As filed with the Securities and Exchange Commission on June 26, 1998.
Registration No. 333-52529
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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MMH HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
Delaware 6719 39-1716155
(State or other (Primary Standard Industrial (I.R.S. Employer
jurisdiction of Classification Code Number) Identification Number)
incorporation or
organization)
4915 South Howell Avenue, 2nd Floor
Milwaukee, Wisconsin 53207
(414) 486-6100
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
MICHAEL S. ERWIN
President
MMH HOLDINGS, INC.
4915 South Howell Avenue, 2nd Floor
Milwaukee, Wisconsin 53207
(414) 486-6100
(Name, address, including zip code, and telephone number
including area code, of agent for service)
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Copies to:
Russell W. Parks, Jr., Esq.
William A. Bianco, Esq.
AKIN, GUMP, STRAUSS, HAUER & FELD, L.L.P.
1333 New Hampshire Avenue, N.W.
Suite 400
Washington, D.C. 20036
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Approximate date of commencement of proposed sale of securities to the public:
As soon as practicable after this Registration Statement becomes effective.
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If any of the securities being registered on this Form are to be offered
in connection with the formation of a holding company and there is compliance
with General Instruction G, check the following box. |_|
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The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933, as amended, or until the Registration Statement
shall become effective on such date as the Securities and Exchange Commission,
acting pursuant to said Section 8(a), may determine.
<PAGE>
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State which such offer, solicitation or sale would be unlawful prior to
registration or qualification under the securities laws of any such State.
SUBJECT TO COMPLETION, DATED JUNE 26, 1998
Offer to Exchange
all outstanding
12% Series A Senior Exchangeable Preferred Stock
($57,710,000 aggregate liquidation preference outstanding)
for
12% Series A Senior Exchangeable Preferred Stock
which has been registered under the Securities Act of 1933
of
MMH Holdings, Inc.
---------------------
THE EXCHANGE OFFER
WILL EXPIRE AT 5:00 p.m., NEW YORK CITY TIME,
ON , 1998, unless extended
MMH Holdings, Inc., a Delaware corporation ("Holdings" or the "Issuer"),
hereby offers, upon the terms and subject to the conditions set forth in this
Prospectus and the accompanying letter of transmittal (the "Letter of
Transmittal," and together with this Prospectus, the "Exchange Offer"), to
exchange $1,000 liquidation preference of its 12% Series A Senior Exchangeable
Preferred Stock, par value $.01 per share (the "New Series A Senior Preferred
Stock"), which have been registered under the Securities Act of 1933, as amended
(the "Securities Act"), pursuant to a Registration Statement (as defined herein)
of which this Prospectus is a part, for each $1,000 liquidation preference of
its outstanding 12% Series A Senior Exchangeable Preferred Stock, par value $.01
per share (the "Old Series A Senior Preferred Stock"), of which $57,710,000
aggregate liquidation preference is outstanding. The New Series A Senior
Preferred Stock and the Old Series A Senior Preferred Stock are together
referred to herein as the "Series A Senior Preferred Stock."
Holdings will accept for exchange any and all shares of Old Series A
Senior Preferred Stock that are validly tendered on or prior to 5:00 p.m. New
York City time, on the date the Exchange Offer expires, which will be ,
1998, unless the Exchange Offer is extended (the "Expiration Date"). The
exchange of shares of Old Series A Senior Preferred Stock for shares of New
Series A Senior Preferred Stock will be made (i) with respect to all shares of
Old Series A Senior Preferred Stock validly tendered and not withdrawn on or
prior to 5:00 p.m. New York City time, on (the "Early Exchange Date"),
within two business days following the Early Exchange Date, and (ii) with
respect to all shares of Old Series A Senior Preferred Stock validly tendered
and not withdrawn after the Early Exchange Date and on or prior to the
Expiration Date, within two business days following the Expiration Date. Tenders
of shares of Old Series A Senior Preferred Stock may be withdrawn at any time
prior to 5:00 p.m., New York City time, on the Expiration Date, unless
previously accepted for exchange. The Exchange Offer is not conditioned upon any
minimum number of shares of Old Series A Senior Preferred Stock being tendered
for exchange. However, the Exchange Offer is subject to certain conditions which
may be waived by Holdings. See "The Exchange Offer." Holdings has agreed to pay
the expenses of the Exchange Offer.
For a discussion of certain risks associated with an investment in the New
Series A Senior Preferred Stock, see "Risk Factors," beginning on page 15 of
this Prospectus.
(Continued on next page)
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THE PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this Prospectus is ___________
<PAGE>
The shares of New Series A Senior Preferred Stock will be obligations of
Holdings governed by the Restated Certificate (as defined herein). The form and
terms of the shares of New Series A Senior Preferred Stock are identical in all
material respects to the form and terms of the shares of Old Series A Senior
Preferred Stock except (i) that the shares of New Series A Senior Preferred
Stock have been registered under the Securities Act, (ii) that the shares of New
Series A Senior Preferred Stock are not entitled to certain registration rights
which are applicable to the shares of Old Series A Senior Preferred Stock under
a registration rights agreement (the "Exchange Offer Registration Rights
Agreement") between Holdings and CIBC Oppenheimer Corp., the initial purchaser
of the shares of Old Series A Senior Preferred Stock (the "Initial Purchaser")
and (iii) for certain contingent interest rate provisions. See "The Exchange
Offer."
Dividends on the New Series A Senior Preferred Stock will accrue from
March 30, 1998, the date of issuance of the Old Series A Senior Preferred Stock,
and will be payable semi-annually on each April 1 and October 1, commencing
October 1, 1998, at a rate per annum of 12% of the liquidation preference per
share. Dividends may be paid, at Holdings' option, on any dividend payment date
occurring on or prior to April 1, 2003, either in cash or by the issuance of
additional shares of New Series A Senior Preferred Stock having an aggregate
liquidation preference equal to the amount of such dividends (and, at Holdings'
option, payment of cash in lieu of fractional shares). The liquidation
preference of the New Series A Senior Preferred Stock will be $1,000 per share.
Holders of shares of Old Series A Senior Preferred Stock whose shares of Old
Series A Senior Preferred Stock are accepted for exchange will be deemed to have
waived the right to receive any dividend payment in respect of Old Series A
Senior Preferred Stock accrued from March 30, 1998 to the date of the issuance
of the New Series A Senior Preferred Stock.
The New Series A Senior Preferred Stock, which will rank senior to all
other capital stock of Holdings, will be redeemable, at the option of Holdings,
in whole or in part, at any time on or after April 1, 2003, at the redemption
prices set forth herein, plus accumulated and unpaid dividends to the date of
redemption. Holdings will be required, subject to certain limitations, to redeem
all of the New Series A Senior Preferred Stock outstanding on April 1, 2009, at
a redemption price equal to 100% of the liquidation preference thereof, plus
accumulated and unpaid dividends to the date of redemption. Upon the occurrence
of a Change of Control (as defined herein), Holdings will, subject to certain
conditions, be required to offer to purchase all of the outstanding shares of
New Series A Senior Preferred Stock at a price equal to 101% of the liquidation
preference thereof, plus accumulated and unpaid dividends to the date of
purchase. Holdings may redeem all, but not less than all, of the outstanding
shares of New Series A Senior Preferred Stock at any time prior to April 1, 2001
at a redemption price equal to 112% of the aggregate liquidation price thereof,
plus accumulated and unpaid dividends thereon to the redemption date, with the
Net Proceeds (as defined herein) of one or more Public Equity Offerings (as
defined herein); provided that any such redemption occurs within 90 days
following the closing of any such Public Equity Offering.
Subject to certain conditions, the New Series A Senior Preferred Stock
will be exchangeable, in whole but not in part, at the option of Holdings, on
any dividend payment date, for Holdings' 12% Exchange Debentures due 2009 (the
"Exchange Debentures"). Interest on the Exchange Debentures will be payable at a
rate of 12% per annum and will accrue from the date of issuance thereof.
Interest on the Exchange Debentures will be payable semi-annually in cash or, at
the option of Holdings, on or prior to April 1, 2003, in additional Exchange
Debentures, in arrears on each April 1 and October 1, commencing on the first
such date after the exchange of the New Series A Senior Preferred Stock for
Exchange Debentures. The Exchange Debentures mature on April 1, 2009. The
Exchange Debentures will be redeemable, at the option of Holdings, in whole or
in part, on or after April 1, 2003, at the redemption prices set forth herein,
plus accrued and unpaid interest to the date of redemption. Upon a Change of
Control, Holdings will be required to make an offer to purchase all outstanding
Exchange Debentures at a purchase price equal to 101% of the principal amount
thereof, plus accrued and unpaid interest thereon to the date of purchase.
Holdings may redeem all, but not less than all, of the Exchange Debentures at
any time prior to April 1, 2001, at a redemption price equal to 112% of the
aggregate principal amount thereof, plus accrued and unpaid interest thereon to
the redemption date, with the Net Proceeds of one or more Public Equity
Offerings; provided that any such redemption occurs within 90 days following the
closing of any such Public Equity Offering. In addition, Holdings will be
obligated in certain instances to make an offer to purchase the Exchange
Debentures at a purchase price equal to 100% of the principal amount thereof
plus accrued and unpaid interest with the net cash proceeds of certain asset
sales.
ii
<PAGE>
The Exchange Debentures will be subordinated in right of payment to all
existing and future Senior Indebtedness (as defined herein) of Holdings and will
rank pari passu with or senior to all future Indebtedness (as defined herein) of
Holdings that expressly provides that it ranks pari passu with or junior to the
Exchange Debentures, as the case may be. As of January 31, 1998, after giving
pro forma effect to the Transactions (as defined herein), Holdings and its
subsidiaries would have had an aggregate of $259.3 million of Indebtedness
outstanding (including $200.0 million principal amount of the Senior Notes (as
defined herein) issued by Morris Material Handling, Inc. (the "Company"), a
wholly-owned subsidiary of Holdings, and $55.0 million of borrowings under the
New Credit Facility (as defined herein)) in respect of which the Exchange
Debentures will be effectively subordinated. Borrowings under the New Credit
Facility are guaranteed by Holdings.
Shares of Old Series A Senior Preferred Stock initially sold to qualified
institutional buyers were initially represented by a global certificate in fully
registered form, without coupons, deposited with a custodian for the Depository
Trust Company ("DTC") and registered in the name of DTC or a nominee of DTC.
Beneficial interests in the global certificate representing the Old Series A
Senior Preferred Stock were shown on, and transfers thereof were effected only
through, records maintained by DTC and its participants. Except as described
herein, shares of New Series A Senior Preferred Stock exchanged for shares of
Old Series A Senior Preferred Stock represented by the global certificate will
be represented by one or more global certificates of New Series A Senior
Preferred Stock in fully registered form, without coupons, registered in the
name of the nominee of DTC. New Series A Senior Preferred Stock in global form
will trade in DTC's Same-Day Funds Settlement System, and secondary market
trading activity in such New Series A Senior Preferred Stock will therefore
settle in immediately available funds. See "Book-Entry, Deliver and Form." New
Series A Senior Preferred Stock issued to non-qualified institutional buyers in
exchange for Old Series A Senior Preferred Stock held by such investors will be
issued only in certificated, fully registered, definitive form.
Based on an interpretation by the staff of the Securities and Exchange
Commission (the "Commission") set forth in no-action letters issued to unrelated
third parties, Holdings believes that shares of New Series A Senior Preferred
Stock issued Exchange Offer in exchange for shares of Old Series
A Senior Preferred Stock may be offered for resale, resold and otherwise
transferred by a holder thereof (other than a "Restricted Holder," being (i) a
broker-dealer who purchases such shares of Old Series A Senior Preferred Stock
directly from Holdings to resell pursuant to Rule 144A or any other available
exemption under the Securities Act or (ii) a person that is an affiliate of
Holdings within the meaning of Rule 405 under the Securities Act), without
compliance with the registration and prospectus delivery provisions of the
Securities Act, provided that the holder is acquiring shares of New Series A
Senior Preferred Stock in the ordinary course of its business and is not
participating, does not intend to participate and has no arrangement or
understanding with any person to participate, in a distribution of the New
Series A Senior Preferred Stock. Eligible holders wishing to accept the Exchange
Offer must represent to Holdings that such conditions have been met. Each
broker-dealer that receives shares of New Series A Senior Preferred Stock for
its own account pursuant to the Exchange Offer must acknowledge that it will
deliver a prospectus in connection with any resale of such New Series A Senior
Preferred Stock. The Letter of Transmittal states that by so acknowledging and
by delivering a prospectus, a broker-dealer will not be deemed to admit that it
is an "underwriter" within the meaning of the Securities Act. This Prospectus,
as it may be amended or supplemented from time to time, may be used by a
broker-dealer in connection with resales of shares of New Series A Senior
Preferred Stock received in exchange for shares of Old Series A Senior Preferred
Stock only where such shares of Old Series A Senior Preferred Stock were
acquired by such broker-dealer as a result of market-making activities or other
trading activities. Holdings has agreed that it will make this Prospectus
available to any broker-dealer for use in connection with any such resale for a
period from the date of this Prospectus until 180 days after the consummation of
the Exchange Offer, or such shorter period as will terminate when all shares of
Old Series A Senior Preferred Stock acquired by broker-dealers for their own
accounts as a result of market-making activities or other trading activities
have been exchanged for shares of New Series A Senior Preferred Stock and resold
by such broker-dealers. See "The Exchange Offer" and "Plan of Distribution."
Holdings will not receive any proceeds from this offering, and no
underwriter is being utilized in connection with the Exchange Offer. See "Use of
Proceeds."
iii
<PAGE>
THE EXCHANGE OFFER IS NOT BEING MADE TO, NOR WILL HOLDINGS ACCEPT
SURRENDERS FOR EXCHANGE FROM, HOLDERS OF SHARES OF OLD SERIES A SENIOR PREFERRED
STOCK IN ANY JURISDICTION IN WHICH THE EXCHANGE OFFER OR THE ACCEPTANCE THEREOF
WOULD NOT BE IN COMPLIANCE WITH THE SECURITIES OR BLUE SKY LAWS OF SUCH
JURISDICTION.
Prior to the Exchange Offer, there has previously been only a limited
secondary market and no public market for the Old Series A Senior Preferred
Stock. If a market for the New Series A Senior Preferred Stock should develop,
the shares of New Series A Senior Preferred Stock could trade at a discount from
their liquidation preference. Holdings does not intend to list the shares of New
Series A Senior Preferred Stock on a national securities exchange or to apply
for quotation of the shares of New Series A Senior Preferred Stock through the
National Association of Securities Dealers Automated Quotation System. There can
be no assurance that an active public market for the New Series A Senior
Preferred Stock will develop.
This Prospectus includes "forward-looking statements" within the meaning
of Section 27A of the Securities Act and Section 21E of the Securities and
Exchange Act of 1934, as amended (the "Exchange Act"), including statements
containing the words "believes," "anticipates," "expects" and words of similar
import. All statements other than statements of historical fact included in this
Prospectus, including, without limitation, the statements under "Prospectus
Summary," "Risk Factors," "Management's Discussion and Analysis of Financial
Condition and Results of Operations," "Business" and elsewhere herein, regarding
Holdings, the Company or any of the transactions described herein, including the
timing, financing, strategies and effects of such transactions, are
forward-looking statements. Although Holdings believes that the expectations
reflected in such forward-looking statements are reasonable, it can give no
assurance that such expectations will prove to have been correct. Important
factors that could cause actual results to differ materially from expectations
are disclosed in this Prospectus, including, without limitation, in conjunction
with the forward-looking statements in this Prospectus and/or under "Risk
Factors." Holdings does not intend to update these forward-looking statements.
iv
<PAGE>
AVAILABLE INFORMATION
Holdings has filed with the Commission a Registration Statement (which
term shall include any amendment, exhibit, schedule and supplement thereto) on
Form S-4 under the Securities Act for the registration of the shares of New
Series A Senior Preferred Stock and Exchange Debentures offered hereby. This
Prospectus, which constitutes a part of the Registration Statement, does not
contain all of the information set forth in the Registration Statement, certain
items of which are omitted as permitted by the rules and regulations of the
Commission. For further information with respect to Holdings and such
securities, reference is hereby made to the Registration Statement, including
the exhibits and schedules thereto. Statements made in this Prospectus
concerning the contents of any contract, agreement or other document referred to
herein are not necessarily complete. With respect to each such contract,
agreement or other document filed with the Commission as an exhibit to the
Registration Statement, reference is hereby made to the exhibit for a more
complete description of the matter involved, and each such statement shall be
deemed qualified in its entirety by such reference. The Registration Statement
and the exhibits and schedules thereto filed by Holdings with the Commission may
be inspected and copied at the Commission at Room 1024, Judiciary Plaza, 450
Fifth Street, N.W., Washington, D.C. 20549, and at the following regional
offices of the Commission: 7 World Trade Center, Suite 1300, New York, New York
10048; and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661-2511. Copies of such information can be obtained from the Public
Reference Section of the Commission, 450 Fifth Street, N.W., Washington, D.C.
20549, at prescribed rates. The Commission maintains a web site that contains
reports, proxy and other information statements and other materials that are
filed through the Commission's Electronic Data Gathering, Analysis and Retrieval
System. The Web site can be accessed at http://www.sec.gov.
Holdings has agreed that if it is not subject to the informational
requirements of Sections 13 or 15(d) of the Exchange Act at any time while the
New Series A Senior Preferred Stock or Exchange Debentures constitute
"restricted securities" within the meaning of the Securities Act, it will
furnish to holders and beneficial owners of such securities and to prospective
purchasers designated by such holders the information required to be delivered
pursuant to Rule 144A(d)(4) under the Securities Act to permit compliance with
Rule 144A in connection with resales of such securities.
v
<PAGE>
TABLE OF CONTENTS
Page
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Available Information................................................... v
Prospectus Summary...................................................... 1
Risk Factors............................................................ 15
The Exchange Offer...................................................... 23
The Transactions........................................................ 31
Dividend Policy......................................................... 33
Use of Proceeds......................................................... 34
Capitalization.......................................................... 35
Unaudited Pro Forma Combined Financial Information...................... 37
Selected Historical and Pro Forma Combined Financial Data............... 45
Management's Discussion and Analysis of Financial Condition and
Results of Operations.................................................. 47
Business................................................................ 53
Management.............................................................. 64
Security Ownership of Certain Beneficial Owners and Management.......... 72
Certain Relationships and Related Transactions.......................... 73
Description of New Credit Facility...................................... 77
Description of the Surety Arrangement................................... 78
The Senior Note Offering................................................ 79
Description of New Series A Senior Preferred Stock and Exchange
Debentures............................................................. 81
Preferred Stock Exchange Offer; Registration Rights..................... 123
Description of the Other Capital Stock.................................. 125
Book-Entry, Delivery and Form........................................... 130
Certain U.S. Federal Income Tax Consequences............................ 133
Plan of Distribution.................................................... 142
Experts................................................................. 143
Legal Matters........................................................... 143
Index to Financial Statements........................................... F-1
vi
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information and combined financial
statements, including notes thereto, appearing elsewhere in this Prospectus. The
"Transactions," which closed on March 30, 1998, consist of the Recapitalization,
the Financings and the October 1997 Drop Down (each as defined herein). Holdings
is a holding company, with no material operating assets, that conducts its
business operations through its direct wholly-owned subsidiary Morris Material
Handling, Inc. ("MMH"). For purposes of this Prospectus, unless the context
requires otherwise, references to the "Company" are to MMH, its subsidiaries and
their predecessors. For periods prior to March 30, 1998, references to the
Company are to the "through-the-air" material handling equipment business (the
"MHE Business") of Harnischfeger Corporation ("HarnCo") and those subsidiaries
and affiliates of HarnCo that were engaged therein. For purposes of this
Prospectus, it is assumed that Holdings has historically owned the capital stock
of MMH, that all of the assets of the MHE Business were owned by subsidiaries
thereof and that, immediately prior to the consummation of the Recapitalization,
the historical combined financial statements of Holdings were identical to those
of the Company which are presented herein. The Company's fiscal year ends
October 31. Consequently, any reference to any particular fiscal year means the
fiscal year ended October 31 of such year.
The Company
The Company is a leading international provider of "through-the-air"
material handling products and services used in most manufacturing industries.
The Company's original equipment operations design and manufacture a
comprehensive line of industrial cranes, hoists and other component products,
sold principally under the P&H and Morris brand names. Through its aftermarket
operations, the Company provides a variety of related products and services,
including replacement parts, repair and maintenance services and product
modernizations. In recent years, the Company has shifted its orientation from an
original equipment-focused United States manufacturer to an international full
service provider with a significant emphasis on the high margin aftermarket
business.
During the past three years, the Company has grown significantly, both
internally and through acquisitions. From fiscal 1994 through fiscal 1997, the
Company's net sales grew from $109.4 million to $353.4 million and EBITDA (as
defined herein) increased from $15.1 million to $45.9 million. Management
believes that this growth is largely attributable to (i) strengthening and
broadening its product line, (ii) building a network of Company-owned
distribution and service centers ("DSCs") which provides a local presence for
product support and a platform for growth and (iii) expanding into attractive
domestic and international markets through internal growth and a disciplined
acquisition strategy.
The Company's core business was founded in 1884 and material handling
machinery and related equipment have been sold under the well-recognized P&H and
Morris brand names since the 1890s. The Company has developed a large global
installed base of equipment, having sold an aggregate of over half a million
cranes and hoists according to management estimates. Management believes that
the Company is one of the leading suppliers of industrial overhead cranes in
North America, the United Kingdom and South Africa. Management also believes
that the Company is one of the largest global providers of aftermarket products
and services to the industrial crane industry. Sales outside of North America
accounted for 39% of fiscal 1997 net sales, with Western Europe representing 22%
and the Pacific Rim representing 8% of net sales.
Industrial cranes and hoists are critical to the operations of most
businesses that require the movement of large or heavy objects. The steel,
aluminum, paper and forest products, aerospace, foundry, and automotive
industries, among others, rely on cranes and hoists as one of the most flexible
and efficient methods of transporting materials within a plant while maximizing
the use of available space. Industrial cranes, which typically last 20 to 50
years, require significant aftermarket support in the form of replacement parts,
machine modernizations and upgrades, repairs, and inspection and maintenance
services.
The current management team has implemented a strategy to capitalize on
the Company's significant global installed base of equipment to generate high
margin aftermarket opportunities. The Company has built its aftermarket
operations in order to become a full service provider and capture additional
revenue. In addition,
1
<PAGE>
management believes that the diversified earnings created by this strategy help
to lessen the effect of economic cycles on the Company. In fiscal 1997,
aftermarket sales accounted for approximately 40% of net sales and 65% of gross
profit on a consolidated basis, while in North America, where the Company has
pursued its full service strategy for a longer period of time, the aftermarket
business accounted for 51% of net sales and 72% of gross profit.
Competitive Strengths
Large Installed Base of Existing Equipment. The Company believes it has
one of the largest installed bases of industrial cranes in North America, the
United Kingdom and South Africa. This installed base provides the Company with
well-established relationships and a strong platform upon which to pursue high
margin aftermarket opportunities. A large portion of the Company's installed
base is used in demanding process industries which require frequent replacement
parts, repairs, inspection services and modernizations.
Stable Aftermarket Demand and Earnings. Material handling products are
critical to customers' operations. As long as industrial plants continue to
operate, the cranes and hoists used in such facilities will require replacement
parts and maintenance services, irrespective of economic cycles. Management has
increased its focus on aftermarket operations, and this more stable business
represented 65% of the Company's gross profit in fiscal 1997.
Diverse Customer Base. The Company sells both original equipment and
aftermarket products and services to thousands of customers operating in various
manufacturing industries in more than 50 countries. Management believes that
this geographic and industry diversity helps to lessen the effect on the Company
of economic cycles that may affect a particular region or industry.
Reputation for Reliability and Engineering Expertise. Over its long
history of providing custom engineered cranes and hoists, the Company has
developed a reputation for engineering expertise and product reliability. As the
Company has developed a number of innovative technologies, it has enhanced its
reputation and built a platform to pursue the higher volume standard crane
market. In addition, the Company has been able to apply its proven technical
skills in the aftermarket business.
Company-Owned Distribution and Service Network. The Company has developed
an international distribution and service network with 61 Company-owned
locations in key industrial markets. This DSC network is central to the
Company's strategy of being a single source provider of original equipment and
aftermarket products and services. Management believes that ownership of its
primary distribution channel provides the following competitive advantages: (i)
a higher level of control over the delivery of its products and services; (ii)
faster service response time; (iii) quicker delivery of standard cranes at a
lower cost; and (iv) increased sales and margins by capturing the incremental
profit that would otherwise be recognized by independent distributors.
Experienced Management Team. The Company is run by an experienced,
entrepreneurial and talented management team led by its President,
Michael Erwin. The top seven executives combined have over 100 years of
experience at the Company. Mr. Erwin has run the Company since December 1994
and, along with the rest of the senior management team, has developed and
implemented the Company's successful growth strategies. In acquiring 12
companies since 1994, management has demonstrated its ability to acquire and
integrate businesses in a disciplined and effective manner. Under current
management's leadership, EBITDA has grown at a compound average annual rate of
approximately 45% from fiscal 1994 through fiscal 1997.
2
<PAGE>
Business Strategy
Management has developed an integrated strategy designed to increase
revenues and profits by capitalizing on the Company's large installed base of
equipment, Company-owned distribution and service network and technical
competencies to capture greater market share and differentiate the Company from
original equipment-focused competitors.
The key components of the Company's strategy are as follows:
Focus on Aftermarket Opportunities. The United States industrial crane and
hoist aftermarket is estimated to be $1.2 billion annually and management
estimates the global aftermarket to be several times that amount. This market is
highly fragmented and a substantial portion of repair and maintenance work is
performed by customers' own maintenance personnel. A recent independent study
indicates that the Company currently captures approximately 25% of the United
States aftermarket potential of its own installed base and less than 10% of the
entire United States aftermarket potential. Management has developed a series of
focused marketing programs and product offerings designed to capture a greater
share of the aftermarket business by taking advantage of the Company's large
installed base, brand recognition, and local DSC network. The Company is
beginning to see the benefits of these efforts and aftermarket sales have
increased in each of the last four years.
Provide High Level of Customer Support. The Company's products and
services are designed to meet its customers' objectives of lowering their
material handling costs and increasing the efficiency of their operations. The
Company's goal is to help its customers reduce costs and increase profitability
through the proper selection, design, manufacture and installation of original
equipment and by providing a wide variety of aftermarket products and services.
Management believes that this ability to provide comprehensive solutions to its
customers' needs is a competitive advantage.
Expand DSC Network. The Company's DSCs are its platform for growth and
central to its strategy of being a single source provider of original equipment
and aftermarket products and services. The Company's North American DSC network
covers a broad territory of geographically dispersed customers. The Company
plans to continue developing this network with the goal of having a DSC in each
key industrial market in North America. The Company has developed similar DSC
networks in the United Kingdom and South Africa, and management plans to
replicate this model in other attractive markets.
Improve Production Efficiency to Reduce Costs. Management has implemented
numerous efficiency initiatives that it believes will improve the Company's
competitiveness while enhancing profit margins. The Company is completing the
re-engineering of various operations to cellular manufacturing. In addition, the
Company has standardized a number of its proprietary components which it
manufactures at specialized facilities for global distribution. Management
believes these initiatives will enable the Company to lower its overall cost
structure by reducing labor, engineering, and fabrication expenses and to
achieve economies of scale and permit faster deliveries. In the United States,
the lead time required to deliver certain original equipment was reduced by as
much as 50% in fiscal 1997.
Increase Sales of High Volume Original Equipment Products. The Company
plans to continue increasing its penetration of the higher volume and more
stable market for standard cranes and hoists by: (i) capitalizing on its brand
equity in engineered cranes; (ii) reducing costs; and (iii) improving delivery
times. The Company has tripled the number of standard cranes it has sold in the
United States during the past three years, yet its share of the United States
standard crane market in fiscal 1997 was still less than 15%.
Expand Through Selected Acquisitions. The global material handling
industry is highly fragmented and is beginning to consolidate as a result of the
scale economies that favor larger competitors. Management believes that the
Company is well positioned to capitalize on this opportunity. Since July 1994,
the Company has acquired 12 businesses, including Morris Mechanical Handling
Ltd.'s ("Morris Ltd.") operations in the United Kingdom and South Africa, which
collectively generated annual revenues in excess of $170.0 million in fiscal
1997. The Company plans to continue making strategic acquisitions to penetrate
new markets and expand the range of its product and service offerings.
3
<PAGE>
The Transactions
On March 30, 1998, in conjunction with the recapitalization (the
"Recapitalization") of Holdings, Holdings sold 57,710 Units (the "Series A
Units"), each consisting of one share of Old Series A Senior Preferred Stock and
0.012476 shares of non-voting common stock (the "Unit Common Stock"), to certain
institutional investors (the "Offering"). In the Recapitalization, MHE
Investments, Inc. ("MHE Investments"), a newly formed affiliate of Chartwell
Investments Inc., together with the purchasers of the Series A Units and HarnCo,
invested new and continuing equity capital of $126.0 million in Holdings (the
"Equity Investment").
The proceeds of the Equity Investment, together with approximately $55.0
million of aggregate borrowings by the Company under a senior secured credit
facility (the "New Credit Facility") entered into in connection with the
consummation of the Recapitalization (the "Recapitalization Closing") and
approximately $200.0 million in aggregate proceeds from the Senior Note Offering
(as defined herein, and together with the Equity Investment and the New Credit
Facility, the "Financings"), were used (i) to finance the Recapitalization, (ii)
to make loans to management to acquire indirect equity interests in Holdings,
(iii) for general corporate purposes and (iv) to pay approximately $23.5 million
of fees and expenses. See "Use of Proceeds." The Recapitalization consideration
consisted of (i) $336.0 million in cash that was paid to HarnCo (subject to
potential post-Recapitalization Closing adjustments as to which an additional
$5.0 million was provided to HarnCo at the Recapitalization Closing) and (ii)
$12.0 million of continuing equity capital that was retained by HarnCo.
The Recapitalization was effectuated pursuant to an agreement (the
"Recapitalization Agreement") among MHE Investments, HarnCo and certain of
HarnCo's affiliates (together with HarnCo, the "HarnCo Parties"). In the
Recapitalization, (i) MHE Investments acquired approximately 88.2% of the voting
power of Holdings, (ii) the Company acquired, directly or indirectly, all of the
equity interests of the entities engaged in the MHE Business that were
previously owned by the HarnCo Parties and (iii) HarnCo received the cash
Recapitalization consideration.
MHE Investments owns approximately 72.6% of the common stock of Holdings
(the "Common Stock") and approximately $28.9 million liquidation preference of
the 12 1/2% Series C Junior Exchangeable Voting Preferred Stock of Holdings (the
"Series C Junior Voting Preferred Stock") and HarnCo owns approximately 20.8% of
the Common Stock and approximately $4.8 million liquidation preference of the 12
1/4% Series B Junior Exchangeable Preferred Stock of Holdings (the "Series B
Junior Preferred Stock"). The Series A Units constitute the remaining equity
interests of Holdings and consist of non-voting stock representing approximately
6.6% of the Common Stock and approximately $57.7 million liquidation preference
of the Old Series A Senior Preferred Stock. See "The Transactions" and
"Capitalization."
In connection with the Recapitalization, the Company entered into a
Trademark License Agreement with an affiliate of HarnCo, pursuant to which the
Company has the right to use the P&H trademark with respect to all MHE Business
products on a worldwide exclusive basis from the date of the Recapitalization
Closing until 15 years after the earlier to occur of a sale of Holdings to a
third party or a public offering of the common stock of Holdings, the Company or
their parents or successors (and for an additional seven years thereafter for
aftermarket products and services). The royalty fee for use of the trademark is
0.75% of the aggregate net sales of the MHE Business for the ten year period
commencing 12 months after the Recapitalization Closing. There will be no
royalty fee for the remainder of the term. The Company also entered into a
number of agreements pursuant to which HarnCo will continue to provide, on an
interim basis, certain supplies, products and services to the Company and its
subsidiaries located in the United States on substantially similar terms and
conditions to those historically provided. See "Certain Relationships and
Related Transactions."
---------------------
Holdings' principal executive offices are located at 4915 South Howell
Avenue, 2nd Floor, Milwaukee, Wisconsin 53207, telephone number (414) 486-6100.
4
<PAGE>
Summary of Terms of the Exchange Offer
The Exchange Offer relates to the exchange of up to $57,710,000 aggregate
liquidation preference of Old Series A Senior Preferred Stock for up to an equal
aggregate liquidation preference of New Series A Senior Preferred Stock. The
shares of New Series A Senior Preferred Stock will be obligations of Holdings
governed by the Restated Certificate. The form and terms of the shares of New
Series A Senior Preferred Stock are identical in all material respects to the
form and terms of the shares of Old Series A Senior Preferred Stock except (i)
that the shares of New Series A Senior Preferred Stock have been registered
under the Securities Act, (ii) that the shares of New Series A Senior Preferred
Stock are not entitled to certain registration rights which are applicable to
the shares of Old Series A Senior Preferred Stock under the Exchange Offer
Registration Rights Agreement and (iii) for certain contingent interest rate
provisions. The shares of Old Series A Senior Preferred Stock and the shares of
New Series A Senior Preferred Stock are together referred to herein as the
"Series A Senior Preferred Stock." See "Description of New Series A Senior
Preferred Stock and Exchange Debentures."
The Exchange Offer .............. $1,000 liquidation preference of New Series A
Senior Preferred Stock will be issued in
exchange for each $1,000 liquidation
preference of Old Series A Senior Preferred
Stock validly tendered pursuant to the
Exchange Offer. As of the date hereof,
$57,710,000 in aggregate liquidation
preference of Old Series A Senior Preferred
Stock is outstanding. The exchange of New
Series A Senior Preferred Stock for Old
Series A Senior Preferred Stock will be made
(i) with respect to all Old Series A Senior
Preferred Stock validly tendered and not
withdrawn on or prior to the Early Exchange
Date, within two business days following the
Early Exchange Date, and (ii) with respect to
all Old Series A Senior Preferred Stock
validly tendered and not withdrawn on or
prior to the Expiration Date, within two
business days following the Expiration Date.
The Old Series A Senior Preferred Stock was
originally issued in a private placement. As
a condition to the purchase of the Old Series
A Senior Preferred Stock, the Initial
Purchaser required that Holdings make a
registered offer to exchange the Old Series A
Senior Preferred Stock for other securities
substantially similar to the Old Series A
Senior Preferred Stock. The Exchange Offer is
being made to satisfy this contractual
obligation of Holdings.
Resale .......................... Based on an interpretation by the staff of
the Commission set forth in no-action letters
issued to unrelated third parties, Holdings
believes that shares of New Series A Senior
Preferred Stock issued pursuant to the
Exchange Offer in exchange for shares of Old
Series A Senior Preferred Stock may be
offered for resale and resold or otherwise
transferred by holders thereof (other than
any Restricted Holder) without compliance
with the registration and prospectus delivery
provisions of the Securities Act, provided
that such shares of New Series A Senior
Preferred Stock are acquired in the ordinary
course of such holders' business and such
holders are not participating, do not intend
to participate and have no arrangement or
understanding with any person to participate,
in the distribution of such shares of New
Series A Senior Preferred Stock. See "K-III
Communications Corporation," SEC No Action
Letter (available May 14, 1993); "Mary Kay
Cosmetics, Inc.," SEC No-Action Letter
(available June 5, 1991); "Morgan Stanley &
Co., Incorporated," SEC No-Action Letter
(available June 5, 1991); and "Exxon Capital
Holdings Corporation," SEC No-Action Letter
(available May 13, 1988). Each broker-dealer
that receives shares of New Series A Senior
Preferred Stock for its own account in
exchange for shares of Old Series A Senior
Preferred Stock, where such shares of Old
Series A Senior Preferred Stock were acquired
by such broker-
5
<PAGE>
dealer as a result of market-making
activities or other trading activities, must
acknowledge that it will deliver a prospectus
in connection with any resale of such shares
of New Series A Senior Preferred Stock. See
"Plan of Distribution."
If any person were to participate in the
Exchange Offer for the purpose of
distributing securities in a manner not
permitted by the preceding paragraph, such
person (i) could not rely on the position of
the staff of the Commission enunciated in
"Exxon Capital Holdings Corporation" and (ii)
must comply with the registration and
prospectus delivery requirements of the
Securities Act in connection with a secondary
resale transaction. Therefore, each holder of
shares of Old Series A Senior Preferred Stock
who accepts the Exchange Offer must represent
in the Letter of Transmittal that it meets
the conditions described above. See "The
Exchange Offer--Terms of the Exchange Offer."
Early Exchange Date ............. All shares of Old Series A Senior Preferred
Stock validly tendered and not withdrawn on
or prior to 5:00 p.m. New York City time, on
, 1998 (the "Early Exchange
Date") will be exchanged for shares of New
Series A Senior Preferred Stock within two
business days following the Early Exchange
Date.
Expiration Date ................. 5:00 p.m., New York City time, on ,
1998 unless the Exchange Offer is extended,
in which case the term "Expiration Date"
means the latest date and time to which the
Exchange Offer is extended. See "The Exchange
Offer--Terms of the Exchange
Offer--Expiration Date; Extensions;
Amendments."
Accrued Dividends on the New
Series A Senior Preferred Stock
and the Old Series A Senior
Preferred Stock ................. The shares of New Series A Senior Preferred
Stock will accrue dividends from March 30,
1998, the date of issuance of the Old Series
A Senior Preferred Stock. Holders of shares
of Old Series A Senior Preferred Stock whose
shares of Old Series A Senior Preferred Stock
are accepted for exchange will be deemed to
have waived the right to receive any payment
in respect of interest on such shares of Old
Series A Senior Preferred Stock accrued from
March 30, 1998 until the date of the issuance
of the shares of New Series A Senior
Preferred Stock. See "The Exchange
Offer--Accrual of Dividends on the New Series
A Senior Preferred Stock."
Conditions to the Exchange
Offer ........................... Holdings will not be obligated to consummate
the Exchange Offer if the shares of New
Series A Senior Preferred Stock to be
received will not be tradeable by the holder,
other than in the case of Restricted Holders,
without restriction under the Securities Act
and the Exchange Act and without material
restrictions under the blue sky or securities
laws of substantially all of the states of
the United States. This condition may be
waived by Holdings. See "The Exchange
Offer--Conditions."
No federal or state regulatory requirements
must be complied with or approvals obtained
in connection with the Exchange Offer, other
than the registration provisions of the
Securities Act and any applicable
registration or qualification provisions of
state securities laws.
6
<PAGE>
Procedure for Tendering
Shares of Old Series A Senior
Preferred Stock ................. Each holder of shares of Old Series A Senior
Preferred Stock wishing to accept the
Exchange Offer must complete, sign and date
the Letter of Transmittal, or a facsimile
thereof, in accordance with the instructions
contained herein and therein, and mail or
otherwise deliver such Letter of Transmittal,
or such facsimile, together with the shares
of Old Series A Senior Preferred Stock
(unless such tender is being effected
pursuant to the procedures for book-entry
transfer described below) to be exchanged and
any other required documentation to the
Exchange Agent (as defined herein) at the
address set forth herein and therein. See
"The Exchange Offer--Procedure for
Tendering."
Special Procedures for
Beneficial Holders .............. Any beneficial holder whose shares of Old
Series A Senior Preferred Stock are
registered in the name of his broker, dealer,
commercial bank, trust company or other
nominee and who wishes to tender in the
Exchange Offer should contact such registered
holder promptly and instruct such registered
holder to tender on his behalf. If such
beneficial holder wishes to tender on his own
behalf, such beneficial holder must, prior to
completing and executing the Letter of
Transmittal and delivering his shares of Old
Series A Senior Preferred Stock, either make
appropriate arrangements to register
ownership of the shares of Old Series A
Senior Preferred Stock in such holder's name
or obtain a properly completed bond power
from the registered holder. The transfer of
record ownership may take considerable time.
See "The Exchange Offer--Procedure for
Tendering."
Guaranteed Delivery Procedures .. Holders of shares of Old Series A Senior
Preferred Stock who wish to tender their
shares of Old Series A Senior Preferred Stock
and whose shares of Old Series A Senior
Preferred Stock are not immediately available
or who cannot deliver their shares of Old
Series A Senior Preferred Stock (or who
cannot complete the procedures for book-entry
transfer on a timely basis) and a properly
completed Letter of Transmittal or any other
documents required by the Letter of
Transmittal to the Exchange Agent prior to
the Early Exchange Date or the Expiration
Date, as the case may be, may tender their
shares of Old Series A Senior Preferred Stock
according to the guaranteed delivery
procedures set forth in "The Exchange
Offer--Guaranteed Delivery Procedures."
Withdrawal Rights ............... Tenders of shares of Old Series A Senior
Preferred Stock may be withdrawn at any time
prior to 5:00 p.m., New York City time, on
the Expiration Date, unless previously
accepted for exchange. See "The Exchange
Offer--Withdrawal of Tenders."
Acceptance of Old Series
A Senior Preferred Stock and
Delivery of New Series A
Senior Preferred Stock .......... Subject to certain conditions (as summarized
above in "Conditions to the Exchange Offer"
and described more fully in "The Exchange
Offer-- Conditions"), Holdings will accept
for exchange any and all shares of Old Series
A Senior Preferred Stock which are validly
tendered in the Exchange Offer prior to 5:00
p.m., New York City time, on each of the
Early Exchange Date and the Expiration Date.
The shares of New Series A Senior Preferred
Stock issued pursuant to the Exchange Offer
will be delivered promptly following each of
the Early Exchange Date
7
<PAGE>
and the Expiration Date. See "The Exchange
Offer--Terms of the Exchange Offer."
Certain Tax Considerations ...... The exchange pursuant to the Exchange Offer
will generally not be a taxable event for
federal income tax purposes. See "Certain
U.S. Federal Income Tax Consequences."
Exchange Agent .................. United States Trust Company of New York, the
Transfer Agent for the Series A Senior
Preferred Stock, is serving as exchange agent
(the "Exchange Agent") in connection with the
Exchange Offer. The address of the Exchange
Agent is: United States Trust Company of New
York, 114 West 47th Street, New York, New
York 10036, Attention: Corporate Trust
Administration. For information with respect
to the Exchange Offer, call 1-800-548-6565.
Use of Proceeds ................. Holdings will not receive any proceeds from
the exchange of the New Series A Senior
Preferred Stock for the Old Series A Senior
Preferred Stock pursuant to the Exchange
Offer. The net proceeds from the sale of the
Old Series A Senior Preferred Stock and the
remaining portion of the Equity Investment,
together with the proceeds of the Senior Note
Offering and borrowings under the New Credit
Facility, were used by Holdings and the
Company (i) to finance the Recapitalization,
(ii) to make loans to management to acquire
indirect equity interests in Holdings, (iii)
for general corporate purposes and (iv) to
pay fees and expenses associated with the
Transactions. See "Use of Proceeds."
8
<PAGE>
Summary Description of the Securities to be Registered
The Series A Senior Preferred Stock
Issuer .......................... MMH Holdings, Inc.
Securities Offered .............. 57,710 shares of 12% Series A Senior
Exchangeable Preferred Stock, par value $.01
per share.
Issue Price ..................... $1,000 per share, plus accumulated and unpaid
dividends.
Liquidation Preference .......... $1,000 per share.
Dividends ....................... The New Series A Senior Preferred Stock will
accumulate dividends from March 30, 1998, the
date of issuance of the Old Series A Senior
Preferred Stock (the "Issue Date"), at an
annual rate of 12% of the liquidation
preference per share, payable semi-annually
in arrears. Dividends may be paid, at
Holdings' option, on any dividend date
occurring on or prior to April 1, 2003,
either in cash or additional shares of New
Series A Senior Preferred Stock having an
aggregate liquidation preference equal to the
amount of such dividend (and, at Holdings'
option, payment of cash in lieu of fractional
shares); thereafter, dividends are payable
only in cash. It is contemplated that
Holdings' sole source of funds to pay
dividends will be cash generated by the
Company. The New Credit Facility and the Note
Indenture (as defined herein) will limit the
ability of the Company to advance funds to
Holdings for the purpose of paying dividends
and the ability of Holdings to pay dividends.
No dividends may be paid in cash on any
preferred stock ranking junior to the New
Series A Senior Preferred Stock, unless cash
dividends on the New Series A Senior
Preferred Stock required to be paid have been
so paid. In addition, no dividends may be
paid in cash on any preferred stock ranking
junior to the New Series A Senior Preferred
Stock during any period when cash dividends
(whether or not required to be so paid) are
not paid on the New Series A Senior Preferred
Stock.
Dividend Payment Dates .......... April 1 and October 1, commencing October 1,
1998.
Optional Redemption ............. The New Series A Senior Preferred Stock will
be redeemable at the option of Holdings, in
whole or in part, at any time on or after
April 1, 2003 at the redemption prices set
forth herein, plus accumulated and unpaid
dividends thereon to the redemption date. In
addition, Holdings may redeem all, but not
less than all, of the New Series A Senior
Preferred Stock at any time and from time to
time prior to April 1, 2001, at a redemption
price equal to 112.0% of the aggregate
liquidation preference thereof, plus
accumulated and unpaid dividends thereon to
the redemption date, with the Net Proceeds of
one or more Public Equity Offerings; provided
that such redemption occurs within 90 days
following the closing of any such Public
Equity Offering.
9
<PAGE>
Mandatory Redemption ............ Holdings is required, subject to certain
conditions, to redeem all of the New Series A
Senior Preferred Stock outstanding on April
1, 2009 at a redemption price equal to 100%
of the liquidation preference thereof, plus
accumulated and unpaid dividends to the date
of redemption.
Voting .......................... The New Series A Senior Preferred Stock will
be non-voting, except as otherwise required
by law and except in certain circumstances
described herein, including (i) amending
certain rights of the holders of New Series A
Senior Preferred Stock and (ii) the issuance
of any class or series of capital stock that
ranks on a parity with or senior to the New
Series A Senior Preferred Stock. Upon the
occurrence of a Voting Rights Triggering
Event (as defined herein), the holders of a
majority of the aggregate outstanding shares
of Series A Senior Preferred Stock and Series
B Junior Preferred Stock (to the extent there
exists a Voting Rights Triggering Event with
respect thereto), voting as a single class,
will be entitled to elect the lesser of two
directors and that number of directors
constituting 25% of the members of the board
of directors of Holdings until such time, in
the case of a dividend default, as all
accumulated and unpaid dividends on the
Series A Senior Preferred Stock have been
fully paid in cash, and in all other cases,
any failure, breach or default giving rise to
such voting rights is remedied, cured or
waived by the holders of at least a majority
of the then outstanding shares of Series A
Senior Preferred Stock and Series B Junior
Preferred Stock. A Voting Rights Triggering
Event shall mean: (i) a failure to pay cash
dividends for two or more semi-annual
dividend periods after April 1, 2003; (ii) a
failure to redeem the outstanding shares of
Series A Senior Preferred Stock on or before
April 1, 2009; (iii) a failure to make or
consummate a Change of Control Offer (as
defined herein); or (iv) a breach or
violation of any of the covenants contained
in the Restated Certificate which breach or
violation continues after the expiration of
applicable grace periods.
Exchange Provisions ............. The New Series A Senior Preferred Stock will
be exchangeable for Exchange Debentures, at
Holdings' option, subject to certain
conditions, in whole but not in part, on any
scheduled dividend payment date. The New
Credit Facility will restrict the ability of
Holdings to incur Indebtedness, including the
Exchange Debentures.
Ranking ......................... The New Series A Senior Preferred Stock will,
with respect to dividend rights and rights
upon liquidation, winding-up and dissolution
of Holdings, rank senior to all other classes
or series of capital stock of Holdings.
Change of Control ............... Upon a Change of Control, Holdings will,
subject to certain conditions, be required to
make an offer to purchase all outstanding
shares of New Series A Senior Preferred Stock
at a price equal to 101% of the liquidation
preference thereof, plus accumulated and
unpaid dividends thereon to the purchase
date. There can be no assurance that Holdings
will have sufficient funds to purchase all of
the New Series A Senior Preferred Stock in
the event of a Change of Control or that
Holdings would be able to obtain financing
for such purpose on favorable terms, if at
all. If Holdings fails to make or
10
<PAGE>
consummate a Change of Control Offer, the
dividend rate on the New Series A Senior
Preferred Stock will increase by 400 basis
points until such time as the Holdings makes
or consummates a Change of Control Offer.
Certain Restrictive Provisions .. The Restated Certificate contains restrictive
provisions that, among other things, restrict
the ability of Holdings and its Restricted
Subsidiaries (as defined herein) to: (i)
incur additional indebtedness; (ii) pay
dividends and make certain other restricted
payments; (iii) enter into transactions with
affiliates; (iv) issue preferred stock of
subsidiaries; or (v) merge or consolidate, or
otherwise engage, in a transaction involving
all or substantially all of the assets of
Holdings and its Restricted Subsidiaries,
taken as a whole. These restrictive
provisions are subject to a number of
important exceptions.
The Exchange Debentures
Issue ........................... 12% Exchange Debentures due 2009, issuable,
at Holdings' option, in exchange for the New
Series A Senior Preferred Stock in an
aggregate principal amount equal to the
liquidation preference of the New Series A
Senior Preferred Stock so exchanged, plus
accumulated and unpaid dividends to the date
fixed for the exchange thereof (the "Exchange
Date"), plus any additional Exchange
Debentures issued from time to time in lieu
of cash interest.
Maturity ........................ April 1, 2009.
Interest Rate and Payment Dates . The Exchange Debentures will bear interest at
a rate of 12% per annum. Interest will accrue
from the most recent interest payment date to
which interest has been paid or provided for
or, if no interest has been paid or provided
for, from the Exchange Date. Interest will be
payable semi-annually in cash (or, at the
option of Holdings, on or prior to April 1,
2003, in additional Exchange Debentures) in
arrears on each April 1 and October 1,
commencing with the first such date after the
Exchange Date.
Optional Redemption ............. The Exchange Debentures will be redeemable at
the option of Holdings, in whole or in part,
at any time on or after April 1, 2003 at the
redemption prices set forth herein, plus
accrued and unpaid interest thereon to the
redemption date. In addition, Holdings may
redeem all, but not less than all, of the
Exchange Debentures at any time and from time
to time prior to April 1, 2001, at a
redemption price equal to 112% of the
aggregate principal amount thereof, plus
accrued and unpaid interest thereon to the
redemption date with the Net Proceeds of one
or more Public Equity Offerings; provided
that such redemption occurs within 90 days
following the closing of any such Public
Equity Offering.
Ranking ......................... The Exchange Debentures will be subordinated
in right of payment to all existing and
future Senior Indebtedness of Holdings and
will rank pari passu with or senior to all
future Indebtedness of Holdings that
expressly provides that it ranks pari passu
with or junior to the Exchange Debentures, as
the case may be. As of January 31, 1998,
after giving pro forma effect to the
Offering, the application of the net proceeds
therefrom and the Transactions, Holdings and
its
11
<PAGE>
subsidiaries would have had an aggregate of
$259.3 million of Indebtedness outstanding
(including the Company's $200.0 million
principal amount Senior Notes and $55.0
million of borrowings under the New Credit
Facility) in respect of which the Exchange
Debentures will be effectively subordinated.
Borrowings under the New Credit Facility are
guaranteed by Holdings and are secured by
substantially all of the assets of the
Company and its subsidiaries located in the
United States and the United Kingdom, certain
of the assets of the Company's subsidiaries
located in Canada and a pledge of
substantially all of the capital stock of the
Company and its subsidiaries. In addition,
obligations incurred under the Surety
Arrangement are secured by certain assets of
the Company. See "Risk Factors--Substantial
Leverage," "--Ranking of New Series A Senior
Preferred Stock; Subordination of Exchange
Debentures; Pledge of Assets," "--Restrictive
Covenants in the New Credit Facility and Note
Indenture."
Change of Control ............... Upon a Change of Control, Holdings will,
subject to certain conditions, be required to
make an offer to purchase all outstanding
Exchange Debentures at a price equal to 101%
of the principal amount thereof, plus accrued
and unpaid interest thereon to the purchase
date. There can be no assurance that Holdings
will have sufficient funds to purchase all of
the Exchange Debentures in the event of a
Change of Control or that Holdings would be
able to obtain financing for such purpose on
favorable terms, if at all.
Certain Covenants ............... The Exchange Indenture (as defined herein)
will contain covenants that, among other
things, restrict the ability of Holdings and
its Restricted Subsidiaries to: (i) incur
additional indebtedness, including senior
subordinated indebtedness; (ii) pay dividends
and make certain other restricted payments;
(iii) enter into transactions with
affiliates; (iv) transfer or sell assets; (v)
issue stock (including preferred stock) of
subsidiaries; (vi) create dividend or other
payment restrictions affecting Restricted
Subsidiaries; and (vii) merge or consolidate,
or otherwise engage, in a transaction
involving all or substantially all of the
assets of Holdings and its Restricted
Subsidiaries, taken as a whole. These
covenants are subject to a number of
important exceptions.
Asset Sales Proceeds ............ Holdings will be obligated in certain
instances to make offers to purchase the
Exchange Debentures at a purchase price in
cash equal to 100% of the principal amount
thereof plus accrued and unpaid interest to
the date of purchase with the net cash
proceeds of certain asset sales.
For more complete information regarding the New Series A Senior Preferred
Stock and Exchange Debentures, including the definitions of certain capitalized
terms used above, see "Description of New Series A Senior Preferred Stock and
Exchange Debentures."
Risk Factors
Prospective purchasers of the Series A Units should consider carefully the
information set forth under the caption "Risk Factors," and all other
information set forth in this Prospectus, in evaluating an investment in the
Series A Units.
12
<PAGE>
Summary Historical and Pro Forma Combined Financial Data
The summary historical combined financial data as of and for the years
ended October 31, 1997, 1996 and 1995 have been derived from the audited
combined financial statements of the Company. The summary historical combined
financial data as of and for the three months ended January 31, 1998 and 1997
have been derived from the unaudited combined financial statements of the
Company. The summary historical combined financial data as of and for the years
ended October 31, 1994 and 1993 have been derived from unaudited internal
records of the Company. The Company's operations for 1994 and 1993 were
integrated with other Harnischfeger Industries, Inc. ("HII") operations and,
therefore, the financial data for these periods represent management's best
estimate of their operating performance. The unaudited financial data presented
herein, in the opinion of management, includes all necessary adjustments
required for the fair presentation of such data.
The summary pro forma combined financial data of Holdings as of and for
the three months ended January 31, 1998 and for the year ended October 31, 1997
have been prepared to reflect the consummation of the Transactions. The
unaudited pro forma combined balance sheet data of Holdings have been prepared
as if such transactions had occurred as of January 31, 1998 and the unaudited
combined statements of operations of Holdings have been prepared as if such
transactions had occurred on November 1, 1996. The summary pro forma combined
financial data of Holdings are not necessarily indicative of the financial
position or results of operations of Holdings had the Transactions reflected
therein actually been consummated on the dates assumed and are not necessarily
indicative of the financial position or results of operations of Holdings that
may be expected for any future period.
The summary combined financial data should be read in conjunction with
"Unaudited Pro Forma Combined Financial Information," "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and the Combined
Financial Statements of the Company and notes thereto appearing elsewhere
herein.
13
<PAGE>
Summary Historical and Pro Forma Combined Financial Data
(dollars in thousands)
<TABLE>
<CAPTION>
Three Months Ended
Fiscal Year Ended October 31, January 31,
------------------------------------------------------------------ -----------------------------------
Pro Forma Pro Forma
1993(a) 1994(a) 1995 1996 1997 1997 1997 1998 1998
--------- --------- -------- -------- -------- --------- --------- --------- ---------
(unaudited) (unaudited) (unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Income statement data:
Net sales .............. $117,032 $109,429 $243,169 $323,735 $353,350 $353,350 $79,982 $76,483 $76,483
Gross profit ........... N/A N/A 56,765 76,176 92,556 92,556 19,190 19,830 19,830
Operating expenses(b) .. N/A N/A 35,043 46,160 57,019 56,157 12,642 14,873 15,270
-------- -------- -------- -------- -------- -------- ------- ------- -------
Operating income ....... $ 4,781 $ 10,437 21,722 30,016 35,537 36,399 6,548 4,957 4,560
Net income/(loss) ...... N/A N/A $ 13,476 $ 18,446 20,853 $ 5,943 $ 4,011 $ 2,139 (1,603)
======== ======== ======== ======== ======== ======= =======
Dividends on preferred
stock ............... (11,460) (3,129)
-------- -------
Net loss attributable
to Common Stock ..... $ (5,517) $(4,732)
======== =======
Other data:
EBITDA(c) .............. $ 9,341 $ 15,075 $ 28,045 $ 38,220 $ 45,859 $ 43,859 $ 8,925 $ 7,538 $ 6,464
Depreciation and
amortization(d) ..... 2,588 2,981 3,800 5,292 6,736 8,536 1,548 1,659 2,109
Capital expenditures ... 1,419 3,935 3,725 6,752 6,498 6,498 1,744 816 816
Cash interest expense .. 24,703 6,234
Ratio of earnings to
fixed charges and
preferred
dividends(e) ........ N/A N/A 23.21x 23.11x 16.46x -- 21.58x 4.40x --
Adjusted data:
Ratio of EBITDA to
cash interest
expense ............. 1.78x 1.70x(f)
Ratio of pro forma debt
to EBITDA ........... 5.91x 6.19x(f)
<CAPTION>
As of October 31, As of January 31,
------------------------------------------------------ -----------------------------------
Pro Forma
1993(a) 1994(a) 1995 1996 1997 1997 1998 1998
--------- --------- -------- -------- -------- --------- --------- ---------
(unaudited) (unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance sheet data:
Working capital ........ N/A N/A $ 17,483 $ 34,523 $ 51,243 $ 37,432 $ 61,552 $ 60,584
Total assets ........... $ 66,667 $126,566 151,168 189,058 199,600 193,633 200,379 290,144
Total debt ............. N/A N/A 4,704 2,044 6,088 3,348 4,289 259,289
Mandatorily redeemable
preferred stock ..... 91,374
</TABLE>
- ----------
(a) Prior to 1995, the Company did not determine its financial position or
results of operations on a stand alone basis as its financial and
management reporting information was commingled with other operating
divisions of HII. As a result, the Company's summary data as of and for
the years ended October 31, 1994 and 1993 is limited and certain
historical financial data is not available.
(b) Operating expenses are shown net of other income.
(c) EBITDA is defined as operating income before depreciation, amortization,
the allocation of certain HII corporate overhead charges (the "HII
Management Fee") and charges related to certain depreciation expenses for
HarnCo assets. For fiscal 1997 and the three months ended January 31,
1998, the HII Management Fee was $2,862 and $677, respectively, and the
charges related to certain depreciation expenses for HarnCo assets were
$724 and $245, respectively. Pro forma EBITDA represents operating income
before depreciation, amortization and the charges related to certain
depreciation expenses for HarnCo assets. EBITDA is not a calculation based
on generally accepted accounting principles. EBITDA should not be
considered as an alternative to net income or operating income, as an
indicator of the operating performance of Holdings or as an alternative to
operating cash flows as a measure of liquidity.
(d) Pro forma includes $1,800 and $450 of amortization of debt issuance costs
for fiscal 1997 and the three months ended January 31, 1998, respectively.
(e) For purposes of calculating the ratio of earnings to fixed charges and
preferred dividends, earnings are defined as net income before tax plus
fixed charges. Fixed charges consist of interest expense (including
amortization of debt issuance costs) and the portion of rental expense
that is representative of the interest factor (deemed to be one third of
annual rent expense). Preferred dividends, for purposes of the ratio,
reflect earnings before tax required to pay preferred stock dividends and
assume that such dividends are paid in kind. For the year ended October
31, 1997 and for the three months ended January 31, 1998 Holdings had a
deficiency of pro forma earnings to fixed charges of $9,204 and $7,339,
respectively.
(f) Reflects a pro forma calculation for the twelve months ended January 31,
1998.
14
<PAGE>
RISK FACTORS
In addition to the other information in this Prospectus, the following
risk factors should be considered carefully in evaluating Holdings and its
business before making an investment in the New Series A Senior Preferred Stock.
This Prospectus contains forward-looking statements which involve risks and
uncertainties. Holdings' actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including those set forth in the following risk factors and elsewhere in this
Prospectus.
Substantial Leverage
Holdings and its subsidiaries have incurred significant debt in connection
with the Transactions. As of January 31, 1998, after giving pro forma effect to
the Transactions, including the Senior Note Offering and borrowings incurred
under the New Credit Facility, Holdings and its subsidiaries would have had an
aggregate of approximately $259.3 million of outstanding Indebtedness (all of
which will be direct obligations of substantially all of its subsidiaries). The
New Credit Facility, which is guaranteed by Holdings, also permits additional
Indebtedness by the Company of up to $100.0 million thereunder. In addition, the
Surety Arrangement provides a surety line of $60.0 million to the Company. See
"Description of the New Credit Facility" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and Capital
Resources." In addition, subject to certain restrictions in the New Credit
Agreement and the indenture governing the Senior Notes (the "Note Indenture"),
the Company and its subsidiaries may incur additional indebtedness from time to
time to finance acquisitions, provide for working capital or capital
expenditures or other purposes.
The level of Holdings' consolidated indebtedness (including the
Indebtedness of the Company and its subsidiaries) could have important
consequences to holders of the New Series A Senior Preferred Stock, including,
but not limited to, the following: (i) the ability of the Company to obtain
additional financing for acquisitions, working capital, capital expenditures or
other purposes, if necessary, may be impaired or such financing may not be
available on terms favorable to the Company; (ii) the Company will have
significant cash requirements for debt service; (iii) financial and other
covenants and operating restrictions imposed by the terms of the Note Indenture
and by the New Credit Facility will limit, among other things, its ability to
borrow additional funds or to dispose of assets; (iv) the Company may be at a
competitive disadvantage because it will be more highly leveraged than some of
its competitors; and (v) a downturn in the Company's businesses will have a more
significant impact on its results of operations and cash flows.
The ability of the Company to satisfy its obligations, including payment
obligations under the New Credit Facility, as to which principal payments will
commence on June 30, 1998, the Senior Notes and any payments to Holdings to
satisfy its cash needs, will be primarily dependent upon the future financial
and operating performance of the Company's subsidiaries and, if needed, upon the
Company's ability to renew or refinance borrowings or to raise additional equity
capital. In addition, although the New Credit Facility includes the Revolving
Credit Facility (as defined herein), future borrowings thereunder are subject to
satisfaction of certain conditions, including a borrowing base test. Each of
these alternatives is dependent upon financial, business and other general
economic factors affecting the Company and its subsidiaries and the Company's
businesses in particular, many of which are beyond their control. If the Company
and its subsidiaries are unable to generate sufficient cash flow to meet their
debt service obligations and satisfy Holdings' cash requirements, including any
future cash dividend requirements to the holders of its preferred stock, they
will have to pursue one or more alternatives, such as reducing or delaying
capital expenditures, refinancing debt or selling assets. There can be no
assurance that any such alternatives could be accomplished on satisfactory terms
or that such actions would yield sufficient funds to meet the Company's cash
requirements. While management believes that cash flow from operations will
provide an adequate source of long-term liquidity, a decrease in operating cash
flow resulting from economic conditions, competition or other uncertainties
beyond the Company's control would increase the need for alternative sources of
liquidity. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources."
15
<PAGE>
Holding Company Structure; Reliance and Restrictions on Subsidiaries for Cash
Flow
As a holding company that conducts all of its operations through
subsidiaries, Holdings is dependent on dividends or other payments from its
subsidiaries to satisfy its cash needs, including to pay cash dividends on the
New Series A Senior Preferred Stock, to service any debt including the Exchange
Debentures (if issued) and to redeem the New Series A Senior Preferred Stock or
retire the Exchange Debentures at maturity. Because the subsidiaries are
separate legal entities that have no obligation in respect of the New Series A
Senior Preferred Stock or the Exchange Debentures, in order to pay cash
dividends on the New Series A Senior Preferred Stock, to service the Exchange
Debentures and to redeem the New Series A Senior Preferred Stock or retire the
Exchange Debentures at maturity, Holdings will be required to obtain dividends,
distributions or loans from its subsidiaries, or obtain funds in a public or
private equity or debt offering or enter into a credit facility. However, the
New Credit Facility and the Note Indenture will contain restrictions on the
ability of the Company to pay dividends or make other restricted payments to
Holdings. Moreover, the terms of the New Series A Senior Preferred Stock will
limit Holdings' ability to enter into transactions with affiliates and the New
Credit Facility and the Note Indenture will limit the ability of Holdings to
incur Indebtedness. Any rights of Holdings (and thus the holders of the New
Series A Senior Preferred Stock) and its creditors (including the holders of
Exchange Debentures, if issued) to participate in the assets of any of Holdings'
subsidiaries upon any liquidation or reorganization of any such subsidiary will
be subject to the prior claims of the subsidiary's creditors, including trade
creditors.
Maturity
The $200.0 million principal amount due under the Senior Notes and the
then outstanding borrowings under the New Credit Facility ($55.0 million as of
the Recapitalization Closing) will mature and become due on April 1, 2008 and
April 1, 2005, respectively. Holdings is required, subject to certain
conditions, to redeem the New Series A Senior Preferred Stock on April 1, 2009,
and the Exchange Debentures (if issued) mature on April 1, 2009. Many factors,
certain of which are beyond Holdings' control, will affect its and its
subsidiaries' performance, and, therefore, the ability of Holdings and its
subsidiaries to meet its ongoing obligations to redeem or repay such
obligations.
Ranking of New Series A Senior Preferred Stock; Subordination of Exchange
Debentures; Pledge of Assets
The New Series A Senior Preferred Stock will rank junior in right of
payment to all existing and future liabilities and obligations (whether or not
for borrowed money) of Holdings and senior in right of payment to each other
existing and future classes and series of capital stock issued by Holdings. The
holders of the New Series A Senior Preferred Stock will have no voting rights,
except as otherwise required by law and in certain circumstances described
herein. See "Description of New Series A Senior Preferred Stock and Exchange
Debentures."
The Exchange Debentures will be unsecured obligations of Holdings and will
be subordinated in right of payment to all existing and future Senior
Indebtedness (as defined in the Exchange Indenture) of Holdings. The Exchange
Debentures will also be structurally subordinated to all indebtedness and other
liabilities of Holdings' subsidiaries, including the obligations of the Company
under the New Credit Facility and the Senior Notes. At January 31, 1998, on a
pro forma basis, after giving effect to the Transactions, the aggregate
principal amount of Indebtedness which would have been structurally senior to
the Exchange Debentures would have been $259.3 million. See "--Holding Company
Structure; Reliance and Restrictions on Subsidiaries for Cash Flow."
Restrictive Covenants; Limited Remedies
The Restated Certificate and the Exchange Indenture contain certain
covenants (some of which in the Exchange Indenture may be more restrictive than
those contained in the Restated Certificate) that, among other things, limit the
ability of Holdings, the Company and its subsidiaries to incur additional
indebtedness, pay dividends and make certain other restricted payments, make
investments, repurchase stock, enter into certain
16
<PAGE>
transactions with affiliates, issue capital stock of their subsidiaries,
consolidate or merge with any person in a transaction involving all or
substantially all of the consolidated assets of Holdings, or transfer or sell
all or substantially all of the consolidated assets of Holdings. In addition,
the Exchange Indenture limits the ability of Holdings and its subsidiaries to
consummate certain asset sales and create dividend or other payment restrictions
affecting their subsidiaries. However, in the case of the Series A Senior
Preferred Stock, the only remedies of a holder thereof for any violation of any
of the above covenants will be to elect, voting with the Series B Junior
Preferred Stock as one class, the lesser of two directors and 25% of the board
of directors of Holdings. Holders of the New Series A Senior Preferred Stock
will have no rights to enjoin, accelerate the redemption of the New Series A
Senior Preferred Stock or recover damages arising from, any such breach. MHE
Investments will retain control of Holdings notwithstanding such breach and the
voting rights of the New Series A Senior Preferred Stock arising therefrom. See
"Description of New Series A Senior Preferred Stock and Exchange
Debentures--Certain Covenants."
Restrictive Covenants in the New Credit Facility and Note Indenture
The New Credit Facility and the Note Indenture contain a number of
covenants that, among other things, limit Holdings' and its subsidiaries'
ability to prepay subordinated indebtedness, dispose of certain assets, create
liens, make capital expenditures, make certain investments or acquisitions and
otherwise restrict corporate activities. In addition, the New Credit Facility
limits Holdings' and its subsidiaries' ability to incur indebtedness and the
Note Indenture will limit the Company's and its subsidiaries' ability to incur
indebtedness. The New Credit Facility also requires Holdings and its
subsidiaries to comply with certain financial ratios and tests, under which
Holdings and its subsidiaries are required to achieve and maintain certain
financial and operating results. The ability of Holdings and its subsidiaries to
comply with such provisions may be affected by events beyond Holdings' control.
A breach of any of these covenants would result in a default under the Note
Indenture or the New Credit Facility, or both. In the event of any such default,
the lenders under the New Credit Facility and/or the holders of the Senior Notes
could elect to declare all amounts borrowed under the New Credit Facility and/or
the Senior Notes, as applicable, together with accrued interest thereon, to be
due and payable which would be an event of default under the Surety Arrangement.
There can be no assurance that the Company would have sufficient assets to pay
indebtedness then outstanding under the New Credit Facility, the Senior Notes
and obligations under the Surety Arrangement and have funds remaining to satisfy
any of the dividend payments on, or to redeem, the New Series A Senior Preferred
Stock. Any future refinancing of the New Credit Facility, the Senior Notes or
any future Indebtedness is likely to contain similar restrictive covenants. See
"Description of the New Credit Facility" and "The Senior Note Offering."
Termination of Relationship with Harnischfeger
Historically, the MHE Business operated as one of several operating units
of HII, the owner of all of the capital stock of HarnCo, and accounted for 11%
of net sales and 12% of operating income of HII in fiscal 1997. There can be no
assurance that the change of the relationship with HII will not adversely affect
the Company's ability to attract or retain customers. Additionally, the Company
has been able to draw on the financial, managerial, and administrative resources
of HarnCo and HII, and there can be no assurance that the future unavailability
of such resources will not adversely affect operations of the Company. There can
be no assurance that the Company will not encounter unanticipated problems or
expenses operating as an independent company or that the Company will be able to
achieve results comparable to those achieved by the MHE Business in the past.
HarnCo and its affiliates historically supplied the Company, among other
things, with information services, accounting services, human resources,
warehouse and order processing services. In connection with the
Recapitalization, the Company entered into a Transition Services Agreement,
pursuant to which HarnCo and its affiliates will provide such services to the
Company and its subsidiaries located in the United States for a period of up to
24 months. The Company also entered into a Component and Manufactured Products
Supply Agreement, pursuant to which HarnCo and its affiliates will supply the
Company and its subsidiaries located in the United States with their
requirements for certain manufactured products for a period of up to two years
after the Recapitalization Closing. When these agreements terminate, there can
be no assurance that the Company will be able to enter into
17
<PAGE>
new arrangements on substantially the same terms as those in effect during the
operation of the MHE Business by HarnCo or that the Company will be able to
perform or obtain such services at costs comparable to those currently
anticipated by the Company. See "The Transactions" and "Certain Relationships
and Related Transactions."
Historically, benefits for the Company's employees have been provided by
HII at expense levels lower than expense levels at which the Company would be
able to provide comparable benefits as an independent entity. The Company may be
required to either provide lower benefits to certain segments of its employee
population or incur additional costs to maintain benefit levels, or both. A
reduction in benefits could adversely affect the Company's ability to attract
and retain employees.
The Company also was provided with various forms of credit support by HII
and its affiliates. There can be no assurance that the termination of its
relationship with HarnCo will not adversely affect the Company's ability to
obtain or maintain credit support. See "--Risk of Inability to Obtain Sufficient
Credit Support."
Risk of Inability to Obtain Sufficient Credit Support
Historically, HarnCo and certain affiliates of HarnCo not engaged in the
MHE Business (the "Non-MHE HarnCo Affiliates"), including HII, provided credit
support for the MHE Business. This credit support included HarnCo and the
Non-MHE HarnCo Affiliates: (i) providing working capital; (ii) guaranteeing
financial and performance obligations with respect to customer and supply
contracts and relationships; (iii) providing collateral and credit support with
respect to letters of credit, surety bonds or other arrangements of the MHE
Business; and (iv) otherwise being directly or contingently liable for the MHE
Business's obligations (collectively, the "Credit Support Obligations"). In
addition, prior to the October 1997 Drop Down, a significant portion of the MHE
Business was conducted directly by HarnCo, including the execution of certain
contracts. For the fiscal year ended October 31, 1997, HII had total revenues of
approximately $3.1 billion and operating income of $319.3 million.
HII and the Company have entered into a credit indemnification agreement
(the "Credit Indemnification Agreement") pursuant to which HII will maintain in
place the Credit Support Obligations in existence at the Recapitalization
Closing but have no further duty to extend, renew or enter into any new Credit
Support Obligations (except as to the MHE Business obligations existing at the
Recapitalization Closing). The Company also has entered into a surety
arrangement to provide credit support for the MHE Business (the "Surety
Arrangement"). The Surety Arrangement provides a surety line of $60.0 million,
in the aggregate, with a limit of $20.0 million for any single obligation. See
"Description of the Surety Arrangement."
While Holdings believes that the Surety Arrangement will provide
sufficient credit support to operate the MHE Business, there can be no assurance
that the Surety Arrangement will be sufficient or that the lack of Credit
Support Obligations in the future from HII and its affiliates will not adversely
affect the MHE Business's relationships with existing or potential customers
and, consequently, adversely impact its business plan and operating strategy.
Labor Relations
As of January 31, 1998, the Company had 2,072 employees. Of the Company's
833 hourly employees, approximately 74% are represented by unions, including
approximately 151 employees in the United States. Until the October 1997 Drop
Down, the Company's unionized employees in the United States were represented
under a collective bargaining agreement between HarnCo and the United
Steelworkers of America, Local 1114 ("Local 1114"), which expires August 31,
1998. In conjunction with the restructuring of the MHE Business in anticipation
of its sale, these employees became employees of a newly created subsidiary of
the Company. The Company will honor the collective bargaining agreement as to
its employees through the remainder of its term. Although negotiations with
respect to a new collective bargaining agreement have not yet begun, the Company
contemplates seeking changes in benefit programs. In addition, the Company is a
party to several other agreements with unions representing its international
employees, all of which have one year terms. There can be no assurance that the
Company will be able to successfully negotiate a new collective bargaining
agreement with Local 1114 or any other
18
<PAGE>
collective bargaining agreements upon their expiration without work stoppages.
Management believes that its current relations with its employees are good, and
none of the Company's businesses has experienced a significant strike, slowdown,
or lockout within the last ten years. There can be no assurance, however, that
the Company's relations with its employees will continue to be good or that the
Company will not experience significant work stoppages in the future. See
"Business--Employees."
Product Liability
The Company is periodically subject to product liability claims relative
to its products, which, if successful, could have a material adverse impact on
the Company. The Company has obtained liability insurance coverage that it
believes will be adequate to satisfy claims with respect to events occurring
after the Recapitalization Closing, but there can be no assurance that the
Company will be able to maintain such coverage or obtain alternate coverage in
the future at a reasonable cost, or that such coverage will be sufficient to
satisfy such future claims, if any.
In connection with the October 1997 Drop Down, except as noted below, the
Company assumed all liabilities with respect to product liability claims of the
MHE Business incurred prior to the Recapitalization Closing. While the Company
believes that it will be able to avail itself of HII's third party insurance
with respect to any such product liability damages that exceed the self insured
thresholds, historically (and until the Recapitalization Closing), a significant
level of MHE Business product liability damages (other than with respect to
asbestos damages) has been self insured by HII.
In addition, until the 1980s, HarnCo manufactured brakes that included
lining materials, and used other non-brake components, that contained asbestos.
HarnCo has been and is currently a defendant in numerous asbestos related
lawsuits and, will likely be named in future such actions. The Company has
agreed to indemnify HarnCo and its affiliates with respect to any liabilities in
excess of insurance arising in connection with past and future asbestos
litigation relating to the MHE Business. HII's insurance policies generally
provide insurance coverage for exposures to asbestos through the mid 1980s. To
date, HII's insurer has paid all liabilities relating to asbestos claims (which
amounts have not been material to the MHE Business) but there can be no
assurance such insurers will continue to do so in the future or that there will
be insurance coverage for such claims.
Implementation of Business Strategy; Future Acquisitions
The Company intends to pursue a business strategy of attempting to
increase revenues and cash flow through a combination of expanding its
participation in aftermarket opportunities, expanding its distribution network,
reducing costs and making strategic acquisitions. No assurance can be given that
the Company will be successful in implementing this strategy. See
"Business--Business Strategy." There can be no assurance that the Company will
be able to make acquisitions on terms favorable to the Company. If the Company
completes any such future acquisitions, it may encounter various associated
risks, including the possible inability to integrate an acquired business into
the Company's operations, diversion of management's attention and unanticipated
problems or liabilities, some or all of which could have a material adverse
effect on the Company's operations and financial performance.
Financing of Expansion Program; Capital Expenditures
The Company intends to fund its expansion and other capital expenditures
through a combination of internally generated funds and borrowings under the New
Credit Facility. The Company's expansion may also require additional funds.
There can be no assurance that the Company will be able to obtain such
additional funding. Additionally, the New Credit Facility, the Note Indenture,
the Restated Certificate and the Exchange Indenture (if applicable) contain
certain restrictions on the Company's ability to borrow under the Acquisition
Facility (as defined herein) and the Revolving Credit Facility. If the Company
were unable to borrow under the New Credit Facility or obtain additional
financing, it might have to curtail or halt its expansion program. See
"--Substantial
19
<PAGE>
Leverage," "--Restrictive Covenants in the New Credit Facility and Note
Indenture," "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources" and "Description of the
New Credit Facility."
Risks Related to International Markets
The Company has operations and assets located in Canada, Mexico, the
United Kingdom, South Africa, and Singapore and is establishing joint ventures
in Malaysia and Saudi Arabia. The Company also sells its products through
distributors and agents in over 50 countries, some of which are merely ad hoc
arrangements and may be terminated at any time. International operations expose
the Company to a number of risks, including currency exchange rate fluctuations,
trade barriers, exchange controls, risk of governmental expropriation, political
and legal risks and restrictions, foreign ownership restrictions and risks of
increases in taxes. Furthermore, some foreign jurisdictions have laws limiting
the right and ability of entities organized or operating therein to pay
dividends or remit earnings to affiliated companies unless specified conditions
are met. The inability of the Company, or limitations on its ability, to conduct
its foreign operations or distribute its products internationally could
adversely affect the Company's operations and financial performance.
Competition
The markets in which the Company operates are highly competitive. Both
domestically and internationally, the Company faces competition from a number of
different manufacturers in each of its product lines, some of which have greater
financial and other resources than the Company. The principal competitive
factors affecting the Company include performance, functionality, price, brand
recognition, customer service and support, financial strength and stability, and
product availability. There can be no assurance that the Company will be able to
compete successfully with its existing competitors or with new competitors.
Failure to compete successfully could have a material adverse effect on the
Company's financial condition, liquidity and results of operations. See
"Business--Competition."
Sensitivity to Economic Cycles
The Company's business is affected by the state of the United States and
global economy in general, and by the varying economic cycles of the industries
in which its products are used. There can be no assurance that any future
condition of the United States economy or the economies of the other countries
in which the Company does business will not have an adverse effect on the
Company's business, operations or financial performance.
Control by Chartwell
An affiliate ("Chartwell") of Chartwell Investments Inc. controls
approximately 88.2% of the voting stock of Holdings. As a result, Chartwell has
the power to appoint all but one of the members of the Board of Directors of
Holdings and has sufficient voting power to determine (without consent of
Holdings' other stockholders) the outcome of any corporate transaction or other
matter submitted to the stockholders for approval, including any public
offering, merger, consolidation or sale of substantially all of Holdings'
assets. Consequently, circumstances could arise in which the interests of
Chartwell, as an equity holder, could be in conflict with the interests of the
holders of the New Series A Senior Preferred Stock and, if issued, the Exchange
Debentures.
Dependence on Key Personnel
The Company's future success depends to a significant extent on the
efforts and abilities of members of the Company's senior management team. While
members of the senior management team have signed employment
20
<PAGE>
contracts, the loss of the services of these individuals could have a material
adverse effect on the Company's business, financial condition, and results of
operations. The Company believes that its future success will also depend
significantly upon its ability to attract, motivate, and retain additional
highly skilled managerial personnel. Competition for such personnel is intense,
and there can be no assurance that the Company will be successful in attracting,
assimilating, and retaining the personnel it requires to grow and operate
profitably.
Dependence on Principal Facilities
The Company's principal operations are conducted at certain key
facilities, some of which are the only producers of certain components for the
Company. The Company has not experienced any material disruption of operations
at its key facilities (other than a fire in 1994 at its principal United Kingdom
manufacturing facility in Loughborough, England), but if operations at any of
such facilities were disrupted as a result of equipment failures, natural
disasters, work stoppages or other reasons, the Company's business and results
of operations could be adversely affected. Although the Company believes its
property damage insurance and business interruption insurance is adequate to
provide for reconstruction of its facilities and equipment or mitigate losses
resulting from any production shutdown caused by an insured loss, as necessary,
there can be no assurance that such insurance will be adequate to cover losses
that may occur.
Environmental Matters
The Company is subject to various laws and regulations relating to the
protection of the environment in each of the countries in which it operates.
These laws and regulations often mandate compliance with increasingly stringent
and costly requirements. The Company is not aware of any environmental matters
currently relevant to its business, individually or in the aggregate, that could
be expected to have a material adverse effect upon its financial condition,
except that the Company is awaiting the results of tests to determine compliance
with emission limits for air quality at its Loughborough, England facility,
which became effective in April 1998. The risk of environmental costs and
liabilities, however, is inherent in the Company's past and present operations,
and there can be no assurance that continued compliance with existing or future
requirements, the cost of such compliance and claims for damages to property and
person resulting from the Company's operations will not have a material adverse
effect upon the Company's financial condition or results of operations. See
"Business--Governmental Regulation."
Risk of Inability to Finance a Change of Control
Upon a Change of Control, Holdings is required to offer to repurchase all
outstanding New Series A Senior Preferred Stock at 101% of the liquidation
preference thereof, plus accumulated and unpaid dividends to the date of
repurchase, and all of the outstanding Exchange Debentures (if issued) at 101%
of the principal amount thereof, plus accrued and unpaid interest thereon to
date of purchase, and the Company is required to offer to repurchase all Senior
Notes at 101% of the principal amount thereof, plus accrued and unpaid interest
to the date of repurchase. A Change of Control will trigger an event of default
under the New Credit Facility which would permit the lenders thereto and the
lenders under any agreement containing cross-default or similar provisions,
including the Surety Arrangement, to accelerate the debt thereunder. Therefore,
upon the occurrence of a Change of Control, the Company may be required to repay
such other outstanding indebtedness and to repurchase the Senior Notes and any
other indebtedness and preferred stock of the Company containing similar change
of control provisions, which payments must be made prior to making any
distributions to Holdings. Consequently, there can be no assurance that
sufficient funds will be available at the time of any Change of Control for the
Company to pay such other obligations and to make available to Holdings funds
for any required repurchases of New Series A Senior Preferred Stock or Exchange
Debentures (if issued) tendered. Further, the provisions of the Restated
Certificate may not afford holders of the New Series A Senior Preferred Stock,
and the Exchange Indenture may not afford holders of the Exchange Debentures (if
issued), protection in the event of a highly leveraged transaction,
reorganization, restructuring, merger or similar transaction involving Holdings
that may adversely affect holders of the New
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Series A Senior Preferred Stock or Exchange Debentures (if issued), if the
transaction does not result in a Change of Control.
Absence of Public Market; Restrictions on Transfer
There is no existing trading market for the Old Series A Senior Preferred
Stock, and there can be no assurance regarding the future development of a
market for the New Series A Senior Preferred Stock, or the ability of holders
thereof to sell the same or the price at which such holders may be able to sell
the New Series A Senior Preferred Stock. If such a market were to develop, the
New Series A Senior Preferred Stock or Exchange Debentures, if issued, could
trade at prices that may be higher or lower than the initial offering price
depending on many factors, including prevailing interest rates, Holdings'
operating results and the market for similar securities. The Initial Purchaser
has advised Holdings that it is making a market in the Old Series A Prefered
Stock and that it currently intends to make a market in the New Series A Senior
Preferred Stock and, if issued, in the Exchange Debentures. The Initial
Purchaser is not obligated to do so, however, and any market-making with respect
to such securities may be discontinued at any time without notice. Therefore,
there can be no assurance as to the liquidity of any trading market for such
securities, or that a market therefor will develop. Holdings does not intend to
apply for listing or quotation of the securities on any securities exchange or
stock market.
Consequences of the Exchange Offer on Non-Tendering Holders of the Old Series A
Senior Preferred Stock
Holdings intends for the Exchange Offer to satisfy its registration
obligations under the Exchange Offer Registration Rights Agreement. If the
Exchange Offer is consummated, Holdings does not intend to file further
registration statements for the sale of other disposition of Old Series A Senior
Preferred Stock. Consequently, following completion of the Exchange Offer,
holders of shares of Old Series A Senior Preferred Stock seeking liquidity in
their investment would have to rely on an exemption to the registration
requirements under applicable securities laws, including the Securities Act,
with respect to any sale or other disposition of the shares of Old Series A
Senior Preferred Stock.
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THE EXCHANGE OFFER
Terms of the Exchange Offer
General
The shares of Old Series A Senior Preferred Stock were sold by Holdings on
March 30, 1998, in a private placement in reliance on Regulation D under the
Securities Act and/or on Section 4(2) of the Securities Act. The shares of Old
Series A Senior Preferred Stock were sold to the Initial Purchaser who resold
the shares of Old Series A Senior Preferred Stock to "qualified institutional
buyers" within the meaning of Rule 144A under the Securities Act. The Initial
Purchaser required as a condition to the purchase of the shares of Old Series A
Senior Preferred Stock that Holdings grant the purchasers of the shares of Old
Series A Senior Preferred Stock certain registration rights pursuant to the
Exchange Offer Registration Rights Agreement. The Exchange Offer Registration
Rights Agreement required Holdings to file with the Commission following the
closing of the Offering of the shares of Old Series A Senior Preferred Stock on
March 30, 1998 (the "Closing"), a registration statement relating to an exchange
offer pursuant to which shares which are substantially identical to the shares
of Old Series A Senior Preferred Stock would be offered in exchange for the then
outstanding shares of Old Series A Senior Preferred Stock tendered at the option
of the holders thereof. The form and terms of the shares of New Series A Senior
Preferred Stock are identical in all material respects to the form and terms of
the shares of Old Series A Senior Preferred Stock except (i) that the shares of
New Series A Senior Preferred Stock have been registered under the Securities
Act, (ii) that the shares of New Series A Senior Preferred Stock are not
entitled to certain registration rights which are applicable to the shares of
Old Series A Senior Preferred Stock under the Exchange Offer Registration Rights
Agreement, and (iii) certain contingent dividend rate provisions applicable to
the shares of Old Series A Senior Preferred Stock are generally not applicable
to the shares of New Series A Senior Preferred Stock. Exchange Debentures
issuable in exchange for shares of New Series A Senior Preferred Stock will have
the same terms as Exchange Debentures issuable in exchange for shares of Old
Series A Senior Preferred Stock. In the event that the applicable
interpretations of the staff of the Commission do not permit Holdings to effect
the Exchange Offer, or if for any other reason the Exchange Offer is not
consummated within 180 days of the Exchange Offer Registration Rights Agreement,
Holdings agreed to use its best efforts to cause to become effective a shelf
registration statement with respect to the resale of the shares of Old Series A
Senior Preferred Stock and to keep such shelf registration statement effective
for a period of up to two years. The Exchange Offer is being made to satisfy the
contractual obligations of Holdings under the Exchange Offer Registration Rights
Agreement.
Holdings has agreed that if (i) Holdings fails to file the registration
statement relating to the Exchange Offer within 60 days following the Issue
Date, (ii) such registration statement (or, if applicable, the shelf
registration statement) is not declared effective within 135 days following the
Issue Date, (iii) Holdings has not exchanged the New Series A Senior Preferred
Stock for all Old Series A Senior Preferred Stock validly tendered in accordance
with the terms of the Exchange Offer on or prior to 45 days after the date on
which such registration statement was declared effective or (iv) certain other
specified events relating to the effectiveness of such registration statement or
shelf registration statement occur, then the per annum dividend rate on the
shares of Old Series A Senior Preferred Stock will increase by 50 basis points
for the period from the occurrence of such default and the per annum dividend
rate will increase by an additional 25 basis points for each subsequent 90 day
period during which such default remains uncured, up to a maximum of 200 basis
points per annum in excess of the initial dividend rate borne by the Old Series
A Senior Preferred Stock, until such time as no default is in effect (at which
time the dividend rate will revert to its initial rate).
The holders of any shares of Old Series A Senior Preferred Stock not
tendered in the Exchange Offer will not be entitled to require Holdings to file
a shelf registration statement, and the dividend rate on such shares of Old
Series A Senior Preferred Stock will remain at its initial level. See "Preferred
Stock Exchange Offer; Registration Rights."
An exchange offer shall be deemed to have been consummated upon the
earlier to occur of (i) Holdings having exchanged shares of New Series A Senior
Preferred Stock for all outstanding shares of Old Series A Senior Preferred
Stock (other than shares of Old Series A Senior Preferred Stock held by a
Restricted Holder) pursuant to
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such exchange offer and (ii) Holdings having exchanged, pursuant to such
exchange offer, shares of New Series A Senior Preferred Stock for all shares of
Old Series A Senior Preferred Stock that have been validly tendered and not
withdrawn on the Expiration Date. In such event, holders of shares of Old Series
A Senior Preferred Stock seeking liquidity in their investment would have to
rely on exemptions to registration requirements under applicable securities
laws, including the Securities Act.
Upon the terms and subject to the conditions set forth in this Prospectus
and in the accompanying Letter of Transmittal, Holdings will accept all shares
of Old Series A Senior Preferred Stock validly tendered prior to 5:00 p.m., New
York City time, on the Expiration Date. The exchange of New Series A Senior
Preferred Stock for shares of Old Series A Senior Preferred Stock will be made
(i) with respect to all shares of Old Series A Senior Preferred Stock validly
tendered and not withdrawn on or prior to the Early Exchange Date, within two
business days following the Early Exchange Date, and (ii) with respect to all
shares of Old Series A Senior Preferred Stock validly tendered and not withdrawn
after the Early Exchange Date but on or prior to the Expiration Date, within two
business days following the Expiration Date. The shares of New Series A Senior
Preferred Stock issued pursuant to the Exchange Offer will be delivered promptly
following each of the Early Exchange Date and the Expiration Date. Holdings will
issue $1,000 liquidation preference of New Series A Senior Preferred Stock in
exchange for each $1,000 liquidation preference of outstanding Old Series A
Senior Preferred Stock accepted in the Exchange Offer.
Based on an interpretation by the staff of the Commission set forth in SEC
no-action letters issued to unrelated third parties, Holdings believes that
shares of New Series A Senior Preferred Stock issued pursuant to the Exchange
Offer in exchange for shares of Old Series A Senior Preferred Stock may be
offered for resale, resold and otherwise transferred by the holders thereof
(other than a Restricted Holder) without compliance with the registration and
prospectus delivery provisions of the Securities Act, provided that such shares
of New Series A Senior Preferred Stock are acquired in the ordinary course of
such holders' business and such holders are not participating, do not intend to
participate and have no arrangement or understanding with any person to
participate in the distribution of such shares of New Series A Senior Preferred
Stock. See "KC-III Communications Corporation," SEC No-Action Letter (available
May 14, 1993); "Mary Kay Cosmetics, Inc.," SEC No-Action Letter (available June
5, 1991); "Morgan Stanley & Co., Incorporated," SEC No-Action Letter (available
June 5, 1991); and "Exxon Capital Holdings Corporation," SEC No-Action Letter
(available May 13, 1988). Each broker-dealer that receives shares of New Series
A Senior Preferred Stock for its own account in exchange for shares of Old
Series A Senior Preferred Stock, where such shares of Old Series A Senior
Preferred Stock were acquired by such broker-dealer as a result of market-making
activities or other trading activities, must acknowledge that it will deliver a
prospectus in connection with any resale of such shares of New Series A Senior
Preferred Stock. See "Plan of Distribution."
If any person were to participate in the Exchange Offer for the purpose of
distributing securities in a manner not permitted by the Commission's
interpretation, such person (i) could not rely on the position of the staff of
the Commission enunciated in "Exxon Capital Holdings Corporation" or similar
interpretive letters and (ii) must comply with the registration and prospectus
delivery requirements of the Securities Act in connection with a secondary
resale transaction. Accordingly, each eligible holder wishing to accept the
Exchange Offer must represent to Holdings in the Letter of Transmittal that the
conditions described above have been met.
In connection with the issuance of the shares of Old Series A Senior
Preferred Stock, Holdings arranged for the inclusion of the Old Series A Senior
Preferred Stock initially purchased by qualified institutional buyers on the
Private Offerings, Resales and Trading through Automated Linkages (PORTAL)
Market of the National Association of Securities Dealers, Inc. Holdings also
arranged for the shares of Old Series A Senior Preferred Stock initially
purchased by qualified institutional buyers to be issued and transferable in
book-entry form through the facilities of DTC, acting as depository, and in
DTC's Same-Day Funds Settlement System. The shares of New Series A Senior
Preferred Stock will also be issuable and transferable in book-entry form
through DTC in the Same-Day Funds Settlement System.
As of the date of this Prospectus, $57,710,000 in aggregate liquidation
preference of the Old Series A Senior Preferred Stock is outstanding.
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<PAGE>
This Prospectus, together with the Letter of Transmittal, is being sent to
all registered holders of shares of Old Series A Senior Preferred Stock as of
, 1998 (the "Record Date").
Holdings shall be deemed to have accepted validly tendered shares of Old
Series A Senior Preferred Stock when, as and if Holdings has given oral or
written notice thereof to the Exchange Agent. The Exchange Agent will act as
agent for the tendering holders of shares of Old Series A Senior Preferred Stock
for the purpose of receiving shares of New Series A Senior Preferred Stock from
Holdings and delivering shares of New Series A Senior Preferred Stock to such
holders.
If any tendered shares of Old Series A Senior Preferred Stock are not
accepted for exchange because of an invalid tender or the occurrence of certain
other events set forth herein, certificates for any such unaccepted shares of
Old Series A Senior Preferred Stock will be returned, without expense, to the
tendering holder thereof as promptly as practicable after the Expiration Date.
The registration expenses to be incurred in connection with the Exchange
Offer, including fees and expenses of the Exchange Agent and Trustee and
accounting and legal fees, will be paid by Holdings. Holdings has agreed to pay,
subject to the instructions in the Letter of Transmittal, all transfer taxes, if
any, relating to the sale or disposition of such holder's shares of Old Series A
Senior Preferred Stock pursuant to the Exchange Offer. See "--Fees and
Expenses."
Expiration Date; Extensions; Amendments
The term "Expiration Date" shall mean , 1998, unless
Holdings, in its sole discretion, extends the Exchange Offer, in which case the
term "Expiration Date" shall mean the latest date to which the Exchange Offer is
extended.
In order to extend the Expiration Date, Holdings will notify the Exchange
Agent of any extension by oral or written notice and will mail to the record
holders of shares of Old Series A Senior Preferred Stock an announcement
thereof, each prior to 9:00 a.m., New York City time, on the next business day
after the previously scheduled Expiration Date. Such announcement may state that
Holdings is extending the Exchange Offer for a specified period of time.
Holdings reserves the right (i) to delay acceptance of any shares of Old
Series A Senior Preferred Stock, to extend the Exchange Offer or to terminate
the Exchange Offer and to refuse to accept shares of Old Series A Senior
Preferred Stock not previously accepted, if any of the conditions set forth
herein under "--Conditions" shall have occurred and shall not have been waived
by Holdings, by giving oral or written notice of such delay, extension or
termination to the Exchange Agent, and (ii) to amend the terms of the Exchange
Offer in any manner deemed by it to be advantageous to the holders of the shares
of Old Series A Senior Preferred Stock. Any such delay in acceptance, extension,
termination or amendment will be followed as promptly as practicable by oral or
written notice thereof. If the Exchange Offer is amended in a manner determined
by Holdings to constitute a material change, Holdings will promptly disclose
such amendment in a manner reasonably calculated to inform the holders of the
shares of Old Series A Senior Preferred Stock of such amendment.
Without limiting the manner in which Holdings may choose to make public
announcements of any delay in acceptance, extension, termination or amendment of
the Exchange Offer, Holdings shall have no obligation to publish, advertise, or
otherwise communicate any such public announcement, other than by making a
timely release to a financial news service.
Accrual of Dividends on the New Series A Senior Preferred Stock
The New Series A Senior Preferred Stock will accrue dividends from March
30, 1998, the date of issuance of the Old Series A Senior Preferred Stock,
payable semi-annually in arrears on April 1 and October 1 of each year
commencing on October 1, 1998, at the rate per annum equal to 12% of the
liquidation preference per share of the New Series A Senior Preferred Stock.
Holders of shares of Old Series A Senior Preferred Stock whose shares of
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<PAGE>
Old Series A Senior Preferred Stock are accepted for exchange will be deemed to
have waived the right to receive any payment in respect of dividends on such
shares of Old Series A Senior Preferred Stock accrued from March 30, 1998 until
the date of the issuance of the New Series A Senior Preferred Stock.
Procedure for Tendering
To tender in the Exchange Offer, a holder must complete, sign and date the
Letter of Transmittal, or a facsimile thereof and mail or otherwise deliver such
Letter of Transmittal or such facsimile, together with the Old Series A Senior
Preferred Stock (unless such tender is being effected pursuant to the procedure
for book-entry transfer described below) and any other required documents, to
the Exchange Agent prior to 5:00 p.m., New York City time, on the Expiration
Date. Signatures on a Letter of Transmittal or a notice of withdrawal, as the
case may be, must be guaranteed by a member firm of a registered national
securities exchange or of the National Association of Securities Dealers, Inc.,
a commercial bank or trust company having an office or correspondent in the
United States or another eligible institution (an "Eligible Institution") unless
the shares of Old Series A Senior Preferred Stock tendered pursuant thereto are
tendered (i) by a registered holder who has not completed the box entitled
"Special Issuance Instructions" or "Special Delivery Instructions" on the Letter
of Transmittal or (ii) for the account of an Eligible Institution.
Any financial institution that is a participant in DTC's Book-Entry
Transfer Facility system may make book-entry delivery of the shares of Old
Series A Senior Preferred Stock by causing DTC to transfer such shares of Old
Series A Senior Preferred Stock into the Exchange Agent's account in accordance
with DTC's procedure for such transfer. Although delivery of shares of Old
Series A Senior Preferred Stock may be effected through book-entry transfer into
the Exchange Agent's account at DTC, the Letter of Transmittal (or facsimile
thereof), with any required signature guarantees and any other required
documents, must, in any case, be transmitted to and received or confirmed by the
Exchange Agent at its addresses set forth herein prior to 5:00 p.m., New York
City time, on the Expiration Date. DELIVERY OF DOCUMENTS TO DTC IN ACCORDANCE
WITH ITS PROCEDURES DOES NOT CONSTITUTE DELIVERY TO THE EXCHANGE AGENT.
The tender by a holder of shares of Old Series A Senior Preferred Stock
will constitute an agreement between such holder and Holdings in accordance with
the terms and subject to the conditions set forth herein and in the Letter of
Transmittal.
Delivery of all documents must be made to the Exchange Agent at its
address set forth herein. Holders may also request that their respective
brokers, dealers, commercial banks, trust companies or nominees effect such
tender for such holders.
The method of delivery of shares of Old Series A Senior Preferred Stock
and the Letter of Transmittal and all other required documents to the Exchange
Agent is at the election and risk of the holders. Instead of delivery by mail,
it is recommended that holders use an overnight or hand delivery service. In all
cases, sufficient time should be allowed to assure timely delivery. No Letter of
Transmittal or shares of Old Series A Senior Preferred Stock should be sent to
Holdings.
Only a holder of shares of Old Series A Senior Preferred Stock may tender
such shares of Old Series A Senior Preferred Stock in the Exchange Offer. The
term "holder" with respect to the Exchange Offer means any person in whose name
shares of Old Series A Senior Preferred Stock are registered on the books of
Holdings or any other person who has obtained a properly completed bond power
from the registered holder or any person whose shares of Old Series A Senior
Preferred Stock are held of record by DTC who desires to deliver such shares of
Old Series A Senior Preferred Stock at DTC.
Any beneficial holder whose shares of Old Series A Senior Preferred Stock
are registered in the name of his broker, dealer, commercial bank, trust company
or other nominee and who wishes to tender his shares of Old Series A Senior
Preferred Stock should contact the registered holder promptly and instruct such
registered holder to tender on his behalf. If such beneficial holder wishes to
tender on his own behalf, such beneficial holder must, prior to completing and
executing the Letter of Transmittal and delivering his shares of Old Series A
Senior Preferred
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Stock, either make appropriate arrangements to register ownership of the shares
of Old Series A Senior Preferred Stock in such holder's name or obtain a
properly completed bond power from the registered holder. The transfer of record
ownership may take considerable time.
If the Letter of Transmittal is signed by a person other than the
registered holder of any shares of Old Series A Senior Preferred Stock listed
therein, such shares of Old Series A Senior Preferred Stock must be endorsed or
accompanied by appropriate bond powers which authorize such person to tender the
shares of Old Series A Senior Preferred Stock on behalf of the registered
holder, in either case signed as the name of the registered holder or holders
appears on the shares of Old Series A Senior Preferred Stock.
If the Letter of Transmittal or any shares of Old Series A Senior
Preferred Stock or bond powers are signed by trustees, executors,
administrators, guardians, attorneys-in-fact, officers of a corporation or
others acting in a fiduciary or representative capacity, such persons should so
indicate when signing, and unless waived by Holdings, evidence satisfactory to
Holdings of their authority to so act must be submitted with the Letter of
Transmittal.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance and withdrawal of the tendered shares of Old Series A
Senior Preferred Stock will be determined by Holdings in its sole discretion,
which determination will be final and binding. Holdings reserves the absolute
right to reject any and all shares of Old Series A Senior Preferred Stock not
validly tendered or any shares of Old Series A Senior Preferred Stock Holdings'
acceptance of which would, in the opinion of counsel for Holdings, be unlawful.
Holdings also reserves the absolute right to waive any irregularities or
conditions of tender as to particular shares of Old Series A Senior Preferred
Stock. Holdings' interpretation of the terms and conditions of the Exchange
Offer (including the instructions in the Letter of Transmittal) will be final
and binding on all parties. Unless waived, any defects or irregularities in
connection with tenders of shares of Old Series A Senior Preferred Stock must be
cured within such time as Holdings shall determine. Neither Holdings, the
Exchange Agent nor any other person shall be under any duty to give notification
of defects or irregularities with respect to tenders of shares of Old Series A
Senior Preferred Stock nor shall any of them incur any liability for failure to
give such notification. Tenders of shares of Old Series A Senior Preferred Stock
will not be deemed to have been made until such irregularities have been cured
or waived. Any shares of Old Series A Senior Preferred Stock received by the
Exchange Agent that are not validly tendered and as to which the defects or
irregularities have not been cured or waived will be returned by the Exchange
Agent without cost to the tendering holder of such shares of Old Series A Senior
Preferred Stock unless otherwise provided in the Letter of Transmittal, as soon
as practicable following the Expiration Date.
By tendering, each holder will represent to Holdings that, among other
things (i) the shares of New Series A Senior Preferred Stock acquired pursuant
to the Exchange Offer are being obtained in the ordinary course of such holder's
business, (ii) such holder is not participating, does not intend to participate
and has no arrangement or understanding with any person to participate, in a
distribution of such shares of New Series A Senior Preferred Stock, (iii) such
holder is not an "affiliate," as defined under Rule 405 of the Securities Act,
of Holdings and (iv) such holder is not a broker-dealer who acquired shares of
Old Series A Senior Preferred Stock directly from Holdings to resell pursuant to
Rule 144A or any other available exemption under the Securities Act.
Guaranteed Delivery Procedures
Holders who wish to tender their shares of Old Series A Senior Preferred
Stock and (i) whose shares of Old Series A Senior Preferred Stock are not
immediately available or (ii) who cannot deliver their shares of Old Series A
Senior Preferred Stock, the Letter of Transmittal or any other required
documents to the Exchange Agent prior to the Early Exchange Date or the
Expiration Date, may effect a tender if:
(a) The tender is made through an Eligible Institution;
(b) Prior to the Early Exchange Date or the Expiration Date, the Exchange
Agent receives from such Eligible Institution a properly completed and duly
executed Notice of Guaranteed Delivery (by telegram, telex, facsimile
transmission, mail, overnight courier or hand delivery) setting forth the name
and address of the holder of the shares of Old Series A Senior Preferred Stock,
the certificate number or numbers of such shares of Old Series A
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Senior Preferred Stock and the principal amount of Old Series A Senior Preferred
Stock tendered, stating that the tender is being made thereby, and guaranteeing
that, within three business days after the date of execution of the Notice of
Guaranteed Delivery, the Letter of Transmittal (or facsimile thereof), together
with the certificate(s) representing the shares of Old Series A Senior Preferred
Stock to be tendered in proper form for transfer and any other documents
required by the Letter of Transmittal, will be deposited by the Eligible
Institution with the Exchange Agent; and
(c) Such properly completed and executed Letter of Transmittal (or
facsimile thereof), together with the certificate(s) representing all tendered
shares of Old Series A Senior Preferred Stock in proper form for transfer (or
confirmation of a book-entry transfer into the Exchange Agent's account at DTC
of shares of Old Series A Senior Preferred Stock delivered electronically) and
all other documents required by the Letter of Transmittal are received by the
Exchange Agent within three business days after the date of execution of the
Notice of Guaranteed Delivery.
Withdrawal of Tenders
Except as otherwise provided herein, tenders of Old Series A Senior
Preferred Stock may be withdrawn at any time prior to 5:00 p.m., New York City
time, on the Expiration Date, unless previously accepted for exchange.
To withdraw a tender of shares of Old Series A Senior Preferred Stock in
the Exchange Offer, a written or facsimile transmission notice of withdrawal
must be received by the Exchange Agent at its address set forth herein prior to
5:00 p.m., New York City time, on the Expiration Date and prior to acceptance
for exchange thereof by Holdings. Any such notice of withdrawal must (i) specify
the name of the person having deposited the shares of Old Series A Senior
Preferred Stock to be withdrawn (the "Depositor"), (ii) identify the shares of
Old Series A Senior Preferred Stock to be withdrawn (including the certificate
number or numbers and principal amount of such shares of Old Series A Senior
Preferred Stock), (iii) be signed by the Depositor in the same manner as the
original signature on the Letter of Transmittal by which such shares of Old
Series A Senior Preferred Stock were tendered (including required signature
guarantees) or be accompanied by documents of transfer sufficient to permit the
transfer agent with respect to the Old Series A Senior Preferred Stock to
register the transfer of such shares of Old Series A Senior Preferred Stock into
the name of the Depositor withdrawing the tender and (iv) specify the name in
which any such shares of Old Series A Senior Preferred Stock are to be
registered, if different from that of the Depositor. All questions as to the
validity, form and eligibility (including time of receipt) of such withdrawal
notices will be determined by Holdings, whose determination shall be final and
binding on all parties. Any shares of Old Series A Senior Preferred Stock so
withdrawn will be deemed not to have been validly tendered for purposes of the
Exchange Offer and no shares of New Series A Senior Preferred Stock will be
issued with respect thereto unless the shares of Old Series A Senior Preferred
Stock so withdrawn are validly retendered. Any shares of Old Series A Senior
Preferred Stock which have been tendered but which are not accepted for exchange
will be returned by the Exchange Agent to the holder thereof without cost to
such holder as soon as practicable after withdrawal, rejection of tender or
termination of the Exchange Offer. Properly withdrawn shares of Old Series A
Senior Preferred Stock may be retendered by following one of the procedures
described above under "--Procedure for Tendering" at any time prior to the
Expiration Date.
Conditions
Notwithstanding any other term of the Exchange Offer, Holdings will not be
obligated to consummate the Exchange Offer if the shares of New Series A Senior
Preferred Stock to be received will not be tradeable by the holder, other than
in the case of Restricted Holders, without restriction under the Securities Act
and the Exchange Act and without material restrictions under the blue sky or
securities laws of substantially all of the states of the United States. Such
condition will be deemed to be satisfied unless a holder provides Holdings with
an opinion of counsel reasonably satisfactory to Holdings to the effect that the
shares of New Series A Senior Preferred Stock received by such holder will not
be tradeable without restriction under the Securities Act and the Exchange Act
and without material restrictions under the blue sky laws of substantially all
of the states of the United States. Holdings may waive this condition.
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If the condition described above exists, Holdings will be entitled to
refuse to accept any shares of Old Series A Senior Preferred Stock and, in the
case of such refusal, will return all tendered shares of Old Series A Senior
Preferred Stock to exchanging holders of the shares of Old Series A Senior
Preferred Stock. See "Preferred Stock Exchange Offer; Registration Rights."
Exchange Agent
United States Trust Company of New York has been appointed as Exchange
Agent for the Exchange Offer. Questions and requests for assistance and requests
for additional copies of this Prospectus or of the Letter of Transmittal should
be directed to the Exchange Agent addressed as follows:
By Hand Delivery: United States Trust Company of New York
111 Broadway
Lower Level Corporate Trust Window
New York, New York 10006
Attn: Corporate Trust Services
By Registered or
Certified Mail: United States Trust Company of New York
P.O. Box 843 Cooper Station
New York, New York 10276
Attn: Corporate Trust Services
By Overnight Courier
(or by Hand Delivery
After 4:30 p.m. on the
Expiration Date Only): United States Trust Company of New York
770 Broadway, 13th Floor
New York, New York 10003
Attn: Corporate Trust Services
Facsimile Transmission:
(Eligible Institutions and
Withdrawal Notices Only) (212) 780-0592
Attn: Customer Service
Confirm: 1-800-548-6565
For Information Call: 1-800-548-6565
Fees and Expenses
The expenses of soliciting tenders pursuant to the Exchange Offer will be
borne by Holdings. The principal solicitation for tenders pursuant to the
Exchange Offer is being made by mail. Additional solicitations may be made by
officers and regular employees of Holdings and its affiliates in person, by
telegraph or telephone.
Holdings will not make any payments to brokers, dealers or other persons
soliciting acceptances of the Exchange Offer. Holdings, however, will pay the
Exchange Agent reasonable and customary fees for its services and will reimburse
the Exchange Agent for its reasonable out-of-pocket expenses in connection
therewith.
The registration expenses to be incurred in connection with the Exchange
Offer, including fees and expenses of the Exchange Agent and the transfer agent
and accounting and legal fees, will be paid by Holdings.
Holdings will pay all transfer taxes, if any, applicable to the exchange
of shares of Old Series A Senior Preferred Stock pursuant to the Exchange Offer.
If, however, certificates representing shares of New Series A Senior Preferred
Stock or shares of Old Series A Senior Preferred Stock for principal amounts not
tendered or
29
<PAGE>
accepted for exchange are to be delivered to, or are to be registered or issued
in the name of, any person other than the registered holder of the shares of Old
Series A Senior Preferred Stock tendered, or if tendered shares of Old Series A
Senior Preferred Stock are registered in the name of any person other than the
person signing the Letter of Transmittal, or if a transfer tax is imposed for
any reason other than the exchange of shares of Old Series A Senior Preferred
Stock pursuant to the Exchange Offer, then the amount of any such transfer taxes
(whether imposed on the registered holder or any other persons) will be payable
by the tendering holder. If satisfactory evidence of payment of such taxes or
exemption therefrom is not submitted with the Letter of Transmittal, the amount
of such transfer taxes will be billed directly to such tendering holder.
Accounting Treatment
No gain or loss for accounting purposes will be recognized by Holdings
upon the consummation of the Exchange Offer. The expenses of the Exchange Offer
will be amortized as a reduction of stockholders' equity over the term of the
New Series A Senior Preferred Stock under generally accepted accounting
principles.
30
<PAGE>
THE TRANSACTIONS
The Recapitalization
The Offering was consummated on March 30, 1998 in conjunction with the
recapitalization of Holdings. In the Recapitalization, MHE Investments, a newly
formed affiliate of Chartwell Investments Inc., together with the purchasers of
the Series A Units and HarnCo, invested new and continuing equity capital of
$126.0 million in Holdings.
The proceeds of the Equity Investment, together with approximately $55.0
million of aggregate borrowings by the Company under the New Credit Facility and
approximately $200.0 million in aggregate proceeds from the Senior Note
Offering, were used (i) to finance the Recapitalization, (ii) to make loans to
management to acquire indirect equity interests in Holdings, (iii) for general
corporate purposes and (iv) to pay approximately $23.5 million of fees and
expenses. See "Use of Proceeds." The Recapitalization consideration consisted of
(i) $336.0 million in cash that was paid to HarnCo (subject to potential
post-Recapitalization Closing adjustments as to which an additional $5.0 million
was provided to HarnCo at the Recapitalization Closing) and (ii) $12.0 million
of continuing equity capital that was retained by HarnCo.
The Recapitalization was effectuated pursuant to the Recapitalization
Agreement, among MHE Investments, HarnCo and certain of HarnCo's affiliates. In
the Recapitalization, (i) MHE Investments acquired approximately 88.2% of the
voting power of Holdings, (ii) Holdings acquired, directly or indirectly, all of
the equity interests of the entities engaged in the MHE Business that were
previously owned by the HarnCo Parties, and (iii) HarnCo received the cash
Recapitalization consideration, comprised of $282.0 million from Holdings and
$54.0 million directly from MHE Investments. Concurrently with the Offering, the
Company sold $200.0 million of its Senior Notes. The net proceeds of the Senior
Note Offering and borrowings under the New Credit Facility were used by the
Company to repurchase a portion of its common stock from Holdings. The proceeds
from such repurchase together with the proceeds of this Offering, were used by
Holdings to finance its portion of the cash Recapitalization consideration.
MHE Investments owns approximately 72.6% of the Common Stock and
approximately $28.9 million liquidation preference of the Series C Junior Voting
Preferred Stock and HarnCo owns approximately 20.8% of the Common Stock and
approximately $4.8 million liquidation preference of the Series B Junior
Preferred Stock. The Series A Units constitute the remaining equity interests of
Holdings and consist of approximately 6.6% of the Common Stock and approximately
$57.7 million liquidation preference of the Old Series A Senior Preferred Stock.
In connection with the Recapitalization, the Company entered into a
Trademark License Agreement with an affiliate of HarnCo, pursuant to which the
Company has the right to use the P&H trademark with respect to all MHE Business
products on a worldwide exclusive basis from the date of the Recapitalization
Closing until 15 years after the earlier to occur of a sale of Holdings to a
third party or a public offering of the common stock of Holdings, the Company or
their parents or successors (and for an additional seven years thereafter for
aftermarket products and services). The royalty fee for use of the trademark is
0.75% of the aggregate net sales of the MHE Business for the ten year period
commencing 12 months after the Recapitalization Closing. There will be no
royalty fee for the remainder of the term. The Company entered into a number of
agreements pursuant to which HarnCo will continue to provide, on an interim
basis, certain supplies, products and services to the Company and its
subsidiaries located in the United States on substantially similar terms and
conditions to those historically provided. See "Certain Relationships and
Related Transactions."
The Equity Investment consisted of: (i) $60.0 million of Series A Units,
which consists of $57.7 million liquidation value of Old Series A Senior
Preferred Stock and $2.3 million of Unit Common Stock, (ii) $12.0 million of
continuing equity capital retained by HarnCo which consists of $4.8 million
liquidation value of Series B Junior Preferred Stock and $7.2 million of Common
Stock and (iii) $54.0 million of equity acquired by MHE Investments which
consists of $28.9 million liquidation value of Series C Junior Voting Preferred
Stock and $25.1 million of Common Stock.
31
<PAGE>
The Pre-Closing Transactions
Immediately prior to the Recapitalization Closing, the HarnCo Parties
effected a number of transactions that resulted in Holdings owning, directly or
indirectly, the equity interests of all of the entities engaged in the MHE
Business that were previously owned by the HarnCo Parties. In connection
therewith, Holdings transferred all of its assets and liabilities, including its
operating assets, to the Company in the form of a capital contribution.
The October 1997 Drop Down
The organizational structure of Holdings and its subsidiaries was
substantially reorganized in connection with the anticipated sale of the
Company. In connection therewith, in October 1997, HarnCo transferred the assets
of its Material Handling Equipment Division (the "MHE Division") to Material
Handling, LLC ("MHLLC"), a newly-created wholly-owned subsidiary of the Company
(the "October 1997 Drop Down"). All non-cash assets held by HarnCo and used
exclusively by the MHE Division were transferred or, in the case of leased
personal property, subleased to MHLLC or to one of its affiliates. In return,
MHLLC assumed substantially all of the liabilities of HarnCo and the Non-MHE
HarnCo Affiliates relating to the MHE Business (other than as described below).
As of the Recapitalization Closing, HarnCo has retained certain income and
other tax liabilities relating to the MHE Business, all environmental
liabilities relating to the ownership or operation of any shared facilities and
of HarnCo's Orchard Street facility, any liabilities for which HarnCo or its
affiliates have been named as potentially responsible parties with respect to
two Superfund sites, and any liabilities arising in connection with claims
alleging exposure to asbestos (to the extent there is insurance coverage
therefor) in connection with the MHE Business prior to the Recapitalization
Closing. In addition, among other matters, the HarnCo Parties have retained all
liability for medical and disability benefit claims for current United States
employees made prior to the Recapitalization Closing, all claims by United
States employees who are on short-term or long-term disability as of the
Recapitalization Closing and all claims with respect to any of the HII benefit
plans for former United States employees of the Company.
New Credit Facility
The Company has entered into the New Credit Facility which consists of a
$70.0 million revolving credit facility (the "Revolving Credit Facility"), a
$30.0 million acquisition facility (the "Acquisition Facility"), a $20.0 million
term loan ("Term Loan A") and a $35.0 million term loan ("Term Loan B" and,
together with Term Loan A, the "Term Loans").
The Revolving Credit Facility permits, subject to compliance with certain
conditions, the Company to borrow, repay and reborrow up to $70.0 million (of
which $15.0 million is required under the Note Indenture to be reserved for
issuance of letters of credit) at any time until the fifth anniversary of the
Recapitalization Closing, the proceeds of which may be used for working capital
and other corporate purposes. The Acquisition Facility, the proceeds of which
may be used for acquisitions, permits, subject to compliance with certain
conditions, the Company to borrow up to $30.0 million at any time until the
third anniversary, and to repay the same in installments on or prior to the
seventh anniversary, of the Recapitalization Closing. Term Loan A will be
repayable in 20 quarterly installments, commencing on June 30, 1998 and Term
Loan B will be repayable in 28 quarterly installments commencing on June 30,
1998.
Borrowings under the New Credit Facility bear interest at various interest
rates based on certain floating reference rates, as selected by the Company,
plus a margin. The New Credit Facility contains customary affirmative and
restrictive covenants on the part of the Company and its subsidiaries.
Borrowings under the New Credit Facility are (i) secured by substantially all of
the present and future assets of the Company and its subsidiaries located in the
United States and the United Kingdom, certain of the Company's subsidiaries'
present and future assets located in Canada and by a pledge of substantially all
of the issued and outstanding shares of capital stock of the Company and its
current and future subsidiaries and (ii) guaranteed by Holdings and
substantially all of the Company's subsidiaries. See "Description of the New
Credit Facility."
32
<PAGE>
Credit Support
Historically, HarnCo and the Non-MHE HarnCo Affiliates, including HII,
provided credit support for the MHE Business. This credit support included: (i)
providing working capital; (ii) guaranteeing financial and performance
obligations with respect to customer and supply contracts and relationships;
(iii) providing collateral and credit support with respect to letters of credit,
surety bonds or other arrangements of the MHE Business; and (iv) otherwise being
directly and contingently liable for the MHE Business's obligations. In
addition, prior to the October 1997 Drop Down, a significant portion of the MHE
Business was conducted directly by HarnCo, including the execution of certain
contracts. For the fiscal year ended October 31, 1997, HII had net sales of
approximately $3.1 billion and operating income of $319.3 million.
HII and the Company have entered into a Credit Indemnification Agreement
pursuant to which HII will maintain in place the Credit Support Obligations in
existence at the Recapitalization Closing but have no further duty to extend,
renew or enter into any new Credit Support Obligations (except as to the MHE
Business Obligations existing at the Recapitalization Closing). The Company will
pay HII an annual fee equal to 1% of the amounts still outstanding under each
letter of credit and bond provided by HarnCo and the Non-MHE HarnCo Affiliates
(approximately $38.4 million as of March 30, 1998), and reimburse HII for
certain future fees and expenses. The Credit Indemnification Agreement also
provides that the Company will reimburse HII on demand for any payment made by
HII or its affiliates under any of the Credit Support Obligations.
The Company entered into the Surety Arrangement to provide credit support
for the MHE Business. The Surety Arrangement provides a surety line of $60.0
million, in the aggregate, with a limit of $20.0 million for any single
obligation. Collateral for the surety line will be letters of credit provided
under the Revolving Credit Facility in the amount of up to 20% of outstanding
surety obligations and a pledge of certain assets of the Company. See
"Description of the Surety Arrangement."
DIVIDEND POLICY
Holdings does not expect to pay any cash dividends on its preferred stock
for the foreseeable future. The ability of Holdings to obtain cash resources to
pay cash dividends on its capital stock is restricted by the terms of the New
Credit Facility and the Note Indenture. See "Risk Factors -- Holding Company
Structure; Reliance and Restrictions on Subsidiaries for Cash Flow; --
Restrictive Covenants; Limited Remedies" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."
33
<PAGE>
USE OF PROCEEDS
(dollars in thousands)
Holdings will not receive any cash proceeds from the issuance of the New
Series A Senior Preferred Stock offered hereby. In consideration for issuing the
New Series A Senior Preferred Stock offered hereby, Holdings will receive, in
exchange, Old Series A Senior Preferred Stock in like liquidation preference.
The net proceeds of the Offering and the remaining portion of the Equity
Investment, together with the proceeds of the Senior Note Offering and
borrowings under the New Credit Facility, were used by Holdings and the Company
(i) to finance the Recapitalization, (ii) to make loans to management to acquire
indirect equity interests in Holdings, (iii) for general corporate purposes and
(iv) to pay estimated fees and expenses associated with the Transactions. See
"Capitalization."
The sources and uses of the Recapitalization were as follows:
Sources:
New Credit Facility:
Term Loans ............................................... $ 55,000
Senior Notes .............................................. 200,000
Equity Investment:
Series A Units ........................................... 60,000
HarnCo's Common Stock at its implied
value and Series B Junior Preferred
Stock ................................................... 12,000
MHE Investments' Common Stock and
Series C Junior Voting Preferred
Stock ................................................... 54,000
---------
Total sources .......................................... $ 381,000
=========
Uses:
Cash portion of the Recapitalization consideration ........ $ 336,000
Stock portion of the Recapitalization consideration ....... 12,000
Prepayment of purchase price adjustment ................... 5,000
Prepayment of credit support fee to HII ................... 290
Short-term loan to management to finance purchase
of equity interests ...................................... 900
General corporate purposes ................................ 3,310
Estimated fees and expenses ............................... 23,500
---------
Total uses ............................................. $ 381,000
=========
34
<PAGE>
CAPITALIZATION
(dollars in thousands)
The following table sets forth the combined capitalization of Holdings at
January 31, 1998 and as adjusted to give effect to the Transactions as if they
had occurred as of January 31, 1998. This table should be read in conjunction
with "Unaudited Pro Forma Combined Financial Information," "Management's
Discussion and Analysis of Financial Condition and Results of Operations," and
the Combined Financial Statements of the Company and the notes thereto appearing
elsewhere in this Prospectus.
As of January 31, 1998
-------------------------
Actual As Adjusted
-------- ------------
Cash ........................................ $ 6,317 $ 3,310(a)
======== =========
Existing debt ............................... $ 4,289 $ 4,289(b)
New Credit Facility: (c)
Term Loans ................................. 55,000(d)
Senior Notes ................................ 200,000(e)
-------- ---------
Total debt ................................ 4,289 259,289
Mandatorily redeemable preferred stock
stated at liquidation value:
Series A Senior Preferred Stock ............ 57,710(f)
Series B Junior Preferred Stock ............ 4,809(g)
Series C Junior Voting Preferred Stock ..... 28,855(h)
-------- ---------
Total preferred stock ..................... 91,374
Shareholders' equity ........................ 132,684(i) (118,220)(j)
-------- ---------
Total capitalization ...................... $136,973 $ 232,443
======== =========
- ----------
(a) As adjusted cash remaining after giving effect to the Transactions,
including the prepayment of a $5.0 million purchase price adjustment under
the Recapitalization Agreement. According to the terms of the
Recapitalization Agreement, if determined at January 31, 1998, the
purchase price adjustment would have been $2.4 million. The remaining $2.6
million of the prepaid purchase price adjustment would then be refunded
within 60 days of the Recapitalization Closing.
(b) Existing debt of $4.3 million consists of a $2.7 million bank overdraft,
$0.4 million of short-term debt, a $0.7 million mortgage, $0.3 million of
industrial revenue bonds and $0.2 million of capital leases.
(c) The New Credit Facility consists of the Revolving Credit Facility, the
Acquisition Facility and the Term Loans. A portion of the Revolving Credit
Facility may be used to provide letters of credit in connection with the
Surety Arrangement. See "Description of the Surety Arrangement."
(d) The Term Loans consist of a $20.0 million five year term loan and a $35.0
million seven year term loan.
(e) The Senior Notes have a ten year maturity.
(f) The Series A Units consist of Old Series A Senior Preferred Stock and Unit
Common Stock.
(g) HarnCo received Series B Junior Preferred Stock in exchange for certain
Common Stock.
(h) MHE Investments acquired Series C Junior Voting Preferred Stock from
HarnCo.
35
<PAGE>
(i) Reflects Holdings' equity at historical book value of $132.7 million. The
Equity Investment in connection with the Recapitalization totals $126.0
million and consists of the following preferred stock and Common Stock:
Preferred Common Equity
Stock Stock Investments
--------- -------- -----------
Purchasers in the Offering ............. $ 57,710 $ 2,290 $ 60,000
MHE Investments ........................ 28,855 25,145 54,000
HarnCo ................................. 4,809 7,191 12,000
-------- -------- ---------
$ 91,374 $ 34,626 $ 126,000
======== ======== =========
MHE Investments acquired preferred stock and Common Stock directly from
HarnCo for $54.0 million as part of the Recapitalization consideration.
The net proceeds of the Senior Note Offering and borrowings under the New
Credit Facility were used by the Company to repurchase a portion of its
common stock from Holdings. The proceeds from such repurchase together
with the proceeds of this Offering were used by Holdings to finance its
portion of the cash Recapitalization consideration. HarnCo's retained
interest consists of $7.2 million of Common Stock, based on the implied
value of the redemption price, and Series B Junior Preferred Stock of $4.8
million.
(j) Reflects the following adjustments to historical book value:
Cash retained by HarnCo ...................................... $ (6,317)
Intercompany receivable retained by HarnCo ................... (255)
Deferred income tax asset retained by HarnCo ................. (2,720)
Deferred income tax asset (net) arising out of Section
338(h)(10) election under the Internal Revenue Code of
1986, as amended (the "Code") ............................... 73,946
Income taxes payable retained by HarnCo ...................... 2,563
Deferred income tax liability retained by HarnCo ............. 3,142
Proceeds from the sale of Unit Common Stock as part of
the Offering ................................................ 2,290
Conversion of perpetual Series C Junior Voting Preferred
Stock into mandatorily redeemable Series C Junior Voting
Preferred Stock ............................................. (28,855)
Exchange of HarnCo's Common Stock for Series B Junior
Preferred Stock ............................................. (4,809)
Redemption from HarnCo of certain Common Stock and
preferred stock for cash .................................... (282,000)
Estimated purchase price adjustment .......................... (2,389)
Estimated fees and expenses related to the equity portion
of the Financings ........................................... (5,500)
---------
$(250,904)
=========
36
<PAGE>
UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
The following Unaudited Pro Forma Combined Balance Sheet of Holdings as of
January 31, 1998 has been prepared to reflect the consummation of the
Transactions as if they had occurred as of January 31, 1998. The Unaudited Pro
Forma Combined Statements of Operations of Holdings for the three months ended
January 31, 1998 and for the year ended October 31, 1997 have been prepared to
reflect the consummation of the Transactions as if they had occurred on November
1, 1996. The Unaudited Combined Pro Forma Financial Information of Holdings does
not purport to be indicative of the operating results and financial position of
Holdings that actually would have been obtained if the Transactions had been
consummated as of and for the dates and periods presented or that may be
obtained in the future. The unaudited pro forma adjustments, as described in the
Notes to Unaudited Pro Forma Combined Financial Information, are based on
available information and upon certain assumptions that management believes are
reasonable. The Unaudited Pro Forma Combined Financial Information should be
read in conjunction with the Combined Financial Statements of the Company and
notes thereto appearing elsewhere herein.
37
<PAGE>
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
(dollars in thousands )
<TABLE>
<CAPTION>
As of January 31, 1998
----------------------------------------
Historical Adjustments Pro Forma (a)
---------- ----------- -------------
<S> <C> <C> <C>
Assets
Current assets
Cash and cash equivalents ................... $ 6,317 $ (3,007)(b) $ 3,310
Accounts receivable, net .................... 75,545 (255)(c) 75,290
Inventories ................................. 36,509 36,509
Other current assets ........................ 6,348 (2,720)(d)
290(e)
900(f)
2,611(g) 7,429
-------- --------- ---------
Total current assets ..................... 124,719 (2,181) 122,538
-------- --------- ---------
Property, plant and equipment
Land and improvements ....................... 3,328 3,328
Buildings ................................... 20,860 20,860
Machinery and equipment ..................... 36,268 36,268
Less: accumulated depreciation .............. (22,462) (22,462)
-------- --------- ---------
37,994 37,994
-------- --------- ---------
Other assets
Goodwill .................................... 31,792 31,792
Other ....................................... 5,874 91,946(h) 97,820
-------- --------- ---------
37,666 91,946 129,612
-------- --------- ---------
Total assets ............................. $200,379 $ 89,765 $ 290,144
======== ========= =========
Liabilities and Shareholder's Equity
Current liabilities
Short-term notes payable and current portion
of long-term obligations ................... $ 567 $ 1,350 (i) $ 1,917
Bank overdrafts ............................. 2,713 2,713
Trade accounts payable ...................... 26,729 26,729
Accrued expenses ............................ 10,989 10,989
Advance payments and progress billings ...... 8,829 8,829
Income taxes payable ........................ 2,563 (2,563)(j) --
Other current liabilities ................... 10,777 10,777
-------- --------- ---------
Total current liabilities ................ 63,167 (1,213) 61,954
Term Loans, excluding current portion ........ 53,650(k) 53,650
Other term debt .............................. 1,009 1,009
Senior Notes ................................. 200,000(l) 200,000
Deferred income taxes ........................ 3,142 (3,142)(m) --
-------- --------- ---------
Total liabilities ........................ 67,318 249,295 316,613
Minority Interest ............................ 377 377
Mandatorily redeemable preferred stock ....... 91,374(n) 91,374
Shareholder's equity ......................... 132,684 (250,904)(o) (118,220)
-------- --------- ---------
Total liabilities and shareholder's equity $200,379 $ 89,765 $ 290,144
======== ========= =========
</TABLE>
38
<PAGE>
Notes to Unaudited Pro Forma Combined Balance Sheet
(a) Pro forma to give effect to the Transactions as if they had occurred as of
January 31, 1998
(b) Reflects the following:
Cash retained by HarnCo .................................... $ (6,317)
Proceeds from Senior Note Offering ......................... 200,000
Borrowings under the New Credit Facility ................... 55,000
Proceeds from the Offering ................................. 60,000
Redemption from HarnCo of certain Common Stock and
preferred stock for cash .................................. (282,000)
Estimated fees and expenses ................................ (23,500)
Prepayment of credit support fee to HII .................... (290)
Short-term loan to management to finance the
purchase of equity interests .............................. (900)
Prepayment of purchase price adjustment .................... (5,000)(i)
---------
$ (3,007)
=========
(i) Reflects prepayment of a purchase price adjustment under the
Recapitalization Agreement. According to the terms of the
Recapitalization Agreement, if determined at January 31, 1998, the
purchase price adjustment would have been $2.4 million. The
remaining $2.6 million of the prepaid purchase price adjustment
would then be refunded within 60 days of the Recapitalization
Closing.
(c) Reflects elimination of intercompany receivables retained by HarnCo.
(d) Reflects elimination of deferred income tax asset retained by HarnCo.
(e) Reflects the prepayment of credit support fee to HII.
(f) Reflects short-term loan to management to finance the purchase of equity
interests. The Company expects such loan to be repaid within one year.
(g) Reflects the receivable from HarnCo which represents the estimate of the
portion of the $5.0 million prepaid purchase price adjustment under the
Recapitalization Agreement that is anticipated to be refunded within 60 days
of the Recapitalization Closing.
(h) Reflects the following:
Deferred income tax asset (net) arising out of the Code
Section 338(h)(10) election .................................. $73,946(i)
-------
Capitalization of the estimated fees and expenses related
to the debt portion of the Financings ........................ 18,000
-------
$91,946
=======
(i) Reflects the increase in the deferred income tax assets of Holdings
since, for United States federal and state income tax purposes, the
Transactions are treated as a taxable asset sale. As a result there
is a step-up in the tax basis of the net assets which will provide
future income tax deductions of $231.1 million and may reduce future
income tax payments by approximately $73.9 million as shown below:
Holdings' total enterprise value ................... $ 360,178
Less: tax basis of net assets acquired ............. (129,097)
---------
231,081
Estimated corporate tax rate ....................... 40.0%
---------
Deferred income tax asset arising out
of the Code Section 338(h)(10) election ........... $ 92,432
=========
Less: valuation reserve ............................ (18,486)(x)
---------
Deferred income tax asset (net) arising
out of the Code Section 338(h)(10) election ....... $ 73,946
=========
(x) A valuation reserve has been established against the deferred
income tax asset on the assumption that the deferred income
tax asset may not be fully utilized in future years. The
valuation reserve represents 20% of the gross asset.
(i) Reflects the current portion of the Term Loans.
(j) Reflects elimination of income taxes payable retained by HarnCo.
(k) Reflects borrowings under the Term Loans excluding current portion.
39
<PAGE>
(l) Reflects Senior Notes with a ten year maturity.
(m) Reflects elimination of deferred income tax liability retained by HarnCo.
(n) Reflects mandatorily redeemable preferred stock stated at liquidation value:
Series A Senior Preferred Stock............................... $57,710
Series B Junior Preferred Stock............................... 4,809
Series C Junior Voting Preferred Stock........................ 28,855
-------
$91,374
=======
Holdings has the option of paying the cumulative dividends on the
mandatorily redeemable preferred stock either in cash or in kind until
2003; thereafter, the payments must be in cash. Dividends are payable
semi-annually in arrears.
(o) Reflects the following:
Cash retained by HarnCo .................................... $ (6,317)
Intercompany receivable retained by HarnCo ................. (255)
Deferred income tax asset retained by HarnCo ............... (2,720)
Deferred income tax asset (net) arising out of
the Code Section 338(h)(10) election ...................... 73,946
Income taxes payable retained by HarnCo .................... 2,563
Deferred income tax liability retained by HarnCo ........... 3,142
Proceeds from the sale of Unit Common Stock as
part of this Offering ..................................... 2,290
Conversion of perpetual Series C Junior Voting
Preferred Stock into mandatorily redeemable Series
C Junior Voting Preferred Stock ........................... (28,855)
Exchange of HarnCo's Common Stock for Series B
Junior Preferred Stock .................................... (4,809)
Redemption from HarnCo of certain Common Stock and
preferred stock for cash .................................. (282,000)
Estimated purchase price adjustment ........................ (2,389)
Estimated fees and expenses related to the equity
portion of the Financings ................................. (5,500)
---------
$(250,904)
=========
40
<PAGE>
UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS
(dollars in thousands)
For the Year Ended October 31, 1997
--------------------------------------------
Historical Adjustments Pro Forma(a)
---------- ----------- ------------
Revenues
Net sales ...................... $ 353,350 $ $ 353,350
Other income--net .............. 2,649 2,649
--------- --------- ---------
355,999 355,999
Cost of sales ................... 260,794 260,794
Product development, selling
and administrative expenses .... 56,806 1,000(b) 57,806
Management fee .................. 2,862 (1,862)(c) 1,000
--------- --------- ---------
Operating income ............... 35,537 862 36,399
Interest expense--net
Affiliates ..................... (394) 394(d) --
Third party .................... (398) (26,105)(e) (26,503)
--------- --------- ---------
Income before income taxes and
minority interest .............. 34,745 (24,849) 9,896
Provision for income taxes ...... (13,874) 9,939(f) (3,935)
Minority interest ............... (18) (18)
--------- --------- ---------
Net income ..................... 20,853 (14,910) 5,943
Dividends on preferred stock .... (11,460)(g) (11,460)
--------- --------- ---------
Net income/(loss) attributable
to Common Stock ............... $ 20,853 $ (26,370) $ (5,517)
========= ========= =========
Other Financial Data:
EBITDA(h) ....................... $ 45,859 $ 43,859
Depreciation and amortization ... 6,736 8,536
Capital expenditures ............ 6,498 6,498
Cash interest expense ........... 792 24,703
41
<PAGE>
UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS
(dollars in thousands)
For the Three Months Ended January 31, 1998
-------------------------------------------
Historical Adjustments Pro Forma(a)
---------- ----------- ------------
Revenues
Net sales ................. $76,483 $ $76,483
Other income--net ......... 284 284
------- ------- -------
76,767 76,767
Cost of sales ................... 56,653 56,653
Product development, selling
and administrative expenses .... 14,480 824(b) 15,304
Management fee .................. 677 (427)(c) 250
------- ------- -------
Operating income ............... 4,957 (397) 4,560
Interest expense--net
Affiliates ................ (687) 687(d) --
Third party ............... (158) (6,526)(e) (6,684)
------- ------- -------
Income/(loss) before income
taxes and minority interest .... 4,112 (6,236) (2,124)
(Provision)/benefit for income
taxes .......................... (1,987) 2,494(f) 507
Minority interest ............... 14 14
------- ------- -------
Net income/(loss) .............. 2,139 (3,742) (1,603)
Dividends on preferred stock .... (3,129)(g) (3,129)
------- ------- -------
Net income/(loss) attributable
to Common Stock ............... $ 2,139 $(6,871) $(4,732)
======= ======= =======
Other Financial Data:
EBITDA(h) ....................... $ 7,538 $ 6,464
Depreciation and amortization ... 1,659 2,109
Capital expenditures ............ 816 816
Cash interest expense ........... 845 6,234
42
<PAGE>
Notes to the Unaudited Pro Forma Combined Statements of Operations
<TABLE>
<CAPTION>
Pro Forma
Pro Forma for for the Three
the Year Months
Ended Ended
October 31, January 31,
1997 1998
------------- -------------
<S> <C> <C>
(a) Pro forma gives effect to the Transactions as if they had occurred on
November 1, 1996.
(b) Reflects the following:
Estimated incremental costs attributable to stand alone operations ....................... $ 1,000 $ 250
Royalty payment under the Trademark License Agreement with an
affiliate of HarnCo. The royalty fee, calculated as 0.75% of the
annual aggregate net sales of the MHE Business, will be incurred
for the ten year period commencing 12 months after the
Recapitalization Closing ................................................................. -- 574
-------- -------
$ 1,000 $ 824
======== =======
(c) Reflects the following:
Elimination of HII Management Fee ........................................................ $ (2,862) $ (677)
Chartwell Investments Inc.'s management consulting fee ................................... 1,000 250
-------- -------
$ (1,862) $ (427)
======== =======
(d) Reflects elimination of interest expense paid to affiliates of HII.
(e) Reflects the following:
Estimated change in cash interest expense on debt ........................................ $(24,006) $(6,001)
Estimated fee paid to HII for outstanding credit support ................................. (299) (75)
Estimated amortization of debt financing costs ........................................... (1,800) (450)
-------- -------
$(26,105) $(6,526)
======== =======
<CAPTION>
Principal Interest Cost Interest Cost
--------- ------------- -------------
<S> <C> <C> <C>
Estimated cash interest expense on debt:
Revolving Credit Facility at LIBOR plus 2.25%(i) ........................ $ -- $ 350 $ 87
Acquisition Facility at LIBOR plus 2.75%(i) ............................. -- 150 37
Term Loan A at LIBOR plus 2.25% ......................................... 20,000 1,575 394
Term Loan B at LIBOR plus 2.75% ......................................... 35,000 2,931 733
Senior Notes at 9.50% ................................................... 200,000 19,000 4,750
-------- -------
$ 24,006 $ 6,001
======== =======
</TABLE>
(i) Reflects a 0.50% fee for undrawn commitments under these facilities.
For the purposes of the above, LIBOR is estimated to be 5.625%.
A 1/8th percentage point increase or decrease in the assumed average
interest rate on the debt issued in connection with the Recapitalization
would change the annual pro forma interest expense for the year ended
October 31, 1997 by approximately $0.3 million and the pro forma net
income for the year ended October 31, 1997 by approximately $0.2 million.
A 1/8th percentage point increase or decrease in the assumed average
interest rate on the debt issued in connection with the Recapitalization
would change the pro forma interest expense for the three months ended
January 31, 1998 by approximately $0.1 million and the pro forma net
income for the three months ended January 31, 1998 by approximately $0.1
million.
43
<PAGE>
(f) Reflects the tax effect of all adjustments at an assumed effective tax rate
of 40%.
(g) Reflects the following:
<TABLE>
<CAPTION>
Dividends(i)
Liquidation ---------------------------------
Preference Pro Forma for Pro Forma for
at the Year Ended the Three Months
Recapitalization October 31, Ended January 31,
Coupon Closing 1997 1998
------ ---------------- -------------- -----------------
<S> <C> <C> <C> <C>
Preferred stock dividends:
Series A Senior Preferred Stock ...... 12.00% $ 57,710 $ 7,133 $1,945
Series B Junior Preferred Stock ...... 12.25 4,809 607 166
Series C Junior Voting Preferred
Stock ............................... 12.50 28,855 3,720 1,018
------- ------
$11,460 $3,129
======= ======
</TABLE>
(i) Holdings has the option of paying the cumulative dividends on the
mandatorily redeemable preferred stock either in cash or in kind
until 2003; thereafter, the payments must be in cash. Dividends are
payable semi-annually in arrears. The above noted dividend amounts
assume that the dividends are paid in kind.
(h) EBITDA is defined as operating income before depreciation, amortization,
the HII Management Fee and charges related to certain depreciation
expenses for HarnCo assets. For fiscal 1997 and the three months ended
January 31, 1998, the HII Management Fee was $2,862 and $677,
respectively, and the charges related to certain depreciation expenses for
HarnCo assets were $724 and $245, respectively. Pro forma EBITDA
represents operating income before depreciation, amortization and the
charges related to certain depreciation expenses for HarnCo assets. EBITDA
is not a calculation based on generally accepted accounting principles.
EBITDA should not be considered as an alternative to net income or
operating income, as an indicator of the operating performance of Holdings
or as an alternative to operating cash flows as a measure of liquidity.
44
<PAGE>
SELECTED HISTORICAL AND PRO FORMA COMBINED FINANCIAL DATA
The selected historical combined financial data as of and for the years
ended October 31, 1997, 1996 and 1995 have been derived from the audited
combined financial statements of the Company. The selected historical combined
financial data as of and for the three months ended January 31, 1998 and 1997
have been derived from the unaudited combined financial statements of the
Company. The selected historical combined financial data as of and for the years
ended October 31, 1994 and 1993 have been derived from unaudited internal
records of the Company. The Company's operations for 1994 and 1993 were
integrated with other HII operations and, therefore, the financial data for
these periods represent management's best estimate of their operating
performance. The unaudited financial data presented herein, in the opinion of
management, includes all necessary adjustments required for the fair
presentation of such data.
The selected pro forma combined financial data of Holdings as of and for
the three months ended January 31, 1998 and for the year ended October 31, 1997
have been prepared to reflect the consummation of the Transactions. The
unaudited pro forma combined balance sheet data of Holdings have been prepared
as if such transactions had occurred as of January 31, 1998 and the unaudited
pro forma combined statements of operations data of Holdings have been prepared
as if such transactions had occurred on November 1, 1996. The selected pro forma
combined financial data of Holdings are not necessarily indicative of the
financial position or results of operations of Holdings had the Transactions
reflected therein actually been consummated on the dates assumed and are not
necessarily indicative of the financial position or results of operations of
Holdings that may be expected for any future periods.
The selected combined financial data should be read in conjunction with
"Unaudited Pro Forma Combined Financial Information," "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and the Combined
Financial Statements of the Company and notes thereto appearing elsewhere
herein.
45
<PAGE>
SELECTED HISTORICAL AND PRO FORMA COMBINED FINANCIAL DATA
(dollars in thousands)
<TABLE>
<CAPTION>
Three Months Ended
Fiscal Year Ended October 31, January 31,
------------------------------------------------------------------- -------------------------------------
Pro Forma Pro Forma
1993(a) 1994(a) 1995 1996 1997 1997 1997 1998 1998
----------- ----------- -------- -------- -------- ----------- ----------- ----------- -----------
(unaudited) (unaudited) (unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Income statement data:
Net sales ............... $117,032 $109,429 $243,169 $323,735 $353,350 $353,350 $79,982 $76,483 $76,483
Gross profit ............ N/A N/A 56,765 76,176 92,556 92,556 19,190 19,830 19,830
Operating expenses(b) ... N/A N/A 35,043 46,160 57,019 56,157 12,642 14,873 15,270
-------- -------- -------- -------- -------- -------- ------- ------- -------
Operating income ........ $ 4,781 $ 10,437 21,722 30,016 35,537 36,399 6,548 4,957 4,560
Net income/(loss) ....... N/A N/A $ 13,476 $ 18,446 $ 20,853 $ 5,943 $ 4,011 $ 2,139 (1,603)
======== ======== ======== ======== ======== ======= =======
Dividends on preferred
stock ................ (11,460) (3,129)
-------- -------
Net loss attributable to
Common Stock ......... $ (5,517) $(4,732)
======== =======
Other data:
EBITDA(c) ............... $ 9,341 $ 15,075 $ 28,045 $ 38,220 $ 45,859 $ 43,859 $ 8,925 $ 7,538 6,464
Depreciation and
amortization(d) ...... 2,588 2,981 3,800 5,292 6,736 8,536 1,548 1,659 2,109
Capital expenditures .... 1,419 3,935 3,725 6,752 6,498 6,498 1,744 816 816
Cash interest expense ... 24,703 6,234
Ratio of earnings to
fixed charges and
preferred
dividends(e) ......... N/A N/A 23.21x 23.11x 16.46x -- 21.58x 4.40x --
Adjusted data:
Ratio of EBITDA to
cash interest
expense .............. 1.78x 1.70x(f)
Ratio of pro forma debt
to EBITDA ............ 5.91x 6.19x(f)
</TABLE>
<TABLE>
<CAPTION>
As of October 31, As of January 31,
------------------------------------------------------ -------------------------------------
Pro Forma
1993(a) 1994(a) 1995 1996 1997 1997 1998 1998
----------- ----------- -------- -------- -------- ----------- ----------- -----------
(unaudited) (unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance sheet data:
Working capital.......... N/A N/A $ 17,483 $ 34,523 $ 51,243 $ 37,432 $ 61,552 $ 60,584
Total assets............. $66,667 $126,566 151,168 189,058 199,600 193,633 200,379 290,144
Total debt............... N/A N/A 4,704 2,044 6,088 3,348 4,289 259,289
Mandatorily redeemable
preferred stock....... 91,374
</TABLE>
- ----------
(a) Prior to 1995, the Company did not determine its financial position or
results of operations on a stand alone basis as its financial and
management reporting information was commingled with other operating
divisions of HII. As a result, the Company's summary data as of and for
the years ended October 31, 1994 and 1993 is limited and certain
historical financial data is not available.
(b) Operating expenses are shown net of other income.
(c) EBITDA is defined as operating income before depreciation, amortization,
the allocation of certain HII corporate overhead charges (the "HII
Management Fee") and charges related to certain depreciation expenses for
HarnCo assets. For fiscal 1997 and the three months ended January 31,
1998, the HII Management Fee was $2,862 and $677, respectively, and the
charges related to certain depreciation expenses for HarnCo assets were
$724 and $245, respectively. Pro forma EBITDA represents operating income
before depreciation, amortization and the charges related to certain
depreciation expenses for HarnCo assets. EBITDA is not a calculation based
on generally accepted accounting principles. EBITDA should not be
considered as an alternative to net income or operating income, as an
indicator of the operating performance of Holdings or as an alternative to
operating cash flows as a measure of liquidity.
(d) Pro forma includes $1,800 and $450 of amortization of debt issuance costs
for fiscal 1997 and the three months ended January 31, 1998, respectively.
(e) For purposes of calculating the ratio of earnings to fixed charges and
preferred dividends, earnings are defined as net income before tax plus
fixed charges. Fixed charges consist of interest expense (including
amortization of debt issuance costs) and the portion of rental expense
that is representative of the interest factor (deemed to be one third of
annual rent expense). Preferred dividends, for purposes of the ratio,
reflect earnings before tax required to pay preferred stock dividends and
assume that such dividends are paid in kind. For the year ended October
31, 1997 and for the three months ended January 31, 1998 Holdings had a
deficiency of pro forma earnings to fixed charges of $9,204 and $7,339,
respectively.
(f) Reflects a pro forma calculation for the twelve months ended January 31,
1998.
46
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Combined
Financial Statements of the Company and the related notes thereto included
elsewhere in this Prospectus. The Company's fiscal year ends October 31.
Consequently, for purposes of this section, unless otherwise specified herein,
references to a particular year are to the fiscal year of the Company ended
October 31 of such year.
General
The Company is a leading international provider of "through-the-air"
material handling products and services used in most manufacturing industries.
The Company's original equipment operations design and manufacture a
comprehensive line of industrial cranes, hoists and other component products.
Through its aftermarket operations, the Company provides a variety of related
products and services, including replacement parts, repair and maintenance
services and product modernizations. In recent years, the Company has shifted
its orientation from an original equipment-focused United States manufacturer to
an international full service provider with a significant emphasis on the high
margin aftermarket business. The Company's revenues are derived principally from
the sale of industrial overhead cranes, component products and aftermarket
products and services.
Recapitalization. Historically, the Company conducted its business as one
of several operating units of HII. Until the October 1997 Drop Down, the core
United States operations of the Company were conducted directly by HarnCo, while
the remainder of the Company's operations (including Morris Ltd. since its
acquisition in 1994) were conducted through a number of entities owned, directly
or indirectly, by HII and its affiliates. Since the Recapitalization Closing,
the Company operates independently of HII. As a result, the Company's historical
performance may not be indicative of future results.
Until the Recapitalization Closing, HII and HarnCo performed a number of
functions necessary to the operations of the Company, in accordance with past
practices, including manufacturing certain products and providing certain
information systems, administrative services and credit support. The Company's
historical financial statements include charges allocated to the Company by HII
for these products and services.
At the Recapitalization Closing, the Company entered into a number of
agreements pursuant to which HII and its affiliates will continue to provide to
the Company and to its subsidiaries located in the United States, on an interim
basis and under substantially similar terms and conditions, certain products and
services. See "Certain Relationships and Related Transactions." In addition, HII
and the Company entered into a Credit Indemnification Agreement pursuant to
which HII will maintain in place the Credit Support Obligations in existence at
the Recapitalization Closing but have no further duty to extend, renew or enter
into any new Credit Support Obligations (except as to the MHE Business
Obligations existing at the Recapitalization Closing). The Company will pay HII
an annual fee equal to 1% of the amounts still outstanding under each letter of
credit and bond provided by HarnCo and the Non-MHE HarnCo Affiliates
(approximately $38.4 million as of March 30, 1998), and reimburse HII for
certain future fees and expenses. The Company also entered into the Surety
Arrangement to provide credit support for the future operations of the MHE
Business. See "Description of the Surety Arrangement."
In connection with the Recapitalization, the Company also entered into a
Trademark License Agreement with an affiliate of HarnCo, pursuant to which the
Company has the right to use the P&H trademark with respect to all MHE Business
products on a worldwide exclusive basis from the date of the Recapitalization
Closing until 15 years after the earlier to occur of a sale of Holdings to a
third party or a public offering of the common stock of Holdings, the Company or
their parents or successors (and for an additional seven years thereafter for
aftermarket products and services). The royalty fee for use of the trademark is
0.75% of the aggregate net sales of the MHE Business for the ten year period
commencing 12 months after the Recapitalization Closing.
For income tax purposes, Holdings and the Company were deemed to acquire
the assets of the MHE Business pursuant to Code Section 338(h)(10) in connection
with the Transactions. Accordingly, this transaction increased
47
<PAGE>
the tax basis of certain assets and created deductible goodwill, which will
generate significant future tax deductions to reduce taxable income.
Acquisitions. The Company consummated ten acquisitions during the fiscal
years ended October 31, 1995, 1996 and 1997. These acquisitions have had a
significant impact on the Company's financial position and results of
operations.
Results of Operations
The following table sets forth certain financial data for the periods
indicated:
Supplemental Data
(dollars in millions)
<TABLE>
<CAPTION>
Three months ended Three months ended Six Months Ended April 30,
------------------ ------------------ ---------------------------------------------
April 30, 1998 April 30, 1997 1997 1998
------------------ ------------------ ---------------------------------------------
Percent of Percent of Percent of Percent of
$ net sales $ net sales $ net sales $ net sales
------ ---------- ------ ---------- ------- ------------ --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales $ 80.8 100.0% $ 97.1 100.0% $177.1 100.0% $157.2 100.0%
Other income - net 0.4 0.5% 0.2 0.3% 1.5 0.8% 0.7 0.5%
Cost of sales 58.5 72.5% 72.8 75.0% 133.6 75.5% 115.2 73.2%
Product development,
selling, and
administrative
expenses 15.2 18.8% 14.0 14.4% 27.3 15.4% 29.5 18.8%
HII management fee 0.5 0.6% 0.8 0.8% 1.4 0.8% 1.2 0.7%
Nonrecurring employee
benefit costs (1) 1.8 2.2% -- 0.0% -- 0.0% 1.9 1.2%
Operating income 5.3 6.5% 9.7 10.0% 16.2 9.2% 10.2 6.5%
Net income 1.5 1.9% 5.6 5.8% 9.6 5.4% 3.7 2.3%
</TABLE>
(1) Severance costs and incentives as described below.
Three months Ended April 30, 1998 as compared to Three Months Ended April 30,
1997
Net sales for the three months ended April 30, 1998 ("Second Quarter 1998")
decreased $16.3 million or 16.8% to $80.8 million from $97.1 million for the
three months ended April 30, 1997 ("Second Quarter 1997"). The decrease was
primarily caused by: (i) a $18.0 million decrease in engineered crane sales
worldwide as Second Quarter 1997 included the completion of several large
projects in both the United States and the United Kingdom without a
corresponding level of projects in Second Quarter 1998; (ii) a $4.4 million
increase in standard crane sales attributable to the expansion of the Company's
North American DSC network; (iii) a $1.7 million decrease in overall parts sales
resulting from a $2.3 million decrease in manufactured parts sales, partially
offset by increased used parts sales. Included in the above net sales changes is
a $1.9 million increase in Second Quarter 1998 due to a full three months
operation of a DSC in Ohio acquired in February 1997. The decline in engineered
crane sales was due to a downturn in orders in the United Kingdom container
crane business, the failure to win certain large projects in the United States
and the delay in the awarding of certain potential orders in the United States
which, if the Company wins certain bids, are expected to become bookings later
in fiscal 1998.
Cost of sales decreased $14.3 million or 19.6% to $58.5 million in Second
Quarter 1998 from $72.8 million in Second Quarter 1997 primarily due to the
lower sales volumes described above. Cost of sales continued to decrease as a
percentage of net sales from 75.0% in Second Quarter 1997 to 72.5% in Second
Quarter 1998 due to the continued shift in the Company's sales mix toward the
higher margin standard cranes and aftermarket products and away from engineered
cranes.
Product development, selling and administrative expenses increased $1.2 million
or 8.6% to $15.2 million in Second Quarter 1998 from $14.0 million in Second
Quarter 1997. The primary causes were the purchase of a large DSC in Ohio in
February 1997, as well as, unabsorbed engineering costs due to lower engineered
crane sales, charges to expense of certain items which were previously absorbed
into cost of sales and general cost increases.
Accordingly, operating income before non-recurring employee benefit costs and
parent management fees decreased $2.9 million or 27.6% to $7.6 million in Second
Quarter 1998 from $10.5 million in Second Quarter 1997. Operating income before
non-recurring employee benefit costs and parent management fees represented 9.3%
of net sales in Second Quarter 1998 compared to 10.8% in Second Quarter 1997.
As a result of the Recapitalization, the Company experienced a series of a
non-recurring employee benefit costs. These costs included severance costs
associated with restructuring the Company's United Kingdom manufacturing
operation and incentives to certain members of management. Costs totaling $1.8
million were incurred in Second Quarter 1998. There was no corresponding amount
incurred in Second Quarter 1997. While the cost of these incentive payments
appears on the Company's income statements, HII is responsible for paying these
incentives.
Parent management fees allocated by HII (prior to the Recapitalization) which
represented an allocation of HII's corporate expenses were $0.5 million and $0.8
for Second Quarter 1998 and Second Quarter 1997, respectively.
Approximately $2.1 million in interest expense was recorded in April 1998
resulting from the issuance of the debt in connection with the Recapitalization.
The provision for income taxes, as a percentage of income before income taxes,
for Second Quarter 1998 was 23.4%. Due to changes in the structure of the
Company, the estimated effective tax rate for Fiscal 1998 is 40%. The Company
accrued tax expense in Second Quarter 1998 sufficient to achieve the 40% rate on
a year-to-date basis.
Net income decreased $4.1 million, or 73.2% to $1.5 million in Second Quarter
1998 from $5.6 million in Second Quarter 1997. Net income represented 1.9% of
net sales in Second Quarter 1998 compared to 5.8% of net sales in Second Quarter
1997.
Six Months Ended April 30, 1998 as Compared to Six Months Ended April 30, 1997
Net sales for the six months ended April 30, 1998 ("First Half 1998")
decreased $19.9 million or 11.2% to $157.2 million from $177.1 million for the
six months ended April 30, 1997 ("First Half 1997"). The change in net sales was
primarily the result of: (i) a $38.9 million decrease in engineered crane sales
worldwide as First Half 1997 included the completion of several large projects
in both the United States and the United Kingdom without a corresponding level
of projects in First Half 1998; (ii) a $16.2 million increase in standard crane
sales in First Half 1998 with the expansion of the Company's North American DSC
network which partially offset the decline in engineered crane sales; and (iii)
a $2.8 million increase in sales of parts, service, modernizations, hoists and
components again due to the expanded DSC network. Included in the above net
sales changes is a $7.4 million increase in First Half 1998 due to a full six
month operation of a DSC in Ohio acquired in February 1997. The decline in
engineered crane sales was due to a downturn in orders in the United Kingdom
container crane business, the failure to win certain large projects in the
United States and the delay in the awarding of certain potential orders in the
United States which, if the Company wins certain bids, are expected to become
bookings later in fiscal 1998.
Other income - net decreased from $1.5 million in First Half 1997 to $0.7
million in First Half 1998 primarily due to the recognition of a $1.1 million
gain in First Half 1997 on an insurance claim relating to a fire at the Morris
Ltd. facility in the United Kingdom in fiscal 1995.
Cost of sales decreased $18.4 million or 13.8% to $115.2 million in First
Half 1998 from $133.6 million in First Half 1997 primarily due to the lower
sales volumes described above. Cost of sales continued to decrease as a
percentage of net sales, from 75.5% in First Half 1997 to 73.2% in First Half
1998. This improvement was caused by a shift in the Company's sales mix toward
the higher margin standard cranes and aftermarket products and away from
engineered cranes. Accordingly, gross profit, as a percentage of net sales,
increased in First Half 1998 to 26.8% from 24.5% in First Half 1997.
48
<PAGE>
Product development, selling and administrative expenses increased $2.2
million or 8.1% to $29.5 million in First Half 1998 from $27.3 million in First
Half 1997. The primary cause was the acquisition of the Ohio DSC in February
1997. Accordingly, only two months of product development, selling and
administrative expenses related to this DSC were recorded in First Half 1997.
Other causes for the increase were unabsorbed engineering costs due to lower
engineered crane sales and general cost increases.
Operating income before non-recurring employee benefit costs and parent
management fees decreased $4.3 million or 24.4% to $13.3 million in First Half
1998 from $17.6 million in First Half 1997. This decrease was primarily due to
lower engineered crane sales volume, the gain on the insurance claim in First
Half 1997 and the additional costs associated with the separation from HII.
Operating income before non-recurring employee benefit costs and parent
management fees represented 8.4% of net sales in First Half 1998 compared to
10.0% in First Half 1997.
As a result of the Recapitalization, the Company experienced a series of
non-recurring employee benefit costs. These costs included severance costs
associated with restructuring the Company's United Kingdom manufacturing
operation and incentives to certain members of management. While the cost of the
incentive payments appear on the Company's income statements, HII, the Company's
former parent, not the Company, is responsible for paying these incentives. The
severance costs were approximately $0.7 million and the incentives to management
were approximately $1.2 million.
Parent management fees allocated by HII (prior to the Recapitalization)
which represented an allocation of HII's corporate expenses were $1.2 million
and $1.4 million for the First Half 1998 and First Half 1997, respectively.
Approximately $2.1 million in interest expense was recorded in April 1998
resulting from the issuance of debt in connection with the Recapitalization.
The provision for income taxes is approximately 40% of Income before
income taxes and Minority interest for both First Half 1998 and First Half 1997.
Accordingly, Net income decreased $5.9 million, or 61.5% to $3.7 million
in First Half 1998 from $9.6 million in First Half 1997. Net income represented
2.3% of net sales in First Half 1998 compared to 5.4% of net sales in First Half
1997.
<TABLE>
<CAPTION>
Fiscal Years Ended October 31,
----------------------------------------------------------
1995 1996 1997
----------------------------------------------------------
Percent of Percent of Percent of
$ Net Sales $ Net Sales $ Net Sales
------ ---------- ------ ---------- ------ ----------
<S> <C> <C> <C> <C> <C> <C>
Net sales ................ $243.2 100.0% $323.7 100.0% $353.4 100.0%
Other income net ......... 3.8 1.6 1.1 0.3 2.6 0.7
Cost of sales ............ 186.4 76.6 247.6 76.5 260.8 73.8
Product development
selling, and
administrative
expenses .............. 36.9 15.2 45.0 13.9 56.8 16.1
Parent management
fee ................... 1.9 0.8 2.3 0.7 2.9 0.8
Nonrecurring employee
benefit costs (1) ... -- -- -- -- -- --
Operating income ......... 21.7 8.9 30.0 9.3 35.5 10.0
Net income ............... 13.5 5.6 18.4 5.7 20.9 5.9
</TABLE>
(1) Severance costs and incentives as described above.
Fiscal 1997 as Compared to Fiscal 1996
Net sales in fiscal 1997 increased $29.7 million or 9.2% to $353.4 million
from $323.7 million in fiscal 1996. The increase in net sales was primarily the
result of:
(i) the acquisition of a large DSC in Ohio in February 1997 which
contributed sales of $15.7 million, prior to eliminations;
(ii) the full year impact in fiscal 1997 of the acquisition of a
large DSC in Alberta, Canada in May 1996 which contributed
$10.8 million in additional sales, prior to eliminations;
(iii) a $9.7 million increase in sales of standard cranes and
aftermarket products and services through the existing North
American DSC network;
(iv) a $9.7 million increase in engineered crane sales in the
United Kingdom due to several large port crane and warehouse
automation projects; and
(v) a $6.1 million increase in sales of standard cranes and
aftermarket products and services through the United Kingdom
DSC network.
These increases were offset, in part, by:
(i) a $9.3 million decrease in engineered crane sales in the
United States due to the unusually high level of large
projects recorded in 1996; and
(ii) an $11.7 million increase in intercompany sales eliminations
primarily due to the increase in sales of products and
services through the Company's North American DSC network
rather than through independent distributors.
Other income--net increased to $2.6 million in 1997 from $1.1 million in
1996 due principally to a $2.0 million gain in 1997 on the insurance claim
relating to the fire at its Morris Ltd. facility in the United Kingdom in fiscal
1995.
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Cost of sales increased $13.2 million or 5.3% to $260.8 million in 1997
from $247.6 million in 1996, primarily as a result of higher sales volume. Cost
of sales represented 73.8% of net sales in 1997, a decrease from 76.5% of net
sales in 1996. This improvement was primarily due to the completion of several
large engineered crane projects at costs lower than previously accrued. In
addition, there was a shift in the Company's sales mix in 1997 toward high
margin aftermarket products and services. As a result, gross profit increased to
$92.6 million or 26.2% of net sales in 1997 from $76.1 million or 23.5% of net
sales in 1996.
Product development, selling and administrative expenses increased by
$11.8 million or 26.2% to $56.8 million in 1997 from $45.0 million in 1996.
These expenses represented 16.1% of net sales in 1997 up from 13.9% in 1996.
This increase was primarily due to costs associated with the continued expansion
of the Company's DSC network in North America and the United Kingdom as well as
an increase in engineering costs that were not allocated to specific projects.
Parent management fees allocated by HII increased to $2.9 million in 1997
from $2.3 million in 1996.
Operating income increased by $5.5 million or 18.3% to $35.5 million in
1997 from $30.0 million in 1996. Operating income represented 10.0% of net sales
in 1997 compared to 9.3% of net sales in 1996. This improvement was primarily
the result of higher margins on certain large original equipment projects and a
change in sales mix toward higher margin aftermarket products and services,
offset, in part, by increased operating expenses associated with the Company's
expanding DSC network.
Net income increased by $2.5 million or 13.6% to $20.9 million in 1997,
from $18.4 million in 1996. This increase resulted principally from higher
operating income, offset, in part, by higher income taxes.
Fiscal 1996 as Compared to Fiscal 1995
Net sales in fiscal 1996 increased $80.5 million or 33.1% to $323.7
million from $243.2 million in fiscal 1995. The increase in net sales was
primarily the result of:
(i) the acquisition of large DSCs in Alabama in October 1995,
South Carolina in December 1995 and Alberta, Canada in May
1996, which contributed $32.3 million in additional sales,
prior to eliminations;
(ii) a $17.9 million increase in United States engineered crane
sales due to several large orders for steel mini-mills;
(iii) a $14.1 million increase in sales of standard cranes and
aftermarket products and services through the existing North
American DSC network; and
(iv) a $13.5 million increase in sales outside North America.
Other income--net decreased to $1.1 million in 1996 from $3.8 million in
1995. Results in 1995 included a gain of $2.3 million associated with an
insurance claim relating to certain assets destroyed by a fire in the United
Kingdom.
Cost of sales increased $61.2 million or 32.8% to $247.6 million in 1996
from $186.4 million in 1995, primarily as a result of higher sales volume. Cost
of sales represented 76.5% of net sales in 1996, compared to 76.6% of net sales
in 1995. Gross profit increased to $76.1 million or 23.5% of net sales in 1996
from $56.8 million or 23.4% of net sales in 1995.
Product development, selling and administrative expenses increased by $8.1
million or 22.0% to $45.0 million in 1996 from $36.9 million in 1995. These
expenses declined to 13.9% of net sales in 1996 from 15.2% of net sales in 1995.
The increased costs were primarily due to the acquisition of DSCs in North
America and the expansion of the Company's DSC network in the United Kingdom.
Parent management fees allocated by HII increased to $2.3 million in 1996
from $1.9 million in 1995.
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Operating income increased by $8.3 million or 38.2% to $30.0 million in
1996 from $21.7 million in 1995. Operating income represented 9.3% of net sales
in 1996, an increase from 8.9% of net sales in 1995. This improvement was
principally the result of sales growth in the higher margin aftermarket parts
and service business, offset, in part, by increased operating expenses as the
Company continued to expand its DSC network.
Net income increased by $4.9 million or 36.3% to $18.4 million in 1996
from $13.5 million in 1995. This increase was primarily the result of higher
operating income, offset, in part, by higher income taxes.
Liquidity and Capital Resources
The majority of the Company's sales of products and services are recorded
as products are shipped or services are rendered. Revenue on certain long-term
contracts is recorded using the percentage-of-completion method. Net cash flow
from operations is affected by the volume of, and the timing of payments under,
percentage-of-completion long-term contracts.
Net cash flow used for operating activities was $2.1 million for the six
months ended April 30, 1998 compared to cash provided by operating activities of
$12.5 million for the six months ended April 30, 1997. The decrease was due
primarily to a decrease in cash provided from HII and its affiliates in First
Half 1998 related to cash provided by HII in connection with the acquisition of
a DSC in Ohio in February 1997.
Net cash flow provided by operations was $3.8 million, $23.5 million and
$12.9 million in 1995, 1996 and 1997, respectively. The decrease from 1996 to
1997 was primarily due to a larger increase in net working capital. The increase
from 1995 to 1996 was primarily due to an increase in net income, an increase in
cash provided from HII and its affiliates and a smaller increase in net working
capital. The Company's cash flow provided by operations was largely affected by
changes in working capital, primarily due to the presence of an unusually large
number of percentage of completion contracts in 1996.
Net cash used for investment and other transactions for the six months
ended April 30, 1998 and 1997 was $3.6 million and $13.5 million, respectively.
The decrease was primarily due to a lower level of acquisition expenditures. The
Company currently anticipates that 1998 capital expenditure requirements for the
maintenance and improvement of existing operations and for the implementation of
systems projects will be approximately $4.0 million.
Net cash used for investment and other transactions for the years ended
1995, 1996, and 1997 was $2.5 million, $21.2 million and $14.9 million,
respectively. The decrease from 1996 to 1997 was primarily due to a lower level
of acquisition expenditures and the receipt in 1997 of insurance proceeds
related to an earlier fire. The increase from 1995 to 1996 was primarily due to
(i) increased expenditures on acquisitions, (ii) increased capital expenditures
in 1996 and (iii) the receipt in 1995 of proceeds from the sale of a facility in
Florida. The Company has completed 10 acquisitions since the beginning of 1995
for a total of $30.9 million.
As part of the Transactions, the Company entered into the New Credit
Facility which includes $55.0 million of term loans, the Revolving Credit
Facility and the Acquisition Facility. The Revolving Credit Facility provides
the Company with up to $70.0 million of available borrowings (of which $15.0
million is required under the Note Indenture to be reserved for issuance of
letters of credit) until the fifth anniversary of the Recapitalization Closing
for working capital, acquisitions and other corporate purposes, subject to
compliance with certain conditions, including a borrowing base test. Up to $20.0
million of the Revolving Credit Facility (of which $15.0 million will not be
subject to a borrowing base) is available for the issuance of documentary and
standby letters of credit. The Acquisition Facility permits the Company to
borrow up to $30.0 million until the third anniversary of the Recapitalization
Closing (and to repay the same in installments prior to the seventh anniversary
of the Recapitalization Closing) to finance acquisitions, subject to compliance
with certain conditions. See "Description of
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the New Credit Facility." Term Loan A will be payable in 20 quarterly
installments, commencing on June 30, 1998 and Term Loan B will be payable in 28
quarterly installments, commencing on June 30, 1998.
Aggregate yearly term loan principal payments under the New Credit
Facility will be as follows: (i) $675,000 in 1998; (ii) $2,100,000 in 1999;
(iii) $3,600,000 in 2000; (iv) $5,100,000 in 2001; (v) $6,600,000 in 2002; (vi)
$11,988,000 in 2003; (vii) $16,625,000 in 2004; and (viii) $8,313,000 in 2005.
Historically, the Company's interest expense has not been material. On a pro
forma basis, assuming the Transactions had occurred on November 1, 1996, the
Company's cash interest expense for 1997 would have been $24,703,000.
Borrowings under the New Credit Facility are (i) secured by substantially
all of the present and future assets of the Company and its subsidiaries located
in the United States and the United Kingdom, certain of the Company's
subsidiaries' present and future assets located in Canada and by a pledge of
substantially all of the issued and outstanding shares of capital stock of the
Company and its current and future subsidiaries and (ii) guaranteed by Holdings
and substantially all of the Company's subsidiaries. See "Description of the New
Credit Facility."
As of April 30, 1998, the Company and its subsidiaries had an aggregate of
$261.9 million of Indebtedness outstanding, including the $200.0 million
principal amount of the Notes and $55.0 million of borrowings under the New
Credit Facility.
At April 30, 1998, the Company had, subject to compliance with certain
conditions, approximately $64.5 million of availability (of which $15.0 million
is required under the Note Indenture to be reserved for issuance of letters of
credit) under the Revolving Credit Facility. See "Capitalization." Management
believes that cash flow from operations, together with borrowings under the
Revolving Credit Facility will be sufficient to meet its anticipated cash
requirements for interest and principal payments, working capital, the payments
to be made to Holdings described below and capital expenditures for the
foreseeable future. The Company also expects that expansion and future
acquisitions will be financed from funds generated from operations and
borrowings under the Revolving Credit Facility and the Acquisition Facility.
Holdings' primary cash needs are for administrative expenses and for the
payment of income taxes of Holdings and its affiliates related to the MHE
Business. Holdings is a holding company that conducts all of its operations
through its subsidiaries. Consequently, Holdings is dependent on payments from
its subsidiaries to meet its cash needs. The New Credit Agreement and the Note
Indenture generally restrict the ability of Holdings' subsidiaries to transfer
funds to Holdings, other than for administrative fees and expenses (subject to a
general limit) and other than for the payment of income taxes. Under the terms
of the Note Indenture, the Company is generally restricted from paying dividends
or making other restricted payments to Holdings unless, among other things, the
ratio of the Company's EBITDA to Consolidated Interest Expense (as defined in
the Note Indenture) for the four most recent consecutive fiscal quarters is at
least 2 to 1. Moreover, the terms of the Series A Senior Preferred Stock, as
well as the Series B Junior Preferred Stock and the Series C Junior Voting
Preferred Stock, restrict the ability of Holdings and its subsidiaries to incur
additional indebtedness. As a result of these restrictions, among others, there
can be no assurance that Holdings will have available to it sufficient cash
resources to pay cash dividends on the New Series A Senior Preferred Stock
commencing October 1, 2003.
The Company's products are sold in over 50 countries around the world.
Although revenues of the Company are generated in foreign currencies, the vast
majority of both sales and associated costs are in United States dollars, Pounds
Sterling and Canadian Dollars. The Company may, from time to time, hedge
specifically identified committed cash flows in foreign currencies using forward
currency sale or purchase contracts. Such foreign currency contracts
historically have not been material in amount.
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BUSINESS
The Company is a leading international provider of "through-the-air"
material handling products and services used in most manufacturing industries.
The Company's original equipment operations design and manufacture a
comprehensive line of industrial cranes, hoists and other component products,
sold principally under the P&H and Morris brand names. Through its aftermarket
operations, the Company provides a variety of related products and services,
including replacement parts, repair and maintenance services and product
modernizations. In recent years, the Company has shifted its orientation from an
original equipment-focused United States manufacturer to an international full
service provider with a significant emphasis on the high margin aftermarket
business.
During the past three years, the Company has grown significantly, both
internally and through acquisitions. From fiscal 1994 through fiscal 1997, the
Company's net sales grew from $109.4 million to $353.4 million and EBITDA
increased from $15.1 million to $45.9 million. Management believes that this
growth is largely attributable to (i) strengthening and broadening its product
line, (ii) building a network of Company-owned distribution and service centers
which provides a local presence for product support and a platform for growth
and (iii) expanding into attractive domestic and international markets through
internal growth and a disciplined acquisition strategy.
The Company's core business was founded in 1884 and material handling
machinery and related equipment have been sold under the well-recognized P&H and
Morris brand names since the 1890s. The Company has developed a large global
installed base of equipment, having sold an aggregate of over half a million
cranes and hoists according to management estimates. Management believes that
the Company is one of the leading suppliers of industrial overhead cranes in
North America, the United Kingdom and South Africa. Management also believes
that the Company is one of the largest global providers of aftermarket products
and services to the industrial crane industry. Sales outside of North America
accounted for 39% of fiscal 1997 net sales, with Western Europe representing 22%
and the Pacific Rim representing 8% of net sales. For additional geographical
information, see the Combined Financial Statements of the Company and notes
thereto appearing elsewhere herein.
Industrial cranes and hoists are critical to the operations of most
businesses that require the movement of large or heavy objects. The steel,
aluminum, paper and forest products, aerospace, foundry, and automotive
industries, among others, rely on cranes and hoists as one of the most flexible
and efficient methods of transporting materials within a plant while maximizing
the use of available space. Industrial cranes, which typically last 20 to 50
years, require significant aftermarket support in the form of replacement parts,
machine modernizations and upgrades, repairs and inspection and maintenance
services.
The current management team has implemented a strategy to capitalize on
the Company's significant global installed base of equipment to generate high
margin aftermarket opportunities. The Company has built its aftermarket
operations in order to become a full service provider and capture additional
revenue. In addition, management believes that the diversified earnings created
by this strategy help to lessen the effect of economic cycles on the Company. In
fiscal 1997, aftermarket sales accounted for approximately 40% of net sales and
65% of gross profit on a consolidated basis, while in North America, where the
Company has pursued its full service strategy for a longer period of time, the
aftermarket business accounted for 51% of net sales and 72% of gross profit.
Prior to the acquisition of Morris Ltd. in 1994, the Company's operations
were primarily conducted in the United States. The acquisition of Morris Ltd.
provided the Company with major manufacturing facilities in the United Kingdom
and South Africa and access to many other markets around the world. The Company
has since expanded its international manufacturing operations by acquiring
Mondel Engineering Ltd.'s brake manufacturing operations in Canada in 1995. In
addition, the Company has acquired regional crane assemblers and large
distributors in Alabama, Ohio, South Carolina, Canada, Mexico, Scotland and
Singapore. Since July 1994, the Company has acquired a total of 12 businesses
that collectively generated annual revenues in excess of $170.0 million in
fiscal 1997.
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Industry Overview
Industrial cranes and hoists provide "through-the-air" material handling
for a broad range of industrial applications. Within the industrial setting,
through-the-air material handing equipment continues to be one of the most
flexible, effective and reliable means of transferring materials while
maximizing the use of available space. Through-the-air material handling
equipment provides more efficient space and capacity utilization than fixed
conveyors and traditional forklifts. These tools are widely used in
manufacturing industries with no practical alternative or substitute. The
industry is comprised of original equipment cranes and hoists, and aftermarket
parts, service and modernizations. Despite global demand, the industrial crane
and hoist industry remains highly fragmented, with three global participants and
a large number of regional and local players.
The United States market for industrial overhead cranes and hoist products
is estimated to be approximately $600 million per year and the potential
aftermarket for such products is estimated to be approximately $1.2 billion per
year. Management estimates that the global market is several times larger. In
mature industrialized economies, original equipment growth is driven by the need
for upgrades and replacements as well as capacity expansion. Technological
innovations such as more compact, space efficient cranes, built in diagnostic
systems and sophisticated motors and transmissions, improve operating efficiency
and fuel the replacement/upgrade market. In emerging economies, however, the
market for overhead cranes is tied principally to industrial development. Demand
for aftermarket products and services is driven by general wear and tear of
equipment and increases as a result of growth in the installed base of cranes
and hoists. Management believes that the global market for outsourced crane
maintenance and repair services is continuing to grow as more companies focus on
core competencies and use outsourced suppliers.
Competitive Strengths
Large Installed Base of Existing Equipment. The Company believes it has
one of the largest installed bases of industrial cranes in North America, the
United Kingdom and South Africa. This installed base provides the Company with
well-established relationships and a strong platform upon which to pursue high
margin aftermarket opportunities. A large portion of the Company's installed
base is used in demanding process industries which require frequent replacement
parts, repairs, inspection services and modernizations.
Stable Aftermarket Demand and Earnings. Material handling products are
critical to customers' operations. As long as industrial plants continue to
operate, the cranes and hoists used in such facilities will require replacement
parts and maintenance services, irrespective of economic cycles. Management has
increased its focus on aftermarket operations, and this more stable business
represented 65% of the Company's gross profit in fiscal 1997.
Diverse Customer Base. The Company sells both original equipment and
aftermarket products and services to thousands of customers operating in various
manufacturing industries in more than 50 countries. Management believes that
this geographic and industry diversity helps to lessen the effect on the Company
of economic cycles that may affect a particular region or industry.
Reputation for Reliability and Engineering Expertise. Over its long
history of providing custom engineered cranes and hoists, the Company has
developed a reputation for engineering expertise and product reliability. As the
Company has developed a number of innovative technologies, it has enhanced its
reputation and built a platform to pursue the higher volume standard crane
market. In addition, the Company has been able to apply its proven technical
skills in the aftermarket business.
Company-Owned Distribution and Service Network. The Company has developed
an international distribution and service network with 61 Company-owned
locations in key industrial markets. This DSC network is central to the
Company's strategy of being a single source provider of original equipment and
aftermarket products and services. Management believes that ownership of its
primary distribution channel provides the following competitive advantages: (i)
a higher level of control over the delivery of its products and services; (ii)
faster service response time; (iii) quicker delivery of standard cranes at a
lower cost; and (iv) increased sales and margins by capturing the incremental
profit that would otherwise be recognized by independent distributors.
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Experienced Management Team. The Company is run by an experienced,
entrepreneurial and talented management team led by its President, Michael
Erwin. The top seven executives combined have over 100 years of experience at
the Company. Mr. Erwin has run the Company since December 1994 and, along with
the rest of the senior management team, has developed and implemented the
Company's successful growth strategies. In acquiring 12 companies since 1994,
management has demonstrated its ability to acquire and integrate businesses in a
disciplined and effective manner. Under current management's leadership, EBITDA
has grown at a compound average annual rate of approximately 45% from fiscal
1994 through fiscal 1997.
Business Strategy
Management has developed an integrated strategy designed to increase
revenues and profits by capitalizing on the Company's large installed base of
equipment, Company-owned distribution and service network and technical
competencies to capture greater market share and differentiate the Company from
original equipment-focused competitors.
The key components of the Company's strategy are as follows:
Focus on Aftermarket Opportunities. The United States industrial crane and
hoist aftermarket is estimated to be $1.2 billion annually and management
estimates the global aftermarket to be several times that amount. This market is
highly fragmented and a substantial portion of repair and maintenance work is
performed by customers' own maintenance personnel. A recent independent study
indicates that the Company currently captures approximately 25% of the United
States aftermarket potential of its own installed base and less than 10% of the
entire United States aftermarket potential. Management has developed a series of
focused marketing programs and product offerings designed to capture a greater
share of the aftermarket business by taking advantage of the Company's large
installed base, brand recognition, and local DSC network. The Company is
beginning to see the benefits of these efforts and aftermarket sales have
increased in each of the last four years.
Provide High Level of Customer Support. The Company's products and
services are designed to meet its customers' objectives of lowering their
material handling costs and increasing the efficiency of their operations. The
Company's goal is to help its customers reduce costs and increase profitability
through the proper selection, design, manufacture and installation of original
equipment and by providing a wide variety of aftermarket products and services.
Management believes that this ability to provide comprehensive solutions to its
customers' needs is a competitive advantage.
Expand DSC Network. The Company's DSCs are its platform for growth and
central to its strategy of being a single source provider of original equipment
and aftermarket products and services. The Company's North American DSC network
covers a broad territory of geographically dispersed customers. The Company
plans to continue developing this network with the goal of having a DSC in each
key industrial market in North America. The Company has developed similar DSC
networks in the United Kingdom and South Africa, and management plans to
replicate this model in other attractive markets.
Improve Production Efficiency to Reduce Costs. Management has implemented
numerous efficiency initiatives that it believes will improve the Company's
competitiveness while enhancing profit margins. The Company is completing the
re-engineering of various operations to cellular manufacturing. In addition, the
Company has standardized a number of its proprietary components which it
manufactures at specialized facilities for global distribution. Management
believes these initiatives will enable the Company to lower its overall cost
structure by reducing labor, engineering, and fabrication expenses and to
achieve economies of scale and permit faster deliveries. In the United States,
the lead time required to deliver certain original equipment was reduced by as
much as 50% in fiscal 1997.
Increase Sales of High Volume Original Equipment Products. The Company
plans to continue increasing its penetration of the higher volume and more
stable market for standard cranes and hoists by: (i) capitalizing on its brand
equity in engineered cranes; (ii) reducing costs; and (iii) improving delivery
times. The Company has tripled
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the number of standard cranes it has sold in the United States during the past
three years, yet its share of the United States standard crane market in fiscal
1997 was still less than 15%.
Expand Through Selected Acquisitions. The global material handling
industry is highly fragmented and is beginning to consolidate as a result of the
scale economies that favor larger competitors. Management believes that the
Company is well positioned to capitalize on this opportunity. Since July 1994,
the Company has acquired 12 businesses which collectively generated annual
revenues in excess of $170.0 million in fiscal 1997. The Company plans to
continue making strategic acquisitions to penetrate new markets and to expand
its range of product and service offerings.
Products and Services
The Company operates through two distinct but interrelated business
groups: (i) original equipment and (ii) aftermarket products and services.
Original Equipment
The Company's original equipment operations design, manufacture and
distribute a broad range of standard and engineered overhead and gantry cranes,
hoists and related products. The Company's original equipment products have a
reputation for quality, durability and technological innovation.
Engineered Cranes. Management attributes the Company's position as a
leading manufacturer of industrial cranes to its reputation for reliability and
engineering sophistication. The Company's engineered cranes are used by
customers with unique performance requirements that cannot be achieved with a
standard overhead crane. The Company's engineered cranes are individually
designed for specific applications in a wide variety of demanding environments
and typically have a high load capacity. Each unit is highly engineered,
incurring between 300 and 4,500 hours of engineering, and is generally priced
between $60,000 and $6.0 million. The Company markets engineered cranes under
the P&H (North and South America and Southeast Asia) and Morris (United Kingdom,
South Africa, Scandinavia, the Middle East and Southeast Asia) brand names.
Within the engineered crane market, performance is often the most critical
purchase criterion for a customer. Given the premium placed on technological
sophistication and specific product performance, customers purchasing highly
engineered cranes tend to be less sensitive to the length of time between order
and delivery than most standard overhead crane customers. Overall lead times for
engineered cranes typically range between 20 and 40 weeks and include on-site
inspection of customer needs, in-house engineering and development,
manufacturing, product testing and installation. Many engineered crane projects
are completed pursuant to contracts on which the Company receives progress
payments and for which the Company occasionally must post performance bonds.
Engineered cranes provide particularly valuable aftermarket opportunities
since they often operate in harsh environments and require frequent replacement
parts and a high degree of ongoing inspection and maintenance services.
Management believes that the Company is well positioned to provide these
services for its customers as a result of its product knowledge, expertise and
local technical support.
Due to the advanced design of an engineered crane, these products are
generally manufactured at one of the Company's facilities located in Oak Creek,
Wisconsin, Loughborough, England or Johannesburg, South Africa. Each of these
facilities maintains advanced manufacturing capabilities, sophisticated
engineering skills, project management and inspection capabilities.
Standard Cranes. The Company's standard cranes, which utilize
pre-engineered components, are adaptable to a wide variety of uses. While the
cranes are configured to meet each customer's particular needs, the degree of
specific engineering is typically limited to less than 100 hours and most often
falls within the 20 to 60 hour range. These cranes typically range in price from
$10,000 to $200,000. The Company markets various standard cranes under the P&H
(North and South America and Southeast Asia), Morris (United Kingdom, South
Africa, Scandinavia, the Middle East and Southeast Asia), Kaverit (Canada) and
Hercules (Mexico) brand names.
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While engineered cranes have typically been produced by larger
manufacturers, local crane builders have historically supplied significant
numbers of standard cranes. Delivery time and price are key purchase criteria.
The Company has successfully grown its standard crane sales by expanding local
assembly operations to shorten delivery times and reduce costs.
Hoists. The Company manufactures electric wire rope and chain hoists,
manual chain hoists and ratchet lever hoists. The Company's hoists range in
capacity from 1/8 of a ton to 60 tons and feature a variety of electrical
control technologies. Customers select a specific type of hoist based on the
number of lifts to be performed per day and the average load capacity. Hoist
product prices range from $100 to $150,000, with most sold in the $1,000 to
$8,000 range. The Company markets its industrial hoists under the Redi-Lift and
Hevi-Lift brand names in North and South America and under the Morris brand name
in the United Kingdom, South Africa, South America and Southeast Asia. Through
the acquisition of Morris Ltd. in 1994, the Company significantly strengthened
its position in the hoist marketplace. In 1994, a portion of the Company's
Loughborough, England facility used to manufacture electric hoists was destroyed
by a fire. The Company rebuilt the facility as a state-of-the-art hoist
manufacturing and assembly plant.
Other Components. Over the past several years, the Company has
significantly expanded its product breadth through strategic acquisitions and
the focused application of its technical expertise to complementary component
products. Industrial brakes and winches represent two important component
products manufactured by the Company and marketed to end-users and/or to other
industrial equipment manufacturers.
Aftermarket Products and Services
The Company's aftermarket business consists of replacement parts, repairs,
inspection and maintenance services, and modernizations for products
manufactured by both the Company and its competitors. The Company's network of
DSCs and independent distributors located around the world is the platform for
the Company's aftermarket sales activities, serving as distribution centers for
its original equipment and replacement parts as well as the focal point for
service activities. While aftermarket sales accounted for approximately 40% of
net sales in fiscal 1997, they accounted for 65% of gross profit. While the
Company's share of the aftermarket business on its United States installed base
is approximately 25%, where proprietary parts or product knowledge is important,
the Company has a significantly higher share of the aftermarket business.
Parts and Components. The Company manufactures a wide range of replacement
parts and components necessary to maintain cranes and hoists manufactured by
both the Company and its competitors. These parts are sold through both DSCs and
independent distributors and agents.
Given the long useful life of an overhead crane, which ranges from 20 to
50 years, the Company's installed base of equipment provides a strong foundation
for the Company's aftermarket business. Parts sales are generated by customer
requests and through service personnel during scheduled inspections, appraisals
and service calls.
The Company markets both proprietary and commercially available parts for
its equipment. Proprietary parts command premium prices because they either have
unique design attributes that make them prohibitively expensive to reverse
engineer or are critical parts where an inadequate substitute could have
catastrophic consequences.
Service. The Company provides installation, repair, inspection and
maintenance services, primarily through its DSC network. The Company provides
these services under highly recognized trade names including ProCare (United
States, Canada), Crane Aid (South Africa) and UK Crane Service (United Kingdom).
The Company has expanded its service offerings as a strategic response to
customers' increased interest in outsourcing the repair, inspection and
maintenance of overhead cranes and hoists. Currently, management estimates that
more than 30% of the Company's total repair and maintenance net sales are from
services performed upon cranes and hoists manufactured by its competitors.
Management believes that there is significant opportunity to leverage its
growing service operations to provide similar services on significantly more of
the cranes and hoists manufactured by its competitors.
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In addition to responding to service calls from clients, the Company has
expanded its portfolio of services to include inspections for regulatory
compliance purposes (such as OSHA) as well as an innovative Crane
Appraisal/Repair Evaluation (CARE) program. The CARE program thoroughly assesses
the condition and performance of a crane and provides a concise reference
document for restoring the equipment to optimal operating performance. Each of
these inspection programs sends a highly-trained service technician into
customers' factories to evaluate the overall condition of the crane or hoist,
and allows the technician to recommend preventive maintenance and replacement
components. See "--Sales, Marketing and Distribution."
Modernizations. Crane modernizations provide an attractive opportunity for
the Company to generate additional revenue from the entire installed base of
equipment. By upgrading the electrical and mechanical systems on existing
cranes, the Company can help its customers to optimize crane performance and
improve the capacity and efficiency of their operations. The cost of modernizing
an older crane typically ranges between 10% and 60% of the cost of a new
product.
Sales, Marketing and Distribution
Due to the diverse nature of its product lines and customer requests, the
Company uses multiple sales approaches to serve its large customer base. A
majority of sales are generated by Company employees and DSCs. In addition, the
Company utilizes a number of independent agents and distributors in certain
markets. In many markets, the members of the Company's sales staff specialize in
either original equipment or aftermarket products and services. These employees
have the ability to effectively identify and service the original equipment and
aftermarket needs of the customer, thereby positioning the Company as a single
source provider.
With the exception of very sophisticated original equipment projects, the
Company's selling efforts occur primarily at the regional level. For
sophisticated original equipment, the Company uses dedicated worldwide product
or engineering specialists to "team sell" the products. In this process, the
team provides written specifications, design concept consulting, project scope
development and project financial planning.
In order to develop stronger and more knowledgeable customer
relationships, the Company has developed a DSC network, bringing the Company's
parts and service operations closer to the customer. The Company's DSC network
provides three distinct yet integrated functions: (i) a distribution network for
parts; (ii) a sales organization for original equipment; and (iii) an
installation, repair, inspection and maintenance service operation. The Company
has significantly expanded its DSC network in recent years through both
acquisitions of previously independent distributors as well as the start-up of
new DSCs.
The Company's DSC network consists of 61 locations, including 38 in North
America. In 1994, the Company opened its first DSC in the United Kingdom and,
over the past three years, has built a DSC network with 12 locations that
operate under the UK Crane Service trade name. The Company's DSC network in
South Africa presently consists of 10 locations that operate under the Crane Aid
trade name.
The DSC network maintains an inventory of fast-moving parts and deploys
fully equipped service technicians, to provide product support to local
customers. Certain of the Company's DSCs also build small, standardized original
equipment cranes, which has enabled the Company to increase its penetration of
the standard crane market. The Company's goal is to have a DSC in each key
industrial market in North America. In certain customer locations, the Company
has technicians permanently on site to provide immediate technical support or
routine preventive maintenance.
<TABLE>
<CAPTION>
The following table outlines the Company's current DSC network:
Location Principal Trade Names Number
- --------------------------------------------------------------------------------
<S> <C> <C>
North America P&H Material Handling Center 38
United Kingdom UK Crane Service 12
South Africa Crane Aid 10
Southeast Asia Morris Blooma 1
</TABLE>
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<PAGE>
The Company's distribution and service operations are also supported by
distributor and agent relationships in more than 50 countries, many of which are
unwritten arrangements that may be terminated at any time.
Manufacturing
The Company employs high-quality, technically advanced manufacturing at
its core facilities. The Company utilizes specialized manufacturing facilities
in combination with regional assembly to balance the different operational
requirements faced by a full service participant in the overhead crane and hoist
industry.
The specialized manufacturing facilities build highly engineered cranes
and utilize advanced technology throughout the manufacturing process. These
facilities support the regional DSC crane assembly operations by providing
high-quality, standardized components which are manufactured using processes
which are not economical for smaller, regional facilities. For example, due to
the specialized nature of the machining and assembly processes associated with
hoists and brake systems, focused manufacturing facilities located in
Loughborough (hoists) and Toronto (brakes) are used to produce the majority of
these components for distribution to the Company's facilities throughout the
world. This centralization allows the Company to take advantage of economies of
scale and focused engineering resources while supporting the Company's objective
of standardizing component design and manufacturing.
By providing light manufacturing and assembly of standardized overhead
crane products on a regional basis, the Company addresses customers' demand for
cost effective products and shorter lead-times. This regional manufacturing
strategy also benefits the Company's new product development efforts since the
regional DSC manufacturers have a better understanding of end-users' performance
needs.
Raw Materials
The Company maintains strong relationships with a large number of
suppliers both domestically and abroad. Typically, the Company will source raw
materials from a local supplier in the region of the manufacturing facility,
often entering into a blanket purchase order or an equivalent arrangement to
reduce costs. Under certain circumstances, however, the Company will establish a
long-term supply arrangement, either in an attempt to secure product consistency
or to take advantage of volume discounts. Some of the materials most frequently
purchased by the Company include steel, electric motors, castings and forgings,
electrical controls and components, and power transmission and related
components. Substantially all of the materials purchased by the Company are
available from a variety of sources within the country of manufacture or abroad.
Backlog
The Company's backlog of orders at January 31, 1998 was approximately
$99.8 million compared to approximately $111.9 million at January 31, 1997.
However, bookings in the quarter ended January 31, 1998 increased by $19.2
million or 32.4% as compared to the quarter ended January 31, 1997. The change
in backlog is primarily attributable to reduced through-put time as the Company
has improved its manufacturing operations. In the United States, the lead time
required to deliver certain original equipment was reduced by as much as 50% in
fiscal 1997. The Company's orders for standard hoist products are usually
shipped within 3 to 12 weeks. Overall lead times for products that are
manufactured to customer's specifications typically range between 12 and 40
weeks.
Warranties
The Company generally provides a warranty on its products for periods of
one to two years. At January 31, 1998, the Company had accrued warranties of
approximately $3.5 million.
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Trademarks and Brand Names
The Company offers its equipment and services primarily under the P&H and
Morris brand names. The P&H and Morris trademarks, which have been consistently
used for over 100 years, are recognized in important markets around the world.
P&H is currently used on above-ground mining equipment manufactured by HarnCo,
as well as on the crane and hoist products manufactured by the Company for
related services offered by the Company. HarnCo has licensed to the Company the
sole and exclusive right to use the P&H trademark on a worldwide basis in
connection with "through-the-air" material handling original equipment from the
date of the Recapitalization Closing until 15 years after the earlier to occur
of a sale of Holdings to a third party or a public offering of the common stock
of Holdings, the Company or their parents or successors, and for an additional
seven years in connection with aftermarket products and services. The royalty
fee for use of the trademark is 0.75% of the aggregate net sales of the MHE
Business for the ten year period commencing 12 months after the Recapitalization
Closing. See "Certain Relationships and Related Transactions."
The Company also sells products under the Kaverit and Mondel trademarks in
Canada, and the Hercules trademark in Mexico. It provides aftermarket service
under the ProCare trademark in the United States, the UK Crane Service trademark
in the United Kingdom, and the Crane Aid trademark in South Africa. The Company
also uses a variety of other marks in different countries. There are no known
conflicts or third party rights which would materially impact the Company's
limited use of the P&H trademark in connection with the Company's business
activities for the life of the license agreement or use of its other trademarks.
Patents
The Company owns approximately 60 United States patents and pending patent
applications and approximately 120 foreign patents and pending patent
applications, primarily in Brazil, Canada, Japan, Mexico and the United Kingdom.
The Company has acquired patents pertaining to improvements in stacker cranes,
portal cranes, anti-sway cable reeving systems for cranes, automation and
controls, and crane wheel and rail configurations to prevent skewing of
rail-mounted cranes. Most of the products manufactured by the Company are
proprietary in design and the Company is not aware of any subsisting patents
held by others which would be infringed by the manufacture and sale of the
Company's current lines of crane and hoist products.
Competition
The industrial crane and hoist industry is highly fragmented, with three
global participants and many regional and local players. Therefore, the markets
in which the Company operates are highly competitive, and the Company faces
competition from a number of different manufacturers in each of its product
areas and geographic markets, both domestic and foreign. Globally, the Company
believes it is one of the three largest manufacturers of industrial overhead
cranes and one of the largest providers of related aftermarket products and
services. Other global competitors include Mannesmann Dematic AG, a subsidiary
of Mannesmann AG, and KCI Konecranes International Corp. Within specific
geographic and product markets, the market share of the top participants often
varies.
Governmental Regulation
Environmental Regulation
The Company's operations and properties worldwide are subject to extensive
and changing legal requirements and regulations pertaining to environmental
matters. In 1997, expenditures in connection with the Company's compliance with
federal, state, local and foreign environmental laws and regulations did not
have a material adverse effect on the Company's earnings or competitive
position.
The principal environmental compliance issues that arise in connection
with the Company's manufacturing facilities are hazardous/solid waste disposal
and air emissions (primarily paint and welding). The Company's DSCs do not
create environmental conditions that materially affect the Company's operations.
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The Resource Conservation and Recovery Act ("RCRA") requires the Company
to manage and recycle or dispose properly of the wastes it generates from its
manufacturing operations. Similar foreign hazardous waste laws and regulations
apply to the Company's facilities outside the United States. RCRA and these
other hazardous waste laws and regulations include storage, management and
manifest provisions, among others. The Company also has embarked on a pollution
prevention program, for example, reducing the hazardous waste generated at its
Oak Creek, Wisconsin facility by 63 percent in 1996 from the prior year, while
at the same time increasing production. The Company has agreements worldwide
with hazardous waste management firms to recycle or dispose properly of
generated hazardous wastes. Many of the Company's regional distribution centers
have a "parts washer sink" on-site, and the spent solvents generated from these
minor cleaning activities are managed, collected and recycled under contracts
with waste management firms. The Company is not aware of any material
non-compliance with applicable hazardous waste laws and regulations at its
facilities or operations.
Under the Clean Air Act, the States have adopted an array of control
measures and programs to minimize certain hazardous air pollutants and
particulate matter. The Company has obtained necessary permits for any affected
facilities. Foreign clean air laws and regulations address many of the same
pollutants and issues. Considerable regulatory activity is expected in the next
ten years with the implementation of 1997 changes to the national ambient air
quality standards for ozone and particulate matter. The Company has made a
number of select investments in equipment at its primary manufacturing sites in
anticipation of these changes. The adoption of some of these additional clean
air regulations might require the Company to make further capital expenditures
not currently anticipated and that may be material.
In connection with the ownership of its properties and operation of its
business, the Company may also be subject to liability under various federal,
state, local and foreign laws, regulations and ordinances relating to clean-up
and removal of hazardous substances on, under or in such properties. Certain
laws, such as the Comprehensive Environmental Response, Compensation and
Liability Act, typically impose liability whether or not the owner or operator
knew of, or was responsible for, the presence of such hazardous substances.
Persons who arrange, or are deemed to have arranged, for the disposal or
treatment of hazardous substances also may be liable for the costs of removal
and remediation of such substances at the treatment or disposal site, regardless
of whether such site is owned or operated by such person. Under the terms of the
Recapitalization Agreement, HarnCo retained all liability for the only two, open
environmental clean-up claims brought against HarnCo in the Milwaukee area. The
Company and its management are not aware of any other material environmental
clean-up claim which is pending or is threatened against the Company, but there
can be no assurance that any such claim will not be asserted against the Company
in the future.
The Company has undergone significant expansion in recent years through
acquisitions, and management has decided that it is important for the Company's
operations to adopt a "proactive" compliance management approach to
environmental matters. The Company hired a manager of safety, health and
environmental affairs in September 1996 to oversee worldwide compliance, and
staff have been designated to lead compliance activities at each facility. The
Company also is developing an "Annual Compliance Calendar" matrix for all
required facility reports and an audit system for all environmental, safety and
health issues. A key component of the Company's environmental strategic
management plan is training for managers and employees. Once fully implemented
in 1998, the Company believes its compliance program will be in conformance with
ISO 14000 standards.
It is likely that situations will arise from time to time requiring the
Company to incur expenditures in order to ensure continuing regulatory
compliance. The Company is not aware of any environmental condition or any
operation at any of its properties or facilities, either individually or in the
aggregate, which would cause expenditures that would result in a material
adverse effect on the Company's results of operations, financial condition, or
competitive position. There could be future, unknown environmental regulatory
changes that could have a material effect.
In connection with the Transactions, an environmental assessment of
certain of the Company's properties and operations at which the Company may have
potential environmental liabilities has been conducted. This environmental
assessment has indicated that no environmental matters or compliance issues
exist at the Company's
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United States properties and operations that would have a material adverse
effect on the Company's earnings or competitive position. At some of the
Company's foreign properties and operations, however, the environmental
assessment has indicated a need for the Company to conduct certain follow-up
measures in order to reduce potential environmental liabilities. The Company
intends to follow up on certain of the recommendations made in the environmental
assessment with respect to both United States and foreign properties. There can
be no assurance that unknown conditions at the Company's facilities will not
result in potential liabilities that may be material.
The Loughborough, England facility is subject to an air emissions permit,
the limits of which became enforceable in April 1998. The Company has retained
a consultant who has conducted tests to determine if the facility complies with
such limits. However, the results of the consultant's tests have not been
received to date. Further, the Company is currently evaluating the purchase of
insurance to cover some or all potential environmental liabilities.
Other Regulation
The Company's operations also are subject to many other laws and
regulations, including those relating to workplace safety and worker health
(principally OSHA and regulations thereunder in the United States and similar
laws in most other countries). The Company believes it is in material compliance
with these laws and regulations and does not believe that future compliance with
such laws and regulations will have a material adverse effect on its cash flow,
results of operations or financial condition.
Properties
The Company maintains its corporate headquarters in Oak Creek, Wisconsin
and conducts its principal operations at the following facilities:
<TABLE>
<CAPTION>
Square
Location Utilization Footage Owned/Leased
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Loughborough, U.K. Crane/hoist manufacturing 420,000 Owned(a)
Oak Creek, WI Crane/hoist/winch manufacturing 277,000 Owned
Johannesburg, S.A. Crane/hoist manufacturing 124,000 Owned
Franklin, OH Regional fabrication/remanufacturing 75,000 Owned
Mexico City, Mexico Crane/hoist manufacturing/distribution/service 65,000 Owned
Edmonton, Canada Crane/hoist regional manufacturing/service 58,300 Owned
Windsor/Madison, WI Crane/hoist remanufacturing 55,000 Leased(b)
Mauldin/Greenville, SC Regional crane assembly/service 40,400 Leased(c)
Birmingham, AL Regional crane assembly/service 36,500 Owned/Leased(d)
Singapore, Singapore Parts warehouse/crane assembly/hoist distribution 21,200 Land Leased(e)
Toronto, Canada Brake systems and parts manufacturing 17,600 Leased
</TABLE>
- ----------
(a) Unused portions are subleased.
(b) Lease expires May 31, 2002.
(c) Lease expires December 31, 2004.
(d) The Company owns the property with the exception of a portion thereof
leased (with an option to purchase) from the Industrial Revenue Board of
Birmingham.
(e) The building is owned while the land underneath the building is to be
leased pursuant to a thirty-year lease.
The Company also owns and leases a number of other properties as DSCs in
the United States, Canada, the United Kingdom, South Africa and Mexico.
The Company believes that its properties have been adequately maintained,
are in generally good condition, and are suitable for the Company's business as
presently conducted. The Company believes its existing facilities provide
sufficient production capacity for its present needs and for its anticipated
needs in the foreseeable future.
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The Company also believes that upon the expiration of its current leases, it
either will be able to secure renewal terms or enter into leases for alternative
locations at market terms.
Employees
At January 31, 1998, the Company had a total of 2,072 full-time employees,
of which 833 were hourly and 1,239 were salaried personnel. Approximately 74% of
the Company's hourly employees are represented by unions. The Company's United
States operations employ approximately 904 employees, of which 151 production
and maintenance employees at the facility in Oak Creek, Wisconsin are unionized.
Until the October 1997 Drop Down, the Company's unionized employees in the
United States were covered by a collective bargaining agreement between HarnCo
and the United Steelworkers of America, Local 1114, which expires August 31,
1998. In connection with the October 1997 Drop Down, these employees became
employees of MHLLC, a newly-created wholly-owned subsidiary of the Company. The
Company will honor the collective bargaining agreement as to its employees
through the remainder of its term. Although negotiations with respect to a new
collective bargaining agreement have not yet begun, the Company contemplates
seeking changes in benefit programs. In addition, the Company is a party to
several agreements with unions representing certain of its employees in Mexico,
South Africa and the United Kingdom. These agreements all have a one year term.
There can be no assurance that the Company will be able to successfully
negotiate a new collective bargaining agreement with Local 1114 or any other
collective bargaining agreements upon their expiration without work stoppages.
None of the Company's businesses has experienced a significant strike,
slowdown, or lockout within the last ten years. The Company believes that its
relationship with its employees is good and that it provides working conditions,
wages, and benefits that are competitive with other providers of the kinds of
products and services offered by the Company.
Legal Proceedings
From time to time, the Company is involved in routine litigation incident
to its operations. The Company believes that any pending or threatened
litigation will not have a material adverse effect on its consolidated results
of operations and financial condition.
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MANAGEMENT
The following sets forth certain information with respect to the persons
who are members of Holdings' Board of Directors or the senior management team of
the Company and/or Holdings.
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Michael S. Erwin................ 45 President, Chief Executive Officer and Director
David D. Smith.................. 43 Vice President--Finance and Director
Peter A. Kerrick................ 41 Vice President--Equipment
Richard J. Niespodziani......... 46 Vice President--Aftermarket Products
Edward J. Doolan................ 46 Vice President--Distribution & Service
K. Bruce Norridge............... 51 Vice President--Europe & Africa
Michael J. Maddock.............. 55 Vice President--Pacific Rim & Middle East
Martin L. Ditkof................ 40 General Counsel and Secretary
Todd R. Berman.................. 40 Chairman of the Board
Jay R. Bloom.................... 42 Director
Robert W. Hale.................. 51 Director
Michael S. Shein................ 34 Director
Michael R. Young................ 53 Director
Larry Zine...................... 43 Director
</TABLE>
Michael S. Erwin--Michael Erwin serves as President and Chief Executive Officer
of Holdings and the Company. He has run the Company since December 1994 and has
served as a director of Holdings since 1995. Since joining the Company in 1974,
he has held a variety of positions, including General Manager, Equipment
Division; Operations Manager, Oak Creek; Marketing Manager, Hoist Division; and
Material Handling Regional Manager, Chicago. Mr. Erwin holds a Bachelor of
Science degree in Business Management, System/Operations Management from
Milwaukee School of Engineering and an Associate's Degree in Mechanical
Technology from Milwaukee Area Technical College.
David D. Smith--David Smith has been serving as Vice President--Finance of
the Company since March 30, 1998 and as a director and Vice President of
Holdings since 1997. Previously, he served as Vice President and Controller of
the Company since 1993. Mr. Smith joined the Company in 1988 as a Senior
Operations Auditor. Mr. Smith received his Bachelor of Science in Business
Administration from Bucknell University and his M.B.A. from the University of
Pittsburgh. Mr. Smith is a Certified Public Accountant.
Peter A. Kerrick--Peter Kerrick assumed his current position as Vice
President--Equipment of the Company in 1995. Since joining the Company in 1978
as a Design & Project Engineer, Mr. Kerrick has held numerous positions with the
Company, primarily in the sales capacity. Mr. Kerrick obtained a Bachelor of
Science degree in Mechanical Engineering from Purdue University.
Richard J. Niespodziani--Richard Niespodziani has served as Vice
President--Aftermarket Products of the Company since 1994. Prior to his current
position, Mr. Niespodziani served as General Manager for five different business
areas at the Company. He also has held multiple positions related to the
Company's aftermarket operations since joining the Company in 1974. Mr.
Niespodziani received his Bachelor of Science degree in Business Administration
from the University of Wisconsin Stevens Point and his M.B.A. from the
University of Wisconsin Whitewater.
Edward J. Doolan--Edward Doolan serves as Vice President--Distribution &
Service of the Company. Prior to being promoted to his current position in 1994,
Mr. Doolan served in a variety of positions in the aftermarket products and
service groups. He joined the Harnischfeger team in 1979 and became Director of
Product Support for the Company in 1985. Mr. Doolan has a Bachelor of Science in
Industrial Engineering from Georgia Tech and an M.B.A. from Marquette
University.
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K. Bruce Norridge--Bruce Norridge has been Vice President--Europe & Africa
of the Company since September 1997. Prior to that, he was Managing Director of
Morris Ltd.'s Engineered Products Division from 1992 to 1997. Mr. Norridge has
been employed with Morris Ltd. since 1979. Mr. Norridge received a National
Diploma in Structural Engineering and an Advanced Diploma in Production
Management and is a graduate fellow of the Production Management Institute of
South Africa. Mr. Norridge is a Registered Professional Technologist in
Engineering and a Registered Professional Production Manager.
Michael J. Maddock--Michael Maddock has been Vice President--Pacific Rim &
Middle East of the Company since September 1997. Previously, Mr. Maddock held a
number of positions at Morris Ltd., including Director and General Manager,
Hoist Division, and Managing Director, Standard Products Division. He joined
Morris Ltd. in 1989. Mr. Maddock received his M.I. in Mechanical Engineering
from the Institute of Mechanical Engineers, a Bachelor of Science in Metallurgy
from the University of Surrey, a Higher National Diploma in Mechanical
Engineering and a Higher National Certificate in Production Engineering. He
received his Membership from the Institute of Mechanical Engineers.
Martin L. Ditkof--Martin Ditkof currently serves as General Counsel of the
Company and as Secretary of Holdings. He joined the Harnischfeger team as a
Corporate Attorney in 1988 and assumed his current position at the Company in
November 1995. Mr. Ditkof received a Bachelors degree in Business Administration
from the University of Michigan and his Juris Doctorate from Cornell Law School.
Todd R. Berman--Todd Berman has been Chairman of the Board of Holdings
since March 30, 1998. Mr. Berman is the founder and President of Chartwell
Investments Inc. He has served as Chairman of the Board of Griffith Consumers
Company, one of the nation's largest independent distributors of heating oil and
other petroleum products, since December 1994; as Chairman of Carl King, Inc.,
the leading operator of gas stations and convenience stores in the Delmarva
peninsula (Delaware, Maryland, Virginia), since December 1994; and as a director
of Petro Stopping Centers, L.P., a leading operator of large, full-service truck
stops, since January 1997. Mr. Berman has been with Chartwell Investments Inc.
or its predecessor since 1992. He received his A.B. from Brown University and an
M.B.A. from Columbia University Graduate School of Business.
Jay R. Bloom--Jay Bloom has been a director since March 30, 1998. Mr.
Bloom is a Managing Director and co-head of the High Yield Group of CIBC
Oppenheimer. In addition, he is the co-head of CIBC High Yield Merchant Banking
Funds. At CIBC Oppenheimer, he has been responsible for overall portfolio
strategy, numerous high yield financings and investments in numerous companies
through the merchant banking funds. Prior to joining CIBC Oppenheimer in 1995,
Mr. Bloom was a founder and managing director of The Argosy Group L.P. Before
Argosy, Mr. Bloom was a managing director in the Mergers and Acquisitions Group
of Drexel Burnham Lambert Incorporated. Mr. Bloom serves on the board of
directors of GT Crossing Limited, Global Telesystems Limited, Heating Oil
Partners, L.P., Consolidated Advisers Limited, L.L.C., and Riverside Millwork
Company, Inc. and is on the Board of Advisors of Oak Hill Securities Fund, L.P.
Mr. Bloom received his B.S. and M.B.A. degrees from Cornell University,
graduating summa cum laude, and his Juris Doctorate from Columbia University
School of Law.
Robert W. Hale--Robert Hale has served as a director since March 30, 1998.
Mr. Hale is President of HII's P&H Mining Equipment division, a position he has
held since 1994. Previously, Mr. Hale ran the Company, serving as Senior Vice
President and General Manager of HII's P&H Material Handling division from 1988
to 1994. Mr. Hale received a Bachelor of Science in civil engineering from
Marshall University and is a graduate of Harvard's AMD Program.
Michael S. Shein--Michael Shein has been a director and Vice-President of
Holdings since March 30, 1998. Mr. Shein is a Managing Director and co-founder
of Chartwell Investments Inc. and has been with Chartwell Investments Inc. or
its predecessor since 1992. Mr. Shein has served as a director of Griffith
Consumers Company, one of the nation's largest independent distributors of
heating oil and other petroleum products, since December 1994; a director of
Carl King, Inc., the leading operator of gas stations and convenience stores in
the Delmarva peninsula (Delaware, Maryland, Virginia), since December 1994; and
a director of Petro Stopping Centers, L.P., a leading operator of large,
full-service truck stops, since January 1997. Mr. Shein received a B.S. summa
cum laude from The Wharton School at the University of Pennsylvania.
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<PAGE>
Michael R. Young--Michael Young has served as a director since March 30,
1998. Mr. Young has served as the Chairman, Chief Executive Officer and
President of Bristol Compressors from 1983 to 1987 and since 1996. Mr. Young was
the Chairman and Chief Executive Officer of Evcon Industries from 1991 to 1995
and was integrally involved in selling the company to York International. Mr.
Young was the President and Chief Operating Officer of York International from
1988 to 1989. From 1976 to 1983, Mr. Young was Director of Product Development
for Rockwell International's Automotive Operations and prior to that was Chief
Engineer of Eaton Corporation's Engineering & Research Center. Mr. Young
received B.S., M.S. and Doctorate degrees from the University of Detroit.
Larry Zine--Larry Zine serves as a director since March 30, 1998. Mr. Zine
has been Executive Vice President and Chief Financial Officer of Petro Stopping
Centers, L.P., a leading operator of large full-service truck stops since
December 1996. Mr. Zine served as the Executive Vice President and Chief
Financial Officer for The Circle K Corporation, the second largest chain of
convenience stores in the United States, from 1988 to 1996. Mr. Zine was an
integral part of The Circle K Corporation's reorganization from bankruptcy in
July 1993, its initial public offering in March 1995 and subsequent sale in June
1996. Mr. Zine has worked for The Circle K Corporation for 15 years in various
capacities. Mr. Zine was educated at the University of North Dakota and holds an
M.S. degree in accounting and a B.S.B.A. in marketing.
Director Compensation
Holdings contemplates that it will not pay directors fees to any of its
directors. Holdings will reimburse its directors for all reasonable
out-of-pocket expenses incurred in connection with attending Board meetings.
Executive Compensation
Holdings does not contemplate that it will compensate its officers for
their services as officers of Holdings.
Arrangements After Consummation of the Transactions
Employment Agreements
On March 30, 1998, the Company entered into new employment agreements with
certain senior managers of the Company, including the Named Executive Officers.
The agreements with Messrs. Erwin, Smith and Niespodziani provide for their
employment in their current capacities for three years, and for additional one
year periods thereafter unless canceled by either party on 60 days notice prior
to such renewal date. They provide Messrs. Erwin, Smith and Niespodziani a base
salary (subject to annual review by the Board of Directors) of $180,000,
$111,300 and $111,540, respectively, and an annual performance-based bonus plan
(based on Economic Value Added for 1998 and on EBITDA for years thereafter), the
terms of which are to be agreed upon by the Compensation Committee of the Board
of Directors and the Company's Chief Executive Officer. The agreements also
provide for the indemnification of the executives, and include non-competition
and confidentiality provisions. If the executive resigns for Good Reason (as
defined therein), the executive is entitled to continuance of his then current
base salary for 12 months, continuation of health and life insurance benefits
for 24, a pro-rated bonus, the continuation of other perquisites for six months
and payment, if requested, for all equity in Holdings or the Company held by the
executive or his family. If the executive is terminated without Cause (as
defined therein) by the Company, he is entitled to a lump sum payment equal to
his then current annual base salary plus a lump sum payment equal to the base
salary which would otherwise have been payable for the balance of the fiscal
year in which termination occurs, and the same benefits as if he resigned for
Good Reason (as outlined above).
The Company also entered into new employment agreements with Messrs.
Norridge and Maddock on March 30, 1998. These agreements generally continue in
effect until the death of the executive, the executive's reaching normal
retirement age, termination for Cause by the Company, termination for Good
Reason by the Executive, or until terminated by either party upon 12 months
notice. Messrs. Maddock and Norridge are entitled to (pound)80,900 and
(pound)79,000 base salary, respectively, subject to review annually, a bonus
calculated and paid in accordance with the
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provisions of the management bonus scheme, an additional payment of
(pound)56,250 for each of 1998 and 1999, pension benefits at least equal in
value to the benefits the executive would have been entitled to under the
previous benefit plan in which such executive participated, and various other
benefits. The executive may terminate the agreement at any time for Good Reason
(as defined therein), in which case the executive is entitled to receive his
annual base salary immediately prior to termination for an additional 12 months
and a lump sum of (pound)56,250 multiplied by two minus the number of times the
executive received this additional payment. The executive is also entitled to
continue participating in the medical, dental and life insurance plans for one
year or until he receives equivalent benefits from a new employer.
Equity Incentive Plan
In connection with the Recapitalization, the Company established a new
equity incentive plan to attract and retain key personnel, including senior
management, and to enhance their interest in the Company's continued success.
Holdings has reserved 1,186.0849 shares of Common Stock and 4,328.25 shares of
Series C Junior Voting Preferred Stock with a value of $8.1 million on March 30,
1998 for this plan (such shares to be denominated in 8,100 units consisting of
0.1464 shares of Common Stock and 0.5344 shares of Series C Junior Voting
Preferred Stock (the "Equity Units")). The Company made an initial option grant
to each member of the Company's senior management on March 30, 1998 under such
executive's employment agreement. The Company does not anticipate making
additional option grants to these executives under the plan, but does anticipate
making grants to other or to new members of management. Options not previously
exercised or terminated expire ten years from the date of grant. Approximately
one-third of the total number of Equity Units subject to the initial grant vest
ratably on each of the first through fourth anniversaries of the date of grant
provided the executive is in the employ of the Company. Approximately one third
of the Equity Units vest 25% a year at the end of each of 1999, 2000, 2001 and
2002, subject to satisfaction of the applicable EBITDA-based Performance Hurdle
(as defined therein) for such year ("B Options"), and approximately one third of
the Equity Units (plus any B Options that did not vest and have been carried
forward) vest if the Internal Rate of Return (as defined therein) earned by the
Company exceeds 40% on the closing date of a Change of Control (as defined
therein) and the executive is in the employ of the Company on such date. The
executives will be permitted to exercise their vested options and sell their
Equity Units after an initial public offering (subject to approval of the
Compensation Committee).
Arrangements Prior to Consummation of the Transactions
The following describes certain compensation and benefit arrangements
applicable to members of the senior management team of the Company for periods
prior to March 30, 1998. Such employees' participation in such plans and
programs, except as otherwise noted, terminated on March 30, 1998, except with
respect to vested benefits.
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<PAGE>
1997 Summary Compensation Table
The following table presents information concerning compensation paid for
services to the Company during fiscal year 1997 to the Chief Executive Officer
of the Company and the four other most highly paid executive officers employed
by the Company at the end of fiscal year 1997, collectively, the "Named
Executive Officers."
<TABLE>
<CAPTION>
Long-Term Compensation
------------------------------------------
Annual Compensation Awards Payouts
------------------------------- ---------------------- ------------------
Other Securities All
Annual Restricted Underlying Other
Compen- Stock Options/ LTIP Compen-
Name and Salary Bonus sation Award(s) SARs Payouts sation
Principal Position ($) ($)(a) ($) ($) (#) ($)(b) ($)(a)(c)
------------------ ------- ------- -------- ---------- ---------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Michael S. Erwin ........................ 155,850 109,192 12,358(a) -- -- 12,220 30,146
President and Chief Executive Officer
David D. Smith .......................... 104,980 47,644 5,705(a) -- -- 6,863 14,705
Vice President--Finance
Richard J. Niespodziani ................. 106,250 61,926 1,967(a) -- -- 1,755 9,052
Vice President--Aftermarket
Products
Michael J. Maddock ...................... 125,300 55,196 -- -- -- -- 95,605(d)
Vice President--Pacific Rim &
Middle East
K. Bruce Norridge ....................... 125,042 55,112 71,932(e) -- -- -- 95,605(d)
Vice President--Europe & Africa
</TABLE>
- ----------
(a) Certain participants in HII's Executive Incentive Plan may elect to defer
up to 100% of their cash bonuses by converting such bonuses into HII
common stock at a 25% discount from the average closing price of the HII
common stock for the last month of the HII fiscal year. All such stock is
held in the HII Deferred Compensation Trust and may not be withdrawn by a
participant as long as the participant remains an employee of HII. Mr.
Erwin, Mr. Smith and Mr. Niespodziani elected to defer 25%, 25% and 10% of
their respective fiscal 1997 cash bonuses into HII common stock under this
plan. The HII Executive Incentive Plan also provides that dividends on
shares held in participants' accounts are reinvested in HII common stock
at a 25% discount from market prices. The dollar values of the differences
between (i) the bonus amount converted and the market value of the shares
purchased and (ii) the dollar amounts attributable to the discount upon
the reinvestment of dividends are included in the "Other Annual
Compensation" column. The dollar value of the bonus amounts that have been
converted into stock and deferred are reported in the "LTIP Payouts" and
"All Other Compensation" columns. The "banked" portion of any bonus is not
reported in the Summary Compensation Table but is reported in the
Long-Term Incentive Plans--Awards Table.
(b) Represents the portion of the bonus earned in 1997 that resulted from
bonuses that were "banked" in prior years under the EVA Bonus Program
described in connection with the Long-Term Incentive Plans--Awards Table.
Mr. Erwin, Mr. Smith and Mr. Niespodziani elected to defer 25%, 25% and
10% of their respective 1997 cash bonuses into HII common stock under the
HII Executive Incentive Plan.
(c) Includes the following amounts which represent bonuses earned in 1997 (net
of amounts reported under LTIP Payouts) and deferred and converted into
HII common stock by the Named Executive Officers under the HII Executive
Incentive Plan as described in footnote (a) above: Mr. Erwin $24,611; Mr.
Smith $10,131; and Mr. Niespodziani $4,123. Also includes $4,080 for Mr.
Erwin, Mr. Smith and Mr. Niespodziani which represents cash payments under
the HII Profit Sharing Plan and the following amounts paid by HII during
fiscal 1997 for group term life insurance premiums for the benefit of the
executives: Mr. Erwin, $1,455; Mr. Smith, $494; and Mr. Niespodziani,
$849.
(d) Represents an annual earn-out paid to Messrs. Maddock and Norridge
pursuant to the terms of their employment agreements.
(e) Includes $13,750 in car allowance and $51,063 for various expatriate
expenses incurred by Mr. Norridge, paid by the Company pursuant to the
terms of his employment agreement.
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<PAGE>
Aggregate Option Exercises in Last Fiscal Year
and Fiscal Year-End Option Values (a)
The following table sets forth information with respect to the Named
Executive Officers concerning the number of shares of HII common stock acquired
on exercise of options by the Named Executive Officers during fiscal 1997, the
value realized and the number and value of options outstanding at October 31,
1997.
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised in-the-Money Options
Shares Options at Fiscal at Fiscal Year-End
Acquired Value Year-End (#) ($)(c)
on Exercise Realized ---------------------------- ----------------------------
Name (#) ($)(b) Exercisable Unexercisable Exercisable Unexercisable
---- ----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Michael S. Erwin.......... 1,625 21,865 5,250 6,000 52,459 27,013
David D. Smith............ 2,875 31,150 0 2,375 0 15,551
Richard J. Niespodziani... 1,750 17,453 0 2,250 0 13,166
Michael J. Maddock........ 1,500 29,250 1,875 2,625 17,436 18,557
K. Bruce Norridge......... 1,875 24,561 0 2,625 0 18,557
</TABLE>
- ----------
(a) No Stock Appreciation Rights (SARs) are outstanding.
(b) Based on the market value of the stock on the date of exercise less the
exercise price and withholding tax paid by the recipient, if any.
(c) Based on the closing price of HII common stock on the New York Stock
Exchange on October 31, 1997 of $39.375.
Until the Recapitalization Closing, a portion of the incentive
compensation for senior executives was paid in cash and a portion was deferred
based on future results.
For those executives who have elected to defer their cash bonuses by
converting such bonuses into HII common stock under the terms of the HII
Executive Incentive Plan, the "banked" portion of any bonus is converted into
HII common stock on the same terms as the "unbanked" portion of the bonus.
Long Term Incentive Plans--Awards in Last Fiscal Year
Number of Shares, Estimated Future
Units or Other Payouts Under
Rights Non-Stock Price
Name (#)(a) Based Plans ($)(b)
---- ----------------- ------------------
Michael S. Erwin......................... 17 1,558
David D. Smith........................... 18 1,732
Richard J. Niespodziani.................. 9 2,486
Michael J. Maddock....................... -- --
K. Bruce Norridge........................ -- --
- ----------
(a) Reflects HII common stock purchased through conversion of each executive's
banked bonus at a 25% discount on the purchase price of $41.78 in
accordance with the provisions of the HII Executive Incentive Plan. The
amount so converted by each of the executive officers is as follows:
Michael Erwin $693; David Smith $770; and Richard Niespodziani $368.
(b) Reflects cash portion of "banked bonus."
69
<PAGE>
Pension Plan Table
The following table sets forth the estimated annual benefits payable upon
retirement at normal retirement age for the years of service indicated under
HII's defined benefit pension plan (and excess benefit arrangements defined
below) at the indicated remuneration levels.
Remuneration covered by the plan includes the following amounts reported
in the 1997 Summary Compensation Table: salary and bonus (including the cash
value of bonuses foregone for stock under the Executive Incentive Plan).
"Banked" bonuses are not included.
The years of service credited for each of the Named Executive Officers
are: Michael Erwin 24 years, David Smith 15 years, and Richard Niespodziani 23
years.
Benefits are based upon years of service and the highest consecutive five
year average annual salary and incentive compensation during the last ten
calendar years of service. Estimated benefits under the retirement plan are
subject to the provisions of the Code which limit the annual benefits which may
be paid from a tax qualified retirement plan. Amounts in excess of such
limitations will either be paid from the general funds of HII or funded with HII
common stock under the terms of the HII Supplemental Retirement and Stock
Funding Plan. The estimated benefits in the table above do not reflect offsets
under the plan of 1.25% per year of service (up to a maximum of 50%) of the
Social Security benefit.
Years of Service
-------------------------------------------------
Remuneration 5 10 15 20 25 30
- ------------ ------ ------ ------ ------- ------- -------
$140,000 10,500 21,000 31,500 42,000 52,500 63,000
180,000 13,500 27,000 40,500 54,000 67,500 81,000
220,000 16,500 33,000 49,500 66,000 82,500 99,000
260,000 19,500 39,000 58,500 78,000 97,500 117,000
300,000 22,500 45,000 67,500 90,000 112,500 135,000
340,000 25,500 51,000 76,500 102,000 127,500 153,000
380,000 28,500 57,000 85,500 114,000 142,500 171,000
Until March 30, 1998, executive officers of the Company located in the
United Kingdom were eligible to participate in an executive section of the
Harnischfeger Industries Pension Scheme (the "UK Scheme"), which provides
defined benefits. Pension income in the UK Scheme at normal retirement age is
based on the employee's years of service and his last twelve months' taxable
earnings (excluding certain benefits in kind and fluctuating payments), or on an
average of those taxable earnings over the last 24 months, if greater. There is
no offset for United Kingdom social security benefits.
In addition to United Kingdom social security benefits to which such a
person may be entitled, the following table illustrates the amount of annual
pension benefits (in pounds sterling) payable from the UK Scheme to an
individual with the indicated earnings and years of service at the individual's
normal retirement age of 65.
Years of Service
--------------------------------------------------
Remuneration 10 15 20 25 30 35
- -------------- ------ ------ ------- ------- ------- -------
(pounds)50,000 16,667 25,000 33,333 33,333 33,333 33,333
75,000 25,000 37,500 50,000 50,000 50,000 50,000
100,000 33,333 50,000 66,667 66,667 66,667 66,667
125,000 41,667 62,500 83,333 83,333 83,333 83,333
150,000 50,000 75,000 100,000 100,000 100,000 100,000
Mr. Maddock and Mr. Norridge were members of the UK Scheme until March 30,
1998. At December 31, 1997, Mr. Maddock had 8.75 years of service and Mr.
Norridge had 3.42 years of service for purposes of this plan.
70
<PAGE>
Because Mr. Norridge joined the plan after June 1, 1989, as a matter of United
Kingdom law, his benefits after 20 or more years of service would be capped at
(pound)56,000.
Divestiture Bonus Agreements
In September and October 1997, Michael S. Erwin, David D. Smith, Richard
J. Niespodziani, Michael J. Maddock, K. Bruce Norridge and certain other
employees of the Company entered into divestiture bonus agreements with HarnCo
(the "Divestiture Bonuses"). These agreements provide for bonuses to be paid to
such employees in the event of a purchase by a third party not affiliated with
HarnCo of substantially all of the assets and liabilities of the MHE Business
which occurs within one year of the date of the agreement. The Divestiture
Bonuses for Messrs. Erwin, Smith, Niespodziani, Maddock and Norridge are to be
$375,000, $125,000, $125,000, $125,000 and $125,000, respectively. Under these
agreements, each employee agreed to release HarnCo and its affiliates from
certain claims and agreed not to voluntarily terminate his employment with the
MHE Business within the first six months following any such divestiture unless
there is a substantial change in the employee's duties, functions and
responsibilities or the employee is required to perform the principal portion of
his duties outside his current locale.
Employment Agreements
In September and October 1997, HarnCo entered into employment agreements
with Michael Erwin, David Smith, Richard Niespodziani and certain other
employees of the Company which were to be effective upon closing of the sale of
the MHE Business to a third-party buyer. These agreements, which HarnCo assigned
to the Company, were terminated on March 30, 1998 and replaced by new employment
agreements. Morris entered into employment agreements with K. Bruce Norridge,
Vice President--Europe & Africa, and Michael J. Maddock, Vice President--Pacific
Rim & Middle East in connection with the sale of Morris to the Company in 1994.
These agreements also were terminated and replaced by new employment agreements
on March 30, 1998.
71
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the number and percentage of outstanding
shares of voting stock of Holdings beneficially owned by: (i) each executive
officer of Holdings and the Company and each director of Holdings; (ii) all
directors of Holdings and all executive officers of Holdings and the Company as
a group; and (iii) each person known by Holdings to own beneficially more than
five percent of Holdings voting stock, respectively. Holdings believes that each
individual or entity named has sole investment and voting power with respect to
shares of voting stock of Holdings indicated as beneficially owned by them,
except as otherwise noted.
<TABLE>
<CAPTION>
Voting Percent Series C Percent
Name and Address of Beneficial Owner Common Stock of Class Preferred Stock of Class
- ------------------------------------ ------------ -------- --------------- --------
<S> <C> <C> <C> <C>
5% Owners:
Chartwell L.P. (a)...................................... 7,907 77.8% 28,855 100.0%
c/o KPMG
Genesis Building
448 GT
Grand Cayman
Cayman Islands
Harnischfeger Corporation............................... 2,261 22.2% -- --
3600 South Lake Drive
St. Francis, Wisconsin 53235
Executive Officers and Directors:
Todd R. Berman (b)...................................... 7,907 77.8% 28,855 100.0%
Michael S. Shein (b).................................... 7,907 77.8% 28,855 100.0%
All directors and officers as a group (14 persons) (c).. 7,907 77.8% 28,855 100.0%
</TABLE>
- ----------
(a) Chartwell L.P., a Cayman Islands limited partnership, is the managing
member of Frasier L.L.C., a Delaware limited liability company and of
Niles L.L.C., a Delaware limited liability company, which together own
100.0% of the shares of common stock of MHE Investments, a Delaware
corporation. MHE Investments, in turn, owns 77.8% of the shares of voting
common stock of Holdings and 100.0% of the Series C Junior Voting
Preferred Stock. The general partner of Chartwell L.P. is Chartwell G.P.
Corp., a Cayman Islands company. Chartwell G.P. Corp. may be deemed to
beneficially own all of the shares of Holdings beneficially owned by
Chartwell L.P. Mr. Donald Gales owns all of the issued and outstanding
capital stock of Chartwell G.P. Corp. and, consequently, may be deemed to
beneficially own all of the shares of Holdings beneficially owned by
Chartwell G.P. Corp. However, Holdings has been advised by each of
Chartwell L.P., Chartwell G.P. Corp. and Mr. Gales that each disclaims
beneficial ownership of such Holdings shares. Todd R. Berman, who is
Chairman of the Board of Holdings, is a limited partner of Chartwell L.P.
Michael S. Shein, who serves as a director and Vice President of Holdings,
is also a limited partner of Chartwell L.P. Mr. Berman and Mr. Shein are
the managers of Frasier L.L.C. and Niles L.L.C. Concurrent with the
Recapitalization Closing, an affiliate of CIBC Oppenheimer Corp., the
Initial Purchaser in the Offering, became a minority interest holder of
Frasier L.L.C. and Niles L.L.C. Jay R. Bloom, who is a director of
Holdings, is a Managing Director of CIBC Oppenheimer Corp.
(b) Chartwell L.P., a Cayman Islands limited partnership, is the managing
member of Frasier L.L.C., a Delaware limited liability company and of
Niles L.L.C., a Delaware limited liability company, which together own
100.0% of the shares of common stock of MHE Investments, a Delaware
corporation. MHE Investments, in turn, owns 77.8% of the shares of voting
common stock of Holdings and 100.0% of the Series C Junior Voting
Preferred Stock. Todd R. Berman, who is Chairman of the Board of Holdings,
is a limited partner of Chartwell L.P. Michael S. Shein, who serves as a
director and Vice President of Holdings, is also a limited partner of
Chartwell L.P. Mr. Berman and Mr. Shein are the managers of Frasier L.L.C.
and Niles L.L.C. The address of each of Mr. Berman and Mr. Shein is c/o
Chartwell Investments Inc., 717 Fifth Avenue, 23rd Floor, New York, New
York 10022.
(c) Members of the Company's senior management purchased $900,000 of equity
interests of Niles L.L.C. concurrent with the Recapitalization Closing.
72
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Relationship with Harnischfeger
Historically, the Company operated as one of several operating units of
HII. Until the reorganization of the Company in October 1997, the core United
States operations of the Company (including all centralized operations and the
Oak Creek manufacturing facility) were conducted directly by HarnCo, which is a
wholly-owned subsidiary of HII, while the rest of the Company's operations
(including Morris Ltd. since its acquisition in 1994) were conducted through a
number of entities, all of which were wholly-owned, directly or indirectly, by
HII and its affiliates, with the exception of the Company's Singapore
operations, which are conducted through an entity in which the Company has an
85% interest. HarnCo continues to own approximately 20.8% of the Common Stock.
HII's two other current operating units consist of mining equipment operations
("Mining"), which are conducted through HarnCo and through another subsidiary of
HII, and paper production equipment operations ("Paper"), which are conducted
through a separate subsidiary of HII.
Previously (and until the Recapitalization Closing), HII and/or HarnCo
performed centrally a number of functions necessary for the operations of the
Company. Under a management services arrangement with HII, the Company was
provided with certain services, including, but not limited to, matters of
organization and administration, cash management, labor relations, employee
benefits, public relations, financial policies and practices, taxation and legal
affairs (intellectual property, environmental, labor, securities and ERISA
compliance, as well as assistance with product liability cases). The annual fee
charged the Company for these services was based upon a pro rata share of
corporate administration costs using an allocation methodology based on
consolidated worldwide sales. Such fees totaled approximately $2.9 million, $2.3
million and $1.9 million in fiscal 1997, 1996 and 1995, respectively.
HarnCo provided information systems services to the Company for which the
Company was charged approximately $1.9 million, $1.0 million and $1.1 million in
fiscal 1997, 1996 and 1995, respectively. HarnCo provided support to the Company
for accounting, credit, traffic, vendor identification numbers and human
resource services for which it charged the Company approximately $756,000,
$784,000 and $776,000 in fiscal 1997, 1996 and 1995, respectively. The Company
also shared a parts warehouse with HarnCo, for which the Company was charged
approximately $1.4 million, $1.3 million and $1.2 million in fiscal 1997, 1996
and 1995, respectively, and leased office space from HarnCo at a cost of
approximately $120,000 per year in fiscal 1997, 1996 and 1995.
In addition, computer hardware, software licenses and other technology
necessary to operate the Company were owned and/or held by HII and/or HarnCo and
were used by HarnCo. Virtually all information systems necessary to the United
States operations of the Company were shared with HarnCo. Furthermore, the
Company (including all of its foreign operations) was insured pursuant to HII's
insurance program. The Company had a number of other arrangements with HII,
HarnCo and/or their affiliates, including tax allocation agreements and
inter-company notes, all of which terminated upon consummation of the
Transactions.
The Company also sold certain products and services to Paper and Mining at
negotiated rates and has performed certain administrative functions for HarnCo
in Mexico. Sales to Mining and Paper amounted to $4.9 million in fiscal 1997,
and to $0.9 million and $0.7 million in fiscal 1996 and 1995, respectively. In
addition, Mining and Paper provided certain products and services to the Company
which management estimates amounted to approximately $10.0 million per year, in
fiscal 1997, 1996 and 1995. HarnCo manufactured electric motors, fabricated
larger steel girders and did machining on certain cranes for the Company at cost
or at cost plus a percentage. In addition, Mining and Paper have acted as motor
rewind subcontractors for the Company. Paper is negotiating a preferred supplier
contract with the Company which provides for the Company to act as a
subcontractor for Paper's service unit. It is contemplated that these
transactions, none of which individually or in the aggregate are significant to
the Company, will continue in the future.
The Company obtained volume discounts by entering into joint purchase
agreements in the United States with HII, Mining and Paper for items such as
bearings, motors, steel, maintenance, repair and operational supplies, domestic
telephone service and rates and fleet and equipment leases (including master
capital leases for vehicles and
73
<PAGE>
other equipment). In the United Kingdom, the Company, Mining and Paper entered
into joint purchase agreements for energy, steel and automobile leases. The
Company also had a joint banking program with the other HII affiliates and
participated in a consolidated pension plan in the United Kingdom. The Company's
hourly employees at its Oak Creek, Wisconsin facility are covered by a
collective bargaining agreement between HarnCo and the United Steelworkers of
America, Local 1114 that also covers certain employees of Mining.
In a number of instances, HII and/or HarnCo provided contracting credit
support in connection with the Company's business. Certain customers for large
crane supply contracts require the supplier to provide contracting credit
support and/or parent guarantees of performance. In addition, HII and/or HarnCo
guaranteed Company debt and the Company's performance under certain real estate,
vehicle and equipment leases. At March 30, 1998, there was approximately $38.4
million outstanding under the letters of credit and bonds provided by HarnCo and
the Non-MHE HarnCo Affiliates. See "The Transactions--Credit Support."
Management believes that in the aggregate these products and services can
be obtained on comparable terms from third parties.
Harnischfeger Separation Agreement
The organizational structure of Holdings and its subsidiaries was
substantially reorganized in connection with the anticipated sale of the MHE
Business. In connection therewith, in October 1997 HarnCo transferred the assets
of its Material Handling Equipment Division to MHLLC, a newly-created
wholly-owned subsidiary of the Company. All non-cash assets held by HarnCo and
used exclusively by the MHE Division were transferred or, in the case of leased
personal property, subleased to MHLLC or to one of its affiliates. In return,
MHLLC assumed substantially all of the liabilities of HarnCo and the Non-MHE
HarnCo Affiliates relating to the MHE Business (other than as described below).
HarnCo has retained certain income and other tax liabilities relating to
the MHE Business, all environmental liabilities relating to the ownership or
operation of any shared facilities and of HarnCo's Orchard Street facility, any
liabilities for which HarnCo or its affiliates have been named as potentially
responsible parties with respect to two Superfund sites, and any liabilities
arising in connection with claims alleging exposure to asbestos (to the extent
there is insurance coverage therefor) in connection with the MHE Business prior
to the Recapitalization Closing. In addition, among other matters, the HarnCo
Parties have retained all liability for medical and disability benefit claims
for current United States employees made prior to the Recapitalization Closing,
all claims by United States employees who are on short-term or long-term
disability as of the Recapitalization Closing and all claims with respect to any
of the HII benefit plans for former United States employees of the Company.
Trademark License Agreement
On March 30, 1998, the Company entered into a trademark licensing
agreement with Harnischfeger Technologies, Inc. ("HTI"), a subsidiary of HarnCo,
pursuant to which it was granted a sole and exclusive worldwide license to use
the "P&H" trade name, trademark and service mark on or in connection with the
MHE Business. The term of the license for original equipment is 15 years after
the earlier to occur of (i) the sale of Holdings to an unaffiliated third party
or (ii) the consummation of a public offering of the common stock of Holdings,
the Company or their parents or successors. The term of the license for
aftermarket parts and services is for an additional seven years. The license
agreement provides for a royalty payment to HTI during the ten year period
commencing 12 months after the Recapitalization Closing equal to 0.75% of the
total net sales of the MHE Business. There will be no royalty fee for the
remainder of the term.
Component and Manufactured Products Supply Agreement
The Company has entered into a two year agreement with HarnCo pursuant to
which HarnCo is to sell, or have its affiliates sell, to the Company and to its
subsidiaries located in the United States, at cost, certain products, repair
parts and rebuilds as have been previously manufactured by HarnCo for the
Company. The price for these products
74
<PAGE>
is the fully absorbed standard cost for normal production products and repair
parts, and the fully absorbed job cost for rebuilds and repairs.
Transition Services Agreement
On March 30, 1998, the Company entered into a Transition Services
Agreement with HarnCo pursuant to which HarnCo and/or its affiliates will
provide the Company and the Company's subsidiaries located in the United States
certain specified transition services for a set monthly price per service, plus
cost sharing in certain instances, for periods ranging up to three years. These
services include financial support (including payroll, accounts payable and some
accounting), MIS support (including mainframe applications, PC support,
engineering applications, maintenance, shared products and telephone system
support), human resources support (including assistance in union negotiations,
processing support for workers' compensation, screening and hiring of hourly
employees and benefits administration), shared space, warehouse services for
repair parts at one of HarnCo's facilities, order processing, office space and
lobby services at HarnCo's offices, employee communications, use of corporate
aircraft owned by HarnCo or its affiliates, and all traffic functions and
transportation of materials between Milwaukee area operations. The Company
estimates it will be charged $2.6 million for such services in the seven
remaining months of fiscal 1998 and $1.6 million in fiscal 1999.
Health and Welfare Arrangements
Under the terms of the Recapitalization Agreement, the current United
States employees of the Company continue to participate, from the
Recapitalization Closing until the earlier of the Company's notice of
termination or December 31, 1998, in the medical, dental, life and long-term
disability insurance benefit plans that are sponsored by HarnCo for the benefit
of these employees as of the Recapitalization Closing. The Company pays HarnCo
the cost of all benefits provided under these plans.
Stockholders Agreement
Holdings has entered into a stockholders' agreement and registration
rights agreement with HarnCo and MHE Investments (the "Stockholders' Agreement")
pursuant to which HarnCo has the right to appoint a representative to the board
of directors of Holdings, so long as HarnCo owns at least 5% of the outstanding
Common Stock. Certain actions by Holdings require HarnCo's approval, including
non-pro rata redemptions, certain post-closing affiliate and insider
transactions, granting of conflicting rights or entering into conflicting
agreements, and dividends or distributions on, or redemptions or purchases of,
any junior equity stock at any time when dividends are in arrears on the Series
B Junior Preferred Stock owned by HarnCo. The Stockholders' Agreement also
provides that HarnCo has the right to purchase its pro rata share of future
issuances of Common Stock except for issuances of management stock and options
and common stock sold in an underwritten public offering. HarnCo's shares are
subject to a right of first refusal in favor of Holdings and its designees and
certain other rights.
Credit Indemnification Agreement
On March 30, 1998, HII and the Company entered into a Credit
Indemnification Agreement pursuant to which HII will maintain in place the
Credit Support Obligations in existence on March 30, 1998 but have no further
duty to extend, renew or enter into any new Credit Support Obligations, other
than with respect to the MHE Business obligations existing at the
Recapitalization Closing. The Company has agreed to pay in advance an annual fee
equal to 1% of the amounts outstanding under each letter of credit and bond
provided by HarnCo and the Non-MHE HarnCo Affiliates (approximately $38.4
million as of March 30, 1998). The Company paid a pro-rated fee of $290,106 for
calendar year 1998 at the Recapitalization Closing. HII will refund the Company
on a quarterly basis a pro-rata portion of the annual fee for any reductions in
the outstanding amount of credit that occurred during such quarter. In addition,
the Company will pay HII the full amount of future fees and other expenses that
may be paid by HII or its affiliates to third parties in connection with
maintaining the Credit Support Obligations. The Credit Indemnification Agreement
provides that the Company is to reimburse HII on demand for any payment made by
HII or its affiliates under any of the Credit Support Obligations.
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Confidentiality and Non-Competition Agreement
At the Recapitalization Closing, Holdings and HII entered into a
Confidentiality and Non-Competition Agreement, pursuant to which HII agreed, on
behalf of itself and of its subsidiaries, not to, directly or indirectly,
participate or engage in, or assist any person that is engaged in, any business
or enterprise that is competitive with the MHE Business as conducted at the
Recapitalization Closing. In addition, the agreement provides for HII and its
affiliates to maintain in confidence and not use any confidential information of
the MHE Business. The non-compete covenants, which apply worldwide, will be in
effect until the later of (i) the fourth anniversary of the Recapitalization
Closing or (ii) the third anniversary of the date on which a director designated
by HII or its affiliates ceases to serve on the board of directors of Holdings.
HII and its affiliates also agreed not to induce or encourage any current
employee of the Company or any of its affiliates to leave the Company or its
affiliates, and not to employ certain specified officers and employees of the
MHE Business for 18 months after the Recapitalization Closing.
Tax Sharing Agreement
Holdings, its subsidiaries and MHE Investments have entered into a tax
sharing agreement (the "Tax Sharing Agreement") which provides for, among other
things, the allocation of federal, state and local tax liabilities between
Holdings, its subsidiaries and MHE Investments. In general, under the Tax
Sharing Agreement, Holdings and its subsidiaries will be responsible for paying
their allocable share of all income taxes shown to be due on the consolidated
federal (and any comparable state or local) income tax return filed by MHE
Investments.
Loans to Management
At the Recapitalization Closing, the Company made short-term loans in an
aggregate principal amount of $900,000 to members of the Company's senior
management to purchase equity interests in Niles L.L.C., an indirect minority
shareholder of Holdings, in accordance with the terms of certain promissory
notes, with proceeds from the debt portion of the Financings. The principal
amounts of the loans to Messrs. Erwin, Smith, Kerrick, Niespodiziani, Doolan,
Maddock, Norridge and Ditkof are $250,000, $110,000, $70,000, $70,000, $100,000,
$125,000, $125,000 and $50,000, respectively. In the case of Messrs. Erwin,
Smith and Doolan, the principal amount of the notes will be payable in part upon
their receipt of their respective Divestiture Bonuses (which is expected to
occur within six months of the Recapitalization Closing) and in part upon
payment of previously deferred amounts from the Harnischfeger Rabbi Trust or on
March 30, 1999 (whichever is earlier). In the case of Messrs. Kerrick,
Niespodziani, Maddock, Norridge and Ditkof, the principal amount of the notes
will be payable as a lump sum upon their receipt of their respective Divestiture
Bonuses (which is expected to occur within six months of the Recapitalization
Closing). Interest on each of the notes, at a rate per annum equal at all times
to the Federal Short-Term Rate in effect from time to time, from the date of
issuance until such note is repaid in full will be payable in arrears as a lump
sum on the date the remaining unpaid principal amount of such note is due in
full. The principal amounts of the loans and interest thereon will be payable in
full in the event the executive ceases to be employed by the Company as a result
of termination for Cause (as defined therein), or by reason of the executive's
death or resignation for other than Good Reason (as defined therein), or upon an
Event of Default (as defined therein). As collateral for the notes, each of the
executives granted to the Company a security interest in the equity interests in
Niles L.L.C. each of them acquired with the proceeds of the loans, in their
respective Divestiture Bonuses and in any proceeds therefrom.
Chartwell Financial Advisory Agreement
The Company entered into an agreement with Chartwell Investments Inc.,
providing for the payment of fees and reimbursement of expenses to Chartwell
Investments Inc. for acting as financial advisor with respect to the
Transactions, including soliciting, structuring and arranging the financing of
the Transactions. The fees, totaling $5.0 million, equal to 1% of the
consolidated capitalization of Holdings and the reimbursement of expenses, were
paid at the Recapitalization Closing. Mr. Berman and Mr. Shein are,
respectively, Chairman of the Board and a director of each of Holdings and the
Company and both are officers and directors of Chartwell Investments Inc.
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Chartwell Management Consulting Agreement
The Company has entered into a management consulting agreement with
Chartwell Investments Inc. pursuant to which Chartwell Investments Inc. provides
the Company with certain management, advisory and consulting services for a fee
of $1.0 million for each fiscal year of the Company during the term of the
agreement, plus reimbursement of expenses. The term of the management consulting
agreement is 10 years commencing at the Recapitalization Closing and is
renewable for additional one year periods unless the Board of Directors of the
Company gives prior written notice of non-renewal to Chartwell Investments Inc.
Mr. Berman and Mr. Shein are, respectively, Chairman of the Board and a director
of each of Holdings and the Company and both are officers and directors of
Chartwell Investments Inc.
DESCRIPTION OF THE NEW CREDIT FACILITY
Commitment
The Company has entered into the New Credit Facility dated March 30, 1998
with Credit Agricole Indosuez and Canadian Imperial Bank of Commerce
individually and as agents (the "Agents") for a group of lenders (the
"Lenders"), pursuant to which the Company has a $70.0 million Revolving Credit
Facility, a $30.0 million Acquisition Facility, a $20.0 million Term Loan A and
a $35.0 million Term Loan B.
The New Credit Facility contains representations and warranties, funding
and yield protection provisions, conditions precedent, financial and other
covenants and restrictions, events of default and other provisions customary for
bank credit agreements of this type. The following summaries of the material
provisions of the New Credit Facility do not purport to be complete, and such
provisions, including definitions of certain terms, are qualified in their
entirety by reference to the New Credit Facility.
General
The Revolving Credit Facility permits the Company to borrow, repay and
reborrow, subject to compliance with certain conditions, including a borrowing
base test, up to $70.0 million (of which $15.0 million is required under the
Note Indenture to be reserved for issuance of letters of credit) at any time
until the fifth anniversary of the Recapitalization Closing, the proceeds of
which may be used for working capital, acquisitions and other corporate
purposes. Up to $20.0 million of the Revolving Credit Facility (of which $15.0
million would not be subject to a borrowing base) is available for the issuance
of standby and documentary letters of credit. The Acquisition Facility, the
proceeds of which will be used for acquisitions, permits the Company to borrow,
subject to compliance with certain conditions, up to $30.0 million at any time
until the third anniversary, and to repay the same in installments on or prior
to the seventh anniversary, of the Recapitalization Closing. Term Loan A will be
repayable in 20 quarterly installments, commencing on June 30, 1998, and Term
Loan B will be repayable in 28 quarterly installments commencing on June 30,
1998.
Mandatory Prepayments
The Company is required to make mandatory prepayments in an amount equal
to 50% of excess cash flow after permitted capital expenditures for the first
fiscal year after the Recapitalization Closing and 75% thereafter, subject to
reduction thereafter based on the ratio of total debt to EBITDA. In addition,
the Company is required to make mandatory prepayments in the amount of 100% of
net proceeds from certain assets sales, equity issuances, certain permitted new
debt issuances and insurance claims not reinvested. The Company is permitted to
make voluntary prepayments at any time.
Interest Rate and Fees
Borrowings under the Revolving Credit Facility and Term Loan A bear
interest at floating rates equal to: (i) 0.75% per annum over the higher of the
Agents' base rate or the Federal Funds Rate plus 0.50%; or (ii) 2.25% per
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annum over the Eurodollar Rate. Borrowings under Term Loan B and the Acquisition
Facility bear interest at rates equal to: (i) 1.25% per annum over the higher of
the Agents' base rate or the Federal Funds Rate plus 0.50%; or (ii) 2.75% per
annum over the Eurodollar Rate. Eurodollar Rates will be calculated for interest
periods of one, two, three or six months, as applicable.
The New Credit Facility provides that the Company is to pay certain fees
and commissions to the Agents and Lenders, including an annual administrative
fee, a Revolving Credit Facility and Acquisition Facility unused commitment fee
and letter of credit fee.
Amortization
Aggregate yearly term loan principal payments under the New Credit
Facility are as follows: (i) $675,000 in fiscal 1998; (ii) $2,100,000 in fiscal
1999; (iii) $3,600,000 in fiscal 2000 (iv) $5,100,000 in fiscal 2001; (v)
$6,600,000 in fiscal 2002; (vi) $11,988,000 in fiscal 2003; (vii) $16,625,000 in
fiscal 2004 and (viii) $8,313,000 in fiscal 2005.
Guarantees and Security
Borrowings under the New Credit Facility are (i) secured by substantially
all of the present and future assets of the Company and its subsidiaries located
in the United States and the United Kingdom, certain of the Company's
subsidiaries' present and future assets located in Canada and by a pledge of all
of the issued and outstanding shares of capital stock of the Company and its
current and future subsidiaries and (ii) guaranteed by Holdings and
substantially all of the Company's subsidiaries.
Covenants; Events of Default
The New Credit Facility contains a number of customary covenants affecting
Holdings and its subsidiaries, including, among other things (i) prohibitions
and/or limitations on the incurrence of debt, liens, payment of dividends,
redemption of securities, investments, transactions with affiliates, mergers,
acquisitions and asset dispositions and (ii) financial covenants, including
interest coverage, leverage and capital expenditures. The New Credit Facility
also contains customary events of default, including a change of control (which
is defined to include the definition of Change of Control in the Restated
Certificate and Exchange Indenture).
Conditions
The New Credit Facility contains a number of conditions to any subsequent
funding by the Lenders, including, among other things, satisfactory appraisals
and environmental reports and the Company's entry into interest rate protection
agreements satisfactory to the Agents.
DESCRIPTION OF THE SURETY ARRANGEMENT
The Company has entered into the Surety Arrangement dated March 30, 1998
with Reliance Insurance Company and certain of its affiliates (collectively,
"Reliance") pursuant to which Reliance will provide up to $60.0 million of bid
bond, completion bond, warranty and other bonds on behalf of the Company, which
bonds will guarantee the obligations of the Company under bid and contract
arrangements with potential and existing customers of the Company. The Surety
Arrangement provides that the Company will reimburse Reliance for any payments
made by Reliance with respect to bonds issued by it.
Collateral for the surety lien will be a letter of credit issued pursuant
to the New Credit Facility and by a pledge of certain assets of the Company.
Obligations under the Surety Arrangement rank pari passu with the Notes.
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THE SENIOR NOTE OFFERING
Concurrently with the Offering, MMH sold, on March 30, 1998, $200,000,000
principal amount of its 9 1/2% Senior Notes due 2008.
General. Interest accrues on the Senior Notes from March 30, 1998, the
date of issuance of the Senior Notes (the "Senior Notes Issue Date"), and is
payable semi-annually on each April 1 and October 1, commencing October 1, 1998.
The Senior Notes will mature on April 1, 2008. The Senior Notes are senior
unsecured obligations of the Company and rank pari passu in right of payment
with all existing and future unsubordinated obligations of the Company and
senior in right of payment to all existing and future subordinated indebtedness
of the Company.
Guarantees. The Senior Notes are unconditionally guaranteed on a senior
unsecured basis, as to payment of principal, premium, if any, and interest,
jointly and severally, by substantially all of the Company's subsidiaries (the
"Guarantors"). Each guarantee ranks pari passu with all existing and future
senior indebtedness of such Guarantor.
Optional Redemption. The Senior Notes are redeemable at the option of the
Company, in whole or in part, at any time on or after April 1, 2003 at the
redemption prices set forth in the Note Indenture under which the Senior Notes
were issued, plus accrued and unpaid interest thereon to the redemption date. In
addition, the Company may redeem in the aggregate up to 35% of the original
principal amount of the Senior Notes at any time and from time to time prior to
April 1, 2001, at a redemption price equal to 109.5% of the aggregate principal
amount thereof, plus accrued and unpaid interest thereon to the redemption date,
with the net proceeds of one or more public equity offerings; provided, that at
least $130.0 million aggregate principal amount of the Senior Notes originally
issued remain outstanding immediately after the occurrence of any such
redemption and that any such redemption occurs within 90 days following the
closing of any such public equity offering.
Change of Control. Upon the occurrence of a change of control, the Company
will be required to make an offer to purchase all outstanding Senior Notes at a
price equal to 101% of the principal amount thereof, plus accrued and unpaid
interest thereon to the purchase date.
Covenants. The Note Indenture contains covenants for the benefit of the
holders of the Senior Notes that, among other things, restrict the ability of
the Company and its restricted subsidiaries to: (i) incur additional
indebtedness; (ii) pay dividends and make distributions; (iii) issue stock of
subsidiaries; (iv) make certain investments; (v) repurchase stock; (vi) create
liens; (vii) enter into transactions with affiliates; (viii) enter into sale and
leaseback transactions; (ix) create dividend or other payment restrictions
affecting Restricted Subsidiaries; (x) merge or consolidate in a transaction
involving all or substantially all of the assets of the Company and its
restricted subsidiaries, taken as a whole; and (xi) transfer or sell assets.
These covenants are subject to a number of important exceptions.
Asset Sale Proceeds. The Company will be obligated in certain instances to
make offers to purchase the Senior Notes at a purchase price in cash equal to
100% of the principal amount thereof plus accrued and unpaid interest to the
date of purchase with the net cash proceeds of certain asset sales.
Exchange Offer, Registration Rights. Pursuant to a registration rights
agreement, the Company and the Guarantors must use their best efforts to file
within 60 days and cause to become effective within 135 days of the Senior Notes
Issue Date an exchange offer registration statement (the "Senior Notes Exchange
Offer Registration Statement") with respect to an offer to exchange the Senior
Notes (the "Senior Notes Exchange Offer") for senior notes of the Company with
terms substantially identical to the Senior Notes. In addition, under certain
circumstances the Company and the Guarantors may be required to file a shelf
registration statement (the "Senior Notes Shelf Registration Statement"). Among
other provisions, in the event that (i) the Senior Notes Exchange Offer
Registration Statement or the Senior Notes Shelf Registration Statement has not
been filed with the
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Commission within 60 days after the Senior Notes Issue Date, (ii) the Senior
Notes Exchange Offer Registration Statement or the Senior Notes Shelf
Registration Statement is not declared effective within 135 days after the
Senior Notes Issue Date, or (iii) the Senior Notes Exchange Offer is not
consummated within 45 days after the Senior Notes Exchange Offer Registration
Statement is declared effective (each event referred to in clauses (i) through
(iii) above is a "Senior Notes Registration Default"), the sole remedy available
to holders of the Senior Notes will be the immediate assessment of additional
interest ("Additional Interest") as follows: the per annum interest rate on the
Senior Notes will increase by 50 basis points, and the per annum interest rate
will increase by an additional 25 basis points for each subsequent 90-day period
during which the Senior Notes Registration Default remains uncured, up to a
maximum additional interest rate of 200 basis points per year in excess of the
interest rate set forth on the cover page hereof. All Additional Interest will
be payable to holders of the Senior Notes in cash on each interest payment date,
commencing with the first such date occurring after any such Additional Interest
commences to accrue. On the date on which such Senior Notes Registration Default
is cured, the interest rate on the Senior Notes will revert to the interest rate
originally borne by the Senior Notes.
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DESCRIPTION OF NEW SERIES A SENIOR
PREFERRED STOCK AND EXCHANGE DEBENTURES
The New Series A Senior Preferred Stock
The following is a summary of the material terms and provisions of the New
Series A Senior Preferred Stock to be issued by Holdings in exchange for the Old
Series A Senior Preferred Stock in the Exchange Offer. This summary does not
purport to be a complete description of the New Series A Senior Preferred Stock
and is subject to the detailed provisions of, and qualified in its entirety by
reference to, the provisions of the Second Amended and Restated Certificate of
Incorporation of the Issuer and the Certificate of Designations establishing the
powers, preferences and relative, participating, optional and other special
rights of the Series A Senior Preferred Stock (collectively, the "Restated
Certificate"). The form of the Restated Certificate is filed as an Exhibit to
the Registration Statement of which this Prospectus is a part and a copy may be
obtained from the Issuer by a holder or prospective investor upon request.
Definitions relating to certain capitalized terms are set forth under "--Certain
Definitions" and throughout this description. Capitalized terms that are used
but not otherwise defined herein have the meanings assigned to them in the
Restated Certificate and such definitions are incorporated herein by reference.
For purposes of this section, references to the "Issuer" mean MMH Holdings,
Inc., excluding its Subsidiaries, references to the "Company" mean Morris
Material Handling, Inc., excluding its Subsidiaries, and references to Surety
Arrangements refer to all such arrangements as defined in this section including
those described in "Description of the Surety Arrangement."
General
The Old Series A Senior Preferred Stock was issued, and the New Series A
Senior Preferred Stock will be issued, pursuant to the terms of the Restated
Certificate. The shares of New Series A Senior Preferred Stock will be issued
solely in exchange for an equal liquidation preference of the outstanding shares
of Old Series A Senior Preferred Stock pursuant to the Exchange Offer. The terms
of the New Series A Senior Preferred Stock will be identical in all material
respects to the form and terms of the Old Series A Senior Preferred Stock except
that: (i) the shares of New Series A Senior Preferred Stock will have been
registered under the Securities Act and will generally be freely transferable by
holders thereof who are not a Restricted Holder; and (ii) the registration
rights and contingent interest rate provisions applicable to the shares of Old
Series A Senior Preferred Stock are generally not applicable to the New Series A
Senior Preferred Stock.
The Issuer is authorized to issue 500,000 shares of preferred stock, $0.01
par value per share. The Restated Certificate of the Issuer authorizes its Board
of Directors, without stockholder approval, to issue classes of preferred stock
from time to time in one or more series, with such designations, preferences and
relative, participating, optional or other special rights, qualifications,
limitations or restrictions as may be determined by the Board of Directors of
the Issuer, subject to certain limitations. See "--Ranking." The Board of
Directors of the Issuer has adopted resolutions creating a maximum of 120,000
shares of Series A Senior Preferred Stock and the Issuer has filed the Restated
Certificate with the Secretary of State of the State of Delaware as required by
Delaware law. Of the 120,000 authorized shares of Series A Senior Preferred
Stock, 57,710 shares were issued in the Series A Unit Offering and may be
reissued in the Exchange Offer, and 62,290 shares of Series A Senior Preferred
Stock are reserved for issuance as dividends in the event the Issuer elects to
pay dividends on the Series A Senior Preferred Stock by issuing additional
shares of Series A Senior Preferred Stock. See "--Dividends" below. Subject to
certain conditions, the New Series A Senior Preferred Stock is exchangeable for
Exchange Debentures at the option of the Issuer on any dividend payment date.
The New Series A Senior Preferred Stock, when issued in accordance with the
terms and conditions of the Exchange Offer, will be fully paid and
nonassessable, and the holders thereof will not have any subscription or
preemptive rights.
Ranking
The New Series A Senior Preferred Stock will, with respect to dividend
distributions and distributions upon the liquidation, dissolution or winding-up
of the Issuer, (i) rank senior to all classes of Common Stock of the Issuer and
to each other class of Capital Stock or series of Preferred Stock existing on or
established after the Issue Date,
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including, without limitation, Junior Capital Stock and (ii) on a parity with
the Old Series A Senior Preferred Stock, if any is not exchanged in the Exchange
Offer. The Issuer may not issue (i) any class or series of Capital Stock ranking
senior to or on a parity with the Series A Senior Preferred Stock (or amend the
provisions of any existing class of Capital Stock or series of Preferred Stock
to make such class or series rank senior to or on a parity with the Series A
Senior Preferred Stock) with respect to dividends or distributions upon
liquidation, dissolution or winding-up of the Issuer; provided, that the Issuer
can issue, from time to time, additional shares of Series A Senior Preferred
Stock to satisfy dividend payments on outstanding shares of Series A Senior
Preferred Stock; or (ii) any shares of Series B Junior Preferred Stock (other
than shares of Series B Junior Preferred Stock issued on the Issue Date and
shares of Series B Junior Preferred Stock issued as dividends thereon), in each
case, without the approval of the holders of at least a majority of the shares
of Series A Senior Preferred Stock then outstanding, voting or consenting, as
the case may be, together as one class.
Dividends
Holders of the New Series A Senior Preferred Stock will be entitled to
receive, when, as and if declared by the Board of Directors of the Issuer, out
of funds legally available therefor, dividends on the New Series A Senior
Preferred Stock at a rate per annum equal to 12% of the liquidation preference
per share of New Series A Senior Preferred Stock, payable semiannually. All
dividends will be cumulative, whether or not earned or declared, on a daily
basis from the Issue Date and will be payable semiannually in arrears on April 1
and October 1 of each year, commencing on October 1, 1998, to holders of record
on the March 15 and September 15 immediately preceding the relevant dividend
payment date. Dividends may be paid, at the Issuer's option, on any dividend
payment date occurring on or prior to April 1, 2003 either in cash or by the
issuance of additional shares of New Series A Senior Preferred Stock (and, at
the Issuer's option, payment of a whole share (after rounding up) or cash in
lieu of a fractional share) having an aggregate liquidation preference equal to
the amount of such dividends. In the event that on or prior to April 1, 2003,
dividends are declared and paid through the issuance of additional shares of New
Series A Senior Preferred Stock, as provided in the previous sentence, such
dividends shall be deemed paid in full and will not accumulate. After April 1,
2003, dividends must be paid in cash. The Restated Certificate prohibits the
Issuer from paying dividends in cash on any Junior Capital Stock unless
dividends on the Series A Senior Preferred Stock were paid in cash when required
to be so paid. In addition, the Restated Certificate prohibits the Issuer from
paying dividends in cash on any Junior Capital Stock during any period when cash
dividends (whether or not required to be paid) are not paid on the Series A
Senior Preferred Stock. The Indenture and the New Credit Facility restrict the
Company's and its Subsidiaries' ability to pay cash dividends on their Capital
Stock to the Issuer and will prohibit such payments in certain instances and
future agreements may provide the same. See "The Senior Note Offering" and
"Description of the New Credit Facility."
Unpaid dividends accumulating after April 1, 2003 on the New Series A
Senior Preferred Stock for any past dividend period and dividends in connection
with any optional redemption may be declared and paid at any time, without
reference to any regular dividend payment date, to holders of record on such
date, not more than 45 days prior to the payment thereof, as may be fixed by the
Board of Directors of the Issuer.
Redemption
Optional Redemption. The New Series A Senior Preferred Stock may be
redeemed (subject to contractual and other restrictions with respect thereto and
to the legal availability of funds therefor) at any time or from time to time on
or after April 1, 2003, in whole or in part, at the option of the Issuer, at the
redemption prices (expressed in percentages of the then effective liquidation
preference thereof) set forth below, plus, without duplication, an amount in
cash equal to all accumulated and unpaid dividends (including an amount in cash
equal to a prorated dividend for the period from the dividend payment date
immediately prior to the redemption date to the redemption date), if redeemed
during the 12-month period beginning on April 1 of each of the years set forth
below:
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Year Percentage
- ---- ----------
2003............................................................. 106.000%
2004............................................................. 104.000%
2005............................................................. 102.000%
2006 and thereafter.............................................. 100.000%
Notwithstanding the foregoing, the Issuer may redeem in the aggregate all,
but not less than all, of the New Series A Senior Preferred Stock then
outstanding, at any time prior to April 1, 2001, at a redemption price equal to
112.000% of the then effective liquidation preference thereof, plus, without
duplication, an amount in cash equal to all accumulated and unpaid dividends
(including an amount in cash equal to a prorated dividend for the period from
the dividend payment date immediately prior to the redemption date to the
redemption date) out of the Net Proceeds of one or more Public Equity Offerings;
provided, that any such redemption occurs within 90 days following the closing
of any such Public Equity Offering.
Mandatory Redemption. The New Series A Senior Preferred Stock will also be
subject to mandatory redemption (subject to contractual and other restrictions
with respect thereto and to the legal availability of funds therefor) in whole
on April 1, 2009 at a price equal to 100% of the liquidation preference thereof,
payable in cash, plus, without duplication, all accumulated and unpaid
dividends, which will also be paid in cash (whether or not otherwise payable in
cash) to the date of redemption.
In the event of redemption of fewer than all of the outstanding shares of
New Series A Senior Preferred Stock, the New Series A Senior Preferred Stock
will be redeemed on a pro rata basis, except that the Issuer may redeem such
shares held by holders of fewer than ten shares (or shares held by holders who
would hold less than ten shares as a result of such redemption). The New Series
A Senior Preferred Stock will be redeemable upon not less than 30 nor more than
60 days' prior written notice, mailed by first class mail to a holder's last
address as it shall appear on the register maintained by the Exchange Agent of
the New Series A Senior Preferred Stock. On and after any redemption date,
dividends will cease to accumulate on the New Series A Senior Preferred Stock or
portions thereof called for redemption unless the Issuer shall fail to redeem
any such New Series A Senior Preferred Stock. The Note Indenture and the New
Credit Facility restrict the ability of the Issuer to redeem the New Series A
Senior Preferred Stock and will prohibit any such redemption in certain
instances.
Exchange
The Issuer may at its option on any dividend payment date exchange, in
whole but not in part, the then outstanding shares of New Series A Senior
Preferred Stock for Exchange Debentures (including any shares of New Series A
Senior Preferred Stock issuable on such dividend payment date on the then
outstanding shares of New Series A Senior Preferred Stock); provided, that (i)
on the date of such exchange there are no accumulated and unpaid dividends on
the New Series A Senior Preferred Stock (including the dividend payable on such
date) or contractual impediments to such exchange; (ii) there shall be legally
available funds sufficient therefor; (iii) immediately after giving effect to
such exchange, no Default or Event of Default (each as defined in the Exchange
Indenture) would exist under the Exchange Indenture as if the Exchange Indenture
had been in effect as of the Issue Date and no default or event of default under
any other material instrument governing Indebtedness outstanding at the time of
such exchange would be caused thereby; and (iv) the Exchange Indenture has been
qualified under the Trust Indenture Act, if such qualification is required at
the time of exchange.
The Issuer will comply with the provisions of Rule 13e-4 promulgated
pursuant to the Exchange Act in connection with any exchange, to the extent
applicable.
The holders of outstanding shares of New Series A Senior Preferred Stock
will be entitled to receive, subject to the second succeeding sentence, $1.00
principal amount of Exchange Debentures for each $1.00 liquidation preference of
New Series A Senior Preferred Stock held by them. The Exchange Debentures will
be issued in registered form, without coupons. Exchange Debentures issued in
exchange for New Series A Senior Preferred Stock will be issued in principal
amounts of $1,000 and integral multiples thereof to the extent possible, and
will also be issued in principal amounts less than $1,000 so that each holder of
New Series A Senior Preferred Stock will
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receive certificates representing the entire amount of Exchange Debentures to
which such holder's shares of New Series A Senior Preferred Stock entitle such
holder; provided that the Issuer may pay cash in lieu of issuing an Exchange
Debenture in a principal amount less than $1,000. The Issuer will send a written
notice of exchange by mail to each holder of record of shares of New Series A
Senior Preferred Stock not less than 30 nor more than 60 days before the date
fixed for such exchange. On and after the exchange date, dividends will cease to
accumulate on the outstanding shares of New Series A Senior Preferred Stock, and
all rights of the holders of New Series A Senior Preferred Stock (except the
right to receive the Exchange Debentures, an amount in cash equal to the
accumulated and unpaid dividends to the exchange date and, if the Issuer so
elects, cash in lieu of any Exchange Debenture which is in an amount that is not
an integral multiple of $1,000) will terminate. The person entitled to receive
the Exchange Debentures issuable upon such exchange will be treated for all
purposes as the registered holder of such Exchange Debentures. See "--The
Exchange Debentures."
Liquidation Preference
Upon any voluntary or involuntary liquidation, dissolution or winding-up
of the Issuer, holders of shares of New Series A Senior Preferred Stock then
outstanding will initially be entitled to be paid, out of the assets of the
Issuer available for distribution, $1,000 per share, plus, without duplication,
an amount in cash equal to accumulated and unpaid dividends thereon to the date
fixed for liquidation, dissolution or winding-up (including an amount equal to a
prorated dividend for the period from the immediately preceding dividend payment
date to the date fixed for liquidation, dissolution or winding-up), before any
distribution is made on any Junior Capital Stock. If upon any voluntary or
involuntary liquidation, dissolution or winding-up of the Issuer, the amounts
payable with respect to the New Series A Senior Preferred Stock (and the Old
Series A Senior Preferred Stock, if any is not exchanged in the Exchange Offer)
are not paid in full, the holders of the Series A Senior Preferred Stock will
share equally and ratably in any distribution of assets of the Issuer first in
proportion to the full liquidation preference to which each is entitled until
such preferences are paid in full, and then in proportion to their respective
amounts of accumulated but unpaid dividends. After payment of the full amount of
the liquidation preference and accumulated and unpaid dividends to which they
are entitled, the holders of shares of New Series A Senior Preferred Stock will
not be entitled to any further participation in any distribution of assets of
the Issuer. However, neither the sale, conveyance, exchange or transfer (for
cash, shares of stock, securities or other consideration) of all or
substantially all of the property or assets of the Issuer nor the consolidation
or merger of the Issuer with one or more entities shall be deemed to be a
liquidation, dissolution or winding-up of the Issuer.
Voting Rights
Holders of the Series A Senior Preferred Stock will have no voting rights
with respect to general corporate matters except as provided by Delaware law or
as set forth in the Restated Certificate. The Restated Certificate provides that
if (i) after April 1, 2003, cash dividends on the Series A Senior Preferred
Stock are in arrears and unpaid for two or more semiannual dividend periods
(whether or not consecutive); (ii) the Issuer fails to redeem the Series A
Senior Preferred Stock on or before April 1, 2009; (iii) the Issuer fails to
make or consummate a Change of Control Offer in the event of a Change of
Control; or (iv) a breach or violation of any of the provisions described under
the captions "--Certain Covenants," "--Merger, Consolidation or Sale of Assets"
or "Reports to Holders" below occurs, which breach or violation continues for a
period of 60 days or more after the Issuer receives notice thereof specifying
the default from the holders of at least 25% of the then outstanding shares of
Series A Senior Preferred Stock; then the number of directors constituting the
Board of Directors of the Issuer will be adjusted to permit the holders of a
majority of the aggregate outstanding shares of Series A Senior Preferred Stock
and Series B Junior Preferred Stock (to the extent there exists a voting rights
triggering event with respect to the certificate of designations therefor),
voting as a single class, to elect the lesser of two directors and that number
of directors constituting at least 25% of the members of the Board of Directors
of the Issuer until such time as, in the case of a dividend default, all
accumulated and unpaid dividends on the Series A Senior Preferred Stock have
been fully paid in cash and, in all other cases, any failure, breach or default
giving rise to such voting rights is remedied, cured or waived by the holders of
at least a majority of the then outstanding shares of the Series A Senior
Preferred Stock and, with respect to a voting rights triggering event relating
to the Series B Junior Preferred Stock, the Series A Senior Preferred Stock and
the Series B Junior Preferred Stock, voting as a single class, at which time the
term of any directors elected pursuant to the provisions of this paragraph shall
terminate. Each such event described in
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clauses (i) through (iv) above is referred to herein as a "Voting Rights
Triggering Event"; provided, that if the Issuer breaches or violates more than
one of the provisions constituting a Voting Rights Triggering Event, all such
breaches or violations shall not constitute more than one Voting Rights
Triggering Event. In addition, upon the occurrence and during the continuance of
a Voting Rights Triggering Event described in clause (iii) above, the per annum
dividend rate on the Series A Senior Preferred Stock will increase by 400 basis
points per annum ("Special Dividends") in excess of the dividend rate originally
borne by the Series A Senior Preferred Stock as set forth under "--Dividends."
Except as set forth in the immediately preceding sentence, the voting rights
provided above shall be the holder's exclusive remedy at law or in equity.
The Restated Certificate provides that the Issuer will not authorize any
additional shares of Series A Senior Preferred Stock or any class or series of
capital stock ranking prior to or on a parity with the Series A Senior Preferred
Stock with respect to dividend distributions or distributions upon liquidation,
dissolution or winding-up without the affirmative vote or consent of holders of
at least a majority of the then outstanding shares of Series A Senior Preferred
Stock of the Issuer which are entitled to vote thereon, voting or consenting, as
the case may be, as one class. The Restated Certificate also provides that the
Issuer may not amend the Restated Certificate so as to affect adversely the
specified rights, preferences, privileges or voting rights of the holders of
shares of Series A Senior Preferred Stock, without the affirmative vote or
consent of the holders of at least a majority of the then outstanding shares of
Series A Senior Preferred Stock which are entitled to vote thereon, voting or
consenting, as the case may be, as one class; provided, that any increase in the
amount of authorized preferred stock or the creation and issuance (other than
the Series A Senior Preferred Stock and Series B Junior Preferred Stock as
provided under "--Ranking") of any other class of preferred stock or any
increase in the amount of authorized shares of such class or any other class of
Junior Capital Stock, including Junior Capital Stock which is preferred stock,
will not be deemed to affect adversely such rights, preferences or voting
powers.
Under Delaware state law, holders of Series A Senior Preferred Stock,
under certain circumstances, are entitled to vote as a class upon a proposed
amendment to the certificate of incorporation of the Issuer, whether or not
entitled to vote thereon by the certificate of incorporation, if the amendment
would alter or change the powers, preferences, or special rights of the shares
of such class so as to affect them adversely.
Certain Covenants
The Restated Certificate contains, among others, the following covenants:
Limitation on Additional Indebtedness
The Issuer will not, and will not cause or permit any Restricted
Subsidiary of the Issuer to, directly or indirectly, incur (as defined) any
Indebtedness (including any Acquired Indebtedness); provided, that if no Voting
Rights Triggering Event shall have occurred and be continuing at the time or as
a consequence of the incurrence of such Indebtedness, the Issuer or any
Restricted Subsidiary may incur Indebtedness (including any Acquired
Indebtedness) if the Issuer's Consolidated Interest Coverage Ratio is greater
than 2.0 to 1.
Notwithstanding the foregoing, the Issuer and its Restricted Subsidiaries
may incur Permitted Indebtedness.
Limitation on Restricted Payments
The Issuer will not make, and will not permit any of its Restricted
Subsidiaries to, directly or indirectly, make, any Restricted Payment after the
Issue Date, unless:
a) no Voting Rights Triggering Event shall have occurred and be
continuing at the time of or immediately after giving effect to such
Restricted Payment;
b) immediately after giving pro forma effect to such Restricted
Payment, the Issuer could incur $1.00 of additional Indebtedness (other
than Permitted Indebtedness) under "--Limitation on Additional
Indebtedness" covenant above; and
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c) immediately after giving effect to such Restricted Payment, the
aggregate of all Restricted Payments declared or made after the Issue Date
does not exceed the sum (without duplication) of (1) 50% of the cumulative
Consolidated Net Income of the Issuer (or minus 100% of any cumulative
deficit in Consolidated Net Income) for the period (treated as one
accounting period) from the first day of the fiscal quarter in which the
Issue Date occurs through the last day of the fiscal quarter immediately
preceding such Restricted Payment, (2) 100% of the aggregate Net Proceeds
in cash received by the Issuer from the issuance or sale, after the Issue
Date (other than to a Restricted Subsidiary), of (A) Junior Capital Stock
(other than Disqualified Capital Stock) of the Issuer or (B) any
Indebtedness or other securities of the Issuer that are convertible into
or exercisable or exchangeable for Junior Capital Stock (other than
Disqualified Capital Stock) of the Issuer which have been so converted or
exercised or exchanged (other than by a Restricted Subsidiary of the
Issuer) and (3) 100% of the net reduction in Investments (other than
Permitted Investments), subsequent to the Issue Date, in any Person,
resulting from payments of interest on Indebtedness, dividends, repayments
of loans or advances or other transfers or distributions of Property or
return of capital (but only to the extent such interest, dividends or
repayments or other transfers or distributions of Property or return of
capital are not included in the calculation of Consolidated Net Income),
in each case, to the Issuer or any Restricted Subsidiary from any Person
(including Unrestricted Subsidiaries) or from redesignations (the
designation of which did not constitute a Permitted Investment) of
Unrestricted Subsidiaries as Restricted Subsidiaries in accordance with
the Restated Certificate, not to exceed in the case of any Person the
amount of Investments (other than Permitted Investments) previously made
by the Issuer or any Restricted Subsidiary in such Person. For purposes of
determining the amount expended for Restricted Payments under this clause
(c), Property other than cash (including a distribution of assets) shall
be valued at its Fair Market Value.
The provisions of this covenant shall not prohibit:
(i) the payment of any distribution within 60 days after the date of
declaration thereof, if at such date of declaration such payment would
comply with the provisions of the Restated Certificate;
(ii) the retirement of any shares of Junior Capital Stock of the
Issuer by conversion into, or by or in exchange for, shares of Junior
Capital Stock (other than Disqualified Capital Stock) of the Issuer, or
out of, the Net Proceeds of the substantially concurrent sale (other than
to a Restricted Subsidiary of the Issuer) of other shares of Junior
Capital Stock of the Issuer (other than Disqualified Capital Stock)
provided, that any such Net Proceeds are excluded from clause (c)(2) of
the immediately preceding paragraph for the purposes of this calculation
(and were not included therein at any time);
(iii) the retirement of any shares of Junior Capital Stock that is
Disqualified Capital Stock by conversion into, or by exchange for, shares
of Junior Capital Stock that is Disqualified Capital Stock of the Issuer,
or out of the Net Proceeds of the substantially concurrent sale (other
than to a Restricted Subsidiary of the Issuer) of other shares of Junior
Capital Stock that are Disqualified Capital Stock of the Issuer;
(iv) payments to MHE Investments or any other Person in respect of
which MHE Investments or such other Person is a member of the consolidated
tax group of the Issuer, for so long as MHE Investments or such other
Person owns such amount of the Capital Stock of the Issuer as will permit
it or a member of the consolidated tax group of MHE Investments or such
other Person to be entitled to file consolidated federal tax returns with
the Issuer, for income taxes pursuant to the Tax Allocation Agreement or
for the purpose of enabling MHE Investments or such other Person or any
such members to pay taxes other than income taxes, to the extent actually
owed and attributable to the operations of the Issuer and its Subsidiaries
or to MHE Investments' or such other Person's ownership thereof;
(v) payments to MHE Investments, for so long as it owns not less
than a majority of the outstanding Common Stock of the Issuer, in amounts
sufficient to pay the ordinary operating and administrative expenses of
MHE Investments (including all reasonable professional fees and expenses),
including in connection with its complying with the Issuer's reporting
obligations (including filings with the Commission and any exchange on
which the Issuer's securities are traded) and obligations to prepare and
distribute business records in the
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ordinary course of business and the Issuer's costs and expenses relating
to taxes, other than those referred to in clause (iv) (which taxes are
attributable to the operations of the Issuer and its Restricted
Subsidiaries or to MHE Investments' ownership thereof); provided, that the
aggregate payments paid in each fiscal year pursuant to this clause (v)
will not exceed 0.20% of the consolidated net sales of the Issuer and its
Restricted Subsidiaries for such fiscal year;
(vi) the purchase, redemption, retirement or other acquisition for
value of Capital Stock of the Issuer or of any Person that directly or
indirectly controls (as defined in the definition of Affiliate) the Issuer
held by employees or former employees of the Issuer or any Restricted
Subsidiary (or their estates or beneficiaries under their estates) upon
death, disability, retirement, termination of employment and pursuant to
the terms of any agreement under which such Capital Stock was issued,
provided, that the aggregate Fair Market Value of the consideration paid
for such purchase, redemption, retirement or other acquisition of such
Capital Stock does not exceed $500,000 in any fiscal year;
(vii) payments due under the Permitted Affiliate Agreements (other
than payments pursuant to paragraph (iv) above) that would otherwise
constitute Restricted Payments; and
(viii) payments that would otherwise constitute Restricted Payments,
not to exceed $750,000 in the aggregate;
provided, that in calculating the aggregate amount of Restricted Payments made
subsequent to the Issue Date for purposes of clause (c) of the immediately
preceding paragraph, amounts expended pursuant to clause (i) (but only if the
declaration thereof has not been counted in a prior period), (v) (other than to
the extent otherwise reducing Consolidated Net Income), (vi) and (viii) shall be
included, without duplication, in such calculation and (ii), (iii), (iv) and
(vii) shall not be included in such calculation. Nothing in the immediately
preceding proviso is meant to affect whether any amount expended pursuant to
clause (iv) should be reflected in Consolidated Net Income. Notwithstanding any
other provision of this covenant, no dividends or distributions may be paid on
any class of Common Stock of the Issuer unless the Issuer has paid in cash all
accumulated dividends due on the two dividend payment dates on or immediately
preceding such proposed date of such dividend or distribution.
If the Issuer or any Restricted Subsidiary makes a Restricted Payment
which, at the time of the making of such Restricted Payment, in the good faith
determination of the Board of Directors of the Issuer or the Company, would be
permitted under the requirements of the Restated Certificate, such Restricted
Payment shall be deemed to have been made in compliance with the Restated
Certificate notwithstanding any subsequent adjustment made in good faith to the
Issuer's or such Restricted Subsidiary's financial statements affecting
Consolidated Net Income.
Limitation on Transactions with Affiliates
The Issuer will not, and will not permit any of its Restricted
Subsidiaries to, directly or indirectly, enter into or suffer to exist any
transaction or series of related transactions (including, without limitation,
the sale, purchase, exchange or lease of assets, Property or services) with any
Affiliate (each, an "Affiliate Transaction") or extend, renew, waive or
otherwise modify the terms of any Affiliate Transaction entered into prior to
the Issue Date unless (i) such Affiliate Transaction is between or among the
Issuer and the Restricted Subsidiaries or between or among Restricted
Subsidiaries; or (ii) the terms of such Affiliate Transaction are fair to the
Issuer or such Restricted Subsidiary, as the case may be, and the terms of such
Affiliate Transaction are at least as favorable as the terms which could be
obtained by the Issuer or such Restricted Subsidiary, as the case may be, in a
comparable transaction made on an arm's-length basis between unaffiliated
parties. In any Affiliate Transaction (or any series of related Affiliate
Transactions) involving an amount or having a Fair Market Value in excess of $2
million which is not permitted under clause (i) of the immediately preceding
sentence, the Issuer shall first obtain a resolution of a majority of the
disinterested members of its Board of Directors which reflects the approval of
such Affiliate Transaction and a determination that such Affiliate Transaction
complies with clause (ii) of the immediately preceding sentence. In any
Affiliate Transaction (or series of related Affiliate Transactions) which
includes the payment of fees of $1 million or more to Chartwell, the Issuer
shall obtain a resolution of a majority of the disinterested members of its
Board of Directors which reflects the approval of such Affiliate Transaction. In
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addition, in any Affiliate Transaction (or any series of related Affiliate
Transactions) involving an amount or having a Fair Market Value in excess of $10
million which is not permitted under clause (i) of the immediately preceding
sentence, the Issuer must obtain, prior to the consummation of the transaction
or transactions, a written opinion from a nationally recognized investment
banking firm or other expert stating that such transaction or transactions are
fair to the Issuer or such Restricted Subsidiary, as the case may be, from a
financial point of view; provided, that no such opinion shall be required in
respect of the provision of services or sales of inventory or products by the
Issuer or any of its Restricted Subsidiaries to a Joint Venture in the ordinary
course of business.
The foregoing provisions will not apply to: (i) any transaction or series
of related transactions pursuant to the terms of the Permitted Affiliate
Agreements; (ii) reasonable fees and compensation paid to and indemnity provided
on behalf of officers, directors or employees of the Issuer or any Restricted
Subsidiary of the Issuer as determined in good faith by the Issuer's Board of
Directors or senior management; (iii) any payment that would be permitted under
the first paragraph or clauses (iv) or (v) of the second paragraph of the
Limitations on Restricted Payments covenant; (iv) any Permitted Investment
(other than Permitted Investments made pursuant to clause (x) of the definition
of Permitted Investments); or (v) loans or advances to employees and officers of
the Issuer or any of its Subsidiaries in the ordinary course of business to
provide for the payment of reasonable expenses incurred by such persons in the
performance of their responsibilities to the Issuer or such Subsidiary or in
connection with any relocation. The aggregate management, consulting and similar
fees paid by the Issuer or its Subsidiaries (excluding expenses and amounts paid
pursuant to the last sentence of this covenant or pursuant to clause (iii) of
this paragraph) to Chartwell shall not exceed $1 million during any fiscal year;
provided, that any such fees may accrue but shall not be paid by the Issuer at
any time after the occurrence and during the continuance of a Voting Rights
Triggering Event until such Voting Rights Triggering Event is cured, whereupon
such accrued and unpaid fees may be paid in addition to other permitted fees. In
addition, the Issuer may pay advisory fees to an Affiliate of the Issuer
(including Chartwell) with respect to specific transactions, provided, that such
payments would be permitted under the first paragraph of the covenant under
"--Limitation on Restricted Payments." In addition, for purposes of this
"--Limitation on Transactions with Affiliates" covenant, any transaction or
series of related transactions between the Issuer or any Restricted Subsidiary
and an Affiliate of the Issuer that is approved by a majority of the
disinterested members of its Board of Directors shall be deemed to comply with
clause (ii) of the first sentence of the preceding paragraph. Notwithstanding
the provisions of this covenant, the Issuer may pay fees and expenses to
Affiliates of the Issuer on the Issue Date in connection with the consummation
of the Transactions as described in this Prospectus.
Limitation on Preferred Stock of Restricted Subsidiaries
The Issuer will not permit any of its Restricted Subsidiaries to issue any
Preferred Stock (other than to the Issuer or a Wholly-Owned Subsidiary), other
than Permitted Foreign Restricted Subsidiary Preferred Stock, or permit any
Person (other than the Issuer or a Wholly-Owned Subsidiary) to hold any such
Preferred Stock unless the Issuer or such Restricted Subsidiary would be
entitled to incur or assume Indebtedness under the covenant described under
"--Limitation on Additional Indebtedness" in the aggregate principal amount
equal to the aggregate liquidation value of the Preferred Stock to be issued or
so held.
Change of Control Offer
Upon the occurrence of a Change of Control, the Issuer shall be obligated
to make an offer to purchase (the "Change of Control Offer") the outstanding New
Series A Senior Preferred Stock at a purchase price (the "Change of Control
Purchase Price") equal to 101% of the liquidation preference thereof plus,
without duplication, an amount in cash equal to all accumulated and unpaid
dividends thereon (including an amount in cash equal to a prorated dividend for
the period from the immediately preceding dividend payment date to the Change of
Control Payment Date (as hereinafter defined)) in accordance with the procedures
set forth in this covenant.
Within 30 days of the occurrence of a Change of Control, the Issuer shall
(i) cause a notice of the Change of Control Offer to be sent at least once to
the Dow Jones News Service or similar business news service in the United
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States and (ii) send by first-class mail, postage prepaid, to each holder of New
Series A Senior Preferred Stock, at the address appearing in the register
maintained by the Exchange Agent, a notice stating:
(a) that the Change of Control Offer is being made pursuant to this
covenant and that all New Series A Senior Preferred Stock validly tendered
will be accepted for payment;
(b) the Change of Control Purchase Price and the purchase date
(which shall be a Business Day not earlier than 30 days nor later than 60
days from the date such notice is mailed (the "Change of Control Payment
Date"));
(c) that any New Series A Senior Preferred Stock not validly
tendered will continue to accumulate dividends;
(d) that, unless the Issuer defaults in the payment of the Change of
Control Purchase Price, any New Series A Senior Preferred Stock accepted
for payment pursuant to the Change of Control Offer shall cease to
accumulate dividends after the Change of Control Payment Date;
(e) that holders accepting the offer to have their New Series A
Senior Preferred Stock purchased pursuant to a Change of Control Offer
will be required to surrender their certificates representing New Series A
Senior Preferred Stock to the Issuer at the address specified in the
notice prior to the close of business on the Business Day preceding the
Change of Control Payment Date;
(f) that holders will be entitled to withdraw their acceptance if
the Issuer receives, not later than the close of business on the third
Business Day preceding the Change of Control Payment Date, a telegram,
telex, facsimile transmission or letter setting forth the name of the
holder, the number of shares of New Series A Senior Preferred Stock
delivered for purchase, and a statement that such holder is withdrawing
his election to have such New Series A Senior Preferred Stock purchased;
(g) that holders whose New Series A Senior Preferred Stock is being
purchased only in part will be issued new certificates representing the
number of shares of New Series A Senior Preferred Stock equal to the
unpurchased portion of the certificates surrendered; and
(h) any other procedures that a holder must follow to accept a
Change of Control Offer or effect withdrawal of such acceptance.
On the Change of Control Payment Date, the Issuer shall, to the extent
lawful, accept for payment the number of shares of New Series A Senior Preferred
Stock validly tendered pursuant to the Change of Control Offer and promptly mail
to each holder of New Series A Senior Preferred Stock so accepted payment in an
amount equal to the purchase price for such New Series A Senior Preferred Stock,
and the Issuer shall execute and issue a new New Series A Senior Preferred Stock
certificate representing the number of shares of New Series A Senior Preferred
Stock equal to any unpurchased shares represented by a certificate surrendered.
The Restated Certificate provides that if any Credit Facility is in effect
or if the Senior Notes are outstanding or if any other Indebtedness of the
Issuer or its Restricted Subsidiaries that requires a payment upon a Change of
Control is outstanding, or any amounts are owing thereunder or in respect
thereof, at the time of the occurrence of a Change of Control, prior to the
mailing of the notice to holders described in the second preceding paragraph,
but in any event within 30 days following any Change of Control, the Issuer
shall be required to (i) cause the borrowers thereunder to repay in full all
obligations under or in respect of such Credit Facility or such other
Indebtedness or offer to repay in full all obligations under or in respect of
such Credit Facility or such other Indebtedness and repay within such 30-day
period the obligations under or in respect of such Credit Facility or such other
Indebtedness of each lender who has then irrevocably accepted such offer and
cause the Company to repay within such 30-day period in full all obligations in
respect of the Senior Notes or offer to repay in full all obligations in respect
of the Senior Notes of each holder who has then irrevocably accepted such offer
or (ii) cause such borrowers and the Company to obtain the requisite consent
under such Credit Facility or such other Indebtedness, the holders of such
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other Indebtedness and from the holders of the Senior Notes, respectively, to
permit the repurchase of the New Series A Senior Preferred Stock as described
above. The Issuer must first comply with the covenant described in the preceding
sentence before it shall be required to purchase New Series A Senior Preferred
Stock in the event of a Change of Control; provided, that the Issuer's failure
to comply with the covenant described in the preceding sentence constitutes a
Voting Rights Triggering Event described in clause (iii) under "--Voting Rights"
above. There can be no assurance that the Issuer will have adequate resources to
refinance or fund the repurchase of the New Series A Senior Preferred Stock in
the event of a Change of Control. The failure of the Issuer, following a Change
of Control, to make a Change of Control Offer or to pay when due the Change of
Control Purchase Price for shares of New Series A Senior Preferred Stock
tendered in conformity with any such Change of Control Offer will give the
holders of the New Series A Senior Preferred Stock the rights described under
"--Voting Rights." As a result of the foregoing, a holder of the New Series A
Senior Preferred Stock may not be able to compel the Issuer to purchase the New
Series A Senior Preferred Stock unless the Issuer, or such borrower or the
Company is able at the time to refinance all of the obligations under or in
respect of such Credit Facility, such Senior Notes or such other Indebtedness or
obtain requisite consent thereunder.
The Restated Certificate further provides that, (A) if the Issuer has
issued any outstanding Preferred Stock (other than the Series A Senior Preferred
Stock), and the Issuer is required to make a Change of Control Offer or to make
a distribution with respect to such Preferred Stock (other than the Series A
Senior Preferred Stock) in the event of a Change of Control, the Issuer shall
not consummate any such offer or distribution with respect to such Preferred
Stock (other than the Series A Senior Preferred Stock) until such time as the
Issuer shall have paid the Change of Control Purchase Price in full to the
holders of Series A Senior Preferred Stock that have validly accepted the
Issuer's Change of Control Offer and shall otherwise have consummated the Change
of Control Offer made to holders of the Series A Senior Preferred Stock and (B)
the Issuer will not issue Preferred Stock with change of control provisions
requiring the payment of such Preferred Stock prior to the payment of the Series
A Senior Preferred Stock in the event of a Change in Control under the Restated
Certificate.
In the event that a Change of Control occurs and the holders of Series A
Senior Preferred Stock exercise their right to require the Issuer to purchase
Series A Senior Preferred Stock, if such purchase constitutes a "tender offer"
for purposes of Rule l4e-1 under the Exchange Act at that time, the Issuer will
comply with the requirements of Rule l4e-1 as then in effect with respect to
such repurchase.
The Issuer will not be required to make a Change of Control Offer upon a
Change of Control if a third party makes such Change of Control Offer
contemporaneously with or upon a Change of Control in the manner, at the times
and otherwise in compliance with the requirements of the Restated Certificate
and purchases all Series A Senior Preferred Stock validly tendered and not
withdrawn under such Change of Control Offer.
Merger, Consolidation or Sale of Assets
The Issuer will not consolidate or merge with or into any Person, or sell,
assign, lease, convey or otherwise dispose of (or cause or permit any of its
Restricted Subsidiaries to sell, assign, lease, convey or otherwise dispose of
(however effected, including, without limitation, by merger or consolidation))
all or substantially all of the Issuer's assets (determined on a consolidated
basis for the Issuer and its Restricted Subsidiaries), whether as an entirety or
substantially an entirety in one transaction or a series of related
transactions, including by way of liquidation or dissolution, to any Person
unless, in each such case: (i)(x) the Issuer shall be the continuing Person, or
(y) the Person (if other than the Issuer) formed by such consolidation or into
which the Issuer or the Restricted Subsidiary, as the case may be, is merged or
to which the Properties and assets of the Issuer or any Restricted Subsidiary,
as the case may be, are transferred (such Person, the "Surviving Entity") (1)
shall be a corporation organized and existing under the laws of the United
States or any State thereof or the District of Columbia and (2) the New Series A
Senior Preferred Stock shall be converted into or exchanged for and shall become
shares of such successor, transferee or resulting Person, having in respect of
such successor, transferee or resulting Person the same powers, preferences and
relative participating, optional or other special rights and the qualifications,
limitations or restrictions thereon, that the New Series A Senior Preferred
Stock had immediately prior to such transaction; (ii) immediately before and
immediately after giving effect to such transaction on a pro forma basis
(including, without limitation, giving effect to any Indebtedness and Acquired
Indebtedness incurred or anticipated to be incurred in connection with or in
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respect of the transaction), no Voting Rights Triggering Event shall have
occurred and be continuing; and (iii) immediately after giving effect to such
transaction on a pro forma basis (including, without limitation, any
Indebtedness incurred or anticipated to be incurred in connection with or in
respect of such transaction or series of transactions) the Issuer (or the
Surviving Entity if the Issuer is not continuing) (A) shall have a Consolidated
Net Worth equal to or greater than the Consolidated Net Worth of the Issuer
immediately prior to such transaction and (B) could incur at least $1.00 of
additional Indebtedness (other than Permitted Indebtedness) under the covenant
set forth under "--Certain Covenants--Limitation on Additional Indebtedness"
above; provided, that a Restricted Subsidiary may merge with and into the Issuer
without complying with this clause (iii)(B).
For purposes of the foregoing, the transfer (by lease, assignment, sale or
otherwise, in a single transaction or series of transactions) of all or
substantially all of the Properties or assets of one or more Subsidiaries of the
Issuer, the Capital Stock of which constitutes all or substantially all of the
Properties and assets of the Issuer, shall be deemed to be the transfer of all
or substantially all of the assets of the Issuer. In addition, the phrase "all
or substantially all" of the assets of the Issuer will likely be interpreted
under applicable law and will be dependent upon particular facts and
circumstances. As a result, there may be a degree of uncertainty in ascertaining
whether a sale or transfer of "all or substantially all" of the assets of the
Issuer or any Restricted Subsidiary has occurred.
For all purposes of the Restated Certificate and the New Series A Senior
Preferred Stock, Subsidiaries of any Surviving Entity will, upon such
transaction or series of transactions, become Restricted Subsidiaries or
Unrestricted Subsidiaries, to the extent and as provided pursuant to the
Restated Certificate.
Exchange Agent and Registrar
United States Trust Company of New York is the exchange agent (the
"Exchange Agent") and registrar for the New Series A Senior Preferred Stock.
Reports to Holders
The Restated Certificate provides that whether or not required by the
rules and regulations of the Commission, so long as any shares of Series A
Senior Preferred Stock are outstanding, the Issuer shall furnish to the holders
of the Series A Senior Preferred Stock within 10 days after it is or would have
been required to file them with the Commission, (i) all annual and quarterly
financial information that would be required to be contained in a filing with
the Commission on Forms 10-K and 10-Q (without exhibits) if the Issuer were
required to file such forms, including a section entitled "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and,
with respect to the annual information only, a report thereon by the Issuer's
certified independent accountants and (ii) all current reports that would be
required to be filed with the Commission on Form 8-K (without exhibits) if the
Issuer were required to file such reports. In addition, whether or not required
by the rules and regulations of the Commission, the Issuer will file a copy of
all such information and reports with the Commission for public availability
(unless the Commission will not accept such a filing). In addition, the Issuer
shall furnish to the holders of the Series A Senior Preferred Stock and to
securities analysts and prospective investors, upon their request, the
information required to be delivered pursuant to Rule 144(d)(4) under the
Securities Act and the exhibits omitted from the information furnished pursuant
to the preceding sentence, for so long as the Series A Senior Preferred Stock is
not freely transferable under the Securities Act.
The Exchange Debentures
The Exchange Debentures, if issued, will be issued under an Indenture (the
"Exchange Indenture"), among the Issuer and United States Trust Company of New
York, as Trustee (the "Debenture Trustee"). The terms of the Exchange Debentures
include those stated in the Exchange Indenture and those made a part of the
Exchange Indenture by reference to the Trust Indenture Act as in effect on the
date of the Exchange Indenture. The Exchange Debentures are subject to all such
terms, and holders are referred to the Exchange Indenture and the Trust
Indenture Act of 1939, as amended (the "Trust Indenture Act") for a statement of
the provisions of the Exchange Debentures. The following is a summary of the
material terms and provisions of the Exchange Debentures and the Exchange
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Indenture. This summary does not purport to be a complete description thereof
and is subject to the detailed provisions of, and qualified in its entirety by
reference to, the Exchange Debentures and the Exchange Indenture (including the
definitions contained therein). A copy of the form of Exchange Indenture may be
obtained from the Issuer by any holder or prospective investor upon request.
Definitions relating to certain capitalized terms are set forth under "--Certain
Definitions" and throughout this description. Capitalized terms that are used
but not otherwise defined herein have the meanings assigned to them in the
Exchange Indenture and such definitions are incorporated by reference herein.
For purposes of this section, references to the "Issuer" mean MMH Holdings,
Inc., excluding its Subsidiaries, references to the "Company" mean Morris
Material Handling, Inc., excluding its Subsidiaries, and references to Surety
Arrangements refer to all such arrangements as defined in this section including
those described in "Description of the Surety Arrangement."
General
The Exchange Debentures will be general unsecured obligations of the
Issuer and will be limited in aggregate principal amount to the liquidation
preference of the New Series A Senior Preferred Stock, plus, without
duplication, accumulated and unpaid dividends, on the date or dates on which it
is exchanged for Exchange Debentures (plus any additional Exchange Debentures
issued in lieu of cash interest as described herein). The Exchange Debentures
will be issued in fully registered form only, in denominations of $1,000 and
integral multiples thereof (other than as described in "--The New Series A
Senior Preferred Stock" or with respect to additional Exchange Debentures issued
in lieu of cash interest as described herein). The Exchange Debentures will be
subordinated in right of payment to all existing and future Senior Indebtedness
of the Issuer and will rank pari passu with or senior to all future Indebtedness
of the Issuer that expressly provides that it ranks pari passu with or junior to
the Exchange Debentures, as the case may be.
All of the operations of the Issuer are conducted through its Subsidiaries
and, therefore, the Issuer is dependent upon the cash flow of its Subsidiaries
to meet its obligations, including its obligations under the Exchange
Debentures. The Exchange Debentures will be effectively subordinated to all
Indebtedness and other liabilities (including trade payables, tort claims and
tax claims) of the Issuer's present and future Subsidiaries, including present
and future Unrestricted Subsidiaries. Any right of the Issuer to receive assets
of any of its Subsidiaries upon such Subsidiary's liquidation or reorganization
(and the consequent right of the holders of the Exchange Debentures to
participate in those assets) will be effectively subordinated to the claims of
that Subsidiary's third-party creditors, except for any Indebtedness validly
owed to the Issuer.
As of January 31, 1998, after giving pro forma effect to the Offering, the
application of the net proceeds therefrom and the Transactions, the Issuer and
its Subsidiaries would have had an aggregate of $259.3 million of Indebtedness
outstanding (including $200.0 million aggregate principal amount of Senior Notes
and $55.0 million of borrowings under the New Credit Facility) in respect of
which the Exchange Debentures will be effectively subordinated.
Maturity, Interest and Principal
The Exchange Debentures will mature on April 1, 2009. The Exchange
Debentures will bear interest at the rate of 12% per annum from the date of
exchange for the New Series A Senior Preferred Stock (the "Exchange Date") until
maturity. Interest will be payable semi-annually in cash (or, on or prior to
April 1, 2003, in additional Exchange Debentures, at the option of the Issuer)
in arrears on each April 1 and October 1, commencing with the first such date
after the Exchange Date, to holders of record of the Exchange Debentures at the
close of business on the immediately preceding March 15 and September 15,
respectively. Interest on the Exchange Debentures will be computed on the basis
of a 360-day year of twelve 30-day months.
Optional Redemption
The Exchange Debentures will be redeemable, at the option of the Issuer,
in whole or in part, at any time or from time to time on or after April 1, 2003,
at the following redemption prices (expressed as percentages of
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principal amount), together, in each case, with accrued and unpaid interest to
the redemption date, if redeemed during the twelve-month period beginning on
April 1 of each year listed below:
Year Percentage
- ---- ----------
2003................................................................ 106.000%
2004................................................................ 104.000%
2005................................................................ 102.000%
2006 and thereafter................................................. 100.000%
Notwithstanding the foregoing, the Issuer may redeem in the aggregate all,
but not less than all, of the Exchange Debentures then outstanding at any time
prior to April 1, 2001, at a redemption price equal to 112.000% of the aggregate
principal amount so redeemed, plus accrued interest to the redemption date out
of the Net Proceeds of one or more Public Equity Offerings; provided, that any
such redemption occurs within 90 days following the closing of any such Public
Equity Offering.
In the event of redemption of fewer than all of the Exchange Debentures,
the Debenture Trustee shall select by lot or on a pro rata basis or in such
other manner as it shall deem appropriate the Exchange Debentures to be
redeemed. The Exchange Debentures will be redeemable in whole or in part upon
not less than 30 nor more than 60 days' prior written notice, mailed by first
class mail to a holder's last address as it shall appear on the register
maintained by the Registrar of the Exchange Debentures. On and after any
redemption date, interest will cease to accrue on the Exchange Debentures or
portions thereof called for redemption unless the Company shall fail to redeem
any such Exchange Debentures.
Subordination
The Indebtedness represented by, and all obligations under, the Exchange
Debentures are, to the extent and in the manner provided in the Exchange
Indenture, subordinated in right of payment to the prior indefeasible payment
and satisfaction in full in cash or Cash Equivalents of all existing and future
Senior Indebtedness of the Issuer.
In the event of any insolvency or bankruptcy case or proceeding, or any
receivership, liquidation, arrangement, reorganization or other similar case or
proceeding in connection therewith, relative to the Issuer or to its creditors,
as such, or to its assets, whether voluntary or involuntary, or any liquidation,
dissolution or other winding-up of the Issuer, whether voluntary or involuntary
and whether or not involving insolvency or bankruptcy, or any general assignment
for the benefit of creditors or other marshalling of assets or liabilities of
the Issuer (except in connection with the merger or consolidation of the Issuer
or its liquidation or dissolution following the transfer of substantially all of
its assets, upon the terms and conditions permitted under the circumstances
described under "--Merger, Consolidation or Sale of Assets") (all of the
foregoing referred to herein individually as a "Bankruptcy Proceeding" and
collectively as "Bankruptcy Proceedings"), the holders of Senior Indebtedness of
the Issuer will be entitled to receive payment and satisfaction in full in cash
or Cash Equivalents of, or such payment provided for, all amounts due on or in
respect of all Senior Indebtedness of the Issuer before the holders of the
Exchange Debentures are entitled to receive or retain any payment or
distribution of any kind (other than a payment or distribution in the form of
Permitted Junior Securities) on account of the Exchange Debentures. In the event
that, notwithstanding the foregoing, the Debenture Trustee or any holder of
Exchange Debentures receives any payment or distribution of assets of the Issuer
of any kind, whether in cash, property or securities, including, without
limitation, by way of set-off or otherwise, in respect of the Exchange
Debentures before all Senior Indebtedness of the Issuer is paid and satisfied in
full, then such payment or distribution (other than a payment or distribution in
the form of Permitted Junior Securities) will be held by the recipient in trust
for the benefit of holders of Senior Indebtedness and will be immediately paid
over or delivered to the holders of Senior Indebtedness or their representative
or representatives to the extent necessary to make payment in full of all Senior
Indebtedness remaining unpaid, after giving effect to any concurrent payment or
distribution, or provision therefor, to or for the holders of Senior
Indebtedness. By reason of such subordination, in the event of liquidation or
insolvency, creditors of the Issuer who are holders of Senior Indebtedness may
recover more, ratably, than other creditors of the Issuer, and creditors of the
Issuer who are not holders of Senior Indebtedness or of the Exchange Debentures
may recover more, ratably, than holders of the Exchange Debentures.
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No payment or distribution (other than a payment or distribution in the
form of Permitted Junior Securities) of any assets or securities of the Issuer
of any kind or character (including, without limitation, cash, property and any
payment or distribution which may be payable or deliverable by reason of the
payment of any other Indebtedness of the Issuer being subordinated to the
payment of the Exchange Debentures by the Issuer) may be made by or on behalf of
the Issuer, including, without limitation, by way of set-off or otherwise, for
or on account of the Exchange Debentures, or for or on account of the purchase,
redemption or other acquisition of the Exchange Debentures, and neither the
Debenture Trustee nor any holder or owner of any Exchange Debentures shall take
or receive from the Issuer, directly or indirectly in any manner, payment in
respect of all or any portion of Exchange Debentures following the delivery by
the representative of the holders of Designated Senior Indebtedness (the
"Representative") to the Debenture Trustee of written notice of the occurrence
of a Payment Default, and in any such event, such prohibition shall continue
until such Payment Default is cured, waived in writing or ceases to exist. At
such time as the prohibition set forth in the preceding sentence shall no longer
be in effect, subject to the provisions of the following paragraph, the Issuer
shall resume making any and all required payments in respect of the Exchange
Debentures, including any missed payments.
Upon the occurrence of a Non-Payment Event of Default, no payment or
distribution (other than a payment or distribution in the form of Permitted
Junior Securities) of any assets of the Issuer of any kind may be made by the
Issuer, including, without limitation, by way of set-off or otherwise, on
account of the Exchange Debentures, or on account of the purchase or redemption
or other acquisition of Exchange Debentures, for a period (a "Payment Blockage
Period") commencing on the date of receipt by the Debenture Trustee of written
notice from the Representative of such Non-Payment Event of Default unless and
until (subject to any blockage of payments that may then be in effect under the
preceding paragraph) the earliest of (w) more than 179 days shall have elapsed
since receipt of such written notice by the Debenture Trustee, (x) such
Non-Payment Event of Default shall have been cured or waived in writing or shall
have ceased to exist, (y) such Designated Senior Indebtedness shall have been
paid in full or (z) such Payment Blockage Period shall have been terminated by
written notice to the Issuer or the Debenture Trustee from such Representative,
after which, in the case of clause (w), (x), (y) or (z), the Issuer shall resume
making any and all required payments in respect of the Exchange Debentures,
including any missed payments. Notwithstanding any other provision of the
Exchange Indenture, in no event shall a Payment Blockage Period commenced in
accordance with the provisions of the Exchange Indenture described in this
paragraph extend beyond 179 days from the date of the receipt by the Debenture
Trustee of the notice referred to above (such period, an "Initial Blockage
Period"). Any number of additional Payment Blockage Periods may be commenced
during the Initial Blockage Period; provided, however, that no such additional
Payment Blockage Period shall extend beyond the Initial Blockage Period. After
the expiration of the Initial Blockage Period, no Payment Blockage Period may be
commenced until at least 360 consecutive days have elapsed since the
commencement date of the Initial Blockage Period. Notwithstanding any other
provision of the Exchange Indenture, no Non-Payment Event of Default with
respect to Designated Senior Indebtedness which existed or was continuing on the
date of the commencement of any Payment Blockage Period initiated by the
Representative shall be, or be made, the basis for the commencement of a second
Payment Blockage Period initiated by the Representative, whether or not within
the Initial Blockage Period, unless such Non-Payment Event of Default shall have
been waived for a period of not less than 90 consecutive days.
If the Issuer fails to make any payment on the Exchange Debentures when
due or within any applicable grace period, whether or not on account of payment
blockage provisions, such failure would constitute an Event of Default under the
Exchange Indenture and would enable the holders of the Exchange Debentures to
accelerate the maturity thereof. See "--Events of Default."
By reason of the subordination provisions described above, in the event of
insolvency of the Issuer, funds which would otherwise be payable to holders of
the Exchange Debentures will be paid to holders of Senior Indebtedness of the
Issuer to the extent necessary to repay such Senior Indebtedness in full, and
the Issuer may be unable to fully meet its obligations with respect to the
Exchange Debentures. Subject to the restrictions set forth in the Exchange
Indenture, in the future the Issuer may incur additional Senior Indebtedness.
See "Risk Factors--Ranking of New Series A Senior Preferred Stock; Subordination
of the Exchange Debentures; Pledge of Assets." The subordination provisions
described above will cease to be applicable to the Exchange Debentures upon any
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defeasance or covenant defeasance described under "--Satisfaction and Discharge
of the Exchange Indenture; Defeasance."
A holder of Exchange Debentures by his acceptance of Exchange Debentures
agrees to be bound by such provisions and authorizes and expressly directs the
Debenture Trustee, on his behalf, to take such action as may be necessary or
appropriate to effectuate the subordination provided for in the Exchange
Indenture and appoints the Debenture Trustee his attorney-in-fact for such
purpose.
Certain Covenants
The Exchange Indenture contains, among others, the following covenants:
Limitation on Other Senior Subordinated Indebtedness
The Issuer will not incur, contingently or otherwise, any Indebtedness
that is both (i) subordinate in right of payment to any Senior Indebtedness of
the Issuer and (ii) senior in right of payment to the Exchange Debentures. For
purposes of this covenant, Indebtedness is deemed to be senior in right of
payment to the Exchange Debentures if it is not explicitly subordinate in right
of payment to Senior Indebtedness at least to the same extent as the Exchange
Debentures are subordinate to Senior Indebtedness.
Limitation on Additional Indebtedness
The Issuer will not, and will not cause or permit any Restricted
Subsidiary of the Issuer to, directly or indirectly, incur (as defined) any
Indebtedness (including any Acquired Indebtedness); provided, that if no Default
or Event of Default shall have occurred and be continuing at the time or as a
consequence of the incurrence of such Indebtedness, the Issuer or any Restricted
Subsidiary may incur Indebtedness (including any Acquired Indebtedness) if the
Issuer's Consolidated Interest Coverage Ratio is greater than 2.0 to 1.
Notwithstanding the foregoing, the Issuer and its Restricted Subsidiaries
may incur Permitted Indebtedness.
Limitation on Restricted Payments
The Issuer will not make, and will not permit any of its Restricted
Subsidiaries to, directly or indirectly, make, any Restricted Payment after the
Issue Date, unless:
a) no Default or Event of Default shall have occurred and be
continuing at the time of or immediately after giving effect to such
Restricted Payment;
b) immediately after giving pro forma effect to such Restricted
Payment, the Issuer could incur $1.00 of additional Indebtedness (other
than Permitted Indebtedness) under "--Limitation on Additional
Indebtedness" covenant above; and
c) immediately after giving effect to such Restricted Payment, the
aggregate of all Restricted Payments declared or made after the Issue Date
does not exceed the sum (without duplication) of (1) 50% of the cumulative
Consolidated Net Income of the Issuer (or minus 100% of any cumulative
deficit in Consolidated Net Income) for the period (treated as one
accounting period) from the first day of the fiscal quarter in which the
Issue Date occurs through the last day of the fiscal quarter immediately
preceding such Restricted Payment, (2) 100% of the aggregate Net Proceeds
in cash received by the Issuer from the issuance or sale, after the Issue
Date (other than to a Restricted Subsidiary), of (A) Capital Stock (other
than Disqualified Capital Stock) of the Issuer or (B) any Indebtedness or
other securities of the Issuer that are convertible into or exercisable or
exchangeable for Capital Stock (other than Disqualified Capital Stock) of
the Issuer which have been so converted or exercised or exchanged (other
than by a Restricted Subsidiary of the Issuer) and (3) 100% of the net
reduction in Investments (other than Permitted Investments), subsequent to
the Issue Date, in any Person, resulting from payments of interest on
Indebtedness, dividends, repayments of loans or advances or other
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transfers or distributions of Property or return of capital (but only to
the extent such interest, dividends or repayments or other transfers or
distributions of Property or return of capital are not included in the
calculation of Consolidated Net Income), in each case to the Issuer or any
Restricted Subsidiary from any Person (including Unrestricted
Subsidiaries) or from redesignations (the designation of which did not
constitute a Permitted Investment) of Unrestricted Subsidiaries as
Restricted Subsidiaries in accordance with the Exchange Indenture, not to
exceed in the case of any Person the amount of Investments (other than
Permitted Investments) previously made by the Issuer or any Restricted
Subsidiary in such Person. For purposes of determining the amount expended
for Restricted Payments under this clause (c), Property other than cash
(including a distribution of assets) shall be valued at its Fair Market
Value.
The provisions of this covenant shall not prohibit:
(i) the payment of any distribution within 60 days after the date of
declaration thereof, if at such date of declaration such payment would
comply with the provisions of the Exchange Indenture;
(ii) the retirement of any shares of Capital Stock of the Issuer or
Subordinated Indebtedness by conversion into, or by or in exchange for,
shares of Capital Stock (other than Disqualified Capital Stock) of the
Issuer, or out of, the Net Proceeds of the substantially concurrent sale
(other than to a Restricted Subsidiary of the Issuer) of other shares of
Capital Stock of the Issuer (other than Disqualified Capital Stock)
provided, that any such Net Proceeds are excluded from clause (c)(2) of
the immediately preceding paragraph for the purposes of this calculation
(and were not included therein at any time);
(iii) the redemption, repayment or retirement of Subordinated
Indebtedness in exchange for, by conversion into, or out of the Net
Proceeds of, (x) a substantially concurrent sale or incurrence of
Subordinated Indebtedness (other than any Indebtedness owed to a
Restricted Subsidiary) or (y) a substantially concurrent sale (other than
to a Restricted Subsidiary of the Issuer) of shares of Capital Stock of
the Issuer provided, that any such Net Proceeds are excluded from clause
(c)(2) of the immediately preceding paragraph (and were not included
therein at any time);
(iv) the retirement of any shares of Disqualified Capital Stock by
conversion into, or by exchange for, shares of Disqualified Capital Stock
of the Issuer, or out of the Net Proceeds of the substantially concurrent
sale (other than to a Restricted Subsidiary of the Issuer) of other shares
of Disqualified Capital Stock of the Issuer;
(v) payments to MHE Investments or any other Person in respect of
which MHE Investments or such other Person is a member of the consolidated
tax group of the Issuer, for so long as MHE Investments or such other
Person owns such amount of the Capital Stock of the Issuer as will permit
it or a member of the consolidated tax group of MHE Investments or such
other Person to be entitled to file consolidated federal tax returns with
the Issuer, for income taxes pursuant to the Tax Allocation Agreement or
for the purpose of enabling MHE Investments or such other Person or any
such members to pay taxes other than income taxes, to the extent actually
owed and attributable to the operations of the Issuer and its Subsidiaries
or to MHE Investments' or such other Persons' ownership thereof;
(vi) payments to MHE Investments, for so long as it owns not less
than a majority of the outstanding Common Stock of the Issuer, in amounts
sufficient to pay the ordinary operating and administrative expenses of
MHE Investments (including all reasonable professional fees and expenses),
including in connection with its complying with the Issuer's reporting
obligations (including filings with the Commission and any exchange on
which the Issuer's securities are traded) and obligations to prepare and
distribute business records in the ordinary course of business and the
Issuer's costs and expenses relating to taxes, other than those referred
to in clause (v) (which taxes are attributable to the operations of the
Issuer and its Restricted Subsidiaries or to MHE Investments' ownership
thereof); provided, that the aggregate payments paid in each fiscal year
pursuant to this clause (vi) will not exceed 0.20% of the consolidated net
sales of the Issuer and its Restricted Subsidiaries for such fiscal year;
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(vii) the purchase, redemption, retirement or other acquisition for
value of Capital Stock of the Issuer or of any Person that directly or
indirectly controls (as defined in the definition of Affiliate) the Issuer
held by employees or former employees of the Issuer or any Restricted
Subsidiary (or their estates or beneficiaries under their estates) upon
death, disability, retirement, termination of employment and pursuant to
the terms of any agreement under which such Capital Stock was issued,
provided, that the aggregate Fair Market Value of the consideration paid
for such purchase, redemption, retirement or other acquisition of such
Capital Stock does not exceed $500,000 in any fiscal year;
(viii) payments due under the Permitted Affiliate Agreements (other
than payments pursuant to paragraph (v) above) that would otherwise
constitute Restricted Payments; and
(ix) payments that would otherwise constitute Restricted Payments,
not to exceed $750,000 in the aggregate;
provided, that in calculating the aggregate amount of Restricted Payments made
subsequent to the Issue Date for purposes of clause (c) of the immediately
preceding paragraph, amounts expended pursuant to clause (i) (but only if the
declaration thereof has not been counted in a prior period), (vi) (other than to
the extent otherwise reducing Consolidated Net Income), (vii) and (ix) shall be
included, without duplication, in such calculation and (ii), (iii), (iv), (v)
and (viii) shall not be included in such calculation. Nothing in the immediately
preceding proviso is meant to affect whether any amount expended pursuant to
clause (v) should be reflected in Consolidated Net Income.
If the Issuer makes a Restricted Payment which, at the time of the making
of such Restricted Payment, in the good faith determination of the Board of
Directors of the Issuer, would be permitted under the requirements of the
Exchange Indenture, such Restricted Payment shall be deemed to have been made in
compliance with the Exchange Indenture notwithstanding any subsequent adjustment
made in good faith to the Issuer's financial statements affecting Consolidated
Net Income.
Limitation on Transactions with Affiliates
The Issuer will not, and will not permit any of its Restricted
Subsidiaries to, directly or indirectly, enter into or suffer to exist any
transaction or series of related transactions (including, without limitation,
the sale, purchase, exchange or lease of assets, Property or services) with any
Affiliate (each, an "Affiliate Transaction") or extend, renew, waive or
otherwise modify the terms of any Affiliate Transaction entered into prior to
the Issue Date, unless (i) such Affiliate Transaction is between or among the
Issuer and the Restricted Subsidiaries or between or among Restricted
Subsidiaries; or (ii) the terms of such Affiliate Transaction are fair to the
Issuer or such Restricted Subsidiary, as the case may be, and the terms of such
Affiliate Transaction are at least as favorable as the terms which could be
obtained by the Issuer or such Restricted Subsidiary, as the case may be, in a
comparable transaction made on an arm's-length basis between unaffiliated
parties. In any Affiliate Transaction (or any series of related Affiliate
Transactions) involving an amount or having a Fair Market Value in excess of $2
million which is not permitted under clause (i) of the immediately preceding
sentence, the Issuer shall deliver to the Debenture Trustee a resolution of a
majority of the disinterested members of the Board of Directors of the Issuer
which reflects the approval of such Affiliate Transaction and a determination
that such Affiliate Transaction complies with clause (ii) of the immediately
preceding sentence. In any Affiliate Transaction (or series of related Affiliate
Transactions) which includes the payment of fees of $1 million or more to
Chartwell, the Issuer shall deliver to the Debenture Trustee a resolution of a
majority of the disinterested members of its Board of Directors which reflects
the approval of such Affiliate Transaction. In addition, in any Affiliate
Transaction (or any series of related Affiliate Transactions) involving an
amount or having a Fair Market Value in excess of $10 million which is not
permitted under clause (i) of the immediately preceding sentence, the Issuer
must deliver to the Debenture Trustee, prior to the consummation of the
transaction or transactions, a written opinion from a nationally recognized
investment banking firm or other expert stating that such transaction or
transactions are fair to the Issuer or such Restricted Subsidiary, as the case
may be, from a financial point of view; provided, that no such opinion shall be
required in respect of the provision of services or sales of inventory or
products by the Issuer or any of its Restricted Subsidiaries to a Joint Venture
in the ordinary course of business.
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The foregoing provisions will not apply to: (i) any transaction or series
of related transactions pursuant to the terms of the Permitted Affiliate
Agreements; (ii) reasonable fees and compensation paid to and indemnity provided
on behalf of officers, directors or employees of the Issuer or any Restricted
Subsidiary of the Issuer as determined in good faith by the Issuer's Board of
Directors or senior management; (iii) any payment that would be permitted under
the first paragraph or clauses (v) or (vi) of the second paragraph of the
Limitations on Restricted Payments covenant; (iv) any Permitted Investment
(other than Permitted Investments made pursuant to clause (x) of the definition
of Permitted Investments); or (v) loans or advances to employees and officers of
the Issuer or any of its Subsidiaries in the ordinary course of business to
provide for the payment of reasonable expenses incurred by such persons in the
performance of their responsibilities to the Issuer or such Subsidiary or in
connection with any relocation. The aggregate management, consulting and similar
fees paid by the Issuer or its Subsidiaries (excluding expenses and amounts paid
pursuant to the last sentence of this covenant or pursuant to clause (iii) of
this paragraph) to Chartwell shall not exceed $1 million during any fiscal year;
provided, that any such fees may accrue but shall not be paid by the Issuer at
any time after the occurrence and during the continuance of a Default or Event
of Default until such Default or Event of Default is cured, whereupon such
accrued and unpaid fees may be paid in addition to other permitted fees. In
addition, the Issuer may pay advisory fees to an Affiliate of the Issuer
(including Chartwell) with respect to specific transactions, provided, that such
payments would be permitted under the first paragraph of the covenant under
"--Limitation on Restricted Payments." In addition, for purposes of this
"--Limitation on Transactions with Affiliates" covenant, any transaction or
series of related transactions between the Issuer or any Restricted Subsidiary
and an Affiliate of the Issuer that is approved by a majority of the
disinterested members of its Board of Directors shall be deemed to comply with
clause (ii) of the first sentence of the preceding paragraph. Notwithstanding
the provisions of this covenant, the Issuer may pay fees and expenses to
Affiliates of the Issuer on the Issue Date in connection with the consummation
of the Transactions as described in this Prospectus.
Limitation on Certain Asset Sales
The Issuer will not, and will not permit any of its Restricted
Subsidiaries to, consummate an Asset Sale unless (i) the Issuer or any of its
Restricted Subsidiaries, as the case may be, receives consideration at the time
of such sale or other disposition at least equal to the Fair Market Value
thereof; (ii) not less than 85% of the consideration received by the Issuer or
any of its Restricted Subsidiaries, as the case may be, is in the form of (a)
cash or Cash Equivalents; provided, that the amount of any liabilities (as shown
on the Issuer's or such Restricted Subsidiary's most recent balance sheet) of
the Issuer or any Restricted Subsidiary (other than contingent liabilities or
liabilities (including Subordinated Indebtedness) subordinated to the Exchange
Debentures or Indebtedness without general recourse to the obligor thereof) that
are assumed or forgiven by the transferee of any such assets will be deemed to
be cash for the purposes of this clause (ii) if the Issuer or such Restricted
Subsidiary is released from any liability for such liabilities and (b)
Replacement Assets; and (iii) the Asset Sale Proceeds received by the Issuer or
such Restricted Subsidiaries are applied (a) either (x) to the extent the Issuer
elects, or is required, to the prepayment, repayment or purchase of Senior
Indebtedness of the Issuer or Indebtedness or Capital Stock of any Restricted
Subsidiary within 360 days following the receipt of the Asset Sale Proceeds from
any Asset Sale, provided, that any such repayment shall result in a permanent
reduction of the commitments thereunder in an amount equal to the principal
amount so repaid; or (y) to the extent the Issuer elects, to acquisitions of
assets (and Investments otherwise permitted to be made in accordance with the
terms of the Exchange Indenture) used or useful in businesses similar or
reasonably related to the business of the Issuer or its Restricted Subsidiaries
as conducted at the time of such Asset Sale, provided, that such acquisitions or
Investments occur on or prior to the 365th day following receipt of such Asset
Sale Proceeds (the "Reinvestment Date"); and (b) if on the Reinvestment Date
with respect to any Asset Sale, the Available Asset Sale Proceeds exceed $10
million, the Issuer shall apply an amount equal to such Available Asset Sale
Proceeds to an offer to repurchase the Exchange Debentures (and at its option,
to an offer to repurchase other pari passu Indebtedness; provided, that the
stated maturity date of such Indebtedness is no later than the stated maturity
date of the Exchange Debentures), at a purchase price in cash equal to 100% of
the principal amount thereof plus accrued and unpaid interest, if any, to the
date of repurchase (an "Excess Proceeds Offer"). To the extent that any amount
of Available Asset Sale Proceeds remains after the completion of such Excess
Proceeds Offer, the Issuer may use such remaining amount in any manner permitted
by the Exchange Indenture and the amount of Available Asset Sale Proceeds then
required to be otherwise applied in accordance with this covenant shall be reset
to zero.
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If the Issuer is required to make an Excess Proceeds Offer, the Issuer
shall mail, within 30 days following the Reinvestment Date, a notice to the
holders stating, among other things: (1) that such holders have the right to
require the Issuer to apply the Available Asset Sale Proceeds to purchase such
Exchange Debentures (and stating whether the Issuer has elected to offer to
repurchase other pari passu Indebtedness described in clause (iii) (b) of the
immediately preceding paragraph) at a purchase price in cash equal to 100% of
the principal amount thereof plus accrued and unpaid interest, if any, to the
purchase date; (2) the purchase date, which shall be not earlier than 30 days
and not later than 60 days from the date such notice is mailed; (3) the
instructions, determined by the Issuer, that each holder must follow in order to
have such Exchange Debentures purchased; and (4) the calculations used in
determining the amount of Available Asset Sale Proceeds to be applied to the
purchase of such Exchange Debentures. If at any time the Issuer is required to
make an Excess Proceeds Offer, the Issuer is also required to make one or more
similar offers (each, an "Additional Excess Proceeds Offer") for any of its
securities or those of any of its Affiliates, the Issuer shall be entitled to
make any such Additional Excess Proceeds Offers simultaneously with such Excess
Proceeds Offer; provided, that, to the extent the Issuer is required to purchase
any such other securities pursuant to such Additional Excess Proceeds Offers,
Available Asset Sale Proceeds shall be reduced by an amount equal to the
aggregate purchase price of all such other securities purchased pursuant to such
Additional Excess Proceeds Offers.
In the event that the Issuer makes an Excess Proceeds Offer, the Issuer
shall comply with any applicable securities laws and regulations, including any
applicable requirements of Section 14(e) of, and Rule 14e-1 under, the Exchange
Act.
Limitation on Preferred Stock of Restricted Subsidiaries
The Issuer will not permit any of its Restricted Subsidiaries to issue any
Preferred Stock (other than to the Issuer or a Wholly-Owned Subsidiary), other
than Permitted Foreign Restricted Subsidiary Preferred Stock, or permit any
Person (other than the Issuer or a Wholly-Owned Subsidiary) to hold any such
Preferred Stock unless the Issuer or such Restricted Subsidiary would be
entitled to incur or assume Indebtedness under the covenant described under
"--Limitation on Additional Indebtedness" in the aggregate principal amount
equal to the aggregate liquidation value of the Preferred Stock to be issued or
so held.
Limitation on Capital Stock of Restricted Subsidiaries
The Issuer will not (i) sell or otherwise convey or dispose of any Capital
Stock of a Restricted Subsidiary other than to a Wholly-Owned Subsidiary, (ii)
permit any of its Restricted Subsidiaries to sell or otherwise convey or dispose
of any Capital Stock of a Restricted Subsidiary of the Issuer other than to the
Issuer or a Wholly-Owned Subsidiary or (iii) permit any of its Restricted
Subsidiaries to issue any Capital Stock, other than to the Issuer or a
Wholly-Owned Subsidiary of the Issuer. The foregoing restrictions shall not
apply to (a) an Asset Sale consisting of not less than 85% of the Capital Stock
of a Restricted Subsidiary owned by the Issuer made in compliance with
"--Limitation on Certain Asset Sales," (b) the issuance of Preferred Stock in
compliance with the covenant described under "--Limitation on Preferred Stock of
Restricted Subsidiaries," (c) the issuance of director's qualifying shares if
required by applicable law or (d) the issuance of Capital Stock of a Foreign
Restricted Subsidiary to third parties; provided, that, immediately after such
transaction such Foreign Restricted Subsidiary remains a Foreign Restricted
Subsidiary or (e) the pledge or hypothecation of, or creation of any security
interest on, any Capital Stock by the Issuer or any of its Restricted
Subsidiaries.
Limitation on Dividend and Other Payment Restrictions Affecting Subsidiaries
The Issuer will not, and will not permit any of its Restricted
Subsidiaries to, directly or indirectly, create or otherwise cause or suffer to
exist or become effective any encumbrance or restriction on the ability of any
Restricted Subsidiary to (i) pay dividends or make any other distributions to
the Issuer or any of its Restricted Subsidiaries (A) on its Capital Stock or (B)
with respect to any other interest or participation in, or measured by, its
profits, (ii) pay any Indebtedness owed to the Issuer or any of its Restricted
Subsidiaries, (iii) make loans or advances or capital contributions to the
Issuer or any of its Restricted Subsidiaries that is a stockholder of such
Person or (iv) transfer
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any of its Properties or assets to the Issuer or any of its Restricted
Subsidiaries that is a stockholder of such Person, except for such encumbrances
or restrictions existing under or by reason of:
(i) encumbrances or restrictions as in effect on the Issue Date;
(ii) any Credit Facility (existing on the Issue Date), the Exchange
Indenture, the Exchange Debentures, the Indenture, the Senior Notes, the
Guarantees and any Surety Arrangement (existing on the Issue Date) or any Surety
Arrangement arising after the Issue Date which, in the good faith judgment of
the Board of Directors of the Issuer, contains substantially the same or less
restrictive encumbrances or restrictions than those contained in any Surety
Arrangements existing on the Issue Date and any permitted amendment,
modification or supplement thereto and any permitted renewal, refinancing,
replacement or refunding thereof provided, that, in the good faith judgment of
the Board of Directors of the Issuer, such encumbrances or restrictions are in
the aggregate no more restrictive than those contained in the agreements
governing the Indebtedness being amended, modified, supplemented, extended,
refinanced, renewed, replaced, defeased or refunded;
(iii) applicable law;
(iv) any instrument governing Indebtedness or Capital Stock of a Person
acquired by the Issuer or any of its Restricted Subsidiaries or of any Person
that becomes a Restricted Subsidiary as in effect at the time of such
acquisition or such Person becoming a Restricted Subsidiary (except to the
extent such Indebtedness was incurred in connection with or in contemplation of
such acquisition of such Person becoming a Restricted Subsidiary), which
encumbrance or restriction is not applicable to any Person, or the Properties or
assets of any Person, other than the Person, or the Property of assets of the
Person (including any Subsidiary of the Person), so acquired;
(v) customary non-assignment provisions in leases, licenses or other
agreements entered into in the ordinary course of business and consistent with
past practices;
(vi) Refinancing Indebtedness; provided, that, in the good faith judgment
of the Board of Directors of the Issuer, such encumbrances or restrictions are
in the aggregate no more restrictive than those contained in the agreements
governing the Indebtedness being extended, refinanced, renewed, replaced,
defeased or refunded;
(vii) Indebtedness having restrictions and encumbrances no more
restrictive than those contained in the Exchange Indenture and the Exchange
Debentures or the Indenture, the Senior Notes and the Guarantees; provided, that
the Issuer or the Company is the primary obligor under such Indebtedness;
(viii) customary restrictions in security agreements or mortgages securing
Indebtedness of the Issuer or a Restricted Subsidiary to the extent such
restrictions restrict the transfer of the Property subject to such security
agreements and mortgages;
(ix) customary restrictions in stock or asset purchase agreements to the
extent such restrictions apply to the Person selling stock or assets (and/or
such Person's Subsidiaries) solely during the period prior to the closing under
such agreements; or
(x) any encumbrance or restriction pursuant to an agreement relating to an
acquisition of Property, so long as the encumbrances or restrictions in any such
agreement relate solely to the Property so acquired (and are not or were not
created in anticipation of or in connection with the acquisition thereof).
Nothing contained in this covenant shall prevent the Issuer or any
Restricted Subsidiary from (i) creating, incurring, assuming or suffering to
exist any Liens or (ii) restricting the sale or other disposition of property or
assets of the Issuer or any of its Restricted Subsidiaries that secure
Indebtedness of the Issuer or any of its Restricted Subsidiaries incurred in
accordance with the Exchange Indenture.
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Payments for Consent
Neither the Issuer nor any of its Subsidiaries shall, directly or
indirectly, pay or cause to be paid any consideration, whether by way of
interest, fee or otherwise, to any holder of any Exchange Debentures for or as
an inducement to any consent, waiver or amendment of any of the terms or
provisions of the Exchange Indenture or the Exchange Debentures unless such
consideration is offered to be paid or agreed to be paid to all holders of the
Exchange Debentures which so consent, waive or agree to amend in the time frame
set forth in solicitation documents relating to such consent, waiver or
agreement.
Change of Control Offer
Upon the occurrence of a Change of Control, the Issuer shall be obligated
to make an offer to purchase (the "Change of Control Offer") the outstanding
Exchange Debentures at a purchase price (the "Change of Control Purchase Price")
equal to 101% of the principal amount thereof plus any accrued and unpaid
interest thereon to the Change of Control Payment Date (as hereinafter defined)
in accordance with the procedures set forth in this covenant.
Within 30 days of the occurrence of a Change of Control, the Issuer shall
(i) cause a notice of the Change of Control Offer to be sent at least once to
the Dow Jones News Service or similar business news service in the United States
and (ii) send by first-class mail, postage prepaid, to the Debenture Trustee and
to each holder of the Exchange Debentures, at the address appearing in the
register maintained by the Registrar of the Exchange Debentures, a notice
stating:
(a) that the Change of Control Offer is being made pursuant to this
covenant and that all Exchange Debentures validly tendered will be
accepted for payment;
(b) the Change of Control Purchase Price and the purchase date
(which shall be a Business Day not earlier than 30 days nor later than 60
days from the date such notice is mailed (the "Change of Control Payment
Date"));
(c) that any Exchange Debenture not validly tendered will continue
to accrue interest;
(d) that, unless the Issuer defaults in the payment of the Change of
Control Purchase Price, any Exchange Debentures accepted for payment
pursuant to the Change of Control Offer shall cease to accrue interest
after the Change of Control Payment Date;
(e) that holders accepting the offer to have their Exchange
Debentures purchased pursuant to a Change of Control Offer will be
required to surrender the Exchange Debentures to the Paying Agent at the
address specified in the notice prior to the close of business on the
Business Day preceding the Change of Control Payment Date;
(f) that holders will be entitled to withdraw their acceptance if
the Paying Agent receives, not later than the close of business on the
third Business Day preceding the Change of Control Payment Date, a
telegram, telex, facsimile transmission or letter setting forth the name
of the holder, the principal amount of the Exchange Debentures delivered
for purchase, and a statement that such holder is withdrawing his election
to have such Exchange Debentures purchased;
(g) that holders whose Exchange Debentures are being purchased only
in part will be issued new Exchange Debentures equal in principal amount
to the unpurchased portion of the Exchange Debentures surrendered,
provided, that each Exchange Debenture purchased and each such new
Exchange Debenture issued shall be in an original principal amount in
denominations of $1,000 and integral multiples thereof;
(h) any other procedures that a holder must follow to accept a
Change of Control Offer or effect withdrawal of such acceptance; and
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(i) the name and address of the Paying Agent.
On the Change of Control Payment Date, the Issuer shall, to the extent
lawful, (i) accept for payment Exchange Debentures or portions thereof validly
tendered pursuant to the Change of Control Offer, (ii) deposit with the Paying
Agent money sufficient to pay the purchase price of all Exchange Debentures or
portions thereof so tendered and (iii) deliver or cause to be delivered to the
Debenture Trustee Exchange Debentures or portions thereof so accepted for
cancellation. The Paying Agent shall promptly mail to each holder of Exchange
Debentures so accepted payment in an amount equal to the purchase price for such
Exchange Debentures, and the Issuer shall execute and issue, and the Debenture
Trustee shall promptly authenticate and mail to such holder, a new Exchange
Debenture equal in principal amount to any unpurchased portion of the Exchange
Debentures surrendered; provided, that each such new Exchange Debenture shall be
issued in an original principal amount in denominations of $1,000 and integral
multiples thereof.
The Exchange Indenture will require that if any Credit Facility is in
effect or if the Senior Notes are outstanding or if any other Indebtedness of
the Issuer or its Restricted Subsidiaries that requires a payment upon a Change
of Control is outstanding, or any amounts are owing thereunder or in respect
thereof, at the time of the occurrence of a Change of Control, prior to the
mailing of the notice to holders described in the second preceding paragraph,
but in any event within 30 days following any Change of Control, the Issuer
shall be required to (i) cause the borrowers thereunder to repay in full all
obligations under or in respect of such Credit Facility or such other
Indebtedness or offer to repay in full all obligations under or in respect of
such Credit Facility or such other Indebtedness and repay within such 30-day
period the obligations under or in respect of such Credit Facility or such other
Indebtedness of each lender who has then irrevocably accepted such offer and
cause the Company to repay within such 30-day period in full all obligations in
respect of the Senior Notes or offer to repay in full all obligations in respect
of the Senior Notes of each holder who has then irrevocably accepted such offer
or (ii) cause such borrowers and the Company to obtain the requisite consent
under such Credit Facility or such other Indebtedness, the holders of such other
Indebtedness and from the holders of the Senior Notes, respectively, to permit
the repurchase of the Exchange Debentures as described above. The Issuer must
first comply with the covenant described in the preceding sentence before it
shall be required to purchase Exchange Debentures in the event of a Change of
Control; provided, that the Issuer's failure to comply with the covenant
described in the preceding sentence constitutes an Event of Default described in
clause (iii) under "Events of Default" below. There can be no assurance that the
Issuer will have adequate resources to refinance or fund the repurchase of the
Exchange Debentures in the event of a Change of Control. The failure of the
Issuer, following a Change of Control, to make a Change of Control Offer or to
pay when due the Change of Control Purchase Price of Exchange Debentures
tendered in conformity with any such Change of Control Offer will give the
Debenture Trustee and the holders of the Exchange Debentures the rights
described under "--Events of Default." As a result of the foregoing, a holder of
the Exchange Debentures may not be able to compel the Issuer to purchase the
Exchange Debentures unless the Issuer, or such borrower or the Company, is able
at the time to refinance all of the obligations under or in respect of such
Credit Facility, such Senior Notes or other such Indebtedness or obtain
requisite consent thereunder.
The Exchange Indenture will provide that, if the Issuer has issued any
outstanding (i) Subordinated Indebtedness or (ii) Capital Stock, and the Issuer
is required to make a Change of Control Offer or to make a distribution with
respect to such Subordinated Indebtedness or Capital Stock in the event of a
Change of Control, the Issuer shall not consummate any such offer or
distribution with respect to such Subordinated Indebtedness or Capital Stock
until such time as the Issuer shall have paid the Change of Control Purchase
Price in full to the holders of Exchange Debentures that have validly accepted
the Issuer's Change of Control Offer and shall otherwise have consummated the
Change of Control Offer made to holders of the Exchange Debentures.
In the event that a Change of Control occurs and the holders of Exchange
Debentures exercise their right to require the Issuer to purchase Exchange
Debentures, if such purchase constitutes a "tender offer" for purposes of Rule
14e-1 under the Exchange Act at that time, the Issuer will comply with the
requirements of Rule l4e-1 as then in effect with respect to such repurchase.
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The Issuer will not be required to make a Change of Control Offer upon a
Change of Control if a third party makes such Change of Control Offer
contemporaneously with or upon a Change of Control in the manner, at the times
and otherwise in compliance with the requirements of the Exchange Indenture and
purchases all Exchange Debentures validly tendered and not withdrawn under such
Change of Control Offer.
Merger, Consolidation or Sale of Assets
The Issuer will not consolidate or merge with or into any Person, or sell,
assign, lease, convey or otherwise dispose of (or cause or permit any of its
Restricted Subsidiaries to sell, assign, lease, convey or otherwise dispose of
(however effected, including, without limitation, by merger or consolidation))
all or substantially all of the Issuer's assets (determined on a consolidated
basis for the Issuer and its Restricted Subsidiaries), whether as an entirety or
substantially an entirety in one transaction or a series of related
transactions, including by way of liquidation or dissolution, to any Person
unless, in each such case: (i)(x) the Issuer shall be the continuing Person, or
(y) the Person (if other than the Issuer) formed by such consolidation or into
which the Issuer or the Restricted Subsidiary, as the case may be, is merged or
to which the Properties and assets of the Issuer or any Restricted Subsidiary,
as the case may be, are transferred (such Person, the "Surviving Entity") (1)
shall be a corporation organized and existing under the laws of the United
States or any State thereof or the District of Columbia and (2) shall expressly
assume, by a supplemental indenture, executed and delivered to the Debenture
Trustee, in form satisfactory to the Debenture Trustee, all of the obligations
of the Issuer under the Exchange Debentures, the Exchange Indenture and the
Exchange Offer Registration Rights Agreement, as the case may be (upon which
assumption the Issuer shall be discharged of any and all obligations on the
Exchange Debentures, the Exchange Indenture and the Exchange Offer Registration
Rights Agreement), and the obligations under the Exchange Indenture shall remain
in full force and effect; (ii) immediately before and immediately after giving
effect to such transaction (including, without limitation, giving effect to any
Indebtedness and Acquired Indebtedness incurred or anticipated to be incurred in
connection with or in respect of the transaction), no Default or Event of
Default shall have occurred and be continuing; and (iii) immediately after
giving effect to such transaction on a pro forma basis (including, without
limitation, any Indebtedness incurred or anticipated to be incurred in
connection with or in respect of such transaction or series of transactions) the
Issuer (or the Surviving Entity if the Issuer is not continuing) (A) shall have
a Consolidated Net Worth equal to or greater than the Consolidated Net Worth of
the Issuer immediately prior to such transaction and (B) could incur at least
$1.00 of additional Indebtedness (other than Permitted Indebtedness) under the
covenant set forth under "--Certain Covenants--Limitation on Additional
Indebtedness" above; provided, that a Restricted Subsidiary may merge with and
into the Issuer without complying with this clause (iii)(B).
In connection with any consolidation, merger or transfer of assets
contemplated by this provision, the Issuer shall deliver, or cause to be
delivered, to the Debenture Trustee, in form and substance reasonably
satisfactory to the Debenture Trustee, an Officers' Certificate and an opinion
of counsel, each stating that such consolidation, merger or transfer and the
supplemental indenture in respect thereto comply with this provision and that
all conditions precedent herein provided for relating to such transaction or
transactions have been complied with.
For purposes of the foregoing, the transfer (by lease, assignment, sale or
otherwise, in a single transaction or series of transactions) of all or
substantially all of the Properties or assets of one or more Subsidiaries of the
Issuer, the Capital Stock of which constitutes all or substantially all of the
properties and assets of the Issuer, shall be deemed to be the transfer of all
or substantially all of the assets of the Issuer. In addition, the phrase "all
or substantially all" of the assets of the Issuer will likely be interpreted
under applicable law and will be dependent upon particular facts and
circumstances. As a result, there may be a degree of uncertainty in ascertaining
whether a sale or transfer of "all or substantially all" of the assets of the
Issuer or any Restricted Subsidiary has occurred.
For all purposes of the Exchange Indenture and the Exchange Debentures,
Subsidiaries of any Surviving Entity will, upon such transaction or series of
transactions, become Restricted Subsidiaries or Unrestricted Subsidiaries, to
the extent and as provided pursuant to the Exchange Indenture.
Upon any transaction or series of transactions that are of the type
described in, and are effected in accordance with, conditions described in the
immediately preceding paragraphs, the Surviving Entity shall succeed to, and be
substituted for, and may exercise every right and power of, the Issuer under the
Exchange Indenture with the same
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effect as if such Surviving Entity had been named as the Issuer therein; and
when a Surviving Entity duly assumes all of the obligations and covenants of the
Issuer pursuant to the Exchange Indenture and the Exchange Debentures, except in
the case of a lease, the predecessor Person shall be relieved of all such
obligations.
Events of Default
The following events are defined in the Exchange Indenture as "Events of
Default":
(i) default in payment of any principal of, or premium, if any, on
the Exchange Debentures when due (whether or not prohibited by the
provisions of the Exchange Indenture described under "Subordination");
(ii) default in the payment of any interest on any Exchange
Debentures when due, which default continues for 30 days or more (whether
or not prohibited by the provisions of the Exchange Indenture described
under "Subordination");
(iii) default by the Issuer in the observance or performance of any
other covenant in the Exchange Debentures or the Exchange Indenture for 60
days after written notice from the Debenture Trustee or the holders of not
less than 25% in aggregate principal amount of the Exchange Debentures
then outstanding (except in the case of a default with respect to the
"--Certain Covenants--Limitation on Certain Asset Sales," "--Change of
Control Offer" or "--Merger, Consolidation or Sale of Assets" covenants,
which shall constitute an Event of Default with such notice requirement
but without such passage of time requirement) (whether or not prohibited
by the provisions of the Exchange Indenture described under
"Subordination");
(iv) failure to pay when due (within any applicable grace period)
principal, interest or premium with respect to any Indebtedness of the
Issuer or any Restricted Subsidiary thereof in an aggregate principal
amount of $5 million of more, or the acceleration of any such Indebtedness
in an aggregate principal amount of $5 million or more which default shall
not be cured or waived;
(v) any final judgment or judgments which can no longer be appealed
for the payment of money in excess of $5 million shall be rendered against
the Issuer or any Restricted Subsidiary thereof (in excess of amounts
covered by insurance and as to which the insurance company has
acknowledged coverage) by a court of competent jurisdiction, and shall not
be bonded (such that a judgment creditor cannot proceed against assets of
the Issuer or any Subsidiary), vacated, discharged or satisfied for any
period of 60 consecutive days during which a stay of enforcement shall not
be in effect; or
(vi) certain events involving bankruptcy, insolvency or
reorganization of the Issuer or any Significant Subsidiary thereof.
For purposes of clause (vi) above, any Restricted Subsidiary which, when
aggregated with all other Restricted Subsidiaries that are not otherwise
Significant Subsidiaries and as to which any event described in clause (vi)
above has occurred, would constitute a Significant Subsidiary.
The Exchange Indenture provides that the Debenture Trustee may withhold
notice to the holders of the Exchange Debentures of any default (except in
payment of principal or premium, if any, or interest on the Exchange Debentures
or a default in the observance or performance of the "Merger, Consolidation or
Sale of Assets" covenant) if the Debenture Trustee considers it to be in the
best interest of the holders of the Exchange Debentures to do so.
The Exchange Indenture provides that if an Event of Default (other than an
Event of Default resulting from certain events of bankruptcy, insolvency or
reorganization) shall have occurred and be continuing, then the Debenture
Trustee or the holders of not less than 25% in aggregate principal amount of the
Exchange Debentures then outstanding may declare to be immediately due and
payable, the entire principal amount of all the Exchange Debentures then
outstanding plus accrued interest to the date of acceleration, and such amounts
shall immediately become due and payable; provided, that after such acceleration
but before a judgment or decree based on
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acceleration is obtained by the Debenture Trustee, the holders of a majority in
aggregate principal amount of outstanding Exchange Debentures may, under certain
circumstances, rescind and annul such acceleration if (i) all Events of Default,
other than nonpayment of principal, premium or interest, that has become due
solely because of acceleration, have been cured or waived as provided in the
Exchange Indenture, (ii) to the extent the payment of such interest is lawful,
interest on overdue installments of interest and overdue principal, which has
become due otherwise than by such declaration of acceleration, has been paid,
(iii) if the Issuer has paid the Debenture Trustee its reasonable compensation
and reimbursed the Debenture Trustee for its expenses, disbursements and
advances and (iv) in the event of the cure or waiver of an Event of Default of
the type described in clause (vi) of the first paragraph above, the Debenture
Trustee shall have received an Officers' Certificate and an opinion of counsel
that such Event of Default has been cured or waived. In case an Event of Default
resulting from certain events of bankruptcy, insolvency or reorganization shall
occur, the principal, premium and interest amount with respect to all of the
Exchange Debentures shall be due and payable immediately without any declaration
or other act on the part of the Debenture Trustee or the holders of the Exchange
Debentures. If, after the delivery of any such notice of acceleration with
respect to an Event of Default under clause (iv) of the first paragraph above,
any such payment default or acceleration relating to such other Indebtedness
shall have been cured or rescinded or such Indebtedness shall have been
discharged within 30 days of such default or acceleration in respect of such
Indebtedness, then such Event of Default specified in clause (iv) shall be
deemed cured for all purposes of the Exchange Indenture.
The holders of a majority in principal amount of the Exchange Debentures
then outstanding shall have the right to waive any existing Default or Event of
Default or compliance with any provision of the Exchange Indenture or the
Exchange Debentures and to direct the time, method and place of conducting any
proceeding for any remedy available to the Debenture Trustee, subject to certain
limitations specified in the Exchange Indenture and under the Trust Indenture
Act.
No holder of any Exchange Debenture will have any right to institute any
proceeding with respect to the Exchange Indenture or for any remedy thereunder,
unless such holder shall have previously given to the Debenture Trustee written
notice of a continuing Event of Default and unless also the holders of at least
25% in aggregate principal amount of the outstanding Exchange Debentures shall
have made written request and offered reasonable indemnity to the Debenture
Trustee to institute such proceeding as a trustee, and unless the Debenture
Trustee shall not have received from the holders of a majority in aggregate
principal amount of the outstanding Exchange Debentures a direction inconsistent
with such request and shall have failed to institute such proceeding within 60
days. Notwithstanding the foregoing, such limitations do not apply to a suit
instituted on such Exchange Debenture on or after the respective due dates
expressed in such Exchange Debenture.
Satisfaction and Discharge of the Exchange Indenture; Defeasance
The Issuer may terminate its obligations under the Exchange Indenture,
when (1) either: (A) all Exchange Debentures theretofore authenticated and
delivered have been delivered to the Debenture Trustee for cancellation, or (B)
all such Exchange Debentures not theretofore delivered to the Debenture Trustee
for cancellation (i) have become due and payable, or (ii) will become due and
payable within 60 days or are to be called for redemption within 60 days (a
"Discharge") under irrevocable arrangements satisfactory to the Debenture
Trustee for the giving of notice of redemption by the Debenture Trustee in the
name, and at the expense, of the Issuer, and the Issuer has irrevocably
deposited or caused to be deposited with the Debenture Trustee funds in an
amount sufficient to pay and discharge the entire indebtedness on the Exchange
Debentures, not theretofore delivered to the Debenture Trustee for cancellation,
for principal of, premium, if any, on and interest to the date of deposit or
stated maturity or date of redemption, whichever is later; (2) the Issuer has
paid or caused to be paid all other sums then due and payable hereunder by the
Issuer; and (3) the Issuer has delivered to the Debenture Trustee an Officers'
Certificate and an opinion of counsel, each stating that all conditions
precedent under the Exchange Indenture relating to the satisfaction and
discharge of the Exchange Indenture have been complied with.
The Issuer may elect, at its option, to have its obligations discharged
with respect to the outstanding Exchange Debentures ("defeasance"). Such
defeasance means that the Issuer will be deemed to have paid and discharged the
entire indebtedness represented by the outstanding Exchange Debentures and its
obligations under the Exchange Indenture, except for (1) the rights of holders
of such Exchange Debentures to receive payments in respect of the
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principal of and any premium and interest on such Exchange Debentures when
payments are due, (2) the Issuer's obligations with respect to such Exchange
Debentures concerning issuing temporary Exchange Debentures, registration of
Exchange Debentures, mutilated, destroyed, lost or stolen Exchange Debentures
and the maintenance of an office or agency for payment and money for security
payments held in trust, (3) the rights, powers, trusts, duties and immunities of
the Debenture Trustee, (4) the Issuer's right of optional redemption, and (5)
the defeasance provisions of the Exchange Indenture. In addition, the Issuer may
elect, at its option, to have its obligations released with respect to certain
covenants, including without limitation their obligation to make Excess Proceeds
Offers in connection with Available Asset Sale Proceeds and Change of Control
Offers in connection with any Change of Control, in the Exchange Indenture
("covenant defeasance") and any omission to comply with such obligation shall
not constitute a Default or an Event of Default with respect to the Exchange
Debentures. In the event covenant defeasance occurs, certain events (not
including non-payment, bankruptcy and insolvency events) described under "Events
of Default" will no longer constitute an Event of Default with respect to the
Exchange Debentures.
In order to exercise either defeasance or covenant defeasance with respect
to outstanding Exchange Debentures: (1) the Issuer must irrevocably have
deposited or caused to be deposited with the Debenture Trustee (or other
qualifying trustee) as trust funds in trust for the purpose of making the
following payments, specifically pledged as security for, and dedicated solely
to the benefits of the holders of such Exchange Debentures: (A) money in an
amount, or (B) U.S. government obligations which through the scheduled payment
of principal and interest in respect thereof in accordance with their terms will
provide, not later than the due date of any payment, money in an amount, or (C)
a combination thereof, in each case sufficient without reinvestment, in the
opinion of a nationally recognized firm of independent public accountants
expressed in a written certification thereof delivered to the Debenture Trustee,
to pay and discharge, and which shall be applied by the Debenture Trustee (or
other qualifying trustee) to pay and discharge the entire indebtedness in
respect of the principal of, and premium, if any, and interest on, such Exchange
Debentures on the stated maturity thereof or (if the Issuer has made irrevocable
arrangements satisfactory to the Debenture Trustee for the giving of notice of
redemption by the Debenture Trustee in the name and at the expense of the
Issuer) the redemption date thereof, as the case may be, in accordance with the
terms of the Exchange Indenture and such Exchange Debentures; (2) in the case of
defeasance, the Issuer shall have delivered to the Debenture Trustee an opinion
of counsel stating that (A) the Issuer has received from, or there has been
published by, the Internal Revenue Service a ruling or (B) since the date of the
Exchange Indenture, there has been a change in the applicable federal income tax
law, in either case (A) or (B) to the effect that, and based thereon such
opinion shall confirm that, the holders of such Exchange Debentures will not
recognize gain or loss for federal income tax purposes as a result of the
deposit, defeasance and discharge to be effected with respect to such Exchange
Debentures and will be subject to federal income tax on the same amount, in the
same manner and at the same times as would be the case if such deposit,
defeasance and discharge were not to occur; (3) in the case of covenant
defeasance, the Issuer shall have delivered to the Debenture Trustee an opinion
of counsel to the effect that the holders of such outstanding Exchange
Debentures will not recognize gain or loss for federal income tax purposes as a
result of the deposit and covenant defeasance to be effected with respect to
such Exchange Debentures and will be subject to federal income tax on the same
amount, in the same manner and at the same times as would be the case if such
deposit and covenant defeasance were not to occur; (4) no Default or Event of
Default with respect to the outstanding Exchange Debentures shall have occurred
and be continuing at the time of such deposit after giving effect thereto or, in
the case of defeasance, either: (A) the Issuer shall have delivered to the
Debenture Trustee an opinion of counsel to the effect that, based upon existing
precedents, if the matter were properly briefed, a court should hold that the
deposit of moneys and/or U.S. government obligations as provided in clause (1)
would not constitute a preference voidable under Section 547 or 548 of the
federal bankruptcy laws; or (B) no Default or Event of Default relating to
bankruptcy or insolvency shall have occurred and be continuing at any time on or
prior to the 91st day after the date of such deposit (it being understood that
this condition shall not be deemed satisfied until after such 91st day); (5)
such defeasance or covenant defeasance shall not cause the Debenture Trustee to
have a conflicting interest within the meaning of the Trust Indenture Act
(assuming all Exchange Debentures are in default within the meaning of the Trust
Indenture Act); (6) such defeasance or covenant defeasance shall not result in a
breach or violation of, or constitute a default under, any other agreement or
instrument to which the Issuer is a party or by which it is bound, (7) such
defeasance or covenant defeasance shall not result in the trust arising from
such deposit constituting an investment company within the meaning of the
Investment Company Act of 1940, as amended, unless such trust shall be
registered under such Act or exempt from registration thereunder; and (8) the
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Issuer shall have delivered to the Debenture Trustee an Officers' Certificate
and an opinion of counsel, each stating that all conditions precedent with
respect to such defeasance or covenant defeasance have been complied with.
In the event of a defeasance or a Discharge, a holder whose taxable year
straddles the deposit of funds and the distribution in redemption to such holder
would be subject to tax on any gain (whether characterized as capital gain or
market discount) in the year of deposit rather than in the year of receipt. In
connection with a Discharge, in the event the Issuer becomes insolvent within
the applicable preference period after the date of deposit, monies held for the
payment of the Exchange Debentures may be part of the bankruptcy estate of the
Issuer, disbursement of such monies may be subject to the automatic stay of the
bankruptcy code and monies disbursed to holders of the Exchange Debentures may
be subject to disgorgement in favor of the estate of the Issuer. Similar results
may apply upon the insolvency of the Issuer during the applicable preference
period following the deposit of monies in connection with covenant defeasance.
Amendment, Supplement and Waiver
Without the consent of any holders of the Exchange Debentures, the Issuer
and the Debenture Trustee, at any time and from time to time, may enter into one
or more indentures supplemental to the Exchange Indenture for any of the
following purposes: (1) to evidence the succession of another Person to the
Issuer and the assumption by any such successor of the covenants of the Issuer
in the Exchange Indenture and in the Exchange Debentures; or (2) to add to the
covenants of the Issuer for the benefit of the holders of the Exchange
Debentures, or to surrender any right or power herein conferred upon the Issuer;
or (3) to add additional Events of Default; or (4) to provide for uncertificated
Exchange Debentures in addition to or in place of certificated Exchange
Debentures; or (5) to evidence and provide for the acceptance of appointment
under the Exchange Indenture by a successor Debenture Trustee; or (6) to secure
the Exchange Debentures; or (7) to cure any ambiguity, to correct or supplement
any provision in the Exchange Indenture which may be defective or inconsistent
with any other provision in the Exchange Indenture, or to make any other
provisions with respect to matters or questions arising under the Exchange
Indenture, provided, that such actions pursuant to this clause shall not
adversely affect the interests of the holders of the Exchange Debentures in any
material respect; or (8) to comply with any requirements of the Commission in
order to effect and maintain the qualification of the Exchange Indenture under
the Trust Indenture Act.
With the consent of the holders of not less than a majority in aggregate
principal amount of the outstanding Exchange Debentures, the Issuer and the
Debenture Trustee may enter into an indenture or indentures supplemental to the
Exchange Indenture for the purpose of adding any provisions to or changing in
any manner or eliminating any of the provisions of the Exchange Indenture or of
modifying, in any manner the rights of the holders of the Exchange Debentures
under the Exchange Indenture including the definitions therein; provided, that
no such supplemental indenture shall, without the consent of the holder of each
outstanding Exchange Debenture affected thereby, (1) change the stated maturity
of any Exchange Debenture or of any installment of interest on any Exchange
Debenture, or reduce the amount payable in respect of the principal thereof or
the rate of interest thereon or any premium payable thereon, or reduce the
amount that would be due and payable on acceleration of the maturity thereof, or
change the place of payment where, or the coin or currency in which, any
Exchange Debenture or any premium or interest thereon is payable, or impair the
right to institute suit for the enforcement of any such payment on or after the
stated maturity thereof, or (2) reduce the percentage in aggregate principal
amount of the outstanding Exchange Debentures, the consent of whose holders is
required for any such supplemental indenture, or the consent of whose holders is
required for any waiver (of compliance with certain provisions of the Exchange
Indenture or certain defaults thereunder and their consequences) provided for in
the Exchange Indenture, or (3) modify in any material respect the obligations of
the Issuer to make Change of Control Offers upon a Change of Control or Excess
Proceeds Offers from the Available Asset Sale Proceeds, or (4) modify or change
any provision of the Exchange Indenture affecting the contractual ranking in
right of payment of the Exchange Debentures in a manner adverse to the holders
of the Exchange Debentures, or (5) modify any of the provisions of this
paragraph or provisions relating to waiver of defaults or certain covenants,
except to increase any such percentage required for such actions or to provide
that certain other provisions of the Exchange Indenture cannot be modified or
waived without the consent of the holder of each outstanding Exchange Debenture
affected thereby.
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The holders of not less than a majority in aggregate principal amount of
the outstanding Exchange Debentures may on behalf of the holders of all the
Exchange Debentures waive any past default under the Exchange Indenture and its
consequences, except a default (1) in any payment in respect of the principal of
(or premium, if any, on) or interest on any Exchange Debentures (including any
Exchange Debenture which is required to have been purchased pursuant to a Change
of Control Offer or an Excess Proceeds Offer which has been made by the Issuer),
or (2) in respect of a covenant or provision hereof which under the Exchange
Indenture cannot be modified or amended without the consent of the holder of
each outstanding Exchange Debenture affected.
Reports to Holders
The Exchange Indenture provides that whether or not required by the rules
and regulations of the Commission, so long as any Exchange Debentures are
outstanding, the Issuer shall furnish to the Debenture Trustee and to the
holders of the Exchange Debentures within 10 days after it is or would have been
required to file them with the Commission, (i) all annual and quarterly
financial information that would be required to be contained in a filing with
the Commission on Forms 10-K and 10-Q (without exhibits) if the Issuer were
required to file such forms, including a section entitled "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and,
with respect to the annual information only, a report thereon by the Issuer's
certified independent accountants and (ii) all current reports that would be
required to be filed with the Commission on Form 8-K (without exhibits) if the
Issuer were required to file such reports. In addition, whether or not required
by the rules and regulations of the Commission, the Issuer will file a copy of
all such information and reports with the Commission for public availability
(unless the Commission will not accept such a filing). In addition, the Issuer
shall furnish to the Debenture Trustee, the holders of the Exchange Debentures
and to securities analysts and prospective investors, upon their request, the
information required to be delivered pursuant to Rule 144(d)(4) under the
Securities Act and the exhibits omitted from the information furnished pursuant
to the preceding sentence, for so long as the Exchange Debentures are not freely
transferable under the Securities Act.
Compliance Certificate
The Issuer will deliver to the Debenture Trustee on or before 90 days
after the end of the Issuer's fiscal year and on or before 45 days after the end
of each of the first, second and third fiscal quarters in each year an Officers'
Certificate stating whether or not the signers know of any Default or Event of
Default that has occurred. If they do, the certificate will describe the Default
or Event of Default, its status and the intended method of cure, if any.
The Debenture Trustee
The Debenture Trustee under the Exchange Indenture will be the Registrar
and Paying Agent with regard to the Exchange Debentures. The Exchange Indenture
provides that, except during the continuance of an Event of Default, the
Debenture Trustee will perform only such duties as are specifically set forth in
the Exchange Indenture. During the existence of an Event of Default, the
Debenture Trustee will exercise such rights and powers vested in it under the
Exchange Indenture and use the same degree of care and skill in its exercise as
a prudent person would exercise under the circumstances in the conduct of such
person's own affairs.
Transfer and Exchange
Holders of the Exchange Debentures may transfer or exchange Exchange
Debentures in accordance with the Exchange Indenture. The Registrar under the
Exchange Indenture may require a holder, among other things, to furnish
appropriate endorsements and transfer documents, and to pay any taxes and fees
required by law or permitted by the Exchange Indenture. The Registrar is not
required to transfer or exchange any Exchange Debenture selected for redemption.
Also, the Registrar is not required to transfer or exchange any Exchange
Debenture for a period of 15 days before selection of the Exchange Debentures to
be redeemed.
The registered holder of an Exchange Debenture may be treated as the owner
of it for all purposes.
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Governing Law
The Exchange Indenture provides that the Exchange Indenture and the
Exchange Debentures will be governed by and construed in accordance with the
internal laws of the State of New York, without giving effect to the principles
of conflicts of laws to the extent the application of the laws of another
jurisdiction would be required thereby.
Certain Definitions
Set forth below is a summary of certain of the defined terms used in the
Restated Certificate and the Exchange Indenture. Reference is made to the
Restated Certificate and the Exchange Indenture for the full definition of all
such terms as well as any other capitalized terms used herein for which no
definition is provided.
"Acquired Indebtedness" means (a) Indebtedness of a Person (including an
Unrestricted Subsidiary) existing at the time such Person becomes a Restricted
Subsidiary or assumed in connection with the acquisition of assets from such
Person and (b) any Seller Note.
"Affiliate" of any specified Person means any other Person (including,
without limitation, such Person's issue, siblings and spouse) that directly or
indirectly through one or more intermediaries controls, or is controlled by, or
is under common control with, such specified Person. For the purposes of this
definition, "control" (including, with correlative meanings, the terms
"controlling," "controlled by," and "under common control with"), as used with
respect to any Person, means the possession, directly or indirectly, of the
power to direct or cause the direction of the management or policies of such
Person, whether through the ownership of voting securities, by agreement or
otherwise. For purposes of the Exchange Indenture and the Restated Certificate,
the term "Affiliate," as it relates to the Issuer, shall (a) include HarnCo for
so long as HarnCo is entitled to designate at least one member of the Board of
Directors of the Issuer or any successor to the Issuer and (b) not include CIBC
Oppenheimer Corp. or Indosuez Capital or their respective Affiliates.
"Asset Acquisition" means (a) an Investment by the Issuer or any
Restricted Subsidiary of the Issuer in any other Person pursuant to which such
Person becomes a Restricted Subsidiary of the Issuer, or is merged with or into
the Issuer or any Restricted Subsidiary of the Issuer or (b) the acquisition by
the Issuer or any Restricted Subsidiary of the Issuer of the assets of any
Person (other than a Restricted Subsidiary of the Issuer) which constitute all
or substantially all of the assets of such Person or comprise any division or
line of business of such Person or any other properties or assets of such Person
other than in the ordinary course of business.
"Asset Sale" means the sale, transfer or other disposition (including,
without limitation, by merger or consolidation) (other than to the Issuer or any
of its Restricted Subsidiaries) in any single transaction or series of related
transactions of (a) any Capital Stock of or other equity interest in any
Restricted Subsidiary of the Issuer (other than directors' qualifying shares to
the extent required by applicable law), (b) all or substantially all of the
assets of the Issuer or of any Restricted Subsidiary thereof, (c) real property
or (d) all or substantially all of the assets, or any Property, or part thereof,
owned by the Issuer or any Restricted Subsidiary thereof, or a division, line of
business or comparable business segment of the Issuer or any Restricted
Subsidiary thereof; provided, that Asset Sales shall not include (i) sales,
leases, conveyances, transfers or other dispositions to the Issuer or to a
Restricted Subsidiary or to any other Person if after giving effect to such
sale, lease, conveyance, transfer or other disposition such other Person becomes
a Restricted Subsidiary, (ii) the sale, lease, conveyance, disposition or other
transfer of all or substantially all of the assets of the Issuer and its
Restricted Subsidiaries taken as a whole as permitted under "--Merger,
Consolidation or Sale of Assets," (iii) any transfer, conveyance, sale, lease or
other disposition of property or assets, the gross proceeds of which (exclusive
of indemnities) do not exceed $500,000, (iv) any sales, leases, conveyances,
transfers or other dispositions of Property or equipment that has become worn
out, obsolete or damaged or otherwise unsuitable for use in connection with the
business of the Issuer or any Restricted Subsidiary, as the case may be, (v) the
incurrence of any Liens, (vi) the making of any Restricted Payment permitted by
the covenant "--Certain Covenants--Limitation on Restricted Payments," (vii)
transfers of cash and sales of Cash Equivalents and (viii) sales, leases,
conveyances, transfers or other dispositions of Property or equipment in the
ordinary course of business.
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"Asset Sale Proceeds" means, with respect to any Asset Sale, (i) cash or
Cash Equivalents received by the Issuer or any Restricted Subsidiary from such
Asset Sale, after (a) provision for all income or other taxes measured by or
resulting from such Asset Sale, (b) payment of all brokerage commissions,
underwriting and other fees and expenses related to such Asset Sale, (c)
provision for minority interest holders in any Restricted Subsidiary as a result
of such Asset Sale and (d) deduction of appropriate amounts to be provided by
the Issuer or a Restricted Subsidiary as a reserve, in accordance with GAAP,
against any liabilities associated with the assets sold or disposed of in such
Asset Sale and retained by the Issuer or a Restricted Subsidiary after such
Asset Sale, including, without limitation, pension and other post employment
benefit liabilities and liabilities related to environmental matters or against
any indemnification obligations associated with the assets sold or disposed of
in such Asset Sale, provided, that at such time as such amounts are no longer
reserved or such reserve is no longer necessary, any remaining amounts shall
become Asset Sale Proceeds to be allocated in accordance with the covenant
"--Certain Covenants--Limitation on Certain Asset Sales," and (ii) promissory
notes and other noncash consideration received by the Issuer or any Restricted
Subsidiary from such Asset Sale or other disposition upon the liquidation or
conversion of such notes or noncash consideration into cash.
"Available Asset Sale Proceeds" means, with respect to any Asset Sale, the
aggregate Asset Sale Proceeds from such Asset Sales that have not been applied
in accordance with clauses (iii) (a), and which has not yet been the basis for
an Excess Proceeds Offer in accordance with clause (iii)(b), of the first
paragraph of "--Certain Covenants--Limitation on Certain Asset Sales."
"Average Life" means, as of any date of determination, with respect to any
Indebtedness, the quotient obtained by dividing (i) the sum of the products of
(x) the number of years from the date of determination to the dates of each
successive scheduled principal payment (including any sinking fund or mandatory
redemption payment requirements) of such Indebtedness multiplied by (y) the
amount of such principal payment by (ii) the sum of all such principal payments.
"Capital Stock" means, with respect to any Person, any and all shares or
other equivalents (however designated and whether or not voting) of capital
stock, partnership interests or any other participation, right or other interest
in the nature of an equity interest in such Person or any option, warrant or
other security convertible into any of the foregoing.
"Capitalized Lease Obligations" means Indebtedness represented by
obligations under a lease that is required to be capitalized for financial
reporting purposes in accordance with GAAP, and the amount of such Indebtedness
shall be the capitalized amount of such obligations determined in accordance
with GAAP.
"Cash Equivalents" means any of the following Investments: (i) marketable
direct obligations issued by, or unconditionally guaranteed by, the United
States Government or issued by any agency thereof and backed by the full faith
and credit of the United States maturing within one year from the date of
acquisition thereof; (ii) marketable direct obligations issued by any state of
the United States of America or any foreign country recognized by the United
States or any political subdivision of any such state or foreign country, as the
case may be, or any public instrumentality thereof (including any taxing
authority) maturing within one year from the date of acquisition thereof and, at
the time of acquisition, having one of the two highest ratings obtainable from
either Standard & Poor's Ratings Group ("S&P") or Moody's Investors Service,
Inc. ("Moody's"); (iii) commercial paper maturing no more than one year from the
date of creation thereof and, at the time of acquisition, having a rating of at
least A-1 from S&P or at least P-1 from Moody's; (iv) certificates of deposit,
time deposit accounts, operating accounts or bankers' acceptances maturing
within one year from the date of acquisition thereof issued or guaranteed by any
commercial banking institution organized under the laws of any jurisdiction
recognized by the United States of America and in which the Issuer or its
Subsidiaries actively conduct business, having at the date of acquisition
thereof combined capital and surplus of not less than U.S. $250,000,000 or the
foreign currency equivalent thereof; (v) repurchase obligations with a term of
not more than 30 days for underlying securities of the types described in clause
(i) above entered into with any bank meeting the qualifications specified in
clause (iv) above; (vi) investments in money market funds which invest
substantially all their assets in securities of the types described in clauses
(i) through (v) above; and (vii) foreign bank deposits and cash equivalents in
jurisdictions where the Issuer
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or its Subsidiaries are then actively conducting business, provided, that (a)
all such deposits are required to be made in the ordinary course of business,
(b) such deposits do not exceed $1,000,000 in the aggregate, and (c) the funds
so deposited do not remain in such bank for more than 10 days.
A "Change of Control" of the Issuer will be deemed to have occurred at
such time as (i) any Person (including a Person's Affiliates) or any Persons
acting together that would constitute a group (for purposes of Section 13(d) of
the Exchange Act, or any successor provision thereto) (a "Group"), other than a
Permitted Holder, becomes the beneficial owner (as defined under Rule 13d-3 or
any successor rule or regulation promulgated under the Exchange Act) of (a) 50%
or more of the total Voting Stock of the Issuer or (b) 50% of all classes of
Common Stock (whether voting or non-voting), taken as a whole, of the Issuer,
(iii) any Person (including a Person's Affiliates) or Group, other than a
Permitted Holder, becomes the beneficial owner of more than 30% of the total
Voting Stock of the Issuer, and the Permitted Holders beneficially own, in the
aggregate, a lesser percentage of the total Voting Stock of the Issuer than such
other Person or Group and the Permitted Holders do not have the right or ability
by voting power, contract or otherwise to elect or designate for election a
majority of the Board of Directors of the Issuer, (iv) there shall be
consummated any consolidation or merger of the Issuer in which the Issuer is not
the continuing or surviving corporation or pursuant to which the Common Stock of
the Issuer would be converted into cash, securities or other Property, other
than a merger or consolidation of the Issuer in which the holders of the Common
Stock of the Issuer outstanding immediately prior to the consolidation or merger
hold, directly or indirectly, at least a majority of the Common Stock of the
surviving corporation immediately after such consolidation or merger, or (v)
during any period of two consecutive years, individuals who at the beginning of
such period constituted the Board of Directors of the Issuer (together with any
new directors whose election by such Board of Directors or whose nomination for
election by the shareholders of the Issuer has been approved by 66 2/3% of the
directors then still in office who either were directors at the beginning of
such period or whose election or recommendation for election was previously so
approved) cease to constitute a majority of the Board of Directors of the
Issuer.
"Chartwell" means Chartwell Investments Inc. and its Affiliates.
"Commission" means the Securities and Exchange Commission.
"Common Stock" of any Person means all Capital Stock of such Person that
does not rank prior, as to the payment of dividends or as to the distribution of
assets upon any voluntary or involuntary liquidation, dissolution or winding-up
of such Person, to any other class of Capital Stock of such Person.
"Consolidated Interest Coverage Ratio" of any Person means the ratio of
(i) EBITDA of such Person for the four most recent consecutive fiscal quarters
for which financial statements are available or, if the Issuer is not in
compliance with its obligations under "--Reports to Holders" on the date of
determination, the four most recent consecutive quarters ending on or prior to
the date of determination (in either such case, the "Four Quarter Period") to
(ii) Consolidated Interest Expense of such Person for such Four Quarter Period.
In addition to and without limitation of the foregoing, for purposes of this
definition, "EBITDA" and "Consolidated Interest Expense" shall be calculated
after giving effect on a pro forma basis to (i)(a) the incurrence of any
Indebtedness of such Person or any of its Restricted Subsidiaries (and the
application of the proceeds thereof) giving rise to the need to make such
calculation and (b) any incurrence or repayment of other Indebtedness (and the
application of the proceeds thereof), occurring on or after the first day of the
Four Quarter Period and on or prior to the date of determination, in each case
set forth in clauses (i)(a) and (b), as if such incurrence or repayment, as the
case may be (and the application of the proceeds thereof), occurred on the first
day of the Four Quarter Period (except that Indebtedness under any revolving
credit facility shall be deemed to be the average daily balance of such
Indebtedness during such Four Quarter Period) and (ii) any Asset Sales or Asset
Acquisitions (including (x) any Person who becomes a Restricted Subsidiary as a
result of any such Asset Acquisition and including any Asset Sale or Asset
Acquisition during such Four Quarter Period by any such Person determined as if
such Person had been a Restricted Subsidiary at the time of such transaction;
provided, that all Indebtedness of such Person and any such Restricted
Subsidiaries shall be deemed to have been incurred on the first day of the Four
Quarter Period and (y) the increase or decrease, as the case may be, in EBITDA
directly attributable to such Asset Sale or Asset Acquisition, as the case may
be) occurring on or after the first day of the Four Quarter Period and on or
prior to the date of determination, as if such Asset Sale
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or Asset Acquisition, as the case may be, (including the incurrence, assumption
or liability for any such Acquired Indebtedness) occurred on the first day of
the Four Quarter Period. For purposes of this definition, whenever pro forma
effect is to be given to an Asset Acquisition, the amount of income or earnings
relating thereto and the amount of Consolidated Interest Expense associated with
any Indebtedness incurred in connection therewith shall be determined in good
faith by a responsible financial or accounting officer of the Issuer.
"Consolidated Interest Expense" means, with respect to any Person, for any
period, without duplication, (i) the aggregate amount of interest charges
(excluding fees and expenses incurred in connection with the Transactions),
whether expensed or capitalized, incurred or accrued by such Person and its
Restricted Subsidiaries, determined on a consolidated basis in conformity with
GAAP for such period, plus (ii) to the extent not included in clause (i) above,
an amount equal to the sum of: (A) imputed interest included in Capitalized
Lease Obligations, (B) all commissions, discounts and other fees and charges
owed with respect to letters of credit and bankers' acceptance financing, (C)
the net costs associated with Interest Rate Agreements, Currency Agreements and
other hedging obligations, (D) the interest portion of any deferred payment
obligations, (E) amortization of discount or premium on Indebtedness, if any,
(F) all capitalized interest and all accrued interest, (G) all other non-cash
interest expense, (H) all interest incurred or paid under any guarantee of
Indebtedness (including a guarantee of principal, interest or any combination
thereof) of any Person, and (I) all dividends or distributions on Disqualified
Capital Stock if payable to a Person other than the Issuer or a Restricted
Subsidiary (other than dividends paid or payable in shares of Capital Stock
(other than Disqualified Capital Stock) of the Issuer, in the case of Exchange
Indenture, and Junior Capital Stock (other than Disqualified Capital Stock) of
the Issuer, in the case of the Restated Certificate) declared and payable in
cash, minus (iii) to the extent included in clause (i) or (ii) above,
amortization or write-off of deferred financing costs (and original issue
discount to the extent it arises from the issuance of Capital Stock (other than
Disqualified Capital Stock) of the Issuer, in the case of the Exchange
Indenture, and Junior Capital Stock (other than Disqualified Capital Stock) of
the Issuer, in the case of the Restated Certificate) during such period and,
without duplication, any charge related to any premium or penalty paid in
connection with redeeming or retiring any Indebtedness of the Issuer or its
Restricted Subsidiaries prior to the stated maturity thereof. If any
Indebtedness outstanding or to be incurred (x) bears a floating rate of
interest, the interest expense on such Indebtedness shall be calculated as if
the rate in effect on the date of determination had been the applicable rate for
the entire Four Quarter Period (taking into account on a pro forma basis any
Interest Rate Agreement that has a remaining term as of the date of
determination in excess of 12 months), and/or (y) was incurred under a revolving
credit facility, the interest expense on such Indebtedness shall be computed
based upon the average daily balance of such Indebtedness during the applicable
period. If any Indebtedness to be incurred bears, at the option of the Issuer or
a Restricted Subsidiary, a fixed or floating rate of interest, the interest
expense on such Indebtedness shall be computed by applying, at the option of the
Issuer or such Restricted Subsidiary, such fixed or floating rate.
"Consolidated Net Income" means with respect to any Person, for any
period, the aggregate of the Net Income of such Person and its Restricted
Subsidiaries for such period on a consolidated basis, determined in accordance
with GAAP; provided, that (a) the Net Income of any Person that is not a
Restricted Subsidiary shall be included only to the extent of the amount of
dividends or other distributions representing the Issuer's proportionate share
of such Person's Net Income for such period actually paid in cash to the Issuer
or a Restricted Subsidiary (subject to clause (b) below) by such Person during
such period, (b) the Net Income of any Subsidiary of the Person in question that
is subject to any restriction or limitation on the payment of dividends or the
making of other distributions (other than pursuant to the New Credit Facility,
the Senior Notes, the Indenture, or any other Indebtedness of the Issuer or any
Restricted Subsidiary of the Issuer containing, in the good faith judgment of
the Board of Directors of the Issuer, substantially the same or less restrictive
limitations on the payment of dividends or the making of other distributions
than those contained in such New Credit Facility, the Senior Notes or the
Indenture or the Exchange Debentures or the Exchange Indenture) shall be
excluded to the extent of such restriction or limitation (regardless of any
waiver thereof), (c)(i) the Net Income of any Person acquired in a pooling of
interests transaction for any period prior to the date of such acquisition and
(ii) any net after tax gain (but not loss) resulting from an Asset Sale by the
Person in question or any of its Subsidiaries other than in the ordinary course
of business shall be excluded, (d) non-cash gains and losses due solely to
fluctuations in currency values shall be excluded, (e) in the case of a
successor to the referent Person by consolidation or merger or as a transferee
of the referent Person's assets, any earnings (or losses) of the successor
corporation prior to such consolidation, merger or transfer of assets shall be
excluded, and (f) all items classified as extraordinary, unusual or
nonrecurring, including all items relating to the
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Transactions and the pre-closing events relating thereto shall be excluded
(including the fees and expenses incurred in connection with the Transactions
and write-offs or other costs associated or arising in connection with the
Transactions). In computing Consolidated Net Income under clause (c) under the
"--Certain Covenants--Limitations on Restricted Payments" covenant, the Issuer
or such Restricted Subsidiary (i) shall use audited financial statements for the
portion of the relevant period for which such statements are available on the
date of determination and unaudited financial statements and other current
financial data based on the books and records of the Issuer for the remaining
portion of such period and (ii) shall be permitted to rely in good faith for the
balance of the relevant period for which audited financial statements are not
available on the financial statements and other financial data derived from the
books and records of the Issuer or such Restricted Subsidiary that are available
on the date of determination.
"Consolidated Net Worth" of any Person means the consolidated
stockholders' equity of such Person and its Restricted Subsidiaries determined
on a consolidated basis in accordance with GAAP, less (to the extent included)
amounts attributable to Disqualified Capital Stock of such Person.
"Consolidated Tangible Assets" of any Person means the consolidated
tangible assets of such Person and its Restricted Subsidiaries determined on a
consolidated basis in accordance with GAAP as of the end of the most recent
fiscal quarter for which financial statements are available or, if the Issuer is
not in compliance with its obligations under "--Reports to Holders" on the date
of determination, the end of the most recent quarter ending on or prior to the
date of determination.
"Credit Facilities" means one or more senior secured or unsecured credit
facilities providing, inter alia, for revolving credit loans, term loans,
bankers' acceptances and/or letters of credit between the Issuer or its
Restricted Subsidiaries and one or more lenders, including, in each case, any
related notes, guarantees, collateral documents, instruments and agreements
executed in connection therewith, and in each case as amended, modified,
renewed, refunded, replaced, restated or refinanced in whole or in part from
time to time.
"Currency Agreement" means any foreign exchange contract, currency swap
agreement or other similar agreement or arrangement designed to protect the
Issuer or any Restricted Subsidiary of the Issuer against fluctuations in
currency values.
"Designated Senior Indebtedness" as to the Issuer or any Subsidiary, as
the case may be, means any Senior Indebtedness (a) under the Credit Facilities,
(b) under any Surety Arrangements or (c) which has at the time of initial
issuance an aggregate principal amount outstanding or available under a
committed facility in excess of $10 million and which has been so designated as
Designated Senior Indebtedness by the Board of Directors of the Issuer at the
time of initial issuance in a resolution delivered to the Debenture Trustee.
"Disqualified Capital Stock" means any Capital Stock of the Issuer or a
Restricted Subsidiary thereof which, by its terms (or by the terms of any
security into which it is convertible or for which it is exchangeable at the
option of the holder), or upon the happening of any event, matures or is
mandatorily redeemable, pursuant to a sinking fund obligation or otherwise, or
is redeemable at the option of the holder thereof, in whole or in part, on or
prior to (i) the mandatory redemption date of the Series A Senior Preferred
Stock or (ii) the maturity date of the Exchange Debentures, as the case may be,
for any consideration other than Capital Stock of the Issuer which is not
Disqualified Capital Stock; provided, that the Series A Senior Preferred Stock
shall not be deemed to be Disqualified Capital Stock and Preferred Stock of the
Issuer that is issued with the benefit of provisions requiring a change of
control offer to be made for such Preferred Stock in the event of a change of
control of the Issuer, which provisions have substantially the same effect as
the provisions of the Exchange Indenture or the Restated Certificate, as
applicable, described under "--Change of Control Offer" shall not be deemed to
be Disqualified Capital Stock solely by virtue of such provisions. Without
limitation of the foregoing, Disqualified Capital Stock shall be deemed to
include any Preferred Stock of a Restricted Subsidiary of the Issuer except for
Permitted Foreign Restricted Subsidiary Preferred Stock.
"EBITDA" means, for any Person, for any period, an amount equal to (a) the
sum of (i) Consolidated Net Income for such period, plus (ii) the provision for
taxes for such period based on income or profits to the extent
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such income or profits were included in computing Consolidated Net Income (minus
any provision for taxes utilized in computing net loss under clause (i) hereof
to the extent such provision reduced the net loss), plus (iii) Consolidated
Interest Expense for such period, plus (iv) depreciation for such period on a
consolidated basis to the extent reducing Consolidated Net Income, plus (v)
amortization of intangibles for such period on a consolidated basis to the
extent reducing Consolidated Net Income, plus (vi) amortization of original
issue discount to the extent it arises from the issuance of Capital Stock (other
than Disqualified Capital Stock) of the Issuer, in the case of the Exchange
Indenture, and Junior Capital Stock (other than Disqualified Capital Stock) of
the Issuer, in the case of the Restated Certificate, to the extent reducing
Consolidated Net Income, plus (vii) any charge related to any premium or penalty
paid in connection with redeeming or retiring any Indebtedness prior to its
stated maturity to the extent reducing Consolidated Net Income, plus (viii) any
other non-cash items reducing Consolidated Net Income for such period, minus (b)
all non-cash items increasing Consolidated Net Income for such period, minus (c)
all cash payments during such period relating to non-cash charges that were
added back in determining EBITDA in any prior period, (provided that payment of
such cash amounts did not reduce Consolidated Net Income) all for such Person
and its Restricted Subsidiaries determined in accordance with GAAP.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Fair Market Value" means, with respect to any asset or Property, the
price which could be negotiated in an arm's-length, free market transaction, for
cash, between a willing seller and a willing and able buyer, neither of whom is
under undue pressure or compulsion to complete the transaction. Fair Market
Value shall be determined by the Board of Directors of the Issuer acting in good
faith and, in the case of determination involving assets or property in excess
of $2 million, shall be evidenced by a resolution of the Board of Directors of
the Issuer delivered to the Trustee.
"Foreign Restricted Subsidiary" of any specified Person means any
Restricted Subsidiary the jurisdiction of incorporation, organization or
formation of which is outside of the United States, Canada, the United Kingdom
and South Africa.
"GAAP" means generally accepted accounting principles consistently applied
as in effect in the United States from time to time.
"Guarantee" means a guarantee of the Senior Notes by a guarantor under the
Indenture, as in effect from time to time.
"guarantee" means, as applied to any obligation, (i) a guarantee (other
than by endorsement of negotiable instruments for collection in the ordinary
course of business), direct or indirect, in any manner, of any part or all of
such obligation and (ii) an agreement, direct or indirect, contingent or
otherwise, the practical effect of which is to assure in any way the performance
(or payment of damages in the event of non-performance) of all or any part of
such obligation, including, without limiting the foregoing, the payment of
amounts drawn down by letters of credit. A guarantee shall include, without
limitation, any agreement to preserve or maintain any other Person's financial
condition or to cause any other Person to achieve certain levels of operating
results.
"incur" means, with respect to any Indebtedness or other obligation of any
Person, to create, issue, incur (by conversion, exchange or otherwise), assume,
guarantee or otherwise become liable in respect of such Indebtedness or other
obligation or the recording, as required pursuant to GAAP or otherwise, of any
such Indebtedness or other obligation on the balance sheet of such Person (and
"incurrence," "incurred," "incurrable," and "incurring" shall have meanings
correlative to the foregoing); provided, that a change in GAAP that results in
an obligation of such Person that exists at such time becoming Indebtedness
shall not be deemed an incurrence of such Indebtedness.
"Indebtedness" means (without duplication), with respect to any Person,
any indebtedness at any time outstanding, secured or unsecured, contingent or
otherwise, which is for borrowed money (whether or not the recourse of the
lender is to the whole of the assets of such Person or only to a portion
thereof), or evidenced by bonds, notes, debentures or similar instruments or
representing the balance deferred and unpaid of the purchase price of any
Property (excluding, without limitation, any balances that constitute accounts
payable or trade payables
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or liabilities arising from advance payments or customer deposits for goods and
services sold by such Person or its Restricted Subsidiaries in the ordinary
course of business, and other accrued liabilities, in each case, arising in the
ordinary course of business) if and to the extent any of the foregoing
indebtedness would appear as a liability upon a balance sheet of such Person
prepared in accordance with GAAP, and shall also include, to the extent not
otherwise included (i) any Capitalized Lease Obligations, (ii) guarantees of
items of other Persons which would be included within this definition for such
other Persons (whether or not such items would appear upon the balance sheet of
the guarantor), including, without limitation, guarantees of dividends for which
such Person may be liable directly or indirectly, (iii) all obligations for the
reimbursement of any obligor on any letter of credit, banker's acceptance or
similar credit transaction (provided that in the case of any such letters of
credit, the items for which such letters of credit provide credit support are
those of other Persons which would be included within this definition for such
other Persons), (iv) Disqualified Capital Stock of the Issuer or any Restricted
Subsidiary thereof, including, without limitation, any liquidation preference
and mandatory redemption payment obligations in respect thereof and (v)
obligations of any such Person under any Interest Rate Agreement or Currency
Agreement applicable to any of the foregoing (if and to the extent such Interest
Rate Agreement or Currency Agreement obligations would appear as a liability
upon a balance sheet of such Person prepared in accordance with GAAP). The
amount of Indebtedness of any Person at any date shall be the outstanding
balance at such date of all unconditional obligations as described above and,
with respect to contingent obligations included within the definition of
Indebtedness, the maximum liability upon the occurrence of the contingency
giving rise to the obligation, provided, that (i) the amount outstanding at any
time of any Indebtedness issued with original issue discount is the principal
amount of such Indebtedness less the remaining unamortized portion of the
original issue discount of such Indebtedness at such time as determined in
conformity with GAAP but such Indebtedness shall only be deemed to have been
incurred on the date of original issuance thereof and, in the case of any
securities constituting Indebtedness, the payment of interest upon which is in
such securities, such Indebtedness shall only be deemed to have been incurred on
the date of issuance of the original securities constituting such Indebtedness,
(ii) Indebtedness shall not include any liability for federal, state, local,
foreign or other taxes and (iii) contingent obligations of the Issuer or any of
its Restricted Subsidiaries under any Surety Obligation will be deemed to be
Indebtedness only upon the earlier of (a) the Issuer's or any Restricted
Subsidiary's obtaining knowledge of any payment by or in respect of any provider
in respect of any Surety Obligation, (b) the demand by any provider for any
reimbursement by the Issuer or any of its Restricted Subsidiaries of any Surety
Obligation or (c) the time at which the Issuer or any of its Restricted
Subsidiaries becomes obligated to make payment in respect of any Surety
Obligation as a result of the provider having made a payment in respect of such
Surety Obligation or as a result of such payment being required to be made by
such provider. Notwithstanding any other provision of the foregoing definition,
any trade or accounts payable arising from the purchase of goods or materials or
for services obtained in the ordinary course of business shall not be deemed to
be "Indebtedness" of the Issuer or any Restricted Subsidiaries for purposes of
this definition. Furthermore, guarantees of (or obligations with respect to
letters of credit supporting) Indebtedness otherwise included in the
determination of such amount shall not also be included.
"Indenture" means the Indenture relating to the Senior Notes, as in effect
on the Issue Date.
"Interest Rate Agreement" means, for any Person, any interest rate swap
agreement, interest rate cap agreement, interest rate collar agreement or other
similar agreement designed to protect the party indicated therein against
fluctuations in interest rates.
"Investments" means, directly or indirectly, any advance (or other
extension of credit), loan or capital contribution to (by means of transfers of
Property to others, payments for Property or services for the account or use of
others or otherwise), any guarantee of any obligations or Indebtedness of any
other Person, the purchase of any stock, bonds, notes, debentures, partnership
or joint venture interests or other securities of, the acquisition, by purchase
or otherwise, of any evidence of beneficial ownership of, or interest in, any
Person. Upon the designation of an Unrestricted Subsidiary as a Restricted
Subsidiary or the acquisition by the Issuer or a Restricted Subsidiary of an
interest in any Person that, as a result thereof, becomes a Restricted
Subsidiary, the Issuer shall be deemed to have made an Investment equal to the
Fair Market Value of all Investments owned by such new Restricted Subsidiary.
Investments shall exclude (i) accounts receivable and other extensions of trade
credit, in each case, on commercially reasonable terms in accordance with normal
trade practices, (ii) prepaid expenses and workers'
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compensation, utility, lease and similar deposits, in the ordinary course of
business and (iii) acquisitions of Property or assets paid for solely by the
issuance of Capital Stock (other than Disqualified Capital Stock) of the Issuer.
"Issue Date" means March 30, 1998, the date of original issuance of the
Old Series A Senior Preferred Stock.
"Joint Venture" of any specified Person means any corporation,
partnership, joint venture, limited liability company, association or other
business entity, whether now existing or hereafter organized or acquired, and
(a) which is engaged in a similar line of business as the Issuer or any
Restricted Subsidiary at the date of determination and (b)(i) in the case of a
corporation, of which not more than 50% of the total voting power of the Capital
Stock entitled (without regard to the occurrence of any contingency) to vote in
the election of directors, officers or trustees thereof is held by the Issuer or
any of its Restricted Subsidiaries, or (ii) in the case of a partnership, joint
venture, limited liability company, association or other business entity, with
respect to which the Issuer or any of its Restricted Subsidiaries has not more
than 50% of the ownership and voting power relating to the policies, management
and affairs thereof.
"Junior Capital Stock" means Capital Stock of the Issuer, including the
Series B Junior Preferred Stock and the Series C Junior Voting Preferred Stock,
that does not rank, as to the payment of dividends or other comparable
distributions or as to the distribution of assets upon any voluntary or
involuntary liquidation, dissolution or winding-up of the Issuer, prior to or on
a parity with the Series A Senior Preferred Stock.
"Lien" means with respect to any Property or assets of any Person, any
mortgage or deed of trust, pledge, hypothecation, assignment, deposit
arrangement, security interest, lien, charge, easement, encumbrance, preference,
priority, or other security agreement or preferential arrangement of any kind or
nature whatsoever on or with respect to such Property or assets (including
without limitation, any Capitalized Lease Obligation, conditional sales, or
other title retention agreement having substantially the same economic effect as
any of the foregoing).
"MHE Investments" means MHE Investments, Inc., a Delaware corporation.
"Net Income" means, with respect to any Person for any period, the net
income (loss) of such Person determined in accordance with GAAP, plus the amount
of any decrease in the deferred tax asset for such period relating to the actual
cash tax benefit realized by such Person or the consolidated tax group of which
such Person is a member resulting from the election under Section 338(h)(10) of
the Code in respect of the Transactions.
"Net Proceeds" means (a) in the case of any sale of Capital Stock by the
Issuer, the aggregate net proceeds received by the Issuer, after payment of
expenses, commissions and the like incurred in connection therewith, whether
such proceeds are in cash or in Property (valued at the Fair Market Value
thereof at the time of receipt) and (b) in the case of any exchange, exercise,
conversion or surrender of outstanding securities of any kind for or into shares
of Capital Stock of the Issuer which is not Disqualified Stock, the net book
value of such outstanding securities on the date of such exchange, exercise,
conversion or surrender (plus any additional amount required to be paid by the
holder to the Issuer upon such exchange, exercise, conversion or surrender) less
any and all payments made to the holders, e.g., on account of fractional shares
and less all expenses incurred by the Issuer in connection therewith.
"Non-Payment Event of Default" means any event (other than a Payment
Default) the occurrence of which entitles one or more Persons to accelerate the
maturity of any then outstanding Designated Senior Indebtedness.
"Officers' Certificate" means, with respect to any Person, a certificate
signed by the Chairman of the Board, the Chief Executive Officer, the President
or any Vice President and the Chief Financial Officer or any Treasurer of such
Person that shall comply with applicable provisions of the Exchange Indenture.
"Payment Default" means any default in the payment of principal of (or
premium, if any) or interest on or any other amount payable in connection with
Designated Senior Indebtedness.
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"Permitted Affiliate Agreements" means the agreements between or among the
Issuer and each of MHE Investments, HarnCo, Chartwell and their respective
Affiliates, listed in the Restated Certificate or the Exchange Indenture, as the
case may be, in effect immediately after the initial issuance of the Old Series
A Senior Preferred Stock on the Issue Date, and as the same may be amended from
time to time subject to the provisions of the covenant described under
"--Certain Covenants--Limitation on Transactions with Affiliates," provided,
that notwithstanding such covenant, such agreements may be extended from time to
time or otherwise amended, to the extent that a majority of the disinterested
members of the Board of Directors of the Issuer has determined in good faith
that no material adverse effect on the creditworthiness of the Issuer and its
Restricted Subsidiaries, taken as a whole, shall result as a consequence
thereby. See "Certain Relationships and Related Transactions" above.
"Permitted Foreign Restricted Subsidiary Preferred Stock" means securities
of Foreign Restricted Subsidiaries of the Issuer denominated in Preferred Stock
that (a) otherwise have substantially the same characteristics of voting or
non-voting Common Stock of a Delaware corporation, (b) do not obligate the
issuer to pay current dividends or distributions in cash or otherwise and (c)
are not subject to any requirement of redemption or repurchase.
"Permitted Holders" means Chartwell.
"Permitted Indebtedness" means:
(i) Indebtedness of the Issuer or any Restricted Subsidiary arising
under or in connection with the Credit Facilities or Acquired Indebtedness
in an aggregate principal amount at any one time outstanding not to exceed
the sum of (a) $55 million, less the aggregate amount of all Net Proceeds
of Asset Sales applied to permanently reduce the outstanding amount of
such Indebtedness, and (b) the greater of (1) $75 million, less the
aggregate amount of all Net Proceeds of Asset Sales applied to permanently
reduce the outstanding amount of such Indebtedness or (2) the sum of (x)
80% of the book value of accounts receivable of the Issuer and its
Restricted Subsidiaries and (y) 45% of the book value of consolidated
inventory of the Issuer and its Restricted Subsidiaries, in each case,
determined at the time of such incurrence, less the aggregate amount of
all Net Proceeds of Asset Sales applied to permanently reduce the
outstanding amount of such Indebtedness; provided, that $15 million of the
Indebtedness incurred under this clause (b) may be incurred solely to
obtain letters of credit and to fund draws thereunder to provide credit
support for the Surety Arrangement or other Surety Obligations or other
letters of credit reasonably necessary in the ordinary course of business;
(ii) Indebtedness under Surety Obligations and under the Surety
Arrangement, in either case, that are due not later than 10 days after the
earlier of (a) the Issuer's or any Restricted Subsidiary's obtaining
knowledge of any payment by or in respect of any provider in respect of
any Surety Obligation, (b) the demand by any provider for any
reimbursement by the Issuer or any of its Restricted Subsidiaries of any
Surety Obligation or (c) the time at which the Issuer or any of its
Restricted Subsidiaries becomes obligated to make payment in respect of
any Surety Obligation as a result of the provider having made a payment in
respect of such Surety Obligation or as a result of such payment being
required to be made by such provider;
(iii) Indebtedness under the Exchange Debentures, the Exchange
Indenture, the Senior Notes, the Indenture and the Guarantees;
(iv) Indebtedness not covered by any other clause of this definition
which is outstanding on the Issue Date other than under the South African
Credit Facility;
(v) Indebtedness of the Issuer to any Restricted Subsidiary and
Indebtedness of any Restricted Subsidiary to the Issuer or another
Restricted Subsidiary, provided that Indebtedness of the Issuer or any
Wholly-Owned Subsidiary to any Restricted Subsidiary (other than a
Wholly-Owned Subsidiary) is incurred for borrowed money; provided,
further, that any Indebtedness otherwise referred to in this clause (v)
that is no longer held by a Restricted Subsidiary or the Issuer (whether
(i) as a result of a sale or transfer of such Indebtedness, (ii) as a
result of such Person no longer being the Issuer or a Restricted
Subsidiary or (iii) otherwise), shall, in each case, be deemed incurred at
such time;
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(vi) Purchase Money Indebtedness and Capitalized Lease Obligations
incurred to acquire Property in the ordinary course of business, which
Indebtedness and Capitalized Lease Obligations, in the aggregate,
outstanding on any date of incurrence (and any Refinancing Indebtedness in
respect thereof), do not exceed 4% of the Consolidated Tangible Assets of
the Issuer and its Restricted Subsidiaries;
(vii) Interest Rate Agreements and Currency Agreements;
(viii) guarantees of obligations of the Issuer or its Restricted
Subsidiaries;
(ix) additional Indebtedness of the Issuer or its Restricted
Subsidiaries not to exceed an aggregate of $10 million in principal amount
outstanding at any time; and
(x) Refinancing Indebtedness in respect of Indebtedness incurred
under clauses (iii), (iv), (v) and (vii) above or incurred pursuant to the
first paragraph of the covenant under "--Certain Covenants--Limitation on
Additional Indebtedness."
"Permitted Investments" means, for any Person, Investments made on or
after the Issue Date consisting of:
(i) Investments by the Issuer, or by a Restricted Subsidiary, in the
Issuer or a Restricted Subsidiary;
(ii) Cash Equivalents;
(iii) Investments by the Issuer, or by a Restricted Subsidiary
thereof, in a Person, if as a result of such Investment (a) such Person
becomes a Restricted Subsidiary of the Issuer or (b) such person is
merged, consolidated or amalgamated with or into, or transfers or conveys
substantially all of its assets (including the proceeds of such
Investment) to, or is liquidated into, the Issuer or a Restricted
Subsidiary thereof;
(iv) non-cash consideration received in conjunction with the
consummation of an Asset Sale that is otherwise permitted under the
covenant described under "--Certain Covenants--Limitation on Certain Asset
Sales";
(v) Interest Rate Agreements and Currency Agreements;
(vi) any Investment existing on the Issue Date;
(vii) Investments received in settlement of obligations owed to the
Issuer or any Restricted Subsidiary as a result of bankruptcy or
insolvency proceedings or upon the foreclosure or enforcement of any Lien
in favor of the Issuer or any Restricted Subsidiary;
(viii) Investments required pursuant to any agreement or obligation
of the Issuer or a Restricted Subsidiary to make such Investments in
effect on the Issue Date, as described in the Restated Certificate or the
Exchange Indenture, as the case may be;
(ix) Investments required to be made pursuant to the Transactions,
as described in the Restated Certificate or the Exchange Indenture, as the
case may be; and
(x) Investments by the Issuer or any Restricted Subsidiary not
otherwise permitted under this definition, in an aggregate amount not to
exceed $15 million at any one time outstanding.
For purposes of clause (x) above, the amount of any Investment
outstanding, in respect of any Investment and the issuer thereof (and its
Subsidiaries), shall be equal to the excess of (a) the aggregate amount of all
Investments made therein by the Issuer or any Restricted Subsidiary on or after
the Issue Date (including the Fair Market Value of all such Investments not made
in cash or Cash Equivalents, valued at the time of such Investment) over (b) the
aggregate amount returned in cash or Cash Equivalents on or with respect to
Investments in such Person (whenever
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such Investment was made) whether through the sale or other disposition of the
Investment in such Person (or portion thereof) or through interest payments,
principal payments, dividends or other distributions or payments; provided, that
such payments or distributions shall not be (and have not been) included in
clause (c)(3) of the first paragraph of the covenant "--Certain
Covenants--Limitation on Restricted Payments" or otherwise included in
Consolidated Net Income.
"Permitted Junior Securities" means debt or equity securities of the
Issuer or any successor corporation provided for by a plan of reorganization or
readjustment that are subordinated to the Exchange Debentures at least to the
same extent that the Exchange Debentures are subordinated to the payment of all
Senior Indebtedness then outstanding.
"Person" means any individual, corporation, partnership, joint venture,
association, joint-stock company, trust, unincorporated organization or
government (including any agency or political subdivision thereof).
"Preferred Stock" means any Capital Stock of a Person, however designated,
which entitles the holder thereof to a preference with respect to dividends,
distributions or liquidation proceeds of such Person over the holders of other
Capital Stock issued by such Person.
"Property" of any Person means all types of real, personal, tangible,
intangible or mixed property owned by such Person whether or not included in the
most recent consolidated balance sheet of such Person and its Subsidiaries under
GAAP.
"Public Equity Offering" means any underwritten public offering of shares
of Common Stock (however designated and whether voting or non-voting) of the
Issuer or the Company and any and all rights, warrants or options to acquire
such Common Stock pursuant to an effective registration statement (other than a
registration statement on Form S-4 or S-8) filed with the Commission in
accordance with the Securities Act.
"Purchase Money Indebtedness" means any Indebtedness incurred in the
ordinary course of business by a Person to finance the cost (including sales and
excise taxes, installation and delivery charges and other direct costs of, and
other direct expenses paid or charged in connection with, such purchase or
construction) of an item of Property, the principal amount of which Indebtedness
does not exceed the sum of (i) 100% of such cost and (ii) reasonable fees and
expenses of such Person incurred in connection therewith.
"Refinancing Indebtedness" means Indebtedness that refunds or refinances
any Indebtedness of the Issuer or its Restricted Subsidiaries outstanding on the
Issue Date or other Indebtedness permitted to be incurred by the Issuer or its
Restricted Subsidiaries pursuant to the terms of the Restated Certificate or the
Exchange Indenture, as the case may be, but only to the extent that (i) in the
case of Exchange Debentures, if the Indebtedness being refunded or refinanced is
Subordinated Indebtedness, the Refinancing Indebtedness is subordinated to
Exchange Debentures, to at least the same extent as the Indebtedness being
refunded or refinanced, (ii) the Refinancing Indebtedness is scheduled to mature
either (a) no earlier than the Indebtedness being refunded or refinanced, or (b)
at least 91 days after (i) the mandatory redemption date of the Series A Senior
Preferred Stock or (ii) the final stated maturity date of the Exchange
Debentures, as the case may be, (iii) the portion, if any, of the Refinancing
Indebtedness that is scheduled to mature on or prior to (i) the mandatory
redemption date of the Series A Senior Preferred Stock or (ii) the final stated
maturity date of the Exchange Debentures, as the case may be, has a weighted
average life to maturity at the time such Refinancing Indebtedness is incurred
that is equal to or greater than the weighted average life to maturity of the
portion of the Indebtedness being refunded or refinanced that is scheduled to
mature on or prior to (x) the mandatory redemption date of the Series A Senior
Preferred Stock or (y) the final stated maturity date of the Exchange
Debentures, as the case may be, and, in the case of clause (ii) above and this
clause (iii), such Refinancing Indebtedness by its terms, or by the terms of any
agreement or instrument pursuant to which such Indebtedness is issued, does not
permit redemption or other retirement (including pursuant to any required offer
to purchase to be made by the Issuer or a Restricted Subsidiary) of such
Indebtedness at the option of the holder thereof prior to the final stated
maturity of the Indebtedness being refinanced, other than a redemption or other
retirement at the option of the holder of such Indebtedness (including pursuant
to a required offer to purchase made by the Issuer or a Restricted Subsidiary)
which is conditioned on a change of control of the Issuer pursuant to
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provisions substantially similar to those contained in the Exchange Indenture
described under "--Change of Control" or "Asset Sales" or otherwise on terms
substantially similar to those in such Indebtedness being refinanced, (iv) such
Refinancing Indebtedness is in an aggregate principal amount that is equal to or
less than the sum of (a) the aggregate principal amount then outstanding under
the Indebtedness being refunded or refinanced, (b) the amount of accrued and
unpaid interest, if any, and premiums owed, if any, not in excess of
pre-existing prepayment provisions on such Indebtedness being refunded or
refinanced and (c) the amount of customary fees, expenses and costs related to
the incurrence of such Refinancing Indebtedness, and (v) such Refinancing
Indebtedness is incurred by the same Person that initially incurred the
Indebtedness being refunded or refinanced, except that the Issuer may incur
Refinancing Indebtedness to refund or refinance Indebtedness of any Wholly-Owned
Subsidiary of the Issuer and any Restricted Subsidiary may incur Refinancing
Indebtedness to refund or refinance Indebtedness of any other Restricted
Subsidiary.
"Replacement Assets" means (x) Properties or assets (other than cash or
Cash Equivalents or any Capital Stock or other security) that will be used in a
business of the Issuer and the Restricted Subsidiaries conducted on the Issue
Date or in a business reasonably related thereto or (y) Capital Stock of any
Person that will become on the date of acquisition thereof a Restricted
Subsidiary as a result of such acquisition.
"Restricted Payment" means any of the following: (i) the declaration or
payment of any dividend or any other distribution or payment of any kind or
character (whether in cash, Property or securities) on Junior Capital Stock of
the Issuer or Capital Stock of any Restricted Subsidiary, in the case of the New
Series A Senior Preferred Stock, or Capital Stock of the Issuer or any
Restricted Subsidiary of the Issuer, in the case of the Exchange Debentures, or
any payment made to the direct or indirect holders (in their capacities as such)
of Junior Capital Stock of the Issuer or Capital Stock of any Restricted
Subsidiary of the Issuer, in the case of the New Series A Senior Preferred
Stock, or Capital Stock of the Issuer or Capital Stock of any Restricted
Subsidiary of the Issuer, in the case of the Exchange Debentures (other than (x)
dividends or distributions payable solely in Capital Stock (other than
Disqualified Capital Stock) of the Issuer, in the case of the Exchange
Indenture, or Junior Capital Stock (other than Disqualified Capital Stock) of
the Issuer, in the case of the Restated Certificate, and (y) dividends or
distributions payable to the Issuer or to a Restricted Subsidiary of the Issuer
and (z) dividends or distributions from a Restricted Subsidiary of the Issuer
that are paid ratably to all Persons holding the Capital Stock of such
Restricted Subsidiary in proportion to the Capital Stock held by such Persons),
(ii) the purchase, redemption or other acquisition or retirement for value of
any Junior Capital Stock of the Issuer or any Capital Stock of any of its
Restricted Subsidiaries or any options, warrants or rights to purchase or
acquire such shares or any securities convertible or exchangeable into such
shares (other than any such shares, options, warrants, rights or securities (a)
that are owned by the Issuer or a Restricted Subsidiary of the Issuer; provided,
that such options, warrants, rights or securities are purchased, redeemed or
otherwise acquired for value by the issuer thereof, or (b) the issuer of which
is a Restricted Subsidiary; provided, that, for purposes of this clause (b),
such purchase, redemption or other acquisition or retirement for value is (A)
permitted under clauses (viii) or (x) of the definition of Permitted Investments
or (B) in an amount, which, when added to all other Restricted Payments made
pursuant to this clause (b), is not greater than 10% of Consolidated Tangible
Assets of the Issuer and its Restricted Subsidiaries), (iii) as to the Exchange
Debentures, the making of any principal payment on, or the purchase, defeasance,
repurchase, redemption or other acquisition or retirement for value, prior to
any scheduled maturity, scheduled repayment or scheduled sinking fund payment,
of any Subordinated Indebtedness (other than Subordinated Indebtedness acquired
in anticipation of satisfying a scheduled sinking fund obligation, principal
installment or final maturity, in each case due within one year of the date of
acquisition), (iv) the making of any Investment other than a Permitted
Investment, (v) any designation (other than pursuant to clause (x) of the
definition of Permitted Investments) of a Restricted Subsidiary as an
Unrestricted Subsidiary (a "Designation"), provided, that the Designation of a
Subsidiary of the Issuer as an Unrestricted Subsidiary shall be deemed to
include the Designation of all of the Subsidiaries of such Subsidiary that were
Restricted Subsidiaries, (vi) forgiveness of any Indebtedness of an Affiliate of
the Issuer to the Issuer or a Restricted Subsidiary and (vii) any advisory fee
paid to an Affiliate with respect to a specific transaction (other than fees
payable on the Issue Date upon consummation of the Transactions). For purposes
of determining the amount expended for Restricted Payments, (a) cash distributed
or invested shall be valued at the face amount thereof and Property other than
cash shall be valued at its Fair Market Value, except that in determining the
amount of any Restricted Payment made under clause (v) above, the amount of such
Restricted Payment shall be equal to the greater of (i) the book value or (ii)
the Fair Market Value of the Issuer's direct and indirect proportionate interest
in
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such Subsidiary on such date and (b) upon the designation of an Unrestricted
Subsidiary as a Restricted Subsidiary, or the acquisition by the Issuer or a
Restricted Subsidiary of an interest in any Person that, as a result thereof,
becomes a Restricted Subsidiary, the Issuer shall be deemed to have made a
Restricted Payment equal to the Fair Market Value of the Capital Stock or, with
respect to the Exchange Debentures, Subordinated Indebtedness of the Issuer or
its Restricted Subsidiaries owned by such new Restricted Subsidiaries.
"Restricted Subsidiary" means a Subsidiary of the Issuer other than an
Unrestricted Subsidiary and includes all of the Subsidiaries of the Issuer
existing as of the Issue Date. The Board of Directors of the Issuer may
designate any Unrestricted Subsidiary or any Person that is to become a
Subsidiary as a Restricted Subsidiary if immediately after giving effect to such
action (and treating any Acquired Indebtedness as having been incurred at the
time of such action), (i) no Voting Rights Triggering Event or Default or Event
of Default, as the case may be, shall have occurred and be continuing, (ii)
Indebtedness of such Person and its Subsidiaries outstanding immediately
following such redesignation would, if incurred at such time, be permitted to be
incurred under the Restated Certificate or the Exchange Indenture and (iii) the
provisions referred to in clause (b) of the last sentence of the definition of
Restricted Payment is complied with and any Investments pursuant to the second
sentence of the definition of Investments are permitted to be made pursuant to
the Restated Certificate or the Exchange Indenture.
"Seller Note" means any Indebtedness of the Issuer or any Restricted
Subsidiary issued to a seller as a portion of the purchase price in any Asset
Acquisition by the Issuer or such Restricted Subsidiary from such seller.
"Senior Indebtedness" means the principal of and premium, if any, and
interest (including post-petition interest) on, and any and all other fees,
expense reimbursement obligations and other amounts due pursuant to the terms of
all agreements, documents and instruments providing for, creating, securing or
evidencing or otherwise entered into in connection with (a) all Indebtedness of
the Issuer owed to lenders under any Credit Facility or any Surety Arrangement,
(b) all obligations of the Issuer with respect to any Interest Rate Agreement or
any Currency Agreement, (c) all obligations of the Issuer to reimburse any bank
or other person in respect of amounts paid under letters of credit, banker's
acceptances or other similar instruments, (d) all other Indebtedness of the
Issuer which does not provide that it is to rank in right of payment pari passu
with or subordinate to the Exchange Debentures, and (e) all deferrals, renewals,
extensions and refundings of, and amendments, modifications and supplements to,
any of the Senior Indebtedness described above. Notwithstanding anything to the
contrary in the foregoing, Senior Indebtedness will not include (i) Indebtedness
of the Issuer to any of its Subsidiaries, (ii) Indebtedness represented by the
Exchange Debentures, (iii) any Indebtedness which by the express terms of the
agreement or instrument creating, evidencing or governing the same is junior or
subordinate in right of payment to any item of Senior Indebtedness (including,
without limitation, Indebtedness represented by Disqualified Stock), (iv) any
trade payable arising from the purchase of goods or materials or for services
obtained in the ordinary course of business, (v) Indebtedness incurred in
violation of the Exchange Indenture or (vi) any Indebtedness which, when
incurred and without respect to any election under Section 1111(b) of Title 11,
United States Code, is without recourse to such Person.
"Senior Notes" means the $200,000,000 aggregate principal amount of 9 1/2%
Senior Notes due 2008 of the Company.
"Series B Junior Preferred Stock" means the 12 1/4% Series B Junior
Exchangeable Preferred Stock of the Issuer, liquidation preference $1,000 per
share.
"Series C Junior Voting Preferred Stock" means the 12 1/2% Series C Junior
Exchangeable Voting Preferred Stock of the Issuer, liquidation preference $1,000
per share.
"Significant Subsidiary" has the meaning set forth in Rule 1-02 of
Regulation S-X under the Securities Act and the Exchange Act, but shall not
include any Unrestricted Subsidiary.
"South African Credit Facility" means a Credit Facility in an aggregate
principal amount or with aggregate commitments not to exceed $5 million to be
entered into by Morris Mechanical Handling (Pty) Ltd.
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"Subordinated Indebtedness" of the Issuer means any Indebtedness (whether
outstanding on the date hereof or hereafter incurred) which is by its terms
expressly subordinate or junior in right of payment to the Exchange Debentures
to substantially the same extent as the Exchange Debentures are subordinated to
Senior Indebtedness.
"Subsidiary" of any specified Person means any corporation, partnership,
joint venture, limited liability company, association or other business entity,
whether now existing or hereafter organized or acquired, (i) in the case of a
corporation, of which more than 50% of the total Voting Stock is held by such
first-named Person or any of its Subsidiaries or (ii) in the case of a
partnership, joint venture, limited liability company, association or other
business entity, with respect to which such first-named Person or any of its
Subsidiaries has at least a majority ownership and voting power relating to the
policies, management and affairs thereof.
"Surety Arrangement" means one or more surety arrangements providing,
inter alia, for the issuance of Surety Obligations between the Issuer or any of
its Restricted Subsidiaries and one or more providers, provided to the Issuer or
its Restricted Subsidiaries including, in each case, any related notes,
guarantees, collateral documents, instruments and agreements executed in
connection therewith, and in each case as amended, modified, renewed, refunded,
replaced, restated or refinanced from time to time.
"Surety Obligations" means any bonds, including bid bonds, advance bonds,
or performance bonds, letters of credit, warranties, and similar arrangements
between the Issuer and any of its Restricted Subsidiaries and one or more
providers, for the benefit of the Issuer's or any Restricted Subsidiary's
suppliers, vendors, insurers or customers including, in each case, any related
notes, guarantees, collateral documents, instruments and agreements executed in
connection therewith, and in each case as amended, modified, renewed, refunded,
replaced, restated or refinanced from time to time.
"Tax Allocation Agreement" means a tax allocation agreement among the
Issuer, the Company and MHE Investments, as in effect on the Issue Date and as
the same may be amended from time to time subject to the provisions of the
covenant described under "--Certain Covenants--Limitation on Transactions with
Affiliates" and provided, that no material adverse effect on Issuer or on the
holders of the New Series A Senior Preferred Stock or the Exchange Debentures,
as the case may be, shall result as a consequence thereby.
"Unrestricted Subsidiary" means (a) any Subsidiary of an Unrestricted
Subsidiary and (b) any Subsidiary of the Issuer which is classified (whether on
or after the Issue Date) as an Unrestricted Subsidiary by a resolution adopted
by the Board of Directors of the Issuer; provided, that a Subsidiary may be so
classified as an Unrestricted Subsidiary only if (i) such classification in
compliance with the covenant set forth under "--Certain Covenants--Limitation on
Restricted Payments," (ii) such Subsidiary does not own beneficially any Capital
Stock of the Issuer or any Restricted Subsidiary (other than any Restricted
Subsidiary of such Subsidiary that is being designated as an Unrestricted
Subsidiary at the time of such classification) and (iii) all Indebtedness of the
Issuer or any Restricted Subsidiary to such Subsidiary is deemed incurred at the
time of such classification or at the time such Capital Stock is no longer so
owned. The Debenture Trustee shall be given prompt notice by the Issuer of each
resolution adopted by the Board of Directors of the Issuer under this provision,
together with a copy of each such resolution adopted. The Restated Certificate
and the Exchange Indenture will provide that the Issuer shall not, and shall not
permit any Restricted Subsidiary to, directly or indirectly, at any time, (a) be
liable for any Indebtedness of any Unrestricted Subsidiary or (b) be liable for
any Indebtedness that provides that the holder thereof may (upon notice, lapse
of time or both) declare a default thereon or cause the payment thereof to be
accelerated or payable prior to its final maturity upon the occurrence of a
default with respect to any Indebtedness of any Unrestricted Subsidiary.
"Voting Stock" of any Person means the Capital Stock of such Person which
ordinarily has voting power for the election of directors (or persons performing
similar functions) of such Person, whether at all times or only so long as no
senior class of securities has such voting power by reason of any contingency.
"Wholly-Owned Subsidiary" means any Restricted Subsidiary, all of the
outstanding Voting Stock (other than directors' qualifying shares) of which are
owned, directly or indirectly, by the Issuer.
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PREFERRED STOCK EXCHANGE OFFER; REGISTRATION RIGHTS
In connection with the issuance of the Old Series A Senior Preferred
Stock, the Issuer entered into the Exchange Offer Registration Rights Agreement
pursuant to which it agreed, for the benefit of the holders of the Old Series A
Senior Preferred Stock, that it would, at its cost, (i) within 60 days after the
date of original issue of the Old Series A Senior Preferred Stock, file a
registration statement (the "Series A Senior Preferred Stock Exchange Offer
Registration Statement") with the Commission with respect to a registered offer
to exchange the Old Series A Senior Preferred Stock for preferred stock of the
Issuer of the same series with terms substantially identical in all material
respects to the Old Series A Senior Preferred Stock, and (ii) within 135 days
after the Issue Date, use its best efforts to cause the Series A Senior
Preferred Stock Exchange Offer Registration Statement to be declared effective
under the Securities Act. The form and terms of the shares of New Series A
Senior Preferred Stock are identical in all material respects to the form and
terms of the shares of Old Series A Senior Preferred Stock except (i) that the
shares of New Series A Senior Preferred Stock have been registered under the
Securities Act, (ii) that the shares of New Series A Senior Preferred Stock are
not entitled to certain registration rights which are applicable to the shares
of Old Series A Senior Preferred Stock and (iii) certain contingent interest
rate provisions applicable to shares of Old Series A Senior Preferred Stock are
generally not applicable to the shares of New Series A Senior Preferred Stock.
Upon the Series A Senior Preferred Stock Exchange Offer Registration Statement
being declared effective, the Issuer has agreed to offer the New Series A Senior
Preferred Stock in exchange for surrender of the Old Series A Senior Preferred
Stock. The Issuer has agreed to keep the Exchange Offer open for not less than
30 days (or longer if required by applicable law) after the date notice of the
Exchange Offer is mailed to the holders of the Old Series A Senior Preferred
Stock. For each share of Old Series A Senior Preferred Stock surrendered to the
Issuer pursuant to the Exchange Offer, the holder of such share of Old Series A
Senior Preferred Stock will receive such New Series A Senior Preferred Stock
having a liquidation preference equal to that of the surrendered shares of Old
Series A Senior Preferred Stock. Dividends on the New Series A Senior Preferred
Stock will accrue from March 30, 1998. The Exchange Offer is being made to
satisfy the contractual obligations of the Issuer under the Exchange Offer
Registration Rights Agreement.
Under existing Commission interpretations, the New Series A Senior
Preferred Stock would in general be freely transferable after the Exchange Offer
without further registration under the Securities Act; provided that in the case
of broker-dealers, a prospectus meeting the requirements of the Securities Act
be delivered as required. The Issuer has agreed for a period of 180 days after
consummation of the Exchange Offer to make available a prospectus meeting the
requirements of the Securities Act to any broker-dealer for use in connection
with any resale of any such New Series A Senior Preferred Stock acquired as
described below. A broker-dealer which delivers such a prospectus to purchasers
in connection with such resales will be subject to certain of the civil
liability provisions under the Securities Act, and will be bound by the
provisions of the Exchange Offer Registration Rights Agreement (including
certain indemnification rights and obligations).
Each holder of Old Series A Senior Preferred Stock that wishes to exchange
such Old Series A Senior Preferred Stock for New Series A Senior Preferred Stock
in the Exchange Offer will be required to make certain representations including
representations that (i) any New Series A Senior Preferred Stock to be received
by it will be acquired in the ordinary course of its business, (ii) it has no
arrangement with any person to participate in the distribution of the New Series
A Senior Preferred Stock and (iii) it is not an "affiliate," as defined in Rule
405 of the Securities Act, of the Issuer, or if it is an affiliate, it will
comply with the registration and prospectus delivery requirements of the
Securities Act to the extent applicable.
If the holder is not a broker-dealer, it will be required to represent
that it is not engaged in, and does not intend to engage in, the distribution of
the New Series A Senior Preferred Stock. If the holder is a broker-dealer that
will receive New Series A Senior Preferred Stock for its own account in exchange
for Old Series A Senior Preferred Stock that were acquired as a result of
market-making activities or other trading activities, it will be required to
acknowledge that it will deliver a prospectus in connection with any resale of
such New Series A Senior Preferred Stock.
In the event that applicable interpretations of the staff of the
Commission do not permit the Issuer to effect such a Exchange Offer, or if for
any other reason the Exchange Offer is not consummated within 180 days of the
date of
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the Exchange Offer Registration Rights Agreement, the Issuer will, at its own
expense, (a) as promptly as practicable, file A Senior Preferred Stock Shelf
Registration Statement covering resales of the Old Series A Senior Preferred
Stock (the "Series A Senior Preferred Stock Shelf Registration Statement"), (b)
use its best efforts to cause the Series A Senior Preferred Stock Shelf
Registration Statement to be declared effective under the Securities Act and (c)
use its best efforts to keep effective the Series A Senior Preferred Stock Shelf
Registration Statement until two years after its effective date. The Issuer
will, in the event of the Series A Senior Preferred Stock Shelf Registration
Statement, provide to each holder of the Old Series A Senior Preferred Stock
copies of the prospectus which is a part of the Series A Senior Preferred Stock
Shelf Registration Statement, notify each such holder when the Series A Senior
Preferred Stock Shelf Registration Statement for the Old Series A Senior
Preferred Stock has become effective and take certain other actions as are
required to permit unrestricted resales of the Old Series A Senior Preferred
Stock. A holder of the Old Series A Senior Preferred Stock that sells such Old
Series A Senior Preferred Stock pursuant to the Series A Senior Preferred Stock
Shelf Registration Statement generally would be required to be named as a
selling securityholder in the related prospectus and to deliver a prospectus to
purchasers, will be subject to certain of the civil liability provisions under
the Securities Act in connection with such sales and will be bound by the
provisions of the Exchange Offer Registration Rights Agreement which are
applicable to such a holder (including certain indemnification rights and
obligations).
Although the Issuer intends to file one of the registration statements
described above, there can be no assurance that such registration statement will
be filed or, if filed, that it will become effective. If the Issuer fails to
comply with the above provisions or if such registration statement fails to
become effective, then, as liquidated damages, additional dividends shall become
payable in respect of the Old Series A Senior Preferred Stock as follows:
If (i) the Series A Senior Preferred Stock Exchange Offer
Registration Statement is not filed within 60 days after the Issue Date;
(ii) the Series A Senior Preferred Stock Exchange Offer Registration
Statement or Preferred Stock Shelf Registration Statement is not declared
effective within 135 days after the Issue Date; and
(iii) either (A) the Issuer has not exchanged the New Series A
Senior Preferred Stock for all Old Series A Senior Preferred Stock validly
tendered in accordance with the terms of the Exchange Offer on or prior to
45 days after the date on which the Series A Senior Preferred Stock
Exchange Offer Registration Statement was declared effective or (B) the
Series A Senior Preferred Stock Exchange Offer Registration Statement
ceases to be effective at any time prior to the time that the Exchange
Offer is consummated or (C) if applicable, the Series A Senior Preferred
Stock Shelf Registration Statement has been declared effective and such
Series A Senior Preferred Stock Shelf Registration Statement ceases to be
effective at any time prior to the second anniversary of its effective
date;
(each such events referred to in clauses (i) through (iii) above is a "Preferred
Stock Registration Default"), the sole remedy available to holders of the Old
Series A Senior Preferred Stock will be the immediate assessment of additional
dividends ("Additional Dividends") as follows: the per annum dividend rate on
the Old Series A Senior Preferred Stock will increase by 50 basis points; and
the per annum dividend rate will increase by an additional 25 basis points for
each subsequent 90-day period during which the Preferred Stock Registration
Default remains uncured, up to a maximum additional dividend rate of 200 basis
points per annum in excess of the dividend rate originally borne by the Old
Series A Senior Preferred Stock. All Additional Dividends will be payable to
holders of the Old Series A Senior Preferred Stock in cash or, at the option of
the Issuer, in additional shares of Old Series A Senior Preferred Stock on any
dividend payment date occurring on or prior to April 1, 2003 (and, at the
Issuer's option, payment of cash in lieu of fractional shares) on the same
original dividend payment dates commencing with the first such date occurring
after any such Additional Dividend commences to accrue, until such Preferred
Stock Registration Default is cured. After the date on which such Preferred
Stock Registration Default is cured, the dividend rate on the Old Series A
Senior Preferred Stock will revert to the dividend rate originally borne by the
Old Series A Senior Preferred Stock.
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The summary herein of certain provisions of the Exchange Offer
Registration Rights Agreement does not purport to be complete and is subject to,
and is qualified in its entirety by reference to, all the provisions of the
Exchange Offer Registration Rights Agreement, a copy of which will be available
upon request to the Issuer.
DESCRIPTION OF THE OTHER CAPITAL STOCK
The following summary of the capital stock of the Issuer does not purport
to be complete and is qualified in its entirety by reference to the detailed
provisions of the Issuer's Restated Certificate, the Certificates of
Designations and by-laws.
The Issuer's authorized capital stock consists of 120,000 shares of
non-voting Unit Common Stock, $.01 par value, 900,000 shares of voting Common
Stock, $.01 par value and 500,000 shares of preferred stock. The Certificates of
Designations governing Holdings' preferred stock (the "Certificates of
Designation") provide for 120,000 shares of Series A Senior Preferred Stock,
10,000 shares of Series B Junior Preferred Stock and 60,000 shares of Series C
Junior Voting Preferred Stock.
Unit Common Stock
Currently, 720 shares of Unit Common Stock, representing approximately
6.6% of all classes of the Common Stock are outstanding. All of such shares of
Unit Common Stock are validly issued, fully paid and nonassessable. The rights
of holders of shares of Unit Common Stock and voting Common Stock are identical
except for voting rights and certain contractual rights. The rights, preferences
and privileges of holders of Unit Common Stock are subject to, and may be
adversely affected by, the rights of the holders of shares of any series of
preferred stock, including the Series A Senior Preferred Stock, the Series B
Junior Preferred Stock and the Series C Junior Voting Preferred Stock
outstanding at the Issue Date or which the Issuer may designate in the future.
Voting Rights. Holders of Unit Common Stock are not entitled to vote
except as otherwise required by law. Upon consummation of an initial public
offering of the Common Stock of the Issuer, each share of Unit Common Stock may
be exchanged at the option of the holder thereof for one share of voting Common
Stock.
Dividends. The Issuer does not currently anticipate paying dividends on
its Common Stock. Holders of Unit Common Stock are entitled, when and if
declared by the board of directors of the Issuer out of funds legally available
therefor, to receive dividends on each outstanding share of Unit Common Stock
ratably with the voting Common Stock. The New Credit Facility, the Senior Notes,
the Note Indenture, the Exchange Indenture, and the Certificates of Designations
restrict the ability of the Issuer to pay dividends on its Common Stock,
including the Unit Common Stock.
Unit Common Stock Registration Rights and Stockholders' Agreement
Registration, Tag-Along and Drag-Along Rights. The Issuer, Chartwell and
the Initial Purchaser have entered into a Common Stock Registration Rights and
Stockholders' Agreement (the "Common Stock Registration Rights Agreement") with
respect to the shares of Unit Common Stock issued in the Offering. The Common
Stock Registration Rights Agreement provides that the Initial Purchaser and
persons to whom Unit Common Stock are transferred (collectively, "Holders") have
the registration rights and other rights and obligations with respect to the
Unit Common Stock described below. Unit Common Stock must be exchanged for
voting Common Stock (the "Registrable Securities") prior to any registration
pursuant to the Common Stock Registration Rights Agreement.
Demand Registration Rights. Holders of at least 25% of the Unit Common
Stock will be entitled on or after April 1, 2003 to require the Issuer to effect
one registration under the Securities Act of Registrable Securities ("Demand
Registration"), subject to certain limitations. Upon a demand, the Issuer is
required to prepare, file with the Commission within 40 days (subject to a delay
of up to 60 days under certain limited circumstances) and cause to be effective
within 120 days of such demand, a registration statement in respect of all of
the Registrable
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Securities; provided, that in lieu of filing such registration statement the
Issuer or its designee may make an offer to repurchase all of the Unit Common
Stock at a price per share equal to the fair market value per share of Unit
Common Stock (without any discount for lack of liquidity, the amount of Unit
Common Stock proposed to be sold, the fact that the shares of Unit Common Stock
held by the Holders may represent a minority interest in a private company or
the fact that the Unit Common Stock is non-voting) determined by a nationally
recognized investment banking firm mutually acceptable to the Issuer and the
Holders of a majority of the Registrable Securities to be registered.
Piggy-Back Registration Rights. Holders of Registrable Securities also
have the right to include such Registrable Securities in any registration
statement covering Common Stock under the Securities Act filed by the Issuer for
its own account or for the account of any of its securityholders (other than (i)
a registration statement on Form S-4 or S-8 or any successor form having similar
effect or (ii) a registration statement filed in connection with an offer of
securities solely to existing securityholders) for sale on the same terms and
conditions as the securities of the Issuer or any other selling securityholder
included therein (a "Piggy-Back Registration"). In the case of a Piggy-Back
Registration, the number of Registrable Securities requested to be included
therein is subject to reduction to the extent that the Issuer is advised by the
managing underwriter therefor that the total number of shares proposed to be
included therein is such as to materially and adversely affect the success of
the offering.
The Common Stock Registration Rights Agreement includes customary
covenants on the part of the Issuer and provides that the Issuer will indemnify
the Holders of Registrable Securities included in any registration statement and
any underwriter with respect thereto against certain liabilities.
Tag-Along Rights. In the event of any proposed transfer, sale or other
disposition of voting Common Stock by Chartwell (or any of its Affiliates) in
any transaction, or a series of related transactions involving shares of voting
Common Stock, which when added to the shares previously transferred, constitutes
more than 15% of the shares of voting Common Stock owned by Chartwell and its
Affiliates, (other than to entities, all of the equity interests of which are
directly or indirectly owned by the ultimate parent of Chartwell or to another
similar investment fund, the principal partners or managers of which are Todd R.
Berman or Michael S. Shein), to a person other than an Affiliate of Chartwell
and its Affiliates (for purposes hereof, being a Person as to which Chartwell
and its Affiliates own, directly or indirectly, less than 10% of the common
equity interests and is not otherwise affiliate with Chartwell) (such other
person being hereinafter referred to as the "proposed purchaser"), each of the
Holders shall have the right, subject to certain exceptions, to require the
proposed purchaser to purchase from each of them up to a percentage of the
number of Unit Common Stock owned by such Holder equaling the percentage derived
by dividing the total number of shares of voting Common Stock Chartwell and its
Affiliates propose to transfer (as reduced after giving effect to the exercise
of these tag-along rights) by the total number of shares of voting Common Stock
outstanding. Any Unit Common Stock purchased from the Holders pursuant to such
provision shall be paid for at the same price per security and upon the same
terms and conditions of such proposed transfer by Chartwell and/or its
Affiliates. The provisions of these tag-along rights do not apply to the
transfer by Chartwell, within 60 days after the Recapitalization Closing, of up
to $1.5 million of its interests in Frasier L.L.C. to unaffiliated third parties
at the price paid therefor by Chartwell.
The Issuer shall notify, or cause to be notified, each Holder in writing
of each such proposed transfer at least 30 days prior to the date thereof. Such
notice shall set forth therein in detail the terms and conditions of such sale.
Each Holder shall, upon not less than 10 days' notice following their receipt of
the notice specified in the preceding paragraph, be entitled to sell its shares
pro rata with Chartwell and its Affiliates.
In the event that the proposed purchaser does not purchase Unit Common
Stock from the Holders and on the same terms and conditions as purchased from
Chartwell and/or its Affiliates, then Chartwell and/or its Affiliates shall
purchase such Unit Common Stock if the Transfer occurs.
Tag-along rights shall terminate upon the consummation of offerings
pursuant to one or more effective registration statements filed with the
Commission with respect to shares of Common Stock in one or more public
offerings generating at least $50 million in aggregate gross proceeds of the
Issuer's Common Stock (a "Qualified Public Offering").
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Drag-Along Rights. If, at any time prior to the consummation of a
Qualified Public Offering of the Issuer, Chartwell and its Affiliates determine
to sell not less than 85% of the Common Stock of the Issuer beneficially owned
by Chartwell and its Affiliates to a Person other than an Affiliate of Chartwell
or an underwriter in a Qualified Public Offering of the Issuer or any of its
Subsidiaries, Chartwell shall have the right to require the holders of the
voting Common Stock to sell a like percentage of such voting Common Stock of
such holders to such transferee; provided that, the consideration to be received
by such holders is the same as that to be received by Chartwell and its
Affiliates and, in any event, shall be cash and/or securities registered under
the Securities Act and listed on a national security exchange or authorized for
quotation on the NASDAQ National Market Systems and provided, further, that
after giving effect to such transaction, Chartwell shall not beneficially own,
directly or indirectly, more than 15% of the Common Stock of the Issuer. Any
shares of voting Common Stock purchased pursuant to this paragraph shall be
purchased at the same price per share of voting Common Stock and upon the same
terms and conditions of such proposed transfer by Chartwell and its Affiliates.
Common Stock
All of the outstanding shares of Common Stock are validly issued, fully
paid and nonassessable. Holders of Common Stock, other than Unit Common Stock,
are entitled to one vote for each share held on all matters submitted to a vote
of stockholders. Each share of Series C Junior Voting Preferred Stock is
entitled to .314 votes per share and the holders thereof are entitled to vote as
a class with the holders of voting Common Stock on all matters as to which the
voting Common Stock is entitled to vote. Neither holders of the Common Stock nor
holders of the Series C Junior Voting Preferred Stock have cumulative voting
rights. Accordingly, holders of a majority of the shares entitled to vote in any
election of directors may elect all of the directors standing for election
unless a Voting Rights Triggering Event has occurred. Holders of Common Stock
are entitled to receive ratably such dividends, if any, as may be declared by
the Board of Directors of the Issuer out of funds legally available therefor,
subject to any preferential dividend rights of outstanding Preferred Stock. Upon
the liquidation, dissolution or winding-up of the Issuer, the holders of Common
Stock are entitled to receive ratably the net assets of the Issuer available
after the payment of all debts and other liabilities and subject to the prior
rights of any outstanding preferred stock. Holders of Common Stock have no
preemptive, subscription, redemption or conversion rights. The rights,
preferences and privileges of holders of Common Stock are subject to, and may be
adversely affected by, the rights of the holders of shares of any series of
preferred stock, including the Series A Senior Preferred Stock, the Series B
Junior Preferred Stock and the Series C Junior Voting Preferred Stock
outstanding at the Issue Date or which the Issuer may designate in the future.
Common Stock Stockholders' Agreement
Issuer, MHE Investments and HarnCo entered into the Stockholders'
Agreement simultaneously with the Recapitalization Closing. Pursuant to the
Stockholders' Agreement, HarnCo has the right to appoint a representative,
reasonably acceptable to MHE Investments, to the Issuer's Board of Directors, so
long as HarnCo continues to own at least 5% of the Common Stock. The
Stockholders' Agreement also provides HarnCo the right to purchase its pro rata
share of future issuances of Common Stock, subject to certain limitations.
In addition, the Stockholders' Agreement provides for the following:
Demand Registration. Subsequent to the completion of an initial public
offering of the Common Stock of the Issuer or any of its subsidiaries, HarnCo
shall have two demand registration rights with respect to the Common Stock,
subject to certain limitations.
Piggy Back Rights. HarnCo has an unlimited number of rights to include its
Common Stock in any registration of Common Stock pursuant to the Securities Act,
subject to certain limitations.
Drag-Along Rights. If MHE Investments proposes to sell at least 85% of its
equity securities in the Issuer to an independent third party, MHE Investments
can require HarnCo to sell that same percentage of its equity securities in the
same transaction on the same terms.
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Tag Along Rights. If MHE Investments proposes to sell in excess of 10% of
its Common Stock to an independent third party, HarnCo has the right to sell a
pro rata portion of its Common Stock to the third party in the same transaction
on the same terms.
Preferred Stock
There currently are 57,710 shares of Old Series A Senior Preferred Stock
outstanding, 4,809 shares of Series B Junior Preferred Stock outstanding and
28,855 shares of Series C Junior Voting Preferred Stock outstanding. See
"Description of New Series A Senior Preferred Stock and Exchange Debentures"
above for a description of the terms of the Series A Senior Preferred Stock.
Series B Junior Preferred Stock. The Series B Junior Preferred Stock was
issued to HarnCo in connection with the Recapitalization. Each share of Series B
Junior Preferred Stock has a liquidation preference of $1,000 per share plus
accumulated and unpaid dividends. Dividends on the Series B Junior Preferred
Stock are cumulative from the Issue Date, at an annual rate of 12 1/4%, to be
paid annually in arrears on each April 1 and October 1, commencing October 1
1998. Dividends are payable at the option of the Issuer, on any dividend date
occurring on or prior to April 1, 2003, either in cash or in additional shares
of Series B Junior Preferred Stock. Thereafter, dividends will be payable in
cash.
The Series B Junior Preferred Stock ranks (i) junior to the Series A
Senior Preferred Stock, (ii) senior to the Series C Junior Voting Preferred
Stock, (iii) junior to any other preferred stock not ranking junior to the
Series A Senior Preferred Stock and (iv) senior to any class of Common Stock
with respect to dividend rights and rights upon liquidation, dissolution or
winding up of the Issuer.
The Issuer will be required to redeem in cash all of the Series B Junior
Preferred Stock outstanding on April 1, 2010 at a redemption price equal to 100%
of the liquidation preference thereof plus accumulated and unpaid dividends to
the redemption date.
The Series B Junior Preferred Stock will be redeemable at the option of
the Issuer, in whole or in part, at any time on or after April 1, 2003, at the
redemption prices set forth in the Certificate of Designations with respect to
the Series B Junior Preferred Stock, together with accumulated and unpaid
dividends thereon, if any, to the redemption date. In addition, the Issuer, at
its option, may redeem all, but not less than all, of the Series B Junior
Preferred Stock outstanding at any time on or prior to April 1, 2001 at a
redemption price equal to 112.250% of the liquidation preference thereof
together with accumulated and unpaid dividends thereon, if any, to the
redemption date, out of the net proceeds of one or more Public Equity Offerings;
provided, however, that any such redemption occurs within 90 days following the
closing of any such Public Equity Offering.
Upon the occurrence of a Change of Control, each holder of the Series B
Junior Preferred Stock will be entitled to require the Issuer to make an offer
to purchase such holder's Series B Junior Preferred Stock at a purchase price
equal to 101% of the liquidation preference, together with accumulated and
unpaid dividends thereon, if any, to the repurchase date. The Certificate of
Designations with respect to the Series B Junior Preferred Stock provides that
if the Issuer fails to make or consummate a Change of Control Offer (as defined
therein), the dividend rate on the Series B Junior Preferred Stock will increase
by 400 basis points per annum until such time as the Issuer makes or consummates
a Change of Control Offer.
Holders of the Series B Junior Preferred Stock do not have voting rights,
except under certain limited circumstances or as required by law; provided, that
upon the occurrence of a Voting Rights Triggering Event (as defined in the
Certificate of Designations with respect to the Series B Junior Preferred
Stock), the holders of the then outstanding shares of Series B Junior Preferred
Stock, voting as a class with the holders of the Series A Senior Preferred
Stock, are entitled to elect the lesser of two directors and that number of
directors constituting at least 25% of the members of the Board of Directors of
the Issuer.
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The Certificate of Designations with respect to the Series B Junior
Preferred Stock contains covenants for the benefit of the holders of the Series
B Junior Preferred Stock substantially similar to those of the Series A Senior
Preferred Stock.
Subject to certain provisions, the Series B Junior Preferred Stock is
exchangeable in whole, but not in part, at the option of the Issuer into
subordinated debentures (the "Series B Exchange Debentures") with substantially
the same terms as the Exchange Debentures. The Series B Exchange Debentures, if
issued, will be issued pursuant to an indenture that will contain covenants for
the benefit of the holders of the Series B Exchange Debentures substantially
similar to those contained in the Exchange Indenture, but will be subordinated
in right of payment to the Exchange Debentures.
Series C Junior Voting Preferred Stock. The Series C Junior Preferred
Voting Stock was acquired by MHE Investments in connection with the
Recapitalization. Each share of Series C Junior Preferred Voting Stock has a
liquidation preference of $1,000 per share plus accumulated and unpaid
dividends. Dividends on the Series C Junior Voting Preferred Stock are
cumulative from the Issue Date, at an annual rate of 12 1/2%, to be paid
semi-annually in arrears on each April 1 and October 1, commencing October 1,
1998. Dividends are payable at the option of Issuer, on any dividend date
occurring on or prior to April 1, 2003, either in cash or in additional shares
of Series C Junior Voting Preferred Stock. Thereafter, dividends will be payable
in cash.
The Series C Junior Voting Preferred Stock ranks junior to the Series A
Senior Preferred Stock, the Series B Junior Preferred Stock and any other
preferred stock not ranking senior to the Series A Junior Preferred Stock and
the Series B Junior Preferred Stock, and senior to any class of Common Stock of
the Issuer with respect to dividend rights and rights upon liquidation,
dissolution or winding-up of the Issuer.
The Issuer will be required to redeem in cash all of the Series C Junior
Voting Preferred Stock outstanding on April 1, 2010 at a redemption price equal
to 100% of the liquidation preference thereof plus accumulated and unpaid
dividends to the redemption date.
The Series C Junior Voting Preferred Stock will be redeemable at the
option of the Issuer, in whole or in part, at any time on or after April 1,
2003, at the redemption prices set forth in the Certificate of Designations with
respect to the Series C Junior Preferred Voting Stock, together with accumulated
and unpaid dividends thereon, if any, to the redemption date. In addition, the
Issuer, at its option, may redeem all, but not less than all, of the Series C
Junior Preferred Stock outstanding at any time on or prior to April 1, 2001 at a
redemption price equal to 112.500% of the liquidation preference thereof
together with accumulated and unpaid dividends thereon, if any, to the
redemption date, out of the net proceeds of one or more Public Equity Offerings;
provided, that any such redemption occurs within 90 days following the closing
of any such Public Equity Offering.
Upon the occurrence of a Change of Control, each holder of the Series C
Junior Voting Preferred Stock will be entitled to require the Issuer to make an
offer to purchase such holder's Series C Junior Voting Preferred Stock at a
purchase price equal to 101% of the liquidation preference, together with
accumulated and unpaid dividends thereon, if any, to the repurchase date. The
Certificate of Designations with respect to the Series C Junior Voting Preferred
Stock provides that if the Issuer fails to make or consummate a Change of
Control Offer (as defined therein), the dividend rate on the Series C Junior
Voting Preferred Stock will increase by 400 basis points per annum until such
time as the Issuer makes or consummates a Change of Control Offer.
Each share of Series C Junior Voting Preferred Stock has voting rights of
0.314 votes per share and the holders thereof are entitled to vote as a class
with the holders of Common Stock on all matters as to which voting Common Stock
is entitled to vote. MHE Investments, through its ownership of all of the Series
C Junior Voting Preferred Stock, is entitled to approximately 49.0% of the
voting power of the Issuer, and through its ownership of Common Stock, has 88.2%
of the voting power of the Issuer in the aggregate. Holders of Series C Junior
Preferred Voting Stock are entitled, upon the occurrence and during the
continuance of a Voting Rights Triggering Event to elect one director of the
board of directors of the Issuer. Upon the transfer by MHE Investments to a
third party other than Chartwell or any Affiliate of Chartwell, the Series C
Junior Voting Preferred Stock will be exchanged for Series C
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Junior Preferred Stock (the "Series C Junior Preferred Stock") identical to the
Series C Junior Voting Preferred Stock in all respects except that it will not
have voting rights, other than as required by law.
The Certificate of Designations with respect to the Series C Junior Voting
Preferred Stock contains covenants for the benefit of the holders of the Series
C Junior Preferred Voting Stock substantially similar to the Series A Senior
Preferred Stock.
Subject to certain provisions, the Series C Junior Voting Preferred Stock
and the Series C Junior Preferred Stock are exchangeable in whole, but not in
part, at the option of the Issuer into subordinated debentures (the "Series C
Exchange Debentures") with substantially the same terms as the Exchange
Debentures. The Series C Exchange Debentures, if issued, will be issued pursuant
to an indenture that will contain covenants for the benefit of the holders of
the Series C Exchange Debentures substantially similar to those contained in the
Exchange Debenture, but will be subordinated in right of payment to the Exchange
Debentures and the Series B Exchange Debentures.
Delaware Law and Certain Charter and By-Law Provisions
The Restated Certificate contains certain provisions permitted under the
General Corporation Law of the State of Delaware (the "DGCL") relating to the
liability of directors. The provisions eliminate a director's liability for
monetary damages for a breach of fiduciary duty except in certain circumstances
involving wrongful acts, such as the breach of a director's duty of loyalty or
acts or omissions which involve intentional misconduct or a knowing violation of
law. Further, the Restated Certificate and the Issuer's By-Laws contain
provisions to indemnify the Issuer's directors and officers to the fullest
extent permitted by the DGCL, including payment in advance of a final
disposition of a director's or officer's expenses and attorneys' fees incurred
in defending any action, suit or proceeding. The Issuer believes that these
provisions will assist the Issuer in attracting and retaining qualified
individuals to serve as directors.
BOOK-ENTRY, DELIVERY AND FORM
The Series A Units, the Old Series A Senior Preferred Stock and the Unit
Common Stock (collectively, the "Securities") were sold to QIBs (as defined) in
reliance on Rule 144A of the Securities Act ("Rule 144A Securities"). The Old
Series A Senior Preferred Stock may subsequently have been sold in offshore
transactions in reliance on Regulation S ("Regulation S Securities") or
transferred to institutional "accredited investors" within the meaning of
subparagraph (a)(1), (2), (3) or (7) of Rule 501 under the Securities Act
("Institutional Accredited Investors") in transactions exempt from registration
under the Securities Act not made in reliance on Rule 144A or Regulation S under
the Securities Act ("Other Securities").
Rule 144A Securities initially were represented by one certificate in
registered, global form (the "Old Global Certificate"). The Old Global
Certificate was deposited upon issuance with the Transfer Agent as custodian for
The Depository Trust Company ("DTC"), in New York, New York, and registered in
the name of DTC's nominee. Regulation S Securities and Other Securities held by
Institutional Accredited Investors, if any, are represented by one or more
shares of certificated Securities.
The Old Global Certificate, to the extent directed by holders thereof in
their Letters of Transmittal, will be exchanged through book-entry electronic
transfer for one or more certificates in registered, global form representing
the New Series A Senior Preferred Stock (collectively, the "New Global
Certificate") registered in the name of DTC or its nominee. No service charge
will be made for any registration of transfer or exchange of Series A Senior
Preferred Stock, but the Issuer may require payment of a sum sufficient to cover
any tax or other governmental charge payable in connection therewith.
Shares of New Series A Senior Preferred Stock issued to non-qualified
institutional buyers in exchange for shares of Old Series A Senior Preferred
Stock held by such investors, if any, will be issued only in certificated, fully
registered, definitive form. The New Global Certificate will, upon request, be
exchangeable for other shares of New
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Series A Senior Preferred Stock in definitive, fully registered form in whole
shares, but only in accordance with DTC's customary procedures. The New Global
Certificate will also be exchangeable in certain other limited circumstances.
The Issuer, the Transfer Agent and any other agent thereof will be entitled to
treat the DTC's nominee as the sole owner and holder of the unexchanged portion
of the New Global Certificate for all purposes.
Depositary Procedures
DTC has advised the Issuer that DTC is a limited-purpose trust company
created to hold securities for its participating organizations (collectively,
the "Participants") and to facilitate the clearance and settlement of
transactions in those securities between the Participants through electronic
book-entry changes in accounts of the Participants. The Participants include
securities brokers and dealers (including the Initial Purchaser), banks, trust
companies, clearing corporations and certain other organizations. Access to
DTC's system is also available to other entities such as banks, brokers, dealers
and trust companies that clear through or maintain a custodial relationship with
a Participant, either directly or indirectly (collectively, the "Indirect
Participants"). Persons who are not Participants may beneficially own securities
held by or on behalf of DTC only through the Participants or the Indirect
Participants. The ownership interest and transfer of ownership interest of each
actual purchaser of each security held by or on behalf of DTC are recorded on
the records of the Participants and the Indirect Participants.
DTC has also advised the Issuer that pursuant to procedures established by
it, (i) upon deposit of the New Global Certificate, DTC will credit the shares
of New Series A Senior Preferred Stock to the accounts of Participants
designated by the Participants and (ii) ownership of such interests in the New
Global Certificate will be shown on, and the transfer of ownership thereof will
be effected only through, records maintained by DTC (with respect to the
Participants) or by the Participants and the Indirect Participants (with respect
to other owners of beneficial interests in the New Global Certificate).
Investors in the New Global Certificate may hold their interests therein
directly through DTC, if they are Participants in such system, or indirectly
through organizations which are Participants in such system. The laws of some
states require that certain persons take physical delivery in definitive form of
securities that they own. Consequently, the ability to transfer beneficial
interests in Series A Senior Preferred Stock and Exchange Debentures to such
persons may be limited to that extent. Because DTC can act only on behalf of the
Participants, which in turn act on behalf of the Indirect Participants and
certain banks, the ability of a person having beneficial interests in Series A
Senior Preferred Stock or Exchange Debentures to pledge such interests to
persons or entities that do not participate in the DTC system, or otherwise take
actions in respect of such interests, may be affected by the lack of a physical
certificate evidencing such interests.
Except as described below, owners of interests in the New Global
Certificate will not have New Series A Senior Preferred Stock registered in
their names, will not receive physical delivery of New Series A Senior Preferred
Stock in certificated form and will not be considered the registered owners or
holders thereof under the Restated Certificate for any purpose.
Payments in respect of the principal of (and premium, if any) and
dividends on the New Global Certificate registered in the name of DTC or its
nominee will be payable to DTC or its nominee in its capacity as the registered
holder thereof. The Issuer and the Exchange Agent will treat the persons in
whose names the New Series A Senior Preferred Stock or Exchange Debentures,
including the New Global Certificate, are registered as the owners thereof for
the purpose of receiving such payments and for any and all other purposes
whatsoever. Consequently, neither the Issuer or the Exchange Agent or any agent
of the Issuer or the Exchange Agent has or will have any responsibility or
liability for (i) any aspect or accuracy of DTC's records or any Participant's
or Indirect Participant's records relating to or payments made on account of
beneficial ownership interests in the New Global Certificate, or for
maintaining, supervising or reviewing any of DTC's records or any Participant's
or Indirect Participant's records relating to the beneficial ownership interests
in the New Global Certificate, or (ii) any other matter relating to the actions
and practices of DTC or any of the Participants or the Indirect Participants.
DTC has advised the Issuer that its current practice, upon receipt of any
payment in respect of securities such as the New Series A Senior Preferred Stock
or Exchange Debentures (including dividends, principal and interest), is
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to credit the accounts of the relevant Participants with the payment on the
payment date, in amounts proportionate to their respective holdings in principal
amount of beneficial interests in the relevant security as shown on the records
of DTC. Payments by the Participants and the Indirect Participants to the
beneficial owners of the New Series A Senior Preferred Stock or Exchange
Debentures will be governed by standing instructions and customary practices and
will not be the responsibility of DTC, the Exchange Agent or the Issuer. Neither
the Issuer nor the Exchange Agent will be liable for any delay by DTC or any of
the Participants in identifying the beneficial owners of the New Series A Senior
Preferred Stock or Exchange Debentures, and the Issuer and the Exchange Agent
may conclusively rely on and will be protected in relying on instructions from
DTC or its nominee as the registered owner of the New Global Certificate for all
purposes.
Interests in the New Global Certificate will trade in DTC's Same-Day Funds
Settlement System and secondary market trading activity in such interests will
therefore settle in immediately available funds, subject in all cases to the
rules and procedures of DTC and the Participants. Transfers between Participants
in DTC will be effected in accordance with DTC's procedures and will be settled
in same-day funds.
DTC has advised the Issuer that it will take any action permitted to be
taken by a holder of Series A Senior Preferred Stock or Exchange Debentures only
at the direction of one or more Participants to whose account with DTC interests
in the Old Global Certificate or the New Global Certificate are credited and
only in respect of such portion of the aggregate principal amount of the Series
A Senior Preferred Stock or Exchange Debentures as to which such Participant or
Participants has or have given such direction. However, if any of the events
described under "--Exchange of Book-Entry Securities for Certificated
Securities" occurs, DTC reserves the right to exchange the New Global
Certificate for New Series A Senior Preferred Stock or Exchange Debentures in
certificate form and to distribute such New Series A Senior Preferred Stock or
Exchange Debentures to its Participants.
The information in this section concerning DTC, Euroclear and CEDEL and
their book-entry systems has been obtained from sources that the Issuer believes
to be reliable, but the Issuer takes no responsibility for the accuracy thereof.
Although DTC has agreed to the foregoing procedures to facilitate
transfers of interests in the Old Global Certificate and the New Global
Certificate among accountholders in DTC, it is under no obligation to perform or
to continue to perform such procedures, and such procedures may be discontinued
at any time. None of the Issuer or the Exchange Agent nor any agent of the
Issuer or the Exchange Agent will have any responsibility for the performance by
DTC or its participants, indirect participants or accountholders of its
obligations under the rules and procedures governing its operations.
Exchange of Book-Entry Securities for Certificated Securities
The New Global Certificate is exchangeable for definitive New Series A
Senior Preferred Stock or Exchange Debentures in registered certificated form if
(i) DTC (x) notifies the Exchange Agent that it is unwilling or unable to
continue as depository for the New Global Certificate and the Issuer thereupon
fails to appoint a successor depository or (y) has ceased to be a clearing
agency registered under the Exchange Act, (ii) the Issuer, at its option,
notifies the Exchange Agent in writing that it elects to cause the issuance of
the New Series A Senior Preferred Stock or the Exchange Debentures in
certificated form or (iii) there shall have occurred and be continuing a Voting
Rights Triggering Event with respect to the New Series A Senior Preferred Stock
or the Exchange Debentures. In all cases, certificated New Series A Senior
Preferred Stock or Exchange Debentures delivered in exchange for any New Global
Certificate or beneficial interests therein will be registered in the names, and
issued in any approved denominations, requested by or on behalf of the
depository (in accordance with its customary procedures). In addition, subject
to certain restrictions on the transferability of the Series A Senior Preferred
Stock, Series A Senior Preferred Stock in definitive form will be issued upon
the resale, pledge or other transfer of any Series A Senior Preferred Stock or
interest therein to any person or entity that is not a qualified institutional
buyer or that does not participate in DTC.
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CERTAIN U.S. FEDERAL INCOME TAX CONSEQUENCES
The following is a general discussion of certain U.S. federal income tax
considerations relevant to the acquisition of the New Series A Senior Preferred
Stock in the Exchange Offer; the ownership and disposition of the New Series A
Senior Preferred Stock who acquire the New Series A Senior Preferred Stock
pursuant to the Exchange Offer; the acquisition of Exchange Debentures in
exchange for New Series A Senior Preferred Stock; and the ownership and
disposition of the Exchange Debentures by holders who acquired the Exchange
Debentures in exchange for New Series A Senior Preferred Stock. This discussion
does not purport to be a complete analysis of all potential tax considerations
to prospective purchasers. The discussion is limited solely to U.S. federal
income tax matters. The discussion is based upon the Code, Treasury regulations,
administrative rulings and pronouncements of the Internal Revenue Service
("IRS"), and judicial decisions, all as of the date of this Prospectus and all
of which are subject to change at any time, possibly with retroactive effect. In
particular, potential investors should be aware that certain relevant provisions
of the Code have not been subject to definitive interpretation by the IRS or the
courts.
This discussion is limited to those potential investors who would hold the
New Series A Senior Preferred Stock as a "capital asset" within the meaning of
Section 1221 of the Code. This discussion does not purport to address federal
income tax consequences that may be applicable to particular categories of
investors, including insurance companies, tax-exempt persons, financial
institutions, dealers in securities, persons that own in excess of 10 percent of
Holdings' stock, persons that hold New Series A Senior Preferred Stock or
Exchange Debentures as part of a straddle, hedge, or conversion transaction,
persons that have a functional currency other than the U.S. dollar, holders
subject to the alternative minimum tax, and non-United States persons, including
foreign corporations and nonresident alien individuals, some of which may be
subject to special rules. This discussion does not address any tax
considerations under the laws of any state, locality or jurisdiction, or foreign
country.
Holdings has not sought, nor does it intend to seek, a ruling from the IRS
as to any of the matters covered by this discussion, and there can be no
assurance that the IRS will not successfully challenge the conclusions reached
in this discussion. BECAUSE THE U.S. FEDERAL INCOME TAX CONSEQUENCES DISCUSSED
BELOW DEPEND UPON EACH HOLDER'S PARTICULAR TAX STATUS, AND DEPEND FURTHER UPON
U.S. FEDERAL INCOME TAX LAWS, REGULATIONS, RULINGS AND DECISIONS WHICH ARE
SUBJECT TO CHANGE (WHICH CHANGES MAY BE RETROACTIVE IN EFFECT), PROSPECTIVE
INVESTORS SHOULD CONSULT THEIR OWN TAX ADVISORS REGARDING THE PARTICULAR TAX
CONSEQUENCES OF AN INVESTMENT IN THE NEW SERIES A SENIOR PREFERRED STOCK.
Exchange
The exchange of New Series A Senior Preferred Stock for Old Series A
Senior Preferred Stock pursuant to the Exchange Offer should not be a taxable
event for U.S. federal income tax purposes. As a result, there should be no
material U.S. federal income tax consequences to holders receiving New Series A
Senior Preferred Stock for Old Series A Senior Preferred Stock under the
Exchange Offer, and a holder should have the same adjusted tax basis and holding
period in the New Series A Senior Preferred Stockas it had in the Old Series A
Senior Preferred Stock immediately before the exchange.
Distributions on New Series A Senior Preferred Stock
Based on current information and projections, it is likely that Holdings
will not have current or accumulated earnings and profits ("earnings and
profits") as determined for U.S. federal income tax purposes prior to 1999. As a
result, during such time as Holdings does not have earnings and profits,
distributions on the New Series A Senior Preferred Stock will first be treated
as a nontaxable return of capital and then will be applied against and reduce
the adjusted tax basis of the New Series A Senior Preferred Stock in the hands
of each holder (but not below zero), thereby increasing the amount of any gain
(or reducing the amount of any loss) which would otherwise be realized by such
holder upon a taxable disposition of such New Series A Senior Preferred Stock.
The amount of any such distribution which exceeds the adjusted tax basis of the
New Series A Senior Preferred Stock in the hands of the holder will be treated
as capital gain. Such gain generally will be taxed at a reduced rate for a
holder who is not a
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corporation and who holds such stock for more than one year and at a further
reduced rate for a holder who is not a corporation and who holds such stock for
more than eighteen months. Accordingly, distributions on the New Series A Senior
Preferred Stock which are not out of earnings and profits will not be
characterized as a dividend for U.S. federal income tax purposes with the
additional result that corporate stockholders will not be entitled to claim the
dividends received deduction with respect to such distributions. See the
discussion below under "--Dividends Received Deduction." The amount of any
distribution will be equal to the amount of cash or the fair market value of the
New Series A Senior Preferred Stock distributed.
Treatment of Distributions Out of Earnings and Profits
In the event that Holdings does have earnings and profits, distributions
by Holdings with respect to the New Series A Senior Preferred Stock (whether
paid in cash or by distribution of additional shares of New Series A Senior
Preferred Stock) will be characterized as dividends that are taxable as ordinary
income to the extent of Holdings' earnings and profits.
Dividends Received Deduction
Subject to important restrictions, dividends received out of earnings and
profits by a corporate holder generally will qualify for the 70 percent
dividends received deduction provided by Section 243(a)(1) of the Code. Under
Section 246(b) of the Code, the aggregate dividends received deduction permitted
a corporate holder may not exceed 70 percent of such holder's "taxable income,"
as specially computed under that section. Under Section 246(c) of the Code, the
70 percent dividends received deduction will not be available with respect to
shares of stock which are not held for at least 46 days (at least 91 days in the
case of a dividend attributable to a period or periods aggregating in excess of
366 days), including the day of disposition, but excluding the day of
acquisition or any day which is at least 46 days (at least 91 days in the case
of the more than 366 day period) after the date on which the stock becomes
ex-dividend. The length of time that a holder is deemed to have held shares for
these purposes is reduced for periods during which the holder's risk of loss
with respect to the stock is diminished by reason of the existence of certain
options, contracts to sell, short sales and other similar transactions. Section
246(c) of the Code also denies the dividends received deduction to the extent
that a corporate holder is under an obligation with respect to substantially
similar or related property to make payments corresponding to the dividend
received. Moreover, under Section 246A of the Code, to the extent that a
corporate holder incurs indebtedness "directly attributable" to investment in
the stock and the stock constitutes "debt-financed portfolio stock" as defined
in Section 246A(c)(1) of the Code, the percentage of the dividends received
deduction available to such holder is proportionately reduced.
Extraordinary Dividends. Section 1059 of the Code requires a corporate
holder to reduce (but not below zero) its basis in the New Series A Senior
Preferred Stock by the "nontaxed portion" of any "extraordinary dividend" if the
holder has not held such stock, subject to a risk of loss, for more than two
years before the date Holdings declares, announces, or agrees to, the amount or
payment of such dividend, whichever is earliest. In addition, upon a sale or
disposition of such stock, a holder will recognize gain, in addition to any gain
otherwise required to be recognized, in any amount equal to so much of the
nontaxed portion of all extraordinary dividends as did not cause a reduction in
stock basis due to the limitation on reducing basis below zero. Generally, the
nontaxed portion of an extraordinary dividend is the amount effectively excluded
from income by application of the dividends received deduction. An extraordinary
dividend on preferred stock, such as the New Series A Senior Preferred Stock, is
a dividend that (i) equals or exceeds 5 percent of the holder's adjusted tax
basis in the stock, treating all dividends having ex-dividend dates within an
85-day period as one dividend, or (ii) exceeds 20 percent of the holder's
adjusted tax basis in the stock, treating all dividends having ex-dividend dates
within the same 365-day period as one dividend. A stockholder may elect to
determine whether a dividend on the New Series A Senior Preferred Stock is
extraordinary by reference to the fair market value of the stock on the day
before the ex-dividend date (rather than by reference to the stockholder's
adjusted tax basis) for purposes of the 5 percent or 20 percent tests described
above if the holder is able to establish the fair market value of the New Series
A Senior Preferred Stock as of such date to the satisfaction of the IRS. An
extraordinary dividend may also include any amount treated as a dividend in the
case of a redemption that is either non-pro rata as to all stockholders or in
partial liquidation of the Holdings, regardless of the relative size of the
dividend and regardless of the corporate holder's holding period for the New
Series A Senior Preferred Stock.
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The extraordinary dividend rules do not apply with respect to certain
"qualified preferred dividends." A qualified preferred dividend is any fixed
dividend payable with respect preferred stock which (i) provides for fixed
preferred dividends payable no less often than annually, and (ii) is not in
arrears as to dividends when acquired, provided the actual rate of return, as
determined under Section 1059(e)(3) of the Code, does not exceed 15 percent.
Where a qualified preferred dividend exceeds the 5 percent (or 20 percent)
threshold for extraordinary dividend status described above, (a) the
extraordinary dividend rules will not apply if the holder holds the stock for
more than five years, and (b) if the holder disposed of the stock before it has
been held for more than five years, the aggregate reduction in basis cannot
exceed the excess of the qualified preferred dividends paid on such stock during
the period held by the taxpayer over the qualified preferred dividends which
would have been paid during such period on the basis of the stated rate of
return, as determined under Section 1059(e)(3) of the Code. The length of time
that a taxpayer is deemed to have held stock for this purpose is determined
under principles similar to those contained in Section 246(c) of the Code
(discussed above).
Based upon the issue price of the Series A Senior Preferred Stock, regular
semi-annual distributions should not constitute extraordinary dividends. Under
certain circumstances, however, the redemption of the New Series A Senior
Preferred Stock for cash or in exchange for Exchange Debentures may be treated
as a distribution taxable as a dividend. See the discussion below under "--Sale,
Exchange or Redemption of New Series A Senior Preferred Stock." To the extent
any such redemption constitutes a dividend, it is likely to constitute an
extraordinary dividend to a corporate holder.
Proposed Legislation. The Clinton Administration's Budget Proposal for
Fiscal Year 1999, released February 2, 1998 (the "Administration's Proposal"),
includes a provision that would eliminate the dividends received deduction for
dividends on limited term preferred stock issued after the date of enactment of
legislation. For this purpose, limited preferred stock generally includes any
preferred stock if the issuer or a related person is required to redeem or
purchase the stock within 20 years of the issue date. It is not clear whether
such proposal will be enacted or, if enacted, whether it will be enacted in the
form proposed. However, if the proposal to eliminate the dividends received
deduction on limited term preferred stock is enacted in its current form, the
dividends received deduction may be eliminated with respect to New Series A
Senior Preferred Stock issued after the date of enactment of legislation.
Prospective purchasers of the New Series A Senior Preferred Stock are urged to
consult their tax advisors with respect to the effect of any proposed
legislation.
CORPORATE HOLDERS ARE URGED TO CONSULT THEIR TAX ADVISORS WITH RESPECT TO
THE POSSIBLE APPLICATION OF SECTION 1059 OF THE CODE TO THEIR OWNERSHIP AND
DISPOSITION OF THE NEW SERIES A SENIOR PREFERRED STOCK.
Redemption Premium
If the redemption price of redeemable preferred stock exceeds its issue
price, all or a portion of such excess may, pursuant to Section 305(c) of the
Code, constitute an excess premium (the "Series A Senior Preferred Stock
Discount") that is treated as a series of constructive distributions of property
(and thus as dividends to the extent of Holdings' earnings and profits, and
otherwise as distributions subject to the treatment described above) over the
period during which the New Series A Senior Preferred Stock cannot be called for
redemption under an economic accrual method similar to the method described
under "--Taxation of Stated Interest and Original Issue Discount on Exchange
Debentures" below. For this purpose, Series A Senior Preferred Stock Discount
will generally be treated as zero if it is less than 1/4 of 1 percent of the
redemption price multiplied by the number of complete years from the date of
issuance of the stock until the stock is to be redeemed.
Under the Treasury regulations promulgated under Section 305 of the Code,
Series A Senior Preferred Stock Discount will arise due to the optional
redemption feature only if, based on all of the facts and circumstances as of
the date the New Series A Senior Preferred Stock is issued, redemption pursuant
to the optional redemption is more likely than not to occur. Constructive
distribution treatment would not result, however, if the redemption treatment
were solely in the nature of a penalty for premature redemption. For this
purpose, a penalty for premature redemption is a premium paid as a result of
changes in economic or market conditions over which neither the issuer
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nor the holder has legal or practical control, such as changes in prevailing
dividend rates. The Treasury regulations provide a safe harbor pursuant to which
constructive distribution treatment will not result from an issuer call right if
(i) the issuer and the holder are unrelated, (ii) there are no arrangements that
effectively require the issuer to redeem the stock, and (iii) exercise of the
option to redeem would not reduce the yield of the stock. Holdings believes
that, under the foregoing criteria, the optional redemption feature does not
give rise to Series A Senior Preferred Stock Discount, and accordingly Holdings
will not report redemption premium associated with the optional redemption
feature as a constructive distribution. However, because of the factual nature
of this determination, there can be no assurance that such treatment will be
sustained.
Under the Treasury regulations promulgated under Section 305 of the Code,
Series A Senior Preferred Stock Discount will arise due to a change in control
redemption feature only if, (i) under the same criteria discussed above with
regard to the optional redemption feature, a change in control redemption is
more likely than not to occur and in addition the redemption premium associated
with such redemption is other than solely in the nature of a penalty for
premature redemption, or (ii) triggering Holdings' obligation to redeem under
the change of control redemption feature is within the legal or practical
control of the holders of the New Series A Senior Preferred Stock (or parties
related thereto) and based on all the facts and circumstances on the issue date
such possibility of redemption is more than remote. Holdings believes that,
under the foregoing criteria, the change of control redemption feature does not
give rise to Series A Senior Preferred Stock Discount, and accordingly Holdings
will not report redemption premium associated with the change of control
redemption feature as a constructive distribution. However, because of the
factual nature of this determination, there can be no assurance that such
treatment will be sustained.
The mandatory redemption and the debenture exchange features should result
in no Series A Senior Preferred Stock Discount for the New Series A Senior
Preferred Stock to the extent of the liquidation preference of $1,000 per share
because the redemption price associated with the mandatory redemption and the
debenture exchange is equal to the liquidation preference of the New Series A
Senior Preferred Stock, and because the initial issue price for the New Series A
Senior Preferred Stock is equal to its liquidation preference of $1,000 per
share. However, shares of New Series A Senior Preferred Stock distributed to
holders of New Series A Senior Preferred Stock in lieu of paying cash dividends
may bear Series A Senior Preferred Stock Discount depending on the issue price
of such shares (i.e., the fair market value of such shares on the date of their
issuance).
Sale, Exchange or Redemption of New Series A Senior Preferred Stock
A holder's sale of New Series A Senior Preferred Stock generally will
result in taxable capital gain or loss equal to the difference between the
amount of cash received and the holder's adjusted basis in the New Series A
Senior Preferred Stock sold. Such gain generally will be capital gain and will
be taxed at a reduced rate for a holder who is not a corporation and who holds
the New Series A Senior Preferred Stock for more than one year and at a further
reduced rate for a holder who is not a corporation and who holds such stock for
more than eighteen months.
Redemptions of New Series A Senior Preferred Stock for cash or in exchange
for Exchange Debentures will be a taxable event to the redeemed stockholder. The
amount received in the redemption will be treated as a distribution taxable as a
dividend (to the extent of Holdings' earnings and profits) to the redeemed
stockholder under Section 302 of the Code (and may constitute an extraordinary
dividend under Section 1059 of the Code) unless the redemption: (a) is treated
as a distribution "not essentially equivalent to a dividend" with respect to the
stockholder under Section 302(b)(1); (b) is "substantially disproportionate"
with respect to the stockholder under Section 302(b)(2); (c) "completely
terminates" the stockholder's equity interest in Holdings pursuant to Section
302(b)(3); or (d) is of stock held by a noncorporate stockholder and is in
partial liquidation of Holdings pursuant to Section 302(b)(4). In determining
whether any of these tests has been met, there generally must be taken into
account shares actually owned by the stockholder and shares considered to be
owned by the stockholder by reason of certain constructive ownership rules set
forth in Section 318 of the Code. A distribution will be "not essentially
equivalent to a dividend" as to a particular stockholder only if it results in a
"meaningful reduction" in the stockholder's interest in Holdings, but there
cannot always be certainty as to when such "meaningful reduction" has occurred
because the applicable test is not based on numerical criteria. Prospective
holders of New Series A Senior Preferred Stock should consult their own tax
advisors as to the application of this rule. Satisfaction of the "complete
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termination" and "substantially disproportionate" exceptions is dependent upon
compliance with the objective tests set forth in Sections 302(b)(3) and
302(b)(2) of the Code, respectively.
If any of these tests is met as to a holder, the redemption of the New
Series A Senior Preferred Stock (whether paid in cash or by an exchange of
Exchange Debentures for the New Series A Senior Preferred Stock) generally would
be treated as to that holder as an exchange under Section 302(a) of the Code
giving rise to capital gain or loss (measured by the excess of the amount
received (cash or the issue price of the Exchange Debentures) over the holder's
tax basis in the redeemed stock). Such gain generally will be capital gain and
will be taxed at a reduced rate for a holder who is not a corporation and who
holds such stock for more than one year and at a further reduced rate for a
holder who is not a corporation and who holds the Holdings Preferred Stock for
more than eighteen months. Payments received upon redemption that represent an
amount equal to the cumulative unpaid dividends generally should be treated in
the same manner as other redemption payments if such amount is paid but no
dividend is declared. Under limited circumstances, however, the extraordinary
dividend and/or the redemption premium rules discussed above might nonetheless
apply.
If, however, these tests are not met and a redemption of the New Series A
Senior Preferred Stock is treated as a distribution that is taxable as a
dividend, the amount of the distribution will be measured by the amount of cash
or the issue price of the Exchange Debentures, as the case may be, received by
the holder. The holder's adjusted tax basis in the redeemed New Series A Senior
Preferred Stock will be transferred to any remaining stock holdings in Holdings.
If the holder does not retain any actual stock holding in Holdings (only holding
shares constructively), the holder may lose such basis entirely. Under the
"extraordinary dividend" provisions of Section 1059 of the Code, a corporate
holder may, under certain circumstances, be required to reduce its basis in the
remaining shares of stock of Holdings (and possibly recognize gain upon a
disposition of such shares) to the extent the holder claims the dividends
received deduction with respect to the dividend. See the discussion above under
"--Treatment of Distributions Out of Earnings and Profits."
Depending upon the circumstances, the treatment of the redemption of the
New Series A Senior Preferred Stock as a dividend, in particular upon its
exchange for Exchange Debentures, may produce undesirable federal income tax
consequences, including the requirement to pay substantial federal income tax
prior to the receipt of cash. Prospective purchasers are therefore urged to
consult their own tax advisors regarding satisfaction of the tests described
above in their particular circumstances, including the possibility that a
substantially contemporaneous sale of all or a portion of the purchasers'
interest in the New Series A Senior Preferred Stock or other equity interest
might be regarded as reducing the purchasers' interest in Holdings, thereby
satisfying one or more of the tests of Section 302(b) of the Code.
Depending upon a holder's particular circumstances, the tax consequences
of holding Exchange Debentures may be less advantageous than the tax
consequences of holding New Series A Senior Preferred Stock. Interest payments
and, potentially, original issue discount ("OID") (discussed below in
"--Original Issue Discount on Exchange Debentures") will be currently includible
in the holder's income when paid or accrued. On the other hand, in the absence
of earnings and profits, a holder will not be required to include in income
distributions paid in respect of the New Series A Senior Preferred Stock until
the aggregate amount of such distributions exceeds the holder's tax basis in
such New Series A Senior Preferred Stock. Moreover, if Holdings does have
adequate earnings and profits, a corporate holder may be eligible for the
dividends received deduction with respect to such dividend payments.
PROSPECTIVE HOLDERS SHOULD CONSULT THEIR OWN TAX ADVISORS AS TO THE
APPLICATION OF SECTION 302 OF THE CODE IN THE EVENT OF A REDEMPTION.
Original Issue Discount on Exchange Debentures
In the event that the New Series A Senior Preferred Stock is exchanged for
Exchange Debentures and the "stated redemption price at maturity" of the
Exchange Debentures exceeds their "issue price" by more than a de minimis amount
(0.25 percent of the stated redemption price at maturity multiplied by the
number of complete years to maturity) the Exchange Debentures will be treated as
having OID equal to the entire amount of such excess.
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If the Exchange Debentures are traded on an established securities market
within the 60 day period ending 30 days after the exchange date, the issue price
of the Exchange Debentures will be their fair market value as of their issue
date. Subject to certain limitations described in the Treasury regulations, the
Exchange Debentures will be deemed to be traded on an established securities
market if, among other things, price quotations will be readily available from
dealers, brokers or traders. If the New Series A Senior Preferred Stock, but not
the Exchange Debentures issued and exchanged therefor, is traded on an
established securities market within the 60 day period ending 30 days after the
exchange, then the issue price of each Exchange Debenture should be the fair
market value of the New Series A Senior Preferred Stock exchanged therefor at
the time of the exchange. The New Series A Senior Preferred Stock generally will
be deemed to be traded on an established securities market if, among other
things, it appears on a system of general circulation that provides a reasonable
basis to determine fair market value based on either recent price quotations or
recent sales transactions. In the event that neither the New Series A Senior
Preferred Stock nor the Exchange Debentures are traded on an established
securities market within the applicable period, the issue price of the Exchange
Debentures will be their stated principal amount--namely, their face
value--unless either (i) the Exchange Debentures do not bear "adequate stated
interest" within the meaning of Section 1274 of the Code, which is unlikely, or
(ii) also unlikely, the Exchange Debentures are issued in a so called
"potentially abusive situation" as defined in the Treasury regulations under
Section 1274 of the Code (including a situation involving a recent sales
transaction), in which case the issue price of such Exchange Debentures
generally will be the fair market value of the New Series A Senior Preferred
Stock surrendered in exchange therefor.
The "stated redemption price at maturity" of the Exchange Debentures will
equal the total of all payments under the Exchange Debentures, other than
payments of "qualified stated interest." "Qualified stated interest" generally
is stated interest that is unconditionally payable in cash or other property
(other than an additional debt instrument of the issuer) at least annually at a
single fixed rate. Exchange Debentures that are issued when Holdings has the
option to pay interest for certain periods in additional Exchange Debentures
should be treated as having been issued without any qualified stated interest.
Accordingly, the sum of all interest payable pursuant to the stated interest
rate on such Exchange Debentures over the entire term should be included (along
with stated principal) in the stated redemption price at maturity of such
Exchange Debentures. On the other hand, if the Exchange Debentures are issued
after the period for paying interest in additional Exchange Debentures has
passed, then stated interest would qualify as qualified stated interest and none
of such stated interest would be included in the stated redemption price at
maturity of the Exchange Debentures. Whether or not stated interest on the
Exchange Debentures qualifies as qualified stated interest, the Exchange
Debentures will have OID, subject to the de minimis exception, if their stated
redemption price at maturity exceeds their issue price.
Taxation of Stated Interest and Original Issue Discount on Exchange Debentures
Each holder of an Exchange Debenture with OID will be required to include
in gross income an amount equal to the sum of the "daily portions" of the OID
for all days during the taxable year in which such holder holds the Exchange
Debenture, even though the cash to which such income is attributable may not be
received until sale, redemption or maturity of the Exchange Debenture. The daily
portions of OID required to be included in a holder's gross income in a taxable
year will be determined under a constant yield method by allocating to each day
during the taxable year in which the holder holds the Exchange Debenture a pro
rata portion of the OID thereon which is attributable to the accrual period in
which such day is included. The amount of the OID attributable to each accrual
period will be the product of the "adjusted issue price" of the Exchange
Debenture at the beginning of such accrual period multiplied by the "yield to
maturity" of the Exchange Debenture (properly adjusted for the length of the
accrual period). The adjusted issue price of an Exchange Debenture at the
beginning of an accrual period is the original issue price of the Exchange
Debenture plus the aggregate amount of OID that accrued in all prior accrual
periods, less any cash payments on the Exchange Debenture. The "yield to
maturity" is the discount rate that, when used in computing the present value of
all principal and interest payments to be made under the Exchange Debenture,
produces an amount equal to the issue price of the Exchange Debenture.
An additional Exchange Debenture (a "Secondary Debenture") issued in
payment of interest with respect to an initially issued Exchange Debenture (an
"Initial Debenture") will not be considered as a payment made on the Initial
Debenture and will instead be aggregated with the Initial Debenture for purposes
of computing and accruing
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OID on the Initial Debenture. As between the Initial Debenture and the Secondary
Debenture, the adjusted issue price of the Initial Debenture would be allocated
between the Initial Debenture and the Secondary Debenture in proportion to their
respective principal amounts. That is, upon the issuance of a Secondary
Debenture with respect to an Initial Debenture, the Initial Debenture and the
Secondary Debenture derived from the Initial Debenture are treated as initially
having the same adjusted issue price and inherent amount of OID per dollar of
principal amount. The Initial Debenture and the Secondary Debenture derived
therefrom also would be treated as having the same yield to maturity. Similar
treatment would be applied when additional Secondary Debentures are issued in
lieu of paying interest. The issue date of the Initial Debenture will also be
the issue date of the Secondary Debenture.
In the event that the Exchange Debentures are issued after April 1, 2003,
when Holdings no longer has the option to pay interest thereon in additional
Exchange Debentures, stated interest would be included in income by a holder in
accordance with such holder's usual method of accounting. In all other cases,
all stated interest will be treated as payments on the Exchange Debentures under
the rules discussed above.
Holdings will furnish annually to the IRS and to certain record holders of
the Exchange Debentures information relating to the OID, if any, accruing during
the calendar year. Such information will be based on the amount of OID that
would have accrued to a holder who acquired the Exchange Debenture on original
issue.
Bond Premium on Exchange Debentures
If the holder's basis in the Exchange Debentures exceeds the amount
payable at the maturity date (or earlier call date, if appropriate), such excess
will be deductible by the holder of the Exchange Debentures as amortizable bond
premium over the term of the Exchange Debentures (taking into account earlier
call dates, as appropriate), under a yield-to-maturity formula, if an election
by the holder under Section 171 of the Code is made or is already in effect. An
election under Section 171 of the Code is available only if the Exchange
Debentures are held as capital assets. This election is revocable only with the
consent of the IRS and applies to all obligations owned or subsequently acquired
by the holder on or after the first day of the taxable year to which the
election applies. To the extent the excess is deducted as amortizable bond
premium, the holder's adjusted tax basis in the Exchange Debentures will be
reduced. The amortizable bond premium is treated as an offset to interest income
on the Exchange Debentures rather than as a separate deduction item. Final
regulations coordinate these amortizable bond premium rules with the acquisition
premium rules in "--Acquisition Premium on Exchange Debentures" below, and in
general would defer to the operation of the acquisition premium rules in the
case of Exchange Debentures issued on or before April 1, 2003, when Holdings has
the option to pay interest on Exchange Debentures in additional Exchange
Debentures (thus precluding stated interest thereon from being qualified stated
interest).
Acquisition Premium on Exchange Debentures
A holder of an Exchange Debenture issued with OID who purchases such
Exchange Debenture for an amount that is greater than its then adjusted issue
price but equal to or less than the sum of all amounts payable on the Exchange
Debenture after the purchase date (other than payments, if any, of qualified
stated interest) will be considered to have purchased such Exchange Debenture at
an "acquisition premium." Under the acquisition premium rules, the amount of OID
which such holder must include in income with respect to such Exchange Debenture
for any taxable year will be reduced by the portion of such acquisition premium
properly allocable to such year.
Market Discount on Exchange Debentures
Purchasers of New Series A Senior Preferred Stock should be aware that the
disposition of Exchange Debentures may be affected by the market discount
provisions of the Code. The market discount rules generally provide that if a
holder of a debt instrument purchases it at a "market discount" and thereafter
realizes gain upon a disposition or a retirement of the debt instrument, the
lesser of such gain or the portion of the market discount that has accrued on a
straight line basis (or on a constant interest rate basis, if such alternative
rate of accrual has been elected by the holder under Section 1276(b) of the
Code) while the debt instrument was held by such holder will be taxed as
ordinary income at the time of such disposition. "Market discount" with respect
to the Exchange
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Debentures will be the amount, if any, by which the "revised issue price" of an
Exchange Debenture (or its stated redemption price at maturity if the Exchange
Debenture has no OID) exceeds the holder's basis in the Exchange Debenture
immediately after such holder's acquisition, subject to a de minimis exception.
The "revised issue price" of an Exchange Debenture is its issue price increased
by the portion of OID previously includible in the gross income of prior holders
for periods prior to the acquisition of the Exchange Debenture by the holder
(without regard to any acquisition premium exclusion) and reduced by prior
payments other than payments of qualified stated interest.
A holder who acquires an Exchange Debenture at a market discount also may
be required to defer a portion of any interest expense that otherwise may be
deductible on any indebtedness incurred or maintained to purchase or carry such
Exchange Debenture until the holder disposes of the Exchange Debenture in a
taxable transaction. Similarly, to the extent of any accrued market discount on
such Exchange Debenture, otherwise unrecognized gain in the Exchange Debenture
will be includible as ordinary income upon disposition of such Exchange
Debenture in certain otherwise non-taxable transfers (such as gifts).
A holder of Exchange Debentures acquired at a market discount may elect
for federal income tax purposes to include market discount in gross income as
the discount accrues, either on a straight-line basis or on a constant interest
rate basis. This current inclusion election, once made, applies to all market
discount obligations acquired on or after the first date of the first taxable
year to which the election applies, and may not be revoked without the consent
of the IRS. If a holder of Exchange Debentures makes such an election, the
foregoing rules with respect to the recognition of ordinary income on sales and
other dispositions of such debt instruments, and with respect to the deferral of
interest deductions on indebtedness incurred or maintained to purchase or carry
such debt instruments, would not apply.
Election to Treat All Interest as Original Issue Discount
A holder may elect to include in gross income all interest that accrues on
an Exchange Debenture using the constant yield method described above under the
heading "--Taxation of Stated Interest and Original Issue Discount on Exchange
Debentures." Holders should consult their own tax advisors regarding the manner
and advisability of making this election.
Applicable High Yield Discount Obligation Consequences
The Exchange Debentures will constitute "applicable high yield discount
obligations" ("AHYDOs") if the yield to maturity of such Exchange Debentures is
equal to or greater than the sum of the relevant applicable federal rate (the
"AFR") for debt instruments at the time the Exchange Debentures are issued plus
five percentage points and they have "significant" OID. A debt instrument is
treated as having significant OID if the aggregate amount that would be included
in gross income with respect to such debt instrument for periods before the
close of any accrual period ending after the date five years after the date of
issue exceeds the sum of (i) the aggregate amount of interest to be paid in cash
under the debt instrument before the close of such accrual period and (ii) the
product of the initial issue price of such debt instrument and its yield to
maturity. It is currently impossible to determine whether the Exchange
Debentures will be treated as AHYDOs because the amount of OID, if any,
attributable to the Exchange Debentures cannot be determined until they are
issued.
If the Exchange Debentures are AHYDOs, a portion of the tax deductions
that would otherwise be available to the Company in respect of the Exchange
Debentures will be deferred or disallowed, which, in turn, might reduce the
after-tax cash flows of Holdings. More particularly, if the Exchange Debentures
constitute AHYDOs, Holdings will not be entitled to deduct OID that accrues with
respect to such Exchange Debentures until amounts attributable to OID are paid
in cash. In addition, if the yield to maturity of the Exchange Debentures
exceeds the sum of the relevant AFR plus six percentage points (the "Excess
Yield"), the "disqualified portion" of the OID accruing on the Exchange
Debenture will be characterized as a non-deductible dividend with respect to
Holdings and also may be treated as a dividend distribution solely for purposes
of the dividends received deduction with respect to holders that are U.S.
corporations. In general, the "disqualified portion" of OID for any accrual
period will be equal to the product of (i) a percentage determined by dividing
the Excess Yield by the yield to maturity and (ii) the OID for the
140
<PAGE>
accrual period. Subject to otherwise applicable limitations, such a corporate
holder will be entitled to a dividends received deduction (generally at a 70%
rate) with respect to the disqualified portion of the accrued OID if Holdings
has sufficient earnings and profits. To the extent that Holdings' earnings and
profits are insufficient, any portion of the OID that otherwise would have been
recharacterized as a dividend for purposes of the dividends received deduction
will continue to be taxed as ordinary OID income in accordance with the rules
described above in "--Taxation of Stated Interest and Original Issue Discount on
Exchange Debentures."
Redemption or Sale of Exchange Debentures
Generally, any redemption or sale of the Exchange Debentures by a holder
would result in taxable gain or loss equal to the difference between the sum of
the amount of cash and the fair market value of other property received (except
to the extent attributable to accrued, but previously untaxed, interest, which
portion of the consideration would be taxed as ordinary income) and the holder's
adjusted basis in the Exchange Debentures. The adjusted tax basis of a holder
who receives an Exchange Debenture in exchange for New Series A Senior Preferred
Stock will generally be equal to the issue price of the Exchange Debenture
increased by any OID with respect to the Exchange Debenture included in the
holder's income prior to sale or redemption of the Exchange Debenture, reduced
by any amortizable bond premium applied against the holder's income prior to
sale or redemption of the Exchange Debenture and by any cash payments other than
payments of qualified stated interest. Except to the extent that an intention to
call the Exchange Debentures prior to their maturity existed at the time of
their original issue as an agreement or understanding between Holdings and the
original holders of a substantial amount of the Exchange Debentures (which
Holdings believes is unlikely, but might nonetheless be asserted by the IRS
under a theory that the optional redemption and the change in control redemption
in respect of the Exchange Debentures manifests such an intention), and subject
to the above discussion of market discount, such gain or loss would be capital
gain or loss and would be long term capital gain or loss.
Backup Withholding
Federal income tax backup withholding at a rate of 31 percent on
dividends, interest payments (including accrued OID), and proceeds from a sale,
exchange, or redemption of New Series A Senior Preferred Stock or Exchange
Debentures, will apply unless the holder (i) is a corporation or comes within
certain other exempt categories (and, when required, demonstrates this fact) or
(ii) provides a taxpayer identification number, certifies as to no loss of
exemption from backup withholding, and otherwise complies with applicable
requirements of the backup withholding rules. The amount of any backup
withholding from a payment to a holder will be allowed as a credit against the
holder's federal income tax liability and may entitle such holder to a refund,
provided that the required information is furnished to the IRS.
THE FOREGOING DISCUSSION OF CERTAIN FEDERAL INCOME TAX CONSIDERATIONS DOES
NOT CONSIDER THE FACTS AND CIRCUMSTANCES OF ANY PARTICULAR PROSPECTIVE HOLDER'S
SITUATION OR STATUS, AND ACCORDINGLY DOES NOT CONSTITUTE TAX ADVICE. EACH
PURCHASER OF NEW SERIES A SENIOR PREFERRED STOCK SHOULD CONSULT ITS OWN TAX
ADVISOR WITH RESPECT TO THE TAX CONSEQUENCES TO IT, INCLUDING THOSE UNDER STATE,
LOCAL, FOREIGN AND OTHER TAX LAWS, AND UNDER ANY RECENT OR PROSPECTIVE CHANGES
IN APPLICABLE TAX LAWS.
141
<PAGE>
PLAN OF DISTRIBUTION
Subject to the terms and conditions set forth in the Securities Purchase
Agreement (the "Purchase Agreement") dated March 23, 1998, Holdings sold to CIBC
Oppenheimer Corp. (the "Initial Purchaser"), and the Initial Purchaser purchased
from Holdings 57,710 Series A Units, consisting of 57,710 shares of Old Series A
Senior Preferred Stock and 720 shares of Unit Common Stock.
The purchase price for the Series A Units was $1,039.68 per share (the
"Unit Offering Price") less the Initial Purchaser's discount of 4.0% per Series
A Unit. The Initial Purchaser sold the Series A Units at the Unit Offering Price
to "Qualified Institutional Buyers" within the meaning of Rule 144A of the
Securities Act.
The Issuer reimbursed the Initial Purchaser for certain expenses and
agreed to indemnify the Initial Purchaser against certain liabilities, including
liabilities under the Securities Act.
The Initial Purchaser acted as a co-agent under the New Credit Facility
and as an initial purchaser in the Senior Note Offering and received customary
fees and had expenses reimbursed in connection with such services.
An affiliate of the Initial Purchaser invested an aggregate of $13.5
million in Frasier L.L.C. and in Niles L.L.C., to acquire indirect equity
interests in Holdings, on arm's length terms concurrent with the Offering.
Each broker-dealer that receives shares of New Series A Senior
Preferred Stock (or any Exchange Debentures issued in exchange therefor) for its
own account pursuant to the Exchange Offer must acknowledge that it will deliver
a prospectus in connection with any resale of such shares of New Series A Senior
Preferred Stock (or any Exchange Debentures issued therefor). This Prospectus,
as it may be amended or supplemented from time to time, may be used by a
broker-dealer in connection with resales of shares of New Series A Senior
Preferred Stock (or any Exchange Debentures issued in exchange therefor)
received in exchange for shares of Old Series A Senior Preferred Stock only
where such shares of Old Series A Senior Preferred Stock were acquired as a
result of market-making activities or other trading activities. Holdings has
agreed that it will make this Prospectus, as amended or supplemented, available
to any broker-dealer for use in connection with any such resale for a period
until 180 days after the Registration Statement has been declared effective, or
such shorter period as will terminate when all shares of Old Series A Senior
Preferred Stock acquired by broker-dealers for their own accounts as a result of
market-making activities or other trading activities have been exchanged for
shares of New Series A Senior Preferred Stock and such shares of New Series A
Senior Preferred Stock (or any Exchange Debentures issued in exchange therefor)
have been resold by such broker-dealers.
Holdings will not receive any proceeds from any sale of New Series A
Senior Preferred Stock (or any Exchange Debentures issued in exchange therefor)
by broker-dealers. Shares of New Series A Senior Preferred Stock received by
broker-dealers for their own account pursuant to the Exchange Offer may be sold
from time to time in one or more transactions in the over-the-counter market, in
negotiated transactions, through the writing of options on the shares of New
Series A Senior Preferred Stock (or any Exchange Debentures issued in exchange
therefor) or a combination of such methods of resale, at market prices
prevailing at the time of resale, at prices related to such prevailing market
prices or negotiated prices. Any such resale may be made directly to purchasers
or to or through brokers or dealers who may receive compensation in the form of
commissions or concessions from any such broker-dealer and/or the purchasers of
any shares of New Series A Senior Preferred Stock (or any Exchange Debentures
issued in exchange therefor). Any broker-dealer that resells shares of New
Series A Senior Preferred Stock (or any Exchange Debentures issued in exchange
therefor) that were received by it for its own account pursuant to the Exchange
Offer and any broker or dealer that participates in a distribution of such
shares of New Series A Senior Preferred Stock (or any Exchange Debentures issued
in exchange therefor) may be deemed to be an "underwriter" within the meaning of
the Securities Act and any profit on any such resale of shares of New Series A
Senior Preferred Stock (or any Exchange Debentures issued in exchange therefor)
and any commissions or concessions received by any such persons may be deemed to
be underwriting compensation under the Securities Act. The Letter of Transmittal
states that by acknowledging that it will deliver and by delivering a
prospectus, a broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act.
142
<PAGE>
For a period until 180 days after the Registration Statement has been
declared effective, or such shorter period as will terminate when all shares of
Old Series A Senior Preferred Stock acquired by broker-dealers for their own
accounts as a result of market-making activities or other trading activities
have been exchanged for shares of New Series A Senior Preferred Stock and such
shares of New Series A Senior Preferred Stock (or any Exchange Debentures issued
in exchange therefor) have been resold by such broker-dealers, Holdings will
promptly send additional copies of this Prospectus and any amendment or
supplement to this Prospectus to any broker-dealer that requests such documents
in the Letter of Transmittal. Holdings has agreed to pay all expenses incident
to the Exchange Offer other than commissions or concessions of any brokers or
dealers and the fees of any counsel or other advisors or experts retained by the
holders of the Series A Senior Preferred Stock, except as expressly set forth in
the Exchange Offer Registration Rights Agreement, and will indemnify the holders
of the Series A Senior Preferred Stock (including any broker-dealers) against
certain liabilities, including liabilities under the Securities Act.
EXPERTS
The combined financial statements of the Material Handling Equipment
Business of Harnischfeger Industries, Inc. as of October 31, 1997 and 1996 and
for each of the three fiscal years in the period ended October 31, 1997,
included in this Prospectus, have been so included in reliance on the report of
Price Waterhouse LLP, independent accountants, given on the authority of said
firm as experts in auditing and accounting.
LEGAL MATTERS
The validity of the New Series A Senior Preferred Stock will be passed
upon for Holdings by Akin, Gump, Strauss, Hauer & Feld, L.L.P., Washington,
D.C., counsel to Holdings.
143
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Page
Reference
---------
MMH HOLDINGS, INC.
Condensed Balance Sheets As of October 31, 1997
and April 30, 1998 (Unaudited)............................... F-2
Unaudited Condensed Statements of Income for the Three Months
Ended April 30, 1998 and April 30, 1997 and for the Six
Months Ended April 30, 1998 and April 30, 1997............... F-3
Unaudited Condensed Statements of Cash Flows for the Six Months
Ended April 30, 1998 and April 30, 1997...................... F-4
Statement of Preferred Stock and Shareholders' Equity ........... F-5
Notes to Financial Statements......................................... F-6
MATERIAL HANDLING EQUIPMENT BUSINESS OF HARNISCHFEGER INDUSTRIES, INC.
Report of Independent Accountants............................... F-17
Combined Balance Sheets as of October 31, 1997
and October 31, 1996......................................... F-18
Combined Statements of Income for the Years Ended
October 31, 1997, October 31, 1996 and
October 31, 1995............................................. F-19
Combined Statements of Cash Flows for the Years
Ended October 31, 1997, October 31, 1996
and October 31, 1995......................................... F-20
Notes to Combined Financial Statements.......................... F-21
For purposes hereof, it is assumed that Holdings has historically owned
the capital stock of Morris Material Handling, Inc., that all of the assets of
the MHE Business were owned by subsidiaries thereof and that immediately prior
to the consummation of the Recapitalization, the historical combined financial
statements of Holdings were identical to those of the MHE Business which are
presented herein.
F-1
<PAGE>
MMH HOLDINGS, INC.
CONDENSED BALANCE SHEETS
(Dollars in Thousands)
April 30, October 31,
1998 1997
--------- ---------
(Unaudited)
ASSETS
Current Assets
Cash $ 2,825 $ 1,532
Accounts receivable--net 78,791 82,209
Inventories 35,338 33,497
Other current assets 4,093 4,765
--------- ---------
Total current assets 121,047 122,003
Property, Plant and Equipment
Cost 64,437 60,763
Less accumulated depreciation (24,993) (21,396)
--------- ---------
39,444 39,367
--------- ---------
Other Assets
Goodwill 32,158 32,229
Debt financing costs 18,098 --
Deferred income taxes 73,242 --
Other 5,856 6,001
--------- ---------
129,354 38,230
--------- ---------
Total assets $ 289,845 $ 199,600
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY/ PARENT INVESTMENT
Current Liabilities
Short-term notes payable and current
portion of long-term obligations $ 5,124 $ 752
Bank overdrafts 1,249 4,293
Trade accounts payable 24,438 32,656
Advance payments and progress billings 8,035 7,685
Accrued warranties 2,781 3,998
Other current liabilities 22,281 21,376
--------- ---------
Total current liabilities 63,908 70,760
Senior Notes 200,000 --
Term Loans 53,650 --
Other Long-Term Debt 1,046 1,043
Deferred Income Taxes 2,597 3,088
--------- ---------
Total liabilities 321,201 74,891
Minority Interest 353 391
Mandatorily Redeemable Preferred Stock 89,443 --
Shareholders' Equity/Parent Investment (121,152) 124,318
--------- ---------
Total liabilities and shareholders'
equity/parent investment $ 289,845 $ 199,600
========= =========
The accompanying notes are an integral part of the financial statements.
F-2
<PAGE>
MMH HOLDINGS, INC.
CONDENSED STATEMENTS OF INCOME
(UNAUDITED)
(Dollars in Thousands)
<TABLE>
<CAPTION>
For the Three Months For the Six Months
Ended April 30, Ended April 30,
---------------------- ----------------------
1998 1997 1998 1997
-------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues
Net sales $ 80,766 $ 97,072 $ 157,249 $ 177,054
Other income - net 442 247 726 1,501
-------- --------- --------- ---------
81,208 97,319 157,975 178,555
Cost of Sales 58,519 72,840 115,172 133,632
Product development, selling and administrative
expenses 15,154 14,024 29,514 27,272
HII management fee 478 786 1,155 1,434
Non-recurring employee benefit costs 1,786 -- 1,906 --
-------- --------- --------- ---------
Operating income 5,271 9,669 10,228 16,217
Interest expense - net
HII Affiliates (761) (259) (1,448) (69)
Third party (2,545) (111) (2,703) (159)
-------- --------- --------- ---------
Income before Income Taxes and Minority Interest 1,965 9,299 6,077 15,989
Provision for Income Taxes (459) (3,713) (2,446) (6,384)
Minority Interest 24 5 38 (3)
-------- --------- --------- ---------
Net income $ 1,530 $ 5,591 $ 3,669 $ 9,602
======== ========= ========= =========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-3
<PAGE>
MMH HOLDINGS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(Dollars in Thousands)
<TABLE>
<CAPTION>
For the Six Months
Ended April 30,
----------------------
1998 1997
--------- ---------
<S> <C> <C>
Operating Activities
Net Income $ 3,669 $ 9,602
Add (deduct) - items not affecting cash provided by
operating activities:
Depreciation and amortization 3,408 3,085
Minority interest (38) 3
Deferred income taxes - net 57 (171)
Divestiture bonus 1,216 --
Gain on fire insurance claim -- (1,100)
Other -- (400)
Changes in working capital, excluding the
effects of acquisition opening balance sheets:
Accounts receivable 3,646 6,309
Inventories (1,968) (1,960)
Other current assets (1,903) 187
Trade accounts payable and bank overdrafts (11,579) 426
Advance payments and progress billings 542 (10,901)
Accrued warranties (1,246) 96
Other current liabilities 929 (3,717)
Activity with parent and other affiliates 1,213 11,064
--------- ---------
Net cash provided by (used for) operating activites (2,054) 12,523
--------- ---------
Investment and Other Transactions
Fixed asset additions - net (2,446) (2,486)
Acquisition of businesses - net of cash acquired (319) (11,787)
Fire insurance claim activity - net -- 1,100
Issuance of loans to senior management (900) --
Other - net 72 (314)
--------- ---------
Net cash used for investment and other transactions (3,593) (13,487)
--------- ---------
Financing Activities
Changes in short-term notes payable 3,065 (667)
Proceeds from Senior Note Offering 200,000 --
Proceeds from New Credit Facility 55,000 --
Dividends to and redemption of shares held by
Holdings (232,845) --
Debt financing costs (18,179) --
Repayments of debt -- (46)
--------- ---------
Net cash provided by (used for) financing activities 7,041 (713)
--------- ---------
Effect of Exchange Rate Changes on
Cash and Cash Equivalents (101) 2
--------- ---------
Increase (Decrease) in Cash and Cash Equivalents 1,293 (1,675)
Cash and Cash Equivalents
Beginning of Period 1,532 3,821
--------- ---------
End of Period $ 2,825 $ 2,146
========= =========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-4
<PAGE>
MMH HOLDINGS, INC.
STATEMENT OF PREFERRED STOCK AND SHAREHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED APRIL 30, 1998
(Dollars In Thousands)
<TABLE>
<CAPTION>
Preferred Stock
--------------------------------------------------------------------------------------
Series A Series B Series C
----------------------- ---------------------- ---------------------- -----------
Shares Carrying Shares Carrying Shares Carrying
Outstanding Value Outstanding Value Outstanding Value Total
------------ -------- ----------- -------- ----------- -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at October 31, 1997 -- $ -- -- $ -- -- $ -- $ --
Net Income -- -- -- -- -- -- --
Currency Translation Adjustments -- -- -- -- -- -- --
Exchange of 450 common shares
outstanding for 100,000
shares of new common stock
and 30,000 shares of Series
C preferred stock -- -- -- -- 30,000 30,000 99,550
Issue Series A preferred and
common shares for
$60 million (net of $2.906
million fees) 57,710 54,804 -- -- -- -- 54,804
Redemption of shares from Harnco
and related costs -- -- -- -- (1,145) (1,145) (1,145)
Exchange of 1,512 common shares
for Series B preferred shares -- -- 4,809 4,809 -- -- 4,809
Preferred stock dividends -- 577 -- 49 -- 301 927
Amortization of preferred stock discount -- 48 -- -- -- -- 48
Capital contribution from HII -- -- -- -- -- -- --
Issuance of loans to senior
management -- -- -- -- -- -- --
Deferred taxes arising from
change in U.S. federal income tax basis -- -- -- -- -- -- --
Activity with HII and other
affiliates, October 31, 1997 -
March 30, 1998 -- -- -- -- -- -- --
========= ========= ========= ========= ========= ========= =========
Balance at April 30, 1998 57,710 $ 55,429 4,809 $ 4,858 28,855 $ 29,156 $ 89,443
========= ========= ========= ========= ========= ========= =========
<CAPTION>
Parent
Common Stock Investment/
------------------- Additional Cumulative Total
Shares Par Paid-in Translation Retained Shareholders'
Outstanding Value Capital Adjustment Earnings Equity
------------ ------ ----------- ------------- ----------- ----------------
(A)
<S> <C> <C> <C> <C> <C> <C>
Balance at October 31, 1997 450 $ -- $ 124,618 $ (300) $ -- $ 124,318
Net Income -- -- -- -- 3,669 3,669
Currency Translation Adjustments -- -- -- (1,520) -- (1,520)
Exchange of 450 common shares
outstanding for 100,000
shares of new common stock
and 30,000 shares of Series
C preferred stock 99,550 1 (30,001) -- -- (30,000)
Issue Series A preferred and
common shares for
$60 million (net of $2.906
million fees) 720 -- 2,290 -- -- 2,290
Redemption of shares from Harnco
and related costs (88,319) (1) (288,793) -- -- (288,794)
Exchange of 1,512 common shares
for Series B preferred shares (1,512) -- (4,809) -- -- (4,809)
Preferred stock dividends -- -- -- -- (927) (927)
Amortization of preferred stock discount -- -- -- -- (48) (48)
Capital contribution from HII -- -- 1,216 -- -- 1,216
Issuance of loans to senior
management -- -- (900) -- -- (900)
Deferred taxes arising from
change in U.S. federal income tax basis -- -- 71,129 -- -- 71,129
Activity with HII and other
affiliates, October 31, 1997 -
March 30, 1998 -- -- 3,224 -- -- 3,224
========= ========= ========= ========= ========= =========
Balance at April 30, 1998 10,889 $ -- $(122,026) $ (1,820) $ 2,694 $(121,152)
========= ========= ========= ========= ========= =========
</TABLE>
(A) Due to the MHE Business having historically been operated as a division of
HII, a historical retained earnings balance cannot be determined.
The accompanying notes are an integral part of the financial statements.
F-5
<PAGE>
MMH HOLDINGS, INC.
NOTES TO FINANCIAL STATEMENTS
(dollars in thousands unless indicated)
(Unaudited)
Note 1 - Basis of Presentation
On January 28, 1998, Harnischfeger Industries, Inc. ("HII") reached an agreement
with MHE Investments, Inc. ("MHE Investments") an affiliate of Chartwell
Investments Inc. ("Chartwell") for the sale of an approximately 80 percent
common ownership interest in HII's Material Handling Equipment Business (the
"MHE Business" or the "Company"). The transaction (the "Recapitalization")
resulted in a significant change in the Company's capital structure. In
connection with the resulting March 30, 1998 Recapitalization (see Note 2), MMH
Holdings, Inc. ("Holdings") acquired all of the equity interests of the entities
engaged in the MHE Business that were previously owned by HII. All of the
Company's business operations are conducted through subsidiaries of Morris
Material Handling, Inc. ("MMH"), a wholly-owned subsidiary of Holdings. For
purposes hereof, it is assumed that, on a historical basis, all of the assets of
the Company were wholly-owned by subsidiaries of MMH. Accordingly, the
historical combined financial statements of MMH and Holdings for periods prior
to the Recapitalization are identical following completion of the transaction
and are included in the accompanying unaudited financial statements for all
periods presented. These financial statements should be read in conjunction with
the audited combined financial statements and the notes thereto of the Material
Handling Equipment Business of Harnischfeger Industries, Inc. for each of the
three years in the period ended October 31, 1997.
In the opinion of management, all adjustments necessary for the fair
presentation of the results of operations for the three and six months ended
April 30, 1998 and 1997, cash flows for the six months ended April 30, 1998 and
1997, and financial position at April 30, 1998 have been made. All adjustments
made are of a normal recurring nature. The results of operations for any interim
period are not necessarily indicative of the results to be expected for the full
year.
Note 2 - Recapitalization Transaction
The Recapitalization was effectuated pursuant to the January 28, 1998
Recapitalization Agreement among MHE Investments, Harnischfeger Corporation
("Harnco") and certain of Harnco's affiliates. In the Recapitalization, (i) MHE
Investments acquired 7,907 shares of Holdings' common stock and $28.9 million of
12 1/2% Series C Junior Voting Exchangeable Preferred Stock from Harnco, (ii)
MMH, a newly-formed subsidiary of Holdings, acquired, directly or indirectly,
all of the equity interests of the entities engaged in the MHE Business that
were previously owned by HII and its affiliates, including Harnco, and (iii)
Harnco received the cash Recapitalization consideration from Holdings. The
transaction closed on March 30, 1998 (the "Recapitalization Closing").
Prior to the Recapitalization Closing, Harnco and other HII affiliates effected
a number of transactions which resulted in Holdings owning indirectly through
MMH the equity interests of all of the entities engaged in the MHE Business.
To consummate the Recapitalization, MMH issued $200 million of 9 1/2% Senior
Notes due 2008 and obtained $55 million of aggregate borrowings under a senior
secured credit facility (see Note 5). Holdings offered 57,710 Units consisting
of 57,710 shares of its 12% Series A Senior Exchangeable Preferred Stock and 720
shares of non-voting common stock for $60 million. These proceeds were used (i)
to finance the cash Recapitalization consideration paid by Holdings, (ii) to
make loans to senior management to acquire indirect equity interests in Holdings
and (iii) to pay approximately $24.0 million of fees and expenses. In connection
with the Recapitalization, Holdings paid to Harnco cash consideration of $287
million, including a $5 million prepayment for a potential post-closing
redemption price adjustment, in exchange for the redemption of 88,319 shares of
voting common stock and 1,145 shares of Series C Junior Preferred Stock. In
addition, Holdings exchanged 1,512 shares of voting common stock for $4.8
million of 12 1/4% Series B Junior Exchangeable Preferred Stock.
F-6
<PAGE>
MMH HOLDINGS, INC.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
(dollars in thousands unless indicated)
(Unaudited)
The cash paid by MMH to Holdings in connection with such transactions was
primarily obtained from the issuance of $200 million of 9 1/2% Senior Notes and
$55 million of bank term loans under a senior secured credit facility.
MHE Investments owns approximately 72.6% of the common stock of Holdings and
$28.9 million of the 12 1/2% Series C Junior Voting Exchangeable Preferred Stock
of Holdings and Harnco owns approximately 20.8% of the common stock of Holdings
and $4.8 million of the 12 1/4% Series B Junior Exchangeable Preferred Stock of
Holdings. The remaining equity interests were issued to institutional investors
and consist of non-voting stock representing approximately 6.6% of common shares
outstanding and $57.7 million of the 12% Series A Senior Exchangeable Preferred
Stock of Holdings.
In connection with the Recapitalization, MMH entered into a Trademark License
Agreement with an affiliate of Harnco pursuant to which MMH has the right to use
the P&H trademark with respect to all MHE Business products on a worldwide
exclusive basis from March 30, 1998 until 15 years after the earlier to occur of
a sale of Holdings to a third party or a public offering of the common stock of
Holdings, MMH or their parents or successors (and for an additional seven years
thereafter for aftermarket products and services). The royalty fee for use of
the trademark is a percentage of the aggregate net sales of the MHE Business for
the ten year period commencing March 30, 1999. There will be no royalty fee for
the remainder of the term following such ten year period. MMH also entered into
a number of agreements pursuant to which HII will continue to provide, on an
interim basis, certain supplies, products and services to MMH and its
subsidiaries located in the United States on substantially similar terms and
conditions to those historically provided.
Note 3 - Acquisitions
During the six months ended April 30, 1997, the Company completed the
acquisition of a large distribution and service center in Ohio for an aggregate
purchase price of $11.8 million, net of cash acquired. This acquisition was
related to the Company's aftermarket business and was accounted for as a
purchase transaction with the purchase price allocated to the fair value of
specific assets acquired and liabilities assumed. Resultant goodwill is being
amortized over 40 years.
Note 4 - Inventories
Inventories consisted of the following:
April 30, October 31,
1998 1997
----------------------
Raw materials $ 16,092 $ 17,391
Work-in-process 12,737 13,654
Finished parts 14,107 10,704
----------------------
42,936 41,749
Less excess of current cost over
stated LIFO value (7,598) (8,252)
----------------------
$ 35,338 $ 33,497
======================
F-7
<PAGE>
MMH HOLDINGS, INC.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
(dollars in thousands unless indicated)
(Unaudited)
Note 5 - Indebtedness
On March 23, 1998, MMH issued $200 million aggregate principal amount of 9 1/2%
Senior Notes due April 1, 2008 (the "Notes") in connection with the
Recapitalization as discussed in Note 2. Interest on the Notes is payable
semiannually on each April 1 and October 1, commencing October 1, 1998. The
Notes will be redeemable at the option of MMH, in whole or in part, at any time
on or after April 1, 2003, at the appropriate redemption price, plus accrued and
unpaid interest thereon to the redemption date. In addition, MMH may redeem in
the aggregate up to 35% of the original principal amount of the Notes at any
time and from time to time prior to April 1, 2001 at a redemption price equal to
109.5% of the aggregate principal amount thereof, plus accrued and unpaid
interest thereon to the redemption date, subject to certain provisions. The
Notes are senior unsecured obligations and are unconditionally guaranteed,
jointly and severally, on a senior unsecured basis by substantially all of MMH's
subsidiaries. See further discussion in Note 11. The Notes are subject to
various covenants that, among other things, limit the ability of MMH and its
subsidiaries to incur additional indebtedness, incur liens, pay dividends and
make certain other restricted payments, make investments, repurchase stock,
consummate certain asset sales, enter into certain transactions with affiliates,
issue capital stock of their subsidiaries, create dividend or other payment
restrictions affecting their subsidiaries, consolidate or merge with any person
in a transaction involving all or substantially all of the consolidated assets
of MMH or transfer or sell all or substantially all of the consolidated assets
of MMH.
At the Recapitalization Closing, MMH entered into a New Credit Facility which
consists of a $70 million revolving credit facility (the "Revolving Credit
Facility"), a $30 million acquisition facility (the "Acquisition Facility"), a
$20 million term loan ("Term Loan A") and a $35 million term loan ("Term Loan
B").
The Revolving Credit Facility will permit, subject to compliance with certain
conditions, MMH to borrow, repay and reborrow up to $70 million (of which $15
million is reserved for issuance of letters of credit under the note indenture)
at any time until the fifth anniversary of the Recapitalization Closing, the
proceeds of which may be used for working capital and other corporate purposes.
The Acquisition Facility, the proceeds of which may be used for acquisitions,
will permit, subject to compliance with certain conditions, MMH to borrow up to
$30 million at any time until the third anniversary, and to repay the same in
installments on or prior to the seventh anniversary of the Recapitalization
Closing. Term Loan A and Term Loan B are repayable in 20 and 28 quarterly
installments, respectively, commencing June 1998.
Borrowings under the New Credit Facility bear interest at various interest rates
based on certain floating reference rates. Borrowings under the New Credit
Facility are secured by certain of MMH's and its subsidiaries' assets, including
substantially all of their assets and are guaranteed by Holdings and
substantially all of MMH's subsidiaries.
To limit the effect of increases in the interest rates of the New Credit
Facility, the Company has entered into an interest rate swap arrangement. The
effect of this agreement, which expires on March 31, 2001, is to limit the
interest rate exposure on specified amounts up to the $55.0 million borrowed
under the New Credit Facility to a fixed LIBOR rate of 5.875% plus 2.25% or
2.75%, as applicable. The differential is accrued as interest rates change and
is recorded as interest expense. Payments under the swap will be made quarterly.
The impact of this agreement was not material for the three and six months ended
April 30, 1998.
F-8
<PAGE>
MMH HOLDINGS, INC.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
(dollars in thousands unless indicated)
(Unaudited)
Note 6 - Contingent Liabilities
At April 30, 1998, MMH was contingently liable to financial institutions and
others for approximately $2.1 million under the New Credit Facility and $34.7
million under the HII Credit Support Obligations for outstanding letters of
credit and surety bonds securing performance of sales contracts related to MMH
operations.
As of the Recapitalization Closing, Harnco retained certain income and other tax
liabilities relating to the MHE Business, all environmental liabilities relating
to previously shared facilities, any liabilities for which Harnco or its
affiliates have been named as potentially responsible parties with respect to
Superfund sites, and any liabilities arising in connection with claims alleging
exposure to asbestos in connection with the MHE Business prior to the
Recapitalization Closing. Additionally, Harnco retained all liability for
medical and disability benefit claims for current United States employees made
prior to the Recapitalization Closing and all claims with respect to any of the
HII benefit plans for former United States employees.
MMH is a party to various litigation matters, including product liability and
other claims, which are normal in the course of its operations. Also, as a
normal part of its operations, MMH undertakes certain contractual obligations
and warranties in connection with the sale of products or services. Although the
outcome of these matters cannot be predicted with certainty, management believes
that such matters will not have a material adverse effect on the MMH combined
results of operations, financial position or cash flows.
MMH is also involved in a number of proceedings and potential proceedings
relating to environmental matters. Although it is difficult to estimate the
potential exposure to MMH related to these environmental matters, management
believes these matters will not have a material adverse effect on its combined
results of operations, financial position or cash flows.
Note 7 - Income Taxes
The deferred income tax accounts reflect the impact of temporary differences
between the basis of assets and liabilities for financial reporting purposes and
their related basis as measured by income tax regulations. For income tax
purposes, MMH and Holdings will be deemed to have acquired the assets of the MHE
Business pursuant to Internal Revenue Code Section 338(h)(10). Accordingly, this
transaction increased the tax basis of certain assets
and created tax-deductible goodwill, and resulted in significant book/tax basis
differences. A valuation allowance was recorded to reflect the estimated amount
of deferred tax assets which may not be realized due primarily to the possible
limitation on the future use of certain foreign credits. The resulting net
adjustment to deferred income taxes has been recorded as an adjustment to
shareholders' equity.
Note 8 - Gain on Fire Insurance Claim
During the first quarter of fiscal 1997, the Company recognized a gain of
approximately $1.1 million based upon the status of the property loss and
business interruption insurance claim related to the fiscal 1995 fire at its
facility in the United Kingdom.
F-9
<PAGE>
MMH HOLDINGS, INC.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
(dollars in thousands unless indicated)
(Unaudited)
Note 9 - Sale of Facility
During the first quarter of fiscal 1998, the Company completed the sale of its
Dayton, Ohio land and building which it had acquired in connection with the
acquisition of an aftermarket operation during the prior year. The operation's
former owners reacquired these assets in exchange for a note receivable of $427
and settlement of the remaining amount of $300 due to the former owners related
to the Company's acquisition. The balance of the note was collected in full by
the Company during the quarter ended April 30, 1998. No significant gain or loss
was recognized in connection with this transaction.
Note 10 - Non-recurring Employee Benefit Costs
As a result of the Recapitalization, the Company recognized certain
non-recurring employee benefit costs. These costs included severance costs
associated with restructuring the Company's United Kingdom manufacturing
operation and incentives to certain members of management. The Company's former
parent, not the Company, is responsible for making these incentive payments and
accordingly, this amount has been reported as a capital contribution in the
accompanying financial statements. The severance costs were approximately $0.7
million and the incentives to management were approximately $1.2 million.
Note 11 - Supplemental Condensed Combining Financial Information
In connection with the Recapitalization, MMH, a direct wholly-owned subsidiary
of Holdings, issued debt securities that are guaranteed by certain of the
Company's affiliates (the "Guarantor Subsidiaries"). Each of the Guarantor
Subsidiaries is a wholly-owned subsidiary, directly or indirectly, of MMH and
the guarantees are full, unconditional and joint and several. Both Holdings and
MMH are holding companies with no material operating assets. All of the
Company's business operations are conducted through subsidiaries of MMH.
Separate financial statements of the Guarantor Subsidiaries are not presented
because company management has determined that they would not be material to
investors. The following supplemental financial information sets forth the
balance sheet, statement of operations and cash flow information for the
Guarantor Subsidiaries and for the Company's other affiliates (the
"Non-Guarantor Subsidiaries"). The supplemental financial information reflects
the investments of the Guarantor Subsidiaries in the Non-Guarantor Subsidiaries
using the equity method of accounting. For purposes of this presentation, it is
assumed that all of the assets of the Company were wholly-owned by subsidiaries
of MMH, which is an entity that was formed by Holdings in connection with the
Recapitalization and that the historical combined financial statements of MMH
and Holdings prior to the Recapitalization Closing are identical following
completion of the transaction.
F-10
<PAGE>
MMH HOLDINGS, INC.
NOTES TO FINANCIAL STATEMENTS - (Continued)
SUPPLEMENTAL CONDENSED CONSOLIDATING
BALANCE SHEET APRIL 30, 1998
(UNAUDITED)
(Dollars in Thousands)
<TABLE>
<CAPTION>
Non- Morris Consolidated
Guarantor Guarantor Material Morris Material
Subsidiaries Subsidiaries Handling, Inc. Eliminations Handling, Inc.
------------- ------------ -------------- ------------ ----------------
<S> <C> <C> <C> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $ 2,404 $ 421 $ -- $ -- $ 2,825
Accounts receivable - net 71,852 6,939 -- -- 78,791
Intercompany accounts receivable 6,260 -- 714 (6,974) --
Inventories 31,799 3,539 -- -- 35,338
Other current assets 3,123 263 707 -- 4,093
-------- -------- --------- --------- ---------
115,438 11,162 1,421 (6,974) 121,047
-------- -------- --------- --------- ---------
Property, Plant and Equipment - net 36,462 2,982 -- -- 39,444
-------- -------- --------- --------- ---------
Other Assets
Goodwill 30,176 1,982 -- -- 32,158
Debt financing costs -- -- 18,098 -- 18,098
Noncurrent intercompany receivable 3,377 -- 80,070 (83,447) --
Investment in affiliates 678 -- 53,027 (53,705) --
Deferred income taxes -- -- 73,242 -- 73,242
Other 5,856 -- -- -- 5,856
-------- -------- --------- --------- ---------
40,087 1,982 224,437 (137,152) 129,354
======== ======== ========= ========= =========
$191,987 $ 16,126 $ 225,858 $(144,126) $ 289,845
======== ======== ========= ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Short-term notes payable and
current portion of long-term obligations $ 3,737 $ 37 $ 1,350 $ -- $ 5,124
Bank overdrafts -- 1,249 -- -- 1,249
Trade accounts payable 22,486 1,952 -- -- 24,438
Intercompany accounts payable 714 5,360 900 (6,974) --
Advance payments and progress billings 7,906 129 -- -- 8,035
Accrued warranties 2,656 125 -- -- 2,781
Other current liabilities 18,442 2,172 1,667 -- 22,281
-------- -------- --------- --------- ---------
55,941 11,024 3,917 (6,974) 63,908
-------- -------- --------- --------- ---------
Senior Notes -- -- 200,000 -- 200,000
Term Loans -- -- 53,650 -- 53,650
Other Term Debt 352 694 -- -- 1,046
Noncurrent Intercompany Payable 80,070 3,377 -- (83,447) --
Deferred Income Taxes 2,597 -- -- -- 2,597
-------- -------- --------- --------- ---------
138,960 15,095 257,567 (90,421) 321,201
Minority Interest -- -- -- 353 353
Mandatorily Redeemable Preferred Stock -- -- -- -- --
Shareholders' Equity 53,027 1,031 (31,709) (54,058) (31,709)
======== ======== ========= ========= =========
$191,987 $ 16,126 $ 225,858 $(144,126) $ 289,845
======== ======== ========= ========= =========
<CAPTION>
Consolidated
MMH MMH
Holdings, Inc. Eliminations Holdings, Inc.
-------------- ------------ ---------------
<S> <C> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $ -- $ -- $ 2,825
Accounts receivable - net -- -- 78,791
Intercompany accounts receivable -- -- --
Inventories -- -- 35,338
Other current assets -- -- 4,093
--------- -------- ---------
-- -- 121,047
--------- -------- ---------
Property, Plant and Equipment - net -- -- 39,444
--------- -------- ---------
Other Assets
Goodwill -- -- 32,158
Debt financing costs -- -- 18,098
Noncurrent intercompany receivable -- -- --
Investment in affiliates (31,709) 31,709 --
Deferred income taxes -- -- 73,242
Other -- -- 5,856
--------- -------- ---------
(31,709) 31,709 129,354
========= ======== =========
$ (31,709) $ 31,709 $ 289,845
========= ======== =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Short-term notes payable and
current portion of long-term obligations $ -- $ -- $ 5,124
Bank overdrafts -- -- 1,249
Trade accounts payable -- -- 24,438
Intercompany accounts payable -- -- --
Advance payments and progress billings -- -- 8,035
Accrued warranties -- -- 2,781
Other current liabilities -- -- 22,281
--------- -------- ---------
-- -- 63,908
--------- -------- ---------
Senior Notes -- -- 200,000
Term Loans -- -- 53,650
Other Term Debt -- -- 1,046
Noncurrent Intercompany Payable -- -- --
Deferred Income Taxes -- -- 2,597
--------- -------- ---------
-- -- 321,201
Minority Interest -- -- 353
Mandatorily Redeemable Preferred Stock 89,443 -- 89,443
Shareholders' Equity (121,152) 31,709 (121,152)
--------- -------- ---------
$ (31,709) $ 31,709 $ 289,845
========= ======== =========
</TABLE>
F-11
<PAGE>
MMH HOLDINGS, INC.
NOTES TO FINANCIAL STATEMENTS - (Continued)
SUPPLEMENTAL CONDENSED COMBINING BALANCE SHEET
October 31, 1997
(Dollars in Thousands)
<TABLE>
<CAPTION>
Non-
Guarantor Guarantor
Subsidiaries Subsidiaries Eliminations Combined
------------ ------------ ------------ ----------
<S> <C> <C> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $ 1,393 $ 139 $ -- $ 1,532
Accounts receivable - net 73,220 8,989 -- 82,209
Intercompany accounts receivable 5,250 1,539 (6,789) --
Inventories 30,855 2,642 -- 33,497
Other current assets 4,486 279 -- 4,765
-------- -------- --------- --------
115,204 13,588 (6,789) 122,003
-------- -------- --------- --------
Property, Plant and Equipment - net 36,192 3,175 -- 39,367
-------- -------- --------- --------
Other Assets
Goodwill 30,368 1,861 -- 32,229
Noncurrent intercompany receivables 3,136 -- (3,136) --
Investment in affiliates 1,174 -- (1,174) --
Other 6,001 -- -- 6,001
-------- -------- --------- --------
40,679 1,861 (4,310) 38,230
-------- -------- --------- --------
$192,075 $ 18,624 $ (11,099) $199,600
======== ======== ========= ========
LIABILITIES AND SHAREHOLDER'S INVESTMENT
Current Liabilities
Short-term notes payable and
current portion of long-term obligations $ 692 $ 60 $ -- $ 752
Bank overdrafts 2,076 2,217 -- 4,293
Trade accounts payable 27,824 4,832 -- 32,656
Intercompany accounts payable 1,539 5,250 (6,789) --
Advance payments and progress billings 7,626 59 -- 7,685
Accrued warranties 3,913 85 -- 3,998
Other current liabilities 20,644 732 -- 21,376
-------- -------- --------- --------
64,314 13,235 (6,789) 70,760
-------- -------- --------- --------
Long-Term Obligations 355 688 -- 1,043
Noncurrent intercompany payables -- 3,136 (3,136) --
Deferred Income Taxes 3,088 -- -- 3,088
Minority Interest -- -- 391 391
Shareholder's Investment 124,318 1,565 (1,565) 124,318
-------- -------- --------- --------
$192,075 $ 18,624 $ (11,099) $199,600
======== ======== ========= ========
</TABLE>
F-12
<PAGE>
MMH HOLDINGS, INC.
NOTES TO FINANCIAL STATEMENTS - (Continued)
SUPPLEMENTAL CONDENSED COMBINING/CONSOLIDATING STATEMENTS OF INCOME
(UNAUDITED)
(Dollars in Thousands)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED APRIL 30, 1998
--------------------------------------------------------------------------------
Combined/
Non- Morris Consolidated
Guarantor Guarantor Material Morris Material
Subsidiaries Subsidiaries Handling, Inc. Eliminations Handling, Inc.
--------------- ------------ -------------- ------------ ---------------
<S> <C> <C> <C> <C> <C>
Revenues
Net Sales $ 149,211 $ 11,314 $ -- $ (3,276) $ 157,249
Other Income - net 726 -- -- -- 726
--------- -------- ------- --------- ---------
149,937 11,314 -- (3,276) 157,975
Cost of Sales 109,576 8,872 -- (3,276) 115,172
Product Development, Selling
and Administrative expenses 27,107 2,324 83 -- 29,514
HII management fee 1,155 -- -- -- 1,155
Non-recurring employee benefit costs 690 -- 1,216 -- 1,906
--------- -------- ------- --------- ---------
Operating Income 11,409 118 (1,299) -- 10,228
Interest Income (Expense) - Net
Affiliates (2,075) (87) 714 -- (1,448)
Third party (198) (282) (2,223) -- (2,703)
--------- -------- ------- --------- ---------
Income (Loss) Before Income Taxes,
Equity in Earnings (Loss) of
Subsidiaries and Minority Interest 9,136 (251) (2,808) -- 6,077
Provision for Income Taxes (2,446) -- -- -- (2,446)
Equity in Earnings (Loss) of Subsidiaries (213) -- 6,477 (6,264) --
Minority Interest -- -- -- 38 38
--------- -------- ------- --------- ---------
Net Income (Loss) $ 6,477 $ (251) $ 3,669 $ (6,226) $ 3,669
========= ======== ======= ========= =========
<CAPTION>
FOR THE SIX MONTHS ENDED APRIL 30, 1998
----------------------------------------------
Combined/
Consolidated
MMH MMH
Holdings, Inc. Eliminations Holdings, Inc.
--------------- ------------ --------------
<S> <C> <C> <C>
Revenues
Net Sales $ -- $ -- $ 157,249
Other Income - net -- -- 726
------ --------- ---------
-- -- 157,975
Cost of Sales -- -- 115,172
Product Development, Selling
and Administrative expenses -- -- 29,514
HII management fee -- -- 1,155
Non-recurring employee benefit costs -- -- 1,906
------ --------- ---------
Operating Income -- -- 10,228
Interest Income (Expense) - Net
Affiliates -- -- (1,448)
Third party -- -- (2,703)
------ --------- ---------
Income (Loss) Before Income Taxes,
Equity in Earnings (Loss) of
Subsidiaries and Minority Interest -- -- 6,077
Provision for Income Taxes -- -- (2,446)
Equity in Earnings (Loss) of Subsidiaries 3,669 (3,669) --
Minority Interest -- -- 38
------ --------- ---------
Net Income (Loss) $3,669 $ (3,669) $ 3,669
====== ========= =========
</TABLE>
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED APRIL 30, 1998
--------------------------------------------------------------------------------
Combined/
Non- Morris Consolidated
Guarantor Guarantor Material Morris Material
Subsidiaries Subsidiaries Handling, Inc. Eliminations Handling, Inc.
--------------- ------------ -------------- ------------ ---------------
<S> <C> <C> <C> <C> <C>
Revenues
Net Sales $ 76,075 $ 6,104 $ -- $ (1,413) $ 80,766
Other Income - net 442 -- -- -- 442
--------- -------- ------- --------- ---------
76,517 6,104 -- (1,413) 81,208
Cost of Sales 55,014 4,918 -- (1,413) 58,519
Product Development, Selling
and Administrative Expenses 13,950 1,121 83 -- 15,154
HII management fee 478 -- -- -- 478
Non-recurring employee benefit costs 570 -- 1,216 -- 1,786
--------- -------- ------- --------- ---------
Operating Income 6,505 65 (1,299) -- 5,271
Interest Income (Expense) - Net
Affiliates (1,433) (42) 714 -- (761)
Third party (186) (136) (2,223) -- (2,545)
--------- -------- ------- --------- ---------
Income (Loss) Before Income Taxes,
Equity in Earnings (Loss) of
Subsidiaries and Minority Interest 4,886 (113) (2,808) -- 1,965
Provision for Income Taxes (470) 11 -- -- (459)
Equity in Earnings (Loss) of Subsidiaries (78) -- 4,338 (4,260) --
Minority Interest -- -- -- 24 24
--------- -------- ------- --------- ---------
Net Income (Loss) $ 4,338 $ (102) $ 1,530 $ (4,236) $ 1,530
========= ======== ======= ========= =========
<CAPTION>
FOR THE THREE MONTHS ENDED APRIL 30, 1998
----------------------------------------------
Combined/
Consolidated
MMH MMH
Holdings, Inc. Eliminations Holdings, Inc.
--------------- ------------ --------------
<S> <C> <C> <C>
Revenues
Net Sales $ -- $ -- $ 80,766
Other Income - net -- -- 442
--------- ---------
-- -- 81,208
Cost of Sales -- -- 58,519
Product Development, Selling
and Administrative Expenses -- -- 15,154
HII management fee -- -- 478
Non-recurring employee benefit costs -- -- 1,786
------ --------- ---------
Operating Income -- -- 5,271
Interest Income (Expense) - Net
Affiliates -- -- (761)
Third party -- -- (2,545)
------ --------- ---------
Income (Loss) Before Income Taxes,
Equity in Earnings (Loss) of
Subsidiaries and Minority Interest -- -- 1,965
Provision for Income Taxes -- -- (459)
Equity in Earnings (Loss) of Subsidiaries 1,530 (1,530) --
Minority Interest -- -- 24
------ --------- ---------
Net Income (Loss) $1,530 $ (1,530) $ 1,530
====== ========= =========
</TABLE>
F-13
<PAGE>
MMH HOLDINGS, INC.
NOTES TO FINANCIAL STATEMENTS - (Continued)
SUPPLEMENTAL CONDENSED COMBINING STATEMENTS OF INCOME
(UNAUDITED)
(Dollars in Thousands)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED APRIL 30, 1997
-----------------------------------------------------------
Non-
Guarantor Guarantor
Subsidiaries Subsidiaries Eliminations Combined
------------ ------------ ------------ ----------
<S> <C> <C> <C> <C>
Revenues
Net Sales $ 167,335 $ 11,060 $ (1,341) $ 177,054
Other Income - Net 1,501 -- -- 1,501
--------- -------- --------- ---------
168,836 11,060 (1,341) 178,555
Cost of Sales 126,189 8,784 (1,341) 133,632
Product Development, Selling
and Administrative Expenses 25,207 2,065 -- 27,272
HII management fee 1,434 -- -- 1,434
--------- -------- --------- ---------
Operating Income 16,006 211 -- 16,217
Interest (Expense) Income - Net
Affiliates 32 (101) -- (69)
Third party 8 (167) -- (159)
--------- -------- --------- ---------
Income Before Income Taxes, Equity in Loss of
Combined Affiliates and Minority Interest 16,046 (57) -- 15,989
Provision for Income Taxes (6,301) (83) -- (6,384)
Equity in Loss of Combined Affiliates (143) -- 143 --
Minority Interest -- -- (3) (3)
--------- -------- --------- ---------
Net Income (Loss) $ 9,602 $ (140) $ 140 $ 9,602
========= ======== ========= =========
</TABLE>
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED APRIL 30, 1997
-----------------------------------------------------------
Non-
Guarantor Guarantor
Subsidiaries Subsidiaries Eliminations Combined
------------ ------------ ------------ ----------
<S> <C> <C> <C> <C>
Revenues
Net Sales $ 91,791 $ 5,761 $ (480) $ 97,072
Other Income - Net 247 -- -- 247
--------- -------- --------- ---------
92,038 5,761 (480) 97,319
Cost of Sales 68,587 4,733 (480) 72,840
Product Development, Selling
and Administrative Expenses 13,020 1,004 -- 14,024
HII management fee 786 -- -- 786
--------- -------- --------- ---------
Operating Income 9,645 24 -- 9,669
Interest Expense - Net
Affiliates (208) (51) -- (259)
Third party (20) (91) -- (111)
--------- -------- --------- ---------
Income Before Income Taxes, Equity in Loss of
Combined Affiliates and Minority Interest 9,417 (118) -- 9,299
Provision for Income Taxes (3,646) (67) -- (3,713)
Equity in Loss of Combined Affiliates (180) -- 180 --
Minority Interest -- -- 5 5
--------- -------- --------- ---------
Net Income (Loss) $ 5,591 $ (185) $ 185 $ 5,591
========= ======== ========= =========
</TABLE>
F-14
<PAGE>
MMH HOLDINGS, INC.
NOTES TO FINANCIAL STATEMENTS - (Continued)
SUPPLEMENTAL CONDENSED COMBINING/CONSOLIDATING STATEMENTS OF CASH FLOW
FOR THE SIX MONTHS ENDED APRIL 30, 1998
(UNAUDITED)
(Dollars in Thousands)
<TABLE>
<CAPTION>
Combined/
Non- Morris Consolidated
Guarantor Guarantor Material Morris Material
Subsidiaries Subsidiaries Handling, Inc. Eliminations Handling, Inc.
------------- ------------ -------------- ------------ ---------------
<S> <C> <C> <C> <C> <C>
Operating Activities
Net income (loss) $ 6,477 $ (251) $ 3,669 $(6,226) $ 3,669
Add/(deduct)-items not affecting cash
provided by operating activities:
Depreciation and amortization 3,101 226 81 -- 3,408
Equity in (earnings) loss
of subsidiaries 213 -- (6,477) 6,264 --
Minority interest -- -- -- (38) (38)
Deferred income taxes - net 57 -- -- -- 57
Divestiture bonus -- -- 1,216 -- 1,216
Changes in working capital, excluding the
effects of acquisition opening
balance sheets:
Accounts receivable 2,121 1,525 -- -- 3,646
Inventories (3,507) 1,539 -- -- (1,968)
Other current assets (14) (1,182) (707) -- (1,903)
Trade accounts payable and
bank overdrafts (8,012) (3,567) -- -- (11,579)
Other current liabilities (3,669) 1,752 2,142 -- 225
Activity with parent and
other affiliates - net 1,479 448 (714) -- 1,213
------- ------- --------- ------- ---------
Net cash provided by (used for)
operating activities (1,754) 490 (790) -- (2,054)
------- ------- --------- ------- ---------
Investment and Other Transactions
Fixed asset additions - net (2,238) (208) -- -- (2,446)
Acquisition of business
- net of cash received (319) -- -- -- (319)
Issuance of loans to senior management -- -- (900) -- (900)
Other - net 72 -- -- -- 72
------- ------- --------- ------- ---------
Net cash used for investment and other
transactions (2,485) (208) (900) -- (3,593)
------- ------- --------- ------- ---------
Financing Activities
Change in short-term notes payable 3,065 -- -- -- 3,065
Proceeds from Senior Note Offering -- -- 200,000 -- 200,000
Proceeds from New Credit Facility -- -- 55,000 -- 55,000
Redemption of shares held by Holdings -- -- (232,845) -- (232,845)
Redemption of common stock and
preferred stock -- -- -- -- --
Net proceeds from issuance of Series A
preferred stock and related common shares -- -- -- -- --
Stock redemption transaction costs -- -- -- -- --
Debt financing costs -- -- (18,179) -- (18,179)
Capital contributions 2,286 -- (2,286) -- --
Proceeds from issuance of debt (23) 23 -- -- --
------- ------- --------- ------- ---------
Net cash provided by financing activities 5,328 23 1,690 -- 7,041
------- ------- --------- ------- ---------
Effect of Exchange Rate Changes on Cash
and cash equivalents (78) (23) -- -- (101)
------- ------- --------- ------- ---------
Increase in Cash and Cash Equivalents 1,011 282 -- -- 1,293
Cash and Cash Equivalents
Beginning of Period 1,393 139 -- -- 1,532
------- ------- --------- ------- ---------
End of Period $ 2,404 $ 421 $ -- $ -- $ 2,825
======= ======= ========= ======= =========
<CAPTION>
Combined/
Consolidated
MMH MMH
Holdings, Inc. Eliminations Holdings, Inc.
-------------- ------------- ----------------
<S> <C> <C> <C>
Operating Activities
Net income (loss) $ 3,669 $(3,669) $ 3,669
Add/(deduct)-items not affecting cash
provided by operating activities:
Depreciation and amortization -- -- 3,408
Equity in (earnings) loss
of subsidiaries (3,669) 3,669
Minority interest -- -- (38)
Deferred income taxes - net -- -- 57
Divestiture bonus -- -- 1,216
Changes in working capital, excluding the
effects of acquisition opening
balance sheets:
Accounts receivable -- -- 3,646
Inventories -- -- (1,968)
Other current assets -- -- (1,903)
Trade accounts payable and
bank overdrafts -- -- (11,579)
Other current liabilities -- -- 225
Activity with parent and
other affiliates - net -- -- 1,213
--------- ------- ---------
Net cash provided by (used for)
operating activities -- -- (2,054)
--------- ------- ---------
Investment and Other Transactions
Fixed asset additions - net -- -- (2,446)
Acquisition of business
- net of cash received -- -- (319)
Issuance of loans to senior management (900)
Other - net -- -- 72
--------- ------- ---------
Net cash used for investment and other
transactions -- -- (3,593)
--------- ------- ---------
Financing Activities
Change in short-term notes payable -- -- 3,065
Proceeds from Senior Note Offering -- -- 200,000
Proceeds from New Credit Facility -- -- 55,000
Redemption of shares held by Holdings 232,845 -- --
Redemption of common stock and
preferred stock (287,000) -- (287,000)
Net proceeds from issuance of Series A
preferred stock and related common shares 57,094 -- 57,094
Stock redemption transaction costs (2,939) -- (2,939)
Debt financing costs -- -- (18,179)
Capital contributions -- -- --
Proceeds from issuance of debt -- -- --
--------- ------- ---------
Net cash provided by financing activities -- -- 7,041
--------- ------- ---------
Effect of Exchange Rate Changes on Cash
and cash equivalents -- -- (101)
--------- ------- ---------
Increase in Cash and Cash Equivalents -- -- 1,293
Cash and Cash Equivalents
Beginning of Period -- -- 1,532
--------- ------- ---------
End of Period $ -- $ -- $ 2,825
========= ======= =========
</TABLE>
F-15
<PAGE>
MMH HOLDINGS, INC.
NOTES TO FINANCIAL STATEMENTS - (Concluded)
SUPPLEMENTAL CONDENSED COMBINING STATEMENTS OF CASH FLOW
FOR THE SIX MONTHS ENDED APRIL 30, 1997
(UNAUDITED)
(Dollars in Thousands)
<TABLE>
<CAPTION>
Non-
Guarantor Guarantor
Subsidiaries Subsidiaries Eliminations Combined
------------ ------------ ------------ ----------
<S> <C> <C> <C> <C>
Operating Activities
Net income (Loss) $ 9,602 $(140) $ 140 $ 9,602
Add/(deduct)-items not affecting cash provided by
operating activities:
Depreciation and amortization 2,917 168 -- 3,085
Equity in loss of combined affiliates 143 -- (143) --
Minority interest -- -- 3 3
Deferred income taxes - net (171) -- -- (171)
Gain on fire insurance claim (1,100) -- -- (1,100)
Other (400) -- -- (400)
Changes in working capital, excluding the
effects of acquisition opening
balance sheets:
Accounts receivable 5,412 897 -- 6,309
Inventories (1,896) (64) -- (1,960)
Other current assets 509 (322) -- 187
Trade accounts payable and bank overdrafts 110 316 -- 426
Other current liabilities (14,254) (268) -- (14,522)
Activity with parent and other affiliates - net 11,409 (345) -- 11,064
-------- ----- ----- --------
Net cash provided by operating activities 12,281 242 -- 12,523
-------- ----- ----- --------
Investment and Other Transactions
Fixed asset additions - net (2,261) (225) -- (2,486)
Acquisition of businesses - net of cash acquired (11,787) -- -- (11,787)
Fire insurance claim activity - net 1,100 -- -- 1,100
Other - net (349) 35 -- (314)
-------- ----- ----- --------
Net cash used for investment and other transactions (13,297) (190) -- (13,487)
-------- ----- ----- --------
Financing Activities
Repayments of notes payable (667) -- -- (667)
Repayments of debt (18) (28) -- (46)
-------- ----- ----- --------
Net cash used for financing activities (685) (28) -- (713)
-------- ----- ----- --------
Effect of Exchange Rate Changes on Cash and Cash Equivalents 4 (2) -- 2
-------- ----- ----- --------
(Decrease)/Increase in Cash and Cash Equivalents (1,697) 22 -- (1,675)
Cash and Cash Equivalents
Beginning of period 3,582 239 -- 3,821
-------- ----- ----- --------
End of period $ 1,885 $ 261 $ -- $ 2,146
======== ===== ===== ========
</TABLE>
F-16
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
Harnischfeger Industries, Inc.
In our opinion, the accompanying combined balance sheets and the related
combined statements of income and of cash flows present fairly, in all material
respects, the financial position of the Material Handling Equipment Business
(the "Company") of Harnischfeger Industries, Inc. at October 31, 1997 and 1996,
and the results of its operations and its cash flows for each of the three years
in the period ended October 31, 1997, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Milwaukee, Wisconsin
December 30, 1997, except as to Note 13 which is as of March 30, 1998
F-17
<PAGE>
MATERIAL HANDLING EQUIPMENT BUSINESS
OF HARNISCHFEGER INDUSTRIES, INC.
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
October 31,
----------------------
1997 1996
---------- ---------
(dollars in thousands)
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents ........................................... $ 1,532 $ 3,821
Accounts receivable--net ............................................ 82,209 75,261
Inventories ......................................................... 33,497 37,239
Other current assets ................................................ 4,765 8,044
-------- --------
Total current assets .......................................... 122,003 124,365
-------- --------
Property, Plant and Equipment
Land and improvements ............................................... 3,466 2,490
Buildings ........................................................... 21,379 17,473
Machinery and equipment ............................................. 35,918 28,564
-------- --------
60,763 48,527
Less accumulated depreciation ....................................... (21,396) (18,340)
-------- --------
39,367 30,187
-------- --------
Other Assets
Goodwill ............................................................ 32,229 28,410
Other ............................................................... 6,001 6,096
-------- --------
38,230 34,506
-------- --------
Total assets .................................................. $199,600 $189,058
======== ========
LIABILITIES AND SHAREHOLDER'S INVESTMENT
Current Liabilities
Short-term notes payable and current portion of long-term obligations $ 752 $ 863
Bank overdrafts ..................................................... 4,293 --
Trade accounts payable .............................................. 32,656 36,921
Employee compensation and benefits .................................. 8,113 9,265
Advance payments and progress billings .............................. 7,685 22,586
Accrued warranties .................................................. 3,998 3,787
Income taxes payable ................................................ 2,393 1,703
Other current liabilities ........................................... 10,870 14,717
-------- --------
Total current liabilities ..................................... 70,760 89,842
-------- --------
Long-Term Obligations ..................................................... 1,043 1,181
Deferred Income Taxes ..................................................... 3,088 3,440
Minority Interest ......................................................... 391 394
Shareholder's Investment .................................................. 124,318 94,201
-------- --------
Total liabilities and shareholder's investment ................ $199,600 $189,058
======== ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-18
<PAGE>
MATERIAL HANDLING EQUIPMENT BUSINESS
OF HARNISCHFEGER INDUSTRIES, INC.
COMBINED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended October 31,
-----------------------------------
1997 1996 1995
--------- --------- ---------
(dollars in thousands)
<S> <C> <C> <C>
Revenues
Net sales ........................................ $ 353,350 $ 323,735 $ 243,169
Other income--net ................................ 2,649 1,149 3,766
--------- --------- ---------
355,999 324,884 246,935
Cost of Sales .......................................... 260,794 247,559 186,404
Product Development, Selling and Administrative Expenses 56,806 44,968 36,931
Parent Management Fee .................................. 2,862 2,341 1,878
--------- --------- ---------
Operating income ................................. 35,537 30,016 21,722
Interest (Expense)/Income--Net
Affiliates ....................................... (394) 163 379
Third party ...................................... (398) (245) (200)
--------- --------- ---------
Income Before Income Taxes and Minority Interest ....... 34,745 29,934 21,901
Provision for Income Taxes ............................. (13,874) (11,488) (8,425)
Minority Interest ...................................... (18) -- --
--------- --------- ---------
Net income ....................................... $ 20,853 $ 18,446 $ 13,476
========= ========= =========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-19
<PAGE>
MATERIAL HANDLING EQUIPMENT BUSINESS
OF HARNISCHFEGER INDUSTRIES, INC.
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended October 31,
--------------------------------
1997 1996 1995
-------- -------- --------
(dollars in thousands)
<S> <C> <C> <C>
Operating Activities
Net income ............................................................. $ 20,853 $ 18,446 $ 13,476
Add/(deduct)--items not affecting cash provided by operating
activities:
Depreciation and amortization .................................... 6,736 5,292 3,800
Minority interest ................................................ (18) -- --
Deferred income taxes--net ....................................... 89 1,347 1,083
Gain on fire insurance claim ..................................... (2,011) -- (2,343)
Other ............................................................ (800) (750) (750)
Changes in working capital, excluding the effects of acquisition opening
balance sheets:
Accounts receivable .............................................. (3,656) (7,217) (19,363)
Inventories ...................................................... 6,044 (8,651) 1,962
Other current assets ............................................. 2,077 (530) (1,939)
Trade accounts payable and bank overdrafts ....................... (2,852) 130 9,100
Employee compensation and benefits ............................... (1,293) 1,399 2,487
Advance payments and progress billings ........................... (16,056) 3,460 2,760
Accrued warranties ............................................... 178 (305) 592
Other current liabilities ........................................ (5,116) 4,047 (236)
Activity with parent and other affiliates--net ................... 8,724 6,788 (6,876)
-------- -------- --------
Net cash provided by operating activities .................................... 12,899 23,456 3,753
-------- -------- --------
Investment and Other Transactions
Fixed asset additions--net ............................................. (6,498) (6,752) (3,725)
Acquisition of businesses, net of cash acquired ........................ (11,787) (15,272) (3,862)
Fire insurance claim activity--net ..................................... 3,441 1,613 (700)
Proceeds from sale of facility ......................................... -- -- 5,288
Other--net ............................................................. (103) (747) 503
-------- -------- --------
Net cash used for investment and other transactions .......................... (14,947) (21,158) (2,496)
-------- -------- --------
Financing Activities
Repayments of notes payable ............................................ (99) -- --
Repayments of debt ..................................................... (155) -- --
-------- -------- --------
Net cash applied to financing activities ..................................... (254) -- --
-------- -------- --------
Effect of Exchange Rate Changes on Cash and Cash Equivalents ................. 13 39 (201)
-------- -------- --------
(Decrease)/Increase in Cash and Cash Equivalents ............................. (2,289) 2,337 1,056
Cash and Cash Equivalents
Beginning of year ...................................................... 3,821 1,484 428
-------- -------- --------
End of year ............................................................ $ 1,532 $ 3,821 $ 1,484
======== ======== ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-20
<PAGE>
MATERIAL HANDLING EQUIPMENT BUSINESS
OF HARNISCHFEGER INDUSTRIES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
(dollars in thousands unless indicated)
Note 1--Significant Accounting Policies
Description of Business--The Material Handling Equipment Business (the
"Company") of Harnischfeger Industries, Inc. designs, manufactures, services and
markets overhead cranes, electric wire rope and chain hoists, engineered
products, and container cranes and crane modernizations for use worldwide in a
variety of industries and applications. In September, 1997, Harnischfeger
Industries, Inc., the Company's parent, announced that it was exploring the
possible sale of the Company.
Basis of Presentation--The combined financial statements of the Company
include the Material Handling Equipment business in the United States and its
affiliates in the United Kingdom, South Africa, Singapore, Canada and Mexico.
All significant intercompany balances and transactions have been eliminated.
Payables/receivables with the Company's parent or its affiliates are recorded as
a component of shareholder's investment.
Use of Estimates--The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements, and the reported amounts of
revenues and expenses during the reporting period. Ultimate realization of
assets and settlement of liabilities in the future could differ from those
estimates.
Inventories--Inventories are stated at the lower of cost or market value.
Cost is determined by the last-in, first-out (LIFO) method for certain domestic
inventories and by the first-in, first-out (FIFO) method for certain domestic
inventories and inventories of foreign subsidiaries.
Revenue Recognition--The majority of the Company's sales of products or
services are recorded as products are shipped or services are rendered. Revenue
on certain long-term contracts is recorded using the percentage-of-completion
method. Losses, if any, are recognized in full as soon as identified.
Property, Plant and Equipment--Property, plant and equipment is stated at
historical cost. Expenditures for major renewals and improvements are
capitalized, while maintenance and repairs which do not significantly improve
the related asset or extend its useful life are charged to expense as incurred.
For financial reporting purposes, plant and equipment is depreciated primarily
by the straight-line method over the estimated useful lives of the assets.
Depreciation claimed for income tax purposes is computed by accelerated methods.
Cash Equivalents--The Company considers all highly liquid debt instruments
with an initial maturity of three months or less at the date of purchase to be
cash equivalents.
Foreign Exchange Contracts--Any gain or loss on forward contracts
designated as hedges of commitments is deferred and included in the measurement
of the related foreign currency transaction. Foreign exchange contract activity
in 1995 through 1997 was not significant.
Foreign Currency Translation--The assets and liabilities of the Company's
international operations are translated at year-end exchange rates; income and
expenses are translated at average exchange rates prevailing during the year.
For operations whose functional currency is the local currency,
translation adjustments are accumulated within shareholder's investment.
Transaction gains and losses are reflected in income. Pre-tax foreign exchange
gains/(losses) included in operating income were $110, $(167) and $(390) in
1997, 1996 and 1995, respectively.
F-21
<PAGE>
MATERIAL HANDLING EQUIPMENT BUSINESS
OF HARNISCHFEGER INDUSTRIES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands unless indicated)
Goodwill and Intangible Assets--Goodwill represents the excess of the
purchase price over the fair value of identifiable net assets of acquired
companies and is amortized on a straight-line basis over periods ranging from 30
to 40 years. The Company assesses the carrying value of goodwill at each balance
sheet date. Consistent with Statement of Financial Accounting Standards ("SFAS")
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of ", such assessments include, as appropriate, a
comparison of (a) the estimated future nondiscounted cash flows anticipated to
be generated during the remaining amortization period of the goodwill to (b) the
net carrying value of goodwill. The Company recognizes diminution in value of
goodwill, if any, on a current basis. Accumulated amortization was $2,268 and
$1,199 at October 31, 1997 and 1996, respectively.
Income Taxes--The Company's domestic income tax provision reflects an
intercompany tax allocation arrangement with its parent such that the domestic
income taxes payable is recorded as if the Company filed separate income tax
returns. The Company records its domestic income taxes payable as an
intercompany payable within shareholder's investment. The Company's foreign
income tax provision and related income taxes payable are recorded based upon
the income tax returns as filed by its foreign affiliates in their respective
jurisdictions.
Domestic and foreign deferred income taxes are recognized for the tax
consequences of temporary differences by applying enacted statutory tax rates
applicable to future years to differences between the financial statement
carrying amounts and the tax bases of existing assets and liabilities, and for
tax basis carryforwards. A valuation allowance is provided for deferred tax
assets where it is considered more likely than not that the Company will not
realize the benefit of such assets.
Fair Value of Financial Instruments--Cash and cash equivalents, accounts
receivable and accounts payable recorded in the balance sheets approximate fair
value based on the short maturity of these instruments. Amounts recorded for
long-term debt are estimated to approximate fair value based on market
conditions and interest rates available to the Company for similar financial
instruments.
Research and Development Expenses--Research and development costs are
expensed as incurred. Such costs incurred in the development of new products or
significant improvements to existing products amounted to $1,369, $319 and $493
in 1997, 1996 and 1995, respectively.
Other Income--Net--Other income--net consists of the following for the
years ended October 31:
1997 1996 1995
------ ------ ------
Gain on fire insurance claim............... $2,011 $ -- $2,343
Licensee income............................ 524 830 679
Other...................................... 114 319 744
------ ------ ------
$2,649 $1,149 $3,766
====== ====== ======
During 1995, one of the Company's facilities in the United Kingdom
experienced a fire which resulted in an insurance claim for property loss and
business interruption. A gain on the property loss portion of the claim amounted
to $2,343 and was recorded in 1995. The remaining $2,011 gain was recorded in
1997 upon finalization of the property loss and business interruption claims.
F-22
<PAGE>
MATERIAL HANDLING EQUIPMENT BUSINESS
OF HARNISCHFEGER INDUSTRIES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands unless indicated)
Note 2--Acquisitions
During 1997, 1996 and 1995, the Company completed several
acquisitions for an aggregate purchase price of $11,787, $15,272 and $3,862,
respectively, net of cash acquired. These acquisitions were primarily related to
the Company's aftermarket business and were accounted for as purchase
transactions with the purchase prices allocated to the fair value of specific
assets acquired and liabilities assumed. Resultant goodwill is being amortized
over 30 to 40 years. With respect to a 1995 acquisition, the Company was
required to make contingent consideration payments of $632 and $691 related to
1996 and 1997, respectively; a final contingent consideration payment related to
1998 may be required.
Note 3--Accounts Receivable
Accounts receivable at October 31 consisted of the following:
1997 1996
------- -------
Trade receivables.............................. $77,356 $67,818
Unbilled receivables........................... 6,183 8,851
Allowance for doubtful accounts................ (1,330) (1,408)
------- -------
$82,209 $75,261
======= =======
The amount of accounts receivable due beyond one year is not significant.
Note 4--Inventories
Inventories at October 31 consisted of the following:
1997 1996
------- -------
Raw material.......................................... $17,391 $22,858
Work-in-process....................................... 13,654 13,213
Finished parts........................................ 10,704 11,087
41,749 47,158
Less excess of current cost over stated LIFO value.... (8,252) (9,919)
------- -------
$33,497 $37,239
======= =======
Inventories valued using the LIFO method represented approximately 43% and
56% of combined inventories at October 31, 1997 and 1996, respectively. During
1997 and 1995, inventory quantities were reduced, resulting in a liquidation of
LIFO inventory quantities carried at lower costs prevailing in prior years as
compared with the cost of 1997 and 1995 purchases. The effect of this
liquidation decreased cost of sales by $1,998 and $698 in 1997 and 1995,
respectively.
Note 5--Income Taxes
The components of income for the Company's domestic and foreign operations
for the years ended October 31 were as follows:
1997 1996 1995
------- ------- -------
Domestic................................. $28,097 $23,381 $16,017
Foreign.................................. 6,648 6,553 5,884
------- ------- -------
$34,745 $29,934 $21,901
======= ======= =======
F-23
<PAGE>
MATERIAL HANDLING EQUIPMENT BUSINESS
OF HARNISCHFEGER INDUSTRIES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands unless indicated)
The provision for income taxes included in the Combined Statements of
Income for years ended October 31 consisted of the following:
1997 1996 1995
-------- -------- --------
Current provision
Federal and state ........ $ 11,028 $ 9,094 $ 6,799
Foreign .................. 2,757 1,047 543
-------- -------- --------
Total current .................. 13,785 10,141 7,342
-------- -------- --------
Deferred provision
Federal and state ........ (137) (91) (611)
Foreign .................. 226 1,438 1,694
-------- -------- --------
Total deferred ................. 89 1,347 1,083
-------- -------- --------
Provision for income taxes ..... $ 13,874 $ 11,488 $ 8,425
======== ======== ========
The difference between the U.S. federal statutory tax rate and the
effective tax rate for the years ended October 31 are as follows:
1997 1996 1995
-------- -------- --------
Federal statutory rate ......... 35.0% 35.0% 35.0%
State taxes, net of federal benefit 3.0 3.0 3.0
Goodwill amortization .......... 2.6 3.0 2.3
Other .......................... (.7) (2.6) (1.8)
-------- -------- --------
39.9% 38.4% 38.5%
======== ======== ========
Foreign income taxes paid were $322, $1,252 and $724 in 1997, 1996 and
1995, respectively.
U.S. income taxes have not been provided on the undistributed profits of
foreign subsidiaries where such profits are expected to be permanently
reinvested. Such unremitted earnings of affiliates which are intended to be
permanently reinvested were $14,100 at October 31, 1997.
Temporary differences and carryforwards which gave rise to the net
deferred tax asset (liability) at October 31 are as follows:
1997 1996
------- -------
Reserves not currently deductible ........ $ 2,766 $ 3,280
Depreciation and amortization ............ (1,897) (2,479)
Prepaid pension asset .................... (1,191) (961)
Other--net ............................... (54) (127)
------- -------
$ (376) $ (287)
======= =======
At October 31, 1997, the Company's Mexican affiliate has a net operating
loss carryforward approximating $2,550 which expires in 2004 and 2005. A
valuation allowance has been recorded against this carryforward for which
utilization is uncertain.
F-24
<PAGE>
MATERIAL HANDLING EQUIPMENT BUSINESS
OF HARNISCHFEGER INDUSTRIES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands unless indicated)
This net deferred tax asset (liability) is included in the Combined
Balance Sheets at October 31 in the following captions:
1997 1996
------- -------
Other current assets ..................... $ 2,712 $ 3,153
Deferred income taxes .................... (3,088) (3,440)
------- -------
$ (376) $ (287)
======= =======
Note 6--Long-Term Obligations and Bank Credit Facilities
Long-term obligations at October 31 consisted of the following:
1997 1996
------ ------
Bank debt, at 7.5% due in installments through 2009 ........ $ 748 $ 876
Industrial Revenue Bonds, at 5.25% due in installments
through 2007 ............................................ 380 405
------ ------
1,128 1,281
Less: amounts payable within one year ...................... 85 100
------ ------
$1,043 $1,181
====== ======
Installments payable related to the Company's long-term obligations are as
follows:
1998 ..................................................................... $85
1999 ..................................................................... 70
2000 ..................................................................... 73
2001 ..................................................................... 82
2002 ..................................................................... 85
At October 31, 1997, short-term bank credit lines of foreign subsidiaries
were approximately $2,828. The outstanding borrowings were $667 with a weighted
average interest rate of 5.25%. There were no compensating balance requirements
under these lines of credit.
Note 7--Employee Benefit Plans
Pensions and Other Employee Benefits
The Company is a participant in its parent's domestic defined benefit
pension plans. Benefits from these plans are based on factors which include
various combinations of service, employee compensation during the last years of
employment and the recipient's social security benefit. Pension expense is
allocated annually by its parent based upon headcount. The Company's pension
expense for these domestic defined benefit plans was $1,275, $1,169 and $1,066
in 1997, 1996 and 1995, respectively.
The Company is also a participant in its parent's qualified profit sharing
plan which covers substantially all domestic employees, except employees covered
by collective bargaining agreements and employees of affiliates with separate
defined contribution plans. Contributions to this plan are based on the
Company's "economic value added" performance. The Company's profit sharing
expense for this plan and other defined contribution plans was $1,584, $1,226
and $1,516 in 1997, 1996 and 1995, respectively.
F-25
<PAGE>
MATERIAL HANDLING EQUIPMENT BUSINESS
OF HARNISCHFEGER INDUSTRIES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands unless indicated)
Pension expense, as determined by the Company's actuaries, for its
employee benefit plan in the United Kingdom for years ended October 31 included
the components shown below. Pension expense for the Company's other foreign
employee benefit plans is not significant.
1997 1996 1995
------- ------- -------
Service cost--benefits earned during the year . $ 782 $ 627 $ 888
Interest cost on projected benefit obligation . 1,359 1,102 1,080
Actual gain on plan assets .................... (2,988) (1,241) (1,552)
Net amortization and deferral ................. 1,186 (259) 223
------- ------- -------
$ 339 $ 229 $ 639
======= ======= =======
The discount rate used for this foreign plan was 7.5% in 1997 and 9.0% in
1996 and 1995. The assumed rate of increase in future compensation of employees
was 4.5% in 1997 and 6% in 1996 and 1995. The expected long-term rate of return
on assets was 10.25% in 1997 and 10.0% in 1996 and 1995.
The following table sets forth this foreign plan's funded status at
October 31:
1997 1996
------- -------
Actuarial present value of:
Vested benefits ................................ $19,268 $13,481
------- -------
Accumulated benefits ........................... 19,268 13,481
------- -------
Projected benefits ............................. 20,665 16,101
Net assets available for benefits .................... 21,101 17,168
------- -------
Plan assets greater than projected benefits .......... 436 1,067
Unrecognized net loss ................................ 3,332 2,225
------- -------
Prepaid pension asset ................................ $ 3,768 $ 3,292
======= =======
Postretirement Benefits Other Than Pensions
The Company's parent generally provides certain health care and life
insurance benefits under various plans for U.S. employees who retire after
attaining early retirement eligibility, subject to plan amendments. In 1993, the
Board of Directors of its parent approved a general approach that would
culminate in the elimination of contributions towards postretirement health care
benefits. Increases in costs were capped for certain plans beginning in 1994
extending through 1998 and contributions will be eliminated on January 1, 1999
for most employee groups. As such, negative plan amendments made subsequent to
November 1, 1993 are being amortized from the date of the amendment to January
1, 1999. Postretirement benefit expense (income) is allocated annually by its
parent based upon headcount. The Company's postretirement benefit (income) was
$(1,658), $(1,126) and $(1,253) in 1997, 1996 and 1995, respectively.
F-26
<PAGE>
MATERIAL HANDLING EQUIPMENT BUSINESS
OF HARNISCHFEGER INDUSTRIES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands unless indicated)
Note 8--Shareholder's Investment
The changes within shareholder's investment for the each of the three
years in the period ended October 31, 1997 are as follows:
Balance at October 31, 1994 .................................... $ 63,155
Net income ............................................... 13,476
Cumulative translation adjustments ....................... (1,229)
Activity with parent and other affiliates--net ........... (6,876)
---------
Balance at October 31, 1995 .................................... 68,526
Net income ............................................... 18,446
Cumulative translation adjustments ....................... 441
Activity with parent and other affiliates--net ........... 6,788
---------
Balance at October 31, 1996 .................................... 94,201
Net income ............................................... 20,853
Cumulative translation adjustments ....................... 540
Activity with parent and other affiliates--net ........... 8,724
---------
Balance at October 31, 1997 .................................... $ 124,318
=========
Note 9--Operating Leases
The Company leases certain plant, office and warehouse space as well as
machinery, vehicles, data processing and other equipment. Certain of these
leases have renewal options at reduced rates and provisions requiring the
Company to pay maintenance, property taxes and insurance. Generally, all rental
payments are fixed.
Total rental expense under operating leases, excluding maintenance, taxes
and insurance, was $4,369, $3,328 and $2,359 in 1997, 1996 and 1995,
respectively.
At October 31, 1997, the future payments for all operating leases with
remaining lease terms in excess of one year, and excluding maintenance, taxes
and insurance, were as follows:
1998 .................................................. $4,054
1999 .................................................. 2,684
2000 .................................................. 1,632
2001 .................................................. 877
2002 .................................................. 523
Note 10--Commitments and Contingencies
At October 31, 1997, the Company and/or its parent were contingently
liable to financial institutions and others for approximately $54,500 for
outstanding letters of credit and surety bonds securing performance of sales
contracts related to the Company's operations.
The Company is party to various litigation matters, including product
liability and other claims, which are normal in the course of its operations.
Also, as a normal part of its operations, the Company undertakes certain
contractual obligations and warranties in connection with the sale of products
or services. Although the outcome of these matters cannot be predicted with
certainty, management believes that the resolution of such matters will not have
a material adverse effect on the Company's combined results of operations,
financial position or cash flows.
F-27
<PAGE>
MATERIAL HANDLING EQUIPMENT BUSINESS
OF HARNISCHFEGER INDUSTRIES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands unless indicated)
The Company is also involved in proceedings and potential proceedings
relating to environmental matters. Although it is difficult to estimate the
potential exposure to the Company related to these environmental matters,
management believes that these matters will not have a material adverse effect
on the Company's combined results of operations, financial position or cash
flows.
Note 11--Geographical Information
<TABLE>
<CAPTION>
Total Sales to
Net Interarea Unaffiliated Operating Identifiable
Sales Sales Customers Income Assets
-------- --------- -------- ------- --------
<S> <C> <C> <C> <C> <C>
1997
United States...................................... $205,815 $ -- $205,815 $26,585 $101,159
Europe............................................. 99,593 (4,667) 94,926 6,662 62,159
Other Foreign...................................... 52,609 -- 52,609 2,290 36,282
Interarea Eliminations............................. (4,667) 4,667 -- -- --
-------- --------- -------- ------- --------
$353,350 $ -- $353,350 $35,537 $199,600
======== ========= ======== ======= ========
1996
United States...................................... $206,896 $ -- $206,896 $21,978 $ 96,803
Europe............................................. 79,280 (3,619) 75,661 5,247 59,766
Other Foreign...................................... 41,178 -- 41,178 2,791 32,489
Interarea Eliminations............................. (3,619) 3,619 -- -- --
-------- --------- -------- ------- --------
$323,735 $ -- $323,735 $30,016 $189,058
======== ========= ======== ======= ========
1995
United States...................................... $147,492 $ -- $147,492 $15,493 $ 80,219
Europe............................................. 87,437 -- 87,437 6,285 55,682
Other Foreign...................................... 8,240 -- 8,240 (56) 15,267
-------- --------- -------- ------- --------
$243,169 $ -- $243,169 $21,722 $151,168
======== ========= ======== ======= ========
</TABLE>
Note 12--Transactions With Parent and Affiliated Companies
The Company and its parent have entered into a management arrangement
whereby the Company is provided with certain services, including, but not
limited to, matters of organization and administration, cash management, labor
relations, employee benefits, public relations, financial policies and
practices, taxation and legal affairs. The annual fee charged the Company for
these services reflects its pro rata share of corporate administration costs
using an allocation methodology based on consolidated worldwide sales. Company
management and its parent believe that the fees charged above are reasonable in
light of the level of services provided and such fees totaled $2,862, $2,341 and
$1,878 in 1997, 1996 and 1995, respectively.
Interest income/(expense) on receivables/(payables) with affiliates is
charged by/(to) the Company using interest rates tied to LIBOR, the 13-week
treasury bill rate or prime rate.
F-28
<PAGE>
MATERIAL HANDLING EQUIPMENT BUSINESS
OF HARNISCHFEGER INDUSTRIES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands unless indicated)
In addition, the Company has the following arrangements with its parent or
other affiliates for shared facilities and services:
1. The Company and an affiliate share a parts warehouse for which
the Company was charged approximately $1,400, $1,272 and $1,215 in 1997,
1996 and 1995, respectively.
2. An affiliate provides support to the Company for accounting,
credit, traffic and human resource services and charged approximately
$756, $784 and $776 to the Company in 1997, 1996 and 1995, respectively.
In addition, the Company leases office space from this affiliate at a cost
of approximately $120 per year for 1997, 1996 and 1995.
3. An affiliate manufactures electric motors and performs
fabrication and machining on certain cranes for the Company at cost.
Company purchases of approximately $10 million per year were made under
this arrangement during fiscal 1995 through 1997.
4. An affiliate provides information systems services to the Company
and charged approximately $1,861, $1,022 and $1,070 to the Company in
1997, 1996 and 1995, respectively.
Note 13--Supplemental Condensed Combining Financial Information
The sale by Harnischfeger Industries, Inc. of a majority interest in the
Company to MHE Investments, Inc. was completed on March 30, 1998. The
transaction was accounted for as a recapitalization of MMH Holdings, Inc.
("Holdings"), the owner, directly of indirectly, of all of the equity interests
of the entities engaged in the Material Handling Equipment Business that were
previously owned by Harnsichfeger Industries, Inc. In connection with the
transaction, Morris Material Handling, Inc. ("MMH"), a direct wholly-owned
subsidiary of Holdings, issued debt securities that are guaranteed by certain of
the Company's affiliates (the "Guarantor Subsidiaries"). Each of the Guarantor
Subsidiaries is a wholly-owned subsidiary, directly or indirectly, of MMH and
the guarantees are full, unconditional and joint and several. Both Holdings and
MMH are holding companies, with no material operating assets. All of the
Company's business operations are conducted through subsidiaries of MMH.
Separate financial statements of the Guarantor Subsidiaries are not
presented because Company management has determined that they would not be
material to investors. The following supplemental financial information sets
forth, on an uncombined basis, balance sheet, statement of operations and cash
flow information for the Guarantor Subsidiaries and for the Company's other
affiliates (the "Non-Guarantor Subsidiaries"). The supplemental financial
information reflects the investments of the Guarantor Subsidiaries in the
Non-Guarantor Subsidiaries using the equity method of accounting. For purposes
of this presentation, it is assumed that all of the assets of the Company were
historically owned by subsidiaries of MMH, which is an entity that was formed by
Holdings in connection with the transaction. Accordingly, the historical
combined financial statements of MMH and Holdings are identical following
completion of the recapitalization.
F-29
<PAGE>
MATERIAL HANDLING EQUIPMENT BUSINESS
OF HARNISCHFEGER INDUSTRIES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands unless indicated)
SUPPLEMENTAL CONDENSED COMBINING BALANCE SHEET
October 31, 1997
<TABLE>
<CAPTION>
Non-
Guarantor Guarantor
Subsidiaries Subsidiaries Eliminations Combined
------------ ------------ ------------ --------
<S> <C> <C> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $ 1,393 $ 139 $ $ 1,532
Accounts receivable - net 73,220 8,989 82,209
Intercompany accounts receivable 5,250 1,539 (6,789) --
Inventories 30,855 2,642 33,497
Other current assets 4,486 279 4,765
--------- --------- --------- ---------
115,204 13,588 (6,789) 122,003
--------- --------- --------- ---------
Property, Plant and Equipment - net 36,192 3,175 -- 39,367
--------- --------- --------- ---------
Other Assets
Goodwill 30,368 1,861 32,229
Noncurrent intercompany receivables 3,136 -- (3,136) --
Investment in affiliates 1,174 -- (1,174) --
Other 6,001 -- 6,001
--------- --------- --------- ---------
40,679 1,861 (4,310) 38,230
--------- --------- --------- ---------
$ 192,075 $ 18,624 $ (11,099) $ 199,600
========= ========= ========= =========
LIABILITIES AND SHAREHOLDER'S INVESTMENT
Current Liabilities
Short-term notes payable and
current portion of long-term obligations $ 692 $ 60 $ $ 752
Bank overdrafts 2,076 2,217 4,293
Trade accounts payable 27,824 4,832 32,656
Intercompany accounts payable 1,539 5,250 (6,789) --
Employee compensation and benefits 8,053 60 8,113
Advance payments and progress
billings 7,626 59 7,685
Accrued warranties 3,913 85 3,998
Income taxes payable 1,935 458 2,393
Other current liabilities 10,656 214 10,870
--------- --------- --------- ---------
64,314 13,235 (6,789) 70,760
--------- --------- --------- ---------
Long-Term Obligations 355 688 1,043
Noncurrent intercompany payables -- 3,136 (3,136) --
Deferred Income Taxes 3,088 -- 3,088
Minority Interest -- -- 391 391
Shareholder's Investment 124,318 1,565 (1,565) 124,318
--------- --------- --------- ---------
$ 192,075 $ 18,624 $ (11,099) $ 199,600
========= ========= ========= =========
</TABLE>
F-30
<PAGE>
MATERIAL HANDLING EQUIPMENT BUSINESS
OF HARNISCHFEGER INDUSTRIES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands unless indicated)
SUPPLEMENTAL CONDENSED COMBINING BALANCE SHEET
October 31, 1996
<TABLE>
<CAPTION>
Non-
Guarantor Guarantor
Subsidiaries Subsidiaries Eliminations Combined
------------ ------------ ------------ --------
<S> <C> <C> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $ 3,582 $ 239 $ $ 3,821
Accounts receivable - net 67,331 7,930 75,261
Intercompany accounts receivable 1,030 (1,030) --
Inventories 34,396 2,843 37,239
Other current assets 7,781 263 8,044
--------- --------- --------- ---------
114,120 11,275 (1,030) 124,365
--------- --------- --------- ---------
Property, Plant and Equipment - net 26,832 3,355 -- 30,187
--------- --------- --------- ---------
Other Assets
Goodwill 26,433 1,977 28,410
Noncurrent intercompany receivables 2,840 -- (2,840) --
Investment in affiliates 3,078 -- (3,078) --
Other 6,096 -- 6,096
--------- --------- --------- ---------
38,447 1,977 (5,918) 34,506
--------- --------- --------- ---------
$ 179,399 $ 16,607 $ (6,948) $ 189,058
========= ========= ========= =========
LIABILITIES AND SHAREHOLDER'S INVESTMENT
Current Liabilities
Short-term notes payable and
current portion of long-term obligations $ 788 $ 75 $ $ 863
Trade accounts payable 29,738 7,183 36,921
Intercompany accounts payable 1,030 (1,030) --
Employee compensation and benefits 9,218 47 9,265
Advance payments and progress
billings 22,385 201 22,586
Accrued warranties 3,671 116 3,787
Income taxes payable 1,204 499 1,703
Other current liabilities 14,374 343 14,717
--------- --------- --------- ---------
81,378 9,494 (1,030) 89,842
--------- --------- --------- ---------
Long-Term Obligations 380 801 1,181
Noncurrent intercompany payables 2,840 (2,840) --
Deferred Income Taxes 3,440 -- 3,440
Minority Interest -- -- 394 394
Shareholder's Investment 94,201 3,472 (3,472) 94,201
--------- --------- --------- ---------
$ 179,399 $ 16,607 $ (6,948) $ 189,058
========= ========= ========= =========
</TABLE>
F-31
<PAGE>
MATERIAL HANDLING EQUIPMENT BUSINESS
OF HARNISCHFEGER INDUSTRIES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands unless indicated)
SUPPLEMENTAL CONDENSED COMBINING STATEMENT OF INCOME
Year Ended October 31, 1997
<TABLE>
<CAPTION>
Non-
Guarantor Guarantor
Subsidiaries Subsidiaries Eliminations Combined
------------ ------------ ------------ --------
<S> <C> <C> <C> <C>
Revenues
Net Sales $ 332,244 $ 24,065 $ (2,959) $ 353,350
Other Income - Net 2,563 86 2,649
--------- --------- --------- ---------
334,807 24,151 (2,959) 355,999
Cost of Sales 243,776 19,977 (2,959) 260,794
Product Development, Selling
and Administrative Expenses 51,954 4,852 56,806
Parent Management Fee 2,862 -- 2,862
--------- --------- --------- ---------
Operating Income 36,215 (678) -- 35,537
Interest (Expense) Income - Net
Affiliates (198) (196) (394)
Third Party 8 (406) (398)
--------- --------- --------- ---------
Income Before Income Taxes, Equity in Loss of
Combined Affiliates and Minority Interest 36,025 (1,280) -- 34,745
Provision for Income Taxes (13,838) (36) (13,874)
Equity in Loss of Combined Affiliates (1,334) -- 1,334 --
Minority Interest -- -- (18) (18)
--------- --------- --------- ---------
Net Income $ 20,853 $ (1,316) $ 1,316 $ 20,853
========= ========= ========= =========
</TABLE>
F-32
<PAGE>
MATERIAL HANDLING EQUIPMENT BUSINESS
OF HARNISCHFEGER INDUSTRIES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands unless indicated)
SUPPLEMENTAL CONDENSED COMBINING STATEMENT OF INCOME
Year Ended October 31, 1996
<TABLE>
<CAPTION>
Non-
Guarantor Guarantor
Subsidiaries Subsidiaries Eliminations Combined
------------ ------------ ------------ --------
<S> <C> <C> <C> <C>
Revenues
Net Sales $ 303,449 $ 23,755 $ (3,469) $ 323,735
Other Income - Net 1,149 -- 1,149
--------- --------- --------- ---------
304,598 23,755 (3,469) 324,884
Cost of Sales 232,952 18,076 (3,469) 247,559
Product Development, Selling
and Administrative Expenses 40,727 4,241 44,968
Parent Management Fee 2,341 -- 2,341
--------- --------- --------- ---------
Operating Income 28,578 1,438 -- 30,016
Interest (Expense) Income - Net
Affiliates 369 (206) 163
Third Party (25) (220) (245)
--------- --------- --------- ---------
Income Before Income Taxes, Equity in Income of
Combined Affiliates and Minority Interest 28,922 1,012 -- 29,934
Provision for Income Taxes (11,150) (338) (11,488)
Equity in Income of Combined Affiliates 674 -- (674) --
--------- --------- --------- ---------
Net Income $ 18,446 $ 674 $ (674) $ 18,446
========= ========= ========= =========
</TABLE>
F-33
<PAGE>
MATERIAL HANDLING EQUIPMENT BUSINESS
OF HARNISCHFEGER INDUSTRIES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands unless indicated)
SUPPLEMENTAL CONDENSED COMBINING STATEMENT OF INCOME
Year Ended October 31, 1995
<TABLE>
<CAPTION>
Non-
Guarantor Guarantor
Subsidiaries Subsidiaries Eliminations Combined
------------ ------------ ------------ --------
<S> <C> <C> <C> <C>
Revenues
Net Sales $ 227,038 $ 17,291 $ (1,160) $ 243,169
Other Income - Net 3,766 -- 3,766
--------- --------- --------- ---------
230,804 17,291 (1,160) 246,935
Cost of Sales 174,558 13,006 (1,160) 186,404
Product Development, Selling
and Administrative Expenses 33,776 3,155 36,931
Parent Management Fee 1,878 -- 1,878
--------- --------- --------- ---------
Operating Income 20,592 1,130 -- 21,722
Interest (Expense) Income - Net
Affiliates 600 (221) 379
Third Party (191) (9) (200)
--------- --------- --------- ---------
Income Before Income Taxes, Equity in Income of
Combined Affiliates and Minority Interest 21,001 900 -- 21,901
Provision for Income Taxes (8,095) (330) (8,425)
Equity in Income of Combined Affiliates 570 -- (570) --
--------- --------- --------- ---------
Net Income $ 13,476 $ 570 $ (570) $ 13,476
========= ========= ========= =========
</TABLE>
F-34
<PAGE>
MATERIAL HANDLING EQUIPMENT BUSINESS
OF HARNISCHFEGER INDUSTRIES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands unless indicated)
SUPPLEMENTAL CONDENSED COMBINING STATEMENT OF CASH FLOWS
Year Ended October 31, 1997
<TABLE>
<CAPTION>
Non-
Guarantor Guarantor
Subsidiaries Subsidiaries Eliminations Combined
------------ ------------ ------------ --------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Operating Activities
Net income $ 20,853 $ (1,316) $ 1,316 $ 20,853
Add/(deduct)-items not affecting cash provided by
operating activities:
Depreciation and amortization 6,400 336 6,736
Equity in loss of combined affiliates 1,334 (1,334) --
Minority interest -- (18) (18)
Deferred income taxes - net 89 89
Gain on fire insurance claim (2,011) (2,011)
Other (800) (800)
Changes in working capital, excluding the effects of
acquisition opening balance sheets:
Accounts receivable (2,318) (1,338) (3,656)
Inventories 5,984 60 6,044
Other current assets 2,113 (36) 2,077
Trade accounts payable and bank overdrafts (3,026) 174 (2,852)
Other current liabilities (22,071) (252) 36 (22,287)
Activity with parent and other affiliates - net 5,976 2,748 8,724
-------- -------- -------- --------
Net cash provided by operating activities 12,523 376 -- 12,899
-------- -------- -------- --------
Investment and Other Transactions
Fixed asset additions - net (6,117) (381) (6,498)
Acquisition of businesses, net of cash acquired (11,787) (11,787)
Fire insurance claim activity - net 3,441 3,441
Other - net (70) (33) (103)
-------- -------- -------- --------
Net cash used for investment and other transactions (14,533) (414) -- (14,947)
-------- -------- -------- --------
Financing Activities
Repayments of notes payable (99) (99)
Repayments of debt (101) (54) (155)
-------- -------- -------- --------
Net cash applied to financing activities (200) (54) -- (254)
-------- -------- -------- --------
Effect of Exchange Rate Changes on Cash and Cash Equivalents 21 (8) 13
-------- -------- -------- --------
Decrease in Cash and Cash Equivalents (2,189) (100) -- (2,289)
Cash and Cash Equivalents
Beginning of year 3,582 239 3,821
-------- -------- -------- --------
End of year $ 1,393 $ 139 $ -- $ 1,532
======== ======== ======== ========
</TABLE>
F-35
<PAGE>
MATERIAL HANDLING EQUIPMENT BUSINESS
OF HARNISCHFEGER INDUSTRIES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands unless indicated)
SUPPLEMENTAL CONDENSED COMBINING STATEMENT OF CASH FLOWS
Year Ended October 31, 1996
<TABLE>
<CAPTION>
Non-
Guarantor Guarantor
Subsidiaries Subsidiaries Eliminations Combined
------------ ------------ ------------ --------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Operating Activities
Net income $ 18,446 $ 674 $ (674) $ 18,446
Add/(deduct)-items not affecting cash provided by
operating activities:
Depreciation and amortization 4,944 348 5,292
Equity in income of combined affiliates (674) 674 --
Deferred income taxes - net 1,347 1,347
Other (750) (750)
Changes in working capital, excluding the effects of
acquisition opening balance sheets:
Accounts receivable (4,252) (2,965) (7,217)
Inventories (7,281) (1,370) (8,651)
Other current assets (410) (120) (530)
Trade accounts payable and bank overdrafts (2,825) 2,955 130
Other current liabilities 8,482 119 8,601
Activity with parent and other affiliates - net 6,230 558 6,788
-------- -------- -------- --------
Net cash provided by operating activities 23,257 199 -- 23,456
-------- -------- -------- --------
Investment and Other Transactions
Fixed asset additions - net (6,373) (379) (6,752)
Acquisition of businesses, net of cash acquired (15,272) (15,272)
Fire insurance claim activity - net 1,613 1,613
Other - net (629) (118) (747)
-------- -------- -------- --------
Net cash used for investment and other transactions (20,661) (497) -- (21,158)
-------- -------- -------- --------
Effect of Exchange Rate Changes on Cash and Cash Equivalents 168 (129) 39
-------- -------- -------- --------
Increase/(Decrease) in Cash and Cash Equivalents 2,764 (427) -- 2,337
Cash and Cash Equivalents
Beginning of year 818 666 1,484
-------- -------- -------- --------
End of year $ 3,582 $ 239 $ -- $ 3,821
======== ======== ======== ========
</TABLE>
F-36
<PAGE>
MATERIAL HANDLING EQUIPMENT BUSINESS
OF HARNISCHFEGER INDUSTRIES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(Concluded)
(dollars in thousands unless indicated)
SUPPLEMENTAL CONDENSED COMBINING STATEMENT OF CASH FLOWS
Year Ended October 31, 1995
<TABLE>
<CAPTION>
Non-
Guarantor Guarantor
Subsidiaries Subsidiaries Eliminations Combined
------------ ------------ ------------ --------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Operating Activities
Net income $ 13,476 $ 570 $ (570) $ 13,476
Add/(deduct)-items not affecting cash provided by
operating activities:
Depreciation and amortization 3,643 157 3,800
Equity in income of combined affiliates (570) 570 --
Deferred income taxes - net 1,083 1,083
Gain on fire insurance claim (2,343) (2,343)
Other (750) (750)
Changes in working capital, excluding the effects of
acquisition opening balance sheets:
Accounts receivable (17,767) (1,596) (19,363)
Inventories 2,386 (424) 1,962
Other current assets (1,904) (35) (1,939)
Trade accounts payable and bank overdrafts 7,680 1,420 9,100
Other current liabilities 5,147 456 5,603
Activity with parent and other affiliates - net (6,733) (143) (6,876)
-------- -------- -------- --------
Net cash provided by operating activities 3,348 405 -- 3,753
-------- -------- -------- --------
Investment and Other Transactions
Fixed asset additions - net (3,625) (100) (3,725)
Acquisition of businesses, net of cash acquired (3,862) (3,862)
Fire insurance claim activity - net (700) (700)
Proceeds from sale of facility 5,288 5,288
Other - net 551 (48) 503
-------- -------- -------- --------
Net cash used for investment and other transactions (2,348) (148) -- (2,496)
-------- -------- -------- --------
Effect of Exchange Rate Changes on Cash and Cash Equivalents (182) (19) (201)
-------- -------- -------- --------
Increase in Cash and Cash Equivalents 818 238 -- 1,056
Cash and Cash Equivalents
Beginning of year -- 428 428
-------- -------- -------- --------
End of year $ 818 $ 666 $ -- $ 1,484
======== ======== ======== ========
</TABLE>
F-37
<PAGE>
PART II INFORMATION NOT REQUIRED IN PROSPECTUS
Section 20. Indemnification of Directors and Officers
Pursuant to Section 102(b)(7) of the Delaware General Corporation Law (the
"DGCL"), Article Seventh of Holdings' Second Amended and Restated Certificate of
Incorporation, as amended (the "Certificate of Incorporation") (incorporated by
reference as Exhibit 3.1 to this Registration Statement), eliminates the
liability of Holdings' directors to Holdings or its stockholders, except for
liabilities related to breach of duty of loyalty, actions not in good faith and
certain other liabilities.
Section 145 of the DGCL provides, in substance, that Delaware corporations
shall have the power, under specified circumstances, to indemnify their
directors, officers, employees and agents in connection with actions, suits or
proceedings brought against them by a third party or in the right of the
corporation, by reason of the fact that they were or are such directors,
officers, employees or agents, against expenses incurred in any such action,
suit or proceeding. The DGCL also provides that Delaware corporations may
purchase insurance on behalf of any such director, officer, employee or agent.
Article Eighth of the Certificate of Incorporation provides that Holdings
shall indemnify any current or former director or officer to the fullest extent
permitted by the DGCL. Article V of Holdings' Bylaws provides that Holdings
shall indemnify to the fullest extent permitted by DGCL its current and former
directors and officers and persons serving as directors and officers of any
corporation at the request of Holdings. Holdings also maintains officers' and
directors' liability insurance which insures against liabilities that officers
and directors of Holdings may incur in such capacities.
Reference is made to the Exchange Offer Registration Rights Agreement
filed as Exhibit 4.1 to this Registration Statement which provides for
indemnification for the officers and directors of Holdings signing a
Registration Statement and certain control persons of Holdings against certain
liabilities, including those arising under the Securities Act in certain
circumstances by selling holders.
II-1
<PAGE>
Item 21. Exhibits and Financial Statement Schedules
Exhibit Number Exhibit
- -------------- -------
1.1 Securities Purchase Agreement, dated March 23, 1998, between MMH
Holdings, Inc. and CIBC Oppenheimer Corp.
2.1 Recapitalization Agreement, dated January 28, 1998, among
Harnischfeger Corporation, the sellers named therein and MHE
Investments, Inc., as amended.
3.1 Second Amended and Restated Certificate of Incorporation of MMH
Holdings, Inc.
3.2 Bylaws of MMH Holdings, Inc.
3.3 Certificate of Designations of the Powers, Preferences and Relative,
Participating, Optional and Other Special Rights of 12% Series A
Senior Exchangeable Preferred Stock, and Qualifications, Limitations
and Restrictions Thereof.
3.4 Certificate of Designations of the Powers, Preferences and Relative,
Participating, Optional and Other Special Rights of 12 1/4% Series B
Junior Exchangeable Preferred Stock, and Qualifications, Limitations
and Restrictions Thereof.
3.5 Certificate of Designations of the Powers, Preferences and Relative,
Participating, Optional and Other Special Rights of 12 1/2% Series C
Junior Preferred Stock, and Qualifications, Limitations and
Restrictions Thereof.
4.1 Preferred Stock Registration Rights Agreement, dated as of March 30,
1998, by and among MMH Holdings, Inc. and CIBC Oppenheimer Corp.
4.2 Common Stock Registration Rights and Stockholders Agreement, dated
as of March 30, 1998, among MMH Holdings, Inc., Chartwell, L.P. and
CIBC Oppenheimer Corp.
4.3 Credit Agreement, dated March 30, 1998, among MMH Holdings, Inc.,
Morris Material Handling, Inc., Material Handling, LLC, Morris
Material Handling, Ltd., Mondel ULC, Kaverit Steel and Crane ULC and
Canadian Imperial Bank of Commerce, as Administrative Agent, Credit
Agricole Indosuez, as Syndication Agent, BankBoston, N.A., as
Documentation Agent, and the Lending Institutions listed therein.
4.4 Guarantee, dated as of March 30, 1998, by MMH Holdings, Inc., in
favor and for the benefit of Canadian Imperial Bank of Commerce.
4.5 Guarantee, dated as of March 30, 1998, by each of the subsidiary
Guarantors named therein, in favor and for the benefit of Canadian
Imperial Bank of Commerce.
4.6 Stockholders and Registration Rights Agreement, dated as of March
30, 1998, by and among MMH Holdings, Inc., MHE Investments, Inc. and
Harnischfeger Corporation.
4.7 Form of Indenture dated as of ______, among MMH Holdings, Inc., as
the Issuer, and ________, as the Trustee for $________ 12% Exchange
Debentures due 2009.
4.8 Form of 12% Exchange Debenture due 2009.
5.1 Legal Opinion of Akin, Gump, Strauss, Hauer & Feld, L.L.P.
concerning the legality of the Preferred Stock (to be filed by
amendment).
II-2
<PAGE>
Exhibit Number Exhibit
- -------------- -------
8.1 Legal Opinion of Akin, Gump, Strauss, Hauer & Feld, L.L.P.
concerning certain tax matters (to be filed by amendment).
10.1 Surety Arrangement, dated March 30, 1998, among Reliance Insurance
Companies, MMH Holdings, Inc., Morris Material Handling, Inc. and
certain of their subsidiaries.
10.2 Credit Indemnification Agreement between Harnischfeger Industries,
Inc. and Morris Material Handling, Inc., dated as of March 30, 1998.
10.3 Tax Sharing Agreement between MHE Investments, Inc., MMH Holdings,
Inc. and certain of MMH Holdings, Inc.'s subsidiaries, dated March
30, 1998.
10.4 Component and Manufactured Products Supply Agreement between HarnCo
and Morris Material Handling, Inc., dated as of March 30, 1998.
10.5 Transition Services Agreement between HarnCo and Morris Material
Handling, Inc., dated as of March 30, 1998.
10.6 Trademark License Agreement between Harnischfeger Technologies, Inc.
and Morris Material Handling, Inc., dated as of March 30, 1998.
10.7 Management Consulting Agreement between Morris Material Handling,
Inc. and Chartwell Investments Inc., dated March 30, 1998.
10.8 Financial Advisory Agreement between Morris Material Handling, Inc.
and Chartwell Investments Inc., dated March 30, 1998.
10.9 Separation Agreement, dated October 26, 1997, between Harnischfeger
Corporation and Material Handling, LLC.
10.10 Share and Asset Purchase Agreement between PHMH Holding Company,
James Gann, Sr., James Gann, Jr. and Gail Gann, dated February 14,
1997.
10.11 Employment Agreement, dated March 30, 1998, between Morris Material
Handling, Inc. and Michael S. Erwin.
10.12 Employment Agreement, dated March 30, 1998, between Morris Material
Handling, Inc. and David D. Smith.
10.13 Employment Agreement, dated March 30, 1998, between Morris Material
Handling, Inc. and Martin L. Ditkof.
10.14 Employment Agreement, dated March 30, 1998, between Morris Material
Handling, Inc. and Richard J. Niespodziani.
10.15 Employment Agreement, dated March 30, 1998, between Morris Material
Handling, Inc. and Peter A. Kerrick.
II-3
<PAGE>
Exhibit Number Exhibit
- -------------- -------
10.16 Employment Agreement, dated March 30, 1998, between Morris Material
Handling, Inc. and Edward J. Doolan.
10.17 Service Agreement, dated March 30, 1998, between Morris Mechanical
Handling Limited and M J Maddock.
10.18 Service Agreement, dated March 30, 1998, between Morris Mechanical
Handling Limited and K B Norridge.
12. Statement of Computation of Financial Ratios.
21. Subsidiaries of MMH Holdings, Inc.
23.1 Consent of Independent Accountants.
23.2 Consent of Akin, Gump, Strauss, Hauer & Feld, L.L.P. (included in
Exhibit 5.1).
25. Statement of Eligibility of Trustee.
27. Financial Data Schedule.
99.1 Letter of Transmittal (to be filed by amendment).
99.2 Notice of Guaranteed Delivery (to be filed by amendment).
II-4
<PAGE>
MATERIAL HANDLING EQUIPMENT BUSINESS
OF HARNISCHFEGER INDUSTRIES, INC.
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
(Thousands of Dollars)
<TABLE>
<CAPTION>
Balance at Additions Currency Balance
Beginning Charged Translation at End
Classification of Year to Expense Deductions(1) Effects of Year
- ----------------------------------- ---------- ---------- ------------- ----------- -------
<S> <C> <C> <C> <C> <C>
Allowance Deducted in Balance Sheet
from Accounts Receivable:
For the year ended October 31, 1997
Doubtful accounts $1,408 $ 439 $ (537) $ 20 $1,330
====== ====== ====== ====== ======
For the year ended October 31, 1996
Doubtful accounts $1,520 $ 354 $ (515) $ 49 $1,408
====== ====== ====== ====== ======
For the year ended October 31, 1995
Doubtful accounts $1,077 $ 706 $ (238) $ (25) $1,520
====== ====== ====== ====== ======
</TABLE>
(1) Represents write-off of bad debts, net of recoveries.
II-5
<PAGE>
Item 22. Undertakings
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the DGCL, the Certificate of Incorporation and Bylaws, or
otherwise, the Registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in such Securities Act, and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than payment by
the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in such
Securities Act and will be governed by the final adjudication of such issue.
The undersigned Registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the Prospectus pursuant to
Items 4, 10(b), 11 or 13 of this Form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the Registration Statement through the
date of responding to the request.
The undersigned Registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the Registration Statement when it became effective.
The undersigned Registrant hereby undertakes to file, during any period in
which offers or sales are being made, a post-effective amendment to the
Registration Statement: (i) to include any prospectus required by Section
10(a)(3) of the Securities Act; (ii) to reflect in the prospectus any facts or
events arising after the effective date of the Registration Statement (or the
most recent post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth in the
Registration Statement. Notwithstanding the foregoing, any increase or decrease
in volume of securities offered (if the total dollar value of securities offered
would not exceed that which was registered) and any deviation from the low or
high end of the estimated maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b) under the
Securities Act if, in the aggregate, the changes in volume and price represent
no more than 20% change in the maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table in the effective registration statement;
and (iii) to include any material information with respect to the plan of
distribution not previously disclosed in the Registration Statement or any
material change to such information in the Registration Statement.
The undersigned Registrant hereby undertakes that, for the purpose of
determining any liability under the Securities Act, each such post-effective
amendment shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
The undersigned Registrant hereby undertakes to remove from registration
by means of a post-effective amendment any of the securities being registered
which remain unsold at the termination of this Offering.
II-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant
has duly caused this Amendment No. 1 to the Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of New
York, State of New York, on the 26th day of June, 1998.
MMH HOLDINGS, INC.
By: /s/ TODD R. BERMAN
--------------------------------
Todd R. Berman
Chairman
Pursuant to the requirements of the Securities Act of 1933, this
Amendment No. 1 to the Registration Statement has been signed by the following
persons in the capacities and on the dates indicated:
Signature Title Date
--------- ----- ----
/s/ TODD R. BERMAN Chairman of the Board of Directors June 26, 1998
- ------------------------
Todd R. Berman
/s/ MICHAEL S. ERWIN* President, Chief Executive Officer June 26, 1998
- ------------------------ and Director (Principal Executive
Michael S. Erwin Officer)
/s/ DAVID D. SMITH* Vice President and Director June 26, 1998
- ------------------------ (Principal Financial and Accounting
David D. Smith Officer)
/s/ MICHAEL S. SHEIN Vice President and Director June 26, 1998
- ------------------------
Michael S. Shein
/s/ JAY R. BLOOM* Director June 26, 1998
- ------------------------
Jay R. Bloom
/s/ ROBERT W. HALE* Director June 26, 1998
- ------------------------
Robert W. Hale
/s/ MICHAEL R. YOUNG* Director June 26, 1998
- ------------------------
Michael R. Young
/s/ LARRY ZINE* Director June 26, 1998
- ------------------------
Larry Zine
/s/ MICHAEL S. SHEIN
- ------------------------
* By Michael S. Shein, by power of attorney
II-7
<PAGE>
INDEX TO EXHIBITS
Exhibit Number Exhibit
- -------------- -------
1.1 Securities Purchase Agreement, dated March 23, 1998, between MMH
Holdings, Inc. and CIBC Oppenheimer Corp.
2.1 Recapitalization Agreement, dated January 28, 1998, among
Harnischfeger Corporation, the sellers named therein and MHE
Investments, Inc., as amended.
3.1 Second Amended and Restated Certificate of Incorporation of MMH
Holdings, Inc.
3.2 Bylaws of MMH Holdings, Inc.
3.3 Certificate of Designations of the Powers, Preferences and Relative,
Participating, Optional and Other Special Rights of 12% Series A
Senior Exchangeable Preferred Stock, and Qualifications, Limitations
and Restrictions Thereof.
4.1 Preferred Stock Registration Rights Agreement, dated as of March 30,
1998, by and among MMH Holdings, Inc. and CIBC Oppenheimer Corp.
4.2 Common Stock Registration Rights and Stockholders Agreement, dated
as of March 30, 1998, among MMH Holdings, Inc., Chartwell, L.P. and
CIBC Oppenheimer Corp.
4.3 Certificate of Designations of the Powers, Preferences and Relative,
Participating, Optional and Other Special Rights of 12 1/4% Series B
Junior Exchangeable Preferred Stock, and Qualifications, Limitations
and Restrictions Thereof.
4.4 Certificate of Designations of the Powers, Preferences and Relative,
Participating, Optional and Other Special Rights of 12 1/2% Series C
Junior Preferred Stock, and Qualifications, Limitations and
Restrictions Thereof.
4.5 Credit Agreement, dated March 30, 1998, among MMH Holdings, Inc.,
Morris Material Handling, Inc., Material Handling, LLC, Morris
Material Handling, Ltd., Mondel ULC, Kaverit Steel and Crane ULC and
Canadian Imperial Bank of Commerce, as Administrative Agent, Credit
Agricole Indosuez, as Syndication Agent, BankBoston, N.A., as
Documentation Agent, and the Lending Institutions listed therein.
4.6 Guarantee, dated as of March 30, 1998, by MMH Holdings, Inc., in
favor and for the benefit of Canadian Imperial Bank of Commerce.
4.7 Guarantee, dated as of March 30, 1998, by each of the subsidiary
Guarantors named therein, in favor and for the benefit of Canadian
Imperial Bank of Commerce.
4.8 Stockholders and Registration Rights Agreement, dated as of March
30, 1998, by and among MMH Holdings, Inc., MHE Investments, Inc. and
Harnischfeger Corporation.
4.9 Form of Indenture dated as of ______, among MMH Holdings, Inc., as
the Issuer, and ________, as the Trustee for $________ 12% Exchange
Debentures due 2009.
4.10 Form of 12% Exchange Debenture due 2009.
5.1 Legal Opinion of Akin, Gump, Strauss, Hauer & Feld, L.L.P.
concerning the legality of the Preferred Stock (to be filed by
amendment).
<PAGE>
Exhibit Number Exhibit
- -------------- -------
8.1 Legal Opinion of Akin, Gump, Strauss, Hauer & Feld, L.L.P.
concerning certain tax matters (to be filed by amendment).
10.1 Surety Arrangement, dated March 30, 1998, among Reliance Insurance
Companies, MMH Holdings, Morris Material Handling, Inc. and certain
of their subsidiaries.
10.2 Credit Indemnification Agreement between Harnischfeger Industries,
Inc. and Morris Material Handling, Inc., dated as of March 30, 1998.
10.3 Tax Sharing Agreement between MHE Investments, Inc., MMH Holdings,
Inc. and certain of MMH Holdings, Inc.'s subsidiaries, dated March
30, 1998.
10.4 Component and Manufactured Products Supply Agreement between HarnCo
and Morris Material Handling, Inc., dated as of March 30, 1998.
10.5 Transition Services Agreement between HarnCo and Morris Material
Handling, Inc., dated as of March 30, 1998.
10.6 Trademark License Agreement between Harnischfeger Technologies, Inc.
and Morris Material Handling, Inc., dated as of March 30, 1998.
10.7 Management Consulting Agreement between Morris Material Handling,
Inc. and Chartwell Investments Inc., dated March 30, 1998.
10.8 Financial Advisory Agreement between Morris Material Handling, Inc.
and Chartwell Investments Inc., dated March 30, 1998.
10.9 Separation Agreement, dated October 26, 1997, between Harnischfeger
Corporation and Material Handling, LLC.
10.10 Share and Asset Purchase Agreement between PHMH Holding Company,
James Gann, Sr., James Gann, Jr. and Gail Gann, dated February 14,
1997.
10.11 Employment Agreement, dated March 30, 1998, between Morris Material
Handling, Inc. and Michael S. Erwin.
10.12 Employment Agreement, dated March 30, 1998, between Morris Material
Handling, Inc. and David D. Smith.
10.13 Employment Agreement, dated March 30, 1998, between Morris Material
Handling, Inc. and Martin L. Ditkof.
10.14 Employment Agreement, dated March 30, 1998, between Morris Material
Handling, Inc. and Richard J. Niespodziani.
10.15 Employment Agreement, dated March 30, 1998, between Morris Material
Handling, Inc. and Peter A. Kerrick.
<PAGE>
Exhibit Number Exhibit
- -------------- -------
10.16 Employment Agreement, dated March 30, 1998, between Morris Material
Handling, Inc. and Edward J. Doolan.
10.17 Service Agreement, dated March 30, 1998, between Morris Mechanical
Handling Limited and M J Maddock.
10.18 Service Agreement, dated March 30, 1998, between Morris Mechanical
Handling Limited and K B Norridge.
12. Statement of Computation of Financial Ratios.
21. Subsidiaries of MMH Holdings, Inc.
23.1 Consent of Independent Accountants.
23.2 Consent of Akin, Gump, Strauss, Hauer & Feld, L.L.P. (included in
Exhibit 5.1).
25. Statement of Eligibility of Trustee.
27. Financial Data Schedule.
99.1 Letter of Transmittal (to be filed by amendment).
99.2 Notice of Guaranteed Delivery (to be filed by amendment).
