.25% and the short-term investments would have earned an average interest
rate of 5.5%.
(c) To eliminate the Whitman charges allocated to Hussmann International and
the Midas Group.
(d) To record income tax benefits attributable to adjustments (a), (b) and (c)
at a combined Federal, state and local income tax rate of 38%.
(e) To record the assumed reduction in long-term debt and increase in short-term
investments arising from the settlement of loans and advances payable to
Whitman by Hussmann International and the Midas Group and the receipt of
cash dividends in conjunction with the Distribution.
(f) To record the distribution of the assets and the liabilities of Hussmann
International and the Midas Group.
(g) To record the acquisition of the outstanding non-voting preferred stock of
Pepsi-Cola General Bottlers, Inc. in exchange for Whitman Common Stock.
(h) To record the effects of adjustments (e), (f) and (g) on shareholders'
equity.
A-6
<PAGE>
ANNEX B -- INFORMATION ABOUT HUSSMANN
BUSINESS
OVERVIEW
Hussmann manufactures, sells, installs and services merchandising and
refrigeration systems for the world's commercial food industry. Products include
refrigerated and non-refrigerated display merchandisers, refrigeration systems,
beverage coolers, air handlers, condensers, coils and walk-in storage coolers
and freezers. Hussmann utilizes advanced technology to create energy efficient
products that are designed to provide low life-cycle cost. Hussmann's wide
product line features high quality products intended to meet the needs of a
broad range of customers.
Hussmann's 1996 sales of approximately $1.0 billion included approximately
$480 million from the sale of display merchandisers, approximately $160 million
from refrigeration systems, approximately $245 million from installation and
service and approximately $120 million from the sale of other products,
including beverage coolers. For further information about Hussmann's historical
results of operations, see "Management's Discussion and Analysis of Financial
Condition and Results of Operations" appearing elsewhere in this Annex.
Hussmann operates in three geographic segments, the U.S. and Canada, the
United Kingdom and Other International, which includes Mexico, Latin America,
Asia Pacific, continental Europe and the Middle East. Hussmann's 1996 sales,
before eliminations of sales between geographic areas, included $827 million
from U.S. and Canada operations, $140 million from U.K. operations and $82
million from Other International operations. See Note 14 of the Notes to
Hussmann's Combined Financial Statements appearing elsewhere in this Annex for
further information about Hussmann's foreign and domestic operations and export
sales.
Hussmann Corporation is the successor to the business started by Harry L.
Hussmann in 1906 which sold butchers' supplies. Hussmann introduced the first
meat display case in 1917 and the first frozen food case for Clarence Birdseye
in 1933. Since 1933, Hussmann Corporation has grown to be the market leader in
the manufacture and sale of refrigerated display merchandisers and refrigeration
systems in the U.S., Canada, the U.K., Mexico and Chile. Hussmann Corporation
was incorporated in Missouri in 1929. Hussmann International, Inc. was
incorporated in Delaware in August 1997 in connection with the Distribution.
Hussmann's principal executive offices are located at 12999 St. Charles Rock
Road, Bridgeton, Missouri 63044 and its telephone number is (314) 291-2000.
MARKET OVERVIEW
In the U.S. and Canada, Hussmann sells its products primarily to
supermarkets and convenience stores, including both national chains and local
retailers. Since 1995, supermarkets and convenience stores have accelerated
their expansion by remodeling their facilities and modernizing their equipment.
Changes have also resulted from growth in the number of dual wage-earner
families who demand more convenience in food preparation. Supermarkets and
convenience stores have also begun to focus on higher margin products such as
prepared foods which require more refrigerated or heated display merchandising
space.
In addition to the expansion by supermarkets and convenience stores, the
retail food service market, which includes outlets such as Boston Market and
Kenny Rogers, is now one of the fastest growing parts of the commercial food
industry in the U.S. This growth is attributable to the same factors driving
supermarkets and convenience stores to sell more prepared foods. Another growing
market within the commercial food industry is commercial/industrial
refrigeration, including processing, produce ripening and cold storage
warehousing facilities.
The international market represents a significant long-term growth
opportunity as countries develop their infrastructure, as well as their food
distribution and preservation needs. Many countries are also experiencing
economic growth, creating demand for more technologically advanced products.
Finally, in Mexico and Latin America, local retailers are expanding and
remodeling their stores as a result of competition from U.S. and European chains
that are entering these markets. However, since 1995, Hussmann has experienced
declining sales in the U.K. Hussmann did not have operating income in the U.K.
in 1996. In the six months ended June 30, 1997,
B-1
<PAGE>
Hussmann's operating loss in the U.K. was $6.3 million. Hussmann management has
determined there is a need to restructure the U.K. operations. Actions to be
taken include the reduction of asset values to recognize impairment and the
consolidation of sales and service branches, which includes some administrative
downsizing. Actions unrelated to the U.K. include the consolidation of certain
manufacturing facilities in the U.S. To provide for the restructuring, Hussmann
is expected to incur nonrecurring charges of approximately $50 million on a
pre-tax basis, or $43 million on an after-tax basis.
STRATEGY
Hussmann's business strategy is to maintain and improve its position as a
leader in the mature markets in which it competes while expanding its presence
in the food service market and evolving international markets.
SALES GROWTH. In the U.S. and Canada, Hussmann is seeking to improve its
sales to those customers which it has historically served in the commercial food
industry while increasing sales to higher growth areas of the food service
market. Hussmann plans to achieve these goals by (i) continuing to develop
proprietary products such as the Impact line and the Protocol refrigeration
system described below in order to differentiate Hussmann from its competitors,
(ii) expanding into the food service market by leveraging its existing
technological and manufacturing expertise and (iii) pursuing strategic
acquisitions to broaden its service and distribution network and manufacturing
capabilities.
INTERNATIONAL EXPANSION. Hussmann seeks to participate in the growth of
developing regions throughout the world by further strengthening a manufacturing
and distribution presence in these regions. In order to more effectively serve
these regions and follow the globalization of its customer base, Hussmann is
investing in manufacturing facilities that have the technology to produce
specific products tailored to local customer demand. Hussmann expects to
increase its global competitiveness by locating manufacturing facilities in
various regions throughout the world. More than one-third of Hussmann's 1996
sales were to customers outside of the U.S.
INCREASED CAPACITY. The commercial food industry in the U.S. has
experienced significant growth since the beginning of 1995. As a result,
Hussmann's plants operated at full capacity during the third and fourth quarters
of 1995 and 1996. In order to capitalize on the industry's growth while
providing timely delivery to existing customers, Hussmann has expanded its plant
in Chino, California and reorganized its shop floor at its Addison, Illinois
plant. In addition, Hussmann intends to increase capacity at its Bridgeton,
Missouri plant. See "Properties" appearing elsewhere in this Annex.
COST REDUCTION. Hussmann has implemented aggressive cost and expense
containment programs, including rationalizing similar manufacturing operations,
instituting centralized purchasing of frequently used components, consolidating
engineering efforts and striving to keep selling, general and administrative and
fixed costs constant through the year 2000.
PRODUCTS
Hussmann products include refrigerated and non-refrigerated display
merchandisers, refrigeration systems, beverage coolers, air handlers,
condensers, coils and walk-in storage coolers and freezers. Hussmann utilizes
advanced technology to create energy efficient products that are designed to
provide low life-cycle cost. Hussmann's wide product line features high quality
products intended to meet the needs of a broad range of customers. All of
Hussmann's products are certified to relevant national or international industry
standards, as appropriate, by independent laboratories.
MERCHANDISERS. Refrigerated display merchandisers preserve perishable food
products while allowing attractive display and accessibility to the consumer.
Display merchandisers are used to display refrigerated and frozen products in
supermarkets, convenience stores, food service outlets and delicatessens. These
merchandisers are either self-contained or linked to a remote refrigeration
system through a system of pipes. Hussmann's display merchandisers can be
customized to display a variety of items.
B-2
<PAGE>
Hussmann's current standard product line of merchandisers, the Impact line,
was introduced in 1995. Hussmann has positioned Impact as a global merchandising
platform. Before the introduction of Impact, Hussmann's operating units offered
region-specific merchandising product lines. Hussmann's operations in the U.S.,
Mexico and China have completed the transition to the Impact line. Hussmann
anticipates that its operations in Latin America and the U.K. will complete the
transition to the Impact line during 1998.
The Impact platform was designed with new technological features,
manufacturing efficiencies, and global markets in mind. Impact products utilize
many common parts and each merchandiser is designed to be dismantled and shipped
in pieces so as to more economically and efficiently address export shipments as
well as remote case assembly opportunities. The Impact line of merchandisers
also includes cases that are not product specific, enabling stores to display
fresh meat, bulk produce, and other products in the same merchandiser by
changing display accessories. Impact merchandisers offer lower energy,
maintenance and refrigeration costs, while featuring advanced styling and
merchandising capabilities.
Hussmann is also a leader in providing customized refrigerated display
merchandisers and accessories which complement its standard lines. The demand
for these merchandisers has increased with the growth of specialty sections in
supermarkets that require custom designed attractive merchandisers that
highlight the products displayed. These higher margin, specialized merchandisers
represent an expanding market where Hussmann can capitalize on its leadership
position and extensive branch network for selling, installing and servicing
products. Hussmann merchandisers can be refrigerated, non-refrigerated, heated
and color coordinated to store specifications. Hussmann is the only manufacturer
with extensive custom capabilities throughout the U.S. and Canada. Hussmann's
Chino, California and Brantford, Ontario plants are the largest custom
merchandiser manufacturers in North America.
REFRIGERATION SYSTEMS. Hussmann is a technological leader in centralized
refrigeration systems. These systems--which include multi-compressors, automatic
flow control systems and electronic controls--are generally located in the
store's back room, away from the display and merchandising areas. They are built
to customer specifications and vary by number of compressors, refrigerant type
and need for satellite units.
In 1993 Hussmann introduced the Protocol refrigeration system. The Protocol
system utilizes compact, multiple scroll compressor refrigeration units enclosed
in attractive housings. Unlike back room systems, individual Protocol units are
located either in or, more often, very near the sales areas, close to the
refrigerated display cases. Protocol units use minimal floor space and eliminate
the need for a refrigeration back room and related construction costs while
allowing for increased sales areas. Protocol is a chlorofluorocarbon (CFC) and
hydro chlorofluorocarbon (HCFC) free system, which uses up to 50% less
refrigerant and reduces the amount of piping and braze joints, which lessens the
likelihood of refrigerant leaks.
OTHER PRODUCTS. Hussmann manufactures numerous other products for use in
the commercial food industry. These products include a line of coolers for the
beverage industry sold primarily in Mexico and Latin America. In addition,
Hussmann manufactures air handlers, condensers and coils for the
commercial/industrial refrigeration market. Hussmann also manufactures and
installs walk-in storage coolers and freezers that are used for bulk storage and
storage for non-display items. These are typically found in the back rooms of
supermarkets and convenience stores and other commercial sites, such as hotel
and cafeteria kitchens, and are filled with items that require refrigeration
prior to sales area display. Hussmann's other products also include
self-contained refrigeration equipment utilized in convenience stores.
PRODUCT DEVELOPMENT AND PROPRIETARY INFORMATION
Hussmann strives to be the technology leader in commercial refrigeration.
Hussmann believes that technological development is an important factor in its
ability to maintain its market leadership position. Hussmann's research and
product development strategy is to centralize the development of new products
for global application. Three global design centers have been established and
responsibility assigned for creating new products with a focus on global design
for specific technologies and product lines. The goal of the design centers is
to achieve more commonality of components and modularity in Hussmann's product
lines. The centers share technologies and product designs. The Impact
merchandiser platform reflects Hussmann's global design approach.
B-3
<PAGE>
The corporate design center, located at Bridgeton, is responsible for
technology development and new supermarket display cases platforms as well as
global manufacturing support. The Glasgow, Scotland design center is responsible
for design and development of self-contained product platforms. The Mexico City
design center is responsible for entry level products such as beverage coolers
and spot merchandisers. In addition to the three global design centers, Hussmann
carries out refrigeration systems development primarily at its Bridgeton,
Atlanta, Brantford and Glasgow facilities and custom merchandiser development at
the Chino, California facility.
The corporate design center, which Hussmann believes to be unique in the
industry, represents a $21.5 million capital investment and includes nine
ambient-controlled display case test rooms, four ambient-controlled
psychrometric test rooms, one ambient-controlled test chamber, all with
dedicated computer based data acquisition systems, a "mini-factory" model shop,
materials testing lab, reverberant sound test room, transit and vibration test
area, rain test chamber and solid modeling design workstations. The corporate
design center allows Hussmann to work closely with chemical companies and
compressor, valve and controls manufacturers to create new generations of cases
and systems.
Hussmann's research and development efforts are staffed by approximately 130
engineers, designers, laboratory technicians and model makers, including
approximately 55 at the corporate design center. During 1996 Hussmann spent
approximately $6 million on research and development, of which $3.6 million was
devoted to the corporate design center. Research and development expenditures
during 1997 are expected to be consistent with 1996.
Hussmann holds patents registered in the U.S. and foreign countries for
various products. Hussmann believes that, although its patents relating to the
Impact platform and Protocol refrigeration systems are important in maintaining
its competitive and marketing advantage, no individual patent is material to its
financial condition or results of operations. Hussmann also holds various
trademarks, trade names and copyrights, none of which, other than the Hussmann
name, is considered by Hussmann to be material to its financial condition or
results of operations
MANUFACTURING OPERATIONS
Hussmann has 10 manufacturing plants in the U.S. and Canada, each of which
is devoted to the manufacture of certain lines of Hussmann products. Hussmann
believes that efficiency and quality are increased by concentrating the
manufacture of its different product lines at separate plants. See "Properties"
appearing elsewhere in this Annex.
In Mexico, Hussmann has manufacturing plants in Mexico City and Monterrey
primarily serving the supermarket and beverage industries. During 1995, Hussmann
expanded its operations in South America with an acquisition of a 75 percent
interest in Refrigeracion Frio-Lux S.A.I. ("Frio-Lux"), a manufacturer of
self-contained refrigerated display merchandisers and walk-in storage coolers
and freezers in Chile. Hussmann purchased the remaining 25 percent of Frio-Lux
in 1997. In January, 1997, Hussmann acquired a 70 percent interest in Hussmann
Fast Frio do Brasil, Ltda. ("Fast Frio"), a Brazilian supermarket equipment
manufacturer.
Hussmann has manufacturing plants in Glasgow, Scotland and Milton Keynes,
England that make refrigerated display merchandisers and refrigeration systems.
Hussmann sells the products manufactured at these plants primarily in the U.K.
In Asia Pacific, Hussmann has a 55 percent interest in Luoyang Hussmann
Refrigeration Co. Ltd. ("Luoyang Refrigeration"), a leading producer of
refrigeration systems and display merchandisers in China. Hussmann opened a new
factory in Luoyang in 1996, and began to produce Hussmann designed products,
including the Impact line of merchandisers.
Most of Hussmann's component purchases are for standard, readily available
materials such as carbon steel, compressors and electrical components. Such
components are available from multiple suppliers, and Hussmann has not
experienced any significant shortages. Hussmann generally does not enter into
long-term supply contracts. Hussmann also purchases custom components produced
to its specifications. Although an interruption in the supply of a custom
component may cause a short-term disruption to operations, Hussmann has
alternative supply
B-4
<PAGE>
plans to mitigate any long-term effects. Hussmann believes it enjoys good
relationships with its suppliers of both standard and custom components.
SALES AND MARKETING
In the U.S., Canada, Mexico and the U.K., Hussmann sells, installs and
services products primarily through its network of approximately 35 branch
facilities. In addition to these company-operated facilities, Hussmann works
with approximately 20 independent distributors in the U.S. and Canada. It has
also entered into a joint venture with Global TH, a Hungarian manufacturer, for
the marketing of Hussmann products in Hungary. Through this network and the
Hussmann Total Service Program (TSP), Hussmann seeks to promote strong customer
loyalty and strengthen its reputation for quality and reliability. The Hussmann
TSP encompasses Hussmann's ability to provide store design, engineer a broad
range of standard and customized equipment, and provide installation and service
capabilities to its customers.
Hussmann has also entered into agreements throughout the U.S. with
manufacturers' representatives specializing in the food service market. Hussmann
believes that these relationships will enable it to more effectively increase
its sales in this growing market.
In Latin America, Hussmann sells through a network of approximately 20
independent distributors in those countries where it has no direct investment.
Hussmann has distribution agreements in Argentina, Colombia, El Salvador,
Brazil, Venezuela, Ecuador, Guatemala, Costa Rica and Puerto Rico. Hussmann has
its own distribution network in Chile, Brazil and Peru. In Southeast Asia,
Hussmann has a 50% owned joint venture with a distributor in Singapore that
sells, services and installs Hussmann products throughout the southern Pacific
Rim. Hussmann has agreements with distributors in Korea, Taiwan, Thailand, New
Zealand, French Polynesia and Guam.
Hussmann's pricing is usually on a competitive bid basis. Hussmann submits
individual store bids, multi-store package bids and annual contract bids. There
is standard pricing for some items such as service parts and also for wholesale
sales.
COMPETITION
In general, the markets in which Hussmann participates are highly
competitive with competition primarily based on price, variety, quality,
technology and energy conservation. Hussmann believes that it is competitive on
these bases. Hussmann's competitors vary according to product and geographic
area and include companies that manufacture a variety of products for the
commercial food industry and those that specialize in a particular product.
Hussmann faces competition from a limited number of large competitors in the
supermarket and convenience store markets in the U.S. and Canada. These
competitors include Kysor-Warren (Scotsman Industries, Inc.), Tyler
Refrigeration Corporation and Hill Phoenix, Inc. (Dover Corporation) in
supermarkets and Universal Nolin/ Kelvinator (Electrolux AB), Master-Bilt
Products, and Federal (Standex International Corporation) in convenience stores.
Competition in the U.S. and Canada in refrigeration systems, walk-in storage
coolers and freezers and other Hussmann products is more fragmented, with
Hussmann facing competition from a number of regional manufacturers.
In Mexico, Latin America and Europe, Hussmann faces competition from large
European manufacturers, such as Costan (EL. FI Elettrofinanziara S.P.A.), Linde
and Zanussi (Electrolux AB), as well as smaller local manufacturers. In Asia
Pacific, Hussmann is in competition with local manufacturers, large European
manufacturers and Japanese manufacturers, such as Sanyo and Nakano.
CUSTOMERS
No single customer accounted for more than 5% of Hussmann's sales during any
of the last three fiscal years. Hussmann's largest customers are supermarkets in
the U.S. and include 19 of the top 20 chains. The U.S. customer base is
comprised of approximately 13,000 independent and 18,000 chain-owned
supermarkets, plus over 52,000 other grocery stores. In recent years,
approximately 4,000 stores purchase refrigeration equipment annually for either
new store openings or remodelings. Historically, Hussmann's supermarket business
has been divided approximately equally between new store activity and the
remodeling of existing stores. In 1996, about 56 percent of such business was in
new store openings, and 44 percent in remodelings.
B-5
<PAGE>
BACKLOG AND SEASONALITY
The dollar amount of firm backlog at June 30, 1997 was $217.1 million,
compared with $221.8 million at June 30, 1996. Substantially all such backlog is
expected to be shipped by December 31, 1997.
Hussmann experiences the greatest demand for its products in the third and
fourth quarters of the year, with approximately 58% of annual sales occurring
during that period in 1996. This demand results from customers' seasonal
construction cycles and desire to complete stores prior to the holidays.
REGULATORY COMPLIANCE AND LEGAL PROCEEDINGS
Hussmann is subject to numerous federal, state and local laws and
regulations designed to protect the environment. In addition to environmental
laws, Hussmann is subject to the Federal Occupational Safety and Health Act and
other laws regulating safety and health. Hussmann maintains a program to
facilitate compliance with these laws, the capital costs of which are not
material to its financial condition or results of operations.
Hussmann is contractually obligated through 2004 to indemnify the current
owners of a previously sold operation for the costs to perform certain remedial
and monitoring activities. These activities are identified and outlined in a
Consent Order signed by Hussmann and the Missouri Department of Natural
Resources. Hussmann believes it has set aside sufficient reserves to meet these
obligations.
Hussmann has been named as a potentially responsible party under superfund
legislation at three sites. One site is a community landfill and the other two
sites are treatment, storage and disposal facilities used by Hussmann to handle
industrial waste. Hussmann is not currently utilizing any of these sites and
believes any liability it may ultimately incur at such sites would not have a
material adverse effect on its financial condition or results of operations.
Hussmann also has other contingent liabilities arising from various pending
claims and litigation on a number of matters. While the amount of liability that
may result from these matters cannot be determined, in the opinion of Hussmann
counsel, the ultimate liability will not materially affect the combined
financial condition or results of operations of Hussmann.
EMPLOYEES
As of July 31, 1997, Hussmann had approximately 8,000 employees, including
approximately 5,000 covered by collective bargaining agreements. Labor contracts
with respect to approximately 1,350 and 1,200 employees expire in 1998 and 1999,
respectively. Labor contracts with respect to approximately 2,410 employees,
including approximately 1,500 employees at Hussmann's Bridgeton facility, expire
in the year 2000. Hussmann considers its relationships with employees to be
generally satisfactory.
PROPERTIES
The following table sets forth certain information with respect to
Hussmann's manufacturing facilities, all of which are owned by Hussmann except
as noted below.
<TABLE>
<CAPTION>
APPROXIMATE
LOCATION SQUARE FOOTAGE PRIMARY PRODUCTS MANUFACTURED
- --------------------------- -------------- ------------------------------------------------------------------------
<S> <C> <C>
Bridgeton, Missouri(1)..... 1,600,000 Refrigerated display merchandisers and refrigeration systems
Montgomery, Alabama(2)..... 157,000 Walk-in storage coolers and freezers
Chino, California(2)....... 400,000 Custom display merchandisers and refrigeration systems
Aurora, Colorado(2)........ 79,000 Bakery merchandisers and floral displays
Norcross, Georgia(2)....... 85,000 Refrigeration systems and air handlers
Addison, Illinois.......... 208,000 Evaporators, condensers and coils
Gloversville, New York..... 150,000 Self-contained refrigerated display merchandisers
Seattle, Washington(2)..... 80,000 Walk-in storage coolers and freezers
</TABLE>
B-6
<PAGE>
<TABLE>
<CAPTION>
APPROXIMATE
LOCATION SQUARE FOOTAGE PRIMARY PRODUCTS MANUFACTURED
- --------------------------- -------------- ------------------------------------------------------------------------
Brantford, Ontario......... 385,000 Custom display merchandisers and refrigeration systems
<S> <C> <C>
St. Hubert, Quebec......... 180,000 Evaporators, condensers, air handlers and coils
Milton Keynes, England..... 80,000 Custom display merchandisers
Glasgow, Scotland.......... 270,000 Refrigerated display merchandisers and refrigeration systems
Mexico City, Mexico........ 280,000 Beverage coolers and refrigerated display merchandisers
Monterrey, Mexico.......... 235,000 Beverage coolers, refrigerated display merchandisers and walk-in storage
coolers and freezers
Santiago, Chile............ 70,000 Self-contained refrigerated display merchandisers and walk-in storage
coolers and freezers
Londrina, Brazil(3)........ 170,000 Refrigerated display merchandisers, shelving, check-out stands and
refrigeration systems
Luoyang, China(3).......... 230,000 Refrigerated display merchandisers and refrigeration systems
</TABLE>
- ------------------------
(1) Hussmann world headquarters and corporate offices.
(2) Leased.
(3) Owned with a joint venture partner.
FINANCING
Hussmann's management expects to enter into a five-year, unsecured revolving
credit facility (the "Hussmann Credit Facility") with a syndicate of commercial
banks and financial institutions prior to the Distribution Date. The Hussmann
Credit Facility will enable Hussmann to borrow funds at variable interest rates
on a revolving credit basis up to an aggregate principal amount of $[ ]
million, subject to the terms and conditions thereof. Hussmann's management
expects to borrow on or before the Distribution Date approximately $[ ]
million under the Hussmann Credit Facility for the purposes of settling
intercompany debt and paying a cash dividend to Whitman. Unused amounts
available under the Hussmann Credit Facility will be available for Hussmann's
working capital requirements and general corporate purposes after the
Distribution Date. Hussmann may convert a portion of its initial debt to longer
term fixed rate debt, contingent upon acceptable market conditions.
POST-DISTRIBUTION DIVIDEND POLICY
The payment and level of cash dividends by Hussmann after the Distribution
will be subject to the discretion of the Hussmann Board. Dividend decisions will
be based upon a number of factors, including Hussmann's operating results and
financial requirements. No determination has been made by the Hussmann Board
with respect to the initial cash dividend that would be paid commencing after
the Distribution. However, it is expected that the cash dividend initially paid
by Hussmann will be determined, in part, by reference to dividend payment levels
of entities engaged in business comparable to the businesses in which Hussmann
is engaged.
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<PAGE>
HUSSMANN INTERNATIONAL
INTRODUCTION TO PRO FORMA COMBINED FINANCIAL INFORMATION
The unaudited Pro Forma Combined Statements of Income of Hussmann
International for the six months ended June 30, 1997 and for the year ended
December 31, 1996 present the pro forma combined results of operations of
Hussmann International, assuming that the transactions contemplated by the
Distribution, including the borrowing to be incurred by Hussmann International
in connection with the Distribution, had been completed as of the beginning of
the respective periods, and include all material adjustments necessary to
restate Hussmann International's historical results. The adjustments required to
reflect such transactions are set forth in the "Pro Forma Adjustments" column.
The unaudited Pro Forma Combined Balance Sheet of Hussmann International as
of June 30, 1997 presents the pro forma combined financial position of Hussmann
International, assuming that the transactions contemplated by the Distribution
described in the preceding paragraph had been completed as of that date. The
adjustments required to reflect such transactions are set forth in the "Pro
Forma Adjustments" column.
The unaudited pro forma combined financial statements of Hussmann
International should be read in conjunction with the historical financial
statements and related notes of Hussmann International included elsewhere in
this Annex B. The pro forma financial information presented is for informational
purposes only and may not necessarily reflect future results of operations or
financial position of Hussmann International or what the results of operations
or financial position of Hussmann International would actually have been had
Hussmann International operated as an independent company during the periods
shown.
B-8
<PAGE>
HUSSMANN INTERNATIONAL
PRO FORMA COMBINED STATEMENT OF INCOME
(UNAUDITED AND IN MILLIONS)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED JUNE 30, 1997
---------------------------------------
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
----------- ------------- -----------
<S> <C> <C> <C>
Sales and revenues............................................................. $ 449.4 $ -- $ 449.4
Cost of goods sold............................................................. 366.1 -- 366.1
----------- ----- -----------
Gross profit................................................................. 83.3 -- 83.3
Selling, general and administrative expenses................................... 51.6 2.0(a) 53.6
Amortization expense........................................................... 0.8 -- 0.8
----------- ----- -----------
Operating income............................................................. 30.9 (2.0) 28.9
Whitman charges................................................................ (14.2) 14.2(b) --
Interest expense:
Whitman...................................................................... (8.9) 8.9(b) --
Other........................................................................ (0.6) (7.4) (c) (8.0)
----------- ----- -----------
Total interest expense..................................................... (9.5) 1.5 (8.0)
Other income, net.............................................................. 1.0 -- 1.0
----------- ----- -----------
Income before income taxes................................................... 8.2 13.7 21.9
Income tax provisions.......................................................... 3.2 5.1(d) 8.3
----------- ----- -----------
Net income................................................................... $ 5.0 $ 8.6 $ 13.6
----------- ----- -----------
----------- ----- -----------
</TABLE>
See accompanying notes to pro forma financial information.
B-9
<PAGE>
HUSSMANN INTERNATIONAL
PRO FORMA COMBINED STATEMENT OF INCOME
(UNAUDITED AND IN MILLIONS)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1996
-------------------------------------
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
--------- ------------- -----------
<S> <C> <C> <C>
Sales and revenues............................................................ $ 1,005.7 $ -- $ 1,005.7
Cost of goods sold............................................................ 801.8 -- 801.8
--------- ----- -----------
Gross profit................................................................ 203.9 -- 203.9
Selling, general and administrative expenses.................................. 108.6 4.0(a) 112.6
Amortization expense.......................................................... 1.5 -- 1.5
--------- ----- -----------
Operating income............................................................ 93.8 (4.0) 89.8
Whitman charges............................................................... (26.7) 26.7(b) --
Interest expense:
Whitman..................................................................... (16.7) 16.7(b) --
Other....................................................................... (1.3) (13.7) (c) (15.0)
--------- ----- -----------
Total interest expense.................................................... (18.0) 3.0 (15.0)
Other income, net............................................................. 2.6 -- 2.6
--------- ----- -----------
Income before income taxes.................................................. 51.7 25.7 77.4
Income tax provisions......................................................... 17.6 9.5(d) 27.1
--------- ----- -----------
Net income.................................................................. $ 34.1 $ 16.2 $ 50.3
--------- ----- -----------
--------- ----- -----------
</TABLE>
See accompanying notes to pro forma financial information.
B-10
<PAGE>
HUSSMANN INTERNATIONAL
PRO FORMA COMBINED BALANCE SHEET
(UNAUDITED AND IN MILLIONS)
<TABLE>
<CAPTION>
JUNE 30, 1997
--------------------------------------
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
----------- ------------ -----------
<S> <C> <C> <C>
ASSETS:
Current assets:
Cash and cash equivalents.................................................. $ 39.9 $ -- $ 39.9
Receivables, net........................................................... 168.7 -- 168.7
Inventories................................................................ 166.0 -- 166.0
Other current assets....................................................... 4.9 -- 4.9
----------- ------------ -----------
Total current assets..................................................... 379.5 -- 379.5
Property and equipment, net.................................................. 148.8 -- 148.8
Intangible assets, net....................................................... 42.6 -- 42.6
Other assets................................................................. 32.2 -- 32.2
----------- ------------ -----------
Total assets............................................................. $ 603.1 $ -- $ 603.1
----------- ------------ -----------
----------- ------------ -----------
LIABILITIES AND EQUITY:
Current liabilities:
Short-term debt............................................................ $ 3.6 $ -- $ 3.6
Accounts payable........................................................... 105.7 -- 105.7
Income taxes payable....................................................... 0.6 -- 0.6
Accrued expenses........................................................... 38.5 -- 38.5
----------- ------------ -----------
Total current liabilities................................................ 148.4 -- 148.4
Loans and advances from Whitman.............................................. 224.9 (224.9) (e) --
Long-term debt............................................................... -- 225.0(e) 225.0
Deferred income taxes and other liabilities.................................. 37.0 -- 37.0
----------- ------------ -----------
Total liabilities........................................................ 410.3 0.1 410.4
----------- ------------ -----------
Shareholder equity........................................................... 192.8 (0.1) (e) 192.7
----------- ------------ -----------
Total liabilities and equity............................................. $ 603.1 $ -- $ 603.1
----------- ------------ -----------
----------- ------------ -----------
</TABLE>
See accompanying notes to pro forma financial information.
B-11
<PAGE>
HUSSMANN INTERNATIONAL
NOTES TO PRO FORMA FINANCIAL INFORMATION
(a) To record the estimated additional administrative expenses that would have
been incurred by Hussmann International as a publicly held, independent
company.
(b) To eliminate the Whitman charges and interest paid to Whitman.
(c) To record the interest expense on the funds assumed to be borrowed under
the Hussmann Credit Facility. The borrowings are assumed to bear an
annualized interest rate of 7.0%, which is management's estimate of the
currently available rate for borrowings under comparable credit facilities.
This rate may change prior to the incurrence of such debt on or before the
Distribution Date; further, after the Distribution the interest rate on the
borrowings under the Hussmann Credit Facility will continue to be subject to
changes in interest rates generally. The following table reflects the effect
on the pro forma combined income statements of an increase or decrease of
1/8 of a percentage point in the annualized interest rate (in millions):
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
DECEMBER 31, 1996
JUNE 30, 1997
------------------------ ------------------------
6.875% 7.125% 6.875% 7.125%
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Income before income taxes................................... $ 22.0 $ 21.8 $ 77.6 $ 77.2
Net income................................................... $ 13.7 $ 13.6 $ 50.4 $ 50.2
</TABLE>
(d) To record income tax benefits attributable to adjustments (a), (b) and (c)
at a combined Federal, state and local tax rate of 37%.
(e) To record payments to be made to Whitman by Hussmann International,
anticipated to aggregate $225 million, which first will be applied to settle
all intercompany loans and advances, with the balance to be paid as a cash
dividend.
B-12
<PAGE>
HUSSMANN INTERNATIONAL SUMMARY OF OPERATIONS
The following table presents selected historical combined financial
information of Hussmann International. The information set forth below should be
read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the historical combined financial
statements of Hussmann International and the notes thereto included elsewhere in
this Annex B. The combined operating results data set forth below for each of
the years ended December 31, 1996, 1995 and 1994 and the combined balance sheet
data as of December 31, 1996 and 1995 are derived from, and are qualified by
reference to, the audited combined financial statements of Hussmann
International included elsewhere in this Annex B, and should be read in
conjunction with those financial statements and notes thereto. The combined
operating results data for each of the years ended December 31, 1993 and 1992
and the combined balance sheet data as of December 31, 1994, 1993 and 1992 are
derived from unaudited combined financial statements of Hussmann International
not included herein. The combined balance sheet data as of June 30, 1996 are
derived from unaudited combined financial statements of Hussmann International
not included herein. The combined operating results data for the six-month
periods ended June 30, 1997 and 1996, and the combined balance sheet data as of
June 30, 1997 are derived from, and are qualified by reference to, the unaudited
interim combined financial statements of Hussmann International included
elsewhere in this Annex B, and should be read in conjunction with those
financial statements and the notes thereto. See "Index to Hussmann International
Historical Financial Information." Per share data has not been presented because
Hussmann International was wholly-owned by Whitman during the periods presented
below.
The combined historical financial information presented below may not
necessarily reflect future results of operations or financial position of
Hussmann International or what the results of operations or financial position
of Hussmann International would actually have been had Hussmann International
operated as an independent company during the periods shown. See "Risk
Factors--Limited Relevance of Historical Combined Financial Information" in the
body of the Information Statement.
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED FOR THE YEARS ENDED DECEMBER 31,
JUNE 30, ---------------------------------------------------------
------------------------ 1993 1992
(IN MILLIONS) 1996 1996 1995 1994 ----------- -----------
----------- --------- --------- --------- (UNAUDITED) (UNAUDITED)
1997 (UNAUDITED)
-----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
COMBINED OPERATING RESULTS DATA:
Sales and revenues.................... $ 449.4 $ 420.6 $ 1,005.7 $ 921.7 $ 859.5 $ 846.5 $ 791.2
Whitman charges....................... (14.2) (15.1) (26.7) (28.6) (28.3) (33.6) (32.0)
Income before accounting change and
discontinued operations............. 5.0 4.8 34.1 23.9 23.6 23.0 20.0
Loss from discontinued operations..... -- -- -- -- -- (1.7) (23.8)
Cumulative effect of accounting
change.............................. -- -- -- -- -- (10.5) --
Net income (loss)..................... 5.0 4.8 34.1 23.9 23.6 10.8 (3.8)
COMBINED BALANCE SHEET DATA:
Total assets.......................... $ 603.1 $ 529.5 $ 611.4 $ 547.4 $ 503.6 $ 490.4 $ 477.6
Loans and advances from Whitman....... 224.9 200.2 211.4 186.9 150.6 134.4 126.7
Shareholder equity.................... 192.8 158.7 192.6 161.1 173.2 164.2 155.8
</TABLE>
B-13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
Hussmann manufactures, sells, installs and services merchandising and
refrigeration systems for the world's commercial food industry. Products include
refrigerated and non-refrigerated display merchandisers, refrigeration systems,
beverage coolers, air handlers, condensers, coils and walk-in storage coolers
and freezers. Hussmann operates in three geographic segments, the U.S. and
Canada, the United Kingdom and Other International, which includes Mexico, Latin
America, Asia Pacific, continental Europe and the Middle East, with
approximately 90% of 1996 sales from the U.S. and Canada and U.K. operations.
In general, the markets in which Hussmann participates are highly
competitive with competition primarily based on price, variety, quality,
technology and energy conservation. Hussmann's competitors vary according to
product and geographic area and include companies that manufacture a variety of
products for the commercial food industry and those that specialize in a
particular product. In the U.S. and Canada, which comprised approximately 75% of
Hussmann's sales in 1996, Hussmann sells its products primarily to supermarkets
and convenience stores, including both national and local retailers. In
addition, Hussmann's sales are historically seasonal, with the greatest demand
for its products in the third and fourth quarters of the year. This demand
results from customers' seasonal construction cycles and the desire to complete
stores prior to the holidays.
Since 1995, Hussmann has experienced declining sales in the U.K. Hussmann
did not have operating income in the U.K. in 1996. In the six months ended June
30, 1997, Hussmann's operating loss in the U.K. was $6.3 million. Hussmann
management has determined there is a need to restructure the U.K. operations.
Actions to be taken include the reduction of asset values to recognize
impairment and the consolidation of sales and service branches, which includes
some administrative downsizing. Actions unrelated to the U.K. operations include
the consolidation of certain manufacturing facilities in the U.S. To provide for
the restructuring, Hussmann is expected to record nonrecurring charges of
approximately $50 million on a pre-tax basis, or $42 million to $44 million on
an after-tax basis.
RESULTS OF OPERATIONS--SIX MONTHS ENDED JUNE 30, 1997 COMPARED TO SIX MONTHS
ENDED JUNE 30, 1996
SALES AND REVENUES
Sales and revenues during the six months ended June 30, 1997 of $449.4
million were $28.8 million or 6.8% over sales and revenues of $420.6 million
during the comparable 1996 period principally driven by volume increases. Sales
and revenue increases in the U.S. and Brazil drove the overall improvement.
Historically, Hussmann has realized approximately 42% of its annual sales and
revenues in the first six months of the year due to construction seasonality and
supermarket customers' desire to finish projects prior to the holiday season.
The following is a summarized analysis of the increase in sales and revenues (in
millions):
<TABLE>
<CAPTION>
SALES AND REVENUES % INCREASE
SIX MONTHS CHANGE FROM (DECREASE)
ENDED JUNE 30, 1997 1996 FROM 1996
------------------- ----------- -------------
<S> <C> <C> <C>
U.S. and Canada..................................... $ 378.2 $ 25.2 7.1%
U.K. ............................................... 46.6 (8.1) (14.8)
Other International................................. 43.6 9.3 27.1
Eliminations........................................ (19.0) 2.4 11.2
------ -----------
Total............................................. $ 449.4 $ 28.8 6.8%
------ -----------
------ -----------
</TABLE>
The 7.1% increase in sales and revenues in the U.S. and Canada was
principally driven by continued strong U.S. supermarket demand. The decrease in
sales and revenues in the U.K. of 14.8% was due to a continued soft market in
the U.K., plus startup delays at a new plant in Milton Keynes, England. The
increase in sales and revenues of 27.1% or $9.3 million in Other International,
which includes Mexico, Latin America, Asia Pacific, continental Europe and the
Middle East, was principally due to the acquisition of Fast Frio in Brazil in
January 1997, which had $8.1 million of sales and revenues in the first half of
1997.
B-14
<PAGE>
GROSS PROFIT AND OPERATING INCOME
As a percent of sales and revenues, gross profit margin in the first six
months of 1997 was 18.5% compared to 19.6% in the first six months of 1996. U.S.
and Canada gross profit percentage of 21.0% was 0.1 points above 1996 gross
profit percentage of 20.9%. The U.S. market has been particularly price
competitive since 1995. Productivity improvements from the new Impact product
line were mostly offset by inflation in material costs which was not offset by
customer price increases. Gross profit percentage in both the U.K. and Other
International operations were below 1996 levels due to lower volume and
manufacturing inefficiencies in the U.K. and a negative change in sales mix in
Mexico driven by the timing of supermarket building programs. Management expects
second half 1997 gross profit margins in both the U.K. and Other International
operations to improve as equipment sales increase.
Total selling, general and administrative ("SG&A") expenses of $51.6 million
were $0.4 million or 0.8% below 1996 SG&A expenses of $52.0 million. Increased
SG&A expenses from the acquisition of Fast Frio in Brazil and increases in China
for sales and manufacturing personnel were more than offset by reductions in the
U.S. and Canada related to the consolidation of support functions.
First half 1997 operating income of $30.9 million was $1.1 million or 3.7%
above first half 1996 operating income of $29.8 million. Historically, Hussmann
realizes approximately 30-33% of its total year operating income in the first
six months due to the seasonality of sales. U.S. and Canada operating income of
$42.0 million was $6.7 million or 19.0% more than 1996 operating income of $35.3
million. This increase was principally driven by strong volume growth plus
continued control of SG&A expenses in support areas. The U.K. operations had a
first half operating income loss of $6.3 million which was $4.8 million below
the 1996 operating loss of $1.5 million. Lower volume combined with start-up
driven manufacturing inefficiencies at the Milton Keynes plant drove this
result. First half operating income for Other International operations of $2.9
million was $1.4 million or 32.6% below 1996 operating income of $4.3 million,
attributable mainly to the timing of supermarket sales in Mexico in 1997
compared to 1996. Management expects that for total year 1997 Mexico operating
income will exceed 1996 levels.
INTEREST EXPENSE
Interest expense of $9.5 million increased $0.8 million or 9.2% from 1996 to
1997 primarily due to additional funds advanced from Whitman to support capital
expenditures and higher working capital requirements.
RESULTS OF OPERATIONS--1996 COMPARED TO 1995
SALES AND REVENUES
Sales and revenues in 1996 of $1,005.7 million were $84.0 million or 9.1%
over 1995 sales and revenues of $921.7 million. Sales and revenue increases in
the U.S., Mexico and Chile led the overall increase. The following is a
summarized analysis of the increase in sales and revenues (in millions):
<TABLE>
<CAPTION>
1996 SALES % INCREASE
AND CHANGE FROM (DECREASE)
REVENUES 1995 FROM 1995
---------- ----------- -----------
<S> <C> <C> <C>
U.S. and Canada.............................................. $ 826.6 $ 88.0 11.9%
U.K. ........................................................ 139.9 (17.4) (11.1)
Other International.......................................... 82.0 14.4 21.3
Eliminations................................................. (42.8) (1.0) 2.4
---------- -----------
Total...................................................... $ 1,005.7 $ 84.0 9.1%
---------- -----------
---------- -----------
</TABLE>
U.S. and Canada 1996 sales and revenues increased 11.9% principally due to a
continued strong U.S. market which Hussmann estimates grew approximately 7.0% in
1996. The U.K. sales and revenues decrease of 11.1% was due to an approximate
20% drop in the U.K. market for refrigerated display merchandisers due primarily
to legislation restricting the building of supermarkets within township limits.
B-15
<PAGE>
Other International sales and revenues increased 21.3% or $14.4 million due
to a $9.2 million or 16.0% improvement in Mexico's sales and revenues plus $3.8
million in increased sales (64%) from Frio-Lux in Chile, a 1995 acquisition.
GROSS PROFIT AND OPERATING INCOME
As a percent of sales and revenues, 1996 gross profit margin was 20.3%,
compared to the prior year percentage of 19.5%. U.S. and Canada operations
increased its gross profit percentage by 0.7 percentage points from 20.2% to
20.9% principally due to improved manufacturing efficiencies driven by higher
volume in U.S. and Canadian plants, which more than offset transitional costs
associated with the introduction of the Impact product line in the U.S. The U.K.
operations experienced a 2.2 percentage point decrease in its gross profit
margin, from 10.7% in 1995 to 8.5% in 1996, primarily as a result of reduced
sales of higher margin equipment and start-up costs in a new plant in Milton
Keynes, England. Approximately 78% of U.K. sales are from service and
contracting which have historically had lower margins than the remaining 22% of
sales from supermarket equipment. Other International gross profit margin
increased 3.2 percentage points, from 23.1% in 1995 to 26.3% in 1996, primarily
from volume driven manufacturing efficiencies combined with selling price
increases in Mexico.
Total SG&A expenses increased by 9.6% from $99.1 million in 1995 to $108.6
million in 1996. The primary causes of this increase were the additional
compensation costs of new employees in China, Chile and the Asia sales force, as
well as increased compensation for existing employees.
1996 operating income of $93.8 million increased $15.1 million or 19.2% more
than 1995 operating income of $78.7 million. U.S. and Canada operating income of
$94.4 million was $15.8 million or 20.1% more than 1995 operating income of
$78.6 million due primarily to strong volume growth and leverage over SG&A costs
which increased at a slower rate than sales principally due to a company-wide
cost reduction program. U.K. 1996 operating income was down $5.8 million from
1995 operating income of $5.8 million due principally to the deterioration in
gross profit percentage. Operating income for Other International operations of
$14.3 million increased $5.2 million or 57.1% more than 1995 operating income of
$9.1 million. This improvement was primarily due to Mexico's $4.7 million or
65.2% increase in operating income over 1995. Stronger exports, selling price
increases and cost controls drove Mexico's improvement.
INTEREST EXPENSE
Interest expense of $18.0 million increased $1.2 million, or 7.1% from 1995
to 1996 primarily due to additional funds advanced from Whitman to support
higher working capital requirements.
EFFECTIVE CORPORATE TAX RATE
Hussmann's effective corporate tax rate of 34.0% in 1996 was 2.8 percentage
points lower than the 1995 effective rate of 36.8% due principally to a credit
to Mexican deferred taxes driven by adjustments to fixed assets for higher
inflation realized in Mexico in 1994 and 1995.
RESULTS OF OPERATIONS--1995 COMPARED TO 1994
SALES AND REVENUES
1995 sales and revenues of $921.7 million were $62.2 million, or 7.2%, over
1994 sales and revenues of $859.5 million. Strong sales and revenues in the
U.S., Canada and the U.K. more than offset the negative impact of the Mexican
peso devaluation which effectively reduced sales and revenues by $39.5 million
in 1995 as compared
B-16
<PAGE>
to 1994. Excluding the effect of the peso devaluation, Hussmann's 1995 sales and
revenues would have been up 11.8% over 1994. The following is a summarized
analysis of the increase in sales and revenues (in millions):
<TABLE>
<CAPTION>
% INCREASE
1995 SALES CHANGE FROM (DECREASE)
AND REVENUES 1994 FROM 1994
------------- ----------- -------------
<S> <C> <C> <C>
U.S. and Canada........................................ $ 738.6 $ 90.9 14.0%
U.K. .................................................. 157.3 10.2 6.9
Other International.................................... 67.6 (29.8) (30.6)
Eliminations........................................... (41.8) (9.1) 27.8
------------- -----------
Total................................................ $ 921.7 $ 62.2 7.2%
------------- -----------
------------- -----------
</TABLE>
U.S. and Canada 1995 sales and revenues increased 14.0% primarily due to a
strong 1995 U.S. demand for refrigerated display merchandisers combined with
increased exports and growth in sales of custom and specialty merchandisers. The
U.K. sales and revenues increase of 6.9% was due primarily to growth in the U.K.
market and increased sales of specialty supermarket equipment. Other
International sales and revenues decreased $29.8 million or 30.6% due
principally to the Mexican peso devaluation which negatively impacted sales and
revenues $39.5 million, partially offset by $9.7 million in additional sales and
revenues from the acquisition of Frio-Lux in Chile and Luoyang Refrigeration in
China.
GROSS PROFIT AND OPERATING INCOME
As a percent of sales and revenues, gross profit margin was 19.5%, compared
to the prior year percentage of 20.7%. U.S. and Canada operations gross profit
percentage decreased by 1.0 percentage point from 21.2% to 20.2%, due primarily
to the inability to pass material and other inflationary increases along to
customers through selling price increases. The U.K. operations experienced a 0.8
percentage point improvement in gross profit margin, from 9.9% in 1994 to 10.7%
in 1995, due primarily to increased sales mix of higher margin supermarket
equipment in 1995. Other International gross profit margin decreased 4.6
percentage points, from 27.7% in 1994 to 23.1% in 1995 due primarily to lower
manufacturing efficiencies in Mexico driven by the sales volume decrease and
also due to the currency translation effect that dollar-denominated material
purchases had on Mexico's cost of goods sold.
SG&A expenses increased by 4.9% from $94.5 million in 1994 to $99.1 million
in 1995. General salary increases and the additional compensation costs of new
employees in Chile and China were the primary causes.
1995 operating income of $78.7 million was $3.8 million or 4.6% below 1994
operating income of $82.5 million. The effect of the peso devaluation had a
14.1% or $12.0 million impact on Hussmann's 1995 over 1994 operating income. The
U.K. 1995 operating income of $5.8 million was 4.9% below 1994 operating income
of $6.1 million primarily due to a flat market in the U.K. Other International
1995 operating income of $9.1 million was down $10.6 million or 53.8% under 1994
operating income of $19.7 million. The peso devaluation impact was partially
offset by $1.0 million in operating income from the Frio-Lux operations.
INTEREST EXPENSE
Interest expense of $16.8 million increased $1.2 million, or 7.7% from 1994
to 1995 primarily due to additional funds advanced from Whitman to support the
acquisitions made in China, Chile and the U.K. during 1995.
EFFECTIVE CORPORATE TAX RATE
Hussmann's effective corporate tax rate for 1995 of 36.8% was 4.3 percentage
points lower than the 1994 effective tax rate of 41.1% due to tax deductions
taken in Mexico in 1995 related to inflation adjustments on inventory,
receivables and property and equipment. Additionally, taxes in 1995 on foreign
source income were lower than in 1994 as a result of lower interest income in
Mexico.
B-17
<PAGE>
LIQUIDITY, FINANCIAL CONDITION AND CAPITAL RESOURCES
CASH FLOWS FROM OPERATIONS. Hussmann's cash flows from operations
historically have been substantially affected by the allocations from Whitman of
expenses to its operating subsidiaries. These charges to Hussmann were $26.7
million, $28.6 million and $28.3 million during 1996, 1995 and 1994,
respectively, and $14.2 million and $15.1 million for the six months ended June
30, 1997 and 1996, respectively. These charges are not necessarily indicative of
the costs that would have been incurred by Hussmann if Hussmann had been an
independent company during the periods presented, and such charges will be
eliminated after the Distribution Date. After the Distribution Date, Hussmann
will be responsible for the expenses of being a public company. In addition,
Whitman has charged Hussmann interest on loans and advances from Whitman.
Hussmann's management believes it will be able to borrow funds after the
Distribution Date at interest rates equal to or below those paid to Whitman,
which would result in lower interest expense to Hussmann. See Note 3 to Combined
Financial Statements of Hussmann International and "Hussmann International Pro
Forma Combined Financial Information" included elsewhere in this Annex B.
On a historical basis, Hussmann generated net cash from operations of $26.1
million, $(4.0) million and $9.3 million during the years ended December 31,
1996, 1995 and 1994 respectively. The $30.1 million improvement in 1996, from
($4.0) million in 1995 to $26.1 million in 1996, was principally driven by a
$10.2 million (43%) increase in net income and $13.2 million in favorable timing
of income tax payments. The $13.3 million deterioration in 1995 cash flows from
operating activities from $9.3 million in 1994 to ($4.0) million in 1995 was
driven by flat net income and a $14.2 million negative impact from the timing of
income tax payments.
For the six-month period ended June 30, 1997, Hussmann generated net cash
from operations of $8.7 million, compared to net cash generated by operations of
$0.7 million for the six-month period ended June 30, 1996. This increase in net
cash was primarily the result of improved management of accounts payable and
management of the first half seasonal inventory build to meet third quarter and
fourth quarter sales levels.
CASH FLOWS FROM INVESTING ACTIVITIES. Net cash used in investing activities
was $27.3 million, $36.7 million and $32.6 million during the years ended
December 31, 1996, 1995 and 1994, respectively. Capital investments of $33.5
million, $29.3 million and $32.7 million in such years were the principal
component of investing activities. Additionally, in 1995 net payments for
companies acquired were $8.4 million, principally as a result of Hussmann's
acquisitions of a 55% interest in Luoyang Refrigeration in Luoyang, China, the
remaining 50% interest in Capital Metalwork Limited in Luton, England, and a 75%
interest in Frio-Lux, Chile.
Net cash used in investing activities was $28.5 million and $15.0 million in
the six months ended June 30, 1997 and 1996, respectively. Capital investments
of $16.4 million and $21.0 million in such periods were the principal component
of investing activities. Net cash used in investing activities during the six
months ended June 30, 1997 also reflect net payments for companies acquired of
$12.4 million, due to Hussmann's acquisitions of the remaining 25% interest in
Frio-Lux, Chile, and a 70% interest in Fast Frio, Brazil, a supermarket case
manufacturer.
Hussmann's management expects capital investments to be in the range of $30
million to $40 million per year during the period 1997 through 1999, excluding
any net cash used for acquisitions and capital investments made in respect of
any such acquisitions. Approximately one-third of such capital investments is
the cost of converting to an integrated company-wide information system. In
addition, Hussmann's management will continue to review potential acquisitions.
See "Business--Strategy" included elsewhere in this Annex B.
CASH FLOWS FROM FINANCING ACTIVITIES. Net cash provided by financing
activities was $14.3 million, $32.9 million and $4.3 million during the years
ended December 31, 1996, 1995 and 1994, respectively. Whitman historically has
served as the primary source of financing for Hussmann. Under Whitman's cash
management procedures, Hussmann has advanced cash not needed for current
operations to Whitman at the then-current commercial bank prime lending rate and
Whitman has advanced cash to Hussmann on the same basis. Due primarily to
Hussmann's investing activities, such as capital investments and acquisitions,
and the allocation of expenses by Whitman to Hussmann, Hussmann has been a net
cash user and, accordingly, there has been a net increase in advances from
Whitman of $24.5 million, $36.4 million and $16.1 million during the years ended
December 31, 1996, 1995 and 1994, respectively, and of $13.5 million and $13.3
million during the six months ended June 30, 1997 and 1996, respectively. These
advances are included in loans and advances from Whitman on Hussmann's Combined
Balance
B-18
<PAGE>
Sheets. See Note 3 to Combined Financial Statements of Hussmann International
included elsewhere in this Annex B. With the elimination of Whitman charges
after the Distribution Date and the expected reductions in interest expense and
the level of cash dividends paid (if any), Hussmann's management believes that
cash flows from operations will be sufficient to cover planned capital
expenditures. See "Hussmann International Pro Forma Combined Financial
Information" included elsewhere in this Annex B.
AVAILABLE CASH AND CREDIT FACILITY. Hussmann's cash and cash equivalents
totaled $39.9 million as of June 30, 1997, compared to $47.1 million and $34.1
million as of December 31, 1996 and 1995, respectively.
Hussmann's management expects to enter into the Hussmann Credit Facility
prior to the Distribution Date. The Hussmann Credit Facility will enable
Hussmann to borrow funds at variable interest rates on a revolving credit basis
up to an aggregate principal amount of $[ ] million, subject to the terms and
conditions thereof. Hussmann's management expects to borrow on or before the
Distribution Date approximately $[ ] million under the Hussmann Credit Facility
for the purposes of settling intercompany loans and advances owing to Whitman of
approximately $ million and paying a cash dividend to Whitman in the amount of
approximately $[ ] million.
Hussmann's management believes that cash flows from operations, unused
amounts available under the Hussmann Credit Facility, and access to capital
markets will be sufficient to satisfy Hussmann's future working capital, capital
investment, acquisition and other financing requirements for the foreseeable
future. Hussmann's management believes that Hussmann will be able to access
capital markets on terms satisfactory to Hussmann, although there can be no
assurance that will be the case.
NON-U.S. OPERATIONS. The most significant non-U.S. operations are located
in Canada, Mexico and the U.K., with other operations located in, among other
countries, Brazil, Chile, China and Singapore. Because Hussmann's non-U.S.
entities conduct business in their respective local currencies, Hussmann is
subject to foreign currency risks when translating its non-U.S. entity financial
statements into U.S. dollars for financial reporting purposes. In general, a
rising U.S. dollar in relation to a foreign currency will have a negative effect
on Hussmann's results of operations, while a falling U.S. dollar will have the
opposite effect on Hussmann's results. In addition to the foreign currency
translation risks faced by Hussmann, other risks associated with non-U.S.
operations include the potential for restrictive actions taken by host country
governments, the risks relating to non-U.S. economic and political conditions,
and the risks relating to limits on the transfer of funds from non-U.S. entities
to Hussmann. Hussmann does not use foreign currency risk management instruments
to manage its exposure to changes in currency exchange rates. However, as the
significance of Hussmann's foreign operations grows, management will reassess
whether it would be appropriate to use foreign currency risk management
instruments.
FUTURE CHANGE IN ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board issued its Statement
No. 130, "Reporting Comprehensive Income." This Statement establishes standards
for reporting and display of comprehensive income and its components in a full
set of general-purpose financial statements. All items that are required to be
recognized under accounting standards as components of comprehensive income must
be reported in a financial statement with the same prominence as other financial
statements. Statement No. 130 is effective for fiscal years beginning after
December 15, 1997.
MANAGEMENT
DIRECTORS
Immediately after the Distribution Date, the Hussmann Board is expected to
consist of the individuals named in the following table. The Hussmann Board will
be divided into three classes. Directors in each class will serve until the
annual meeting of shareholders held in the year in which the term for such class
expires and will serve
B-19
<PAGE>
thereafter for three years. See "Certain Antitakeover Effects of Certain Charter
and By-Law Provisions, the Rights and Delaware Law" in the body of the
Information Statement.
<TABLE>
<CAPTION>
YEAR TERM
NAME AGE EXPIRES BACKGROUND
- --------------------------------- --- ----------- ------------------------------------------------------------------
<S> <C> <C> <C>
[name]........................... [ ] 1999 [ ]
[name]........................... [ ] 1999 [ ]
[name]........................... [ ] 2000 [ ]
[name]........................... [ ] 2000 [ ]
[name]........................... [ ] 2001 [ ]
[name]........................... [ ] 2001 [ ]
</TABLE>
COMMITTEES OF THE BOARD OF DIRECTORS
Hussmann will be managed under the direction of its Board of Directors. The
Hussmann Board will meet on a regular basis to review Hussmann's operations,
strategic and business plans, acquisitions and dispositions, and other
significant developments affecting Hussmann, and to act on matters requiring
approval of the Hussmann Board. It will also hold special meetings when an
important matter requires Hussmann Board action between scheduled meetings.
Members of senior management will be regularly invited to Hussmann Board
meetings to discuss the progress of and future plans relating to their areas of
responsibility.
To facilitate independent director review, and to make the most effective
use of the directors' time and capabilities, the Hussmann Board is expected to
establish various committees, including those described below.
The EXECUTIVE COMMITTEE of the Hussmann Board will be constituted by the
Hussmann Board to act, except as limited by applicable law, in lieu of the
Hussmann Board and between meetings of the Hussmann Board. The Executive
Committee is expected to consist of [ ].
The AUDIT COMMITTEE will review the audit report of Hussmann as prepared by
its designated certified public accountants, recommend the selection of a
certified public accounting firm each year and review audit and any non-audit
fees paid to Hussmann's certified public accountants. The Hussmann internal
audit reports will also be available for review by the Audit Committee. The
Committee will report its findings and recommendations to the Hussmann Board for
appropriate action. The Audit Committee is expected to consist of
[ ].
The MANAGEMENT RESOURCES AND COMPENSATION COMMITTEE will be charged with the
responsibility of supervising the compensation policies of Hussmann,
administering Hussmann's employee incentive plans, reviewing officers' salaries,
approving significant changes in salaried employee benefits and recommending to
the Hussmann Board such other forms of remuneration as it deems appropriate. The
Management Resources and Compensation Committee is expected to consist of
[ ].
The FINANCE AND PENSION COMMITTEE will supervise the financial affairs of
Hussmann and receive and review reports of those persons who supervise and
manage the Hussmann pension plans. The Hussmann Board may delegate to the
Finance and Pension Committee and certain officers its authority to approve
financing transactions within specified dollar limitations. The Finance and
Pension Committee is expected to consist of [ ].
The Hussmann Board, acting as a committee of the whole, will have the
responsibility for considering nominations for prospective board members. The
Hussmann Board will consider nominees recommended by other directors,
shareholders and management who present for evaluation by the Hussmann Board
appropriate data with respect to the suggested candidate, provided that
nominations by shareholders must be made in accordance with the Hussmann
By-Laws. See "Certain Antitakeover Effects of Certain Charter and By-Law
Provisions, the Rights and Delaware Law--Certificate of Incorporation and
By-Laws" in the body of the Information Statement.
The Hussmann Board may also establish other committees.
B-20
<PAGE>
COMPENSATION OF DIRECTORS
Directors who are not employees of Hussmann will receive an annual retainer
of [$ ], plus [$ ] for each meeting of the Hussmann Board and [$ ] for each
Hussmann Board Committee meeting attended. The Chairman of each Hussmann Board
Committee will be paid an additional [$ ] annual retainer. Non-employee
directors may also receive awards pursuant to the Hussmann Stock Incentive Plan.
EXECUTIVE OFFICERS
Set forth below is information with respect to those individuals who are
expected to serve as executive officers of Hussmann immediately following the
Distribution.
<TABLE>
<CAPTION>
NAME, AGE AND POSITION BACKGROUND AND EXPERIENCE
- ----------------------------------------- --------------------------------------------------------------------------
<S> <C>
J. Larry Vowell (56) .................... Mr. Vowell has spent his entire professional career with Hussmann. After
President and Chief Executive Officer holding a variety of management positions, Mr. Vowell became President and
Chief Operating Officer--Hussmann U.S.A. early in 1990 and President and
Chief Executive Officer later that year.
John S. Gleason (56) .................... Following a lengthy career with J. I. Case, Mr. Gleason joined Hussmann in
Executive Vice President--North 1988 as President--International Group. He served as Executive Vice
American Operations President--Sales and Marketing for North America from 1991-1995.
John Schlee (54) ........................ Mr. Schlee joined Hussmann in 1988 as Group Vice President--
Senior Vice President--Global Manufacturing. He became Senior Vice President--Manufacturing in 1989, and
Development was Senior Vice President--International from 1995-1996.
Michael D. Newman (41) .................. Mr. Newman joined Hussmann in 1996. Prior to that, he spent seventeen
Senior Vice President--Chief Financial years with General Electric Company in various financial positions, most
Officer and Treasurer recently as Manager, America's Finance.
Bruce E. Ryan (49) ...................... Mr. Ryan has held various offices with Hussmann since 1979. He served as
Vice President--Europe and Middle East Vice President--Administration for International from 1981 to 1988, and
Vice President--Strategic Planning from 1988 to 1989. In 1989 he joined
Permea, Inc. as President. From 1991 to 1993 he served as Corporate Vice
President of Fisher International, Inc. From 1993 to 1995, when he
rejoined Hussmann, Mr. Ryan was President of Crosby Valve and Gauge
Company.
Lawrence R. Rauzon (48) ................. Mr. Rauzon served as Vice President--Western United States from 1989-1994
Vice President--Asia Pacific when he was appointed Vice President and Region Manager, Western United
States. He was appointed to his present position in 1996. He has been with
Hussmann since 1978.
Mark C. Schaefer (40) ................... Mr. Schaefer joined Hussmann in 1981. He became President-- Hussmann
Vice President--Mexico and Latin Mexico in 1992, and was appointed to his present position in 1995.
America
Burton Halpern (56) ..................... Mr. Halpern has served in various legal capacities with Hussmann since
Vice President, General Counsel and 1970. He became General Counsel in 1985.
Secretary
Joseph R. Pinkston III (42) ............. Mr. Pinkston joined Hussmann in 1995. From 1992-1995 he served as Group
Vice President--Human Resources Director of Human Resources for the Bowman Distribution Division of the
Barnes Group. Prior to that, he served in various human resource positions
with units of AlliedSignal.
</TABLE>
B-21
<PAGE>
OWNERSHIP OF HUSSMANN COMMON STOCK BY MANAGEMENT
All Hussmann Common Stock is currently owned by Whitman and no director or
executive officer of Hussmann owns any shares of Hussmann Common Stock. The
following table sets forth the beneficial ownership of Whitman Common Stock on
November 1, 1997 by the individuals expected to be directors of Hussmann, the
executive officers named in the Summary Compensation Table below and by all
directors and executive officers of Hussmann as a group. Directors and executive
officers of Hussmann will receive shares of Hussmann Common Stock in respect of
the shares of Whitman Common Stock held by them on the Record Date on the same
basis as other Whitman shareholders. Directors and executive officers of
Hussmann who do not exercise options to purchase Whitman Common Stock prior to
the Distribution Date will, as of the Distribution Date, have such options
replaced with options to purchase Hussmann Common Stock of equivalent value.
Each of the following individuals and members of the group has sole voting and
investment power with respect to the shares shown unless otherwise indicated.
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF PERCENT OF
NAME OR IDENTITY OF GROUP BENEFICIAL OWNERSHIP CLASS
- ----------------------------------------------------------------------------------- -------------------- -------------
<S> <C> <C>
[name]............................................................................. [ ](a) *
[name]............................................................................. [ ](a) *
[name]............................................................................. [ ](a) *
J. Larry Vowell.................................................................... [ ](a) *
John S. Gleason.................................................................... [ ](a) *
John Schlee........................................................................ [ ](a) *
Michael D. Newman.................................................................. [ ](a) *
Bruce E. Ryan...................................................................... [ ](a) *
All Directors and Executive Officers as a Group ([ ] persons)...................... [ ](b) [ ]
</TABLE>
- ------------------------
* Less than 1%.
(a) Includes shares which the named director or executive officer has the right
to acquire within 60 days after November 1, 1997, through exercise of stock
options, as follows: Mr. Vowell, [ ] shares; Mr. Gleason, [ ] shares;
Mr. Schlee, [ ] shares; Mr. Newman, [ ] shares; and Mr. Ryan, [ ]
shares.
(b) The number of shares shown as beneficially owned include [ ] shares which
directors and executive officers have the right to acquire within 60 days
after November 1, 1997, through the exercise of Whitman Common Stock
options, [ ] shares subject to possible forfeiture under outstanding
Whitman restricted stock awards, and [ ] shares representing the vested
beneficial interest of such persons under the Whitman Retirement Savings
Plan.
B-22
<PAGE>
COMPENSATION OF EXECUTIVE OFFICERS
SUMMARY COMPENSATION TABLE
The following table shows annual and long-term compensation for each of
Hussmann's five most highly compensated executive officers for services in all
capacities to Hussmann and its subsidiaries and affiliates during 1996.
Compensation, as reflected in this table and the tables on stock options which
follow, is presented on the basis of rules of the SEC and does not, in the case
of certain stock-based awards or accruals, necessarily represent the amount of
compensation realized or which may be realized in the future. References to
"restricted stock" and "stock options" relate to awards under Whitman's Stock
Incentive Plan.
<TABLE>
<CAPTION>
LONG TERM COMPENSATION
---------------------------
AWARDS
---------------------------
ANNUAL COMPENSATION WHITMAN
--------------------------------------- RESTRICTED WHITMAN ALL OTHER
OTHER ANNUAL STOCK AWARDS STOCK OPTIONS COMPENSATION
NAME AND PRINCIPAL POSITION SALARY ($) BONUS ($) COMPENSATION ($) (B) (#) ($) (A)
- --------------------------------- ----------- ----------- ------------- ------------ ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
J. Larry Vowell.................. 307,500 265,000 13,550 353,500 59,200 57,504
President and Chief Executive
Officer
John S. Gleason.................. 233,746 160,000 8,751 207,050 34,800 32,156
Executive Vice President--
North American Operations
John Schlee...................... 183,246 115,000 8,751 159,075 26,900 22,926
Senior Vice President--
Global Development
Michael D. Newman................ 151,598 115,000 8,022 159,075 26,900 13,742
Senior Vice President--Chief
Financial Officer and Treasurer
Bruce E. Ryan.................... 176,997 49,000 8,751 159,075 26,900 21,017
Vice President--
Europe and Middle East
</TABLE>
- ------------------------
(a) The amounts shown for All Other Compensation are amounts accrued under a
nonqualified retirement plan (Mr. Vowell, $30,152; Mr. Gleason, $20,495; Mr.
Schlee, $14,293; Mr. Newman, $9,095; and Mr. Ryan, $13,620), together with
the 1996 values of premiums paid by Hussmann for an executive split dollar
life insurance program established July 1, 1996, to replace benefits
formerly provided under a group program (Mr. Vowell, $27,352; Mr. Gleason,
$11,661; Mr. Schlee, $8,633; Mr. Newman, $4,647; and Mr. Ryan, $7,397).
(b) The number of shares of restricted Whitman Common Stock and the market value
thereof held by Messrs. Vowell, Gleason, Schlee, Newman and Ryan at December
31, 1996, was as follows: Mr. Vowell, 18,967 shares ($433,870); Mr. Gleason,
11,001 shares ($251,648); Mr. Schlee, 8,467 shares ($193,683); Mr. Newman,
6,300 shares ($144,113); and Mr. Ryan, 7,900 shares ($180,713). Such shares
vest ratably over a period of three years. Dividend equivalents are paid on
restricted stock at the times and in the same amount as dividends paid to
all Whitman shareholders.
B-23
<PAGE>
OPTION/SAR GRANTS IN LAST FISCAL YEAR
The following table sets forth, for each of the executive officers named in
the Summary Compensation Table, options granted in respect of Whitman Common
Stock during 1996 pursuant to Whitman's Stock Incentive Plan. No stock
appreciation rights were granted. Hussmann employees who do not exercise options
to purchase Whitman Common Stock prior to the Distribution Date will, as of the
Distribution Date, have such options replaced with options to purchase Hussmann
Common Stock of equivalent value.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL
NUMBER OF RATES OF STOCK PRICE
SECURITIES % OF TOTAL APPRECIATION FOR
UNDERLYING OPTIONS OPTION
OPTIONS GRANTED TO TERM (B)
GRANTED EMPLOYEES EXERCISE EXPIRATION ---------------------
NAME (#)(A) IN 1996 PRICE ($/SH) DATE 5% ($) 10% ($)
- ------------------------------------------- ----------- --------------- ------------- ----------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
J. Larry Vowell............................ 59,200 2.5 25.31 5/2/06 942,306 2,387,987
John S. Gleason............................ 34,800 1.5 25.31 5/2/06 553,923 1,403,749
John Schlee................................ 26,900 1.1 25.31 5/2/06 428,176 1,085,082
Michael D. Newman.......................... 26,900 1.1 25.31 5/2/06 428,176 1,085,082
Bruce E. Ryan.............................. 26,900 1.1 25.31 5/2/06 428,176 1,085,082
</TABLE>
- ------------------------
(a) All options were granted at a price equal to 100% of the fair market value
of Whitman Common Stock at date of grant, which was May 2, 1996. Options
become exercisable as to 1/3 on the first anniversary of the date of grant,
2/3 on the second anniversary, and in full on the third anniversary.
(b) The dollar amounts under these columns are the result of calculations at the
5% and 10% assumed annual growth rates mandated by the SEC and, therefore,
are not intended to forecast possible future appreciation, if any, in the
price of Whitman Common Stock. The calculations were based on the exercise
price per share and the ten-year term of the options.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END
OPTION/SAR VALUES
The following table sets forth information with respect to the executive
officers named in the Summary Compensation Table regarding the exercise of
options to purchase Whitman Common Stock during 1996 and unexercised options
held as of December 31, 1996.
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES VALUE OF
UNDERLYING UNEXERCISED
UNEXERCISED OPTIONS IN-THE-MONEY
HELD AT OPTIONS AT
DECEMBER 31, 1996 DECEMBER 31, 1996
(#) ($) (A)
SHARES ACQUIRED ON VALUE REALIZED EXERCISABLE/ EXERCISABLE/
NAME EXERCISE (#) ($) UNEXERCISABLE UNEXERCISABLE
- ------------------------------------ ------------------- ---------------- ------------------- -------------------
<S> <C> <C> <C> <C>
J. Larry Vowell..................... -- -- 35,000/77,800 272,676/99,008
John S. Gleason..................... 57,098 612,115 17,133/45,467 130,102/55,313
John Schlee......................... -- -- 61,108/35,167 607,815/42,846
Michael D. Newman................... -- -- -0-/26,900 -0-/-0-
Bruce E. Ryan....................... -- -- 3,233/33,367 14,954/29,908
</TABLE>
- ------------------------
(a) Based on the closing price of Whitman Common Stock ($22.875) on December
31, 1996, as reported for New York Stock Exchange Composite Transactions.
B-24
<PAGE>
STOCK INCENTIVE PLAN
Hussmann intends to adopt, with the approval of Whitman in its capacity as
the sole stockholder of Hussmann, the Hussmann Stock Incentive Plan (the
"Hussmann Stock Plan"). The Hussmann Stock Plan will be administered by the
Management Resources and Compensation Committee of the Hussmann Board. Hussmann
intends to seek shareholder approval of the Hussmann Stock Plan at its 1999
annual meeting of shareholders.
The Hussmann Stock Plan provides for the grant of incentive stock options
that qualify under Section 422 of the Code, nonqualified stock options, stock
appreciation rights, restricted stock awards and performance awards to employees
and non-employee directors (except that non-employee directors may not receive
incentive stock options). Hussmann has reserved for issuance under the Hussmann
Stock Plan [ ] shares of Hussmann Common Stock. The Management Resources and
Compensation Committee of the Hussmann Board is expected to grant, subject to
completion of the Distribution, nonqualified options to purchase Hussmann Common
Stock to its executive officers and certain other persons who will be employees
of Hussmann. Each such option will have an exercise price equal to 100% of the
fair market value of Hussmann Common Stock on the effective date of grant, and
will be for a term of ten years. In addition, as described under "Arrangements
between Whitman and the Companies Relating to the Distribution--Distribution and
Indemnity Agreements" in the body of the Information Statement, employees of
Hussmann who hold options and restricted stock under the Whitman Stock Incentive
Plan are expected to receive substitute awards of equivalent value under the
Hussmann Stock Plan, following completion of the Distribution.
PENSION PLANS
Hussmann maintains qualified, defined benefit pension plans and nonqualified
retirement plans paying benefits in optional forms elected by the employee based
upon percentage multipliers which are applied to Covered Compensation and
Credited Service. The pension plans and related nonqualified plans were amended
effective January 1, 1992, to reinstate benefit accruals that were frozen for
most employees as of December 31, 1988, when Hussmann changed its benefit plan
structure. The revised benefit formula provides a normal retirement benefit of
1% of Covered Compensation for each year of Credited Service (excluding
1989-1991), up to a maximum of 20 years. The changes also include special
minimum benefits based on Credited Service accrued through December 31, 1988,
and Covered Compensation at retirement.
The following table reflects future benefits, payable as life annuities upon
retirement, in terms of a range of amounts determined under the revised benefit
formula mentioned above, at representative periods of Credited Service.
PROJECTED ANNUAL PENSION
<TABLE>
<CAPTION>
YEARS OF CREDITED SERVICE (B)
--------------------------------------------
COVERED COMPENSATION (A) 5 10 15 20 OR MORE
- ------------------------------------------------------------------------ --------- --------- --------- -----------
<S> <C> <C> <C> <C>
$200,000................................................................ $ 10,000 $ 20,000 $ 30,000 $ 40,000
$300,000................................................................ 15,000 30,000 45,000 60,000
$400,000................................................................ 20,000 40,000 60,000 80,000
$500,000................................................................ 25,000 50,000 75,000 100,000
</TABLE>
- ------------------------
(a) Covered Compensation includes salary and bonus, as shown in the Summary
Compensation Table, averaged over the five consecutive years in which such
compensation is the highest.
(b) As of December 31, 1996, Messrs. Gleason, Schlee, Newman and Ryan had 5, 5,
1 and 11, years of Credited Service, respectively.
The benefit for Mr. Vowell, who had 29 years of Credited Service at December
31, 1988, will be determined under the minimum benefit formula (33.3% of Covered
Compensation). Such benefits are not subject to deduction for social security or
other offset amounts. As of December 31, 1996, Mr. Vowell had an accrued annual
benefit payable at normal retirement age of approximately $171,000.
B-25
<PAGE>
TERMINATION BENEFITS
Hussmann has entered into Change in Control Agreements (the "Change in
Control Agreements"), with Messrs. Vowell, Gleason, Schlee, Newman, Ryan and
certain other officers. The Change in Control Agreements were a result of a
determination by the Hussmann Board that it was important and in the best
interests of Hussmann and its shareholders to ensure that, in the event of a
possible change in control of Hussmann, the stability and continuity of
management would continue unimpaired, free of the distractions incident to any
such change in control. The Change in Control Agreements become effective on the
Distribution Date.
For purposes of the Change in Control Agreements, a "change in control"
includes (i) a consolidation or merger of Hussmann in which Hussmann is not the
continuing or surviving corporation or pursuant to which shares of Hussmann
Common Stock would be converted into cash, securities or other property, other
than a transaction in which the proportionate ownership of the Hussmann Common
Stock and the surviving corporation remains substantially unchanged, (ii) a sale
of all or substantially all of the assets of Hussmann, (iii) a shareholder
approved plan or proposal for the liquidation of Hussmann, (iv) the acquisition
by any person of 25% or more of Hussmann's voting securities, or (v) if, over a
two-year period, persons who are directors of Hussmann cease to constitute a
majority of the Hussmann Board, unless the new directors were approved by a
two-thirds vote of the continuing directors.
Benefits are payable under the Change in Control Agreements only if a change
in control has occurred and within three years thereafter the officer's
employment is terminated involuntarily without cause or voluntarily by the
officer for reasons such as demotion, relocation, loss of benefits or other
changes. The principal benefits to be provided to officers under the Change in
Control Agreements are (i) a lump sum payment equal to three years' compensation
(base salary and incentive compensation), and (ii) continued participation in
Hussmann's employee benefit programs or equivalent benefits for three years
following termination. If the officer's termination occurs after age 62,
separation payments are reduced by a factor based upon the number of months
remaining until the officer reaches age 65. The Change in Control Agreements
provide that, if separation payments thereunder, either alone or together with
payments under any other plan of Hussmann, would constitute a "parachute
payment" as defined in the Code and subject the officer to the excise tax
imposed by Section 4999 of the Code, Hussmann will pay such tax and any taxes on
such payment.
The Change in Control Agreements are not employment agreements, and do not
impair the right of Hussmann to terminate the employment of the officer with or
without cause prior to a change in control, or, absent a potential or pending
change in control, the right of the officer to voluntarily terminate his
employment.
1999 ANNUAL MEETING OF SHAREHOLDERS
The Hussmann By-Laws provide that an annual meeting of shareholders will be
held each year on a date specified by the Hussmann Board. Prior to the Record
Date, Whitman, which was then and is currently the sole shareholder of Hussmann,
elected the current members of the Hussmann Board. The first annual meeting of
Hussmann shareholders after the Distribution is expected to be held on May 5,
1999.
In order to be considered for inclusion in Hussmann's proxy materials for
the 1999 annual shareholders meeting, any proposals by shareholders must be
received at Hussmann's principal executive offices at 12999 St. Charles Rock
Road, Bridgeton, Missouri 63044, within a reasonable time before solicitation of
proxies for such meeting is made. In addition, shareholders at the Hussmann 1999
annual meeting may consider shareholder proposals or nominations brought by a
shareholder of record on the record date for the 1999 annual meeting, who is
entitled to vote at such annual meeting and who has complied with the
Shareholder Notice Procedure established by the Hussmann By-Laws. A shareholder
proposal or nomination intended to be brought before the Hussmann 1999 annual
meeting must be received by the Secretary of Hussmann on or after February 6,
1999 and on or prior to February 26, 1999. See "Certain Antitakeover Effects of
Certain Charter and By-Law Provisions, the Rights and Delaware Law--Certificate
of Incorporation and By-Laws--Advance Notice Provisions for Shareholder
Nominations and Shareholder Proposals" in the body of the Information Statement.
B-26
<PAGE>
HUSSMANN INTERNATIONAL
INDEX TO HISTORICAL FINANCIAL INFORMATION
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Independent Auditors' Report................................................................................. B-28
Combined Statements of Income for the years ended December 31, 1996, 1995 and 1994 and for the six months
ended June 30, 1997 and 1996 (unaudited)................................................................... B-29
Combined Balance Sheets as of December 31, 1996 and 1995 and as of June 30, 1997 (unaudited)................. B-30
Combined Statements of Cash Flows for the years ended December 31, 1996, 1995 and 1994 and for the six months
ended June 30, 1997 and 1996 (unaudited)................................................................... B-31
Notes to Combined Financial Statements....................................................................... B-32
</TABLE>
B-27
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Whitman Corporation:
We have audited the accompanying combined balance sheets of Hussmann
International as of December 31, 1996 and 1995, and the related combined
statements of income and cash flows for each of the years in the three-year
period ended December 31, 1996. These combined financial statements are the
responsibility of Hussmann International's management. Our responsibility is to
express an opinion on these combined financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the combined financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the combined financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall combined
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of Hussmann
International as of December 31, 1996 and 1995, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1996 in conformity with generally accepted accounting
principles.
KPMG Peat Marwick LLP
St. Louis, Missouri
January 8, 1997
B-28
<PAGE>
HUSSMANN INTERNATIONAL
COMBINED STATEMENTS OF INCOME
(IN MILLIONS)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS FOR THE YEARS ENDED
ENDED JUNE 30 DECEMBER 31
-------------------- -------------------------------
1997 1996 1996 1995 1994
--------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Sales and revenues................................................. $ 449.4 $ 420.6 $ 1,005.7 $ 921.7 $ 859.5
Cost of goods sold................................................. 366.1 338.0 801.8 742.4 681.4
--------- --------- --------- --------- ---------
Gross profit..................................................... 83.3 82.6 203.9 179.3 178.1
Selling, general and administrative expenses....................... 51.6 52.0 108.6 99.1 94.5
Amortization expense............................................... 0.8 0.8 1.5 1.5 1.1
--------- --------- --------- --------- ---------
Operating income................................................. 30.9 29.8 93.8 78.7 82.5
Whitman charges.................................................... (14.2) (15.1) (26.7) (28.6) (28.3)
Interest expense:
Whitman.......................................................... (8.9) (8.0) (16.7) (14.7) (13.5)
Other............................................................ (0.6) (0.7) (1.3) (2.1) (2.1)
--------- --------- --------- --------- ---------
Total interest expense......................................... (9.5) (8.7) (18.0) (16.8) (15.6)
Other income, net.................................................. 1.0 1.4 2.6 4.5 1.5
--------- --------- --------- --------- ---------
Income before income taxes....................................... 8.2 7.4 51.7 37.8 40.1
Income tax provisions.............................................. 3.2 2.6 17.6 13.9 16.5
--------- --------- --------- --------- ---------
Net income....................................................... $ 5.0 $ 4.8 $ 34.1 $ 23.9 $ 23.6
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
See accompanying notes to combined financial statements.
B-29
<PAGE>
HUSSMANN INTERNATIONAL
COMBINED BALANCE SHEETS
(IN MILLIONS)
<TABLE>
<CAPTION>
DECEMBER 31
--------------------
1996 1995
JUNE 30 --------- ---------
-----------
1997
-----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS:
Current assets:
Cash and cash equivalents......................................................... $ 39.9 $ 47.1 $ 34.1
Receivables, net.................................................................. 168.7 199.5 185.6
Inventories....................................................................... 166.0 154.5 124.1
Other current assets.............................................................. 4.9 4.2 7.1
----------- --------- ---------
Total current assets............................................................ 379.5 405.3 350.9
Property and equipment, net......................................................... 148.8 138.4 127.3
Intangible assets, net.............................................................. 42.6 38.7 37.8
Other assets........................................................................ 32.2 29.0 31.4
----------- --------- ---------
Total assets.................................................................... $ 603.1 $ 611.4 $ 547.4
----------- --------- ---------
----------- --------- ---------
LIABILITIES AND EQUITY:
Current liabilities:
Short-term debt................................................................... $ 3.6 $ 1.9 $ 3.8
Accounts payable.................................................................. 105.7 113.4 109.0
Income taxes payable.............................................................. 0.6 10.2 3.5
Accrued expenses.................................................................. 38.5 46.2 40.4
----------- --------- ---------
Total current liabilities....................................................... 148.4 171.7 156.7
Loans and advances.................................................................. 224.9 211.4 186.9
Deferred income taxes and other liabilities......................................... 37.0 35.7 42.7
----------- --------- ---------
Total liabilities............................................................... 410.3 418.8 386.3
Shareholder equity.................................................................. 192.8 192.6 161.1
----------- --------- ---------
Total liabilities and equity.................................................... $ 603.1 $ 611.4 $ 547.4
----------- --------- ---------
----------- --------- ---------
</TABLE>
See accompanying notes to combined financial statements.
B-30
<PAGE>
HUSSMANN INTERNATIONAL
COMBINED STATEMENTS OF CASH FLOWS
(IN MILLIONS)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS
FOR THE YEARS ENDED DECEMBER 31
ENDED JUNE 30
-------------------- -------------------------------
1997 1996 1996 1995 1994
--------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income........................................................... $ 5.0 $ 4.8 $ 34.1 $ 23.9 $ 23.6
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization...................................... 11.1 9.8 20.2 19.6 17.3
Changes in assets and liabilities, exclusive of acquisitions:
(Increase) decrease in receivables............................... 35.1 31.5 (13.9) (12.8) (4.0)
(Increase) in inventories........................................ (9.8) (18.5) (30.4) (12.5) (6.6)
Increase (decrease) in accounts payable.......................... (10.4) (20.3) 4.4 3.8 (18.3)
Increase (decrease) in income taxes payable...................... (9.6) (3.5) 6.7 (6.5) 7.7
Net change in other assets and liabilities....................... (12.7) (3.1) 5.0 (19.5) (10.4)
--------- --------- --------- --------- ---------
Net cash provided by (used in) operating activities.................... 8.7 0.7 26.1 (4.0) 9.3
--------- --------- --------- --------- ---------
Cash flows from investing activities:
Capital investments.................................................. (16.4) (21.0) (33.5) (29.3) (32.7)
Proceeds from sales of property and equipment........................ 0.3 6.0 6.2 1.0 2.4
Companies acquired, net of cash acquired............................. (12.4) -- -- (8.4) (2.3)
--------- --------- --------- --------- ---------
Net cash used in investing activities.................................. (28.5) (15.0) (27.3) (36.7) (32.6)
--------- --------- --------- --------- ---------
Cash flows from financing activities:
Net increase (decrease) in short-term debt........................... 1.8 (1.4) (1.9) 3.8 --
Net increase in loans and advances from Whitman...................... 13.5 13.3 24.5 36.4 16.1
Dividends to Whitman................................................. (2.2) (8.3) (8.3) (7.3) (11.8)
--------- --------- --------- --------- ---------
Net cash provided by financing activities.............................. 13.1 3.6 14.3 32.9 4.3
Effects of exchange rate changes on cash and cash equivalents.......... (0.5) -- (0.1) (2.9) (0.3)
--------- --------- --------- --------- ---------
Net change in cash and cash equivalents................................ (7.2) (10.7) 13.0 (10.7) (19.3)
Cash and cash equivalents as of beginning of period.................... 47.1 34.1 34.1 44.8 64.1
--------- --------- --------- --------- ---------
Cash and cash equivalents as of end of period.......................... $ 39.9 $ 23.4 $ 47.1 $ 34.1 $ 44.8
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
See accompanying notes to combined financial statements.
B-31
<PAGE>
HUSSMANN INTERNATIONAL
NOTES TO COMBINED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
Hussmann International manufactures, sells, installs, and services
merchandising and refrigeration systems for the world's commercial food
industry.
PRINCIPLES OF COMBINATION
These combined financial statements present the operations of Hussmann
International, which is comprised of wholly-owned and majority-owned
subsidiaries of Whitman Corporation (Whitman). Hussmann International consists
of Hussmann Corporation and its subsidiaries and of other companies owned by
Whitman but directly managed by Hussmann Corporation.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of deposits with banks and financial
institutions which are unrestricted as to withdrawal or use, and which have
original maturities of three months or less.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Hussmann International's financial instruments include cash and cash
equivalents, receivables, short-term debt, and accounts payable; the carrying
amounts approximate fair values because of the short maturity of these
instruments. Because of the intercompany nature of the indebtedness, it is not
considered meaningful to present fair value information with respect to the
loans and advances from Whitman.
INVENTORIES
Inventories are valued at the lower of cost (principally determined on the
first-in, first-out or average methods) or net realizable value.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation is computed using
the straight-line method. When property is sold or retired, the cost and
accumulated depreciation are eliminated from the accounts and gains or losses
are recorded in other income (expense), net. Expenditures for maintenance and
repairs are expensed as incurred. The approximate ranges of annual depreciation
rates are 2% to 5% for buildings and improvements and 8% to 33% for machinery
and equipment.
INTANGIBLE ASSETS
Intangible assets represent the excess of cost over fair market value of
tangible assets of acquired businesses, reflecting premiums paid for brand
names, trademarks, distribution systems, manufacturing know-how and other
intangibles. Such premiums (goodwill) generally are being amortized on
straight-line bases over 40 years, with minor amounts being amortized over
shorter periods. Hussmann International evaluates, at least on an annual basis,
the carrying value of its goodwill by reviewing undiscounted cash flows by
operating unit. If the sum of the projected undiscounted cash flows over the
remaining lives of the related assets does not exceed the carrying value of the
related goodwill, goodwill would be adjusted for the difference between the fair
value and the carrying value of such goodwill.
B-32
<PAGE>
HUSSMANN INTERNATIONAL
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ACCOUNT CLASSIFICATIONS
Certain amounts presented in the accompanying combined financial statements
are classified in a manner that differs, in minor respects, from the manner in
which such amounts have been classified in Whitman's consolidated financial
statements.
USE OF ESTIMATES
Management has made a number of estimates and assumptions relating to the
reporting of assets and liabilities and the disclosure of contingent assets and
liabilities to prepare these combined financial statements in conformity with
generally accepted accounting principles. Actual results could differ from these
estimates.
(2) CHANGES IN EQUITY
The following table presents the changes in equity for the years ended
December 31, 1994, 1995, and 1996 and for the six months ended June 30, 1997 (in
millions):
<TABLE>
<CAPTION>
HUSSMANN CUMULATIVE
INTERNATIONAL CURRENCY
CAPITAL TRANSLATION SHAREHOLDER
ACCOUNTS ADJUSTMENTS EQUITY
------------- ------------- -----------
<S> <C> <C> <C>
JANUARY 1, 1994........................................ $ 185.1 $ (20.9) $ 164.2
Net income............................................. 23.6 23.6
Stock compensation plans............................... 0.2 0.2
Dividends to Whitman................................... (11.8) (11.8)
Translation adjustments................................ (3.0) (3.0)
------ ------ -----------
DECEMBER 31, 1994...................................... 197.1 (23.9) 173.2
Net income............................................. 23.9 23.9
Stock compensation plans............................... 0.6 0.6
Dividends to Whitman................................... (7.3) (7.3)
Translation adjustments................................ (29.3) (29.3)
------ ------ -----------
DECEMBER 31, 1995...................................... 214.3 (53.2) 161.1
Net income............................................. 34.1 34.1
Stock compensation plans............................... 1.0 1.0
Dividends to Whitman................................... (8.3) (8.3)
Translation adjustments................................ 4.7 4.7
------ ------ -----------
DECEMBER 31, 1996...................................... 241.1 (48.5) 192.6
Net income (unaudited)................................. 5.0 5.0
Dividends to Whitman (unaudited)....................... (2.2) (2.2)
Translation adjustments (unaudited).................... (2.6) (2.6)
------ ------ -----------
JUNE 30, 1997 (unaudited).............................. $ 243.9 $ (51.1) $ 192.8
------ ------ -----------
------ ------ -----------
</TABLE>
B-33
<PAGE>
HUSSMANN INTERNATIONAL
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(3) TRANSACTIONS WITH WHITMAN
CASH MANAGEMENT AND ADVANCES
Whitman manages the cash not considered necessary for current operating
requirements of certain of its subsidiaries, including the U.S. operations of
Hussmann International. Cash not needed for current operations is advanced to
Whitman at the then-current commercial bank prime lending rate; cash is advanced
by Whitman on the same basis. All advances to or from Whitman are included in
advances and loans from Whitman in the combined balance sheets. Interest income
and expense on such advances are included in interest expense-- Whitman in the
combined statements of income.
DIVIDENDS PAID TO WHITMAN
Hussmann International has paid dividends to Whitman, as summarized in Note
2.
NOTE PAYABLE TO WHITMAN
Included in loans and advances from Whitman as of December 31, 1996 and 1995
is a junior subordinated note in the amount of $117.3 million, which is due in
2001 and bears a floating (prime) rate of interest.
WHITMAN CHARGES
Whitman allocates portions of its corporate office general and
administrative expenses and interest expense to its subsidiaries. Hussmann
International's share of such costs amounted to $26.7 million in 1996, $28.6
million in 1995, and $28.3 million in 1994.
(4) RECEIVABLES
Receivables are stated net of allowance for doubtful accounts of $1.6
million (unaudited) as of June 30, 1997, $2.2 million as of December 31, 1996,
and $1.5 million as of December 31, 1995.
(5) INVENTORIES
Inventories as of June 30, 1997 and December 31, 1996 and 1995 consisted of
the following (in millions):
<TABLE>
<CAPTION>
DECEMBER 31
--------------------
1996 1995
JUNE 30 --------- ---------
-----------
1997
-----------
(UNAUDITED)
<S> <C> <C> <C>
Raw materials and supplies...................................... $ 74.7 $ 66.2 $ 54.8
Work in process................................................. 61.9 59.8 46.6
Finished goods.................................................. 29.4 28.5 22.7
----------- --------- ---------
$ 166.0 $ 154.5 $ 124.1
----------- --------- ---------
----------- --------- ---------
</TABLE>
B-34
<PAGE>
HUSSMANN INTERNATIONAL
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(6) PROPERTY AND EQUIPMENT
Property and equipment as of June 30, 1997 and December 31, 1996 and 1995
consisted of the following (in millions):
<TABLE>
<CAPTION>
DECEMBER 31
--------------------
1996 1995
JUNE 30 --------- ---------
-----------
1997
-----------
(UNAUDITED)
<S> <C> <C> <C>
Land............................................................ $ 5.5 $ 4.9 $ 4.0
Buildings and improvements...................................... 82.2 78.8 70.7
Machinery and equipment......................................... 204.3 188.7 173.9
----------- --------- ---------
Total property and equipment.................................... 292.0 272.4 248.6
Accumulated depreciation........................................ (143.2) (134.0) (121.3)
----------- --------- ---------
Property and equipment, net..................................... $ 148.8 $ 138.4 $ 127.3
----------- --------- ---------
----------- --------- ---------
</TABLE>
(7) INTANGIBLE ASSETS
Intangible assets are stated net of accumulated amortization of $18.1
million (unaudited) as of June 30, 1997, $17.5 million as of December 31, 1996,
and $15.1 million as of December 31, 1995.
(8) ACCRUED EXPENSES
Accrued expenses as of June 30, 1997 and December 31, 1996 and 1995
consisted of the following (in millions):
<TABLE>
<CAPTION>
DECEMBER 31
--------------------
1996 1995
JUNE 30 --------- ---------
-------------
1997
-------------
(UNAUDITED)
<S> <C> <C> <C>
Salaries and wages................................................. $ 12.7 $ 16.5 $ 16.1
Taxes other than income taxes...................................... 5.7 8.2 8.2
Warranty........................................................... 7.4 8.2 6.1
Pension............................................................ 7.8 7.8 4.5
Other.............................................................. 4.9 5.5 5.5
----- --------- ---------
$ 38.5 $ 46.2 $ 40.4
----- --------- ---------
----- --------- ---------
</TABLE>
(9) LEASES
As of December 31, 1996, annual minimum rental payments under operating
leases that have initial non-cancelable terms in excess of one year were as
follows (in millions):
<TABLE>
<CAPTION>
LEASES
-----------
<S> <C>
1997..................................................................................... $ 12.5
1998..................................................................................... 8.9
1999..................................................................................... 6.4
2000..................................................................................... 2.9
2001..................................................................................... 2.2
Thereafter............................................................................... 12.0
-----
Total minimum lease payments............................................................. $ 44.9
-----
-----
</TABLE>
B-35
<PAGE>
HUSSMANN INTERNATIONAL
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(9) LEASES (CONTINUED)
Total rent expense applicable to operating leases amounted to $9.6 million,
$9.0 million and $8.7 million in 1996, 1995 and 1994, respectively. A majority
of Hussman International's leases provide that Hussmann International pay taxes,
maintenance, insurance and certain other operating expenses which are not
included in the above lease amounts.
(10) INCOME TAXES
The income tax provisions consisted of (in millions):
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Current:
U.S. Federal.......................................................... $ 10.1 $ 3.1 $ 3.6
Non-U.S............................................................... 5.6 6.8 14.3
U.S. state and local.................................................. 1.2 0.7 1.2
--------- --------- ---------
Total current..................................................... 16.9 10.6 19.1
--------- --------- ---------
Deferred:
U.S. Federal.......................................................... 0.1 1.1 (0.1)
Non-U.S............................................................... 0.6 2.0 (2.5)
U.S. state and local.................................................. -- 0.2 --
--------- --------- ---------
Total deferred...................................................... 0.7 3.3 (2.6)
--------- --------- ---------
Income tax provisions................................................... $ 17.6 $ 13.9 $ 16.5
--------- --------- ---------
--------- --------- ---------
</TABLE>
The items which gave rise to differences between the income tax provisions
in the combined statements of income and income taxes computed at the U.S.
statutory rate are summarized as follows:
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Income tax expense computed at U.S. statutory rate...................... 35.0% 35.0% 35.0%
U.S. state and local taxes, net of U.S. Federal income tax benefit...... 1.5 1.6 1.9
Higher (lower) non-U.S. effective tax rates............................. (3.3) 0.3 2.5
Other items, net........................................................ 0.8 (0.1) 1.7
--------- --------- ---------
Income tax provisions................................................... 34.0% 36.8% 41.1%
--------- --------- ---------
--------- --------- ---------
</TABLE>
Pretax income from non-U.S. operations amounted to $23.3 million, $25.6
million, and $32.5 million in 1996, 1995 and 1994, respectively. U.S. income
taxes have not been provided on the undistributed income ($85.1 million) of
Hussmann International's non-U.S. operations, which currently is not intended to
be remitted to the U.S. No deferred tax liability has been recognized with
regard to the potential remittance of such undistributed income. It is not
practicable to estimate the incremental income tax liability that might be
incurred if such income was remitted to the U.S.
B-36
<PAGE>
HUSSMANN INTERNATIONAL
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(10) INCOME TAXES (CONTINUED)
Deferred income taxes are created by "temporary differences" which exist
between amounts of assets and liabilities recorded for financial reporting
purposes and such amounts as reported under income tax regulations. Deferred tax
assets and liabilities as of December 31, 1996 and 1995 consisted of (in
millions):
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
Deferred tax assets attributable to:
Post-retirement benefit accruals.............................................. $ 6.2 $ 5.8
Other accruals................................................................ 7.6 6.1
--------- ---------
Total deferred tax assets................................................... 13.8 11.9
--------- ---------
Deferred tax liabilities attributable to:
Property and equipment, principally depreciation method differences........... (8.2) (9.8)
Pensions...................................................................... (6.6) (6.3)
Inventories................................................................... (5.2) (3.1)
Other......................................................................... (1.5) --
--------- ---------
Total deferred tax liabilities.............................................. (21.5) (19.2)
--------- ---------
Net deferred tax liability...................................................... $ (7.7) $ (7.3)
--------- ---------
--------- ---------
Net deferred tax asset (liability) included in:
Other assets.................................................................. $ 0.9 $ 3.0
Deferred income taxes and other liabilities................................... (8.6) (10.3)
--------- ---------
Net deferred tax liability...................................................... $ (7.7) $ (7.3)
--------- ---------
--------- ---------
</TABLE>
Management believes it is more likely than not that all deferred tax assets
will be realized and, accordingly no valuation allowance is required.
(11) PENSION AND OTHER POST-RETIREMENT PLANS
HUSSMANN INTERNATIONAL-SPONSORED DEFINED BENEFIT PENSION PLANS
Substantially all of Hussmann International's U.S. employees are covered
under various defined benefit pension plans sponsored and funded by Hussmann
International. Plans covering salaried employees provide pension benefits based
on years of service and generally are limited to a maximum of 20% of an
employee's average annual compensation during the five years preceding
retirement. Plans covering hourly employees generally provide benefits of stated
amounts for each year of service. Plan assets are invested primarily in common
stocks, corporate bonds and government securities.
Net periodic pension cost for 1996, 1995 and 1994 included the following
components (in millions):
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Service cost--benefits earned during period........................... $ 4.2 $ 3.6 $ 3.6
Interest cost on projected benefit obligation......................... 10.4 9.7 9.1
Actual return on assets............................................... (16.2) (19.1) (4.2)
Net amortization and deferral......................................... 4.9 8.7 (5.9)
--------- --------- ---------
Total net periodic pension cost....................................... $ 3.3 $ 2.9 $ 2.6
--------- --------- ---------
--------- --------- ---------
</TABLE>
B-37
<PAGE>
HUSSMANN INTERNATIONAL
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(11) PENSION AND OTHER POST-RETIREMENT PLANS (CONTINUED)
The principal economic assumptions used in the determination of net periodic
pension cost include the following:
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Discount rate........................................................... 7.5% 8.5% 7.0%
Expected long-term rate of return on assets............................. 9.5% 9.5% 10.0%
Rate of increase in compensation levels................................. 5.0% 6.0% 4.5%
</TABLE>
Pension costs are funded in amounts not less than minimum levels required by
regulation. The following table reconciles the pension plans' funded status to
the amounts recognized in Hussmann International's combined balance sheets as of
December 31, 1996 and 1995 (in millions):
<TABLE>
<CAPTION>
1996 1995
---------------------------- ----------------------------
ASSETS EXCEED ACCUMULATED ASSETS EXCEED ACCUMULATED
ACCUMULATED BENEFITS ACCUMULATED BENEFITS
BENEFITS EXCEED ASSETS BENEFITS EXCEED ASSETS
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Actuarial present value of benefit
obligation (measured as of
September 30):
Vested benefit obligation.......... $ (80.5) $ (34.7) $ (78.0) $ (29.0)
------ ------ ------ ------
------ ------ ------ ------
Accumulated benefit obligation..... (82.5) (37.5) (80.3) (31.8)
------ ------ ------ ------
------ ------ ------ ------
Projected benefit obligation....... (98.3) (39.0) (93.5) (32.9)
Plan assets at fair market value
(measured as of September 30)...... 116.0 32.3 103.8 29.0
Plan assets in excess of (less than)
projected benefit obligation....... 17.7 (6.7) 10.3 (3.9)
Unrecognized net asset at
transition......................... (0.3) -- (0.3) (0.1)
Unrecognized prior service costs..... 5.4 8.0 6.3 3.4
Unrecognized net loss (gain)......... (11.7) 1.4 (5.7) 2.3
Additional liability required to
recognize minimum liability........ -- (7.8) -- (4.5)
------ ------ ------ ------
Prepaid (accrued) pension cost
recognized in balance sheets....... $ 11.1 $ (5.1) $ 10.6 $ (2.8)
------ ------ ------ ------
------ ------ ------ ------
</TABLE>
The principal economic assumptions used in determining the above benefit
obligations were discount rates of 7.5% in both 1996 and 1995 and rates of
increase in future compensation levels of 5.0% in both 1996 and 1995.
HUSSMANN INTERNATIONAL-SPONSORED DEFINED CONTRIBUTION PLANS
Substantially all U.S. salaried employees, certain U.S. hourly employees and
certain Canadian employees participate in voluntary, contributory defined
contribution plans to which Hussmann International makes full or partial
matching contributions. Hussmann International matching contributions to these
plans amounted to $3.1 million, $2.9 million and $3.0 million in 1996, 1995 and
1994, respectively.
B-38
<PAGE>
HUSSMANN INTERNATIONAL
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(11) PENSION AND OTHER POST-RETIREMENT PLANS (CONTINUED)
MULTI-EMPLOYER PENSION PLANS
Hussmann International participates in a number of multi-employer pension
plans which provide benefits to certain unionized employee groups. Amounts
contributed to the plans totaled $3.4 million, $2.8 million and $2.4 million in
1996, 1995 and 1994, respectively.
POST-RETIREMENT BENEFITS OTHER THAN PENSIONS
Hussmann International provides substantially all former U.S. salaried
employees who retired prior to July 1, 1989 and selected other employees in the
U.S. and Canada with certain life and health care benefits. U.S. salaried
employees retiring after July 1, 1989 generally are required to pay the full
cost of these benefits. Eligibility for these benefits varies with the
employee's classification prior to retirement. Accrued post-retirement benefit
costs recorded in Hussmann International's combined balance sheets were $14.4
million and $15.1 million as of December 31, 1996 and 1995, respectively. The
costs associated with the program were immaterial in each of the years 1994
through 1996.
MULTI-EMPLOYER POST-RETIREMENT MEDICAL AND LIFE INSURANCE
Hussmann International participates in a number of multi-employer plans
which provide health care and survivor benefits to unionized employees during
their working lives and after retirement. Portions of the benefit contributions,
which cannot be disaggregated, related to post-retirement benefits for plan
participants. Total amounts charged against income and contributed to the plans
(including benefit coverage during their working lives) amounted to $5.1
million, $4.0 million, and $4.0 million in 1996, 1995 and 1994, respectively.
(12) OTHER FINANCIAL INFORMATION
Net cash provided by operating activities includes cash payments or cash
receipts as follows (in millions):
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Interest paid........................................................... $ 18.0 $ 16.3 $ 15.2
Income taxes paid....................................................... 8.5 4.9 2.2
</TABLE>
There were no significant acquisitions in either 1996 or 1994. In 1995
Hussmann International acquired an equipment distributor in Chile, the remaining
50% interest in a refrigeration manufacturer and distributor in the U.K. The
total amount paid for all acquisitions was $9.4 million. All such acquisitions
were accounted for as purchases, and Hussmann International's combined operating
results include such acquisitions from the dates of purchase. The effects of
these acquisitions, had they been made as of January 1, 1995, would not have
been significant to Hussmann International's combined operating results.
(13) CONTINGENCIES
Hussmann International has certain contingent liabilities arising from
various pending claims and litigation on a number of matters. While the amount
of liability that may result from these matters cannot be determined, in the
opinion of Hussmann International counsel, the ultimate liability will not
materially affect the combined financial position or results of operations of
Hussmann International.
(14) BUSINESS SEGMENT INFORMATION
Hussmann International is engaged in manufacturing, sales, installation and
servicing of commercial refrigeration systems and equipment in various markets
throughout the world. Hussmann International manages this business with separate
senior management teams responsible for the U.S. and Canada and various
international
B-39
<PAGE>
HUSSMANN INTERNATIONAL
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(14) BUSINESS SEGMENT INFORMATION (CONTINUED)
markets. The following tables present financial information for each of these
business segments as of and for the years ended December 31, 1996, 1995 and 1994
(in millions):
<TABLE>
<CAPTION>
SALES AND REVENUES OPERATING INCOME
------------------------------- --------------------
1996 1995 1994 1996 1995
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
U.S. and Canada..................................................... $ 826.6 $ 738.6 $ 647.7 $ 94.4 $ 78.6
U. K................................................................ 139.9 157.3 147.1 -- 5.8
Other International................................................. 82.0 67.6 97.4 14.3 9.1
Eliminations........................................................ (42.8) (41.8) (32.7) -- --
--------- --------- --------- --------- ---------
Total before corporate and other expenses........................... $ 1,005.7 $ 921.7 $ 859.5 108.7 93.5
--------- --------- ---------
--------- --------- ---------
Hussmann International corporate administrative expenses............ (14.9) (14.8)
--------- ---------
Total operating income.............................................. 93.8 78.7
Whitman charges..................................................... (26.7) (28.6)
Interest expense.................................................... (18.0) (16.8)
Other income, net................................................... 2.6 4.5
--------- ---------
Income before income taxes.......................................... $ 51.7 $ 37.8
--------- ---------
--------- ---------
<CAPTION>
1994
---------
<S> <C>
U.S. and Canada..................................................... $ 70.1
U. K................................................................ 6.1
Other International................................................. 19.7
Eliminations........................................................ --
---------
Total before corporate and other expenses........................... 95.9
Hussmann International corporate administrative expenses............ (13.4)
---------
Total operating income.............................................. 82.5
Whitman charges..................................................... (28.3)
Interest expense.................................................... (15.6)
Other income, net................................................... 1.5
---------
Income before income taxes.......................................... $ 40.1
---------
---------
</TABLE>
<TABLE>
<CAPTION>
DEPRECIATION CAPITAL
IDENTIFIABLE ASSETS AND AMORTIZATION INVESTMENTS
------------------------------- ------------------------------- ---------
1996 1995 1994 1996 1995 1994 1996
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
U.S. and Canada..................................... $ 350.3 $ 324.9 $ 285.0 $ 12.5 $ 10.6 $ 9.2 $ 19.4
U. K................................................ 115.0 116.1 106.7 2.9 4.9 4.5 6.2
Other International................................. 84.1 58.6 61.0 2.0 1.6 1.5 6.8
Corporate assets.................................... 62.0 47.8 50.9 2.8 2.5 2.1 1.1
--------- --------- --------- --------- --------- --------- ---------
$ 611.4 $ 547.4 $ 503.6 $ 20.2 $ 19.6 $ 17.3 $ 33.5
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
<CAPTION>
1995 1994
--------- ---------
<S> <C> <C>
U.S. and Canada..................................... $ 19.1 $ 16.5
U. K................................................ 4.1 5.5
Other International................................. 4.2 8.6
Corporate assets.................................... 1.9 2.1
--------- ---------
$ 29.3 $ 32.7
--------- ---------
--------- ---------
</TABLE>
Foreign currency gains or losses were not significant. Sales between
geographical areas were not significant. Sales to any single customer and sales
to domestic or foreign governments were each less than ten percent of combined
sales and revenues.
Included in U.S. and Canada sales shown above were export sales to the
following geographic areas (in millions):
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Europe and Middle East.................................................. $ 1.5 $ 2.7 $ 4.6
Latin America........................................................... 8.5 9.5 7.5
Asia Pacific............................................................ 8.1 5.8 4.0
--------- --------- ---------
Total exports........................................................... $ 18.1 $ 18.0 $ 16.1
--------- --------- ---------
--------- --------- ---------
</TABLE>
B-40
<PAGE>
HUSSMANN INTERNATIONAL
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(14) BUSINESS SEGMENT INFORMATION (CONTINUED)
Information regarding Hussmann International's sales and revenues and its
operating income, by business segment, for the six month periods ended June 30,
1997 and 1996 is as follows (unaudited and in millions):
<TABLE>
<CAPTION>
OPERATING INCOME
SALES AND REVENUES
-------------------- --------------------
1997 1996 1997 1996
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
U.S. and Canada.................................................................. $ 378.2 $ 353.0 $ 42.0 $ 35.3
U. K............................................................................. 46.6 54.7 (6.3) (1.5)
Other International.............................................................. 43.6 34.3 2.9 4.3
Eliminations..................................................................... (19.0) (21.4) -- --
--------- --------- --------- ---------
Total before corporate and other expenses........................................ $ 449.4 $ 420.6 38.6 38.1
--------- ---------
--------- ---------
Hussmann International corporate administrative expenses......................... (7.7) (8.3)
--------- ---------
Total operating income........................................................... 30.9 29.8
Whitman charges.................................................................. (14.2) (15.1)
Interest expense................................................................. (9.5) (8.7)
Other income, net................................................................ 1.0 1.4
--------- ---------
Income before income taxes....................................................... $ 8.2 $ 7.4
--------- ---------
--------- ---------
</TABLE>
(15) SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table presents Hussmann International's sales and revenues,
gross profit, and net income on a quarterly basis (in millions):
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER FULL YEAR
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
1997
Sales and revenues................................................. $ 198.6 $ 250.8
Gross profit....................................................... 34.9 48.4
Net income (loss).................................................. (0.7) 5.7
1996
Sales and revenue.................................................. $ 194.6 $ 226.0 $ 261.5 $ 323.6 $ 1,005.7
Gross profit....................................................... 34.5 48.1 56.0 65.3 203.9
Net income (loss).................................................. (1.8) 6.6 13.2 16.1 34.1
1995
Sales and revenue.................................................. $ 168.7 $ 220.6 $ 241.4 $ 291.0 $ 921.7
Gross profit....................................................... 28.7 46.5 49.0 55.1 179.3
Net income (loss).................................................. (0.3) 4.8 8.7 10.7 23.9
</TABLE>
B-41
<PAGE>
ANNEX C -- INFORMATION ABOUT MIDAS
BUSINESS
OVERVIEW
Midas provides retail automotive services through franchised and
Group-operated stores in the U.S., Canada, France and other locations in Europe,
Australia, Southeast Asia, the Middle East, Latin America and the Caribbean.
Midas stores offer exhaust, brake, suspension, air conditioning and maintenance
services. In addition, Midas manufactures and sells Midas brand products for
resale at Midas stores. Midas also manufactures exhaust products under the IPC
brand name for sale to distributors. Domestic manufacturing plants produce
approximately 2,000 different types of mufflers and 3,200 types of exhaust and
tail pipes to service approximately 1,200 makes and models of automobiles. AS
USED HEREIN, THE TERM "GROUP-OPERATED STORE" MEANS A STORE OPERATED BY MIDAS AND
EXCLUDES STORES OPERATED BY FRANCHISEES.
There are approximately 2,700 Midas stores worldwide, of which approximately
1,900 are located in the U.S. The U.S. stores include approximately 1,750
franchised stores, with the balance being Group-operated. Approximately
two-thirds of the Midas stores located outside of the U.S. are franchised.
Midas brand products are sold at wholesale to franchised Midas stores and at
retail by Group-operated stores. IPC brand exhaust products are sold to
distributors. Midas also manufactures and sells shop equipment under the Huth
trademark. Midas Realty Corporation, a Midas subsidiary ("Midas Realty"),
selects, leases, acquires and constructs sites for Midas stores.
For the year ended December 31, 1996, Midas' sales and revenues were
approximately $604 million, including sales and revenues from the sale of
products and equipment of approximately $296 million, sales and revenues from
retail sales of Group-operated stores of approximately $202 million and
franchise fee and royalty payments of approximately $72 million. For the year
ended December 31, 1996, the service mix at U.S. stores by sales and revenues
was approximately 47% brakes, 37% exhaust, 11% suspension (including shock
absorbers and struts) with the balance including other maintenance services. The
service mix outside of the U.S. is generally consistent with the U.S. service
mix.
Midas has been engaged in the retail automotive exhaust business since 1954,
and has granted franchises for and operated Midas stores since 1956. Midas
International Corporation was incorporated in Delaware in 1959. Midas Group,
Inc. was incorporated in Delaware in August 1997 in connection with the
Distribution. Midas' principal executive offices are located at 225 North
Michigan Avenue, Chicago, Illinois 60601 and its telephone number is (312)
565-7500.
MARKET OVERVIEW
Increased technological complexity and durability of vehicles have been the
dominant forces in the evolution of the automotive repair industry since the
1970s. As a result, the types of service providers, as well as the type and
frequency of repairs being performed, has changed. The total number of service
outlets in the U.S. has been declining over the past 15 years. The largest
decrease is attributable to a reduction in the number of local service stations
offering automotive repair. As the number of service stations offering
automotive repair has decreased, more sophisticated service providers have
emerged. The number of independent maintenance and repair shops and large
automotive repair chains has increased slightly. In addition, certain automobile
companies and dealers have announced their intention to pursue more repair
business by separating repair shops from showrooms and offering more convenient
service.
The technological sophistication of modern automobiles has also affected the
types of service needed over the lifetime of a vehicle. In general, the
automotive aftermarket has grown as the number of vehicles in operation, the
average age of these vehicles and the annual number of miles driven per vehicle
have increased. This aftermarket growth is limited by improved vehicle
durability. Vehicles are now assembled with more durable parts, such as
stainless steel exhaust systems, and suspension parts such as shocks and struts
are now more technologically advanced. As a result, the repairs performed over
the lifetime of today's vehicles are more likely to be maintenance repairs and
light repair work.
C-1
<PAGE>
These industry trends have resulted over time in a decline in Midas' core
exhaust and suspension services, and a slowing in the growth of revenues derived
from brake services. These trends have also created two specific business issues
that Midas management is addressing. The first issue is that selling, general
and administrative expenses in the U.S. have recently grown at a rate that is
disproportionate to sales and revenue growth. The second issue is poor operating
results of Group-operated U.S. stores.
Midas management has addressed these issues with a major restructuring of
the business. Major actions to be taken include: discontinuance of the segment
that comprises the U.S. Group-operated stores, reductions of asset values to
recognize impairments, modification of a number of franchise programs in the
U.S., and a reduction in the level of employment. These actions are designed to
reverse declines in earnings and return on investment and provide resources to
invest for future growth. The costs associated with the restructuring will be
recorded during the quarter ended September 1997; nonrecurring charges are
expected to be approximately $65 million on a pre-tax basis or approximately $45
million on an after-tax basis.
STRATEGY
Midas seeks to increase shareholder value by growing earnings and improving
returns through the execution of several clearly defined strategies. First,
Midas has begun a program to develop customer loyalty through expanded service
offerings and other convenience and customer service initiatives. In addition,
Midas intends to expand its non-U.S. operations to participate in the growing
international automotive repair market. Finally, Midas has rededicated itself to
its franchisee store operations through the discontinuance of its U.S.
Group-operated store division.
INCREASE CUSTOMER LOYALTY. Midas' goal is to establish long-term
relationships with customers modeled on the independent repair shop. Midas views
maintenance service as a key opportunity to develop relationships with car
owners by increasing the frequency of visits to the Midas Store. Maintenance
services allow Midas to position itself as an alternative to the independent
repair shops and car dealers and to compete with these service providers on the
bases of convenience, quality and value. Midas has instituted other initiatives
such as Uniform Inspection Guidelines, that involve customers in the diagnostic
stage of repairs, and expanded shop hours in order to build stronger customer
relationships.
INTERNATIONAL EXPANSION. In general, the international automotive repair
market is growing more quickly than the U.S. market. This growth is a result of
the growing economies and growing number of automobiles in many emerging
markets. Opportunities exist in more established markets because they are still
largely served by automobile dealers and independent repair shops. The lower
prices and convenience that Midas offers provides an alternative to these
service outlets much as it did in the U.S. twenty years ago. Midas seeks to
tailor its growth strategy to the individual market in order to successfully
establish the Midas name. Midas entered the European market in 1976 through its
development in France and Belgium, and has used a strategy of establishing the
Midas name through Group-operated stores and then initiating a franchise
program. In the future, Midas anticipates entering into master license
agreements or joint ventures with a regional operator who is familiar with the
needs of local consumers as well as the regulatory structure of the region.
INCREASED U.S. FRANCHISE FOCUS. Much of the success of the Midas program
over the past 40 years has been the strength of its franchisees and the focus of
management on franchising. The decision to discontinue Group-operated stores in
the U.S. will allow Midas to concentrate its human and financial resources on
the goal of increasing franchisee retain sales and system-wide profitability.
FRANCHISES AND THE MIDAS SYSTEM
Midas has developed a system for the establishment and operation of Midas
stores that is used in both franchised and Group-operated stores worldwide. This
system includes site selection, store construction and layout, equipment
selection and installation, purchasing and inventory control methods, accounting
methods, merchandising, advertising, sales and promotional techniques,
installation techniques, personnel training and other matters relating to the
efficient and successful operation of Midas stores and the maintenance of high
standards of quality.
C-2
<PAGE>
Midas identifies and qualifies franchisees through a well-organized
recruitment program in each region of the world in which it operates.
Franchisees are qualified based primarily upon a candidate's financial
suitability and operational experience, among other criteria. Midas also
considers a franchisee's ability to work within the Midas franchise system. Each
franchisee enters into a standard franchise and trademark agreement with Midas.
The franchise and trademark agreement varies by country but these variances do
not substantially alter the franchise arrangement. THE FRANCHISE AND TRADEMARK
AGREEMENT USED IN THE U.S. (THE "U.S. FRANCHISE AGREEMENT") HAS BEEN FILED AS AN
EXHIBIT TO THE MIDAS REGISTRATION STATEMENT, AND THE FOLLOWING SUMMARY OF
PORTIONS THEREOF IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE U.S. FRANCHISE
AGREEMENT AS FILED. SEE "AVAILABLE INFORMATION" IN THE BODY OF THE INFORMATION
STATEMENT.
TERM AND FEES; ESTIMATED COSTS; ROYALTY PAYMENTS. The initial term of the
U.S. Franchise Agreement, as well as most franchise and trademark agreements
throughout the world, is twenty years. The U.S. Franchise Agreement may be
terminated by the franchisee upon thirty days written notice. In most instances
in the U.S. Midas retains, through real estate agreements between franchisees
and Midas Realty (described below), the ability to occupy a site in the event of
a termination of the applicable franchise and trademark agreement in order to
assure that the site may continue to be operated as a Midas store.
An initial franchise fee is charged upon execution of a franchise and
trademark agreement. In opening a Midas store, a franchisee incurs additional
expenses relating to site selection or approval by Midas Realty, fixtures,
machinery and equipment and initial product inventory. None of the fees and
expenses is financed by Midas and, with the exception of a portion of the
initial franchise fee, none is refundable.
Franchisees pay Midas monthly royalties based on a percentage of sales. As
described more fully below, in most countries in which Midas does business, it
is obligated to use one-half of the royalty payments it receives for
advertising.
REALTY AGREEMENTS. Since the mid-1970s, Midas has required each U.S.
franchisee to enter into an agreement with Midas Realty giving Midas Realty the
ability to occupy a site in the event of a termination of the related franchise
and trademark agreement in order to ensure that the site may continue to be
operated as a Midas store if Midas chooses. The agreement with Midas Realty
remains in effect throughout the term of the related franchise and trademark
agreement. When Midas Realty owns the real estate or has the primary lease on a
Midas store, the franchisee is required to lease or sublease the Midas store
from Midas Realty. If the franchisee owns the real estate, the franchisee is
required to provide Midas with real estate control through one of two
alternative means. The first alternative provides for the lease by the
franchisee to Midas Realty of the premises, which in turn leases the premises
back to the franchisee. So long as the franchisee continues to be both the
landowner and the franchisee of that store, no rent is exchanged between the
franchisee and Midas Realty. If the real estate is sold to a third party or if
the franchised Midas store is sold to a new franchisee to whom the sublease is
assigned, Midas Realty will then collect rent from the franchisee and pay rent
to the landowner. Under the second alternative the franchisee enters into a
conditional option to lease with Midas Realty which grants Midas Realty the
option to lease the premises in the event that the related franchise agreement
is terminated. If the franchisee leases real estate from a third-party upon
which the Midas store is located, Midas requires that the franchisee grant to
Midas Realty a conditional assignment of the lease to take effect upon the
termination of the related franchise and trademark agreement. Approximately 75%
of existing franchised Midas stores are subject to various forms of agreements
with Midas Realty. See Note 7 to the Combined Financial Statements of the Midas
Group appearing elsewhere in this Annex C.
SITES AND SITE SELECTION. Midas assists franchisee candidates by
identifying and developing a site on which a Midas store will be constructed.
Midas may also approve or disapprove of a site located by the candidate. Midas
approves a particular site based upon a review of the demographic
characteristics of the site, traffic counts and patterns, population patterns,
income statistics, parking, competition, proximity of other businesses and other
commercial criteria.
TRAINING. Franchisees are required to complete the Midas initial training
program. The first part of the program includes a minimum of three weeks
observing a franchised Midas store in operation as well as completion of a
self-training program. The second part of the initial training program is held
at a Midas training center and lasts at least three weeks. Supplemental training
sessions are also offered by Midas at certain regional facilities. Midas also
makes training materials available and conducts training seminars in the field.
C-3
<PAGE>
MACHINERY, FIXTURES, INVENTORY AND OTHER GOODS. Midas recommends sources
for machinery, equipment, furniture and fixtures necessary to outfit a Midas
store for operation. In the U.S. and Canada, franchisees are required to
purchase from Midas a sufficient quantity of Midas warranted products,
principally mufflers, shock absorbers, struts and brake pads and shoes, adequate
to meet the public demand for genuine Midas products and to promptly fill
customers' requests for replacement under the terms of various Midas warranties.
Midas is the sole supplier of these warranted parts. Other products, which are
not warranted, such as pipe and brake parts, are sold by Midas, but may be
purchased by franchised stores from other sources. Store equipment, such as
lifts, alignment equipment, lathes, racking and tools may also be purchased
through Midas or from other sources.
WARRANTY PROGRAM. An important feature of the Midas system is the
requirement that the retail customer be provided a written warranty from Midas
on certain Midas products that will be honored at all Midas stores. Each Midas
store is required to honor such warranties in accordance with their terms and
with policies as issued from time to time by Midas.
ADVERTISING. Midas is obligated to use one-half of the royalty payments it
receives from franchisees for advertising placed during the calendar year the
royalties are received or during the following calendar year. Midas directs all
use of advertising funds, and all decisions regarding the creative concepts and
materials used, whether national, regional or local advertising will be used,
the particular media and advertising content, and the advertising agencies to be
used are controlled by Midas. World-wide advertising expenditures during 1996
were approximately $100 million, which included one-half of franchisee royalties
received, Group expenditures and various other local market contributions.
NATIONAL MIDAS DEALERS ASSOCIATION. The National Midas Dealers Association
(the "NMDA") is an independent association of Midas franchisees. Approximately
75% of the Midas franchisees in the U.S. belong to the NMDA. Midas' management
communicates on a regular basis with NMDA representatives and various NMDA
committees to solicit franchisee input.
PROPRIETARY INFORMATION
Midas holds various patents, trademarks, trade names and copyrights, none of
which, other than the Midas name, is considered by Midas to be material to its
financial condition and results of operations. Midas vigorously defends the
Midas name throughout the world and the name is registered as a trademark in
approximately 55 countries in addition to the U.S. Midas also owns certain trade
secrets including product catalogs, price lists, training manuals and inventory
systems.
MANUFACTURING AND RESALE OPERATIONS
Midas manufactures and resells parts for the U.S. automotive aftermarket.
These products include mufflers, exhaust pipes and tail pipes manufactured by
Midas and shock absorbers, brakes, suspension, steering and front end parts
resold by Midas. Exhaust systems are manufactured by Midas at its Bedford Park,
Illinois and Hartford, Wisconsin facilities. These parts are sold at wholesale
to Midas franchised stores and at retail by Group-operated stores and are
required to be stocked by Midas stores in order to serve the demand for
warranted Midas parts. Midas IPC brand products are also manufactured at both
the Bedford Park and Hartford locations. Huth brand products are manufactured at
the Huth manufacturing plant in Hartford. Midas manufacturing plants have
limited backlogs of uprocessed orders.
Midas purchases the raw materials for the products it manufactures,
primarily steel and packaging, from various suppliers through both long-term and
short-term contracts, depending upon anticipated market conditions. Midas
purchases products for resale from various suppliers through contracts that
generally range from one to three years in duration. These raw materials and
products are available from multiple suppliers, and Midas has not experienced
any significant shortages. Midas believes it enjoys good relationships with its
suppliers.
COMPETITION
The automotive repair industry is highly competitive and fragmented, and the
number, size and strength of competitors vary from region to region. Midas'
primary competitors include national and local specialty chains,
C-4
<PAGE>
both franchised and company-operated, car dealerships, independent repair shops
and service bays operated by mass merchandisers. Certain of these competitors
are well-capitalized and a number of them have instituted expansion plans. Midas
believes that competition in the industry is primarily based on customer service
and reputation, store location, name awareness and price. Midas believes that it
generally has a favorable competitive position with respect to each of these
variables.
CUSTOMERS
The Midas business is not dependent upon a single customer or small group of
customers.
SEASONALITY
Midas experiences the greatest demand for its services in the second and
third quarters of the year, with approximately 55% of annual sales and revenues
occurring during that period in 1996.
REGULATORY COMPLIANCE AND LEGAL PROCEEDINGS
FRANCHISING MATTERS. Midas is subject to a variety of federal and state
laws governing franchise sales and marketing and franchise trade practices.
Applicable laws and regulations generally require disclosure of business
information in connection with the sale of franchises. Certain state regulations
also affect the ability of the franchisor to revoke or refuse to renew a
franchise. Midas deals with franchisees in good faith and seeks to comply with
regulatory requirements. However, given the scope of the Midas business and the
nature of franchise regulation, compliance problems may be encountered from time
to time.
CONSUMER PROTECTION MATTERS. National automotive repair chains have been
the subject of investigations and reports by consumer protection agencies and
the Attorneys General of various states. Publicity in connection with such
investigations can have an adverse effect on the financial condition and results
of operations of a company. In addition to such investigations, state and local
governments have enacted numerous consumer protection laws. Midas has instituted
procedures, including uniform standards of service to be followed by all Midas
stores, to improve customer satisfaction, which also aids in regulatory
compliance.
ENVIRONMENTAL AND OCCUPATIONAL SAFETY MATTERS. Midas stores handle used
automotive oils and certain solvents that are disposed of by licensed
third-party contractors. As a result, Midas is subject to a number of federal,
state and local laws designed to protect the environment. Midas, through its
Group-operated stores, is also subject to regulation regarding the installation
of catalytic converters. In addition to environmental laws, Midas is subject to
the Federal Occupational Safety and Health Act and other laws regulating safety
and health. Midas maintains a program to facilitate compliance with these laws,
the costs of which are not material to its financial condition and results of
operations.
LEGAL PROCEEDINGS. Midas has certain contingent liabilities arising from
various pending claims and litigation related to a number of matters. While the
amount of liability that may result from these matters cannot be determined, in
the opinion of Midas counsel, the ultimate liability will not materially affect
the combined financial position or results of operations of Midas.
EMPLOYEES
As of July 31, 1997, Midas had approximately 4,000 employees, including
approximately 950 who were covered by collective bargaining agreements. Labor
contracts with respect to approximately 150, 350 and 450 employees expire in
1998, 1999 and 2000, respectively. Midas considers its relationships with
employees to be generally satisfactory. Midas franchisees hire their own
employees. As a result of the shortage of qualified mechanics in the automotive
industry, individual franchisees may have difficulty hiring qualified personnel.
C-5
<PAGE>
PROPERTIES
Midas owns two manufacturing facilities located in Bedford Park, Illinois
(180,000 square feet) and Hartford, Wisconsin (200,000 square feet). Midas also
owns an engineering and technical services facility in Chicago, Illinois. Midas
also leases 20,000 square feet of space in Hartford, Wisconsin. In addition,
Midas leases office space in Chicago, where its corporate headquarters are
located, and owns two and leases ten warehouses in the U.S. and Canada. All
facilities are adequately equipped and maintained, and capacity is considered to
be adequate for current needs.
FINANCING
Midas' management expects to enter into a [ ]-year, unsecured revolving
credit facility (the "Midas Credit Facility") with a syndicate of commercial
banks and financial institutions prior to the Distribution Date. The Midas
Credit Facility will enable Midas to borrow funds at variable interest rates on
a revolving credit basis up to an aggregate principal amount of $[ ] million,
subject to the terms and conditions thereof. Midas' management expects to borrow
on or before the Distribution Date approximately $[ ] million under the Midas
Credit Facility for the purposes of settling intercompany loans and advances and
paying a cash dividend to Whitman. Unused amounts available under the Midas
Credit Facility will be available for Midas' working capital requirements and
general corporate purposes after the Distribution Date. Midas may convert a
portion of its initial debt to longer term fixed rate debt, contingent upon
acceptable market conditions.
POST-DISTRIBUTION DIVIDEND POLICY
The payment and level of cash dividends by Midas after the Distribution will
be subject to the discretion of the Midas Board. Dividend decisions will be
based upon a number of factors, including Midas' operating results and financial
requirements. No determination has been made by the Midas Board with respect to
the initial cash dividend that would be paid commencing after the Distribution.
However, it is expected that the cash dividend initially paid by Midas will be
determined, in part, by reference to dividend payment levels of entities engaged
in business comparable to the businesses in which Midas is engaged.
C-6
<PAGE>
MIDAS GROUP
INTRODUCTION TO PRO FORMA COMBINED FINANCIAL INFORMATION
The unaudited Pro Forma Combined Statements of Income of the Midas Group for
the six months ended June 1997 and for the year ended December 1996 present the
pro forma combined results of operations of the Midas Group, assuming that the
transactions contemplated by the Distribution, including the borrowing to be
incurred by the Midas Group in connection with the Distribution, had been
completed as of the beginning of the respective periods, and include all
material adjustments necessary to restate the Midas Group's historical results
on a pro forma basis. The adjustments required to reflect such transactions are
set forth in the "Pro Forma Adjustments" columns.
The unaudited Pro Forma Combined Balance Sheet of the Midas Group as of June
1997 presents the pro forma combined financial position of the Midas Group,
assuming that the transactions contemplated by the Distribution described in the
preceding paragraph had been completed as of that date. The adjustments required
to reflect such transactions are set forth in the "Pro Forma Adjustments"
column.
The unaudited pro forma combined financial statements of the Midas Group
should be read in conjunction with the historical financial statements and
related notes of the Midas Group included elsewhere in this Annex C. The pro
forma financial information presented is for informational purposes only and may
not necessarily reflect future results of operations or financial position of
the Midas Group or what the results of operations or financial position of the
Midas Group would actually have been had the Midas Group operated as an
independent company during the periods shown.
C-7
<PAGE>
MIDAS GROUP
PRO FORMA COMBINED STATEMENT OF INCOME
(UNAUDITED AND IN MILLIONS)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED JUNE 1997
---------------------------------------
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
----------- ------------- -----------
<S> <C> <C> <C>
Sales and revenues.............................................................. $ 302.3 $ -- $ 302.3
Cost of goods sold.............................................................. 140.6 -- 140.6
----------- ----- -----------
Gross profit.................................................................. 161.7 -- 161.7
Selling, general, and administrative expenses................................... 126.1 2.5(a) 128.6
Amortization expense............................................................ 1.6 -- 1.6
----------- ----- -----------
Operating income.............................................................. 34.0 (2.5) 31.5
Whitman charges................................................................. (9.0) 9.0(b) --
Interest expense:
Whitman....................................................................... (3.9) 3.9(b) --
Other......................................................................... (1.1) (9.3)(c) (10.4)
----------- ----- -----------
Total interest expense........................................................ (5.0) (5.4) (10.4)
Other income, net............................................................... 0.5 -- 0.5
----------- ----- -----------
Income before income taxes.................................................... 20.5 1.1 21.6
Income tax provisions........................................................... 8.8 0.4(d) 9.2
----------- ----- -----------
Net income.................................................................... $ 11.7 $ 0.7 $ 12.4
----------- ----- -----------
----------- ----- -----------
</TABLE>
See accompanying notes to pro forma financial information.
C-8
<PAGE>
MIDAS GROUP
PRO FORMA COMBINED STATEMENT OF INCOME
(UNAUDITED AND IN MILLIONS)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 1996
-------------------------------------
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
----------- ----------- -----------
<S> <C> <C> <C>
Sales and revenues.............................................................. $ 604.2 $ -- $ 604.2
Cost of goods sold.............................................................. 281.8 -- 281.8
----------- ----------- -----------
Gross profit.................................................................. 322.4 -- 322.4
Selling, general, and administrative expense.................................... 241.3 5.0(a) 246.3
Amortization expense............................................................ 3.1 -- 3.1
----------- ----------- -----------
Operating income.............................................................. 78.0 (5.0) 73.0
Whitman charges................................................................. (17.2) 17.2(b) --
Interest expense:
Whitman....................................................................... (7.3) 7.3(b) --
Other......................................................................... (2.7) (18.0) (c) (20.7)
----------- ----------- -----------
Total interest expense...................................................... (10.0) (10.7) (20.7)
Other income, net............................................................... 0.8 -- 0.8
----------- ----------- -----------
Income before income taxes.................................................... 51.6 1.5 53.1
Income tax provisions........................................................... 21.2 0.6(d) 21.8
----------- ----------- -----------
Net income.................................................................... $ 30.4 $ 0.9 $ 31.3
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
See accompanying notes to pro forma financial information.
C-9
<PAGE>
MIDAS GROUP
PRO FORMA COMBINED BALANCE SHEET
(UNAUDITED AND IN MILLIONS)
<TABLE>
<CAPTION>
JUNE 1997
-------------------------------------
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
----------- ----------- -----------
<S> <C> <C> <C>
ASSETS:
Current assets:
Cash and cash equivalents..................................................... $ 10.5 $ -- $ 10.5
Receivables, net.............................................................. 76.1 -- 76.1
Inventories................................................................... 94.2 -- 94.2
Other current assets.......................................................... 15.0 -- 15.0
----------- -----------
Total current assets........................................................ 195.8 -- 195.8
Property and equipment, net..................................................... 212.6 -- 212.6
Intangible assets, net.......................................................... 49.4 -- 49.4
Other assets.................................................................... 27.3 -- 27.3
----------- ----------- -----------
Total assets.................................................................. $ 485.1 $ -- $ 485.1
----------- ----------- -----------
----------- ----------- -----------
LIABILITIES AND EQUITY:
Current liabilities:
Short-term debt............................................................... $ 3.1 $ -- $ 3.1
Accounts payable.............................................................. 41.8 -- 41.8
Income taxes payable.......................................................... 5.3 -- 5.3
Accrued expenses.............................................................. 28.7 -- 28.7
----------- -----------
Total current liabilities................................................... 78.9 -- 78.9
Loans and advances from Whitman................................................. 85.1 (85.1) (e) --
Long-term debt.................................................................. -- 225.0(e) 225.0
Obligations under capital leases................................................ 15.2 -- 15.2
Deferred income taxes and other liabilities..................................... 24.8 -- 24.8
----------- ----------- -----------
Total liabilities............................................................. 204.0 139.9 343.9
Shareholder equity.............................................................. 281.1 (139.9) (e) 141.2
----------- ----------- -----------
Total liabilities and equity.................................................. $ 485.1 $ -- $ 485.1
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
See accompanying notes to pro forma financial information.
C-10
<PAGE>
MIDAS GROUP
NOTES TO PRO FORMA FINANCIAL INFORMATION
(a) To record the estimated additional administrative expenses that would have
been incurred by the Midas Group as a publicly held, independent company.
(b) To eliminate the Whitman charges and interest paid to Whitman.
(c) To record the interest expense on the funds assumed to be borrowed under
the Midas Credit Facility. The borrowings are assumed to bear an annualized
interest rate of 8.0%, which is management's estimate of the currently
available rate for borrowings under comparable credit facilities. This rate
may change prior to the incurrence of such debt on or before the
Distribution Date; further, after the Distribution the interest rate on the
borrowings under the Midas Credit Facility will continue to be subject to
changes in interest rates generally. The following table reflects the effect
on the pro forma combined statements of income of an increase or decrease of
1/8 of a percentage point in the annualized interest rate (in millions):
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED
JUNE 1997 DECEMBER 1996
------------------------ ------------------------
7.875% 8.125% 7.875% 8.125%
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Income before income taxes................................... $ 21.7 $ 21.4 $ 53.4 $ 52.8
Net income................................................... $ 12.5 $ 12.2 $ 31.5 $ 31.1
</TABLE>
(d) To record income tax benefits attributable to adjustments (a), (b) and (c)
at a combined Federal, state and local tax rate of 38%.
(e) To record payments to be made to Whitman by the Midas Group, anticipated to
aggregate $225 million, which first will be applied to settle intercompany
loans and advances, with the balance to be paid as a cash dividend.
C-11
<PAGE>
MIDAS GROUP SUMMARY OF OPERATIONS
The following table presents selected historical combined financial
information of the Midas Group. The information set forth below should be read
in conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the historical combined financial statements of
the Midas Group and the notes thereto included elsewhere in this Annex C. The
combined operating results data set forth below for each of the years ended
December 1996, 1995 and 1994 and the combined balance sheet data as of December
1996 and 1995 are derived from, and are qualified by reference to, the audited
combined financial statements of the Midas Group included elsewhere in this
Annex C, and should be read in conjunction with those financial statements and
the notes thereto. The combined operating results data for each of the years
ended December 1993 and 1992 and the combined balance sheet data as of December
1994, 1993 and 1992 are derived from audited combined financial statements of
the Midas Group not included herein. The combined balance sheet data as of June
1996 are derived from unaudited combined financial statements of the Midas Group
not included herein. The combined operating results data for the six-month
periods ended June 1997 and 1996, and the combined balance sheet data as of June
1997 are derived from, and are qualified by reference to, the unaudited interim
combined financial statements of the Midas Group included elsewhere in this
Annex C, and should be read in conjunction with those financial statements and
the notes thereto. See "Index to Midas Group Historical Financial Information."
Per share data has not been presented because the Midas Group was wholly-owned
by Whitman during the periods presented below.
The combined historical financial information presented below may not
necessarily reflect future results of operations or financial position of the
Midas Group or what the results of operations or financial position of the Midas
Group would actually have been had the Midas Group operated as an independent
company during the periods shown. See "Risk Factors--Limited Relevance of
Historical Combined Financial Information" in the body of the Information
Statement.
<TABLE>
<CAPTION>
FOR THE SIX MONTHS
ENDED JUNE FOR THE YEARS ENDED DECEMBER
-------------------- -----------------------------------------------------
(IN MILLIONS) 1997 1996 1996 1995 1994 1993 1992
--------- --------- --------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
COMBINED OPERATING RESULTS DATA:
Sales and revenues............................... $ 302.3 $ 292.3 $ 604.2 $ 576.1 $ 543.2 $ 503.6 $ 485.6
Whitman charges.................................. (9.0) (9.7) (17.2) (19.0) (17.5) (21.2) (21.6)
Income before accounting change.................. 11.7 13.9 30.4 31.7 26.6 19.4 23.5
Cumulative effect of accounting change........... -- -- -- -- -- (4.1) --
Net income....................................... 11.7 13.9 30.4 31.7 26.6 15.3 23.5
COMBINED BALANCE SHEET DATA:
Total assets..................................... $ 485.1 $ 476.4 $ 482.7 $ 451.4 $ 418.4 $ 395.0 $ 389.3
Obligations under capital leases................. 15.2 14.1 13.6 16.2 15.2 15.7 17.3
Loans and advances from Whitman.................. 85.1 79.5 77.2 70.3 70.0 90.1 99.7
Shareholder equity............................... 281.1 267.2 277.1 258.5 231.1 206.0 201.6
</TABLE>
C-12
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
Midas provides retail automotive services through approximately 2,700
franchised and Group-operated Midas stores worldwide. Midas stores offer
exhaust, brake, suspension, air conditioning and maintenance services.
Approximately 1,900 Midas stores are located in the United States, including
approximately 1,750 franchised stores and approximately 150 Group-operated
stores. Approximately two-thirds of the Midas stores located outside of the U.S.
are franchised.
Midas realizes some combination (all in the case of the U.S. and Canada) of
the following types of sales and revenues from the operation of Midas stores
worldwide: (i) ongoing royalties from franchisees; (ii) franchise and
development fees from franchisees; (iii) real estate rental revenues; (iv) sales
to franchisees of both manufactured and purchased parts; and (v) retail sales
from Group-operated stores. Midas also sells manufactured exhaust parts to
independent wholesale distributors.
INDUSTRY TRENDS. Automotive repair facilities, other than those operated by
new vehicle retailers, have become increasingly specialized in recent years.
Although the total number of service bays has experienced little growth, the
number of service bays operated by specialized aftermarket service providers has
grown. The increased durability and technological complexity of vehicles have
affected the types and frequency of services needed over the lifetime of a
vehicle. Vehicles are now assembled with more durable parts, such as stainless
steel exhaust systems. In addition, suspension parts such as shock absorbers and
struts are now more technologically advanced. As a result, aftermarket exhaust
and suspension service needs are declining on a volume basis.
An important industry characteristic is the seasonality of demand for
services. In general, the demand for services correlates with the miles that
vehicles are driven. Miles driven tend to be heaviest in the second and third
quarters of the year.
The foregoing factors have resulted in a highly competitive environment,
especially in the U.S. As opposed to exhaust and suspension needs, brake service
needs are growing moderately. However, the brake service market is becoming
increasingly competitive as more aftermarket service providers offer brake
service.
These industry trends have resulted over time in a decline in Midas' core
exhaust and suspension services, and a slowing in the growth of revenues derived
from brake services. To counter these declines, Midas is adding retail services,
including additional repair services and general automobile maintenance
services. See "Business-- Strategy" included elsewhere in this Annex C.
These industry trends have also created two specific business issues that
Midas management is addressing. The first issue is that selling, general and
administrative expenses in the U.S. have recently grown at a rate that is
disproportionate to sales and revenue growth. The second issue is poor operating
results of Group-operated U.S. stores.
Midas management has addressed these issues with a major restructuring of
the business. Major actions to be taken include: discontinuance of the segment
that comprises the U.S. Group-operated stores, reductions of asset values to
recognize impairments, modification of a number of franchise programs in the
U.S., and a reduction in the level of employment. These actions are designed to
reverse declines in earnings and return on investment and provide resources to
invest for future growth. The costs associated with the restructuring will be
recorded during the quarter ended September 1997; nonrecurring charges are
expected to be approximately $65 million on a pre-tax basis, or $44 million to
$45 million on an after-tax basis.
FISCAL REPORTING PERIODS
Fiscal 1994 through 1996 were each comprised of 52 weeks, while fiscal 1997
will be comprised of 53 weeks. The first six months of fiscal 1997 consisted of
27 weeks, as compared to 26 weeks in fiscal 1996. The financial effects of this
additional week of operations are discussed below.
C-13
<PAGE>
RESULTS OF OPERATIONS--SIX MONTHS ENDED JUNE 1997 COMPARED TO SIX MONTHS ENDED
JUNE 1996
MIDAS SYSTEM-WIDE RETAIL SALES. Midas System-wide retail sales (including
both franchised and Group-operated stores) increased $4.5 million, or 0.6% in
the six months ended June 1997. Following is a summary of Midas System-wide
retail sales for the six months ended June 1997 and 1996, by business segment
(in millions):
MIDAS SYSTEM-WIDE RETAIL SALES
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE
--------------------
1997 1996 CHANGE
--------- --------- -----------
<S> <C> <C> <C>
U.S.:
Franchised stores................................................. $ 538.7 $ 550.0 (2.1)%
Group-operated stores............................................. 45.0 38.7 16.3
--------- ---------
Total U.S....................................................... 583.7 588.7 (0.8)
--------- ---------
Non-U.S.:
Europe............................................................ 109.6 103.4 6.0
Canada............................................................ 64.1 61.0 5.1
Other............................................................. 24.6 24.4 0.8
--------- ---------
Total non-U.S................................................... 198.3 188.8 5.0
--------- ---------
Total............................................................... $ 782.0 $ 777.5 0.6%
--------- ---------
--------- ---------
</TABLE>
Midas System-wide retail sales in the U.S. declined $5.0 million, or 0.8%,
in the six months ended June 1997, to a total of $583.7 million. The decrease
was due to lower retail customer traffic in core services (exhaust, brakes and
suspension), partially offset by price increases and increased retail customer
traffic in other services. Retail sales of U.S. franchised stores decreased
$11.3 million, or 2.1%, to a total of $538.7 million. This decrease was due to
the factors noted above and the conversion of 10 franchised stores in Utah to
Group-operated stores. Retail sales from Group-operated stores in the U.S.
increased $6.3 million, or 16.3%, during the first half of 1997. This increase
was principally due to an additional week of operations in the first half of
1997, an increase in the number of shops in operation due to the Utah
acquisition, and price increases.
Midas System-wide retail sales in Europe increased $6.2 million, or 6.0%,
during the six months ended June 1997, to a total of $109.6 million. The
increase was due to a combination of a 14.0% increase in the number of stores in
operation and sales growth from stores open one year or more, as measured in
local currencies. Midas System-wide European retail sales as measured in U.S.
dollars would have been approximately $11 million higher if currency exchange
rates in the first half of 1997 remained the same as during the first half of
1996.
Midas System-wide retail sales in Canada increased $3.1 million, or 5.1%,
during the first half of 1997 to a total of $64.1 million. This increase was due
to increased retail customer traffic and price increases.
C-14
<PAGE>
MIDAS GROUP SALES AND REVENUES. Sales and revenues increased $10.0 million,
or 3.4%, during the six months ended June 1997, to a total of $302.3 million. Of
the increase, $8.3 million was due to the extra week of operations in the first
half at U.S. and Canadian operations. Following is a summary of sales and
revenues for the six months ended June 1997 and 1996, by business segment (in
millions):
MIDAS GROUP SALES AND REVENUES
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE
--------------------
1997 1996 CHANGE
--------- --------- -----------
<S> <C> <C> <C>
U.S. Operations:
Franchise activities.............................................. $ 168.4 $ 168.9 (0.3)%
Group-operated stores............................................. 45.0 38.7 16.3
--------- ---------
Total U.S....................................................... 213.4 207.6 2.8
--------- ---------
Non-U.S. Operations:
Europe............................................................ 54.8 52.4 4.6
Canada............................................................ 28.8 25.8 11.6
Other............................................................. 5.3 6.5 (18.5)
--------- ---------
Total non-U.S................................................... 88.9 84.7 5.0
--------- ---------
Total............................................................... $ 302.3 $ 292.3 3.4%
--------- ---------
--------- ---------
</TABLE>
Sales and revenues from U.S. Operations increased $5.8 million, or 2.8%, for
the six months ended June 1997, to a total of $213.4 million. Excluding the
extra week of operations, first half sales and revenues in the U.S. would have
declined $1.7 million or 0.8%. Sales and revenues from U.S. franchise activities
for the six months ended June 1997 were relatively flat and totaled $168.4
million. Excluding the additional week of operations in the first half, sales
and revenues from U.S. franchise activities would have declined $6.0 million, or
3.6%, due to lower sales of wholesale parts as a consequence of an unfavorable
change in retail sales mix. Sales and revenues from U.S. Group-operated stores
increased $6.3 million, or 16.3%, in the first half, principally due to the
additional week of operations ($1.9 million), an increase in the number of
stores in operation, and price increases.
European sales and revenues increased $2.4 million, or 4.6%, for the six
months ended June, 1997, to a total of $54.8 million. The increase was due to a
combination of an increase in the number of stores in operation, both franchised
and Group-operated stores, and sales increases from stores open one year or
more. European sales and revenues as reported in U.S. dollars would have been
$6.1 million higher if currency exchange rates in the first half of 1997
remained the same as during the first half of 1996.
Canadian sales and revenues increased $3.0 million, or 11.6%, during the
first half of 1997. The inclusion of an additional week of operations in the
first half accounted for about one quarter of the increase, with the balance due
to increased royalty revenues, increased wholesale parts sales and increased
retail sales from Group-operated stores.
Other non-U.S. Operations' sales and revenues declined $1.2 million, or
18.5%, in the first half due to the franchising of a number of Group-operated
stores in Australia.
GROSS PROFIT. Gross profit for the six months ended June 1997 increased
$5.7 million, or 3.7%, to a total of $161.7 million. Approximately two-thirds of
the increase was due to the inclusion of the additional week of operations in
the U.S. and Canada. The remainder of the increase was due to the increased
number of Group-operated stores. The gross profit contributions of
Group-operated stores are generally higher than other Midas operations, due to
the retail markup necessary to cover occupancy, advertising and other costs. As
a percentage of sales and revenues, total gross profit was essentially flat on a
year-to-year basis.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $10.3 million, or 8.9%, during the first half
of 1997, to a total of $126.1 million. The increase was due to a combination of
C-15
<PAGE>
an increase in the number of Group-operated stores, the extra week of operations
in 1997 in the U.S. and Canada, and generally higher spending in most expense
categories.
OPERATING INCOME. Operating income decreased $4.7 million, or 12.1%, during
the first half of 1997, to a total of $34.0 million. Following is a summary of
operating income for the six months ended June 1997 and 1996, by business
segment (in millions):
MIDAS GROUP OPERATING INCOME
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE
--------------------
1997 1996 CHANGE
--------- --------- -----------
<S> <C> <C> <C>
U.S. Operations:
Franchise activities................................................. $ 36.1 $ 40.5 (10.9)%
Group-operated stores................................................ (1.1) (0.9) (22.2)
--------- ---------
Total U.S.......................................................... $ 35.0 39.6 (11.6)
--------- ---------
Non-U.S. Operations:
Europe............................................................... 1.0 0.7 42.9
Canada............................................................... 1.2 1.1 9.1
Other................................................................ (0.4) (0.3) (33.3)
--------- ---------
Total non-U.S...................................................... 1.8 1.5 20.0
--------- ---------
36.8 41.1 (10.4)
Corporate administrative expenses...................................... (2.8) (2.4) (16.7)
--------- ---------
Total.................................................................. $ 34.0 $ 38.7 (12.1)%
--------- ---------
--------- ---------
</TABLE>
Operating income from U.S. Operations declined $4.6 million, or 11.6%, for
the six months ended June 1997, to a total of $35.0 million. Operating income
from U.S. franchise activities decreased $4.4 million, or 10.9%, in the first
half of 1997, to a total of $36.1 million. The decrease was due to lower gross
margins on wholesale parts sales and higher operating expenses. The operating
income generated by the additional week of operations in 1997 was offset by
nonrecurring severance charges during the same period. The operating loss from
Group-operated stores increased $0.2 million in the first half due to higher
operating expenses.
European operating income increased $0.3 million in the first half of 1997
to a total of $1.0 million. The increase was due to a combination of increased
sales and revenues, and improved gross margin.
Canadian operating income increased $0.1 million in the first half of 1997.
Excluding the one additional week of operations in 1997, operating income would
have been essentially unchanged as compared to the year ago period.
C-16
<PAGE>
RESULTS OF OPERATIONS--1996 COMPARED TO 1995
MIDAS SYSTEM-WIDE RETAIL SALES. Midas System-wide retail sales increased by
$57.1 million, or 3.8% in 1996 to a total of $1,566.3 million. Following is a
summary Midas System-wide retail sales for 1996 and 1995, by business segment
(in millions):
MIDAS SYSTEM-WIDE RETAIL SALES
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
--------------------
1996 1995 CHANGE
--------- --------- -----------
<S> <C> <C> <C>
U.S.:
Franchised stores.............................................. $ 1,090.2 $ 1,068.4 2.0%
Group-operated stores.......................................... 81.4 76.2 6.8
--------- ---------
Total U.S.................................................... 1,171.6 1,144.6 2.4
--------- ---------
Non-U.S.:
Europe......................................................... 219.9 197.4 11.4
Canada......................................................... 125.5 118.2 6.2
Other.......................................................... 49.3 49.0 0.6
--------- ---------
Total non-U.S................................................ 394.7 364.6 8.3
--------- ---------
Total............................................................ $ 1,566.3 $ 1,509.2 3.8%
--------- ---------
--------- ---------
</TABLE>
Midas System-wide retail sales in the U.S. increased $27.0 million, or 2.4%,
in 1996 to a total of $1,171.6 million. Retail sales from U.S. franchised stores
increased 2.0% due to higher selling prices and a 1.0% increase in the number of
stores in operation. Retail sales from Group-operated stores increased 6.8% due
to an increase in the number of stores in operation and higher selling prices.
Midas System-wide retail sales in Europe increased $22.5 million, or 11.4%,
in 1996 to a total of $219.9 million. The increase in retail sales in Europe was
due to continued rapid store expansion and gains in same store sales.
Midas System-wide retail sales in Canada increased $7.3 million, or 6.2%, in
1996 to a total of $125.5 million. The increase in retail sales in Canada was
due to increased retail customer traffic at both franchised and Group-operated
stores.
C-17
<PAGE>
MIDAS GROUP SALES AND REVENUES. Sales and revenues increased $28.1 million,
or 4.9%, in 1996 to a total of $604.2 million. Following is a summary of sales
and revenues for 1996 and 1995, by business segment (in millions):
MIDAS GROUP SALES AND REVENUES
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
--------------------
1996 1995 CHANGE
--------- --------- ---------
<S> <C> <C> <C>
U.S. Operations:
Franchise activities.............................................. $ 341.9 $ 337.6 1.3%
Group-operated stores............................................. 81.4 76.2 6.8
--------- ---------
Total U.S....................................................... 423.3 413.8 2.3
--------- ---------
Non-U.S. Operations:
Europe............................................................ 113.2 94.6 19.7
Canada............................................................ 55.0 51.7 6.4
Other............................................................. 12.7 16.0 (20.6)
--------- ---------
Total non-U.S................................................... 180.9 162.3 11.5
--------- ---------
Total............................................................... $ 604.2 $ 576.1 4.9%
--------- ---------
--------- ---------
</TABLE>
U.S. sales and revenues increased $9.5 million, or 2.3%, in 1996 to a total
of $423.3 million. The 1.3% increase in sales and revenues from U.S. franchise
activities was due to increases in sales of wholesale parts and royalty
revenues. The 6.8% increase in Group-operated store retail sales was principally
due to an increase in the number of stores in operation.
European sales and revenues increased $18.6 million, or 19.7%, in 1996 to a
total of $113.2 million. The increase in European sales and revenues was due to
a combination of a 15% increase in the number of stores in operation, an
increase in the number of Group-operated stores, and an increase in same store
sales.
Canadian sales and revenues increased $3.3 million, or 6.4%, in 1996 to a
total of $55.0 million. The increase in Canadian sales and revenues was due to
increases in royalty revenues, retail sales from same store Group-operated
stores, and sales of wholesale parts.
Sales and revenues from other non-U.S. operations decreased 20.6% in 1996
due to the franchising of Group-operated stores in Australia and generally weak
overall retail sales in Australia.
GROSS PROFIT. Gross profit increased $14.7 million, or 4.8%, in 1996 to a
total of $322.4 million. This increase was consistent with the 4.9% increase in
sales and revenues. As a percentage of sales and revenues, gross profit was
essentially flat on a year-to-year basis.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $18.8 million, or 8.4%, in 1996 to a total of
$241.3 million. Slightly more than one-half of the increase in operating
expenses was attributable to higher expenses at Group-operated stores, due to a
combination of an increase in the number of stores in operation and higher per
store selling expenses. The remainder of the increase was due to generally
higher selling and administrative expenses, particularly at U.S. franchise
operations.
C-18
<PAGE>
OPERATING INCOME. Operating income decreased $4.5 million, or 5.5%, in 1996
to a total of $78.0 million. The following is a summary of operating income for
1996 and 1995, by business segment (in millions):
MIDAS GROUP OPERATING INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
--------------------
1996 1995 CHANGE
--------- --------- ---------
<S> <C> <C> <C>
U.S. Operations:
Franchise activities................................................. $ 77.3 $ 84.1 (8.1)%
Group-operated stores................................................ (0.8) 0.7 *
--------- ---------
Total U.S.......................................................... $ 76.5 $ 84.8 (9.8)
--------- ---------
Non-U.S. Operations:
Europe............................................................... 4.7 2.8 67.9
Canada............................................................... 2.7 1.7 58.8
Other................................................................ (1.1) (2.6) (57.7)
--------- ---------
Total non-U.S...................................................... 6.3 1.9 *
--------- ---------
82.8 86.7 (3.9)
Corporate administrative expenses...................................... (4.8) (4.2) (14.3)
--------- ---------
Total.................................................................. $ 78.0 $ 82.5 (5.5)%
--------- ---------
--------- ---------
</TABLE>
- ------------------------
* NOT MEANINGFUL.
Operating income from U.S. Operations decreased $8.3 million, or 9.8%, to a
total of $76.5 million. The decreases in operating income from both franchise
activities and Group-operated stores were primarily due to higher operating
expenses.
Operating income from European operations increased $1.9 million, or 67.9%,
in 1996 to a total of $4.7 million. The increase was due to continued rapid
store expansion, increased same store retail sales growth at both Group-operated
and franchised stores, and increased wholesale parts brokerage fees.
Operating income from Canadian operations increased $1.0 million, or 58.8%,
in 1996 to a total of $2.7 million. The increase was due to a combination of a
gain from the franchising of a Group-operated store market, increased retail
sales at both Group-operated and franchised stores, and higher sales of
wholesale parts.
The loss from other non-U.S. operations declined $1.5 million in 1996 due to
improved results at Australian operations and reduced spending for market
research and related professional consulting fees.
C-19
<PAGE>
RESULTS OF OPERATIONS--1995 COMPARED TO 1994
MIDAS SYSTEM-WIDE RETAIL SALES. Midas System-wide retail sales increased by
$70.1 million, or 4.9%, in 1995 to a total of $1,509.2 million. Following is a
summary of Midas System-wide retail sales for 1995 and 1994, by business segment
(in millions):
MIDAS SYSTEM-WIDE RETAIL SALES
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER
--------------------
1995 1994 CHANGE
--------- --------- -----------
<S> <C> <C> <C>
U.S.:
Franchised stores.............................................. $ 1,068.4 $ 1,035.5 3.2%
Group-operated stores.......................................... 76.2 74.7 2.0
--------- ---------
Total U.S.................................................... 1,144.6 1,110.2 3.1
--------- ---------
Non-U.S.:
Europe......................................................... 197.4 163.6 20.7
Canada......................................................... 118.2 118.9 (0.6)
Other.......................................................... 49.0 46.4 5.6
--------- ---------
Total non-U.S................................................ 364.6 328.9 10.9
--------- ---------
Total............................................................ $ 1,509.2 $ 1,439.1 4.9%
--------- ---------
--------- ---------
</TABLE>
Midas System-wide retail sales in the U.S. increased $34.4 million, or 3.1%,
in 1995 to a total of $1,144.6 million. The growth in retail sales was due to
price increases, an increase in the number of stores in operation and an
increase in brake service customer traffic, offset partially by lower exhaust
service customer traffic.
Midas System-wide retail sales in Europe increased $33.8 million, or 20.7%,
in 1995 to a total of $197.4 million. The increase was due to a combination of a
7.5% increase in the number of stores in operation, a $9.5 million increase due
to the favorable effects of changes in currency exchange rates, and higher same
store retail traffic.
Midas System-wide retail sales in Canada were virtually flat in 1995 as
compared with 1994. Midas System-wide retail sales in other non-U.S. countries
increased 5.6% in 1995, with one-half of the increase due to the favorable
effects of changes in currency exchange rates and the balance due to same store
sales growth in Australia.
C-20
<PAGE>
MIDAS GROUP SALES AND REVENUES. Sales and revenues increased $32.9 million,
or 6.1% in 1995 to a total of $576.1 million. Following is a summary of sales
and revenues for 1995 and 1994, by business segment (in millions):
MIDAS GROUP SALES AND REVENUES
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
--------------------
1995 1994 CHANGE
--------- --------- -----------
<S> <C> <C> <C>
U.S. Operations:
Franchise activities.............................................. $ 337.6 $ 328.2 2.9%
Group-operated stores............................................. 76.2 74.7 2.0
--------- ---------
Total U.S....................................................... 413.8 402.9 2.7
--------- ---------
Non-U.S.Operations:
Europe............................................................ 94.6 72.1 31.2
Canada............................................................ 51.7 51.7 --
Other............................................................. 16.0 16.5 (3.0)
--------- ---------
Total non-U.S................................................... 162.3 140.3 15.7
--------- ---------
Total............................................................... $ 576.1 $ 543.2 6.1%
--------- ---------
--------- ---------
</TABLE>
U.S. sales and revenues increased $10.9 million, or 2.7%, in 1995 to a total
of $413.8 million. Increased royalty and real estate rental revenues, higher
wholesale parts shipments and increased retail sales at Group-operated stores
accounted for the growth.
European sales and revenues increased $22.5 million, or 31.2%, due to rapid
expansion of the Group-operated store network, increased royalties, and
increased wholesale product brokerage fees.
GROSS PROFIT. Gross profit increased $25.0 million, or 8.8%, in 1995 to a
total of $307.7 million. The increase was due to a combination of growth in the
number of Group-operated stores, increased royalty and real estate rental
revenues and increased wholesale parts sales and brokerage fees. The Group's
gross profit margin improved 1.4 percentage points in 1995 to 53.4% due to a
shift in sales mix to Group-operated store sales, which traditionally provide
higher gross profit margins.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $17.5 million, or 8.5%, in 1995 to $222.5
million. Approximately two-thirds of the increase in 1995 was attributable to
growth in the number of Group-operated stores and growth in same store sales of
the Group-operated store network. The remainder of the growth in expenses was to
support higher sales and revenues.
C-21
<PAGE>
OPERATING INCOME. Operating income increased $7.3 million, or 9.7%, in 1995
to a total of $82.5 million. Following is a summary of operating income for 1995
and 1994, by business segment (in millions):
MIDAS GROUP OPERATING INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
--------------------
1995 1994 CHANGE
--------- --------- -----------
<S> <C> <C> <C>
U.S. Operations:
Franchise activities................................................. $ 84.1 $ 75.0 12.1%
Group-operated stores................................................ 0.7 3.1 (77.4)
--------- ---------
Total U.S.......................................................... 84.8 78.1 8.6
--------- ---------
Non-U.S. Operations:
Europe............................................................... 2.8 2.6 7.7
Canada............................................................... 1.7 1.7 --
Other................................................................ (2.6) (3.3) 21.2
--------- ---------
Total non-U.S...................................................... 1.9 1.0 90.0
--------- ---------
86.7 79.1 9.6
Corporate administrative expenses...................................... (4.2) (3.9) (7.7)
--------- ---------
Total.................................................................. $ 82.5 $ 75.2 9.7%
--------- ---------
--------- ---------
</TABLE>
Operating income from U.S. Operations increased $6.7 million, or 8.6%, in
1995 to a total of $84.8 million. Operating income from U.S. franchise
activities increased $9.1 million, or 12.1%, to a total of $84.1 million. The
increase in U.S. franchise operating income was due to a combination of
increased royalty and real estate rental revenues, and increased sales of
wholesale parts. Group-operated store results declined $2.4 million in 1995 as
store operating expenses increased at a faster rate than sales.
European operating income was up 7.7% in 1995 to $2.8 million due to an
increase in the number of stores and sales growth from stores opened one year or
more. The loss from other non-U.S. Operations declined $0.7 million due to
improved results at Australian operations.
LIQUIDITY, FINANCIAL CONDITION AND CAPITAL RESOURCES
CASH FLOWS FROM OPERATIONS. Midas' cash flows from operations historically
have been substantially affected by the allocations from Whitman of expenses to
its operating subsidiaries. These charges to Midas were $17.2 million, $19.0
million and $17.5 million during 1996, 1995, and 1994, respectively, and $9.0
million and $9.7 million for the six months ended June 1997 and 1996,
respectively. These charges are not necessarily indicative of the costs that
would have been incurred by Midas had it been an independent company during the
periods presented, and such charges will be eliminated after the Distribution
Date. After the Distribution, Midas will be responsible for the expenses of
being a public company. Although Midas management believes it will be able to
borrow funds after the Distribution at interest rates equal to or below those
paid to Whitman (ranging from prime to 10.5%), total interest expense to be
incurred by Midas after the Distribution Date is expected to increase
substantially due to the additional funds required to pay a cash dividend to
Whitman at the Distribution Date. See Note 3 to Combined Financial Statements of
Midas Group and "Midas Group Pro Forma Combined Financial Information" included
elsewhere in this Annex C.
On a historical basis, Midas generated net cash from operations of $34.5
million, $39.3 million and $47.9 million during 1996, 1995, and 1994,
respectively.
The decline in cash provided by operations in each of the last two years was
principally due to increased levels of operating working capital (receivables
and inventories, less payables), which increases were disproportionate to the
increases in sales and revenues. In addition, in 1996 there was a decline in the
liability for advertising funds collected from and disbursed for U.S.
franchisees, due to higher spending levels in 1996 as compared to 1995.
C-22
<PAGE>
For the six-month period ended June 1997, Midas generated net cash from
operations of $1.8 million, compared to net cash from operations of $1.9 million
for the same period in 1996. Significant changes in cash flows during the
six-month periods included an increase of $18.1 million in receivables in 1996
and a decrease in accounts payable of $13.5 million in 1997. The increase in
receivables in 1996 was primarily due to strong sales and revenues and a special
wholesale parts sales promotion that included extended payment terms. In 1997,
there was no similar sales promotion and sales and revenues were relatively
weak. The decline in accounts payable in 1997 was due to reduced second quarter
spending of advertising funds collected from and disbursed for U.S. franchisees,
which resulted in lower payables to advertising agencies, and the timing of
payments to several large vendors.
CASH FLOWS FROM INVESTING ACTIVITIES. During all periods presented, cash
flows for investing activities were comprised of capital investments for
property and equipment, offset by proceeds from sales of property and equipment.
During the years 1994 through 1996, average capital investments were
approximately $31.2 million; they are expected to be approximately $30 million
in 1997. The principal capital investments are comprised of investments in
Group-operated stores, through acquisitions of existing franchised stores and
the development of new stores. Midas management anticipates that capital
investments in the years 1998 through 2000 will decline to a level of
approximately $15 million per year, primarily through reductions in the level of
investments in Group-operated stores.
CASH FLOWS FROM FINANCING ACTIVITIES. The principal use of cash in
financing activities has been the payment of cash to Whitman. Net payments to
Whitman, including dividends, amounted to $4.0 million in 1996, $9.2 million in
1995, and $24.6 million in 1994. Such net payments declined on a year-to-year
basis largely because of the previously described increases in the levels of
operating working capital. During the six months ended June 1997, net payments
received from Whitman amounted to $5.8 million, as compared to $4.8 million in
the six months ended June 1996. The funds advanced by Whitman were used to fund
a portion of the increases in operating working capital that occurred in those
periods. See "Cash Management and Advances" in Note 3 to Combined Financial
Statements of Midas Group included elsewhere in this Annex C.
AVAILABLE CASH AND CREDIT FACILITY. Midas' cash and cash equivalents
totaled $10.5 million as of June 1997 compared to $18.2 million and $11.6
million at December 1996 and 1995, respectively.
Midas management expects to enter into the Midas Credit Facility prior to
the Distribution Date. The Midas Credit Facility will enable Midas to borrow
funds at variable interest rates on a revolving credit basis up to an aggregate
principal amount of $[ ] million, subject to the terms and conditions thereof.
On or before the Distribution Date, Midas will make payments to Whitman to repay
all intercompany loans and advances and to pay a cash dividend. Based upon the
level of intercompany loans and advances as of June 1997, the aggregate amount
of such payments is anticipated to be $225 million, which funds will be borrowed
under the Midas Credit Facility.
Midas management believes that cash flows from operations, asset sales and
unused amounts available under the Midas Credit Facility will be sufficient to
satisfy Midas' future working capital, capital investment and other financing
requirements for the foreseeable future.
NON-U.S. OPERATIONS. The most significant non-U.S. operations are located
in Canada and France, with other operations located in, among other countries,
Australia, Austria, Belgium, Italy and Spain. Midas is subject to foreign
currency risks when translating its non-U.S. entity financial statements into
U.S. dollars for financial reporting purposes. In general, a rising U.S. dollar
in relation to a foreign currency will have a negative effect on Midas' results
of operations, while a falling U.S. dollar will have the opposite effect on
Midas' results. In addition to the foreign currency translation risks faced by
Midas, other risks associated with non-U.S. operations include the potential for
restrictive actions taken by host country governments, the risks relating to
non-U.S. economic and political conditions, and the risks relating to limits on
the transfer of funds from non-U.S. entities to Midas. Midas does not use
foreign currency risk management instruments to manage its exposure to changes
in foreign currency exchange rates. However, should the significance of Midas'
non-U.S. operations grow, management will reassess whether it would be
appropriate to use foreign currency risk management instruments.
C-23
<PAGE>
FUTURE CHANGE IN ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board issued its Statement
No. 130, "Reporting Comprehensive Income." This Statement establishes standards
for reporting and display of comprehensive income and its components in a full
set of general-purpose financial statements. All items that are required to be
recognized under accounting standards as components of comprehensive income must
be reported in a financial statement with the same prominence as other financial
statements. Statement No. 130 is effective for fiscal years beginning after
December 15, 1997.
MANAGEMENT
DIRECTORS
Immediately after the Distribution Date, the Midas Board is expected to
consist of the individuals named in the following table. The Midas Board will be
divided into three classes. Directors in each class will serve until the annual
meeting of shareholders held in the year in which the term for such class
expires and will serve thereafter for three years. See "Certain Antitakeover
Effects of Certain Charter and By-Law Provisions, the Rights and Delaware Law"
in the body of the Information Statement.
<TABLE>
<CAPTION>
YEAR TERM
NAME AGE EXPIRES BACKGROUND
- --------------------------------- --- ----------- ------------------------------------------------------------------
<S> <C> <C> <C>
[name]........................... [ ] 1999 [ ]
[name]........................... [ ] 1999 [ ]
[name]........................... [ ] 2000 [ ]
[name]........................... [ ] 2000 [ ]
[name]........................... [ ] 2001 [ ]
[name]........................... [ ] 2001 [ ]
</TABLE>
COMMITTEES OF THE BOARD OF DIRECTORS
Midas will be managed under the direction of its Board of Directors. The
Midas Board will meet on a regular basis to review Midas' operations, strategic
and business plans, acquisitions and dispositions, and other significant
developments affecting Midas, and to act on matters requiring approval of the
Midas Board. It will also hold special meetings when an important matter
requires Midas Board action between scheduled meetings. Members of senior
management will be regularly invited to Midas Board meetings to discuss the
progress of and future plans relating to their areas of responsibility.
To facilitate independent director review, and to make the most effective
use of the directors' time and capabilities, the Midas Board is expected to
establish various committees, including those described below.
The EXECUTIVE COMMITTEE of the Midas Board will be constituted by the Midas
Board to act, except as limited by applicable law, in lieu of the Midas Board
and between meetings of the Midas Board. The Executive Committee is expected to
consist of [ ].
The AUDIT COMMITTEE will review the audit report of Midas as prepared by its
designated certified public accountants, recommend the selection of a certified
public accounting firm each year and review audit and any non-audit fees paid to
Midas' certified public accountants. The Midas internal audit reports will also
be available for review by the Audit Committee. The Committee will report its
findings and recommendations to the Midas Board for appropriate action. The
Audit Committee is expected to consist of [ ].
The MANAGEMENT RESOURCES AND COMPENSATION COMMITTEE will be charged with the
responsibility of supervising the compensation policies of Midas, administering
Midas' employee incentive plans, reviewing officers' salaries, approving
significant changes in salaried employee benefits and recommending to the Midas
Board such other forms of remuneration as it deems appropriate. The Management
Resources and Compensation Committee is expected to consist of
[ ].
The FINANCE AND PENSION COMMITTEE will supervise the financial affairs of
Midas and receive and review reports of those persons who supervise and manage
the Midas pension plans. The Midas Board may delegate to the
C-24
<PAGE>
Finance and Pension Committee and certain officers its authority to approve
financing transactions within specified dollar limitations. The Finance and
Pension Committee is expected to consist of [ ].
The Midas Board, acting as a committee of the whole, will have the
responsibility for considering nominations for prospective board members. The
Midas Board will consider nominees recommended by other directors, shareholders
and management who present for evaluation by the Midas Board appropriate data
with respect to the suggested candidate, provided that nominations by
shareholders must be made in accordance with the Midas By-Laws. See "Certain
Antitakeover Effects of Certain Charter and By-Law Provisions, the Rights and
Delaware Law--Certificate of Incorporation and By-Laws" in the body of the
Information Statement.
The Midas Board may also establish other committees.
COMPENSATION OF DIRECTORS
Directors who are not employees of Midas will receive an annual retainer of
[$ ], plus [$ ] for each meeting of the Midas Board and [$ ] for each Midas
Board Committee meeting attended. The Chairman of each Midas Board Committee
will be paid an additional [$ ] annual retainer. Non-employee directors may also
receive awards pursuant to the Midas Stock Incentive Plan.
EXECUTIVE OFFICERS
Set forth below is information with respect to those individuals who are
expected to serve as executive officers of Midas immediately following the
Distribution.
<TABLE>
<CAPTION>
NAME, AGE AND POSITION BACKGROUND AND EXPERIENCE
- ----------------------------------------- --------------------------------------------------------------------------
<S> <C>
John R. Moore (62) ...................... Mr. Moore has been with Midas since 1965. In the ensuing years, he held
President and Chief Executive Officer various positions with Midas, becoming President and Chief Executive
Officer in 1982.
R. Lee Barclay (55) ..................... Mr. Barclay joined Midas in 1980 as Vice President--Controller. He became
Executive Vice President and Chief Vice President and Chief Financial Officer in 1982, and has served in his
Financial Officer present position since 1989. He spent eight years as an audit manager for
Price Waterhouse in the 1970's.
Terrence E. Reynolds (58) ............... Mr. Reynolds joined Midas in 1985 as Vice President--U.S. Operations. He
Senior Vice President and General became a Senior Vice President in 1989 and assumed his current position in
Manager--U.S. Operations Group 1997.
John A. Warzecha (49) ................... Mr. Warzecha served as Vice President and General Manager of Midas'
Senior Vice President and General Group-operated stores from 1989-1993, and as Senior Vice President--U.S.
Manager--Midas U.S. Franchise Operations from 1993-1997. He first joined Midas in 1973.
Peter J. F. Schalburg (46) .............. Mr. Schalburg has served as Senior Vice President and General
Senior Vice President and General Manager--European operations since August 1997. From 1990 to 1997 he
Manager--European Operations served as Vice President and General Manager--Europe. Prior to 1990, he
served in various international sales and marketing positions with Valeo
and Tenneco Automotive.
Robert H. Sorensen (51) ................. Mr. Sorensen joined Midas in 1995. From 1990-1995, Mr. Sorensen was in
Vice President, General Counsel and private practice with the law firm of Kaufman, Chaiken & Sorensen. Prior
Secretary to 1990, he served as chief legal officer with Rollins, Inc. and Burger
King Corporation.
</TABLE>
C-25
<PAGE>
<TABLE>
<CAPTION>
NAME, AGE AND POSITION BACKGROUND AND EXPERIENCE
- ----------------------------------------- --------------------------------------------------------------------------
Gerard M. Klaisle (44) .................. Mr. Klaisle recently became Senior Vice President--Human Resources of
Senior Vice President--Human Resources Midas. From 1987-1997 he was Midas' Vice President--Human Resources for
U.S. operations. He joined Midas in 1982.
<S> <C>
Edwin A. Grell (53) ..................... Mr. Grell has been with Midas since 1979. He has subsequently held various
Treasurer and Assistant Corporate audit and accounting positions, becoming Treasurer and Assistant Corporate
Controller Controller in 1993.
</TABLE>
OWNERSHIP OF MIDAS COMMON STOCK BY MANAGEMENT
All Midas Common Stock is currently owned by Whitman and no director or
executive officer of Midas owns any shares of Midas Common Stock. The following
table sets forth the beneficial ownership of Whitman Common Stock on November 1,
1997 by the individuals expected to be directors of Midas, the executive
officers named in the Summary Compensation Table below and by all directors and
executive officers of Midas as a group. Directors and executive officers of
Midas will receive shares of Midas Common Stock in respect of the shares of
Whitman Common Stock held by them on the Record Date on the same basis as other
Whitman shareholders. Directors and executive officers of Midas who do not
exercise options to purchase Whitman Common Stock prior to the Distribution Date
will, as of the Distribution Date, have such options replaced with options to
purchase Midas Common Stock of equivalent value. Each of the following
individuals and members of the group has sole voting and investment power with
respect to the shares shown unless otherwise indicated.
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF PERCENT OF
NAME OR IDENTITY OF GROUP BENEFICIAL OWNERSHIP CLASS
- ----------------------------------------------------------------------------------- -------------------- -------------
<S> <C> <C>
[name]............................................................................. [ ](a) *
[name]............................................................................. [ ](a) *
[name]............................................................................. [ ](a) *
John R. Moore...................................................................... [ ](a) *
R. Lee Barclay..................................................................... [ ](a) *
Terrence E. Reynolds............................................................... [ ](a) *
John A. Warzecha................................................................... [ ](a) *
Peter J. F. Schalburg.............................................................. [ ](a) *
All Directors and Executive Officers as a Group ([ ] persons)...................... [ ](b) [ ]
</TABLE>
- ------------------------
* Less than 1%.
(a) Includes shares which the named director or executive officer has the right
to acquire within 60 days after November 1, 1997, through exercise of
Whitman Common Stock options, as follows: Mr. Moore, [ ] shares; Mr.
Barclay, [ ] shares; Mr. Reynolds, [ ] shares; Mr. Warzecha, [ ]
shares; and Mr. Schalburg, [ ] shares.
(b) The number of shares shown as beneficially owned include [ ] shares which
directors and executive officers have the right to acquire within 60 days
after November 1, 1997, through the exercise of Whitman Common Stock
options, [ ] shares subject to possible forfeiture under outstanding
Whitman restricted stock awards, and [ ] shares representing the vested
beneficial interest of such persons under the Whitman Retirement Savings
Plan.
C-26
<PAGE>
COMPENSATION OF EXECUTIVE OFFICERS
SUMMARY COMPENSATION TABLE
The following table shows annual and long-term compensation for each of
Midas' five most highly compensated executive officers for services in all
capacities to Midas and its subsidiaries and affiliates during 1996.
Compensation, as reflected in this table and the tables on stock options which
follow, is presented on the basis of rules of the SEC and does not, in the case
of certain stock-based awards or accruals, necessarily represent the amount of
compensation realized or which may be realized in the future. References to
"restricted stock" and "stock options" relate to awards under Whitman's Stock
Incentive Plan.
<TABLE>
<CAPTION>
LONG TERM COMPENSATION
---------------------------
AWARDS
ANNUAL COMPENSATION ---------------------------
--------------------------------------- WHITMAN
OTHER ANNUAL RESTRICTED WHITMAN
COMPENSATION STOCK AWARDS STOCK ALL OTHER
NAME AND PRINCIPAL POSITION SALARY ($) BONUS ($) ($) ($)(B) OPTIONS (#) COMPENSATION ($)(A)
- --------------------------------- ---------- --------- ------------ ------------ ------------ -------------------
<S> <C> <C> <C> <C> <C> <C>
John R. Moore.................... 352,000 100,000 16,182 315,625 53,000 43,976
President and Chief Executive
Officer
R. Lee Barclay................... 237,750 41,000 8,193 161,600 32,000 41,806
Executive Vice President and
Chief Financial Officer
Terrence E. Reynolds............. 210,000 24,000 8,193 111,100 18,700 26,907
Senior Vice President and
General Manager-- U.S. Operation
Group
John A. Warzecha................. 178,875 27,000 8,193 111,100 18,700 23,259
Senior Vice President and
General Manager-- Midas U.S.
Peter J. F. Schalburg............ 199,809 101,000 -- 146,450 22,000 16,785
Senior Vice President and
General Manager-- European
Operations
</TABLE>
- ------------------------
(a) Except for Mr. Schalburg, the amounts shown for All Other Compensation are
amounts accrued under a nonqualified retirement plan (Mr. Moore, $35,832;
Mr. Barclay, $19,794; Mr. Reynolds, $17,760; and Mr. Warzecha, $15,903),
together with the 1996 values of premiums paid by Midas for an executive
split dollar life insurance program established July 1, 1996, to replace
benefits formerly provided under a group program (Mr. Moore, $8,144; Mr.
Barclay, $22,012; Mr. Reynolds, $9,147; and Mr. Warzecha, $7,356). The
amount shown for Mr. Schalburg is the amount contributed by Midas to a
private retirement arrangement that supplements the French social security
program.
(b) The number of shares of restricted Whitman Common Stock and the market value
thereof held by Messrs. Moore, Barclay, Reynolds, Warzecha and Schalburg at
December 31, 1996 was as follows: Mr. Moore, 17,134 shares ($391,940); Mr.
Barclay, 8,567 shares ($195,970); Mr. Reynolds, 6,068 shares ($138,806); Mr.
Warzecha, 6,034 shares ($138,028); and Mr. Schalburg, 6,934 shares
($158,615). Such shares vest ratably over a period of three years. Dividend
equivalents are paid on restricted stock at the times and in the same
amounts as dividends paid to all Whitman shareholders.
C-27
<PAGE>
OPTION/SAR GRANTS IN LAST FISCAL YEAR
The following table sets forth, for each of the executive officers named in
the Summary Compensation Table, options granted in respect of Whitman Common
Stock during 1996 pursuant to Whitman's Stock Incentive Plan. No stock
appreciation rights were granted. Midas employees who do not exercise options to
purchase Whitman Common Stock prior to the Distribution Date will, as of the
Distribution Date, have such options replaced with options to purchase Midas
Common Stock of equivalent value.
<TABLE>
<CAPTION>
POTENTIAL
REALIZABLE
VALUE AT
ASSUMED
ANNUAL RATES OF
NUMBER OF STOCK PRICE
SECURITIES % OF TOTAL APPRECIATION
UNDERLYING OPTIONS FOR
OPTIONS GRANTED TO EXERCISE OPTION TERM (B)
GRANTED EMPLOYEES IN PRICE EXPIRATION ---------------
NAME (#)(A) 1996 ($/SH) DATE 5% ($) 10% ($)
- --------------------------- ----------- ------------ ----------- ---------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
John R. Moore.............. 53,000 2.20 25.31 5/2/06 843,618 2,137,894
R. Lee Barclay............. 32,000 1.30 25.31 5/2/06 509,354 1,290,804
Terrence E. Reynolds....... 18,700 .78 25.31 5/2/06 297,654 754,313
John A. Warzecha........... 18,700 .78 25.31 5/2/06 297,654 754,313
Peter J. F. Schalburg...... 22,000 .91 25.31 5/2/06 350,181 887,428
</TABLE>
- ------------------------
(a) All options were granted at a price equal to 100% of the fair market value
of Whitman Common Stock at date of grant, which was May 2, 1996. Options
become exercisable as to 1/3 on the first anniversary of the date of grant,
2/3 on the second anniversary, and in full on the third anniversary.
(b) The dollar amounts under these columns are the result of calculations at the
5% and 10% assumed annual growth rates mandated by the SEC and, therefore,
are not intended to forecast possible future appreciation, if any, in the
price of Whitman Common Stock. The calculations were based on the exercise
price per share and the ten-year term of the options.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END
OPTION/SAR VALUES
The following table sets forth information with respect to the executive
officers named in the Summary Compensation Table regarding the exercise of
options to purchase Whitman Common Stock during 1996 and unexercised options
held as of December 31, 1996.
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES
UNDERLYING
UNEXERCISED VALUE OF UNEXERCISED
OPTIONS HELD AT IN-THE-MONEY
DECEMBER 31, OPTIONS AT
SHARES 1996 (#) DECEMBER 31, 1996
ACQUIRED ON VALUE EXERCISABLE / ($) (A) EXERCISABLE
NAME EXERCISE (#) REALIZED ($) UNEXERCISABLE / UNEXERCISABLE
- --------------------------- ------------ ------------ ---------------- --------------------
<S> <C> <C> <C> <C>
John R. Moore(b)........... -- -- 139,708/70,267 1,382,046/92,329
R. Lee Barclay............. -- -- 33,567/40,333 303,247/43,325
Terrence E. Reynolds....... 52,975 519,593 11,833/24,967 92,203/33,425
John A. Warzecha........... -- -- 33,737/24,833 334,055/32,467
Peter J. F. Schalburg...... 21,500 250,375 14,367/28,733 113,811/36,779
</TABLE>
- ------------------------
(a) Based on the closing price of Whitman Common Stock ($22.875) on December
31, 1996, as reported for New York Stock Exchange Composite Transactions.
(b) Includes exercisable tandem stock appreciation rights covering 3,175 shares.
C-28
<PAGE>
STOCK INCENTIVE PLAN
Midas intends to adopt, with the approval of Whitman in its capacity as the
sole stockholder of Midas, the Midas Stock Incentive Plan (the "Midas Stock
Plan"). The Midas Stock Plan will be administered by the Management Resources
and Compensation Committee of the Midas Board. Midas intends to seek shareholder
approval of the Midas Stock Plan at its 1999 annual meeting of shareholders.
The Midas Stock Plan provides for the grant of incentive stock options that
qualify under Section 422 of the Code, nonqualified stock options, stock
appreciation rights, restricted stock awards and performance awards to employees
and non-employee directors (except that non-employee directors may not receive
incentive stock options). Midas has reserved for issuance under the Midas Stock
Plan [ ] shares of Midas Common Stock. The Management Resources and
Compensation Committee of the Midas Board is expected to grant, subject to
completion of the Distribution, nonqualified options to purchase Midas Common
Stock to its executive officers and certain other persons who will be employees
of Midas. Each such option will have an exercise price equal to 100% of the fair
market value of Midas Common Stock on the effective date of grant, and will be
for a term of ten years. In addition, as described under "Arrangements between
Whitman and the Companies Relating to the Distribution--Distribution and
Indemnity Agreements" in the body of the Information Statement, employees of
Midas who hold options and restricted stock under the Whitman Stock Incentive
Plan are expected to receive substitute awards of equivalent value under the
Midas Stock Plan, following completion of the Distribution.
PENSION PLANS
Midas maintains qualified, defined benefit pension plans and nonqualified
retirement plans paying benefits in optional forms elected by the employee based
upon percentage multipliers which are applied to Covered Compensation and
Credited Service. The pension plans and related nonqualified plans were amended
effective January 1, 1992, to reinstate benefit accruals that were frozen for
most employees as of December 31, 1988, when Midas changed its benefit plan
structure. The revised benefit formula provides a normal retirement benefit of
1% of Covered Compensation for each year of Credited Service (excluding
1989-1991), up to a maximum of 20 years. The changes also include special
minimum benefits based on Credited Service accrued through December 31, 1988,
and Covered Compensation at retirement.
The following table reflects future benefits, payable as life annuities upon
retirement, in terms of a range of amounts determined under the revised benefit
formula mentioned above, at representative periods of Credited Service.
PROJECTED ANNUAL PENSION
<TABLE>
<CAPTION>
YEARS OF CREDITED SERVICE(B)
--------------------------------------------
COVERED COMPENSATION(A) 5 10 15 20 OR MORE
- ------------------------------------------------------------------------ --------- --------- --------- -----------
<S> <C> <C> <C> <C>
$200,000................................................................ $ 10,000 $ 20,000 $ 30,000 $ 40,000
$300,000................................................................ 15,000 30,000 45,000 60,000
$400,000................................................................ 20,000 40,000 60,000 80,000
$500,000................................................................ 25,000 50,000 75,000 100,000
</TABLE>
- ------------------------
(a) Covered Compensation includes salary and bonus, as shown in the Summary
Compensation Table, averaged over the five consecutive years in which such
compensation is the highest.
(b) As of December 31, 1996, Messrs. Barclay, Reynolds and Warzecha had 16, 8
and 19 years of Credited Service, respectively.
The benefit for Mr. Moore who had 23 years of Credited Service as of
December 31, 1988, will be determined under the minimum benefit formula (28% of
Covered Compensation). Such benefits are not subject to deduction for social
security or other offset amounts. As of December 31, 1996, Mr. Moore has an
accrued annual benefit payable at normal retirement age of approximately
$124,000.
C-29
<PAGE>
As an employee of Midas Europe and resident of Monaco, Mr. Schalburg does
not participate in a Midas pension plan. As reflected in the Summary
Compensation Table above, Midas contributes to a private retirement arrangement
for Mr. Schalburg that supplements the French social security program.
TERMINATION BENEFITS
Midas has entered into Change in Control Agreements (the "Change in Control
Agreements"), with Messrs. Moore, Barclay, Reynolds, Warzecha, Schalburg and
certain other officers. The Change in Control Agreements were a result of a
determination by the Midas Board that it was important and in the best interests
of Midas and its shareholders to ensure that, in the event of a possible change
in control of Midas, the stability and continuity of management would continue
unimpaired, free of the distractions incident to any such change in control. The
Change in Control Agreements become effective on the Distribution Date.
For purposes of the Change in Control Agreements, a "change in control"
includes (i) a consolidation or merger of Midas in which Midas is not the
continuing or surviving corporation or pursuant to which shares of Midas Common
Stock would be converted into cash, securities or other property, other than a
transaction in which the proportionate ownership of the Midas Common Stock and
the surviving corporation remains substantially unchanged, (ii) a sale of all or
substantially all of the assets of Midas, (iii) a shareholder approved plan or
proposal for the liquidation of Midas, (iv) the acquisition by any person of 25%
or more of Midas' voting securities, or (v) over a two-year period, persons who
are directors of Midas cease to constitute a majority of the Midas Board, unless
the new directors were approved by a two-thirds vote of the continuing
directors.
Benefits are payable under the Change in Control Agreements only if a change
in control has occurred and within three years thereafter the officer's
employment is terminated involuntarily without cause or voluntarily by
the officer for reasons such as demotion, relocation, loss of benefits or other
changes. The principal benefits to be provided to officers under the Change in
Control Agreements are (i) a lump sum payment equal to three years' compensation
(base salary and incentive compensation), and (ii) continued participation in
Midas' employee benefit programs or equivalent benefits for three years
following termination. If the officer's termination occurs after age 62,
separation payments are reduced by a factor based upon the number of months
remaining until the officer reaches age 65. The Change in Control Agreements
provide that, if separation payments thereunder, either alone or together with
payments under any other plan of Midas, would constitute a "parachute payment"
as defined in the Code and subject the officer to the excise tax imposed by
Section 4999 of the Code, Midas will pay such tax and any taxes on such payment.
The Change in Control Agreements are not employment agreements, and do not
impair the right of Midas to terminate the employment of the officer with or
without cause prior to a change in control, or, absent a potential or pending
change in control, the right of the officer to voluntarily terminate his
employment.
1999 ANNUAL MEETING OF SHAREHOLDERS
The Midas By-Laws provide that an annual meeting of shareholders will be
held each year on a date specified by the Midas Board. Prior to the Record Date,
Whitman, which was then and is currently the sole shareholder of Midas, elected
the current members of the Midas Board. The first annual meeting of Midas
shareholders after the Distribution is expected to be held on May 6, 1999.
In order to be considered for inclusion in Midas' proxy materials for the
1999 annual shareholders meeting, any proposals by shareholders must be received
at Midas' principal executive offices at 225 North Michigan Avenue, Chicago,
Illinois 60601, within a reasonable time before solicitation of proxies for such
meeting is made. In addition, shareholders at the Midas 1999 annual meeting may
consider shareholder proposals or nominations brought by a shareholder of record
on the record date for the 1999 annual meeting, who is entitled to vote at such
annual meeting and who has complied with the Shareholder Notice Procedure
established by the Midas By-Laws. A shareholder proposal or nomination intended
to be brought before the Midas 1999 annual meeting must be received by the
Secretary of Midas on or after February 6, 1999 and on or prior to February 26,
1999. See "Certain Antitakeover Effects of Certain Charter and By-Law
Provisions, the Rights and Delaware Law--Certificate of Incorporation and
By-Laws--Advance Notice Provisions for Shareholder Nominations and Shareholder
Proposals" in the body of the Information Statement.
C-30
<PAGE>
MIDAS GROUP
INDEX TO HISTORICAL FINANCIAL INFORMATION
<TABLE>
<S> <C>
Independent Auditors' Report............................................................ C-32
Combined Statements of Income for the years ended December 1996, 1995 and 1994 and for
the six months ended June 1997 and 1996 (unaudited)................................... C-33
Combined Balance Sheets as of December 1996 and 1995 and as of June 1997 (unaudited).... C-34
Combined Statements of Cash Flows for the years ended December 1996, 1995 and 1994 and
for the six months ended June 1997 and 1996 (unaudited)............................... C-35
Notes to Combined Financial Statements.................................................. C-36
</TABLE>
C-31
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Whitman Corporation:
We have audited the accompanying combined balance sheets of the Midas Group
as of December 1996 and 1995, and the related combined statements of income and
cash flows for each of the years in the three-year period ended December 1996.
These combined financial statements are the responsibility of the Midas Group's
management. Our responsibility is to express an opinion on these combined
financial statements 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 combined financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the combined financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall combined
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of the Midas Group as
of December 1996 and December 1995, and the results of their operations and
their cash flows for each of the years in the three-year period ended December
1996 in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Chicago, Illinois
January 8, 1997
C-32
<PAGE>
MIDAS GROUP
COMBINED STATEMENTS OF INCOME
(IN MILLIONS)
<TABLE>
<CAPTION>
FOR THE SIX
MONTHS ENDED FOR THE YEARS ENDED DECEMBER
JUNE
-------------------- -------------------------------
1997 1996 1996 1995 1994
--------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Sales and revenues.................................................. $ 302.3 $ 292.3 $ 604.2 $ 576.1 $ 543.2
Cost of goods sold.................................................. 140.6 136.3 281.8 268.4 260.5
--------- --------- --------- --------- ---------
Gross profit...................................................... 161.7 156.0 322.4 307.7 282.7
Selling, general, and administrative expenses....................... 126.1 115.8 241.3 222.5 205.0
Amortization expense................................................ 1.6 1.5 3.1 2.7 2.5
--------- --------- --------- --------- ---------
Operating income.................................................. 34.0 38.7 78.0 82.5 75.2
Whitman charges..................................................... (9.0) (9.7) (17.2) (19.0) (17.5)
Interest expense:
Whitman........................................................... (3.9) (4.2) (7.3) (7.2) (7.1)
Other............................................................. (1.1) (1.6) (2.7) (2.1) (2.1)
--------- --------- --------- --------- ---------
Total interest expense.......................................... (5.0) (5.8) (10.0) (9.3) (9.2)
Other income (expense), net......................................... 0.5 0.6 0.8 1.7 (2.0)
--------- --------- --------- --------- ---------
Income before income taxes........................................ 20.5 23.8 51.6 55.9 46.5
Income tax provisions............................................... 8.8 9.9 21.2 24.2 19.9
--------- --------- --------- --------- ---------
Net income........................................................ $ 11.7 $ 13.9 $ 30.4 $ 31.7 $ 26.6
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
See accompanying notes to combined financial statements.
C-33
<PAGE>
MIDAS GROUP
COMBINED BALANCE SHEETS
(IN MILLIONS)
<TABLE>
<CAPTION>
DECEMBER
--------------------
1996 1995
JUNE --------- ---------
-----------
1997
-----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS:
Current assets:
Cash and cash equivalents......................................................... $ 10.5 $ 18.2 $ 11.6
Receivables, net.................................................................. 76.1 72.0 66.0
Inventories....................................................................... 94.2 88.8 77.1
Other current assets.............................................................. 15.0 19.5 16.8
----------- --------- ---------
Total current assets............................................................ 195.8 198.5 171.5
Property and equipment, net......................................................... 212.6 212.3 208.2
Intangible assets, net.............................................................. 49.4 45.9 46.8
Other assets........................................................................ 27.3 26.0 24.9
----------- --------- ---------
Total assets.................................................................... $ 485.1 $ 482.7 $ 451.4
----------- --------- ---------
----------- --------- ---------
LIABILITIES AND EQUITY:
Current liabilities:
Short-term debt................................................................... $ 3.1 $ 3.9 $ 1.1
Accounts payable.................................................................. 41.8 55.4 47.7
Income taxes payable.............................................................. 5.3 8.3 6.2
Accrued expenses.................................................................. 28.7 26.3 32.6
----------- --------- ---------
Total current liabilities....................................................... 78.9 93.9 87.6
Loans and advances from Whitman..................................................... 85.1 77.2 70.3
Obligations under capital leases.................................................... 15.2 13.6 16.2
Deferred income taxes and other liabilities......................................... 24.8 20.9 18.8
----------- --------- ---------
Total liabilities............................................................... 204.0 205.6 192.9
Shareholder equity.................................................................. 281.1 277.1 258.5
----------- --------- ---------
Total liabilities and equity.................................................... $ 485.1 $ 482.7 $ 451.4
----------- --------- ---------
----------- --------- ---------
</TABLE>
See accompanying notes to combined financial statements.
C-34
<PAGE>
MIDAS GROUP
COMBINED STATEMENTS OF CASH FLOWS
(IN MILLIONS)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS
FOR THE YEARS ENDED
ENDED JUNE DECEMBER
-------------------- -------------------------------
1997 1996 1996 1995 1994
--------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income........................................................... $ 11.7 $ 13.9 $ 30.4 $ 31.7 $ 26.6
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization...................................... 11.3 10.3 20.3 18.1 16.4
Changes in assets and liabilities:
(Increase) in receivables........................................ (4.3) (18.1) (6.1) (3.9) (4.0)
(Increase) in inventories........................................ (5.4) (2.3) (11.8) (7.2) (3.5)
Increase (decrease) in accounts payable.......................... (13.5) (3.4) 7.6 3.2 7.3
Net change in other assets and liabilities....................... 2.0 1.5 (5.9) (2.6) 5.1
--------- --------- --------- --------- ---------
Net cash provided by operating activities.............................. 1.8 1.9 34.5 39.3 47.9
--------- --------- --------- --------- ---------
Cash flows from investing activities:
Capital investments.................................................. (21.4) (13.3) (30.7) (34.3) (28.7)
Proceeds from sales of property and equipment........................ 2.2 1.4 4.7 3.8 3.8
--------- --------- --------- --------- ---------
Net cash used in investing activities.................................. (19.2) (11.9) (26.0) (30.5) (24.9)
--------- --------- --------- --------- ---------
Cash flows from financing activities:
Net increase (decrease) in short-term debt........................... (1.8) 10.9 3.2 0.5 0.9
Payment of obligations under capital leases.......................... (0.6) (0.7) (1.0) (1.8) (1.0)
Obligations incurred under capital leases............................ 6.9 -- -- 2.3 0.9
Net increase (decrease) in loans and advances from Whitman........... 8.2 9.2 6.9 1.1 (20.0)
Dividends to Whitman................................................. (2.4) (4.4) (10.9) (10.3) (4.6)
--------- --------- --------- --------- ---------
Net cash provided by (used in) financing activities.................... 10.3 15.0 (1.8) (8.2) (23.8)
--------- --------- --------- --------- ---------
Effect of exchange rate changes on cash and cash equivalents........... (0.6) (0.3) (0.1) (0.2) (0.2)
--------- --------- --------- --------- ---------
Net change in cash and cash equivalents................................ (7.7) 4.7 6.6 0.4 (1.0)
Cash and cash equivalents as of beginning of period.................... 18.2 11.6 11.6 11.2 12.2
--------- --------- --------- --------- ---------
Cash and cash equivalents as of end of period.......................... $ 10.5 $ 16.3 $ 18.2 $ 11.6 $ 11.2
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
See accompanying notes to combined financial statements.
C-35
<PAGE>
MIDAS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
The Midas Group provides retail automotive services through franchised and
Group-operated stores in the U.S., Canada, France and other countries. The Midas
Group also manufactures exhaust and other products for the automotive
aftermarket, which products are distributed to franchisees and others.
PRINCIPLES OF COMBINATION
These combined financial statements present the operations of the Midas
Group, which is comprised of wholly-owned subsidiaries of Whitman Corporation
(Whitman). The Midas Group consists of Midas International Corporation and its
wholly-owned subsidiaries and of other Midas companies owned by Whitman but
directly managed by Midas International Corporation.
FISCAL PERIODS
The 1996, 1995, and 1994 fiscal years ended on December 14, 16, and 17,
respectively. Each of the years consisted of 52 weeks. The fiscal six months
ended June 21, 1997 consisted of 27 weeks, while the fiscal six months ended
June 15, 1996 consisted of 26 weeks. The fiscal year of the Midas Group's
operations outside the U.S. and Canada ends in November.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of deposits with banks and financial
institutions which are unrestricted as to withdrawal or use, and which have an
original maturity of three months or less.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Midas Group's financial instruments include cash and cash equivalents,
receivables, short-term debt, and accounts payable; the carrying amounts
approximate fair values because of the short maturity of these instruments.
Because of the intercompany nature of the indebtedness, it is not considered
meaningful to present fair value information with respect to the loans and
advances from Whitman.
INVENTORIES
Inventories are valued at the lower of cost, determined using the first-in,
first-out method, or net realizable value.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation is computed using
the straight-line method and includes amortization of assets held under capital
leases. When property is sold or retired, the cost and accumulated depreciation
are eliminated from the accounts and gains or losses are recorded in other
income (expense), net. Expenditures for maintenance and repairs are expensed as
incurred. The approximate ranges of annual depreciation rates are 2% to 10% for
buildings and improvements and 8% to 20% for machinery and equipment.
INTANGIBLE ASSETS
Intangible assets primarily consist of the excess of cost over fair market
value of tangible assets of acquired businesses, reflecting premiums paid for
consumer franchises, brand names, trademarks, and other intangible assets. Such
premiums (goodwill) generally are being amortized on straight-line bases over 40
years, while franchise rights are being amortized over 20 years, with minor
amounts being amortized over shorter periods. The
C-36
<PAGE>
MIDAS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Midas Group evaluates, at least on an annual basis, the carrying value of its
goodwill by reviewing undiscounted cash flows by operating unit. If the sum of
the projected undiscounted cash flows over the remaining lives of the related
assets does not exceed the carrying value of the related goodwill, goodwill
would be adjusted for the difference between the fair value and the carrying
value of such goodwill.
ADVERTISING
Advertising expenditures are expensed as incurred. Advertising expenses that
are included in the Midas Group's selling, general and administrative expenses
were $21.4 million in 1996, $20.4 million in 1995, and $18.4 million in 1994.
These advertising expenditures represent only the Group expenses of the
worldwide total spent on advertising.
ACCOUNT CLASSIFICATIONS
Certain amounts presented in the accompanying combined financial statements
are classified in a manner that differs, in minor respects, from the manner in
which such amounts have been classified in Whitman's consolidated financial
statements.
USE OF ESTIMATES
Management has made a number of estimates and assumptions relating to the
reporting of assets and liabilities and the disclosure of contingent assets and
liabilities to prepare these combined financial statements in conformity with
generally accepted accounting principles. Actual results could differ from these
estimates.
C-37
<PAGE>
MIDAS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(2) CHANGES IN EQUITY
The following table presents the changes in equity of the Midas Group for
the years ended December 1994, 1995, and 1996 and for the six months ended June
1997 (in millions):
<TABLE>
<CAPTION>
CUMULATIVE
MIDAS GROUP CURRENCY
CAPITAL TRANSLATION SHAREHOLDER
ACCOUNTS ADJUSTMENTS EQUITY
--------------- ------------- -----------
<S> <C> <C> <C>
DECEMBER 1993............................................................. $ 212.6 $ (6.6) $ 206.0
Net income................................................................ 26.6 -- 26.6
Dividends to Whitman...................................................... (4.6) -- (4.6)
Translation adjustments................................................... -- 3.1 3.1
------ ----- -----------
DECEMBER 1994............................................................. 234.6 (3.5) 231.1
Net income................................................................ 31.7 -- 31.7
Capital contribution from Whitman......................................... 3.6 -- 3.6
Dividends to Whitman...................................................... (10.3) -- (10.3)
Translation adjustments................................................... -- 2.4 2.4
------ ----- -----------
DECEMBER 1995............................................................. 259.6 (1.1) 258.5
Net income................................................................ 30.4 -- 30.4
Dividends to Whitman...................................................... (10.9) -- (10.9)
Translation adjustments................................................... -- (0.9) (0.9)
------ ----- -----------
DECEMBER 1996............................................................. 279.1 (2.0) 277.1
Net income (unaudited).................................................... 11.7 -- 11.7
Capital contribution from Whitman (unaudited)............................. 0.2 -- 0.2
Dividends to Whitman (unaudited).......................................... (2.4) -- (2.4)
Translation adjustments (unaudited)....................................... -- (5.5) (5.5)
------ ----- -----------
JUNE 1997 (unaudited)..................................................... $ 288.6 $ (7.5) $ 281.1
------ ----- -----------
------ ----- -----------
</TABLE>
(3) TRANSACTIONS WITH WHITMAN
CASH MANAGEMENT AND ADVANCES
Whitman manages the cash not considered necessary for current operating
requirements of certain of its subsidiaries, including the U.S. operations of
the Midas Group. Cash not needed for current operations is advanced to Whitman
at the then-current commercial bank prime lending rate; cash is advanced by
Whitman on the same basis. All advances to or from Whitman are included in loans
and advances from Whitman in the combined balance sheets. Interest income and
expense on such advances are included in interest expense--Whitman in the
combined statements of income.
C-38
<PAGE>
MIDAS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(3) TRANSACTIONS WITH WHITMAN (CONTINUED)
LOANS PAYABLE TO WHITMAN
The following notes and loans are included in loans and advances from
Whitman as of December 1996 and 1995 (in millions):
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
Note due through 2002, 10.5%.................................................... $ 35.0 $ 40.8
Junior subordinated note due 2001, floating prime rate.......................... 29.0 29.0
Loan payable due 2013, variable rate based on tax exempt
bond market rates (average 1996 rate was 3.7%)................................ 5.0 5.0
Note, denominated in French francs, due 2001, 6.0%.............................. 6.0 --
--------- ---------
$ 75.0 $ 74.8
--------- ---------
--------- ---------
</TABLE>
DIVIDENDS AND CAPITAL CONTRIBUTIONS
The Midas Group has paid dividends to Whitman and has received capital
contributions from Whitman, as summarized in Note 2.
WHITMAN CHARGES
Whitman allocates portions of its corporate office general and
administrative expenses and interest expense to its subsidiaries. The Midas
Group's share of such costs amounted to $17.2 million in 1996, $19.0 million in
1995, and $17.5 million in 1994.
(4) SUPPLEMENTAL BALANCE SHEET AND CASH FLOW INFORMATION
RECEIVABLES
Receivables are stated net of allowance for doubtful accounts of $3.6
million (unaudited) as of June 1997, $3.3 million as of December 1996, and $2.7
million as of December 1995.
INVENTORIES
Inventories as of June 1997 and December 1996 and 1995 consisted of the
following (in millions):
<TABLE>
<CAPTION>
DECEMBER
--------------------
1996 1995
JUNE 1997 --------- ---------
-------------
(UNAUDITED)
<S> <C> <C> <C>
Raw materials and supplies......................................... $ 5.9 $ 5.3 $ 5.4
Work in process.................................................... 1.5 1.9 1.5
Finished goods..................................................... 86.8 81.6 70.2
----- --------- ---------
$ 94.2 $ 88.8 $ 77.1
----- --------- ---------
----- --------- ---------
</TABLE>
C-39
<PAGE>
MIDAS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(4) SUPPLEMENTAL BALANCE SHEET AND CASH FLOW INFORMATION (CONTINUED)
PROPERTY AND EQUIPMENT
Property and equipment as of June 1997 and December 1996 and 1995 consisted
of the following (in millions):
<TABLE>
<CAPTION>
DECEMBER
--------------------
1996 1995
JUNE 1997 --------- ---------
-----------
(UNAUDITED)
<S> <C> <C> <C>
Land............................................................ $ 52.0 $ 51.1 $ 51.5
Buildings and improvements...................................... 131.2 128.7 129.8
Machinery and equipment......................................... 165.4 162.4 146.7
----------- --------- ---------
Total property and equipment.................................... 348.6 342.2 328.0
Accumulated depreciation........................................ (136.0) (129.9) (119.8)
----------- --------- ---------
Property and equipment, net..................................... $ 212.6 $ 212.3 $ 208.2
----------- --------- ---------
----------- --------- ---------
</TABLE>
INTANGIBLE ASSETS
Intangible assets are stated net of accumulated amortization of $23.2
million (unaudited) as of June 1997, $21.8 million as of December 1996, and
$18.9 million as of December 1995.
ACCRUED EXPENSES
Accrued expenses as of June 1997 and December 1996 and 1995 consisted of the
following (in millions):
<TABLE>
<CAPTION>
DECEMBER
--------------------
1996 1995
JUNE 1997 --------- ---------
-------------
(UNAUDITED)
<S> <C> <C> <C>
Salaries and wages................................................. $ 9.4 $ 9.3 $ 7.7
Taxes other than income taxes...................................... 8.3 8.1 8.1
Other expenses and interest........................................ 11.0 8.9 16.8
----- --------- ---------
$ 28.7 $ 26.3 $ 32.6
----- --------- ---------
----- --------- ---------
</TABLE>
SUPPLEMENTAL CASH FLOW INFORMATION
Net cash provided by operating activities includes cash payments for
interest and income taxes as follows (in millions):
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Interest paid--Whitman................................................... $ 7.0 $ 7.1 $ 7.2
Interest paid--other..................................................... 2.1 2.1 2.1
Income taxes paid........................................................ 20.1 23.8 26.8
</TABLE>
C-40
<PAGE>
MIDAS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(5) INCOME TAXES
The income tax provisions consisted of (in millions):
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Current:
U.S. Federal.................................................................... $ 15.0 $ 16.3 $ 15.1
Non-U.S......................................................................... 4.3 5.5 3.5
U.S. state and local............................................................ 2.5 2.4 2.9
--------- --------- ---------
Total current................................................................. 21.8 24.2 21.5
--------- --------- ---------
Deferred:
U.S. Federal.................................................................... (0.9) 0.5 (1.0)
Non-U.S......................................................................... 0.4 (0.5) (0.3)
U.S. state and local............................................................ (0.1) -- (0.3)
--------- --------- ---------
Total deferred................................................................ (0.6) -- (1.6)
--------- --------- ---------
Income tax provisions............................................................. $ 21.2 $ 24.2 $ 19.9
--------- --------- ---------
--------- --------- ---------
</TABLE>
The items which gave rise to differences between the income tax provisions
in the combined statements of income and income taxes computed at the U.S.
statutory rate are summarized as follows:
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Income tax expense computed at U.S. statutory rate................................ 35.0% 35.0% 35.0%
U.S. state and local taxes, net of U.S. Federal income tax benefit................ 2.9 2.7 3.4
Higher non-U.S. effective tax rates............................................... 4.5 5.9 5.8
Other items, net.................................................................. (1.3) (0.3) (1.4)
--------- --------- ---------
Income tax provisions............................................................. 41.1% 43.3% 42.8%
--------- --------- ---------
--------- --------- ---------
</TABLE>
Pretax income from non-U.S. operations amounted to $8.7 million, $7.1
million, and $1.4 million in 1996, 1995, and 1994, respectively. U.S. income
taxes have not been provided on the undistributed income ($35.6 million) of the
Midas Group's non-U.S. operations, which currently is not intended to be
remitted to the U.S. No deferred tax liability has been recognized with regard
to the potential remittance of such undistributed income. It is not practicable
to estimate the incremental income tax liability that might be incurred if such
income was remitted to the U.S.
C-41
<PAGE>
MIDAS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(5) INCOME TAXES (CONTINUED)
Deferred income taxes are created by "temporary differences" between amounts
of assets and liabilities for financial reporting purposes and such amounts as
reported under income tax regulations. Deferred tax assets and liabilities as of
December 1996 and 1995 consisted of (in millions):
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
Deferred tax assets attributable to:
Employment benefit and vacation accruals......................................................... $ 4.9 $ 4.0
Capitalized leases............................................................................... 1.5 1.9
Other............................................................................................ 6.0 5.4
--------- ---------
Total deferred tax assets.......................................................................... 12.4 11.3
--------- ---------
Deferred tax liabilities attributable to:
Depreciation and amortization.................................................................... (12.2) (11.2)
Pension costs.................................................................................... (3.4) (3.4)
Other............................................................................................ (1.4) (1.9)
--------- ---------
Total deferred tax liabilities..................................................................... (17.0) (16.5)
--------- ---------
Net deferred tax liability......................................................................... $ (4.6) $ (5.2)
--------- ---------
--------- ---------
Net deferred tax asset (liability) included in:
Other current assets............................................................................. $ 2.5 $ 1.9
Deferred income taxes and other liabilities...................................................... (7.1) (7.1)
--------- ---------
Net deferred tax liability......................................................................... $ (4.6) $ (5.2)
--------- ---------
--------- ---------
</TABLE>
Management believes it is more likely than not that all deferred tax assets
will be realized and, accordingly, no valuation allowance is required.
(6) FRANCHISE AGREEMENTS
The Midas Group's franchise agreements generally cover a 20-year period and
provide for renewals. A franchise agreement can be canceled by the Midas Group
only in the event a franchisee fails to comply with the provisions of the
agreement.
Franchise agreements provide for initial and renewal fees and continuing
royalty payments based on a percentage of sales.
Worldwide stores in operation as of year-end consisted of (unaudited):
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Franchised.............................................................. 2,297 2,248 2,229
Group-operated.......................................................... 380 362 346
--------- --------- ---------
Total................................................................... 2,677 2,610 2,575
--------- --------- ---------
--------- --------- ---------
</TABLE>
U.S. franchisees are required to purchase Midas guaranteed products.
Nonguaranteed products, equipment, and supplies are not required to be purchased
from the Midas Group. In most cases, franchisees also lease real estate from the
Midas Group.
U.S. revenues from the sale of guaranteed and nonguaranteed products to
franchisees amounted to $213.6 million in 1996, $214.0 million in 1995, and
$212.1 million in 1994. These product sales represented 50% of the Midas Group's
U.S. sales and revenues in 1996, 52% in 1995, and 53% in 1994.
C-42
<PAGE>
MIDAS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(6) FRANCHISE AGREEMENTS (CONTINUED)
Rental income derived from real estate leased to U.S. franchisees amounted
to $30.8 million in 1996, $30.5 million in 1995, and $29.1 million in 1994.
Rental income represented 7% of the Midas Group's U.S. sales and revenues in
1996, 1995, and 1994.
U.S. franchisees also purchased $3.9 million of store equipment from the
Midas Group in 1996, compared to $3.5 million in 1995 and $2.6 million in 1994.
(7) LEASES
Control of the real estate used by Midas stores is a fundamental strength of
the Midas program. The Midas Group employs a number of methods to ensure
continued dedication of the real estate to the Midas program. The Midas Group
leases real estate that is subleased to franchisees and owns real estate in the
U.S. that is leased to franchisees. The Midas Group has also entered into
contingent operating lease agreements that are described below. As of December
1996, approximately 75% of the Midas stores in operation worldwide were
controlled by the Midas Group using one of these methods.
LEASED REAL ESTATE
The Midas Group's gross rent expense, applicable to operating leases,
relates to rentals of stores, distribution facilities, corporate administration
facilities and other miscellaneous items.
The Midas Group's gross rent expense, the sublease rental income from
franchisees that reduced gross rent expense, and the resulting net rent expense
for 1996, 1995 and 1994 are presented below (in millions):
<TABLE>
<CAPTION>
SUBLEASE
GROSS RENT RENTAL NET RENT
EXPENSE INCOME EXPENSE
----------- ----------- -----------
<S> <C> <C> <C>
1996............................................................... $ 36.5 $ 22.6 $ 13.9
1995............................................................... 34.0 21.8 12.2
1994............................................................... 33.6 21.3 12.3
</TABLE>
Substantially all of the Midas Group's operating leases provide that the
Midas Group pay taxes, maintenance, insurance, and certain other operating
expenses. The subleases with franchisees contain provisions for the Midas Group
to recover such costs.
C-43
<PAGE>
MIDAS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(7) LEASES (CONTINUED)
As of December 1996, annual minimum rental payments due under capital and
operating leases that have initial or remaining noncancelable terms in excess of
one year, along with sublease rentals on real estate due under noncancelable
subleases were as follows (in millions):
<TABLE>
<CAPTION>
CAPITAL OPERATING SUBLEASE
LEASES LEASES RENTALS
----------- ----------- -----------
<S> <C> <C> <C>
1997.............................................................. $ 2.1 $ 33.7 $ 18.5
1998.............................................................. 2.1 30.8 17.2
1999.............................................................. 2.1 27.1 15.0
2000.............................................................. 2.0 23.7 12.4
2001.............................................................. 2.0 21.0 10.4
Thereafter........................................................ 14.3 99.6 43.8
----- ----------- -----------
Total minimum lease payments...................................... 24.6 $ 235.9 $ 117.3
----------- -----------
----------- -----------
Less imputed interest............................................. 10.3
-----
Present value of minimum lease payments........................... 14.3
Less current portion included in short-term debt.................. 0.7
-----
Obligations under capital leases--noncurrent...................... $ 13.6
-----
-----
</TABLE>
As of December 1996 and 1995, the net book value of property under capital
leases included in the combined balance sheets amounted to $10.9 million and
$13.2 million, respectively.
REAL ESTATE OWNED BY THE MIDAS GROUP AND LEASED TO FRANCHISEES
The Midas Group owns real estate located in various communities throughout
the U.S. that is leased to franchisees under operating lease agreements.
Substantially all leases are for initial terms of 20 years and provide for
minimum and contingent rentals.
Real estate leased to franchisees and included in the combined balance
sheets consisted of (in millions):
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
Land.......................................................................... $ 37.6 $ 38.3
Buildings and improvements.................................................... 70.9 69.7
--------- ---------
Total property and equipment.................................................. 108.5 108.0
Accumulated depreciation...................................................... (22.2) (20.4)
--------- ---------
Property and equipment, net................................................... $ 86.3 $ 87.6
--------- ---------
--------- ---------
</TABLE>
Rental income for 1996 and 1995 was $15.6 million, compared to $14.6 million
in 1994. Minimum future lease payments to be received are as follows (in
millions):
<TABLE>
<S> <C>
1997.................................................................. $ 13.6
1998.................................................................. 13.5
1999.................................................................. 13.0
2000.................................................................. 11.9
2001.................................................................. 10.2
Thereafter............................................................ 56.6
---------
$ 118.8
---------
---------
</TABLE>
C-44
<PAGE>
MIDAS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(7) LEASES (CONTINUED)
CONTINGENT OPERATING LEASE AGREEMENTS
The Midas Group has entered into contingent operating lease agreements
covering real estate that is leased by U.S. and Canadian franchisees from
parties that are directly or indirectly related to the franchisees.
As of December 1996, approximately 151 stores were covered by these
contingent operating lease agreements, under which the Midas Group could be
required, under certain limited circumstances, to begin making rental payments
with respect to individual store locations. The average annual store rental is
$49 thousand with an average remaining term of seven years.
Management believes that, individually and in the aggregate, any potential
difference that might arise under these contingent lease agreements between the
rental expense and the rental income from future subleases would not materially
affect the combined financial position or results of operations of the Midas
Group.
(8) PENSION AND OTHER POST-RETIREMENT PLANS
DEFINED BENEFIT PENSION PLANS SPONSORED BY THE MIDAS GROUP
Substantially all U.S. employees are covered under various defined benefit
pension plans sponsored and funded by the Midas Group. Plans covering salaried
employees provide pension benefits based on years of service, and generally are
limited to a maximum of 20% of an employee's average annual compensation during
the five years preceding retirement. Plans covering hourly employees generally
provide benefits of stated amounts for each year of service. Plan assets are
invested primarily in common stocks, corporate bonds, and government securities.
Net periodic pension cost for 1996, 1995, and 1994 included the following
components (in millions):
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Service cost--benefits earned during period.............................. $ 1.5 $ 1.4 $ 1.3
Interest cost on projected benefit obligation............................ 2.4 2.3 1.9
Actual return on assets.................................................. (5.2) (6.2) (0.9)
Net amortization and deferral............................................ 1.7 2.9 (2.3)
--------- --------- ---------
Total net periodic pension cost.......................................... $ 0.4 $ 0.4 $ --
--------- --------- ---------
--------- --------- ---------
</TABLE>
The principal economic assumptions used in the determination of net periodic
pension cost included the following:
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Discount rate........................................................... 7.5% 8.5% 7.0%
Expected long-term rate of return on assets............................. 9.5% 9.5% 10.0%
Rate of increase in compensation levels................................. 5.0% 6.0% 4.5%
</TABLE>
C-45
<PAGE>
MIDAS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(8) PENSION AND OTHER POST-RETIREMENT PLANS (CONTINUED)
Pension costs are funded in amounts not less than minimum levels required by
regulation. The following table reconciles the pension plans' funded status to
the amounts recognized in other noncurrent assets (liabilities) in the Midas
Group's combined balance sheets as of December 1996 and 1995 (in millions):
<TABLE>
<CAPTION>
1996 1995
------------------------------ ------------------------------
ASSETS EXCEED ACCUMULATED ASSETS EXCEED ACCUMULATED
ACCUMULATED BENEFITS EXCEED ACCUMULATED BENEFITS EXCEED
BENEFITS ASSETS BENEFITS ASSETS
------------- --------------- ------------- ---------------
<S> <C> <C> <C> <C>
Actuarial present value of benefit
obligation (measured as of September
30):
Vested benefit obligation............. $ (25.8) $ (0.4) $ (23.5) $ --
------ ----- ------ -----
Accumulated benefit obligation........ (27.4) (0.9) (25.2) (0.3)
------ ----- ------ -----
Projected benefit obligation.......... (32.0) (1.8) (29.9) (0.7)
Plan assets at fair market value
(measured as of September 30)......... 45.9 -- 41.5 --
------ ----- ------ -----
Plan assets in excess of (less than)
projected benefit obligation.......... 13.9 (1.8) 11.6 (0.7)
Unrecognized net asset at transition.... (1.7) -- (2.0) --
Unrecognized prior service costs........ 2.9 0.7 3.6 0.4
Unrecognized net gain................... (6.0) -- (4.3) (0.4)
------ ----- ------ -----
Prepaid (accrued) pension cost
recognized in balance sheets.......... $ 9.1 $ (1.1) $ 8.9 $ (0.7)
------ ----- ------ -----
------ ----- ------ -----
</TABLE>
The principal economic assumptions used in determining the above benefit
obligations were discount rates of 7.5% in both 1996 and 1995 and rates of
increase in future compensation levels of 5.0% in both 1996 and 1995.
DEFINED CONTRIBUTION PLANS SPONSORED BY MIDAS GROUP
Substantially all U.S. salaried employees, certain U.S. hourly employees,
and certain Australian and Canadian employees participate in voluntary,
contributory defined contribution plans to which the Midas Group makes full or
partial matching contributions. The Midas Group's matching contributions to
these plans amounted to $1.9 million, $2.3 million, and $1.5 million in 1996,
1995, and 1994, respectively. The Midas Group's cost for the associated
nonqualified plan was $0.3 million per year for 1996, 1995, and 1994.
MULTI-EMPLOYER PENSION PLANS
The Midas Group participates in a number of multi-employer pension plans
which provide benefits to certain unionized employee groups. Amounts contributed
to these plans totaled $0.3 million per year for 1996, 1995, and 1994.
POST-RETIREMENT MEDICAL AND LIFE INSURANCE
The Midas Group provides substantially all former U.S. salaried employees
who retired prior to July 1989 and selected other employees in the U.S. and
Canada with certain life and health care benefits. Accrued post-retirement
benefit costs recorded in the Midas Group's combined balance sheets were $6.9
million and $7.1 million as of December 1996 and 1995, respectively. The costs
associated with the programs were immaterial in each of the years 1994 through
1996.
C-46
<PAGE>
MIDAS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(9) CONTINGENCIES
The Midas Group has certain contingent liabilities arising from various
pending claims and litigation related to a number of matters. While the amount
of liability that may result from these matters cannot be determined, in the
opinion of the Midas Group counsel, the ultimate liability will not materially
affect the combined financial position or results of operations of the Midas
Group.
(10) BUSINESS SEGMENT INFORMATION
The Midas Group's most significant operations are in three geographic
regions: the U.S., Europe and Canada. The U.S. business segments are franchising
activities and the operation of Group-operated retail stores. The non-U.S.
operations are integrated operations that are managed geographically. Sales
between business segments and geographic areas were not significant. Foreign
currency gains and losses were not significant. Sales to any single customer
were less than five percent of sales and revenues in each of the years
presented.
C-47
<PAGE>
MIDAS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(10) BUSINESS SEGMENT INFORMATION (CONTINUED)
The following tables present financial information for each of the Midas
Group's business segments as of and for the years ended December 1996, 1995 and
1994 (in millions):
<TABLE>
<CAPTION>
SALES AND REVENUES OPERATING INCOME
------------------------------- -------------------------------
1996 1995 1994 1996 1995 1994
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
U.S. Operations:
Franchise activities..................................... $ 341.9 $ 337.6 $ 328.2 $ 77.3 $ 84.1 $ 75.0
Group-operated stores.................................... 81.4 76.2 74.7 (0.8) 0.7 3.1
--------- --------- --------- --------- --------- ---------
Total U.S.................................................. 423.3 413.8 402.9 76.5 84.8 78.1
--------- --------- --------- --------- --------- ---------
Non-U.S. Operations:
Europe................................................... 113.2 94.6 72.1 4.7 2.8 2.6
Canada................................................... 55.0 51.7 51.7 2.7 1.7 1.7
Other.................................................... 12.7 16.0 16.5 (1.1) (2.6) (3.3)
--------- --------- --------- --------- --------- ---------
Total non-U.S.............................................. 180.9 162.3 140.3 6.3 1.9 1.0
--------- --------- --------- --------- --------- ---------
Total before corporate and other expenses.................. $ 604.2 $ 576.1 $ 543.2 82.8 86.7 79.1
--------- --------- ---------
--------- --------- ---------
Midas Group corporate administrative expenses.............. (4.8) (4.2) (3.9)
--------- --------- ---------
Total operating income..................................... 78.0 82.5 75.2
Whitman charges............................................ (17.2) (19.0) (17.5)
Interest expense........................................... (10.0) (9.3) (9.2)
Other income (expense), net................................ 0.8 1.7 (2.0)
--------- --------- ---------
Income before income taxes................................. $ 51.6 $ 55.9 $ 46.5
--------- --------- ---------
--------- --------- ---------
</TABLE>
<TABLE>
<CAPTION>
DEPRECIATION
IDENTIFIABLE ASSETS AND AMORTIZATION CAPITAL INVESTMENTS
------------------------------- ------------------------------- --------------------
1996 1995 1994 1996 1995 1994 1996 1995
--------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Operations:
Franchise activities............... $ 250.9 $ 239.7 $ 231.7 $ 7.9 $ 7.4 $ 6.9 $ 10.1 $ 10.3
Group-operated stores.............. 84.7 83.7 70.5 5.7 5.1 4.7 8.4 11.8
--------- --------- --------- --------- --------- --------- --------- ---------
Total U.S............................ 335.6 323.4 302.2 13.6 12.5 11.6 18.5 22.1
--------- --------- --------- --------- --------- --------- --------- ---------
Non-U.S. Operations:
Europe............................. 102.5 81.0 69.0 4.9 3.6 2.5 10.2 10.6
Canada............................. 35.1 38.4 37.1 1.2 1.3 1.4 1.5 1.2
Other.............................. 9.5 8.6 10.1 0.6 0.7 0.9 0.5 0.4
--------- --------- --------- --------- --------- --------- --------- ---------
Total non-U.S........................ 147.1 128.0 116.2 6.7 5.6 4.8 12.2 12.2
--------- --------- --------- --------- --------- --------- --------- ---------
Total................................ $ 482.7 $ 451.4 $ 418.4 $ 20.3 $ 18.1 $ 16.4 $ 30.7 $ 34.3
--------- --------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- --------- ---------
<CAPTION>
1994
---------
<S> <C>
U.S. Operations:
Franchise activities............... $ 10.4
Group-operated stores.............. 6.9
---------
Total U.S............................ 17.3
---------
Non-U.S. Operations:
Europe............................. 8.2
Canada............................. 1.6
Other.............................. 1.6
---------
Total non-U.S........................ 11.4
---------
Total................................ $ 28.7
---------
---------
</TABLE>
C-48
<PAGE>
MIDAS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(10) BUSINESS SEGMENT INFORMATION (CONTINUED)
Information regarding the Midas Group's sales and revenues and its operating
income, by business segment, for the six month periods ended June 1997 and 1996
is as follows (unaudited and in millions):
<TABLE>
<CAPTION>
OPERATING INCOME
SALES AND REVENUES
-------------------- --------------------
1997 1996 1997 1996
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
U.S. Operations:
Franchise activities........................................................... $ 168.4 $ 168.9 $ 36.1 $ 40.5
Group-operated stores.......................................................... 45.0 38.7 (1.1) (0.9)
--------- --------- --------- ---------
Total U.S........................................................................ 213.4 207.6 35.0 39.6
--------- --------- --------- ---------
Non-U.S. Operations:
Europe......................................................................... 54.8 52.4 1.0 0.7
Canada......................................................................... 28.8 25.8 1.2 1.1
Other.......................................................................... 5.3 6.5 (0.4) (0.3)
--------- --------- --------- ---------
Total non-U.S.................................................................... 88.9 84.7 1.8 1.5
--------- --------- --------- ---------
Total before corporate and other expenses........................................ $ 302.3 $ 292.3 36.8 41.1
--------- ---------
--------- ---------
Midas Group corporate administrative expenses.................................... (2.8) (2.4)
--------- ---------
Total operating income........................................................... 34.0 38.7
Whitman charges.................................................................. (9.0) (9.7)
Interest expense................................................................. (5.0) (5.8)
Other income, net................................................................ 0.5 0.6
--------- ---------
Income before income taxes....................................................... $ 20.5 $ 23.8
--------- ---------
--------- ---------
</TABLE>
(11) SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table presents Midas Group's sales and revenues, gross profit,
and net income on a quarterly basis (in millions):
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH FULL
QUARTER QUARTER QUARTER QUARTER YEAR
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
1997
Sales and revenues.................................................. $ 142.0 $ 160.3
Gross profit........................................................ 75.4 86.3
Net income.......................................................... 3.1 8.6
1996
Sales and revenues.................................................. $ 130.6 $ 161.7 $ 168.7 $ 143.2 $ 604.2
Gross profit........................................................ 69.9 86.1 89.9 76.5 322.4
Net income.......................................................... 2.6 11.3 12.4 4.1 30.4
1995
Sales and revenues.................................................. $ 127.0 $ 153.9 $ 160.9 $ 134.3 $ 576.1
Gross profit........................................................ 67.1 82.0 87.2 71.4 307.7
Net income.......................................................... 2.4 11.4 13.4 4.5 31.7
</TABLE>
The first quarter of 1997 consisted of fourteen weeks, while all other
quarters consisted of thirteen weeks.
C-49
