SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended October 31, 1999
Commission Registrant; State of Incorporation; IRS EMPLOYER
File Number Address; and Telephone Number Identification No.
333-52529 MMH HOLDINGS, INC. 39-1924039
(a Delaware Corporation)
315 W. Forest Hill Avenue
Oak Creek, Wisconsin 53154
(414) 764-6200
333-52527 MORRIS MATERIAL HANDLING, INC. 39-1716155
(a Delaware Corporation)
315 W. Forest Hill Avenue
Oak Creek, Wisconsin 53154
(414) 764-6200
Securities Registered Pursuant to Section 12(b) of the Act
None
Securities Registered Pursuant to Section 12(g) of the Act
None
Indicate by check mark whether the registrants (1) have filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrants were required to file such reports), and (2) have been subject to
such filing requirements for the past 90 days.
Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrants' knowledge in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
form 10-K. [x]
As of February 10, 2000, 10,169 shares of MMH Holdings, Inc. Voting Common Stock
were outstanding, none of which were held by non-affiliates. In addition, 4,350
shares of MMH Holdings, Inc. Nonvoting Common Stock were outstanding, 720 of
which were held by non-affiliates. There is no established trading market for
MMH Holdings, Inc.'s Nonvoting Common Stock.
As of February 10, 2000, 100 shares of Morris Material Handling, Inc. Common
Stock were outstanding, all of which were held by MMH Holdings, Inc.
<PAGE>
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Item 14 of Part IV are incorporated by reference to: MMH Holdings,
Inc.'s Registration Statement No. 333-52529, filed on May 13, 1998; Morris
Material Handling, Inc.'s Registration Statement No. 333-52527, filed on May 13,
1998; Amendment No. 2 to MMH Holdings, Inc.'s Registration Statement No.
333-52529, filed on July 22, 1998; Amendment No. 2 to Morris Material Handling,
Inc.'s Registration Statement No. 333-52527, filed on July 22, 1998; MMH
Holdings, Inc.'s and Morris Material Handling, Inc.'s Annual Report on Form 10-K
for the fiscal year ended October 31, 1998; MMH Holdings, Inc.'s and Morris
Material Handling, Inc.'s Quarterly Report on Form 10-Q for the quarter ended
April 30, 1999; and MMH Holdings, Inc.'s and Morris Material Handling, Inc.'s
Quarterly Report on Form 10-Q for the quarter ended July 31, 1999.
This combined Form 10-K is separately filed by MMH Holdings, Inc. and by Morris
Material Handling, Inc. The financial statements presented in this combined
report (collectively, the "Financial Statements") include the financial
statements of MMH Holdings, Inc. as well as separate financial statements for
Morris Material Handling, Inc. Information contained herein relating to any
individual Registrant is filed by such Registrant on its own behalf.
Certain sections of this Form 10-K, including "Business" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
contain various forward looking statements within the meaning of Section 21E of
the Securities Exchange Act of 1934, which represent management's expectations
or beliefs concerning future events. The Registrants caution that those
statements are further qualified by important factors that could cause actual
results to differ from those in the forward looking statements. Factors that
might cause such a difference include, without limitation, general economic
conditions and competition in the markets in which the Registrants' operations
are located and are detailed herein under "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Cautionary Factors."
Consequently, all forward-looking statements made herein are qualified by these
cautionary statements. There can be no assurance that the actual results, events
or developments referenced herein will occur or be realized.
<PAGE>
MMH HOLDINGS, INC.
MORRIS MATERIAL HANDLING, INC.
INDEX TO
ANNUAL REPORT ON FORM 10-K
For the Year Ended October 31, 1999
Page
Part I
Item 1. Business 1
Item 2. Properties 12
Item 3. Legal Proceedings 13
Item 4. Submission of Matters to a Vote
of Security Holders 14
Part II
Item 5. Market for the Registrants' Common Stock
and Related Stockholder Matters 15
Item 6. Selected Financial Data
MMH Holdings, Inc. 16
Morris Material Handling, Inc. 17
Item 7. Management's Discussion and Analysis
of Financial Condition and
Results of Operations 18
Item 7A. Quantitative and Qualitative
Disclosures about Market Risk 28
Item 8. Financial Statements and
Supplementary Data 30
Item 9. Changes in and Disagreements with
Accountants on Accounting and
Financial Disclosure 76
Part III
Item 10. Directors and Executive Officers
of the Registrants 77
Item 11. Executive Compensation 80
Item 12. Security Ownership of Certain
Beneficial Owners and Management 86
Item 13. Certain Relationships and Related Transactions 88
Part IV
Item 14. Exhibits, Financial Statement
Schedules and Reports on Form 8-K 93
Signatures 100
<PAGE>
PART I
Item 1. Business
MMH Holdings, Inc. ("Holdings") is a holding company whose sole direct
subsidiary is Morris Material Handling, Inc. ("MMH"), a manufacturer,
distributor and service provider of "through-the-air" material handling
equipment with operations in the United States, United Kingdom, South Africa,
Singapore, Canada, Australia, Thailand, Chile and Mexico. Unless the context
requires otherwise, references to the "Company" in this combined 10-K 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. 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.
Background: Recapitalization
Historically, the Company conducted its business as one of several operating
units of Harnischfeger Industries, Inc. ("HII"). Until October 1997, the core
United States operations of the Company were conducted directly by HarnCo, a
wholly-owned subsidiary of HII, while the remainder of the Company's operations
(including the Company's operations in the United Kingdom and South Africa since
their acquisition in 1994) were conducted through a number of entities owned,
directly or indirectly, by HII and its affiliates. In October 1997, in
connection with the anticipated sale of the Company, HarnCo transferred the
assets of its Material Handling Equipment Division ("MHE Division") to Material
Handling, LLC ("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 certain affiliates of HarnCo not engaged in the MHE
Business (the "Non-MHE HarnCo Affiliates") relating to the MHE Business.
On January 28, 1998, HII reached an agreement with MHE Investments, Inc. ("MHE
Investments"), a newly formed affiliate of Chartwell Investments Inc., for the
sale of an approximately 80 percent common ownership interest in the MHE
Business. Pursuant to this agreement, HarnCo and other HII affiliates effected a
number of transactions (the "Transactions" or the "Recapitalization") that
resulted in Holdings, a preexisting company engaged in the MHE Business,
acquiring, through MMH, its newly formed wholly owned subsidiary, the equity
interests of all of the various operating entities engaged in the MHE Business.
As a result of the reorganization of the MHE Business' legal entities, Holdings
and the Company became the successor companies to the MHE Business. The
Transactions are accounted for as a recapitalization for financial reporting
purposes. Accordingly, the historical basis of the Company's assets and
liabilities was not impacted by the Transactions.
In conjunction with the Recapitalization, which closed on March 30, 1998 (the
"Recapitalization Closing"), Holdings sold $60.0 million of Series A Units,
consisting of $57.7 million liquidation preference of Holdings' 12% Series A
Senior Exchangeable Preferred Stock (the "Holdings Series A Senior Preferred
Stock") and 720 shares of non-voting common stock, to institutional investors.
In addition, MMH sold $200.0 million aggregate principal amount of 9 1/2% Senior
Notes due 2008 (the "Senior Notes") and entered into a senior secured credit
facility (the "New Credit Facility"). The New Credit Facility included $55.0
million of term loans, a revolving credit facility (the "Revolving Credit
Facility") and an acquisition facility (the "Acquisition Facility"). The
Revolving Credit Facility initially provided the Company with up to $70.0
million of available borrowings for working capital, acquisitions and other
corporate purposes, subject to compliance with certain conditions. The
Acquisition Facility initially permitted the Company to borrow up to $30.0
million until the third anniversary of the Recapitalization Closing to finance
acquisitions, subject to compliance with certain conditions.
As discussed below, the Company did not meet certain of the financial covenants
under the New Credit Facility for the periods ended January 31, 1999 and April
30, 1999, and the New Credit Facility was amended on August 2, 1999. In
addition, the Company anticipates that it will not meet certain financial
covenants contained in the New Credit Facility for the quarter ended January 31,
2000 and the foreseeable future thereafter. The Company entered into an
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Amendment and Waiver under the New Credit Facility, dated as of January 31,
2000, whereby, among other matters, the lenders waived compliance by the Company
with such financial covenants, for the period from January 31, 2000 until 5:00
p.m. March 29, 2000 (the "January Waiver"). The January Waiver permits the
Company, subject to certain conditions, to make additional borrowings under the
Revolving Credit Facility and issue additional letters of credit, above levels
in existence on January 31, 2000, in an aggregate amount of up to $12.0 million,
during the waiver period.
Currently, the Company is not generating sufficient funds from operations to
satisfy working capital and debt service requirements, and as a result must rely
on Revolving Credit Facility borrowings to continue to operate. While the
Company anticipates that cash generated from operations and Revolving Credit
Facility borrowings will be sufficient to enable it to satisfy its cash flow
needs until March 29, 2000, there can be no assurance that it will have
sufficient cash flow and borrowings available to enable it to meet its
obligations until such date. Upon the expiration of the January Waiver on March
29, 2000, the Company will not have sufficient cash to continue operations,
unless arrangements can be entered into to provide liquidity for the Company.
See "Recent Developments--New Credit Facility Amendment;" "Liquidity Status",
and "Liquidity and Capital Resources."
At the Recapitalization Closing, (i) MHE Investments paid HarnCo $54.0 million
for 72.6% of the common stock of Holdings (the "Holdings Common Stock") (after
giving effect to the Transactions) and approximately $28.9 million liquidation
preference of the 12 1/2% Series C Junior Voting Exchangeable Preferred Stock of
Holdings (the "Holdings Series C Junior Voting Preferred Stock"), (ii) Holdings
redeemed certain shares of Holdings Common Stock and Holdings Series C Junior
Voting Preferred Stock from HarnCo for $282.0 million in cash (subject to
potential post-Recapitalization adjustments as to which an additional $5.0
million was provided to HarnCo) and approximately $4.8 million liquidation
preference of the 12 1/4% Series B Junior Exchangeable Preferred Stock of
Holdings (the "Holdings Series B Junior Preferred Stock"), and (iii) HarnCo
retained approximately 20.8% of the Holdings Common Stock (after giving effect
to the Transactions).
Until the Recapitalization Closing, HII and HarnCo performed a number of
functions necessary to the operations of the Company in accordance with past
practices, including manufacturing certain products and providing certain
information systems, administrative services and credit support. Holdings' and
MMH's historical financial statements include charges allocated to the MHE
Business by HII for these products and services. Because the Company operates
independently of HII since the Recapitalization Closing, however, Holdings' and
MMH's pre-Recapitalization performance may not be indicative of future financial
results.
At the Recapitalization Closing, MMH entered into a number of agreements
pursuant to which HII and its affiliates continued to provide to MMH and to its
subsidiaries located in the United States, on an interim basis and under
substantially the same terms and conditions as before the closing, certain
products and services. In addition, HII and MMH entered into a credit
indemnification agreement (the "Credit Indemnification Agreement") pursuant to
which HII maintains in place the credit support obligations in existence at the
Recapitalization Closing but has 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). See "Certain Relationships and
Related Transactions--Relationship with Harnischfeger." Under the Credit
Indemnification Agreement, MMH is required to pay HII, an annual fee equal to 1%
of the amounts outstanding under each letter of credit and bond provided by
HarnCo and its affiliates (approximately $27.7 million as of October 31, 1999).
MMH accrued a fee of $223,000 for calendar year 1999. HII is required to refund
the Company on a quarterly basis a pro-rata portion of the annual fee for any
reductions in the outstanding amount of credit that occurred during such
quarter. In addition, the Company will reimburse HII for certain future fees and
expenses. The Company also entered into a surety arrangement (the "Surety
Arrangement") with a third party at the Recapitalization Closing to provide
credit support for its post-Recapitalization Closing operations.
In connection with the Recapitalization, the Company also entered into a
trademark license agreement (the "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
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the MHE Business for the ten year period which commenced March 30, 1999. The
Company accrued $1,353,000 of expenses for royalty fees in the period from March
30, 1999 to October 31, 1999. The Company has elected to defer the payment of
the royalty fee for the period ended October 31, 1999, which would be payable
January 30, 2000, pursuant to the terms of the Trademark License Agreement. The
Trademark License Agreement provides that the annual royalty fee may be deferred
for up to two years if the Company does not meet certain financial criteria. The
Company can only defer up to two payments during the term of the agreement. In
addition, interest accrues at 12% per year on the deferred fee payments.
As discussed below, the Company could be materially adversely affected by the
fact that HII and certain of its United States affiliates filed for bankruptcy
protection. See "Recent Developments--HII Bankruptcy."
For income tax purposes, Holdings and MMH were deemed to acquire the assets of
the MHE Business pursuant to Code Section 338(h)(10) in connection with the
Transactions. Accordingly, the Recapitalization increased the tax basis of
certain assets and created tax-deductible goodwill. Realization of deferred tax
assets is dependent on generating sufficient taxable income prior to expiration
of net operating loss carryforwards. During 1999, the Company re-estimated its
future operating results and determined its deferred tax asset valuation
allowance required an increase of $80.4 million which was recognized as income
tax expense. Management believes it is more likely than not that the net
deferred tax assets recorded will not be realized.
Recent Developments
New Credit Facility Amendment; Liquidity Status
The Company did not meet certain of the financial covenants under the New Credit
Facility for the period ended January 31, 1999 and did not meet such financial
covenants and certain additional financial covenants for the period ended April
30, 1999. The Company obtained waivers of such financial covenants through
August 2, 1999. The waivers permitted the Company to borrow certain amounts
under the Revolving Credit Facility to meet its working capital requirements;
however the Company could not, without prior lender consent, (i) borrow any
amounts under the Acquisition Facility, (ii) borrow any amounts under the
Revolving Credit Facility in excess of the aggregate amount of the Revolving
Credit Facility borrowings that the Company had repaid subsequent to March 2,
1999, or (iii) request the issuance of letters of credit, bid bonds or
performance bonds in an aggregate amount after March 2, 1999 in excess of $5.0
million.
On August 2, 1999, the Company obtained an amendment to the New Credit Facility
(the "Amendment") which cured past financial covenant violations and reset
financial covenants until April 2001. The Amendment increased the cash
availability under the Revolving Credit Facility from $35.7 million under the
previous waiver agreement to $40.7 million. At January 31, 2000, the Company had
$25.2 million of outstanding Revolving Credit Facility borrowings. In addition,
the Amendment permitted the Company to obtain letters of credit, bid bonds and
performance bonds in an amount not to exceed $10.0 million in the aggregate of
which $5.2 million have been issued. After giving effect to the Amendment, the
Acquisition Facility provided for $12.1 million of borrowings ($7.1 million of
which was previously funded by the lenders under the New Credit Facility and
$5.0 million of which was funded on August 2, 1999 by indirect equity holders in
Holdings, as described below). No additional borrowings under the Acquisition
Facility are available from the lenders under the New Credit Facility.
The Amendment also permitted the Company to apply half of the proceeds of the
sale of its industrial brake business (the "Brake Business"), which was
consummated on December 16, 1999, to general corporate purposes, which the
Company would otherwise have been required to use to prepay indebtedness under
the New Credit Facility. After consummation of the sale, the Company repaid $3.1
million of the outstanding term loans ($2.4 million of which was applied to the
final scheduled principal payment obligation with respect to such term loans)
and repaid $0.3 million on the Acquisition Facility.
In connection with, and as a condition to, the lenders under the New Credit
Facility entering into the Amendment, certain of the current indirect equity
holders in Holdings purchased, through Martin Crane L.L.C. ("Martin Crane"), a
newly formed limited liability company, a $5.0 million participation in the New
Credit Facility and received shares of non-voting common stock of Holdings,
representing 25% of the outstanding Holdings Common Stock. As a result, at
January 31, 2000, MHE Investments owns approximately 54.5% of the Holdings
Common Stock, HarnCo owns approximately 15.6% of the Holdings Common Stock,
institutional investors own approximately 4.9% of the Holdings Common Stock and
Martin Crane owns approximately 25.0% of the Holdings Common Stock.
The Company also anticipates that it will not meet certain financial covenants
contained in the New Credit Facility for the quarter ended January 31, 2000 and
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the foreseeable future thereafter. The Company entered into an Amendment and
Waiver under the New Credit Facility, dated as of January 31, 2000, whereby,
among other matters, the lenders waived compliance by the Company with such
financial covenants, for the period from January 31, 2000 until 5:00 p.m. March
29, 2000. The January Waiver permits the Company, subject to certain conditions,
to make additional borrowings under the Revolving Credit Facility and issue
additional letters of credit, above levels in existence on January 31, 2000, in
an aggregate amount of up to $12.0 million, during the waiver period.
Currently, the Company is not generating sufficient funds from operations to
satisfy working capital and debt service requirements, and as a result must rely
on Revolving Credit Facility borrowings to continue to operate. While the
Company anticipates that cash generated from operations and Revolving Credit
Facility borrowings will be sufficient to enable it to satisfy its cash flow
needs until March 29, 2000, there can be no assurance that it will have
sufficient cash flow and borrowings available to enable it to meet its
obligations until such date. Upon the expiration of the January Waiver on March
29, 2000, the Company will not have sufficient cash to continue operations,
unless arrangements can be entered into to provide liquidity for the Company.
See "Liquidity and Capital Resources."
HII Bankruptcy
On June 7, 1999, (the "Petition Date") HII and certain of its United States
affiliates (including HarnCo) filed voluntary petitions for relief under Chapter
11 of the Bankruptcy Code in the United States Bankruptcy Court for the District
of Delaware. Certain provisions of the Bankruptcy Code allow a debtor to avoid,
delay and/or reduce its contractual and other obligations to third parties.
There can be no assurance that HII and its affiliates will not attempt to
utilize such provisions to cease performance under their agreements and
arrangements with the Company. The inability of the Company to receive the
benefits of one or more of these agreements or the termination of ongoing
arrangements between the Company and affiliates of HII (including those relating
to the provision of services and materials by HII and its affiliates to the
Company) could materially adversely affect the Company's operations and
financial performance. In the event that any of the liabilities retained by HII
and its affiliates in connection with the Recapitalization remain unsatisfied as
of the Petition Date, the Company's right to indemnification for any such
amounts it has paid on behalf of HII and its affiliates may also be avoided,
delayed or reduced. Each of HII and certain of its affiliates on the one hand,
and the Company and certain of its affiliates, on the other hand, have
receivables and payables to the other that may be affected by the HII
Bankruptcy.
Hiring of New Chief Executive Officer
On March 2, 1999, Jack Stinnett was hired as President and Chief Executive
Officer of the Company. Prior to joining the Company, Mr. Stinnett served as
Vice President and General Manager of Engine Components World Wide for TRW, a
global automotive parts business. See "Directors and Executive Officers of the
Registrants." Mr. Stinnett entered into an employment agreement with the Company
on January 27, 1999. See "Executive Compensation--Employment Agreement and
Severance Agreements."
Company and Industry Overview
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 "through-the-air" material handling equipment as a flexible and
efficient method of transporting materials within a plant 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. The industrial crane and hoist industry remains highly
fragmented, with four global participants and a large number of regional and
local players.
The industry is comprised of original equipment cranes and hoists, and
aftermarket parts, service and modernizations. The United States market for
industrial overhead cranes and hoist products is estimated to be approximately
$400 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 sales 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. Industrial cranes,
which typically last 20 to 50 years, require significant aftermarket support in
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the form of replacement parts, machine modernizations and upgrades, repairs and
inspection and maintenance services. Management believes the market for service
and parts will continue at approximately current levels, however, management
expects the current down-turn in the crane equipment market to continue.
Products and Services
The following presents the Company's business and operations. The Company's
business and operations, however, may be significantly adversely affected by its
liquidity situation. See "Liquidity and Capital Resources." 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. Management believes that the Company is one of the leading
suppliers of industrial overhead cranes in North America, the United Kingdom,
Australia 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 24% of
fiscal 1999 net sales, with Western Europe representing 16% and the Pacific Rim
representing 4% of net sales. For additional geographical information, see the
Financial Statements and notes thereto appearing elsewhere herein.
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 - 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 and Morris 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.
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 flexible 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, Morris, and
various other brand names throughout the world.
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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 grown its standard crane market
share 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 P&H brand name 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 Mechanical Handling 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 hoist
manufacturing bay into a more efficient hoist manufacturing and
assembly facility.
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
Company-owned distribution and service centers ("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.
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
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 difficult to
reverse engineer or are critical parts where an inadequate substitute
could have serious safety and operational consequences.
Service - The Company provides installation, repair, inspection and
maintenance services, primarily through its DSC network. The Company
provides these services under recognized trade names including Crane
Aid (South Africa) and UK Crane Service (United Kingdom).
The Company has expanded its service offerings as a strategic response
to customers' 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 an opportunity to leverage its growing service operations to provide
similar services on more of the cranes and hoists manufactured by its
competitors.
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."
6
<PAGE>
Modernizations - Crane modernizations provide an opportunity for the
Company to generate additional revenue from its 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.
Management of the Company has further defined the organization around the
following operating segments consistent with the way that management assesses
operating performance. The Company's primary operating segments are as follows:
Equipment and Aftermarket - Americas
Equipment and Aftermarket - Other
Distribution and Service - North America
Engineered Products and Automation - Europe
Equipment and Aftermarket - Europe
Equipment and Aftermarket - Asia Pacific
Equipment and Aftermarket - South Africa
Each segment has a manager who is directly accountable to and maintains regular
contact with the Chief Executive Officer. The Company evaluates performance of
its segments based on operating income, determined on a basis consistent with
amounts reported in the consolidated financial statements.
The Equipment and Aftermarket - Americas segment designs and manufactures a
comprehensive line of engineered and standard overhead cranes, hoists and other
component products and repair parts at the Company's facilities located in Oak
Creek and Windsor, Wisconsin. This segment also modernizes products manufactured
by both the Company and its competitors. This segment is the main manufacturer
of the replacement parts sold by the Company's Distribution and Service-North
America segment as well as the manufacturer of component products used in that
segment's standard cranes. Repair parts and component products are purchased by
the Distribution and Service - North America segment at list price less standard
intercompany discounts.
The Equipment and Aftermarket - Other segment is the Company's brake
manufacturing operation in Canada. Approximately 35% of this segment's sales are
to other Company segments. The Company sold this operation in December 1999.
The Distribution and Service - North America segment is the network of
Company-owned locations in key industrial markets in North America. The network
is the platform for the Company's sales activities, serving as distribution
centers for its original equipment and replacement parts as well as the focal
point for service activities. Some of the distribution centers also fabricate
and assemble standard cranes using components manufactured by the Equipment and
Aftermarket - Americas and the Equipment and Aftermarket - Europe segments.
The Engineered Products and Automation - Europe segment focuses on the
manufacture of highly engineered ship-to-shore and gantry cranes for use in
container handling and automated warehouse units at the Company's facility
located in Loughborough, England, and provides software support for the
automated warehouse units installed at customer locations.
The Equipment and Aftermarket-Europe segment consists of standard crane and
hoist manufacturing in the Loughborough, England facility as well as the network
of Company-owned distribution centers in key industrial markets in the United
Kingdom. The Equipment and Aftermarket -Europe segment provides services for the
Engineered Products and Automation segment at prices consistent with those
charged to external customers. In addition, this segment distributes hoists
through Distribution and Service - North America and Equipment and Aftermarket -
Asia Pacific and South Africa at prices consistent with those charged to
external customers.
The Equipment and Aftermarket - Asia Pacific and South Africa segments operate
in a manner similar to the Distribution and Service North America segment. The
Asia Pacific segment includes operations in Australia, Singapore, Thailand and
Saudi Arabia.
Sales, Marketing and Distribution
7
<PAGE>
Due to the diverse nature of its product lines and customer requests, the
Company uses multiple sales approaches to serve its customer base. However, the
majority of sales are generated by Company employees. In addition, the Company
utilizes a number of independent agents and distributors in certain overseas
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 sophisticated original equipment projects, the Company's
selling efforts occur primarily at the regional level. For sophisticated
original equipment, the Company uses 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 continued to
expand its DSC network in recent years through both acquisitions of previously
independent distributors as well as the start-up of new DSCs.
In 1999, the Company reorganized its Distribution and Service - North America
segment along geographic lines to form eight North American regions. They
include five in the United States, two in Canada and one in Mexico. The
reorganization has allowed the Company to strengthen its customer focus by
providing capable crane engineering, sales, service, manufacturing and parts
support on a local basis. By centralizing engineering, manufacturing and parts
at each regional headquarters, the Company has been able to reduce selling,
general and administrative expenses.
A similar approach has been adopted in the Company's international operations.
The United Kingdom Material Handling Centre has the capability of full crane
design and manufacture as well as service and parts. Crane design and component
manufacture in the other international operations in Thailand, Singapore,
Australia and South Africa are under the control of the U.K. operation to
minimize selling, general and administrative expenses and control product cost.
Number of Number of
Branch Service
Region Headquarters Locations Manufacturer Technicians
- ------------- ------------------ --------- ----------- -----------
Northeast Philadelphia, PA 4 Yes 28
Southeast Birmingham, AL 8 Yes 44
Western Dallas, TX 10 No 70
Great Lakes Franklin, OH 8 Yes 40
Midwest Waukesha, WI 4 No 27
Eastern Canada Hamilton, Ontario 3 Yes 31
8
<PAGE>
Western Canada Edmonton, Alberta 6 Yes 28
Mexico Mexico City 2 Yes 12
United Kingdom Loughborough 12 Yes 60
South Africa Johannesburg 9 Yes 35
Australia Sydney 3 Yes 18
Singapore Tuas 1 Yes 4
Thailand Bangkok 2 Yes 6
-- --- ---
72 403
In 1999 the Company acquired a distributor and regional crane builder located in
Philadelphia, Pennsylvania and a service business in North Carolina. These
acquisitions together with ongoing growth added four branch locations, and
approximately 50 service technicians. In 2000 the Company is not planning any
acquisitions.
Manufacturing
The Company employs 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. 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, a focused manufacturing facility located in Loughborough is 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 close 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.
Backlog
The Company's backlog of orders at October 31, 1999 was approximately $77.4
million compared to approximately $97.3 million at October 31, 1998. Bookings
for the year ended October 31, 1999 were $274.3 million as compared to $317.5
million for the year ended October 31, 1998. The change in backlog is due to
lower bookings and completion of several large projects in fiscal 1999. The
decrease in bookings was primarily due to lower orders for modernizations,
standard cranes, hoists and components bookings, especially in international
markets. Fourth quarter 1998 bookings also included a $21 million order with no
comparably sized order in 1999. 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. The entire backlog of orders is anticipated to be shipped in fiscal 2000.
9
<PAGE>
Warranties
The Company generally provides a warranty on its products for periods of one to
two years. At October 31, 1999, the Company had accrued warranties of
approximately $1.8 million.
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, mobile
construction cranes manufactured by Terex (the successor to the former mobile
construction crane division of HarnCo), as well as on the crane and hoist
products manufactured by the Company and 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
which commenced March 30, 1999. The Company accrued $1,353,000 of expenses for
royalty fees in the period from March 30, 1999 to October 31, 1999. The Company
has elected to defer the payment of the royalty for the period ended October 31,
1999, which would otherwise be payable on January 30, 2000 pursuant to the terms
of Trademark License Agreement. The Trademark License Agreement provides that
the annual royalty fee may be deferred for up to two years if the Company does
not meet certain financial criteria. The Company can only defer up to two
payments during the term of the agreement. In addition, interest accrues at 12%
per year on the deferred fee payments. See "Certain Relationships and Related
Transactions."
The Company also sells products under the Kaverit trademark in Canada and the
Powerlec and JDN Monocrane trademarks in Australia. It provides aftermarket
service under 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 55 United States patents and pending patent applications and 56
foreign patents and pending patent applications, primarily in 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. Patents are important
to the Company because, among other things, they prevent competitors from using
the Company's proprietary inventions and designs. The Company believes this
provides a competitive advantage in the marketplace. However, the Company's
overall competitive position is not dependent upon a particular patent, nor
would the loss of any particular patent have a material impact upon the
Company's competitive or financial position. Nonetheless, the Company expects to
continue to protect its proprietary technology through patents and other forms
of intellectual property. The Company has aggressively pursued infringement of
its proprietary rights and intends to continue to do so should the need arise.
The Company's patents have a duration ranging from approximately one to eighteen
years, depending on the filing dates of the patent applications.
Competition
The industrial crane and hoist industry is highly fragmented, with four 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. The current depressed
level of new equipment orders has increased the intensity of competition and has
reduced selling prices and margins on new equipment bookings. Globally, the
Company believes it is one of the four 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; Columbus McKinnon Corp.; and KCI Konecranes
10
<PAGE>
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 1999, 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 painting operations). The
Company's DSCs do not create environmental conditions that materially
affect the Company's operations.
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 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, although that rulemaking is currently subject
to litigation and thus may be delayed. 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 has developed an "Annual
Compliance Calendar" matrix for all required facility reports and a
management system for all environmental, safety and health issues. A
11
<PAGE>
key component of the Company's environmental strategic management plan
is continuous awareness and training for managers and employees.
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, a comprehensive environmental
assessment of certain of the Company's properties and operations at
which the Company may have potential environmental liabilities was
conducted. This environmental assessment indicated that no
environmental matters or compliance issues exist that would have a
material adverse effect on the Company's earnings or competitive
position. The Company has followed up on all priority recommendations
made in the environmental assessment with respect to both United States
and foreign operations. 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. The test results indicated
that the Company exceeded emission limits in one area. Significant
operational changes have been implemented. The Company has submitted a
proposal to the Charnwood Borough Counsel and has received verbal
approval, however a formal response has not yet been received. At this
time it is not anticipated that material expenditures will be required.
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). In fiscal 1999,
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 financial
position. Additionally, 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.
Employees
At December 31, 1999, the Company employed 2,151 persons, of whom 1,054 were
hourly and 1,097 were salaried personnel. Approximately 42.8% of the Company's
hourly employees are represented by unions. The Company's unionized employees in
Oak Creek, Wisconsin are covered by a collective bargaining agreement with the
United Steelworkers of America, Local 1114, which expires August 31, 2002. The
unionized employees in Philadelphia, Pennsylvania are covered by a collective
bargaining agreement with the International Association of Bridge, Structural,
Ornamental and Reinforcing Iron Workers, Local 502, which expires July 31, 2000.
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 one year terms. The Company believes that its
relations with its employees are good.
Item 2. Properties
The Company maintains its corporate headquarters in Oak Creek,
Wisconsin and conducts its principal operations at the following facilities:
12
<PAGE>
<TABLE>
<CAPTION>
Square Operating
Location Utilization Footage Owned/Leased Segment (h)
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Loughborough, U.K Crane/hoist manufacturing 420,000 Owned (4), (5)
Oak Creek, WI Crane/hoist/winch manufacturing 277,000 Owned (1)
Johannesburg, S.A Crane/hoist manufacturing 124,000 Owned (7)
Franklin, OH Regional fabrication/remanufacturing 75,000 Owned (3)
Mexico City, Mexico Crane/hoist manufacturing/distribution/service 65,000 Owned (3)
Edmonton, Canada Crane/hoist regional manufacturing/service 58,300 Owned (3)
Burlington, Ontario, Canada Crane manufacturing/distribution/service 20,000 Owned (3)
Windsor, WI Crane/hoist remanufacturing 55,000 Leased (a) (1)
Mauldin/Greenville, SC Regional crane assembly/service 40,400 Leased (b) (3)
Philadelphia, PA Regional crane assembly/service 39,000 Leased (c) (3)
Birmingham, AL Regional crane assembly/service 36,500 Owned/Leased (d) (3)
Melbourne, Australia Crane/hoist manufacturing/service 30,000 Leased (e) (6)
Singapore, Singapore Parts warehouse/crane assembly/hoist distribution 21,200 Licensed (f) (6)
Sydney, Australia Material handling equipment distribution/service 14,000 Leased (g) (6)
</TABLE>
(a) Lease expires May 31, 2002.
(b) Lease expires December 31, 2004.
(c) Lease expires July 31, 2000.
(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) Lease expires August 4, 2003.
(f) The property is held under a license granted pursuant to a building
agreement with the Jurong Town Corporation of Singapore. Subject to
compliance with certain stipulated conditions in such agreement, the
Company is to be granted a 30-year lease of the property from April 1,
1994.
(g) Lease expires June 30, 2003.
(h) The operating segments are as follows:
(1) Equipment and Aftermarket - Americas
(2) Equipment and Aftermarket - Other
(3) Distribution and Service - North America
(4) Engineered Products and Automation - Europe
(5) Equipment and Aftermarket - Europe
(6) Equipment and Aftermarket - Asia Pacific
(7) Equipment and Aftermarket - South Africa
The Company also leases a number of other properties as DSCs in the United
States, Canada, the United Kingdom, South Africa, Australia, Chile, Thailand 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. 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.
Item 3. Legal Proceedings
On October 28, 1996, a strong windstorm caused significant damage to the Belview
container-handling terminal at the Port of Waterford in Ireland. One
container-handling crane sold by the Company's United Kingdom subsidiary was
destroyed and another was seriously damaged. The two cranes were sold to the
Waterford Harbour Commissioners in 1992 and commissioned for use in 1993. On
October 19, 1998, the Waterford Harbour Commissioners wrote to the Company and
provided a notice of arbitration, asserting breach of contract, negligence and
13
<PAGE>
breach of duty against the Company's United Kingdom subsidiary in connection
with the destroyed and damaged cranes. The Waterford Harbour Commissioners
claimed direct damages of IR(pound)8.5 million ($11.5 million based on exchange
rates at January 31, 2000) and unspecified consequential damages. The port
operator, Bell Lines, Limited, filed a similar claim against the Company's
United Kingdom subsidiary in October 1999, asserting unspecified damages.
Management intends to vigorously defend both matters. One of the Company's
insurance carriers has agreed to provide defense coverage for one of the two
cranes involved in the accident and limited indemnification if the Company is
unsuccessful in defending the claims. The Company is continuing to work with its
insurance broker to determine the availability of additional insurance coverage,
if any. While the Company believes that it will obtain a favorable resolution
(either by successfully defending the claim or by obtaining insurance coverage
thereon), no assurances can be made as to the final outcome of the claims. If
the Company is found liable for the claims and is unable to obtain insurance
coverage therefor, there could be a material adverse effect on the Company's
operations and financial performance.
The Company is also involved from time to time in various other routine
litigation incident to its operations. Although the outcome of those matters
cannot be predicted with certainty, management believes that any such pending or
threatened litigation will not have a material adverse effect on its
consolidated results of operations and financial condition.
Item 4. Submission of Matters to a Vote of Security Holders
On May 28, 1999, the sole shareholder of MMH adopted resolutions by written
consent in lieu of a regular meeting electing Todd R. Berman and Michael S.
Shein as directors of the Company.
On July 29, 1999, the sole shareholder of MMH adopted resolutions by written
consent in lieu of a special meeting electing Jack F. Stinnett as a director of
the Company.
14
<PAGE>
PART II
Item 5. Market for Registrants' Common Equity and Related Stockholder Matters
There is no established public trading market for Holdings' Voting Common Stock,
par value $.01 per share (the "Holdings Voting Common Stock"), or Holdings'
Nonvoting Common Stock, par value $.01 per share (the "Holdings Nonvoting Common
Stock"). As of January 31, 2000, there were two holders of Holdings Voting
Common Stock and nine holders of Holdings Nonvoting Common Stock.
Holdings has not paid or declared any cash dividends during the last two fiscal
years and does not anticipate paying cash dividends on the Holdings Voting
Common Stock or Holdings Nonvoting Common Stock in 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
indenture that governs the Senior Notes (the "Note Indenture") . See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
There is no established public trading market for MMH's Common Stock, par value
$.01 per share (the "MMH Common Stock"). Holdings owns all of the issued and
outstanding MMH Common Stock.
MMH paid an aggregate of $9,000 in dividends to Holdings during fiscal 1999.
On August 27, 1999, Holdings issued 1,210 shares of its non-voting common stock
to Martin Crane in consideration for Martin Crane's funding of a $5.0 million
participation interest in the New Credit Facility in connection with the August
2, 1999 amendment of the New Credit Facility. On December 3, 1999, Holdings
issued 2,420 more shares of its non-voting common stock to Martin Crane as
additional consideration pursuant to the terms of the Subordination and
Participation Agreement. No underwriter was involved in the transaction, which
was exempt from registration under Section 4(2) of the Securities Act.
Appropriate legends were affixed to the stock certificates issued in the above
transactions.
15
<PAGE>
Item 6. Selected Financial Data
For the purposes of this Form 10-K, it is assumed that Holdings has historically
owned the capital stock of MMH, that all the assets of the MHE Business were
owned by subsidiaries of MMH and that, immediately prior to the consummation of
the Recapitalization, the historical combined financial statements of Holdings
were identical to those of the Company.
<TABLE>
MMH Holdings, Inc.
Selected Financial Data
(dollars in thousands)
<CAPTION>
Fiscal Year Ended October 31,
---------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
------------ ------------- ----------- ------------- -------------
Income Statement Data:
<S> <C> <C> <C> <C> <C>
Net Sales $294,195 $317,857 $353,350 $323,735 $243,169
Gross profit 75,492 90,866 92,556 76,176 56,765
Other income - net 392 1,331 2,649 1,149 3,766
Selling, general and
administrative expenses 72,439 63,152 56,806 44,968 36,931
HII Management fee - 1,155 2,862 2,341 1,878
Nonrecurring employee
benefit costs (a) - 1,216 0 0 0
------------ ------------- ----------- ------------- -------------
Operating income 3,445 26,674 35,537 30,016 21,722
Net income (loss) (98,205) 4,291 $20,853 $18,446 $13,476
=========== ============= =============
Dividends on preferred stock (12,322) (6,545)
Amortization of preferred
stock discount (581) (338)
------------ -------------
Net loss attributable
to Common Stock ($111,108) ($2,592)
============ =============
As of October 31,
--------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
------------- ------------- ----------- -------------- -------------
Balance sheet data:
Total assets $226,836 $310,997 $199,600 $189,058 $151,168
Total debt 297,114 265,338 6,088 2,044 4,704
Mandatorily redeemable
preferred stock 108,245 95,351 0 0 0
</TABLE>
(a) Represents incentives to certain members of management. While the cost of
the incentive payments appear on the Company's income statement, HII, the
Company's former parent, not the Company, was responsible for paying these
incentives.
16
<PAGE>
<TABLE>
Morris Material Handling. Inc.
Selected Financial Data
(dollars in thousands)
<CAPTION>
Fiscal Year Ended October 31,
--------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
------------- ------------- ------------- -------------- -------------
Income Statement Data:
<S> <C> <C> <C> <C> <C>
Net Sales $294,195 $317,857 $353,350 $323,735 $243,169
Gross profit 75,492 90,866 92,556 76,176 56,765
Other income - net 392 1,331 2,649 1,149 3,766
Selling, general and
administrative expenses 72,439 63,152 56,806 44,968 36,931
HII Management fee - 1,155 2,862 2,341 1,878
Nonrecurring employee
benefit costs (a) - 1,216 0 0 0
------------- ------------- ------------- -------------- -------------
Operating income 3,445 26,674 35,537 30,016 21,722
Net income $(98,205) $ 4,291 $20,853 $18,446 $ 13,476
============= ============= ============= ============== =============
As of October 31,
--------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
------------- ------------- ------------- -------------- -------------
Balance sheet data:
Total assets $226,836 $310,997 $199,600 $189,058 $151,168
Total debt 297,114 265,338 6,088 2,044 4,704
</TABLE>
(a) Represents incentives to certain members of management. While the cost of
the incentive payments appear on the Company's income statement, HII, the
Company's former parent, not the Company, was responsible for paying these
incentives.
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Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operation
The following discussion should be read in conjunction with the
Financial Statements and the related notes thereto included elsewhere in this
document. The Company's fiscal year ends October 31. Consequently, any reference
to any particular fiscal year means the fiscal year ended October 31 of such
year.
General
The Company is an international provider of "through-the-air"
material handling products and services used in most manufacturing industries.
The Company's original equipment operations design and manufacture a
comprehensive line of industrial cranes, hoists and component products. Through
its aftermarket operations, the Company provides a variety of related products
and services, including replacement parts, repair and maintenance services and
product modernizations. In recent years, the Company has shifted its orientation
from an original equipment-focused United States manufacturer to 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. Prior to March 30, 1998, the core United States
operations of the Company were conducted directly by HarnCo, while the remainder
of the Company's operations throughout the world were conducted through a number
of entities owned, directly or indirectly, by HII and its affiliates.
On January 28, 1998, HII reached an agreement with MHE Investments, a newly
formed affiliate of Chartwell Investments Inc., for the sale of an approximately
80 percent common ownership interest in the MHE Business. Pursuant to this
agreement, HarnCo and other HII affiliates effected a number of transactions
that resulted in Holdings, a preexisting company engaged in the MHE Business,
acquiring, through MMH, its newly formed wholly-owned subsidiary, the equity
interests of all of the operating entities engaged in the MHE Business. As a
result of the reorganization of the MHE Business' legal entities, Holdings and
the Company became the successor companies to the MHE Business. The Transactions
are accounted for as a recapitalization for financial reporting purposes.
Accordingly, the historical basis of the Company's assets and liabilities was
not impacted by the Transactions.
In conjunction with the Recapitalization, which closed on March 30, 1998 (the
"Recapitalization Closing"), Holdings sold $60.0 million of Series A Units,
consisting of $57.7 million liquidation preference of Holdings' 12% Series A
Senior Exchangeable Preferred Stock (the "Holdings Series A Senior Preferred
Stock") and 720 shares of non-voting common stock, to institutional investors.
In addition, MMH sold $200.0 million aggregate principal amount of 9 1/2% Senior
Notes due 2008 (the "Senior Notes") and entered into a senior secured credit
facility (the "New Credit Facility"). The New Credit Facility included $55.0
million of term loans, a revolving credit facility (the "Revolving Credit
Facility") and an acquisition facility (the "Acquisition Facility"). The
Revolving Credit Facility initially provided the Company with up to $70.0
million of available borrowings for working capital, acquisitions and other
corporate purposes, subject to compliance with certain conditions. The
Acquisition Facility initially permitted the Company to borrow up to $30.0
million until the third anniversary of the Recapitalization Closing to finance
acquisitions, subject to compliance with certain conditions. The New Credit
Facility was amended on August 2, 1999. See "Recent Developments--New Credit
Facility Amendment; Liquidity Status"; "Liquidity and Capital Resources." As
amended, the Revolving Credit Facility provided $50.7 million of available
borrowings ($10.0 million of which was required to be reserved for issuance of
letters of credit), and the Acquisition Facility provided for $12.4 million of
borrowings ($7.4 million of which was previously funded by the lenders under the
New Credit Facility and $5.0 million of which was funded by indirect equity
holders in Holdings) for acquisitions and general corporate purposes. No
additional borrowings under the Acquisition Facility are available from lenders
under the New Credit Facility.
The Company, however, anticipates that it will not meet certain financial
covenants contained in the New Credit Facility for the quarter ended January 31,
2000 and the foreseeable future thereafter. The Company entered into an
Amendment and Waiver under the New Credit Facility, dated as of January 31,
2000, whereby, among other matters, the lenders waived compliance by the Company
with such financial covenants, for the period from January 31, 2000 until 5:00
p.m. March 29, 2000 (the "January Waiver"). The January Waiver permits the
Company, subject to certain conditions, to make additional borrowings under the
Revolving Credit Facility and issue additional letters of credit, above levels
in existence on January 31, 2000, in an aggregate amount of up to $12.0 million,
during the waiver period.
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<PAGE>
Currently, the Company is not generating sufficient funds from operations to
satisfy working capital and debt service requirements, and as a result must rely
on Revolving Credit Facility borrowings to continue to operate. While the
Company anticipates that cash generated from operations and Revolving Credit
Facility borrowings will be sufficient to enable it to satisfy its cash flow
needs until March 29, 2000, there can be no assurance that it will have
sufficient cash flow and borrowings available to enable it to meet its
obligations until such date. Upon the expiration of the January Waiver on March
29, 2000, the Company will not have sufficient cash to continue operations,
unless arrangements can be entered into to provide liquidity for the Company.
See "Liquidity and Capital Resources."
At the Recapitalization Closing, (i) MHE Investments paid HarnCo $54.0 million
for 72.6% of the Holdings Common Stock (after giving effect to the Transactions)
and approximately $28.9 million liquidation preference of the Holdings Series C
Junior Voting Preferred Stock, (ii) Holdings redeemed certain shares of Holdings
Common Stock and Holdings Series C Junior Voting Preferred Stock from HarnCo for
$282.0 million in cash (subject to potential post-Recapitalization adjustments
as to which an additional $5.0 million was provided to HarnCo) and approximately
$4.8 liquidation preference of the Holdings Series B Junior Preferred Stock, and
(iii) HarnCo retained approximately 20.8% of the Holdings Common Stock (after
giving effect to the Transactions).
In connection with, and as a condition to, the lenders under the New Credit
Facility entering into the August 2, 1999 Amendment to the New Credit Facility,
certain of the current indirect equity holders in Holdings purchased, through
Martin Crane, a $5.0 million participation in the New Credit Facility and
received shares of non-voting common stock of Holdings, in consideration
therefor. As a result, at January 31, 2000, MHE Investments owns approximately
54.5% of the Holdings Common Stock, HarnCo owns approximately 15.6% of the
Holdings Common Stock, institutional investors own approximately 4.9% of the
Holdings Common Stock and Martin Crane owns approximately 25.0% of the Holdings
Common Stock.
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. Holdings' and
MMH's historical financial statements include charges allocated to the MHE
Business by HII for these products and services. Because the Company operates
independently of HII since the Recapitalization Closing, however, Holdings' and
MMH's historical performance may not be indicative of future financial results.
At the Recapitalization Closing, MMH entered into a number of agreements
pursuant to which HII and its affiliates continued to provide to MMH and to its
subsidiaries located in the United States, on an interim basis and under
substantially the same terms and conditions as before the closing, certain
products and services. In addition, HII and MMH entered into a credit
indemnification agreement (the "Credit Indemnification Agreement") pursuant to
which HII will maintain in place the credit support obligations in existence at
the Recapitalization Closing but have no further duty to extend, renew or enter
into any new credit support obligations (except as to the MHE Business
obligations existing at the Recapitalization Closing). See "Certain
Relationships and Related Transactions--Relationship with Harnischfeger." Under
the Credit Indemnification Agreement, MMH is required to pay HII, an annual fee
equal to 1% of the amounts outstanding under each letter of credit and bond
provided by HarnCo and its affiliates (approximately $27.7 million as of October
31, 1999). MMH accrued a fee of $223,000 for calendar year 1999. HII is required
to refund the Company on a quarterly basis a pro-rata portion of the annual fee
for any reductions in the outstanding amount of credit that occurred during such
quarter. In addition, the Company will reimburse HII for certain future fees and
expenses. The Company also entered into a surety arrangement (the "Surety
Arrangement") with a third party at the Recapitalization Closing to provide
credit support for its post-Recapitalization Closing operations.
In connection with the Recapitalization, the Company also entered into a
trademark license agreement (the "Trademark License Agreement") with an
affiliate of HarnCo, pursuant to which the Company has the right to use the P&H
trademark with respect to all MHE Business products on a worldwide exclusive
basis from the date of the Recapitalization Closing until 15 years after the
earlier to occur of a sale of Holdings to a third party or a public offering of
the common stock of Holdings, the Company or their parents or successors (and
for an additional seven years thereafter for aftermarket products and services).
The royalty fee for use of the trademark is 0.75% of the aggregate net sales of
the MHE Business for the ten year period which commenced March 30, 1999. The
Company accrued $1,353,000 of expenses for royalty fees in the period from March
30, 1999 to October 31, 1999. The Company has elected to defer the payment of
the royalty fee for the period ended October 31, 1999, which would be payable
January 30, 2000, pursuant to the terms of the Trademark License Agreement. The
19
<PAGE>
Trademark License Agreement provides that the annual royalty fee may be deferred
for up to two years if the Company does not meet certain financial criteria. The
Company can only defer up to two payments during the term of the agreement. In
addition, interest accrues at 12% per year on the deferred fee payments.
The Company could be materially adversely affected by the fact that HII and
certain of its United States affiliates filed for bankruptcy protection. See
"Recent Developments--HII Bankruptcy."
For income tax purposes, Holdings and MMH were deemed to acquire the assets of
the MHE Business pursuant to Code Section 338(h)(10) in connection with the
Transactions. Accordingly, the Recapitalization increased the tax basis of
certain assets and created tax-deductible goodwill.
Acquisitions and Divestitures
Acquisitions-During the year ended October 31, 1999, the Company completed two
acquisitions with an aggregate purchase price of $4.1 million, net of cash
acquired. During 1998, the Company completed several acquisitions for an
aggregate purchase price of $8.9 million, net of cash acquired. These
acquisitions were related to the Company's aftermarket business and were
accounted for as purchase transactions with the purchase prices allocated to the
fair value of specific assets acquired and liabilities assumed. Resultant
goodwill is being amortized over 10 to 40 years. One 1999 acquisition and one
1998 acquisition were partially financed by the sellers. The resulting deferred
purchase price will be paid in 2004 and 2005 for the 1999 acquisition and annual
installments through 2006 for the 1998 acquisition. Future payments for
acquisitions partially financed by the sellers are $100,000 in each of the years
2000, 2001, 2002 and 2003; $1,100,000 in 2004; $700,000 in 2005; and $100,000 in
2006. The two 1999 acquisitions added approximately $13.7 million in sales and
$1.5 million in operating income to the Company's results in 1999.
During the year ended October 31, 1999, the Company made final consideration
payments of $1.5 million related to two 1998 acquisitions. With respect to a
1995 acquisition, the Company made a final contingent consideration payment of
$1.4 million in the year ended October 31, 1999. Additionally, a payment of
$100,000 was made toward the 1998 acquisition that was partially financed by the
seller. On a pro forma basis, the 1999 and 1998 acquisitions were not material
to results of operations reported for the year ended October 31, 1999 and
accordingly, such information is not presented.
Divestitures-On December 16, 1999, the Company completed the sale of the Brake
Business located in Mississauga, Ontario, Canada, for a net sale price of $6.8
million after deduction of certain transaction-related items, including taxes.
During fiscal 1999, the Brake Business contributed $5.7 million in sales and
$1.4 million in operating income to the Company's results.
In accordance with the New Credit Facility, as amended by the Amendment, the
Company was permitted to apply half of the net proceeds of the sale of the Brake
Business (which amounted to $3.4 million) to general corporate purposes, which
the Company would otherwise have been required to use to prepay indebtedness
under the New Credit Facility. After consummation of the sale, the Company
repaid $3.1 million of the outstanding term loans ($2.4 million of which was
applied to the final scheduled principal payment obligation with respect to the
term loans) and repaid $0.3 million on the Acquisition Facility.
Results of Operations
Fiscal 1999 as Compared to Fiscal 1998
Net sales in 1999 decreased $23.7 million or 7.4% to $294.2 million from $317.9
million in 1998. The decrease in net sales was primarily caused by the
following: (i) a decrease of $15.9 million in hoists and component sales
primarily resulting from continued softness in certain European and Asian
markets; (ii) a decrease of $7.1 million in engineered crane sales worldwide
largely due to the fact that 1998 included $8.9 million in container crane sales
in the United Kingdom without any corresponding sales in 1999; (iii) a decrease
in overall parts sales of $3.6 million caused primarily by the decrease in spare
parts orders attributable to the lower engineered crane sales resulting from a
weakened market; and (iv) a decrease in modernization sales of $1.4 million.
These decreases were partially offset by an increase in service sales of $2.4
million and an increase in standard crane sales of $1.9 million.
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<PAGE>
Cost of sales decreased $8.3 million or 3.7% to $218.7 million in 1999 from
$227.0 million in 1998 primarily due to the lower sales volumes described above.
However, cost of sales as a percentage of net sales increased from 71.4% in 1998
to 74.3% in 1999 due to the lower level of volume in manufacturing operations
tied to the decrease in engineered crane and hoist and component sales.
Additionally, the Company experienced $2.0 million in special charges during
1999 related to revised estimates of inventory obsolescence, warranty reserves
and contract completion costs.
Selling, general and administrative expenses increased $9.2 million or 14.7% to
$72.4 million in 1999 from $63.2 million in 1998. The primary cause was $4.2
million of special charges related to provisions for certain delinquent accounts
receivable and changes in management (severance and recruiting costs).
Additional causes were: (i) the increased administrative resources necessary to
replace functions formerly performed by HII and their affiliates, including
information systems and certain accounting and human resource functions; (ii)
increased consulting costs; and (iii) increases due to the 1999 and 1998
acquisitions. Selling, general and administrative expenses in 1999 also included
approximately $1.0 million of management fees compared to $0.6 million in 1998.
Additionally, selling, general and administrative expenses in 1999 included
approximately $1.4 million of accrued royalties owed to HII for use of the P&H
trademark after March 30, 1999, the initial date such royalty payments began
accruing, while 1998 expenses included severance costs of $1.8 million
associated with restructuring the Company's United States and United Kingdom
manufacturing operations. These increases were offset by savings associated with
the 1998 restructuring of the United Kingdom and United States manufacturing
operations and other cost-reduction measures.
Parent management fees allocated by HII (prior to the Recapitalization), which
represented an allocation of HII's corporate expenses, were $1.2 million in
1998. Additionally, in 1998, the Company recognized incentive payments of $1.2
million to certain members of management. While the cost of these incentive
payments appears on the Company's income statements, HII, the Company's former
parent, paid these incentives.
Approximately $30.0 million in interest expense was recorded in 1999. The
components include $23.6 million related to the debt issued in connection with
the Recapitalization and related commitment fees, $2.6 million related to
borrowings for working capital and acquisition funding, a $0.4 million fee paid
in conjunction with the waiver of New Credit Facility debt covenant violations,
$0.7 million related to other borrowings, $2.5 million in amortization of
financing costs recognized in connection with the Recapitalization and $0.2 in
amortization of a credit support fee payable to HII. Interest expense in 1998
included $1.5 million related to borrowings from HII and affiliates (prior to
the Recapitalization), $14.2 million related to the debt issued in connection
with the Recapitalization, $0.8 million on borrowings for working capital, $1.2
million in amortization of financing costs and $0.3 million in amortization of a
credit support fee payable to HII. The Company paid $27.7 million in cash
interest, waiver fees and commitment fees during 1999.
Realization of deferred tax assets is dependent on generating sufficient taxable
income prior to expiration of net operating loss carryforwards. During 1999, the
Company re-estimated its future operating results and determined its deferred
tax asset valuation allowance required an increase of $80.4 million which was
recognized as income tax expense. Management believes it is more likely than not
that the net deferred tax assets recorded will not be realized.
The current income tax expense recorded of $2.1 million resulted primarily from
profitable operations in Canada and from state income tax liabilities.
The Company's backlog of orders at October 31, 1999 was approximately $77.4
million compared to approximately $97.3 million at October 31, 1998. Bookings in
1999 were $274.3 million compared to $317.5 million in 1998. The change in
backlog is due to lower bookings and completion of several large projects in
fiscal 1999. The decrease in bookings was primarily due to lower orders for
modernizations, standard cranes, hoists and components bookings, especially in
international markets. Fourth quarter 1998 bookings included a $21 million order
with no comparably sized order in 1999.
Fiscal 1998 as Compared to Fiscal 1997
Net sales in 1998 decreased $35.5 million or 10.0% to $317.9 million from $353.4
million in 1997. The decrease in net sales was primarily the result of a
decrease in engineered crane sales worldwide as 1997 included the completion of
several large projects in both the United States and the United Kingdom without
a corresponding level of projects in 1998. The decline in engineered crane sales
was largely due to a downturn in orders in the United Kingdom container crane
business and the failure to win certain large projects in the United States.
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<PAGE>
This decrease was offset, in part, by an increase in (i) standard crane sales
due to a product mix shift away from engineered cranes, new product sales
(trolleys) and the continued expansion of the Company's DSC network, (ii)
modernization sales due to the completion of several large projects and (iii)
sales of parts, service, hoists and components also due to the expanded DSC
network. These increases also were due, in part, to a full year's operation of a
DSC in Ohio acquired in February 1997 and to sales of the four acquisitions made
during 1998.
Other income - net decreased from $2.6 million in 1997 to $1.3 million in 1998
primarily due to the recognition of a $2.0 million gain in 1997 on an insurance
claim relating to a fire at the Morris Mechanical Handling Ltd. facility in the
United Kingdom in 1995. Other income - net in 1998 includes a gain of
approximately $0.3 million on the sale of certain fixed assets, including a
building.
Cost of sales decreased $33.8 million or 13.0% to $227.0 million in 1998 from
$260.8 million in 1997 primarily due to the lower sales volumes described above.
Cost of sales as a percentage of net sales also decreased, from 73.8% in 1997 to
71.4% in 1998. This improvement is a result of a shift in the Company's sales
mix toward the higher margin standard cranes and aftermarket products and away
from engineered cranes.
Selling, general and administrative expenses increased $6.4 million or 11.2% to
$63.2 million in 1998 from $56.8 million in 1997 due to expenses related to the
businesses acquired in 1997 and 1998, unabsorbed engineering costs due to lower
engineered crane sales, additional costs associated with the separation from
HII, including the staffing of corporate tax and treasury functions and rent on
new corporate headquarters, management fees included in 1998 for periods
subsequent to the Recapitalization, and severance costs of $1.8 million
associated with restructuring the Company's United States and United Kingdom
manufacturing operations.
As a result of the Recapitalization, the Company recognized incentive payments
of $1.2 million to certain members of management. While the cost of these
incentive payments appears on the Company's income statements, HII, the
Company's former parent, paid these incentives.
Approximately $16.5 million in third party interest expense was recorded in
1998, including $14.2 million in interest expense on the Senior Notes and under
the New Credit Facility and $1.2 million of amortization of related deferred
financing costs. The Company also incurred $0.8 million in interest expense on
working capital borrowings outstanding and $0.3 million in amortization of a
credit support fee payable to HII.
The provision for income taxes was approximately 50.9% of income before income
taxes and minority interest for 1998 as compared to 39.9% for 1997. This
increase is due in large part to higher foreign effective tax rates, the
nondeductible divestiture bonus expense charge and the effect of an increase in
the deferred tax valuation allowance.
Net income decreased $16.6 million or 79.4% to $4.3 million in 1998 from $20.9
million in 1997. Net income represented 1.3% of net sales in 1998 compared to
5.9% of net sales in 1997.
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 $15.2 million in 1999 versus net
cash flow provided by operating activities of $9.6 million and $12.9 million in
1998 and 1997, respectively. The decrease in operating cash flow from 1998 to
1999 was primarily due to a $33.2 million decrease in net income after adjusting
for the effect of the increase in the deferred tax provision, offset, in part,
by a $6.1 million increase in cash flow resulting from net changes in working
capital and a $2.8 million increase in depreciation and amortization. The
decrease in operating cash flow from 1997 to 1998 was due primarily to a $16.6
million decrease in net income for 1998 offset by increases in advance payments
and progress billings and non-cash expenses such as amortization of financing
costs and divestiture bonuses during the year. Lower levels of acquisition
funding provided by HII and its affiliates in 1998, compared to the acquisition
funding provided for the acquisition of a DSC in Ohio in February 1997, also
contributed to the decrease in cash flow provided by operating activities.
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<PAGE>
Net cash used for investment and other transactions for 1999, 1998 and 1997 was
$13.7 million, $16.0 million and $14.9 million, respectively. During 1999, $5.6
million of cash was used for acquisitions related to the Company's aftermarket
business and for payments made with respect to three earlier acquisitions versus
$8.9 million used for 1998 acquisitions. Additionally, capital expenditures
increased to $7.6 million in 1999 from $5.2 million in 1998. The 1999
expenditures included computers and computer upgrades, new operating system
software, office and warehouse consolidations and new manufacturing equipment.
The increase from 1997 to 1998 was due mainly to the receipt of an insurance
claim in 1997 due to an earlier fire. This was offset in part by a lower level
of acquisition expenditures during 1998 than 1997. The Company anticipates
approximately $2.0 million in capital expenditures in fiscal 2000 for computers,
computer upgrades and various furniture, fixtures, machinery and equipment. The
Company's ability to undertake those capital expenditures will likely be
adversely affected by its liquidity situation, as discussed below. The Company
did not have any material commitments for capital expenditures as of October 31,
1999 or as of January 31, 2000.
Net cash provided by financing activities was $30.3 million and $7.5 million in
1999 and 1998, respectively. The increase from 1998 to 1999 was primarily due to
net proceeds from borrowings used to fund principal and interest payments,
working capital needs and acquisitions. The increase from 1997 to 1998 was due
to the financing activities associated with the Recapitalization. Net cash used
for financing activities was $0.3 million in 1997.
As part of the Recapitalization, MMH offered $200.0 million principal amount of
its 9 1/2% Senior Notes. Interest on the Senior Notes began accruing on March
30, 1998, the date of issuance of the Senior Notes, 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.
As part of the Transactions, the Company entered into the New Credit Facility
which included a $20 million term loan ("Term Loan A"), a $35 million term loan
("Term Loan B" and together with Term Loan A, the "Term Loans"), a revolving
credit facility (the "Revolving Credit Facility") and an acquisition facility
(the "Acquisition Facility"). The Revolving Credit Facility initially provided
the Company with up to $70.0 million of available borrowings 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.
Term Loan A is payable in 20 quarterly installments, which commenced on June 30,
1998 and Term Loan B is payable in 28 quarterly installments, which commenced on
June 30, 1998.
As of January 31, 2000, the aggregate scheduled yearly loan principal payments
for all borrowings under the New Credit Facility, after giving effect to the
changes in repayment schedules due to the partial prepayment of the term loans
and Acquisition Facility with proceeds from the December 1999 divestiture of the
Brake Business, are as follows: (i) $6,792,000 in 2000; (ii) $5,119,000 in 2001;
(iii) $6,674,000 in 2002; (iv) $35,720,000 in 2003; (v) $24,090,000 in 2004; and
(vi) $8,011,000 in 2005.
Borrowings under the New Credit Facility bear interest at various interest rates
based on certain floating reference rates. 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 arrangement, which expires on
March 31, 2001, is to limit the interest rate exposure on specified amounts up
to $55.0 million borrowed under the New Credit Facility at a fixed LIBOR rate of
5.875% plus 3.5%.
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.
The Company did not meet certain of the financial covenants under the New Credit
Facility for the period ended January 31, 1999 and did not meet such financial
covenants and certain additional financial covenants for the period ended April
30, 1999. The Company obtained waivers of such financial covenants through
August 2, 1999. The waivers permitted the Company to borrow certain amounts
under the Revolving Credit Facility to meet its working capital requirements;
23
<PAGE>
however the Company could not, without prior lender consent, (i) borrow any
amounts under the Acquisition Facility, (ii) borrow any amounts under the
Revolving Credit Facility in excess of the aggregate amount of the Revolving
Credit Facility borrowings that the Company had repaid subsequent to March 2,
1999, or (iii) request the issuance of letters of credit, bid bonds or
performance bonds in an aggregate amount after March 2, 1999 in excess of $5.0
million.
On August 2, 1999, the Company entered into the Amendment which cured past
financial covenant violations and reset financial covenants under the New Credit
Facility until April 2001. The Amendment increased the cash availability under
the Revolving Credit Facility from $35.7 million under the previous waiver
agreement to $40.7 million. At January 31, 2000, the Company had $25.2 million
of outstanding Revolving Credit Facility borrowings. In addition, the Amendment
permitted the Company to obtain letters of credit, bid bonds and performance
bonds in an amount not to exceed $10.0 million in the aggregate of which $5.2
million have been issued.
In connection with, and as a condition to the New Credit Facility lenders
entering into, the Amendment, certain of the current indirect equity holders in
Holdings, through Martin Crane purchased a $5.0 million participation in the New
Credit Facility and received certain non-voting equity interests in Holdings,
consisting of 25% of the then outstanding Holdings Common Stock.
The Company anticipates that it will not meet certain financial covenants
contained in the New Credit Facility for the quarter ended January 31, 2000 and
the foreseeable future thereafter. The Company entered into an Amendment and
Waiver under the New Credit Facility, dated as of January 31, 2000, whereby,
among other matters, the lenders waived compliance by the Company with such
financial covenants, for the period from January 31, 2000 until 5:00 p.m. March
29, 2000. The January Waiver permits the Company, subject to certain conditions,
to make additional borrowings under the Revolving Credit Facility and issue
additional letters of credit, above levels in existence on January 31, 2000, in
an aggregate amount of up to $12.0 million, during the waiver period.
Currently, the Company is not generating sufficient funds from operations to
satisfy working capital and debt service requirements, and as a result must rely
on Revolving Credit Facility borrowings to continue to operate. While the
Company anticipates that cash generated from operations and Revolving Credit
Facility borrowings will be sufficient to enable it to satisfy its cash flow
needs until March 29, 2000, there can be no assurance that it will have
sufficient cash flow and borrowings available to enable it to meet its
obligations until such date.
Until March 29, 2000 and thereafter, the Company may experience severe financial
and operational difficulties resulting from its liquidity situation that may
prevent it from continuing operations.
In addition, at the time of expiration of the January Waiver, the Company will
again be in default under certain financial covenants of the New Credit
Facility. As a result of these defaults, the lenders ("Lenders") under the New
Credit Facility will be able to declare all amounts of principal and accrued
interest outstanding under the New Credit Facility immediately due and payable
(an "Acceleration"). If such Lenders so accelerate, the Company will then also
be in default under the indenture governing the Senior Notes (the "Indenture").
In such event, the Company would not be able to cure such default and the
trustee under the Indenture will be able to accelerate the Company's outstanding
indebtedness (including accrued interest) evidenced by the Senior Notes. The
Company will not have sufficient funds to repay the outstanding indebtedness
under the New Credit Facility or the Senior Notes if either such indebtedness is
accelerated. As of January 31, 2000, the Company had $298.9 million of
indebtedness outstanding, including $86.7 million under the New Credit Facility
(including accrued interest) and $206.3 million evidenced by the Senior Notes
(including accrued interest).
In the event that the Lenders do not cause an Acceleration to occur on March 29,
2000, the Company will nonetheless be unable to meet certain of its obligations
as they become due after such date, including a $9.5 million interest payment
obligation under the Senior Notes due on April 1, 2000. As a result, the Lenders
and, after the expiration of the applicable grace period, the trustee under the
Indenture will have the right to accelerate the Company's outstanding
indebtedness. In such event, the Company will not have sufficient funds to repay
New Credit Facility borrowings and the Senior Notes.
The Company is currently seeking, and is engaged in discussions regarding, its
strategic alternatives. The Company has engaged in discussions with the Lenders
and also intends to begin preliminary discussions with representatives of the
holders of Senior Notes concerning the possible restructuring of the Company's
capital structure, including a possible sale of the Company to a third party in
connection therewith. There can be no assurance that the Company will be able to
successfully pursue strategic alternatives or that the results of its
discussions with its creditors will be successful. As discussed above, if the
Company fails in the near future to resolve its critical liquidity issues, the
Company may be unable to continue as a going concern.
24
<PAGE>
Holdings' current 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' ability to meet its cash needs
depends entirely upon receiving dividends, loans, advances or other payments
from its subsidiaries. If for the reasons outlined above or otherwise, the
Company is unable to continue as a going concern, Holdings also will not be able
to continue to operate as a going concern. The New Credit Facility and the
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 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 Indenture) for the four most recent consecutive fiscal quarters is at least
2 to 1. Moreover, the terms of the Holdings Series A Senior Preferred Stock, as
well as the Holdings Series B Junior Preferred Stock and the Holdings Series C
Junior Voting Preferred Stock, restrict the ability of Holdings and its
subsidiaries to incur additional indebtedness. There are no current material
restrictions on the ability of the Company's subsidiaries to pay dividends or
otherwise make payments to the Company. In addition, the Company anticipates
that there will not be any material economic restrictions or adverse tax effects
with respect to the Company's ability to repatriate foreign assets. There can be
no assurance, however, that such limitations will not exist in the future. As a
result of these restrictions and the Company's current financial condition
outlined above, it is unlikely that Holdings will have available to it
sufficient cash resources to pay cash dividends on the Holdings Series A Senior
Preferred Stock (or on the Holdings Series B Junior Preferred Stock and the
Holdings Series C Junior Voting Preferred Stock) commencing October 1, 2003. In
addition, all issues of Holdings' preferred stock are mandatorily redeemable.
Euro Conversion
On January 1, 1999, eleven of the fifteen member countries of the European
Monetary Union (the "participating countries") began a three-year transition
from their national currencies to a new common currency, the "euro". As of that
date, the participating countries no longer control their own monetary policies
by directing independent interest rates for their national currency. The
national currencies will remain legal tender and can be used in commercial
transactions until January 1, 2002. Beginning January 1, 2002, the participating
countries will issue new euro currency and withdraw their respective national
currencies which will no longer be used as legal tender. The Company's only
significant operations in member countries of the European Monetary Union are in
the United Kindgom, which is not a participating country. As such, management
does not believe that the euro conversion will have a significant impact on the
operations, cash flows or financial position of the Company, unless and until
the United Kingdom adopts the euro.
Cautionary Factors
This report contains or may contain forward looking statements by or on behalf
of Holdings and the Company. Such statements are based upon management's current
expectations and are subject to risks and uncertainties that could cause the
Company's actual results to differ materially from those contemplated in the
statements. Readers are cautioned not to place undue reliance on these forward
looking statements. In addition to the assumptions and other factors referred to
specifically in connection with such statements, factors that could cause the
Company's actual results to differ materially from those contemplated include,
among others, the following:
Liquidity Status - The Company did not meet certain of the
financial covenants under the New Credit Facility for the period
ended January 31, 1999 and did not meet such financial covenants
and certain additional financial covenants for the period ended
April 30, 1999. The Company obtained a waiver of such financial
covenants through August 2, 1999. On August 2, 1999, the Company
obtained an amendment to the New Credit Facility (the
"Amendment") which cured past financial covenant violations and
reset financial covenants until April 2001. The Amendment
increased the cash availability under the Revolving Credit
Facility from $35.7 million under the previous waiver agreement
to $40.7 million. In addition, the Amendment permitted the
Company to obtain letters of credit, bid bonds and performance
bonds in an amount not to exceed $10.0 million in the aggregate
of which $5.2 million have been issued.
The Company anticipates that it will not meet certain financial
covenants contained in the New Credit Facility for the quarter
ended January 31, 2000 and the foreseeable future thereafter. The
25
<PAGE>
Company entered into an Amendment and Waiver under the New Credit
Facility, dated as of January 31, 2000, whereby, among other
matters, the lenders waived compliance by the Company with such
financial covenants, for the period from January 31, 2000 until
5:00 p.m. March 29, 2000. The January Waiver permits the Company,
subject to certain conditions, to make additional borrowings under
the Revolving Credit Facility and issue additional letters of
credit, above levels in existence on January 31, 2000, in an
aggregate amount of up to $12.0 million, during the waiver period.
Currently, the Company is not generating sufficient funds from
operations to satisfy working capital and debt service
requirements, and as a result must rely on Revolving Credit
Facility borrowings to continue to operate. While the Company
anticipates that cash generated from operations and Revolving
Credit Facility borrowings will be sufficient to enable it to
satisfy its cash flow needs until March 29, 2000, there can be so
assurance that it will have sufficient cash flow and borrowings
available to enable it to meet its obligations until such date.
Until March 29, 2000 and thereafter, the Company may experience
severe financial and operational difficulties resulting from its
liquidity situation that may prevent it from continuing
operations. In addition, at the time of expiration of the January
Waiver, the Company will again be in default under certain
financial covenants of the New Credit Facility. As a result of
these defaults, the Lenders will be able to declare all amounts of
principal and accrued interest outstanding under the New Credit
Facility immediately due and payable. If such Lenders so
accelerate, the Company will then also be in default under the
Indenture . In such event, the Company would not be able to cure
such default and the trustee under the Indenture will be able to
accelerate the Company's outstanding indebtedness (including
accrued interest) evidenced by the Senior Notes. The Company will
not have sufficient funds to repay the outstanding indebtedness
under the New Credit Facility or the Senior Notes if either such
indebtedness is accelerated. As of January 31, 2000, the Company
had $298.9 million of indebtedness outstanding, including $86.7
million under the New Credit Facility (including accrued interest)
and $206.3 million evidenced by the Senior Notes (including
accrued interest).
In the event that the Lenders do not cause an Acceleration to
occur on March 29, 2000, the Company will nonetheless be unable to
meet certain of its obligations as they become due after such
date, including a $9.5 million interest payment obligation under
the Senior Notes due on April 1, 2000. As a result, the Lenders
and, after expiration of the applicable grace period, the trustee
under the Indenture will have the right to accelerate the
Company's outstanding indebtedness. In such event, the Company
will not have sufficient funds to repay New Credit Facility
borrowings and the Senior Notes.
The Company is currently seeking, and is engaged in discussions
regarding, its strategic alternatives. The Company has engaged in
discussions with the Lenders and also intends to begin preliminary
discussions with representatives of the holders of Senior Notes
concerning the possible restructuring of the Company's capital
structure, including a possible sale of the Company to a third
party in connection therewith. There can be no assurance that the
Company will be able to successfully pursue strategic alternatives
or that the results of its discussions with its creditors will be
successful. As discussed above, if the Company fails in the near
future to resolve its critical liquidity issues, both the Company
and Holdings may be unable to continue as going concerns.
Potential Material Adverse Effect of HII Bankruptcy - On June 7,
1999, HII and certain of its United States affiliates (including
HarnCo) filed voluntary petitions for relief under Chapter 11 of
the Bankruptcy Code in the United States Bankruptcy Court for the
District of Delaware. Certain provisions of the Bankruptcy Code
allow a debtor to avoid, delay and/or reduce its contractual and
other obligations to third parties. There can be no assurance
that HII and its affiliates will not attempt to utilize such
provisions to cease performance under their agreements and
arrangements with the Company. The inability of the Company to
receive the benefits of one or more of these agreements or the
termination of ongoing arrangements between the Company and
affiliates of HII (including those relating to the provision of
services and materials by HII and its affiliates to the Company)
could materially adversely affect the Company's operations and
financial performance. In the event that any of the liabilities
retained by HII and its affiliates in connection with the
Recapitalization remain unsatisfied as of the Petition Date, the
Company's right to indemnification for any such amounts it has
paid on behalf of HII and its affiliates may also be avoided,
delayed or reduced. Each of HII and certain of its affiliates on
26
<PAGE>
one hand, and the Company and certain affiliates on the other
hand, have receivables and payables to the other which may be
affected by the HII Bankruptcy.
Risks Associated with Large Crane Projects - The Company's
principal business includes designing, manufacturing, marketing
and servicing large cranes for the capital goods industries. Long
periods of time are often necessary to plan, design and build
these machines. With respect to these machines, there are risks
of customer acceptance and start-up or performance problems.
Large amounts of capital are required to be devoted by some of
the Company's customers to purchase these machines and to finance
the steel mills, paper mills and other facilities that use these
machines. The Company's success in obtaining and managing sales
opportunities can affect the Company's financial performance. In
addition, some projects are located in undeveloped or developing
economies where business conditions are less predictable.
Finally, the market for large cranes is down substantially and
the outlook is not expected to improve for the foreseeable
future.
Risks Associated with International Operations - The Company has
operations and assets located in Canada, Mexico, Chile, the
United Kingdom, South Africa, Thailand,Australia 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. The Company's
international operations (including Canada, Mexico, Chile, South
Africa, Singapore, Thailand, Australia and the United Kingdom)
accounted for 36.4%, 36.2% and 41.8% of the Company's aggregate
net sales in 1999, 1998 and 1997, respectively. Although
historically, exchange rate fluctuations and other international
factors have not had a material impact on the Company's business,
financial condition or results of operations, international
operations expose the Company to a number of risks, including
currency exchange rate fluctuations, trade barriers, exchange
controls, risk of governmental expropriation, political and legal
risks and restrictions, foreign ownership restrictions and risks
of increases in taxes. The inability of the Company, or
limitations on its ability, to conduct its foreign operations or
distribute its products internationally could adversely affect
the Company's operations and financial performance.
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. The current depressed level of new
equipment orders has increased the intensity of competition and
has reduced selling prices and margins on new equipment bookings.
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. In addition, the Company's
ability to compete successfully will likely be adversely affected
by the Company's liquidity crisis.
Market Risks - 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.
Year 2000 Compliance
The Company did not experience any significant disruption in operations as a
result of the Year 2000 issue; however, there remains a potential for Year 2000
problems to occur after January 1, 2000. Management believes that any potential
problems would not have a significant impact on operations of the Company.
The potential Year 2000 problems existed as a result of computer programs
written and systems designed using two digits rather than four to define the
applicable year. Consequently, such software had the potential to recognize a
date using "00" as the year 1900 rather than the year 2000. This could have
resulted in a system failure or miscalculations causing disruptions of
operations, including, among other things, a temporary inability to process
transactions, send invoices, or engage in similar normal business activities.
27
<PAGE>
Since 1996, the Company has been engaged in resolving its Year 2000 issues,
first as a subsidiary of HII, and now on its own as an independent entity. After
the Recapitalization, the Company established its own Year 2000 teams. These
teams performed site audits at each of the Company's operations in order to
identify and address all Year 2000 issues related to both information technology
("IT") systems and internally used manufacturing and administrative equipment.
Hardware and software technology guidelines were implemented worldwide in order
to ensure that all systems were Year 2000 compliant before January 1, 2000.
With respect to non-IT systems, such as heating and ventilation systems,
security systems and machine tools, the Company sought representations from the
relevant vendors that the systems were Year 2000 compliant. The Company received
such assurances from a number of non-IT system vendors and did not encounter any
significant unresolved Year 2000 issues with respect to such systems. In
addition, in the event that there were any unresolved Year 2000 issues with
respect to its non-IT systems, the Company believes it could have obtained
replacement services either internally or from third parties without significant
disruptions to its operations.
During the third fiscal quarter of 1999, the Company's operations in Oak Creek,
Wisconsin replaced their existing business system, formerly shared with HarnCo.
The decision to replace the system was based solely on the need to move off of
the shared system. The vendor of the replacement system represented to the
Company that the new system is Year 2000 compliant (which representation was
confirmed by an outside consultant). The Company sought and received
representations from the applicable vendors that the business systems used in
the United Kingdom, South Africa, Australia, Singapore, Canada, and Mexico were
Year 2000 compliant. The operating system used in the North American
distribution and service business was made compliant during the second fiscal
quarter of 1999 by applying the vendor supplied upgrade.
The Company also assessed and addressed Year 2000 issues with significant
vendors. The Company sought assurances from all of its vendors with respect to
Year 2000 issues. The Company does not, however, control the systems of other
companies, and cannot assure that these systems were timely converted and, if
not converted, would not have an adverse effect on the Company's business
operations. In the event that the Company's significant vendors or suppliers did
not complete their Year 2000 compliance efforts, the Company could have
experienced disruptions in its operations. Disruptions in the economy generally
resulting from Year 2000 issues also could have affected the Company. With
respect to products sold by the Company, management continues to believe that
any liability for Year 2000 compliance will not be material.
The Company used and will continue to use all necessary internal resources to
resolve any Year 2000 issues. The Company completed its Year 2000 remediation
before December 31, 1999. Total expenses on the project through December 31,
1999 were approximately $1.6 million and were primarily related to expenses for
repair or replacement of software and hardware, expenses associated with
facilities, products and supplier reviews and project management expenses. The
Company did not encounter any significant expenditures subsequent to January 1,
2000 and management does not anticipate any additional significant expenditures
in the future.
Future Accounting Changes
In June 1998, the Financial Accounting Standards Board (FASB) has issued
Statement of Accounting Standards ("SFAS") No. 133 "Accounting for Derivative
Instruments and Hedging Activities." It requires all derivative instrumaents to
be recorded in the statements of financial position at fair value. In June 1999,
the statement's effective date was delayed by one year, and it will be effective
for the year ending October 31, 2001. Interim reporting for this standard will
be required. Due to the Company's current limited use of derivative instruments,
the adoption of this statement is not expected to have a material effect on the
Company's financial condition or results of operations.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
The Company is potentially exposed to market risk asssociated with changes in
foreign exchange and interest rates. From time to time the Company will enter
into derivative financial instruments to hedge these exposures. An instrument
will be treated as a hedge if it is effective in offsetting the impact of
volatility in the Company's underlying interest rate and foreign exchange rate
exposures. The Company does not enter into derivatives for speculative purposes.
28
<PAGE>
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 contracts.
Such foreign currency contract activity historically has not been material. At
October 31, 1999, there were no foreign currency forward contracts outstanding.
There also were no material non-functional currency denominated financial
instruments, which would expose the Company to foreign exchange risk,
outstanding at October 31, 1999.
As noted above, the Company is exposed to market risk associated with adverse
movements in interest rates. Specifically, the Company is exposed to changes in
the value of its $200 million Senior Notes and to changes in earnings and
related cash flows on its variable interest rate debt obligations outstanding
under the New Credit Facility. Borrowings outstanding under the New Credit
Facility totalled $92.6 million at October 31, 1999.The fair value of the
Company's Senior Notes was approximately $66 million based upon the quoted
market price of the instrument on October 31, 1999.
The Company entered into an interest rate swap arrangement in order to limit the
effect of increases in the interest rates under the New Credit Facility. The
effect of this agreement, which expires on March 31, 2001, is to limit the
interest rate exposure on specified amounts up to $55.0 million borrowed under
the New Credit Facility to a fixed LIBOR rate of 5.875% (the "Fixed Rate") plus
3.5%, as applicable. As a result, the interest rates applicable to Term Loan A
and Term Loan B at October 31, 1999 have been fixed at 9.375%, respectively. The
differential between the floating rate of the New Credit Facility and the Fixed
Rate is accrued as interest rates change and is recorded as an adjustment of
interest expense. The Company would have paid approximately $0.1 million to
terminate the interest rate swap at October 31, 1999. After considering the
related effects on the Company's interest rate swap discussed above, a 10%
increase/decrease in the average floating reference rates in effect under the
New Credit Facility at October 31, 1999 would not have a material effect on the
Company's earnings or cash flows.
29
<PAGE>
Item 8. Financial Statements and Supplementary Data
INDEX TO 1999 FINANCIAL STATEMENTS
Financial Statements:
MMH HOLDINGS, INC.
Report of Independent
Accountants ........................................................... 31
Balance Sheets at October 31, 1999 and 1998 ........................... 33
Statements of Income and Comprehensive Income for
the three years ended October 31, 1999 ............................... 34
Statements of Cash Flows for the
three years ended October 31, 1999 ................................... 35
Statements of Preferred Stock and Shareholders'
Equity/Parent Investment for the three years
ended October 31, 1999 .............................................. 36
Notes to Financial
Statements ............................................................ 41
Financial Statement Schedules:
For the three years ended October 31, 1999
II - Valuation And Qualifying Accounts
MORRIS MATERIAL HANDLING, INC
Report of Independent
Accountants ........................................................... 31
Balance Sheets at October 31, 1999 and 1998 ........................... 33
Statements of Income and Comprehensive
Income for the three years ended October 31, 1999 .................... 34
Statements of Cash Flows for the
three years ended October 31, 1999 .................................. 35
Statements of Preferred Stock and Shareholders'
Equity/Parent Investment for the three years
ended October 31, 1999 .............................................. 36
Notes to Financial
Statements ............................................................ 41
Financial Statement Schedules:
For the three years ended October 31, 1999
II - Valuation And Qualifying Accounts
All other schedules are omitted because they are not applicable or the required
information is shown in financial statements or notes thereto.
30
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
MMH Holdings, Inc.
In our opinion, the financial statements listed in the accompanying index
present fairly, in all material respects, the financial position of MMH
Holdings, Inc. and its subsidiaries at October 31, 1999 and 1998, and the
results of their operations and their cash flows for each of the three years in
the period ended October 31, 1999, in conformity with accounting principles
generally accepted in the United States. In addition, in our opinion, the
financial statement schedules listed in the accompanying index present fairly,
in all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements. These financial
statements and financial statement schedules are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements and financial statement schedules based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States, 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.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 4 to the
financial statements, the Company suffered a decline in operating results and
reported a substantial net loss in fiscal 1999, and anticipates being in
violation of certain of its amended debt agreements during fiscal 2000 based
upon its current projection of results of operations. If further amendments to
the related agreements cannot be negotiated or satisfactory waivers obtained,
substantially all of the Company's long-term debt obligations and other
obligations under surety agreements would be subject to acceleration. The
Company would not have sufficient assets to settle such liabilities then
outstanding. These circumstances raise substantial doubt about the Company's
ability to continue as a going concern. Management's plans in regard to these
matters are also described in Note 4. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
PRICEWATERHOUSECOOPERS LLP
Milwaukee, Wisconsin
January 31, 2000
31
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholder of
Morris Material Handling, Inc.
In our opinion, the financial statements listed in the accompanying index
present fairly, in all material respects, the financial position of Morris
Material Handling, Inc. and its subsidiaries at October 31, 1999 and 1998, and
the results of their operations and their cash flows for each of the three years
in the period ended October 31, 1999, in conformity with accounting principles
generally accepted in the United States. In addition, in our opinion, the
financial statement schedules listed in the accompanying index present fairly,
in all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements. These financial
statements and financial statement schedules are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements and financial statement schedules based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States, 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.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 4 to the
financial statements, the Company suffered a decline in operating results and
reported a substantial net loss in fiscal 1999, and anticipates being in
violation of certain of its amended debt agreements during fiscal 2000 based
upon its current projection of results of operations. If further amendments to
the related agreements cannot be negotiated or satisfactory waivers obtained,
substantially all of the Company's long-term debt obligations and other
obligations under surety agreements would be subject to acceleration. The
Company would not have sufficient assets to settle such liabilities then
outstanding. These circumstances raise substantial doubt about the Company's
ability to continue as a going concern. Management's plans in regard to these
matters are also described in Note 4. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
PRICEWATERHOUSECOOPERS LLP
Milwaukee, Wisconsin
January 31, 2000
32
<PAGE>
<TABLE>
MMH HOLDINGS, INC.
BALANCE SHEETS
ASSETS
<CAPTION>
October 31,
---------------------------------
1999 1998
------------- --------------
($ in 000's)
Current Assets
<S> <C> <C>
Cash and cash equivalents $ 3,929 $ 2,534
Accounts receivable-net 64,481 81,947
Inventories 39,994 42,561
Deferred income taxes -- 6,277
Other current assets 7,842 5,190
--------- ---------
116,246 138,509
--------- ---------
Property, Plant and Equipment
Land and improvements 3,349 3,481
Buildings 23,235 22,604
Machinery and equipment 45,219 41,564
--------- ---------
71,803 67,649
Less accumulated depreciation (30,829) (26,579)
--------- ---------
40,974 41,070
--------- ---------
Other Assets
Goodwill 42,844 39,843
Debt financing costs 16,398 18,905
Deferred income taxes -- 65,979
Other 10,374 6,691
--------- ---------
69,616 131,418
--------- ---------
$ 226,836 $ 310,997
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Short-term notes payable and current
portion of long-term obligations (Note 9) $ 383 $ 2,262
Revolving Credit Facility borrowings (Note 9) 27,925 --
Term loans (Note 9) 52,225 --
Acquisition Facility Line borrowings (Note 9) 12,430 --
Senior Notes (Note 9) 200,000 --
Bank overdrafts 1,367 1,252
Trade accounts payable 26,757 32,893
Employee compensation and benefits 8,020 8,601
Advance payments and progress billings 8,336 9,399
Accrued warranties 1,821 2,324
Accrued interest 1,804 2,201
Income taxes payable 2,205 2,307
Other current liabilities 9,791 16,714
--------- ---------
353,064 77,953
Revolving Credit Facility Borrowings (Note 9) -- 1,200
Term Loans (Note 9) -- 52,225
Acquisition Facility Borrowings (Note 9) -- 6,194
Senior Notes (Note 9) -- 200,000
Other Long-Term Obligations 2,784 2,205
Deferred Income Taxes -- 2,698
Other Long-Term Liabilities 1,307 --
Minority Interest 504 364
Commitments and Contingencies (Note 12)
Mandatorily Redeemable Preferred Stock 108,245 95,351
Shareholders' Equity (239,068) (127,193)
--------- ---------
$ 226,836 $ 310,997
========= =========
</TABLE>
The accompanying notes are an integral part of the financial statements.
33
<PAGE>
<TABLE>
MMH HOLDINGS, INC.
STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (LOSS)
<CAPTION>
Year Ended October 31,
----------------------------------------------------
1999 1998 1997
--------- ------------ -----------
($ in 000's)
Revenues
<S> <C> <C> <C>
Equipment and Part Sales $ 235,526 $ 261,544 $ 301,995
Service Sales 58,669 56,313 51,355
--------- --------- ---------
Net Sales 294,195 317,857 353,350
Other Income - Net 392 1,331 2,649
--------- --------- ---------
294,587 319,188 355,999
Cost of Sales 218,703 226,991 260,794
Selling, General and Administrative Expenses 72,439 63,152 56,806
HII Management Fee -- 1,155 2,862
Non-Recurring Employee Benefit Costs -- 1,216 --
--------- --------- ---------
Operating Income 3,445 26,674 35,537
Interest Expense - Net
HII Affiliates -- (1,448) (394)
Third Party (30,027) (16,527) (398)
--------- --------- ---------
Income (Loss) Before Income Taxes
and Minority Interest (26,582) 8,699 34,745
Provision for Income Taxes (71,680) (4,435) (13,874)
Minority Interest 57 27 (18)
--------- --------- ---------
Net Income (Loss) (98,205) 4,291 20,853
Foreign Currency Translation Adjustments (687) (2,441) 540
--------- --------- ---------
Comprehensive Income (Loss) $ (98,892) $ 1,850 $ 21,393
========= ========= =========
</TABLE>
The accompanying notes are an integral part of the financial statements.
34
<PAGE>
<TABLE>
MMH HOLDINGS, INC.
STATEMENTS OF CASH FLOWS
<CAPTION>
Year Ended October 31,
----------------------------------------
1999 1998 1997
---------- --------- ---------
Operating Activities ($ in 000's)
<S> <C> <C> <C>
Net income $ (98,205) $ 4,291 $ 20,853
Add (deduct) - items not affecting cash provided by
operating activities:
Depreciation and amortization 8,239 6,823 6,736
Amortization of debt financing costs 2,531 1,169 --
Deferred income taxes - net 69,614 327 89
Divestiture bonus -- 1,216 --
Gain on fire insurance claim -- -- (2,011)
Other (57) (908) (818)
Changes in working capital, excluding the effects of acquisition opening
balance sheets:
Accounts receivable 17,950 2,223 (3,656)
Inventories 4,000 (7,692) 6,044
Other current assets (3,385) (3,317) 2,077
Trade accounts payable and bank overdrafts (6,810) (4,292) (2,852)
Employee compensation and benefits (975) 75 (1,293)
Advance payments and progress billings (1,335) 2,258 (16,056)
Accrued warranties (489) (1,689) 178
Accrued interest (397) 2,201 --
Other current liabilities (5,856) 3,647 (5,116)
Activity with parent and other affiliates - net -- 3,224 8,724
--------- --------- ---------
Net cash provided by (used for) operating activities (15,175) 9,556 12,899
--------- --------- ---------
Investment and Other Transactions
Fixed asset additions - net (7,594) (5,208) (6,498)
Acquisition of businesses - net of cash acquired (5,630) (8,891) (11,787)
Fire insurance claim activity - net -- -- 3,441
Issuance of loans to senior management (150) (900) --
Repayment of loans by senior management 70 780 --
Other - net (444) (1,738) (103)
--------- --------- ---------
Net cash used for investment and other transactions (13,748) (15,957) (14,947)
--------- --------- ---------
Financing Activities
Net proceeds (repayments) of short-term debt and notes payable 463 (694) (99)
Proceeds from Acquisition Facility borrowings 6,235 6,194 --
Net proceeds from Revolving Credit Facility borrowings 26,300 1,200 --
Repayments of long-term debt (2,100) (675) (155)
Payment of fees for amendment of New Credit Facility (612) -- --
Proceeds from Senior Note Offering -- 200,000 --
Proceeds from New Credit Facility -- 55,000 --
Net proceeds from issuance of Series A preferred stock
and related common shares -- 57,094 --
Redemption of common stock and preferred stock -- (287,000) --
Stock redemption transaction costs -- (3,553) --
Debt financing costs -- (20,074) --
--------- --------- ---------
Net cash provided by (used for) financing activities 30,286 7,492 (254)
--------- --------- ---------
Effect of Exchange Rate Changes on
Cash and Cash Equivalents 32 (89) 13
--------- --------- ---------
Increase (Decrease) in Cash and Cash Equivalents 1,395 1,002 (2,289)
Cash and Cash Equivalents
Beginning of Year 2,534 1,532 3,821
--------- --------- ---------
End of Year $ 3,929 $ 2,534 $ 1,532
========= ========= =========
Supplemental disclosures of cash flow information:
Cash paid during each year for:
Interest $ 27,671 $ 12,849 $ 398
Taxes 1,934 1,391 322
Non-cash transactions:
Acquisition purchase price financed by seller 1,600 800 --
Preferred stock dividends in kind 12,322 6,545 --
</TABLE>
The accompanying notes are an integral part of the financial statements.
35
<PAGE>
<TABLE>
MMH HOLDINGS, INC.
STATEMENTS OF PREFERRED STOCK AND SHAREHOLDERS' EQUITY/PARENT INVESTMENT
($ in 000's)
<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, 1996 -- $ -- -- $ -- -- $ -- $ --
Net Income -- -- -- -- -- -- --
Stock issued to HarnCo in exchange for
certain operating assets and ownership
interests of the MHE Business -- -- -- -- -- -- --
Change in foreign currency translation -- -- -- -- -- -- --
Activity with HII and other
Affiliates - net -- -- -- -- -- -- --
--------- --------- --------- --------- --------- --------- ---------
Balance at October 31, 1997 -- -- -- -- -- -- --
Net income -- -- -- -- -- -- --
Change in foreign currency translation -- -- -- -- -- -- --
Exchange of 450 common shares
outstanding for 100,000 shares of
common stock and 30,000
shares of Series C preferred stock -- -- -- -- 30,000 30,000 30,000
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 3,478 4,075 296 347 1,823 2,123 6,545
Amortization of preferred stock
discount -- 338 -- -- -- -- 338
Capital contribution from HII -- -- -- -- -- -- --
Issuance of loans to senior management -- -- -- -- -- -- --
Repayment of loans by 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 - net -- -- -- -- -- -- --
--------- --------- --------- --------- --------- --------- ---------
Balance at October 31, 1998 61,188 59,217 5,105 5,156 30,678 30,978 95,351
Net loss -- -- -- -- -- -- --
Change in foreign currency translation -- -- -- -- -- -- --
Net issuance of loans to senior management -- -- -- -- -- -- --
Issuance of non-voting common shares -- -- -- -- -- -- --
Cash dividends paid -- (9) -- -- -- -- (9)
Preferred stock dividends 7,553 7,654 646 652 3,955 4,016 12,322
Amortization of preferred stock
discount -- 581 -- -- -- -- 581
--------- --------- --------- --------- --------- --------- ---------
Balance at October 31, 1999 68,741 $ 67,443 5,750 $ 5,808 34,633 $ 34,994 $ 108,245
========= ========= ========= ========= ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
Common Stock Parent Accumulated Total
------------------- Investment/ Other Shareholders'
Shares Par Additional Comprehensive Retained Equity/Parent
Outstanding Value Paid-in-Capital Loss Earnings Investment
--------------------- ---------------- -------------- ----------- ---------------
(A)
<S> <C> <C> <C> <C> <C> <C>
Balance at October 31, 1996 100 $ -- $ 95,041 $ (840) $ -- $ 94,201
Net Income -- -- 20,853 -- -- 20,853
Stock issued to HarnCo in exchange for
certain operating assets and ownership
interests of the MHE Business 350 -- -- -- -- --
Change in foreign currency translation -- -- -- 540 -- 540
Activity with HII and other
Affiliates - net -- -- 8,724 -- -- 8,724
--------- --------- --------- --------- --------- ---------
Balance at October 31, 1997 450 -- 124,618 (300) -- 124,318
Net income -- -- -- -- 4,291 4,291
Change in foreign currency translation -- -- -- (2,441) -- (2,441)
Exchange of 450 common shares
outstanding for 100,000 shares of
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) (289,407) -- -- (289,408)
Exchange of 1,512 common shares
for Series B preferred shares (1,512) -- (4,809) -- -- (4,809)
Preferred stock dividends -- -- -- -- (6,545) (6,545)
Amortization of preferred stock
discount -- -- -- -- (338) (338)
Capital contribution from HII -- -- 1,216 -- -- 1,216
Issuance of loans to senior management -- -- (900) -- -- (900)
Repayment of loans by senior management -- -- 780 -- -- 780
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 - net -- -- 3,224 -- -- 3,224
--------- --------- --------- --------- --------- ---------
Balance at October 31, 1998 10,889 -- (121,860) (2,741) (2,592) (127,193)
Net loss -- -- -- -- (98,205) (98,205)
Change in foreign currency translation -- -- -- (687) -- (687)
Net issuance of loans to senior management -- -- -- -- (80) (80)
Issuance of non-voting common shares 1,210 -- -- -- -- --
Cash dividends paid -- -- -- -- -- --
Preferred stock dividends -- -- -- -- (12,322) (12,322)
Amortization of preferred stock
discount -- -- -- -- (581) (581)
--------- --------- --------- --------- --------- ---------
Balance at October 31, 1999 12,099 $ -- $(121,860) $ (3,428) $ (113,780) $(239,068)
========= ========= ========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of the financial statements.
(A) Due to the MHE Business having historically been operated as a division of
HII, a historical retained earnings balance cannot be determined.
36
<PAGE>
<TABLE>
MORRIS MATERIAL HANDLING, INC.
BALANCE SHEETS
ASSETS
<CAPTION>
October 31,
---------------------------------
1999 1998
------------- --------------
($ in 000's)
Current Assets
<S> <C> <C>
Cash and cash equivalents $ 3,929 $ 2,534
Accounts receivable-net 64,481 81,947
Inventories 39,994 42,561
Deferred income taxes -- 6,277
Other current assets 7,842 5,190
--------- ---------
116,246 138,509
--------- ---------
Property, Plant and Equipment
Land and improvements 3,349 3,481
Buildings 23,235 22,604
Machinery and equipment 45,219 41,564
--------- ---------
71,803 67,649
Less accumulated depreciation (30,829) (26,579)
--------- ---------
40,974 41,070
--------- ---------
Other Assets
Goodwill 42,844 39,843
Debt financing costs 16,398 18,905
Deferred income taxes -- 65,979
Other 10,374 6,691
--------- ---------
69,616 131,418
--------- ---------
$ 226,836 $ 310,997
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Short-term notes payable and current
portion of long-term obligations (Note 9) $ 383 $ 2,262
Revolving Credit Facility borrowings (Note 9) 27,925 --
Term loans (Note 9) 52,225 --
Acquisition Facility Line borrowings (Note 9) 12,430 --
Senior Notes (Note 9) 200,000 --
Bank overdrafts 1,367 1,252
Trade accounts payable 26,757 32,893
Employee compensation and benefits 8,020 8,601
Advance payments and progress billings 8,336 9,399
Accrued warranties 1,821 2,324
Accrued interest 1,804 2,201
Income taxes payable 2,205 2,307
Other current liabilities 9,791 16,714
--------- ---------
353,064 77,953
Revolving Credit Facility Borrowings (Note 9) -- 1,200
Term Loans (Note 9) -- 52,225
Acquisition Facility Borrowings (Note 9) -- 6,194
Senior Notes (Note 9) -- 200,000
Other Long-Term Obligations 2,784 2,205
Deferred Income Taxes -- 2,698
Other Long-Term Liabilities 1,307 --
Minority Interest 504 364
Commitments and Contingencies (Note 12)
Shareholders' Equity (130,823) ( 31,842)
--------- ---------
$ 226,836 $ 310,997
========= =========
</TABLE>
The accompanying notes are an integral part of the financial statements.
37
<PAGE>
<TABLE>
MORRIS MATERIAL HANDLING, INC.
STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (LOSS)
<CAPTION>
Year Ended October 31,
----------------------------------------------------
1999 1998 1997
--------- ------------ -----------
($ in 000's)
Revenues
<S> <C> <C> <C>
Equipment and Part Sales $ 235,526 $ 261,544 $ 301,995
Service Sales 58,669 56,313 51,355
--------- --------- ---------
Net Sales 294,195 317,857 353,350
Other Income - Net 392 1,331 2,649
--------- --------- ---------
294,587 319,188 355,999
Cost of Sales 218,703 226,991 260,794
Selling, General and Administrative Expenses 72,439 63,152 56,806
HII Management Fee -- 1,155 2,862
Non-Recurring Employee Benefit Costs -- 1,216 --
--------- --------- ---------
Operating Income 3,445 26,674 35,537
Interest Expense - Net
HII Affiliates -- (1,448) (394)
Third Party (30,027) (16,527) (398)
--------- --------- ---------
Income (Loss) Before Income Taxes
and Minority Interest (26,582) 8,699 34,745
Provision for Income Taxes (71,680) (4,435) (13,874)
Minority Interest 57 27 (18)
--------- --------- ---------
Net Income (Loss) (98,205) 4,291 20,853
Foreign Currency Translation Adjustments (687) (2,441) 540
--------- --------- ---------
Comprehensive Income (Loss) $ (98,892) $ 1,850 $ 21,393
========= ========= =========
</TABLE>
The accompanying notes are an integral part of the financial statements.
38
<PAGE>
<TABLE>
MORRIS MATERIAL HANDLING, INC.
STATEMENTS OF CASH FLOWS
<CAPTION>
Year Ended October 31,
----------------------------------------
1999 1998 1997
---------- --------- ---------
Operating Activities ($ in 000's)
<S> <C> <C> <C>
Net income $ (98,205) $ 4,291 $ 20,853
Add (deduct) - items not affecting cash provided by
operating activities:
Depreciation and amortization 8,239 6,823 6,736
Amortization of debt financing costs 2,531 1,169 --
Deferred income taxes - net 69,614 327 89
Divestiture bonus -- 1,216 --
Gain on fire insurance claim -- -- (2,011)
Other (57) (908) (818)
Changes in working capital, excluding the effects of acquisition opening
balance sheets:
Accounts receivable 17,950 2,223 (3,656)
Inventories 4,000 (7,692) 6,044
Other current assets (3,385) (3,317) 2,077
Trade accounts payable and bank overdrafts (6,810) (4,292) (2,852)
Employee compensation and benefits (975) 75 (1,293)
Advance payments and progress billings (1,335) 2,258 (16,056)
Accrued warranties (489) (1,689) 178
Accrued interest (397) 2,201 --
Other current liabilities (5,856) 3,647 (5,116)
Activity with parent and other affiliates - net -- 3,224 8,724
--------- --------- ---------
Net cash provided by (used for) operating activities (15,175) 9,556 12,899
--------- --------- ---------
Investment and Other Transactions
Fixed asset additions - net (7,594) (5,208) (6,498)
Acquisition of businesses - net of cash acquired (5,630) (8,891) (11,787)
Fire insurance claim activity - net -- -- 3,441
Issuance of loans to senior management (150) (900) --
Repayment of loans by senior management 70 780 --
Other - net (444) (1,738) (103)
--------- --------- ---------
Net cash used for investment and other transactions (13,748) (15,957) (14,947)
--------- --------- ---------
Financing Activities
Net proceeds (repayments) of short-term debt and notes payable 463 (694) (99)
Proceeds from Acquisition Facility borrowings 6,235 6,194 --
Net proceeds from Revolving Credit Facility borrowings 26,300 1,200 --
Repayments of long-term debt (2,100) (675) (155)
Payment of fees for amendment of New Credit Facility (612) -- --
Proceeds from Senior Note Offering -- 200,000 --
Proceeds from New Credit Facility -- 55,000 --
Net proceeds from issuance of Series A preferred stock
and related common shares -- 57,094 --
Redemption of common stock and preferred stock -- (287,000) --
Stock redemption transaction costs -- (3,553) --
Debt financing costs -- (20,074) --
--------- --------- ---------
Net cash provided by (used for) financing activities 30,286 7,492 (254)
--------- --------- ---------
Effect of Exchange Rate Changes on
Cash and Cash Equivalents 32 (89) 13
--------- --------- ---------
Increase (Decrease) in Cash and Cash Equivalents 1,395 1,002 (2,289)
Cash and Cash Equivalents
Beginning of Year 2,534 1,532 3,821
--------- --------- ---------
End of Year $ 3,929 $ 2,534 $ 1,532
========= ========= =========
Supplemental disclosures of cash flow information:
Cash paid during each year for:
Interest $ 27,671 $ 12,849 $ 398
Taxes 1,934 1,391 322
Non-cash transactions:
Acquisition purchase price financed by seller 1,600 800 --
</TABLE>
The accompanying notes are an integral part of the financial statements.
39
<PAGE>
<TABLE>
MORRIS MATERIAL HANDLING, INC.
STATEMENTS OF SHAREHOLDER'S EQUITY/PARENT INVESTMENT
($ in 000's)
<CAPTION>
Common Stock Parent Accumulated Total
------------------- Investment/ Other Shareholders'
Shares Par Additional Comprehensive Retained Equity/Parent
Outstanding Value Paid-in-Capital Loss Earnings Investment
--------------------- ---------------- -------------- ----------- ---------------
(A)
<S> <C> <C> <C> <C> <C> <C>
Balance at October 31, 1996 - $ - $ 95,041 $ (840) $ - $ 94,201
Net income 20,853 20,853
Change in foreign currency translation 540 540
Activity with HII and other affiliates 8,724 8,724
------ ------ ---------- --------- ------- ---------
Balance at October 31, 1997 - - 124,618 (300) - 124,318
Net income 4,291 4,291
Change in foreign currency translation (2,441) (2,441)
Stock issued to Holdings in exchange for
certain operating assets and ownership
interest of the MHE business 200
Dividends to and redemption of
Shares from Holdings (100) (233,459) (233,459)
Capital contribution from HII 1,216 1,216
Issuance of loans to senior management (900) (900)
Repayment of loans by senior management 780 780
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-net 3,224 3,224
------ ------ ---------- --------- ------- ---------
Balance at October 31, 1998 100 - (33,392) (2,741) 4,291 (31,842)
Net loss (98,205) (98,205)
Change in foreign currency translation (687) (687)
Distribution to Holdings (9) (9)
Net issuance of loans to senior management (80) (80)
------ ------ ---------- --------- -------- ----------
Balance at October 31, 1999 100 $ - $ (33,392) $ (3,428) $(94,003) $(130,823)
====== ====== =========== ========== ========= ==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
(A) Due to the MHE Business having historically been operated as a division of
HII, a historical retained earnings balance cannot be determined.
40
<PAGE>
MMH HOLDINGS, INC.
MORRIS MATERIAL HANDLING, INC.
NOTES TO FINANCIAL STATEMENTS
(Dollar amounts in thousands unless indicated)
Note 1 - Basis of Presentation
On January 28, 1998, Harnischfeger Industries, Inc. ("HII") reached an agreement
with MHE Investments, Inc. ("MHE Investments") an affiliate of Chartwell
Investments Inc. ("Chartwell") for the sale of an approximately 80 percent
common ownership interest in HII's Material Handling Equipment Business (the
"MHE Business"). As more fully described in Note 3, the resulting transactions
(the "Recapitalization"), which closed on March 30, 1998 (the "Recapitalization
Closing"), led to a significant change in the capital structure and a
reorganization of the underlying legal entities of the MHE Business. As a result
of the Recapitalization, MMH Holdings, Inc. ("Holdings"), a pre-existing company
engaged in the MHE Business, became an indirect holding company for the
operating entities engaged in the MHE Business. Specifically, Morris Material
Handling, Inc. ("MMH" and collectively with its subsidiaries and their
predecessors, the "Company"), a newly formed wholly-owned direct subsidiary of
Holdings, directly or indirectly acquired the various operating entities engaged
in the MHE Business. Holdings was recapitalized in order to effect the
redemption of certain shares of common stock of Holdings held by Harnischfeger
Corporation ("HarnCo"). As a result of the reorganization of the legal entities
of the MHE Business, Holdings and MMH became the successor companies to the MHE
Business. The transactions have been accounted for as a recapitalization and
accordingly, the financial statements presented herewith reflect the underlying
historical accounting basis of the MHE Business.
For periods prior to the Recapitalization Closing, the financial statements
presented represent the combined financial statements of the entities comprising
the MHE Business. For purposes hereof, it is assumed that Holdings has
historically owned the capital stock of MMH, that all of the assets of the MHE
Business were owned by subsidiaries of MMH and that, immediately prior to the
consummation of the Recapitalization, the historical combined financial
statements of Holdings were identical to those of the Company.
All significant intercompany balances and transactions have been eliminated.
Payables and receivables with HII and affiliates prior to the Recapitalization
are recorded as a component of parent investment.
Note 2 - Description of Business and Significant Accounting Policies
Description of Business - MMH Holdings, Inc. is a holding company, with no
material operations, that conducts its business operations through its directly
wholly-owned subsidiary Morris Material Handling, Inc.
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. The Company's revenues are derived principally from the
sale of industrial overhead cranes, component products and aftermarket products
and services.
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.
41
<PAGE>
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. The
Company's products are generally under warranty against defects in material and
workmanship for a period of 1 to 2 years. The Company generally provides for
future warranty costs based upon the relationship of sales in prior periods to
actual warranty costs.
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.
Interest Rate Swaps - To limit the effect of increases in interest rates, the
Company has entered into an interest rate swap arrangement. The differential
between the contract floating and fixed rates is accrued each period and
recorded as an adjustment of interest expense.
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 shareholders' equity. For subsidiaries
operating in highly inflationary economies, financial statements are remeasured
into the United States dollar with adjustments resulting from the translation of
monetary assets and liabilities reflected in results of operations. Transaction
gains and losses are reflected in income. Pre-tax foreign exchange gains
(losses) included in operating income were $557, $(118) and $110 in 1999, 1998
and 1997, respectively.
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 10 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, excluding interest, 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. Impairment assessments made in
accordance with SFAS No. 121 are made in connection with an analysis of related
long-lived assets acquired in the respective purchase business combination.
Debt financing costs - In conjunction with the Recapitalization (see Note 3),
the Company recorded $20.1 million of debt financing costs. These costs are
being amortized over periods ranging from 5 to 10 years. Accumulated
amortization was $3,682 and $1,169 at October 31, 1999 and 1998, respectively.
Income Taxes - For periods prior to the Recapitalization, the Company's domestic
income tax provision reflects an intercompany tax allocation arrangement with
its parent such that the domestic income taxes payable was recorded as if the
Company filed separate income tax returns. The Company recorded its domestic
income taxes payable as an intercompany payable within shareholder's investment.
Subsequent to the Recapitalization, 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, based upon
amounts calculated as if separate income tax returns were filed, 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. 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 benefit of such
assets will not be realized.
42
<PAGE>
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. The fair values of
long-term debt obligations are estimated based on market conditions and interest
rates available to the Company for similar financial instruments and in the case
of the Company's senior notes, based on quoted market prices. The fair value of
the Company's interest rate swap was obtained from a dealer quote. The fair
value of the Company's Senior Notes was approximately $66 million based upon the
quoted market price of the instrument on October 31, 1999.
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 $930, $1,308 and
$1,369 in 1999, 1998 and 1997, respectively.
Computer Software - Costs of computer software developed or obtained for
internal use are capitalized and amortized on a straight-line basis over the
estimated useful life of the software (generally three to five years).
Segment Information - The Company adopted SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information" for the fiscal year ended
October 31, 1999. SFAS No. 131 supersedes SFAS No. 14, "Financial Reporting for
Segments of a Business Enterprise" and requires the Company to report certain
financial information about operating segments. The method specified in SFAS No.
131 for determining what information to report is referred to as the "management
approach". The management approach is based upon the way that management
organizes the segments within the enterprise for making operating decisions and
assessing performance. SFAS No. 131 also requires disclosures about products and
services, geographic areas, and major customers. The adoption of SFAS No. 131
did not affect results of operations or financial position but did affect the
disclosure of segment information (see Note 15 - Segment Information).
Future Accounting Changes - In June 1998, the Financial Accounting Standards
Board (FASB) issued Statement of Accounting Standards ("SFAS") No. 133
"Accounting for Derivative Instruments and Hedging Activities." It requires all
derivative instrumaents to be recorded in the statements of financial position
at fair value. In June 1999, the statement's effective date was delayed by one
year, and it will be effective for the year ending October 31, 2001. Interim
reporting for this standard will be required. Due to the Company's current
limited use of derivative instruments, the adoption of this statement is not
expected to have a material effect on the Company's financial condition or
results of operations.
Note 3 - Recapitalization Transaction
The Recapitalization was effectuated pursuant to the January 28, 1998
Recapitalization Agreement among MHE Investments, HarnCo and certain of HII's
affiliates. Pursuant to this agreement, HarnCo and other HII affiliates effected
a number of transactions which resulted in Holdings owning, directly or
indirectly, the equity interests of all of the operating entities engaged in the
MHE Business. Holdings in turn formed MMH as a wholly owned subsidiary to
directly or indirectly hold the various operating entities engaged in the MHE
Business.
The principal transactions effected as part of the Recapitalization were the
following: (i) MHE Investments acquired (x) 7,907 shares of Holdings' common
stock for $25.1 million and (y) $28.9 million liquidation preference of
Holdings' 12 1/2% Series C Junior Voting Exchangeable Preferred Stock (the
"Series C Junior Voting Preferred Stock") from HarnCo, (ii) Holdings redeemed
certain shares of its common stock and Series C Junior Voting Preferred Stock
held by HarnCo for $287 million in cash (including a $5 million prepayment of a
potential post-closing redemption price adjustment) and approximately $4.8
million liquidation preference of Holdings' 12 1/4% Series B Junior Exchangeable
Preferred Stock (the "Series B Junior Preferred Stock"); and (iii) HarnCo
retained 2,261 shares of Holdings' common stock.
To finance the Recapitalization, Holdings sold $60 million of Series A Units,
consisting of $57.7 million liquidation preference of Holdings' 12% Series A
Senior Exchangeable Preferred Stock (the "Series A Senior Preferred Stock") and
$2.3 million of Holdings' non-voting common stock, to institutional investors.
In addition, MMH issued $200 million of aggregate principal amount of its 9 1/2%
Senior Notes due 2008 (the "Note Offering") and entered into a senior secured
credit facility (the "New Credit Facility") (See Notes 9 and 10). MMH used a
portion of the $200 million aggregate proceeds from the Note Offering and $55
million aggregate borrowings under the New Credit Facility to redeem certain of
its common shares from Holdings and pay Holdings a dividend which on a combined
basis totaled $233.8 million. Holdings, in turn, used the proceeds from this
redemption, together with the proceeds of the sale of the Series A Units, to
finance the cash portion of the redemption price for HarnCo's shares. The
remainder of the proceeds were used by Holdings and MMH (i) to make loans to
43
<PAGE>
senior management to acquire indirect equity interests in Holdings, (ii) to fund
certain transaction fees and expenses and (iii) for general corporate purposes.
Note 4 - Liquidity and Capital Resources
The Company anticipates that it will not meet certain financial covenants
contained in the New Credit Facility for the quarter ended January 31, 2000 and
the foreseeable future thereafter. The Company entered into an Amendment and
Waiver under the New Credit Facility, dated as of January 31, 2000, whereby,
among other matters, the lenders waived compliance by the Company with such
financial covenants, for the period from January 31, 2000 until 5:00 p.m. March
29, 2000 (the "January Waiver"). The January Waiver permits the Company, subject
to certain conditions, to make additional borrowings under the Revolving Credit
Facility and issue additional letters of credit, above levels in existence on
January 31, 2000, in an aggregate amount of up to $12.0 million, during the
waiver period.
Currently, the Company is not generating sufficient funds from operations to
satisfy working capital and debt service requirements, and as a result must rely
on Revolving Credit Facility borrowings to continue to operate. While the
Company anticipates that cash generated from operations and Revolving Credit
Facility borrowings will be sufficient to enable it to satisfy its cash flow
needs until the March 29, 2000, there can be no assurance that it will have
sufficient cash flow and borrowings available to enable it to meet its
obligations until such date.
Until March 29, 2000 and thereafter, the Company may experience severe financial
and operational difficulties resulting from its liquidity situation that may
prevent it from continuing operations.
In addition, at the time of expiration of the January Waiver, the Company will
again be in default under certain financial covenants of the New Credit
Facility. As a result of these defaults, the lenders ("Lenders") under the New
Credit Facility will be able to declare all amounts of principal and accrued
interest outstanding under the New Credit Facility immediately due and payable
(an "Acceleration"). If such Lenders so accelerate, the Company will then also
be in default under the indenture governing the Senior Notes (the "Indenture").
In such event, the Company would not be able to cure such default and the
trustee under the Indenture will be able to accelerate the Company's outstanding
indebtedness (including accrued interest) evidenced by the Senior Notes. The
Company will not have sufficient funds to repay the outstanding indebtedness
under the New Credit Facility or the Senior Notes if either such indebtedness is
accelerated. At October 31, 1999, the Company had $297.5 million of indebtedness
outstanding, including $92.8 million under the New Credit Facility (including
accrued interest) and $201.6 million evidenced by the Senior Notes (including
accrued interest).
In the event that the Lenders do not cause an Acceleration to occur on March 29,
2000, the Company will nonetheless be unable to meet certain of its obligations
as they become due after such date, including a $9.5 million interest payment
obligation under the Senior Notes due on April 1, 2000. As a result, the Lenders
and, after expiration of the applicable grace period, the trustee under the
Indenture will have the right to accelerate the Company's outstanding
indebtedness. In such event, the Company will not have sufficient funds to repay
New Credit Facility borrowings and the Senior Notes.
The Company is currently seeking, and is engaged in discussions regarding, its
strategic alternatives. The Company has engaged in discussions with the Lenders
and also intends to begin preliminary discussions with representatives of the
holders of Senior Notes concerning the possible restructuring of the Company's
capital structure, including a possible sale of the Company to a third party in
connection therewith. There can be no assurance that the Company will be able to
successfully pursue strategic alternatives or that the results of its
discussions with its creditors will be successful. As discussed above, if the
Company fails in the near future to resolve its critical liquidity issues, the
Company may be unable to continue as a going concern.
Note 5- Acquisitions
During the year ended October 31, 1999, the Company completed two acquisitions
with an aggregate purchase price of $4.1 million, net of cash acquired. During
1998, the Company completed several acquisitions for an aggregate purchase price
of $8.9 million, net of cash acquired. These acquisitions were related to the
Company's aftermarket business and were accounted for as purchase transactions
with the purchase prices allocated to the fair value of specific assets acquired
and liabilities assumed. Resultant goodwill of the transactions, $2.5 million
for the 1999 transactions and $8.3 million for the 1998 transactions, is being
amortized over 10 to 40 years. One 1999 acquisition and one 1998 acquisition
were partially financed by the sellers. The resulting deferred purchase price
will be paid in 2004 and 2005 for the 1999 acquisition, and in annual
installments through 2006 for the 1998 acquisition.
44
<PAGE>
During the year ended October 31, 1999, the Company made final consideration
payments of $1.5 million related to two 1998 acquisitions. With respect to a
1995 acquisition, the Company made a final contingent consideration payment of
$1.4 million in the year ended October 31, 1999. Additionally, a payment of
$100,000 was made toward a 1998 acquisition that was partially financed by the
seller. On a pro forma basis, the 1999 and 1998 acquisitions were not material
to results of operations reported for the year ended October 31, 1999 and
accordingly, such information is not presented.
Note 6 - Accounts Receivable
Accounts receivable at October 31 consisted of the following:
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Trade receivables $ 59,737 $ 78,142
Unbilled receivables 6,469 5,411
Allowance for doubtful accounts (1,725) (1,606)
-------- --------
$ 64,481 $ 81,947
======== ========
</TABLE>
The amount of accounts receivable due beyond one year is not significant.
Note 7 - Inventories
Inventories at October 31 consisted of the following:
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Raw material $ 8,771 $ 14,517
Work-in-process 20,166 20,545
Finished parts 18,116 14,910
-------- --------
47,053 49,972
Less excess of current cost over
Stated LIFO value (7,059) (7,411)
-------- --------
$ 39,994 $ 42,561
======== ========
</TABLE>
Inventories valued using the LIFO method represented approximately 33% and 38%
of inventories at October 31, 1999 and 1998, respectively. During 1999 and 1998,
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 1999 and 1998 purchases. The effect of these liquidations decreased cost
of sales by $171, $2,079 and $1,998 in 1999, 1998 and 1997, respectively.
Note 8 - Goodwill
Net goodwill at October 31 consisted of the following:
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Goodwill $ 47,686 $ 42,997
Accumulated amortization (4,842) (3,154)
-------- --------
$ 42,844 $ 39,843
======== ========
</TABLE>
During the fourth quarter of fiscal 1999, the Company reduced the remaining
estimated useful life of goodwill related to its non-North American operations
to ten years. This change in estimate resulted in additional amortization
expense of $340. Net goodwill at October 31, 1999 related to such operations was
$14.6 million. Management believes there is no impairment of recorded goodwill
at October 31, 1999.
45
<PAGE>
Note 9 - Indebtedness
On March 30, 1998, MMH issued $200 million aggregate principal amount of 9.5%
Senior Notes due April 1, 2008 (the "Senior Notes") in connection with the
Recapitalization as discussed in Note 3. Interest on the Senior Notes is payable
semi-annually on each April 1 and October 1, commencing October 1, 1998. The
Senior 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 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, subject to certain
provisions. The Senior 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 20.
At the Recapitalization Closing, MMH entered into the 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 initially permitted, subject to compliance with
certain conditions, MMH to borrow, repay and reborrow up to $70 million 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. At
October 31, 1999 and 1998, the Company had $27.5 million and $1.2 million of
borrowings outstanding under the Revolving Credit Facility. The Acquisition
Facility, the proceeds of which may be used for acquisitions, initally
permitted, subject to compliance with certain conditions, MMH to borrow up to
$30 million at any time until the third anniversary of the Recapitalization
Closing, 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, which commenced in
June 1998. The Company is required to make mandatory prepayments to reduce
outstanding loans or commitments, as applicable, under the New Credit Facility,
equal to 75% of the Company's excess cash flow, as defined; provided that such
amount shall be 50% in fiscal 1999 and may be reduced further in fiscal 1999 and
future periods under certain circumstances set forth in the agreement. The
commitment of the participating lending institutions to make additional loans
under the Revolving Credit Facility and Acquisition Facility is subject to
certain conditions, including that nothing shall have occurred or become known
which the participating lending institutions shall have determined could be
reasonably expected to have a material adverse effect, as defined, on the
Company.
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 of
0.75% and a letter of credit fee of 3.625% of the average outstanding amounts
under letters of credit.
Borrowings under the New Credit Facility are secured by certain of MMH's and its
subsidiaries' assets, including substantially all of their assets located in the
United States and the United Kingdom, and are guaranteed by Holdings and
substantially all of MMH's subsidiaries.
Borrowings under the New Credit Facility bear interest at various interest rates
based on certain floating reference rates (the "Floating Rate"). To limit the
effect of increases in the interest rates under 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% (the "Fixed Rate") plus 3.5%. As
a result, the interest rates applicable to Term Loan A and Term Loan B at
October 31, 1999 have been fixed at 9.375%. The differential between the
Floating Rate and the Fixed Rate is accrued as interest rates change and is
recorded as an adjustment of interest expense. The fair value of the interest
rate swap is the amount which the Company would receive or pay to terminate the
instrument at the reporting date. The Company would have paid approximately $0.1
million to terminate the swap at October 31, 1999.
The New Credit Facility and the indenture governing the Senior Notes (the "Note
Indenture") contain a number of covenants that, among other things, limit
Holdings' and its subsidiaries' ability to prepay subordinated indebtedness,
dispose of certain assets, create liens, make capital expenditures, make certain
investments or acquisitions and otherwise restrict corporate activities. In
addition, the New Credit Facility limits Holdings' and its subsidiaries' ability
to incur indebtedness and the Note Indenture limits the Company's and its
subsidiaries' ability to incur indebtedness. The New Credit Facility also
requires Holdings and its subsidiaries to comply with certain financial ratios
and borrowing condition tests based on quarterly measurements of the latest
twelve months results of operations, under which Holdings and its subsidiaries
are required to achieve and maintain certain financial and operating results. A
breach of any of these covenants would result in a default under the Note
Indenture or the New Credit Facility, or both. In the event of any such default,
46
<PAGE>
the lenders under the New Credit Facility and/or the holders of the Senior Notes
could elect to declare all amounts borrowed under the New Credit Facility and/or
the Senior Notes, as applicable, together with accrued interest thereon, to be
due and payable which would also result in an event of default under the Surety
Arrangement.
The Company did not meet certain of the financial covenants under the New Credit
Facility for the period ended January 31, 1999 and did not meet such financial
covenants and certain additional financial covenants for the period ended April
30, 1999. On August 2, 1999, the Company obtained an amendment to the New Credit
Facility (the "Amendment") which cured past financial covenant violations and
reset the financial covenants until April 2001. The Amendment increased the cash
availability under the Revolving Credit Facility from $35.7 million under the
previous waiver agreement to $40.7 million. In connection with, and as a
condition to, the Amendment, certain of the current indirect equity holders in
Holdings purchased a $5.0 million participation in the New Credit Facility and
received certain non-voting equity interests in Holdings, consisting of 25% of
the then outstanding common stock of Holdings.
As discussed in Note 4, the Company anticipates being in violation of its
amended financial covenants under the New Credit Facility as of January 31,
2000, and at subsequent quarterly measurement dates during fiscal 2000.
Accordingly, amounts outstanding at October 31, 1999 of $88.6 million under the
New Credit Facility and $200 million of Senior Notes have been classified as
current liabilities in the accompanying balance sheets.
Long-term obligations at October 31 consisted of the following:
<TABLE>
<CAPTION>
1999 1998
----------------- -----------------
<S> <C> <C>
Senior notes, at 9.5% due April 1, 2008 $ 200,000 $200,000
Bank term loan (Term Loan A), at LIBOR plus 3.5% (8.90875% at
October 31, 1999) due in quarterly installments through March
2003 17,750 19,500
Bank term loan (Term Loan B), at LIBOR plus 3.55% (8.90875% at
October 31, 1999) due in quarterly installments through March
2005 34,475 34,825
Bank Acquisition loan (combined draws), at LIBOR plus 3.5%
(8.9925% at October 31, 1999) due in eight quarterly
installments beginning June 2003 through March 2005 7,430 6,194
Acquisition Term Loan (Sponsor Loan), at Eurodollar plus 6.0%
(11.4925% at October 31, 1999) due in eight quarterly
installments beginning June 2003 through March 2005 5,000 -
Bank revolving credit loan, at LIBOR plus 3.5% ($17.0 million at
8.9925% and $10.5 million at 8.90875% at October 31, 1999) due
March 2003 27,500 1,200
U.S. Swingline borrowings at Prime less 0.5% (7.75% at October 31,
1999) 425 -
Deferred payments for purchases of companies, due in annual
installments through 2006 1,993 1,123
Long-term capital leases with various expiration dates 218 198
Bank debt, at 6.5% due in annual installments through March 2010
636 696
Industrial revenue bonds, at 6.0% due in annual installments
through June 2007 320 350
----------------- -----------------
295,747 264,086
Less current portion 292,963 2,262
----------------- -----------------
$ 2,784 $261,824
================= =================
</TABLE>
47
<PAGE>
At October 31, 1999, installments payable related to the Company's long-term
obligations are as follows:
<TABLE>
<CAPTION>
MMH Subsidiaries Total
-------- -------- --------
<S> <C> <C> <C>
2000 $292,155 $ 808 $292,963
2001 -- 348 348
2002 -- 288 288
2003 -- 198 198
2004 -- 1,212 1,212
Thereafter -- 738 738
-------- -------- --------
$292,155 $ 3,592 $295,747
======== ======== ========
</TABLE>
At October 31, 1999 and 1998, there were no short-term bank credit lines of
foreign subsidiaries.
48
<PAGE>
Note 10 - Mandatorily Redeemable Preferred Stock and Shareholders' Equity
Mandatorily redeemable preferred stock at October 31, 1999 consisted of the
following:
Carrying Value
12% Series A senior exchangeable preferred stock, stated
value $1,000 per share, par value $.01 per share, 120,000
shares authorized, 68,741 shares issued and outstanding $67,443
12 1/4% Series B junior exchangeable preferred stock, stated
value $1,000 per share, par value $.01 per share, 10,000
shares authorized, 5,750 shares issued and outstanding 5,808
12 1/2% Series C junior voting exchangeable preferred stock,
stated value $1,000 per share, par value $.01 per share,
60,000 shares authorized, 34,633 shares issued and
outstanding 34,994
-----------
$ 108,245
===========
Series A Senior Preferred Stock
The Series A Senior Preferred Stock is nonvoting and ranks senior to all classes
of common stock and to each other series of preferred stock. The Series A Senior
Preferred Stock shareholders are entitled to receive cumulative dividends at an
annual rate of 12% of the liquidation preference value, payable semi-annually in
arrears. Dividends may be paid, at Holdings' option, on any dividend date prior
to April 1, 2003, either in cash or additional shares of Series A Senior
Preferred Stock. Cash will be paid in lieu of fractional shares. After April 1,
2003, dividends will be payable in cash.
On or after April 1, 2003, the Series A Senior Preferred Stock may be redeemed,
in whole or in part, at the option of Holdings at the following redemption
prices, plus an amount in cash equal to all accumulated and unpaid dividends:
Year Beginning April 1, Percentage
2003 106.000%
2004 104.000%
2005 102.000%
2006 and thereafter 100.000%
Notwithstanding the foregoing, Holdings may redeem in the aggregate all, but not
less than all, of the 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 an amount in cash equal to all
accumulated and unpaid dividends out of the net proceeds of a public offering of
shares of common stock, provided that redemption occurs within 90 days following
the closing of any such public offering. On April 1, 2009, the Series A Senior
Preferred Stock will be subject to mandatory redemption at a price equal to 100%
of the liquidation preference thereof, plus all accumulated and unpaid dividends
to the date of redemption, payable in cash. Dividends in kind declared and
accumulated were $7,553 and $7,654, respectively, at October 31, 1999.
Subject to certain conditions, the 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
49
<PAGE>
"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 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 applicable redemption prices, plus accrued and
unpaid interest to the date of redemption.
Series B Junior Preferred Stock
The Series B Junior Preferred Stock was issued to HarnCo in connection with the
Recapitalization. The Series B Junior Preferred Stock is generally nonvoting and
ranks junior to the Series A Senior Preferred Stock and senior to the Series C
Junior Voting Preferred Stock discussed below as well as any class of common
stock. Dividends on the Series B Junior Preferred Stock are cumulative from
March 30, 1998, at an annual rate of 12 1/4%, to be paid semi-annually in
arrears on each April 1 and October 1, commencing October 1, 1998. Prior to
April 1, 2003, dividends are payable, at Holdings' option, either in cash or in
additional shares of Series B Junior Preferred Stock. After that date, dividends
will be payable in cash.
On or after April 1, 2003, the Series B Junior Preferred Stock may be redeemed,
in whole or in part, at the option of Holdings at the applicable redemption
price together with an amount in cash equal to all accumulated and unpaid
dividends. In addition, Holdings, at its option, may redeem all, but not less
than all, of the Series B Junior Preferred Stock then outstanding, at any time
prior to April 1, 2001, at a redemption price equal to 112.250% of the then
effective liquidation preference thereof, plus an amount in cash equal to all
accumulated and unpaid dividends out of the net proceeds of a public offering of
shares of common stock, provided that redemption occurs within 90 days following
the closing of any such public offering. On April 1, 2010, Holdings will be
required to redeem in cash all of the Series B Junior Preferred Stock
outstanding at a redemption price equal to 100% of the liquidation preference
thereof, plus all accumulated and unpaid dividends to the date of redemption.
Dividends in kind declared and accumulated were $645 and $652, respectively, at
October 31, 1999.
Subject to certain conditions, the outstanding shares of Series B Junior
Preferred Stock are exchangeable, in whole but not in part, at the option of
Holdings, at any time on any dividend payment date for Holdings' 12 1/4%
Exchange Debentures due 2010.
Series C Junior Voting Preferred Stock
The Series C Junior Voting Preferred Stock was acquired by MHE Investments in
connection with the Recapitalization. Each share of Series C Junior Voting
Preferred Stock has voting rights of 0.314 votes per share. The Series C Junior
Voting Preferred Stock ranks junior to the Series A Senior Preferred Stock and
Series B Junior Preferred Stock and senior to any class of common stock.
Dividends on the Series C Junior Voting Preferred Stock are cumulative from
March 30, 1998, 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. Prior to
April 1, 2003, dividends are payable, at Holdings' option, either in cash or in
additional shares of Series C Junior Voting Preferred Stock. Thereafter,
dividends will be payable in cash.
On or after April 1, 2003, the Series C Junior Voting Preferred Stock may be
redeemed, in whole or in part, at the option of Holdings at the applicable
redemption price together with an amount in cash equal to all accumulated and
unpaid dividends. In addition, Holdings, at its option, may redeem all, but not
less than all, of the Series C Junior Voting Preferred Stock then outstanding,
at any time prior to April 1, 2001, at a redemption price equal to 112.500% of
the then effective liquidation preference thereof, plus an amount in cash equal
to all accumulated and unpaid dividends out of the net proceeds of a public
offering of shares of common stock, provided that redemption occurs within 90
days following the closing of any such public offering. On April 1, 2010,
Holdings will be required to redeem in cash all of the Series C Junior Voting
Preferred Stock outstanding at a redemption price equal to 100% of the
liquidation preference thereof, plus all accumulated and unpaid dividends to the
date of redemption. Dividends in kind declared and accumulated were $3,955 and
$4,016, respectively, at October 31, 1999.
Subject to certain conditions, the outstanding shares of Series C Junior Voting
Preferred Stock are exchangeable, in whole but not in part, at the option of
Holdings at any time on any dividend payment date for Holdings' 12 1/2% Exchange
Debentures due 2010.
50
<PAGE>
Common Stock
Common stock consisted of the following at October 31, 1999:
Par Value
MMH Holdings, Inc.:
Nonvoting common stock, $.01 par
value, 100,000 shares authorized, 1,930
shares issued and outstanding $--
Voting common stock, $.01 par value,
900,000 shares authorized, 10,169 shares
issued and outstanding --
Morris Material Handling, Inc.
Common stock, $.01 par value, 1,000 shares
authorized, 100 shares issued and outstanding --
MMH Holdings, Inc. holds all of the outstanding common stock of Morris Material
Handling, Inc.
Note 11 - Income Taxes
The components of income(loss) of the Company's domestic and foreign operations
for the years ended October 31 were as follows:
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Domestic $(17,419) $ 8,774 $ 28,097
Foreign (9,163) (75) 6,648
-------- -------- --------
$(26,582) $ 8,699 $ 34,745
======== ======== ========
</TABLE>
The provision for income taxes included in the Statements of Income and
Comprehensive Income for the years ended October 31 consisted of the following:
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
Current provision
<S> <C> <C> <C>
Federal and state $ 373 $ 1,883 $ 11,028
Foreign 1,769 2,225 2,757
-------- -------- --------
Total current 2,142 4,108 13,785
-------- -------- --------
Deferred provision
Federal and state 71,455 1,804 (137)
Foreign (1,917) (1,477) 226
-------- -------- --------
Total deferred 69,538 327 89
-------- -------- --------
Provision for income taxes $ 71,680 $ 4,435 $ 13,874
======== ======== ========
</TABLE>
51
<PAGE>
The difference between the U.S. federal statutory tax rate and the effective tax
rate for the years ended October 31 are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
Federal statutory rate 34.0% 34.0% 35.0%
Divestiture bonuses -- 4.7 --
Foreign taxes, net of federal benefit (0.3) 3.2 1.9
State taxes, net of federal benefit (0.1) 1.9 3.0
Valuation allowance adjustment (302.5) 7.6 --
Other - net (0.7) (0.5) --
------ ------ ------
(269.6)% 50.9% 39.9%
====== ====== ======
</TABLE>
Foreign income taxes paid were $2,972, $1,209 and $322 in 1999, 1998 and 1997,
respectively.
Temporary differences and carryforwards which gave rise to deferred tax assets
and liabilities at October 31 were as follows:
<TABLE>
<CAPTION>
1999 1998
--------- ---------
Deferred tax assets
<S> <C> <C>
Accrued expenses and reserves $ 3,578 $ 2,164
Inventories 4,306 3,980
Fixed assets 5,786 6,068
Intangibles 70,529 76,828
U.S. federal and state tax loss carryforwards 15,137 756
Other 1,914 578
--------- ---------
101,250 90,374
Valuation allowance (99,336) (18,919)
--------- ---------
1,914 71,455
--------- ---------
Deferred tax liabilities
Other (744) (562)
Prepaid pension asset (1,170) (1,335)
--------- ---------
(1,914) (1,897)
--------- ---------
Net deferred tax asset (liability) $ -- $ 69,558
========= =========
</TABLE>
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, Holdings and MMH were 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. Substantially
all of the additional deferred taxes recorded resulted from this goodwill
created for tax purposes. 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 foreign tax credits. The
resulting net adjustment to deferred income taxes of approximately $71 million
has been recorded as an adjustment to shareholders' equity for the year ended
October 31, 1998.
As a result of the Section 338(h)(10) election made in connection with the
Recapitalization, all historical earnings and profits were taxed. Accordingly,
any dividends remitted from pre-closing retained earnings of the Company's
foreign subsidiaries would be treated as previously-taxed and subject only to
local withholding taxes, for which the Company may claim a foreign tax credit.
During the fourth quarter of fiscal 1999, the Company increased its deferred tax
valuation allowance to reduce its net deferred tax assets to zero. This change
in estimate reflects primarily the significant shortfall in actual fiscal 1999
operating results compared with estimates developed during the year in
52
<PAGE>
connection with the negotiation of its New Credit Facility amendment and an
increase in the estimated pretax loss for fiscal 2000. In addition, the Company
has reported cumulative pretax losses since the March 30, 1998 recapitalization.
Accordingly, based upon this negative evidence as of October 31, 1999,
management concluded that the realization of recorded U.S. deferred tax assets
could not be supported as more likely than not of occurrence in accordance with
SFAS 109. At October 31, 1999, the Company has approximately $41 million and $24
million of federal and state net operating loss carryforwards, respectively,
which expire at various future dates.
At October 31, 1999, the Company's Mexican affiliate has a net operating loss
carryforward approximating $2.0 million which expires in 2004 and 2005. A
valuation allowance has been recorded against this carryforward for which
utilization is uncertain. The amount of the valuation allowance recorded against
such net operating loss carryforwards which if subsequently recognized would
reduce long-lived assets of the acquired entity is not material.
This net deferred tax asset (liability) is included in the balance sheets at
October 31 in the following captions:
<TABLE>
<CAPTION>
1999 1998
----- --------
<S> <C> <C>
Other current assets $-- $ 6,277
Other assets -- 65,979
Noncurrent liabilities -- (2,698)
----- --------
$-- $ 69,588
===== ========
</TABLE>
Note 12 - Commitments and Contingencies
To secure the performance of sales contracts related to MMH operations, MMH was
contingently liable to financial institutions and others for the following at
October 31, 1999: (i) $4.8 million of outstanding letters of credit and surety
bonds under the New Credit Facility, (ii) $2.8 million under a surety
arrangement for outstanding surety bonds and (iii) $6.1 million of surety bonds
with other institutions. Prior to the Recapitalization Closing, HII and its
affiliates ("HII Group") provided credit support for the MHE Business. As part
of the Recapitalization, HII agreed to maintain in place credit support
(including letters of credit and surety bonds) in existence at the
Recapitalization Closing and the Company agreed to reimburse HII for any
payments made by the HII Group with respect to such credit support. At October
31, 1999, approximately $27.7 million of HII Group letters of credit and surety
bonds remained outstanding.
As of the Recapitalization Closing, HarnCo retained certain income and other tax
liabilities relating to the MHE Business, all environmental liabilities relating
to previously shared facilities, any liabilities for which HarnCo or its
affiliates have been named as potentially responsible parties with respect to
Superfund sites, and any liabilities arising in connection with claims alleging
exposure to asbestos (to the extent there is insurance coverage therefor) in
connection with the MHE Business prior to the Recapitalization Closing.
Additionally, HarnCo retained all liability for medical and disability benefit
claims for current United States employees made prior to the Recapitalization
Closing and all claims with respect to any of the HII benefit plans for former
United States employees.
HarnCo has been and is currently a defendant to a number of asbestos related
lawsuits and will likely be named in future such actions. Most suits involve
multiple defendants including asbestos manufacturers. MMH has agreed to
indemnify HarnCo and its affiliates with respect to any liabilities in excess of
insurance arising in connection with past and future asbestos litigation
relating to the MHE Business. HII's insurance program included coverage for
asbestos related claim activity through 1986, when coverage for asbestos related
claims ceased to be available. HII's insurer has provided first dollar coverage
for policy periods through 1976. During the 1977 to 1985 policy periods, HII had
a variety of policies, with retention levels ranging from $100,000 to $15.0
million and total coverage limits ranging from $12.5 million to $50.0 million.
To date, HII's insurer has paid all liabilities relating to asbestos claims
(which amounts have not been material to the MHE Business) but there can be no
assurance such insurers will continue to do so in the future or that there will
be insurance coverage for such claims. In addition, policy primary aggregate
levels were exhausted in certain years, which would require the participation of
excess insurers for future claim activity. Given its experience to date with
such claims, the Company believes that its exposure to asbestos related claims
is not material, but there can be no assurance that such liability will not in
fact be material.
All of the Company's agreements and arrangements with HII and its affiliates
(including those referred to above and those relating to the provision of
services and materials by HII and its affiliates to the Company) could be
materially adversely affected by the fact that on June 7, 1999 (the "Petition
Date"), HII and certain of its United States affiliates (including HarnCo) filed
voluntary petitions for relief under Chapter 11 of the United States Bankruptcy
53
<PAGE>
Code (the "Bankruptcy Code") in the United States Bankruptcy Court for the
District of Delaware (the "HII Bankruptcy"). Certain provisions of the
Bankruptcy Code allow a debtor to avoid, delay and/or reduce its contractual and
other obligations to third parties. There can be no assurance that HII and its
affiliates will not attempt to utilize such provisions to cease performance
under their agreements with the Company. The inability of the Company to receive
the benefits of one or more of these agreements or the termination of ongoing
arrangements between the Company and affiliates of HII could materially
adversely affect the Company's operations and financial performance. In the
event that any of the liabilities retained by HII and its affiliates remain
unsatisfied as of the Petition Date, the Company's right to indemnification for
any such amounts it has paid on behalf of HII and its affiliates may also be
avoided, delayed or reduced.
Each of HII and certain of its affiliates on the one hand, and the Company and
certain of its affiliates, on the other hand, have receivables and payables to
the other which may be affected by the HII Bankruptcy.
On October 28, 1996, a strong windstorm caused significant damage to the Belview
container-handling terminal at the Port of Waterford in Ireland. One
container-handling crane sold by the Company's United Kingdom subsidiary was
destroyed and another was seriously damaged. The two cranes were sold to the
Waterford Harbour Commissioners in 1992 and commissioned for use in 1993. On
October 19, 1998, the Waterford Harbour Commissioners wrote to the Company and
provided a notice of arbitration, asserting breach of contract, negligence and
breach of duty against the Company's United Kingdom subsidiary in connection
with the destroyed and damaged cranes. The Waterford Harbour Commissioners
claimed direct damages of IR(pound)8.5 million ($11.5 million based on exchange
rates at January 31, 2000) and unspecified consequential damages. The port
operator, Bell Lines, Limited, filed a similar claim against the Company's
United Kingdom subsidiary in October 1999, asserting unspecified damages.
Management intends to vigorously defend both matters. One of the Company's
insurance carriers has agreed to provide defense coverage for one of the two
cranes involved in the accident and limited indemnification if the Company is
unsuccessful in defending the claims. The Company is continuing to work with its
insurance broker to determine the availability of additional insurance coverage,
if any. While the Company believes that it will obtain a favorable resolution
(either by successfully defending the claim or by obtaining insurance coverage
thereon), no assurances can be made as to the final outcome of the claims. If
the Company is found liable for the claims and is unable to obtain insurance
coverage therefor, there could be a material adverse effect on the Company's
operations and financial performance. Based upon the current status of this
matter, no related liability has been accrued at October 31, 1999.
The Company is a party to various other litigation matters, including product
liability and other claims, which are normal in the course of its operations.
Also, as a normal part of its operations, the Company undertakes certain
contractual obligations and warranties in connection with the sale of products
or services. Although the outcome of these matters cannot be predicted with
certainty, management believes that the resolution of such matters will not have
a material adverse effect on the consolidated results of operations, financial
position or cash flows of the Company.
Under the terms of the Recapitalization Agreement, HarnCo retained all liability
for the only two open environmental clean-up claims brought against HarnCo in
the Milwaukee, Wisconsin area. The Company and its management are not aware of
any other material environmental clean-up claim which is pending or is
threatened against the Company, but there can be no assurance that any such
claim will not be asserted against the Company in the future. In addition, as
noted above, the Company's right to indemnification against HarnCo for such
liabilities may be avoided, delayed or reduced as a result of HarnCo's filing
for bankruptcy protection.
Note 13 - Employee Benefit Plans
The Company adopted SFAS No. 132, "Employer's Disclosures about Pensions and
Other Postretirement Benefits," in 1999. SFAS No. 132 revises disclosure
requirements for pension and othere postretirement benefit plans for all years
presented but does not change the measurement or recognition of those plans.
HII Plans
Prior to the Recapitalization, the Company was a participant in HII and
affiliates' domestic defined benefit pension plans. Benefits from these plans
were based on factors which included various combinations of service, employee
compensation during the last years of employment and the recipient's social
security benefit. Pension expense was allocated annually based upon headcount.
The Company's pension expense for these domestic defined benefit plans was $0,
$584 and $1,275 in 1999, 1998 and 1997, respectively.
The Company was also a participant in HII's qualified profit sharing plan which
covered substantially all domestic employees, except employees covered by
54
<PAGE>
collective bargaining agreements and employees of affiliates with separate
defined contribution plans. Contributions to this plan were 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 in 1997.
MMH Plans
Effective April 1, 1998, the Company established a retirement savings plan under
Section 401(k) of the Internal Revenue Code (the "Plan"). The Plan covers all
non-bargaining unit employees in the United States from their first day of
service. Employees can contribute from 1% to 10% of their eligible pre-tax pay.
The Company matches 100% of contributions up to 3% of an employee's eligible pay
and 50% of the next 2% of an employee's eligible pay. Also, once an employee
turns 35, the Company contributes an additional percentage of the employee's pay
based on his/her age. In addition, the Company makes a special contribution for
long-service and older employees who were participants in the former HII pension
plan in order to make up for future years of non-participation in that plan. If
an employee's age plus years of service add up to 65 or more, the Company
contributes an additional percentage of the employee's pay to the Plan. All
Company contributions are 100% vested upon contribution. An employee must be
active on December 31 of the Plan year in order to qualify for annual Company
contributions. The Company recognized expense of $2,331 and $890 during 1999 and
1998, respectively, related to the Plan.
The Company also continued the HII profit sharing plan as a component of its new
retirement savings plan. The profit sharing plan 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 in 1998 were based on the Company's "economic value
added" performance. Effective November 1, 1998, contributions were based on
earnings of the Company before interest and taxes. The Company's profit sharing
expense for this plan was $0 and $137 in 1999 and 1998, respectively.
In connection with the Recapitalization, the Company committed to establish 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 reserved 1,186.0849 shares of Holdings nonvoting common stock and
4,328.25 shares of Holdings 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 Holdings nonvoting common stock
and 0.5344 shares of Holdings Series C Junior Voting Preferred Stock (the
"Equity Units")). The Company has commited to make 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 is in the process of establishing
the vesting terms for such Equity Units and none are outstanding at October 31,
1999.
Pension expense, as determined by the Company's actuaries, for its employee
benefit plan in the United Kingdom for the three years ended October 31 included
the components shown below. Pension expense for the Company's other foreign
employee benefit plans is not significant.
<TABLE>
<CAPTION>
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Service cost - benefits earned during the year $ 914 $ 894 $ 782
Interest cost on projected benefit obligation 1,634 1,665 1,359
Actual gain on plan assets (4,062) (1,408) (2,988)
Net amortization and deferral 2,552 (619) 1,186
------- ------- -------
$ 1,038 $ 532 $ 339
======= ======= =======
</TABLE>
The discount rate used for this foreign plan was 6.0%, 6.0% and 7.5% in 1999,
1998 and 1997. The assumed rate of increase in future compensation of employees
was 4.0%, 4.0% and 4.5% in 1999, 1998 and 1997. The expected long-term rate of
return on assets was 8.5%, 8.5% and 10.25% in 1999, 1998 and 1997.
55
<PAGE>
The following table sets forth the funded status of the United Kingdom plan at
October 31:
<TABLE>
<CAPTION>
1999 1998
-------- --------
Change in Plan Assets:
<S> <C> <C>
Fair value of plan assets at beginning of year $ 23,851 $ 21,100
Actual return on plan assets 4,062 1,408
Employer contributions 691 965
Plan participants' contributions 195 224
Currency translation (355) 572
Benefits paid (495) (418)
======== ========
Fair value of plan assets at end of year $ 27,949 $ 23,851
======== ========
Change in Benefit Obligation:
Benefit obligation at beginning of year $ 27,739 $ 20,665
Service cost 914 894
Interest cost 1,634 1,665
Plan participants' contributions 195 224
Actuarial (gain)/loss (24) 4,121
Currency translation (403) 588
Benefits paid (495) (418)
======== ========
Benefit obligation at end of year $ 29,560 $ 27,739
======== ========
Actuarial present value of:
Vested benefits $ 25,713 $ 23,606
-------- --------
-------- --------
Accumulated benefits 25,713 23,606
-------- --------
Projected benefits 29,560 27,739
Net assets available for benefits 27,949 23,851
-------- --------
Plan assets (less) greater than projected benefits (1,611) (3,888)
Unrecognized net loss 5,729 8,195
-------- --------
Prepaid pension asset $ 4,118 $ 4,307
======== ========
</TABLE>
Postretirement Benefits Other Than Pensions
HII generally provided certain health care and life insurance benefits under
various plans for U.S. employees who retired after attaining early retirement
eligibility, subject to plan amendments. In 1993, the HII Board of Directors
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 were eliminated on September 1, 1998 for most employee groups. As
such, negative plan amendments made subsequent to November 1, 1993 were
amortized from the date of the amendment to September 1, 1998. Postretirement
benefit income was allocated each year based upon headcount. The Company's
postretirement benefit income was $684 for the five months ended March 30, 1998
and $1,658 during 1997. Following the Recapitalization, the Company has no
liability to previously retired employees for such benefits.
As of October 31, 1998, the Company no longer offered any postretirement health
care or life insurance benefits.
56
<PAGE>
Note 14 - 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 $4,375, $4,465 and $4,369 in 1999, 1998 and 1997, respectively.
At October 31, 1999, 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:
2000 $4,035
2001 2,719
2002 1,645
2003 1,139
2004 746
Note 15 - Segment Information
The Company adopted SFAS No. 131, " Disclosures about Segments of an Enterprise
and Related Information" for fiscal year ended October 31, 1999. Prior years'
segment information has been restated to conform to the current year
presentation. Pursuant to SFAS No. 131, the Company has identified its
reportable segments based on the Company's method of internal reporting which is
utilized by its chief operating decision-maker, the Chief Executive Officer. The
reportable operating segments are as follows:
Equipment and Aftermarket - Americas
Equipment and Aftermarket - Other
Distribution and Service - North America
Engineered Products and Automation - Europe
Equipment and Aftermarket - Europe
Equipment and Aftermarket - Asia Pacific
Equipment and Aftermarket - South Africa
Each segment has a manager who is directly accountable to and maintains regular
contact with the Chief Executive Officer. The Company evaluates performance of
its segments based on operating income, determined on a basis consistent with
amounts reported in the consolidated financial statements.
The Equipment and Aftermarket - Americas segment designs and manufactures a
comprehensive line of engineered and standard overhead cranes, hoists and other
component products and repair parts at the Company's facilities located in Oak
Creek and Windsor, Wisconsin. This segment also modernizes products manufactured
by both the Company and its competitors. This segment is the main manufacturer
of the replacement parts sold by the Company's Distribution and Service - North
America segment as well as the manufacturer of component products used in that
segment's standard cranes. Repair parts and component products are purchased by
the Distribution and Service - North America segment at list price less standard
intercompany discounts.
The Equipment and Aftermarket - Other segment is the Company's brake
manufacturing operation in Canada. Approximately 35% of this segment's sales are
to other Company segments. The Company sold this operation in December 1999 (See
Note 19 - Subsequent Events).
The Distribution and Service - North America segment is the network of
Company-owned locations in key industrial markets in North America. The network
is the platform for the Company's sales activities, serving as distribution
centers for its original equipment and replacement parts as well as the focal
point for service activities. Some of the distribution centers also fabricate
and assemble standard cranes using components manufactured by the Equipment and
Aftermarket - Americas and the Equipment and Aftermarket - Europe segments.
57
<PAGE>
The Engineered Products and Automation - Europe segment focuses on the
manufacture of highly engineered ship-to-shore and gantry cranes for use in
container handling and automated warehouse units at the Company's facility
located in Loughborough, England, and provides software support for the
automated warehouse units installed at customer locations.
The Equipment and Aftermarket - Europe segment consists of standard crane and
hoist manufacturing in the Loughborough, England facility as well as the network
of Company-owned distribution centers in key industrial markets in the United
Kingdom. The Equipment and Aftermarket - Europe segment provides services for
the Engineered Products and Automation segment at prices consistent with those
charged to external customers. In addition, this segment distributes hoists
through Distribution and Service - North America and Equipment and Aftermarket -
Asia Pacific and South Africa at prices consistent with those charged to
external customers.
The Equipment and Aftermarket - Asia Pacific and South Africa segments operate
in a manner similar to the Distribution and Service North America segment. The
Asia Pacific segment includes operations in Australia, Singapore, Thailand and
Saudi Arabia.
Within North America, certain centrally incurred costs such as insurance costs
and computer charges are allocated to operating segments based upon various
methods of allocation. In the United Kingdom, utilities, property taxes and
insurance costs are allocated to the segments based upon varying allocation
methods. Domestically, costs related to centralized accounting, marketing, human
resources, and IT functions are not allocated. Internationally, these costs were
allocated amongst individual segments in fiscal 1997 and 1998, however, in
fiscal 1999, no allocation was done. Assets are not allocated in assessing
operating performance by the Chief Executive Officer other than at the level of
the Company's total Equipment and Aftermarket - Americas, Distribution and
Service - North America and total International operations. Long-lived assets
include property, plant and equipment, goodwill and other intangible assets.
Segment operating income for fiscal 1998 and 1997 excludes management fees paid
by the Company to its former parent, HII.
In fiscal 1997, the Company did not report information related to intercompany
sales in a manner consistent with its present reporting structure. Accordingly,
it is not practicable to present a breakdown of external and intercompany sales
by segment for 1997.
58
<PAGE>
<TABLE>
MMH HOLDINGS, INC.
MORRIS MATERIAL HANDLING, INC.
Operating Segments
For the Year Ended October 31, 1999
<CAPTION>
-----------------------------------------
SALES
------------------------------------- ---------- ------------ ------- ----------
Operating Depreciation Long-
Income & Lived Capital
External Intercompany Total (Loss) Amortization Assets Expenditures
----------- ---------------- -------- ---------- ------------ ------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Equipment & Aftermarket - Americas $ 50,602 $ 52,370 $ 102,972 $ 7,226 $ 3,163 $ -- $ --
Equipment & Aftermarket - Other 3,809 1,934 5,743 1,417 67 -- --
--------- --------- --------- --------- --------- --------- ---------
Total Equipment & Aftermarket 54,411 54,304 108,715 8,643 3,230 $ 17,312 $ 5,064
Distribution & Service - North America 166,929 4,130 171,059 10,291 1,940 36,783 990
Eliminations & Other 0 (58,434) (58,434) 76 0 -- --
--------- --------- --------- --------- --------- --------- ---------
Total Americas 221,340 0 221,340 19,010 5,170 -- --
--------- --------- --------- --------- --------- --------- ---------
Engineered Products & Automation - Europe 11,568 507 12,075 (1,056) 124 -- --
Equipment & Aftermarket - Europe 35,521 6,446 41,967 1,803 1,137 -- --
Eliminations & Other 0 (1,869) (1,869) (4,418) 497 -- --
--------- --------- --------- --------- --------- --------- ---------
Total Europe 47,089 5,084 52,173 (3,671) 1,758 -- --
Equipment & Aftermarket - South Africa 12,794 599 13,393 (913) 152 -- --
Equipment & Aftermarket - Asia Pacific 12,972 0 12,972 (624) 349 -- --
Eliminations & Other 0 (1,431) (1,431) (722) 810 -- --
--------- --------- --------- --------- --------- --------- ---------
Total International 72,855 4,252 77,107 (5,930) 3,069 34,971 1,540
--------- --------- --------- --------- --------- --------- ---------
Corporate and Eliminations 0 (4,252) (4,252) (9,635) 0 -- --
========= ========= ========= ========= ========= ========= =========
Consolidated $ 294,195 $ -- $ 294,195 $ 3,445 $ 8,239 $ 89,066 $ 7,594
========= ========= ========= ========= ========= ========= =========
</TABLE>
59
<PAGE>
<TABLE>
MMH HOLDINGS, INC.
MORRIS MATERIAL HANDLING, INC.
Operating Segments
For the Year Ended October 31, 1998
<CAPTION>
--------------------------------------
SALES
------------------------------------- ---------- ------------ ------- ----------
Operating Depreciation Long-
Income & Lived Capital
External Intercompany Total (Loss) Amortization Assets Expenditures
----------- ---------------- -------- ---------- ------------ ------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Equipment & Aftermarket - Americas $ 72,051 $ 52,114 $ 124,165 $ 18,886 $ 2,598 $ -- $ --
Equipment & Aftermarket - Other 4,410 1,796 6,206 1,688 57 -- --
--------- --------- --------- --------- --------- --------- ---------
Total Equipment & Aftermarket 76,461 53,910 130,371 20,574 2,655 $ 15,071 $ 3,820
Distribution & Service - North America 159,187 2,297 161,484 14,160 1,716 32,132 423
Eliminations & Other 0 (56,207) (56,207) (268) 0 -- --
-------- --------- --------- --------- --------- --------- ---------
Total Americas 235,648 0 235,648 34,466 4,371 -- --
-------- --------- --------- --------- --------- --------- ---------
Engineered Products & Automation -Europe 14,608 3,412 18,020 (2,372) 330 -- --
Equipment & Aftermarket - Europe 44,195 10,777 54,972 3,216 889 -- --
Eliminations & Other 0 (3,491) (3,491) (905) 469 -- --
--------- --------- --------- --------- --------- --------- ---------
Total Europe 58,803 10,698 69,501 (61) 1,688 -- --
Equipment & Aftermarket - South Africa 16,342 930 17,272 687 182 -- --
Equipment & Aftermarket - Asia Pacific 7,064 0 7,064 (483) 174 -- --
Eliminations & Other 0 (5,687) (5,687) (486) 408 -- --
-------- -------- --------- --------- --------- --------- ---------
Total International 82,209 5,941 88,150 (343) 2,452 35,635 965
--------- ---------- --------- --------- --------- --------- ---------
Corporate and Eliminations 0 (5,941) (5,941) (6,294) 0 -- --
========= ========= ========= ========= ========= ========= =========
Consolidated $ 317,857 $ -- $ 317,857 $ 27,829 $ 6,823 $ 82,838 $ 5,208
========= ========= ========= ========= ========= ========= =========
</TABLE>
60
<PAGE>
<TABLE>
MMH HOLDINGS, INC.
MORRIS MATERIAL HANDLING, INC.
Operating Segments
For the Year Ended October 31, 1997
<CAPTION>
Operating Depreciation Long-
Income & Lived Capital
Total Sales (Loss) Amortization Assets Expenditures
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Equipment & Aftermarket - Americas $ 140,208 $ 23,918 $ 2,751 $ -- $ --
Equipment & Aftermarket - Other 5,919 1,385 74 -- --
--------- --------- --------- --------- ---------
Total Equipment & Aftermarket 146,127 25,303 2,825 $ 12,115 $ 3,673
Distribution & Service - North America 138,275 9,319 1,535 28,639 1,414
Eliminations & Other (50,402) (350) 0 -- --
--------- --------- --------- --------- ---------
Total Americas 234,000 34,272 4,360 -- --
--------- --------- --------- --------- ---------
Engineered Products & Automation -Europe 59,290 942 398 -- --
Equipment & Aftermarket - Europe 57,019 3,953 850 -- --
Eliminations & Other (16,716) 2,246 312 -- --
--------- --------- --------- --------- ---------
Total Europe 99,593 7,141 1,560 -- --
Equipment & Aftermarket South Africa 18,230 (330) 223 -- --
Equipment & Aftermarket - Asia Pacific 5,836 228 113 -- --
Eliminations & Other 0 (480) 480 -- --
--------- --------- --------- --------- ---------
Total International 123,659 6,559 2,376 32,609 1,411
--------- --------- --------- --------- ---------
Corporate and Eliminations (4,312) (2,432) 0 -- --
========= ========= ========= ========= =========
Consolidated $ 353,347 $ 38,399 $ 6,736 $ 73,363 $ 6,498
========= ========= ========= ========= =========
</TABLE>
61
<PAGE>
The following table provides information related to external customer sales and
long-lived assets by geographic area. Geographic sales are based on the country
in which the sales originate.
<TABLE>
<CAPTION>
1999
------------------------------------------------
External Sales Long-Lived Assets
------------------- ----------------------
<S> <C> <C>
United States $187,067 $ 43,785
Canada 28,077 9,231
United Kingdom 47,089 24,791
South Africa 12,794 1,426
Australia 10,292 4,665
Other 8,876 5,168
-------- --------
$294,195 $ 89,066
======== ========
1998
------------------------------------------------
External Sales Long-Lived Assets
------------------- ----------------------
United States $202,639 $ 37,360
Canada 26,034 8,828
United Kingdom 58,803 26,516
South Africa 16,342 1,577
Australia 2,073 4,267
Other 11,966 4,290
======== ========
$317,857 $ 82,838
======== ========
1997
------------------------------------------------
External Sales Long-Lived Assets
------------------- ----------------------
United States $205,815 $ 34,536
Canada 22,104 5,023
United Kingdom 94,926 27,573
South Africa 18,230 1,846
Other 12,275 4,385
======== ========
$353,350 $ 73,363
======== ========
</TABLE>
62
<PAGE>
Information related to sales of products and services to external customers is
presented below:
<TABLE>
<CAPTION>
-------- -------- --------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Machines 157,395 179,825 221,121
Parts 78,131 81,719 80,874
Service 58,669 56,313 51,355
-------- -------- --------
Total $294,195 $317,857 $353,350
-------- -------- --------
</TABLE>
Note 16 - Related Party Transactions
HII and Affiliates
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 $1,155 and $2,862 in 1998 and 1997,
respectively.
Interest income/(expense) on receivables/(payables) with HII affiliates was
charged by/(to) the Company using interest rates tied to LIBOR, the 13-week
treasury bill rate or prime rate.
Throughout 1999 and 1998, the Company sold certain products and services to HII
affiliates at negotiated rates and performed certain administrative functions
for HarnCo in Mexico. Sales to HII affiliates amounted to $1.0 million, $3.2
million and $4.9 million in fiscal 1999, 1998 and 1997, respectively.
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. See Note 12. At October 31, 1999,
HarnCo continues to be shown as the guarantor on the Birmingham, Alabama
facility lease with the Industrial Revenue Board of Birmingham.
On June 7, 1999, (the "Petition Date") HII and certain of its United States
affiliates (including HarnCo) filed voluntary petitions for relief under Chapter
11 of the Bankruptcy Code in the United States Bankruptcy Court for the District
of Delaware. Certain provisions of the Bankruptcy Code allow a debtor to avoid,
delay and/or reduce its contractual and other obligations to third parties.
There can be no assurance that HII and its affiliates will not attempt to
utilize such provisions to cease performance under their agreements and
arrangements with the Company. The inability of the Company to receive the
benefits of one or more of these agreements or the termination of ongoing
arrangements between the Company and affiliates of HII (including those relating
to the provision of services and materials by HII and its affiliates to the
Company) could materially adversely affect the Company's operations and
financial performance. In the event that any of the liabilities retained by HII
and its affiliates in connection with the Recapitalization remain unsatisfied as
of the Petition Date, the Company's right to indemnification for any such
amounts it has paid on behalf of HII and its affiliates may also be avoided,
delayed or reduced. Each of HII and certain of its affiliates on the one hand,
and the Company and certain of its affiliates, on the other hand, have
receivables and payables to the other that may be affected by the HII
Bankruptcy.
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 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 had been provided historically, and for all of fiscal
1998, but were not covered by a written agreement until the date of the
Recapitalization. These services include financial support (including payroll,
63
<PAGE>
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 claims,
screening and hiring of hourly employees and benefits administration), shared
space, warehouse services for repair parts at one of HarnCo's facilities until
July 1998, 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 was charged $2.1 million and $5.0
million for such services in fiscal 1999 and 1998, respectively. These
arrangements for shared facilities and services, which are consistent with those
which existed prior to the Recapitalization, include the following:
1. The Company and an HII affiliate shared a parts warehouse through
June 1998 for which the Company was charged approximately $976
and $1,400 in 1998 and 1997, respectively.
2. An HII affiliate provides support to the Company for accounting,
credit, traffic and human resource services and charged
approximately $194, $335 and $756 to the Company in 1999, 1998
and 1997, respectively. In addition, the Company leased office
space from this affiliate through February 1999 at a cost of
approximately $41, $120 and $120 for 1999, 1998 and 1997,
respectively.
3. HarnCo provided certain products and services to the Company
which management estimates amounted to approximately $14.1
million, $12.4 million and $10.0 million in fiscal 1999, 1998 and
1997, respectively. 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, HII affiliates have acted as motor rewind
subcontractors for the Company. It is contemplated that these
transactions, none of which individually or in the aggregate are
significant to the Company, will continue in the future.
4. An HII affiliate provides information systems services to the
Company and charged approximately $1,886, $3,610 and $1,861 to
the Company in 1999, 1998 and 1997, respectively. During the
third fiscal quarter of 1999, the Company replaced its shared
business system.
Prior to the Recapitalization, the above-noted charges were negotiated by the
Company on an annual basis with HII or other affiliates. The Company considers
such costs, in the aggregate, to reflect arms-length terms and believes that in
the aggregate these products and services can be obtained on comparable terms
from third parties.
Component and Manufactured Products Supply Agreement - At the Recapitalization
Closing, the Company 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 is the fully absorbed standard cost for
normal production products and repair parts, and the fully absorbed job cost for
rebuilds and repairs.
Trademark License Agreement - In connection with the Recapitalization, MMH
entered into a trademark license agreement (the "Trademark License Agreement")
with an affiliate of HarnCo pursuant to which the Company was granted the right
to use the "P&H" trade name, trademark and service mark 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 equal to
0.75% of the aggregate net sales of the MHE Business for the ten year period
which commenced March 30, 1999. There will be no royalty fee for the remainder
of the term following such ten year period. The Company accrued $1.4 million of
expenses for royalty fees in the period from March 30, 1999 to October 31, 1999.
The Company has elected to defer the payment of the royalty fees for the period
ended October 31, 1999, which would otherwise be payable on January 30, 2000
pursuant to the terms of Trademark License Agreement. The Trademark License
Agreement provides that the annual royalty fee may be deferred for up to two
years if the Company does not meet certain financial criteria. The Company can
only defer up to two payments during the term of the agreement. In addition,
interest accrues at 12% per year on the deferred fee payments.
Health and Welfare Arrangements - Under the terms of the Recapitalization
Agreement, the current United States employees of the Company continued to
participate, from the Recapitalization Closing until December 31, 1998, in the
medical, dental, life and long-term disability insurance benefit plans that were
sponsored by HarnCo for the benefit of these employees as of the
Recapitalization Closing. The Company paid to HarnCo the cost of all benefits
provided under these plans. The Company recognized approximately $0.7 million
and $1.1 million of expense related to these arrangements in fiscal 1999 and
1998, respectively. Beginning on January 1, 1999, the Company sponsored its own
medical, dental, life and long-term disability insurance benefit plans.
Stockholders Agreement - At the Recapitalization Closing, Holdings entered into
a stockholders' agreement and registration rights agreement with HarnCo and MHE
Investments (the "Stockholders' Agreement") pursuant to which HarnCo has the
64
<PAGE>
right to appoint a representative to the board of directors of Holdings, so long
as HarnCo owns at least 5% of the outstanding voting common stock of Holdings.
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 of Holdings
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 - At the Recapitalization Closing, MMH entered
into a number of agreements pursuant to which HII and its affiliates will
continue to provide to MMH and to its subsidiaries located in the United States,
on an interim basis and under substantially the same terms and conditions as
before the closing, certain products and services. In addition, HII and MMH
entered into a credit indemnification agreement (the "Credit Indemnification
Agreement") pursuant to which HII will maintain in place the credit support
obligations in existence at the Recapitalization Closing but have no further
duty to extend, renew or enter into any new credit support obligations (except
as to the MHE Business obligations existing at the Recapitalization Closing).
Under the Credit Indemnification Agreement, MMH is required to pay HII, in
advance, an annual fee equal to 1% of the amounts outstanding under each letter
of credit and bond provided by HII and its affiliates (approximately $27.7
million as of October 31, 1999). MMH accrued a pro-rated fee of $223,000 for
calendar year 1999. MMH paid a pro-rated fee of $290,000 for calendar year 1998.
HII is required to refund the Company on a quarterly basis a pro-rata portion of
the annual fee for any reductions in the outstanding amount of credit that
occurred during such quarter. In addition, the Company will reimburse HII for
certain future fees and expenses. The Company also entered into a surety
arrangement (the "Surety Arrangement") to provide credit support for its
post-Recapitalization Closing operations.
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. Interest on each of the notes, at a rate per annum
equal at all times to the federal short-term rate (as defined) 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. In conjunction with Jack Stinnett's,
President and Chief Executive Officer, purchase of 80% of the former President's
equity interest in Niles L.L.C., the Company made a loan to Mr. Stinnett in the
amount of $150,000.
Chartwell
Chartwell Financial Advisory Agreement - The Company entered into an agreement
with Chartwell providing for the payment of fees and reimbursement of expenses
to Chartwell for acting as financial advisor with respect to the
Recapitalization, including soliciting, structuring and arranging the financing
of the Recapitalization. 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.
Chartwell Management Consulting Agreement - The Company has entered into a
management consulting agreement with Chartwell pursuant to which Chartwell
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. The Company
incurred expenses totaling $1,000 and $583, excluding amounts paid for the
reimbursement of expenses, during fiscal 1999 and 1998, respectively, under this
agreement.
Note 17 - Non-Recurring Employee Benefit Costs
As a result of the Recapitalization and subsequent restructuring, the Company
recognized certain non-recurring employee benefit costs. These costs included:
1. Employee Termination Costs - During fiscal 1998 and 1999, the
Company has incurred employee termination costs to reduce
employee staffing levels associated with restructuring the
Company's United Kingdom and United States manufacturing
operations. During the 1998 fiscal year, 72 employees were
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<PAGE>
terminated, resulting in severance costs of $0.7 million. Also,
in October 1998, the Company announced additional terminations of
64 employees resulting in additional severance costs of
approximately $1.1 million in fiscal 1998. The staffing
reductions announced in October 1998 were completed in early
fiscal 1999. In 1999, the Company initiated and completed further
staff reductions at its United Kingdom and United States
operations. Approximately 129 employees were terminated at a cost
of approximately $1.8 million. Severance costs included severance
pay, outplacement services and insurance coverage.
2. Divestiture Bonuses - Incentives were given to certain members of
management in connection with the sale of the MHE Business by HII
in fiscal 1998. HII, not the Company, was responsible for making
these incentive payments and accordingly, this amount has been
reported as a capital contribution in the accompanying financial
statements. The incentives paid to management were approximately
$1.2 million.
Note 18 - Other Income - Net
Other income - net consists of the following for the years ended October 31:
<TABLE>
<CAPTION>
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Gain on fire insurance claim $ -- $ -- $ 2,011
Licensee income 470 594 524
Other-net (78) 737 114
------- ------- -------
$ 392 $ 1,331 $ 2,649
======= ======= =======
</TABLE>
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.
Note 19 - Subsequent Events
Divestiture-On December 16, 1999, the Company completed the sale of the Brake
Business located in Mississauga, Ontario, Canada, for a net sale price of $6.8
million after deduction of certain transaction-related items, including taxes.
During fiscal 1999, the Brake Business contributed $5.7 million in sales and
$1.4 million in operating income to the Company's results.
In accordance with the New Credit Facility, as amended by the Amendment, the
Company was permitted to apply half of the net proceeds of the sale of the Brake
Business (which amounted to $3.4 million) to general corporate purposes, which
the Company would otherwise have been required to use to prepay indebtedness
under the New Credit Facility. After consummation of the sale, the Company
repaid $3.1 million of the outstanding term loans ($2.4 million of which was
applied to the final scheduled principal payment obligation with respect to the
term loans) and repaid $0.3 million on the Acquisition Facility.
Fire - On January 29, 1999, the Company's leased facility in Philadelphia,
Pennsylvania experienced a fire. Total damages were not material to the Company
as a whole and will be covered by insurance. The fire did not cause a
significant disruption in operations at this facility so a material adverse
impact on the Company's financial statements is not expected.
Note 20 - Supplemental Condensed Financial Information
In connection with the Recapitalization, MMH, a direct wholly-owned subsidiary
of Holdings, issued Senior Notes that are guaranteed by certain of MMH's
subsidiaries (the "Guarantor Subsidiaries"). Each of the Guarantor Subsidiaries
is a wholly-owned subsidiary, directly or indirectly, of MMH and the guarantees
are full, unconditional and joint and several. Both Holdings and MMH are holding
companies with no material operating assets. All of the Company's business
operations are conducted through subsidiaries of MMH and accordingly, both
Holdings and MMH are dependent on the operating subsidiaries of MMH to fund
their cash needs, including debt service and tax obligations.
Separate financial statements of the Guarantor Subsidiaries are not presented
because management has determined that they would not be material to investors.
The following supplemental financial information sets forth the balance sheet,
statement of operations and cash flow information for the Guarantor Subsidiaries
and for MMH's other subsidiaries (the "Non-Guarantor Subsidiaries"). The
supplemental financial information reflects the investments of the Guarantor
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<PAGE>
Subsidiaries in the Non-Guarantor Subsidiaries using the equity method of
accounting. For purposes of this presentation, it is assumed that, historically,
all of the assets of the MHE Business were wholly-owned by subsidiaries of MMH,
which is an entity that was formed by Holdings in connection with the
Recapitalization and accordingly, the historical financial statements of MMH and
Holdings are identical following completion of the Recapitalization.
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<PAGE>
<TABLE>
MMH HOLDINGS, INC.
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET
OCTOBER 31, 1999
($ in 000's)
<CAPTION>
Non Morris
Guarantor Guarantor Material
ASSETS Subsidiaries Subsidiaries Handling, Inc. Eliminations
-------------- ------------- ------------ -------------
Current Assets
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 2,325 $ 104 $ 1,500 $ --
Accounts receivable - net 60,163 4,318 -- --
Intercompany accounts receivable 20,057 -- 13,204 (33,261)
Inventories 37,892 2,102 -- --
Other current assets 6,509 533 800 --
--------- --------- --------- ---------
126,946 7,057 15,504 (33,261)
--------- --------- --------- ---------
Property, Plant and Equipment 38,294 2,680 -- --
--------- --------- --------- ---------
Other Assets
Goodwill 40,010 2,834 -- --
Debt financing costs -- -- 16,398 --
Noncurrent intercompany receivable 5,161 -- 83,891 (89,052)
Investment in affiliates (1,527) -- 64,899 (63,372)
Deferred income taxes -- -- -- --
Other 9,758 -- 616 --
--------- --------- --------- ---------
53,402 2,834 165,804 (152,424)
--------- --------- --------- ---------
$ 218,642 $ 12,571 $ 181,308 $(185,685)
========= ========= ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Current portion of long-term obligations $ 342 $ 41 $ -- $ --
New Credit Facility borrowings 425 -- 27,500 --
Term loans -- -- 52,225 --
Acquisition Facility Line borrowings -- -- 12,430 --
Senior notes -- -- 200,000 --
Bank overdrafts 139 1,228 -- --
Trade accounts payable 25,562 1,195 -- --
Intercompany accounts payable 13,204 4,153 15,904 (33,261)
Advance payments and progress billings 8,336 -- -- --
Accrued warranties 1,748 73 -- --
Accrued interest 18 -- 1,786 --
Other current liabilities 16,854 1,148 2,014 --
--------- --------- --------- ---------
66,628 7,838 311,859 (33,261)
--------- --------- --------- ---------
Senior Notes -- -- -- --
Other Long-Term Debt 2,189 595 -- --
Noncurrent intercompany payable 83,891 5,161 -- (89,052)
Other Long Term Liabilities 1,035 -- 272 --
Minority Interest -- -- -- 504
Mandatorily Redeemable Preferred Stock -- -- -- --
Stockholders' Equity/Parent Investment 64,899 (1,023) (130,823) (63,876)
--------- --------- --------- ---------
$ 218,642 $ 12,571 $ 181,308 $(185,685)
========= ========= ========= =========
Consolidated Consolidated
Morris Material MMH MMH
ASSETS Handling, Inc. Holdings, Inc. Eliminations Holdings, Inc.
-------------- ------------- ------------ -------------
Current Assets
Cash and cash equivalents $ 3,929 $ -- $ -- $ 3,929
Accounts receivable - net 64,481 -- -- 64,481
Intercompany accounts receivable -- -- -- --
Inventories 39,994 -- -- 39,994
Other current assets 7,842 -- -- 7,842
--------- --------- --------- ---------
116,246 -- -- 116,246
--------- --------- --------- ---------
Property, Plant and Equipment 40,974 -- -- 40,974
--------- --------- --------- ---------
Other Assets
Goodwill 42,844 -- -- 42,844
Debt financing costs 16,398 -- -- 16,398
Noncurrent intercompany receivable -- -- -- --
Investment in affiliates -- (130,823) 130,823 --
Deferred income taxes -- -- -- --
Other 10,374 -- -- 10,374
--------- --------- --------- ---------
69,616 (130,823) 130,823 69,616
--------- --------- --------- ---------
$ 226,836 $(130,823) $ 130,823 $ 226,836
========= ========= ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Current portion of long-term obligations $ 383 $ -- $ -- $ 383
New Credit Facility borrowings 27,925 -- -- 27,925
Term loans 52,225 -- -- 52,225
Acquisition Facility Line borrowings 12,430 -- -- 12,430
Senior notes 200,000 -- -- 200,000
Bank overdrafts 1,367 -- -- 1,367
Trade accounts payable 26,757 -- -- 26,757
Intercompany accounts payable -- -- -- --
Advance payments and progress billings 8,336 -- -- 8,336
Accrued warranties 1,821 -- -- 1,821
Accrued interest 1,804 -- -- 1,804
Other current liabilities 20,016 -- -- 20,016
--------- --------- --------- ---------
353,064 -- -- 353,064
--------- --------- --------- ---------
Senior Notes -- -- -- --
Other Long-Term Debt 2,784 -- -- 2,784
Noncurrent intercompany payable -- -- -- --
Other Long Term Liabilities 1,307 -- -- 1,307
Minority Interest 504 -- -- 504
Mandatorily Redeemable Preferred Stock -- 108,245 -- 108,245
Stockholders' Equity/Parent Investment (130,823) (239,068) 130,823 (239,068)
--------- --------- --------- ---------
$ 226,836 $(130,823) $ 130,823 $ 226,836
========= ========= ========= =========
</TABLE>
68
<PAGE>
<TABLE>
MMH HOLDINGS, INC.
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET
OCTOBER 31, 1998
($ in 000's)
<CAPTION>
Non Morris
Guarantor Guarantor Material
ASSETS Subsidiaries Subsidiaries Handling, Inc. Eliminations
-------------- ------------- ------------ -------------
Current Assets
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 2,214 $ 320 $ -- $ --
Accounts receivable - net 76,000 5,947 -- --
Intercompany accounts receivable 20,687 -- 6,915 (27,602)
Inventories 39,749 2,812 -- --
Deferred income taxes 801 -- 5,476 --
Other current assets 4,417 384 389 --
--------- --------- --------- ---------
143,868 9,463 12,780 (27,602)
--------- --------- --------- ---------
Property, Plant and Equipment 38,295 2,775 -- --
--------- --------- --------- ---------
Other Assets
Goodwill 37,767 2,076 -- --
Debt financing costs -- -- 18,905 --
Noncurrent intercompany receivable 3,853 -- 83,416 (87,269)
Investment in affiliates 331 -- 66,732 (67,063)
Deferred income taxes -- -- 65,979 --
Other 6,691 -- -- --
--------- --------- --------- ---------
48,642 2,076 235,032 (154,332)
--------- --------- --------- ---------
$ 230,805 $ 14,314 $ 247,812 $(181,934)
========= ========= ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Short-term notes payable and current
portion of long-term obligations $ 122 $ 40 $ 2,100 $ --
Bank overdrafts -- 1,252 -- --
Trade accounts payable 30,539 2,354 -- --
Intercompany accounts payable 6,915 4,130 16,557 (27,602)
Advance payments and progress billings 9,394 5 -- --
Accrued warranties 2,200 124 -- --
Accrued interest -- -- 2,201 --
Other current liabilities 27,563 1,205 (1,146) --
--------- --------- --------- ---------
76,733 9,110 19,712 (27,602)
--------- --------- --------- ---------
Revolving Credit Facility Borrowings -- -- 1,200 --
Term Loans -- -- 52,225 --
Acquisition Facility Borrowings -- -- 6,194 --
Senior Notes -- -- 200,000 --
Other Long-Term Debt 1,226 656 323 --
Noncurrent intercompany payable 83,416 3,853 -- (87,269)
Deferred Income Taxes 2,698 -- -- --
Minority Interest -- -- -- 364
Mandatorily Redeemable Preferred Stock -- -- -- --
Stockholders' Equity/Parent Investment 66,732 695 (31,842) (67,427)
--------- --------- --------- ---------
$ 230,805 $ 14,314 $ 247,812 $(181,934)
========= ========= ========= =========
Consolidated Consolidated
Morris Material MMH MMH
Handling, Inc. Holdings, Inc. Eliminations Holdings, Inc.
-------------- ------------- ------------ -------------
ASSETS
Current Assets
Cash and cash equivalents $ 2,534 $ -- $ -- $ 2,534
Accounts receivable - net 81,947 -- -- 81,947
Intercompany accounts receivable -- -- -- --
Inventories 42,561 -- -- 42,561
Deferred income taxes 6,277 -- -- 6,277
Other current assets 5,190 -- -- 5,190
--------- --------- --------- ---------
138,509 -- -- 138,509
--------- --------- --------- ---------
Property, Plant and Equipment 41,070 -- -- 41,070
--------- --------- --------- ---------
Other Assets
Goodwill 39,843 -- -- 39,843
Debt financing costs 18,905 -- -- 18,905
Noncurrent intercompany receivable -- -- -- --
Investment in affiliates -- (31,842) 31,842 --
Deferred income taxes 65,979 -- -- 65,979
Other 6,691 -- -- 6,691
--------- --------- --------- ---------
131,418 (31,842) 31,842 131,418
--------- --------- --------- ---------
$ 310,997 $ (31,842) $ 31,842 $ 310,997
========= ========= ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Short-term notes payable and current
portion of long-term obligations $ 2,262 $ -- $ -- $ 2,262
Bank overdrafts 1,252 -- -- 1,252
Trade accounts payable 32,893 -- -- 32,893
Intercompany accounts payable -- -- -- --
Advance payments and progress billings 9,399 -- -- 9,399
Accrued warranties 2,324 -- -- 2,324
Accrued interest 2,201 -- -- 2,201
Other current liabilities 27,622 -- -- 27,622
--------- --------- --------- ---------
77,953 -- -- 77,953
--------- --------- --------- ---------
Revolving Credit Facility Borrowings 1,200 -- -- 1,200
Term Loans 52,225 -- -- 52,225
Acquisition Facility Borrowings 6,194 -- -- 6,194
Senior Notes 200,000 -- -- 200,000
Other Long-Term Debt 2,205 -- -- 2,205
Noncurrent intercompany payable -- -- -- --
Deferred Income Taxes 2,698 -- -- 2,698
Minority Interest 364 -- -- 364
Mandatorily Redeemable Preferred Stock -- 95,351 -- 95,351
Stockholders' Equity/Parent Investment (31,842) (127,193) 31,842 (127,193)
--------- --------- --------- ---------
$ 310,997 $ (31,842) $ 31,842 $ 310,997
========= ========= ========= =========
</TABLE>
69
<PAGE>
<TABLE>
MMH HOLDINGS, INC.
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE YEAR ENDED OCTOBER 31, 1999
($ in 000's)
<CAPTION>
Non Morris
Guarantor Guarantor Material
Subsidiaries Subsidiaries Handling, Inc. Eliminations
-------------- ------------- ------------ -------------
Revenues
<S> <C> <C> <C> <C>
Equipment and Parts Sales $ 224,510 $ 11,848 $ -- $ (832)
Service Sales 54,563 4,106 -- --
--------- --------- --------- ---------
Net Sales 279,073 15,954 -- (832)
Other Income - net 397 (5) -- --
--------- --------- --------- ---------
279,470 15,949 -- (832)
Cost of Sales 206,349 13,186 -- (832)
Selling, General and
Administrative Expenses 66,257 3,833 2,349 --
Operating Income (Loss) 6,864 (1,070) (2,349) --
Interest (Expense) Income - net
Affiliates (6,070) (375) 6,445 --
Third Party (675) (424) (28,928) --
--------- --------- --------- ---------
Income (Loss) Before Income Taxes, Equity
in Earnings (Loss) of Subsidiaries and Minority Interest 119 (1,869) (24,832) --
Provision for Income Taxes (32) -- (71,648) --
Equity in Earnings (Loss) of Subsidiaries (1,812) -- (1,725) 3,537
Minority Interest -- -- -- 57
--------- --------- --------- ---------
Net Income (Loss) $ (1,725) $ (1,869) $ (98,205) $ 3,594
========= ========= ========= =========
Consolidated Consolidated
Morris Material MMH MMH
Handling, Inc. Holdings, Inc. Eliminations Holdings, Inc.
-------------- ------------- ------------ -------------
Revenues
Equipment and Parts Sales $ 235,526 $ -- $ -- $ 235,526
Service Sales 58,669 -- -- 58,669
--------- --------- --------- ---------
Net Sales 294,195 -- -- 294,195
Other Income - net 392 -- -- 392
--------- --------- --------- ---------
294,587 -- -- 294,587
Cost of Sales 218,703 -- -- 218,703
Selling, General and
Administrative Expenses 72,439 -- -- 72,439
Operating Income (Loss) 3,445 -- -- 3,445
Interest (Expense) Income - net
Affiliates -- -- -- --
Third Party (30,027) -- -- (30,027)
--------- --------- --------- ---------
Income (Loss) Before Income Taxes, Equity
in Earnings (Loss) of Subsidiaries and Minority Interest (26,582) -- -- (26,582)
Provision for Income Taxes (71,680) -- -- (71,680)
Equity in Earnings (Loss) of Subsidiaries -- (98,205) 98,205 --
Minority Interest 57 -- -- 57
--------- --------- --------- ---------
Net Income (Loss) $ (98,205) $ (98,205) $ 98,205 $ (98,205)
========= ========= ========= =========
</TABLE>
70
<PAGE>
<TABLE>
MMH HOLDINGS, INC.
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE YEAR ENDED OCTOBER 31, 1998
($ in 000's)
<CAPTION>
Non Morris
Guarantor Guarantor Material
Subsidiaries Subsidiaries Handling, Inc. Eliminations
-------------- ------------- ------------ -------------
Revenues
<S> <C> <C> <C> <C>
Net Sales $ 298,897 $ 22,262 $ -- $ (3,302)
Other Income - net 1,331 -- -- --
--------- --------- --------- ---------
300,228 22,262 -- (3,302)
Cost of Sales 212,736 17,557 -- (3,302)
Selling, General and
Administrative Expenses 56,588 4,184 583 --
HII Management Fee 1,155 -- -- --
Non-Recurring Employee Benefit Costs 1,797 -- 1,216 --
--------- --------- --------- ---------
Operating Income (Loss) 27,952 521 (1,799) --
Interest (Expense) Income - net
Affiliates (5,407) (167) 4,126 --
Third Party (76) (505) (15,946) --
--------- --------- --------- ---------
Income (Loss) Before Income Taxes, Equity
in Earnings of Subsidiaries and Minority Interest 22,469 (151) (13,619) --
(Provision) Benefit for Income Taxes (2,895) 264 (1,804) --
Equity in Earnings of Subsidiaries 140 -- 19,714 (19,854)
Minority Interest -- -- -- 27
--------- --------- --------- ---------
Net Income $ 19,714 $ 113 $ 4,291 $ (19,827)
========= ========= ========= =========
Consolidated Consolidated
Morris Material MMH MMH
Handling, Inc. Holdings, Inc. Eliminations Holdings, Inc.
-------------- ------------- ------------ -------------
Revenues
Net Sales $ 317,857 $ -- $ -- $ 317,857
Other Income - net 1,331 -- -- 1,331
--------- --------- --------- ---------
319,188 -- -- 319,188
Cost of Sales 226,991 -- -- 226,991
Selling, General and
Administrative Expenses 61,355 -- -- 61,355
HII Management Fee 1,155 -- -- 1,155
Non-Recurring Employee Benefit Costs 3,013 -- -- 3,013
--------- --------- --------- ---------
Operating Income (Loss) 26,674 -- -- 26,674
Interest (Expense) Income - net
Affiliates (1,448) -- -- (1,448)
Third Party (16,527) -- -- (16,527)
--------- --------- --------- ---------
Income (Loss) Before Income Taxes, Equity
in Earnings of Subsidiaries and Minority Interest 8,699 -- -- 8,699
(Provision) Benefit for Income Taxes (4,435) -- -- (4,435)
Equity in Earnings of Subsidiaries -- 4,291 (4,291) --
Minority Interest 27 -- -- 27
--------- --------- --------- ---------
Net Income $ 4,291 $ 4,291 $ (4,291) $ 4,291
========= ========= ========= =========
</TABLE>
71
<PAGE>
<TABLE>
MMH HOLDINGS, INC.
SUPPLEMENTAL CONDENSED COMBINING STATEMENT OF OPERATIONS
FOR THE YEAR ENDED OCTOBER 31, 1997
($ in 000's)
<CAPTION>
Non
Guarantor Guarantor
Subsidiaries Subsidiaries Eliminations Combined
----------- ------------ ------------ ---------
Revenues
<S> <C> <C> <C> <C>
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
Selling, General and
Administrative Expenses 52,530 4,276 -- 56,806
HII Management Fee 2,862 -- -- 2,862
--------- --------- --------- ---------
Operating Income (Loss) 35,639 (102) -- 35,537
Interest Expense - net
HII Affiliates (198) (196) -- (394)
Third Party 8 (406) -- (398)
--------- --------- --------- ---------
Income (Loss) Before Income Taxes, Equity in Loss
of Combined Affiliates and Minority Interest 35,449 (704) -- 34,745
Provision for Income Taxes (13,838) (36) -- (13,874)
Equity in Loss of Combined Affiliates (758) -- 758 --
Minority Interest -- -- (18) (18)
--------- --------- --------- ---------
Net Income (Loss) $ 20,853 $ (740) $ 740 $ 20,853
========= ========= ========= =========
</TABLE>
72
<PAGE>
<TABLE>
MMH HOLDINGS, INC.
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED OCTOBER 31, 1999
($ in 000's)
<CAPTION>
Non Morris
Guarantor Guarantor Material
Subsidiaries Subsidiaries Handling, Inc. Eliminations
-------------- ------------- ------------ -------------
Operating Activities
<S> <C> <C> <C> <C>
Net income (loss) $ (1,725) $ (1,869) $(98,205) $ 3,594
Add (deduct) - items not affecting cash provided
by operating activities:
Depreciation and amortization 7,939 279 21 --
Amortization of debt financing costs -- -- 2,531 --
Equity in loss/(earnings) of subsidiaries 1,812 -- 1,725 (3,537)
Deferred income taxes - net (1,833) -- 71,447 --
Other -- -- -- (57)
Changes in working capital, excluding the effects
of acquisition opening
balance sheets:
Accounts receivable 16,641 1,309 -- --
Inventories 3,376 624 -- --
Other current assets (2,054) (928) (403) --
Trade accounts payable and bank overdrafts (5,841) (969) -- --
Accrued interest 18 -- (415) --
Other current liabilities (11,714) (43) 3,102 --
-------- -------- -------- --------
Net cash provided by (used for) operating activities 6,619 (1,597) (20,197) --
Investment and Other Transactions
Fixed asset additions - net (7,511) (83) -- --
Acquisition of businesses - net of cash acquired (5,630) -- -- --
Issuance of loans to senior management -- -- (150) --
Repayment of loans by senior management -- -- 70 --
Other - net 162 (19) (587) --
-------- -------- -------- --------
Net cash used for investment and other transactions (12,979) (102) (667) --
-------- -------- -------- --------
Financing Activities
Net proceeds (repayments) of short-term
debt and notes payable 505 (42) -- --
Proceeds from Acquisition Facility line borrowings -- -- 6,235 --
Net proceeds from Revolving Credit Facility borrowings -- -- 26,300 --
Payment of fees for amendment of New Credit Facility -- -- (612) --
Distribution to parent 5,922 1,537 (7,459) --
Repayments of long-term debt -- -- (2,100) --
-------- -------- -------- --------
Net cash provided by (used for) financing activities 6,427 1,495 22,364 --
Effect of Exchange Rate Changes on Cash and Cash Equivalents 44 (12) -- --
Increase (Decrease) in Cash and Cash Equivalents 111 (216) 1,500 --
Cash and Cash Equivalents
Beginning of Year 2,214 320 -- --
-------- -------- -------- --------
End of Year $ 2,325 $ 104 $ 1,500 $ --
======== ======== ======== ========
Consolidated Consolidated
Morris Material MMH MMH
Handling, Inc. Holdings, Inc. Eliminations Holdings, Inc.
-------------- ------------- ------------ -------------
Operating Activities
Net income (loss) $(98,205) $(98,205) $ 98,205 $(98,205)
Add (deduct) - items not affecting cash provided
by operating activities:
Depreciation and amortization 8,239 -- -- 8,239
Amortization of debt financing costs 2,531 -- -- 2,531
Equity in loss/(earnings) of subsidiaries -- 98,205 (98,205) --
Deferred income taxes - net 69,614 -- -- 69,614
Other (57) -- -- (57)
Changes in working capital, excluding the effects
of acquisition opening
balance sheets:
Accounts receivable 17,950 -- -- 17,950
Inventories 4,000 -- -- 4,000
Other current assets (3,385) -- -- (3,385)
Trade accounts payable and bank overdrafts (6,810) -- -- (6,810)
Accrued interest (397) -- -- (397)
Other current liabilities (8,655) -- -- (8,655)
-------- -------- -------- --------
Net cash provided by (used for) operating activities (15,175) -- -- (15,175)
Investment and Other Transactions
Fixed asset additions - net (7,594) -- -- (7,594)
Acquisition of businesses - net of cash acquired (5,630) -- -- (5,630)
Issuance of loans to senior management (150) -- -- (150)
Repayment of loans by senior management 70 -- -- 70
Other - net (444) -- -- (444)
-------- -------- -------- --------
Net cash used for investment and other transactions (13,748) -- -- (13,748)
-------- -------- -------- --------
Financing Activities
Net proceeds (repayments) of short-term debt
and notes payable 463 -- -- 463
Proceeds from Acquisition Facility line borrowings 6,235 -- -- 6,235
Net proceeds from Revolving Credit Facility borrowings 26,300 -- -- 26,300
Payment of fees for amendment of New Credit Facility (612) -- -- (612)
Distribution to parent -- -- -- --
Repayments of long-term debt (2,100) -- -- (2,100)
-------- -------- -------- --------
Net cash provided by (used for) financing activities 30,286 -- -- 30,286
Effect of Exchange Rate Changes on Cash and Cash Equivalents 32 -- -- 32
Increase (Decrease) in Cash and Cash Equivalents 1,395 -- -- 1,395
Cash and Cash Equivalents
Beginning of Year 2,534 -- -- 2,534
-------- -------- -------- --------
End of Year $ 3,929 $ -- $ -- $ 3,929
======== ======== ======== ========
</TABLE>
73
<PAGE>
<TABLE>
MMH HOLDINGS, INC.
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED OCTOBER 31, 1998
($ in 000's)
<CAPTION>
Non Morris
Guarantor Guarantor Material
Subsidiaries Subsidiaries Handling, Inc. Eliminations
-------------- ------------- ------------ -------------
Operating Activities
<S> <C> <C> <C> <C>
Net income $ 19,714 $ 113 $ 4,291 $ (19,827)
Add (deduct) - items not affecting cash provided
by operating activities:
Depreciation and amortization 6,371 452 -- --
Amortization of debt financing costs -- -- 1,169 --
Equity in earnings of subsidiaries (140) -- (19,714) 19,854
Deferred income taxes - net (1,477) -- 1,804 --
Divestiture bonus -- -- 1,216 --
Other (881) -- -- (27)
Changes in working capital, excluding the effects
of acquisition opening
balance sheets:
Accounts receivable (247) 2,470 -- --
Inventories (9,231) 1,539 -- --
Other current assets (2,177) (751) (389) --
Trade accounts payable and bank overdrafts (1,405) (2,887) -- --
Accrued interest -- -- 2,201 --
Other current liabilities 3,644 647 -- --
Activity with parent and other affiliates - net 11,038 (1,011) (6,803) --
--------- --------- --------- ---------
Net cash provided by (used for) operating activities 25,209 572 (16,225) --
--------- --------- --------- ---------
Investment and Other Transactions
Fixed asset additions - net (5,078) (130) -- --
Acquisition of businesses - net of cash acquired (8,891) -- -- --
Issuance of loans to senior management -- -- (900) --
Repayment of loans by senior management -- -- 780 --
Other - net (1,532) (206) -- --
--------- --------- --------- ---------
Net cash used for investment and other transactions (15,501) (336) (120) --
--------- --------- --------- ---------
Financing Activities
Repayments of short-term debt and notes payable (639) (55) -- --
Proceeds from Senior Note Offering -- -- 200,000 --
Proceeds from New Credit Facility -- -- 55,000 --
Proceeds from Acquisition Facility borrowings -- -- 6,194 --
Net proceeds from Revolving Credit Facility borrowings -- -- 1,200 --
Net proceeds from issuance of Series A preferred stock
and related common shares -- -- -- --
Redemption of shares held by Holdings -- -- (233,459) --
Redemption of common stock and preferred stock -- -- -- --
Stock redemption transaction costs -- -- -- --
Debt financing costs -- -- (20,074) --
Distribution to parent (8,159) -- 8,159 --
Repayments of long-term debt -- -- (675) --
--------- --------- --------- ---------
Net cash provided by (used for) financing activities (8,798) (55) 16,345 --
Effect of Exchange Rate Changes on Cash and Cash Equivalents (89) -- -- --
Increase (Decrease) in Cash and Cash Equivalents 821 181 -- --
Cash and Cash Equivalents
Beginning of Year 1,393 139 -- --
--------- --------- --------- ---------
End of Year $ 2,214 $ 320 $ -- $ --
======== ======== ======== ========
Consolidated Consolidated
Morris Material MMH MMH
Handling, Inc. Holdings, Inc. Eliminations Holdings, Inc.
-------------- ------------- ------------ -------------
Operating Activities
Net income $ 4,291 $ 4,291 $ (4,291) $ 4,291
Add (deduct) - items not affecting cash provided
by operating activities:
Depreciation and amortization 6,823 -- -- 6,823
Amortization of debt financing costs 1,169 -- -- 1,169
Equity in earnings of subsidiaries -- (4,291) 4,291 --
Deferred income taxes - net 327 -- -- 327
Divestiture bonus 1,216 -- -- 1,216
Other (908) -- -- (908)
Changes in working capital, excluding the effects
of acquisition opening
balance sheets:
Accounts receivable 2,223 -- -- 2,223
Inventories (7,692) -- -- (7,692)
Other current assets (3,317) -- -- (3,317)
Trade accounts payable and bank overdrafts (4,292) -- -- (4,292)
Accrued interest 2,201 -- -- 2,201
Other current liabilities 4,291 -- -- 4,291
Activity with parent and other affiliates - net 3,224 -- -- 3,224
--------- --------- --------- ---------
Net cash provided by (used for) operating activities 9,556 -- -- 9,556
--------- --------- --------- ---------
Investment and Other Transactions
Fixed asset additions - net (5,208) -- -- (5,208)
Acquisition of businesses - net of cash acquired (8,891) -- -- (8,891)
Issuance of loans to senior management (900) -- -- (900)
Repayment of loans by senior management 780 -- -- 780
Other - net (1,738) -- -- (1,738)
--------- --------- --------- ---------
Net cash used for investment and other transactions (15,957) -- -- (15,957)
--------- --------- --------- ---------
Financing Activities
Repayments of short-term debt and notes payable (694) -- -- (694)
Proceeds from Senior Note Offering 200,000 -- -- 200,000
Proceeds from New Credit Facility 55,000 -- -- 55,000
Proceeds from Acquisition Facility borrowings 6,194 -- -- 6,194
Net proceeds from Revolving Credit Facility borrowings 1,200 -- -- 1,200
Net proceeds from issuance of Series A preferred stock
and related common shares -- 57,094 -- 57,094
Redemption of shares held by Holdings (233,459) 233,459 -- --
Redemption of common stock and preferred stock -- (287,000) -- (287,000)
Stock redemption transaction costs -- (3,553) -- (3,553)
Debt financing costs (20,074) -- -- (20,074)
Distribution to parent -- -- -- --
Repayments of long-term debt (675) -- -- (675)
--------- --------- --------- ---------
Net cash provided by (used for) financing activities 7,492 -- -- 7,492
Effect of Exchange Rate Changes on Cash and Cash Equivalents (89) -- -- (89)
Increase (Decrease) in Cash and Cash Equivalents 1,002 -- -- 1,002
Cash and Cash Equivalents
Beginning of Year 1,532 -- -- 1,532
--------- --------- --------- ---------
End of Year $ 2,534 $ -- $ -- $ 2,534
======== ======== ======== ========
</TABLE>
74
<PAGE>
<TABLE>
MMH HOLDINGS, INC.
SUPPLEMENTAL CONDENSED COMBINING STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED OCTOBER 31, 1997
($ in 000's)
<CAPTION>
Non
Guarantor Guarantor
Subsidiaries Subsidiaries Eliminations Combined
------------ ------------ ------------ --------
Operating Activities
<S> <C> <C> <C> <C>
Net income (loss) $ 20,853 $ (740) $ 740 $ 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 activities 758 -- (758) --
Deferred income taxes - net 89 -- -- 89
Gain on fire insurance claim (2,011) -- -- (2,011)
Other (800) -- (18) (818)
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 6,552 2,172 -- 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 short-term debt and notes payable (99) -- -- (99)
Repayments of long-term debt (101) (54) -- (155)
-------- -------- -------- --------
Net cash provided by 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>
75
<PAGE>
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
None.
76
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrants
The following sets forth certain information with respect to the persons who are
members of Holdings' Board of Directors, MMH's Board of Directors or the senior
management team of MMH and/or Holdings as of February 10, 2000 (1).
Name Age Position
Jack F. Stinnett 54 President, Chief Executive Officer and
Chairman of the Board of MMH and Holdings
David D. Smith 45 Vice President-Finance of MMH and Vice President
and Director of Holdings
Peter A. Kerrick 43 Vice President--Engineered Equipment of MMH
Edward J. Doolan 48 Vice President--Distribution & Service of MMH
Michael J. Maddock 56 Vice President--Europe, Pacific Rim &
Middle East of MMH
Martin L. Ditkof 42 General Counsel and Secretary of MMH and
Secretary of Holdings
Ross C. Smith 43 Vice President--Standard Cranes and
Components of MMH
Randall G. Burlison 56 Vice President--Product Support of MMH
Todd R. Berman 41 Director of MMH and Holdings
Jay R. Bloom (2) 43 Director of Holdings
Robert W. Hale (3) 52 Director of Holdings
Michael S. Shein (3) 36 Director of MMH and Vice President and
Director of Holdings
Michael R. Young (2) 54 Director of Holdings
Larry Zine (3) 44 Director of Holdings
Eric A. Green 38 Director of Holdings
(1) Michael S. Erwin resigned as President, Chief Executive Officer and
Director of MMH and Holdings in March 1999. Richard J. Niespodziani
resigned as Vice President--Aftermarket Products of MMH in June 1999. K.
Bruce Norridge resigned as Vice President--Europe & Africa of MMH in
October 1999. J. Bradley Wiedmann resigned as Vice President--Human
Resources of MMH in December 1999. Malcolm Lassman resigned as a director
of Holdings on December 5, 1999.
(2) Member of the Compensation Committee. (3) Member of the Audit Committee.
Jack F. Stinnett--Jack Stinnett joined the Company as President, Chief Executive
Officer and as a director of both Holdings and MMH in March 1999. He serves as
Chairman of the Board of each of Holdings and MMH since February 2, 2000.
Previously, he served as Vice President and General Manager of Engine Components
World Wide for TRW, a global automotive parts business. Before that, Mr.
Stinnett was employed by Babcock & Wilcox in various management and materials
positions. Mr. Stinnett graduated from the United States Naval Academy with a
Bachelor of Science degree in Marine Engineering and obtained as MBA from
Lynchburg College/Tulane University.
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--Engineered 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.
77
<PAGE>
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.
Michael J. Maddock--Michael Maddock has been Vice President--Pacific Rim &
Middle East of the Company since September 1997. Mr. Maddock's responsibilities
were expanded to include Europe in March 1999. 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 and
Secretary 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.
Ross C. Smith--Ross Smith assumed his current position as Vice
President--Standard Cranes and Components in March 1999. Mr. Smith joined the
Company in July 1998 as the Vice President of Business Development and Strategic
Planning. Previously, Mr. Smith held a position in strategic planning and market
development at Siebe plc., a global supplier of intelligent automation, controls
and industrial equipment since 1989. Mr. Smith received his B.A. from
Northwestern University and an M.B.A. from the Owen School at Vanderbilt
University.
Randall G. Burlison--Randy Burlison assumed his current position as Vice
President--Product Support in 1999. Since joining the Company in 1978, Mr.
Burlison has held a variety of positions including General Manager, Crane
Division, and Operations Manager, Oak Creek. Mr. Burlison received his Bachelor
of Science degree in Industrial Engineering from the University of Illinois.
Todd R. Berman--Todd Berman has been a director of Holdings and a director of
the Company since March 30, 1998. Mr. Berman is the founder and President of
Chartwell Investments Inc. He 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, from December 1994 until February
1999; as Chairman of Carl King, Inc., the leading operator of gas stations and
convenience stores in the Delmarva peninsula (Delaware, Maryland, Virginia),
from December 1994 until February 1999; and as a director of Petro Stopping
Centers, L.P., a leading operator of large, full-service truck stops, from
January 1997 until July 1999. 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 of Holdings since March 30, 1998.
Mr. Bloom is a Managing Director and co-head of High Yield Investment Banking,
Sales, Trading and Research at CIBC World Markets. In addition, he is the
co-head of CIBC High Yield Merchant Banking Funds. At CIBC World Markets, 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 World Markets 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 was appointed as the representative of HarnCo to the
board of directors of Holdings (pursuant to the terms of the Stockholders'
Agreement (as defined herein)) on March 30, 1998 and has served as a director of
Holdings since that date. 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.
78
<PAGE>
Michael S. Shein--Michael Shein has been a director and Vice-President of
Holdings and a director of the Company 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 served as a
director of Griffith Consumers Company, one of the nation's largest independent
distributors of heating oil and other petroleum products, from December 1994
until February 1999; a director of Carl King, Inc., the leading operator of gas
stations and convenience stores in the Delmarva peninsula (Delaware, Maryland,
Virginia), from December 1994 until February 1999; and a director of Petro
Stopping Centers, L.P., a leading operator of large, full-service truck stops,
from January 1997 until July 1999. Mr. Shein received a B.S. summa cum laude
from The Wharton School at the University of Pennsylvania.
Michael R. Young--Michael Young has served as a director of Holdings 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. He is currently a director of York International. 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 has served as a director of Holdings since March 30,
1998. Mr. Zine is Chief Financial Officer and Executive Vice President of
Blockbuster and was the Executive Vice President and Chief Financial Officer of
Petro Stopping Centers, L.P., a leading operator of large full-service truck
stops, from September 1996 until 1999. Prior to that, 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 educated at the University of North
Dakota and holds an M.S. degree in accounting and a B.S.B.A. in marketing.
Eric A. Green--Eric Green has served as a director of Holdings since August 21,
1999. Mr. Green is a partner in Chase Capital Partners and is a director of
Interdent. Before joining Chase Capital, Mr. Green was a Managing Director in
the Merchant Banking Group at Banque Paribas. Mr. Green also was employed by GE
Capital and the General Electric Company. Mr. Green received a Bachelor of
Administration from Wabash College and an M.B.A. from New York University.
Director Compensation
Holdings pays directors fees to certain of its directors. Larry Zine and Michael
Young each receive $3,000 per meeting. In addition, the Company has committed to
grant 50 options to purchase shares of Holdings Series A Senior Preferred Stock
at an exercise price of $1,000. Holdings and MMH reimburse all of their
directors for reasonable out-of-pocket expenses incurred in connection with
attending Board meetings.
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<PAGE>
Item 11. Executive Compensation
Summary Compensation Table
The following table presents information concerning compensation paid for
services to the individuals who served as Chief Executive Officer of the Company
during fiscal year 1999, the four other most highly paid executive officers
employed by the Company at the end of fiscal year 1999, and two individuals who
would have been among the four most highly paid executive officers if they had
been employed by the Company at the end of the fiscal year 1999, for each of the
fiscal years ended October 31, 1999 and 1998, respectively (collectively, the
"Named Executive Officers").
<TABLE>
<CAPTION>
Annual Compensation
-------------------------------------
Other All
Annual LTIP Other
Name and Salary Bonus Compensation Bonus Payouts Compensation
Principal Position ($) ($) ($) ($) (a) ($) (b) ($) (c)
------------- ------------ ----------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Jack F. Stinnet 1999 265,389 100,000 4,800 -- -- 5,787(d)
President and Chief Executive
Officer 1998 N/A N/A N/A N/A N/A N/A
Michael S. Erwin 1999 68,991 -- -- -- -- 312,012(d)
Former President and Chief
Executive Officer 1998 176,670 11,484 -- 17,736 7,010 384,789(d)
Edward J. Doolan 1999 140,040 7,352 -- -- -- 12,341(d)
Vice President - Distribution
& Service 1998 114,040 24,376 0 7,323 2,659 134,087(d)
Michael J. Maddock 1999 133,485 -- 20,483 (e) -- -- 99,842(f)
Vice President - Europe
Pacific Rim & Middle East 1998 133,485 0 19,465 (e) 0 0 219,388(f)
David D.Smith 1999 144,000 14,493 -- -- -- 6,959(d)
Vice President and Chief
Financial Officer 1998 115,830 4,517 -- 11,216 4,386 129,594(d)
Randall G. Burlison 1999 109,020 6,271 -- -- -- 12,923(d)
Vice President - Product
Support 1998 108,220 15,367 -- 12,512 -- 10,556(d)
Richard J. Niespodziani 1999 78,750 -- -- -- -- 194,473(d)
Former Vice President -
Aftermarket 1998 112,005 23,941 -- 16,991 2,210 134,631(d)
K. Bruce Norridge 1999 125,342 -- 50,342 (e) -- -- 356,582(f)
Former Vice President -
Europe 1998 130,350 -- 75,926 (e) -- -- 219,388(f)
</TABLE>
(a) Represents the cash portion of the bonus earned in 1998 that resulted
from bonuses that were "banked" in prior years under the HII EVA Bonus
Program, for which Messrs. Erwin, Doolan, Smith, Burlison and
Niespodziani were eligible until the Recapitalization Closing.
(b) Represents HII common stock purchased through conversion of each
executive's banked bonus at a 25% discount on the purchase price of
$46.04 in accordance with the provisions of the HII Executive Incentive
Plan. Mr. Erwin and Mr. Niespodziani had elected to defer 25% and 10%
of their respective prior year cash bonuses into HII common stock under
the HII Executive Incentive Plan in which Messrs. Erwin, Doolan, Smith,
Burlison and Niespodziani participated until the Recapitalization
Closing.
80
<PAGE>
(c) Fiscal year 1998 includes divestiture bonuses of $375,000, $125,000,
$125,000, $125,000, $125,000 and $125,000 for Messrs. Erwin, Doolan,
Smith, Maddock, Niespodziani, and Norridge, respectively. See
"--Divestiture Bonus Agreements." Fiscal year 1999 includes lump sum
payments of $300,000, $178,500, and $256,740, respectively, to Messrs.
Erwin, Niespodziani and Norridge pursuant to severance agreements
entered into with the Company.
(d) Includes $689, $445, $477, $425 and $437 paid to Messrs. Erwin,
Doolan, Smith, Burlison and Niespodziani, respectively, under the HII
profit sharing plan, in which they participated until the
Recapitalization Closing, and the profit sharing component of the
Company's Retirement Plan (as defined herein), which was adopted on
April 1, 1998, and which permits the employee to elect to receive half
of the payment in cash, rather than as a contribution to the
Retirement Plan. No amounts were earned in fiscal year 1999 under the
profit sharing component of the Company's Retirement Plan. Also
includes employer matching, transition and age-based contributions of
$7,200, $7,643, 3,501, $10,131 and $8,549 for Messrs. Erwin, Doolan,
Smith, Burlison and Niespodziani, respectively, for fiscal year 1998
and the following amounts paid by HII and the Company during fiscal
1998 for group term life insurance premiums for the benefit of the
executives: Mr. Erwin, $1,900; Mr. Doolan, $999; Mr. Smith, $616; Mr.
Burlison, $2,367; and Mr. Niespodziani, $1,082. Fiscal year 1999
amounts include employer matching, transition and age-based
contributions of $4,800, $11,315, $12,000, $6,600, $11,975 and $8,664
for Messrs. Stinnett, Erwin, Doolan, Smith, Burlison and Niespodziani,
respectively, and the following amounts paid by the Company for group
term life insurance premiums for the benefit of the executives: Mr.
Stinnett, $987; Mr. Erwin, $697; Mr. Doolan, $341; Mr. Smith, $359;
Mr. Burlison, $857; and Mr. Niespodziani, $388.
(e) Fiscal year 1998 includes $14,641 and $14,469 in car allowance for Mr.
Norridge and Mr. Maddock, respectively, as well as $56,549 for an
expatriate allowance paid to Mr. Norridge by the Company pursuant to
the terms of his employment agreement. Fiscal year 1999 includes
$18,480 and $20,483 in car allowance for Mr. Norridge and Mr. Maddock,
respectively, as well as $50,342 in expatriate allowance for Mr.
Norridge. Also includes taxable benefits such as private health
insurance, fuel allowance and telephone allowance.
(f) Represents an annual earn-out paid to Messrs. Maddock and Norridge
pursuant to the terms of their employment agreements.
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.
Until March 30, 1998, executive officers of the Company located in the United
States participated in HII's defined benefit pension plan. The following table
sets forth the estimated annual benefits payable upon retirement at normal
retirement age for the years of service indicated under the plan (and excess
benefit arrangements defined below) at the indicated remuneration levels.
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
81
<PAGE>
Remuneration covered by the plan includes the following amounts reported in the
1998 Summary Compensation Table: salary and bonus (including the cash value of
bonuses foregone for stock under the HII Executive Incentive Plan). "Banked"
bonuses are not included.
The years of service credited for each of the Named Executive Officers are:
Michael Erwin 26 years, Edward Doolan 20 years, David Smith 11 years, Randall
Burlison 21 years and Richard Niespodziani 24 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 Internal Revenue Code of 1986, as amended, 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.
Executive officers of the Company located in the United Kingdom were eligible to
participate in an executive section of the Harnischfeger Industries Pension
Scheme specific to the Company (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 April 1999, the defined
benefit pension scheme was separated from the Harnischfeger Industries Pension
Scheme into the Morris Material Handling Pension Plan.
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.
<TABLE>
<CAPTION>
Years of Service
--------------------------------------------------------------------------------------------------
Remuneration 10 15 20 25 30 35
- ------------ ---------- ------------- ------------- ------------ ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
(pound)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
</TABLE>
Mr. Maddock and Mr. Norridge continue to be members of the UK Scheme. At October
31, 1999, Mr. Maddock had 10.75 years of service and Mr. Norridge had 4.34 years
of service for purposes of this plan. 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. Mr. Norridge's service period
remains fixed at the date of termination.
Divestiture Bonus Agreements
In October 1998, Michael S. Erwin, Edward J. Doolan, David D. Smith, Michael J.
Maddock, Richard J. Niespodziani, and K. Bruce Norridge were each paid a
divestiture bonus of $375,000, $125,000, $125,000, $125,000, $125,000 and
$125,000, respectively. These amounts were paid under agreements with HarnCo
which provided for bonuses to be paid to certain 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. Under these agreements, each
employee had 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 was a
substantial change in the employee's duties, functions and responsibilities or
the employee was required to perform the principal portion of his duties outside
his current locale.
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<PAGE>
Arrangements After Consummation of the Transactions
Employee Retirement Savings Plan
Effective April 1, 1998, the Company established a retirement savings plan under
Section 401(k) of the Internal Revenue Code (the "Retirement Plan"). The
Retirement Plan covers all non-bargaining unit employees in the United States
from their first day of service. Employees can contribute from 1% to 10% of
their eligible pre-tax pay. The company matches 100% of the first 3% and 50% of
the next 2% of each employee's contribution to the Retirement Plan ("matching
contributions"). Once an employee turns 35, the Company contributes an
additional percentage of the employee's pay based on his/her age ("age-based
contributions"). In addition, the Company makes a special contribution for
long-service and older employees who were participants in the former HII pension
plan in order to make up for future years of nonparticipation in that plan. If
an employee's age plus years of service add up to 65 or more, the Company
contributes an additional percentage of the employee's pay to the Retirement
Plan ("transition contributions"). All contributions are 100% vested upon
contribution. An employee must be active on December 31 of the plan year in
order to qualify for annual Company contributions. During fiscal year 1998, the
Company contributed $7,200, $7,643, $3,501, $10,131 and $8,549 in matching,
transition and age-based contributions to the Retirement Plan for Messrs. Erwin,
Doolan, Smith, Burlison and Niespodziani, respectively. Fiscal year 1999 amounts
include employer matching, transition and age-based contributions of $4,800,
$11,315, $12,000, $6,600, $11,975 and $8,664 for Messrs. Stinnett, Erwin,
Doolan, Smith, Burlison and Niespodziani, respectively.
Profit Sharing Plan
The Company has continued the HII profit sharing plan as a component of its
Retirement Plan. The profit sharing plan covers substantially all domestic
employees, except those covered by collective bargaining agreements and
employees of affiliates with separate defined contribution plans. During fiscal
1998, contributions to this plan were based on the Company's "economic value
added" performance. Effective November 1, 1998, contributions are based on
earnings of the Company before interest and taxes. Employees have the option to
receive half of the payment in cash rather than in the form of a contribution to
the Retirement Plan. Messrs. Erwin, Doolan, Smith, Burlison and Niespodziani
received cash payments of $689, $445, $477, $425 and $437, respectively, under
the profit sharing plan in fiscal 1998. No amounts were earned in fiscal year
1999 under the profit sharing component of the Company's Retirement Plan.
Employment Agreements and Severance Arrangements
On March 30, 1998, the Company entered into employment agreements with certain
senior managers of the Company. The agreements with Messrs. Erwin, Doolan,
Smith, and Niespodziani provided for their employment in their current
capacities at that time 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 provided Messrs. Erwin, Doolan, Smith, and Niespodziani a
base salary (subject to annual review by the Board of Directors) of $180,000,
$111,540, $111,300 and $109,800, 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, which definition includes a material
reduction of the executive's duties or substantial change in work conditions, a
material decrease in compensation or benefits, and changes in control of the
Company), the executive is entitled to continuance of his then current base
salary for 12 months, continuation of health and life insurance benefits for 24
months, 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 by the Company without
Cause (as defined therein, which definition includes the willful failure of the
executive to substantially perform his duties, and the commission of a fraud on
the Company, if not cured within 30 days' written notice thereof), 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.
The Company also entered into new employment agreements with Messrs. Norridge
and Maddock on March 30, 1998. These agreements generally continue in effect
83
<PAGE>
until the death of the executive, the executive's reaching normal retirement
age, termination by the Company for Cause (as defined therein, which definition
includes the executive being absent from work through sickness or disability for
more than six months in any 12 month period, and the executive neglecting to
perform his duties in a material way), termination by the executive for Good
Reason (as defined therein, which definition includes the failure by the Company
to pay the compensation and benefits required by the agreement and a material
diminishment in the duties of 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 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, 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.
The Company entered into an employment agreement with Mr. Stinnett on January
27, 1999. The agreement with Mr. Stinnett provides for his employment in his
current capacity for three years, and for additional one-year periods thereafter
unless canceled by either party on 60 days notice prior to such renewal date. It
provides Mr. Stinnett a base salary (subject to annual review by the Board of
Directors) of $400,000 and an annual performance-based bonus plan (based on
EBITDA), the terms of which are to be agreed upon by the Board of Directors and
Mr. Stinnett. The agreement also provide for the indemnification of Mr.
Stinnett, and includes non-competition and confidentiality provisions. If Mr.
Stinnett resigns for Good Reason (as defined therein, which definition includes
a material reduction of his duties or substantial change in work conditions, a
material decrease in compensation or benefits, and changes in control of the
Company), he is entitled to continuance of his then current base salary for 12
months, continuation of health and life insurance benefits for 24 months, 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 Mr.
Stinnett or his family. If Mr. Stinnett is terminated by the Company without
Cause (as defined therein, which definition includes the willful failure of the
executive to substantially perform his duties, and the commission of a fraud on
the Company, if not cured within 30 days' written notice thereof), he is
entitled to a lump sum payment equal to 1.5 times his then current annual base
salary and the same benefits as if he resigned for Good Reason.
On March 16, 1999, the Company entered into a severance agreement with Mr.
Erwin. The terms of Mr. Erwin's severance agreement provided for a lump sum
severance amount of $300,000, which represented his base salary for 12 months
plus the amount of his base salary that remained unpaid for fiscal 1999 as of
the date of termination. The Company re-purchased 20% of Mr. Erwin's equity
interest in Niles L.L.C., a Delaware limited liability company which indirectly
owns 29.3% of the Holdings Voting Common Stock and 37.6% of the Holdings Series
C Junior Voting Preferred Stock. Mr. Stinnett purchased the remaining 80% of Mr.
Erwin's equity interest in Niles L.L.C. See "Certain Relationships and Related
Transactions--Loans to Management." Mr. Erwin also received reimbursement of
unpaid customary and reasonable business expenses, continuation of health and
life insurance benefits at the Company's expense for 24 months from the date of
termination, continuation of all other perquisites for six months, and
reasonable outplacement assistance for six months following the date of
termination in an amount not to exceed $5,000. In addition, the severance
agreement provides for the indemnification of Mr. Erwin, and includes
confidentiality and non-competition provisions.
On June 3, 1999, the Company entered into a severance agreement with Mr.
Niespodziani. The terms of Mr. Niespodziani's severance agreement provided for a
lump sum severance amount of $178,500, which represented his base salary for 12
months plus the amount of his base salary that remained unpaid for fiscal 1999
as of the date of termination. Mr. Niespodziani also received reimbursement of
unpaid customary and reasonable business expenses, continuation of health and
life insurance benefits at the Company's expense for 24 months from the date of
termination, continuation of all other perquisites for six months, and
reasonable outplacement assistance for six months following the date of
termination in an amount not to exceed $5,000. In addition, the agreement
provides for the indemnification of Mr. Niespodziani and includes
confidentiality and non-competition provisions.
On September 22, 1999, the Company entered into a compromise agreement with Mr.
Norridge. The terms of Mr. Norridge's compromise agreement provided for a
termination payment of (pound)144,000, payment of any outstanding salary accrued
through the date of termination and payment of the agreed bonus amount of
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<PAGE>
(pound)56,250 together with (pound)4,260 interest on such bonus. Mr. Norridge
also received continuation of medical insurance and life insurance at the
Company's expense for him and his spouse for a period of twelve months,
continued eligibility for certain pension plan benefits, and reimbursement for
legal fees relating to the termination and outplacement assistance in an amount
not to exceed (pound)5,000.
Equity Incentive Plan
In connection with the Recapitalization, the Company committed to establish 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 reserved 1,186.0849 shares of Holdings Nonvoting Common Stock and
4,328.25 shares of Holdings 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 Holdings Nonvoting Common Stock
and 0.5344 shares of Holdings Series C Junior Voting Preferred Stock (the
"Equity Units")). The Company has committed to make an initial option grant to
each member of the Company's senior management on March 30, 1998 under such
executive's employment agreement. Mr. Erwin is to be granted 1,990 Equity Units
(representing 291.3 shares of Holdings Nonvoting Common Stock and 1,063.5 shares
of Holdings Series C Junior Voting Preferred Stock) Messrs. Doolan,
Niespodziani, Maddock and Norridge each are to be granted 676 Equity Units
(representing 99.0 shares of Holdings Nonvoting Common Stock and 361.3 shares of
Holdings Series C Junior Voting Preferred Stock). The initial exercise price of
each Equity Unit covered by the initial option grants to the members of the
Company's senior management is to be $1,000. 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 will expire ten years from the date of grant.
The Company is in the process of establishing the vesting terms for such Equity
Units.
85
<PAGE>
Item 12. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth, as of January 31, 2000, the number and
percentage of outstanding shares of voting stock and nonvoting common stock of
Holdings beneficially owned by: (i) each executive officer of Holdings and MMH
and each director of Holdings and MMH; (ii) all directors of Holdings and MMH
and all executive officers of Holdings and MMH 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>
Nonvoting Percent Voting Percent Series C Percent
Name and Address of Beneficial Owner Common Stock Of Class Common Stock Of Class Preferred Stock of Class
5% Owners:
<S> <C> <C> <C> <C> <C> <C>
Chartwell L.P. (a) 3,630 83.4% 7,907 77.8% 34,633 100.0%
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
Named Executive Officers and
Directors:
Todd R. Berman (b) 3,630 83.4% 7,907 77.8% 34,633 100.0%
Michael S. Shein (b) 3,630 83.4% 7,907 77.8% 34,633 100.0%
Jack F. Stinnett (c) (d) -- -- -- -- -- --
Michael S. Erwin (c) -- -- -- -- -- --
David D. Smith (c) (d) -- -- -- -- -- --
Peter A. Kerrick (c) -- -- -- -- -- --
Richard Niespodziani (c) -- -- -- -- -- --
Edward J. Doolan (c) -- -- -- -- -- --
K. Bruce Norridge (c) -- -- -- -- -- --
Michael J. Maddock (c) (d) -- -- -- -- -- --
Martin L. Ditkof (c) -- -- -- -- -- --
Jay R. Bloom (a) -- -- -- -- -- --
Robert W. Hale -- -- -- -- -- --
Michael R. Young -- -- -- -- -- --
Larry Zine -- -- -- -- -- --
Eric Green (a) -- -- -- -- -- --
All directors and officers as a group 3,630 83.4% 7,907 77.8% 34,633 100.0%
(14 persons)
</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 own 62.4%
and 37.6%, respectively, of the shares of common stock of MHE
Investments, a Delaware corporation. MHE Investments, in turn, owns
77.8% of the shares of Holdings Voting Common Stock and 100.0% of the
Holdings Series C Junior Voting Preferred Stock. Chartwell L.P. is
also the managing member of Martin Crane L.L.C., a Delaware limited
liability company, which owns 83.4% of the shares of Holdings
Nonvoting Common 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 and
MMH, is a limited partner of Chartwell L.P. Michael S. Shein, who
serves as a director and Vice President of Holdings and as a director
of MMH, is also a limited partner of Chartwell L.P. Mr. Berman and Mr.
Shein are the managers of Frasier L.L.C., Niles L.L.C. and Martin
Crane L.L.C. Concurrent with the Recapitalization Closing, an
affiliate of CIBC World Markets Corp., the initial purchaser in the
offering of Series A Units, acquired an approximately 25.0% interest
in each of Frasier L.L.C. and Niles L.L.C. An affiliate of CIBC World
Markets Corp. also acquired an approximately 25.0% interest in Martin
Crane L.L.C. Accordingly, CIBC World Markets Corp. holds an indirect
equity interest in 19.4% of the shares of Holdings Voting Common Stock
and in 20.9% of the shares of Holdings Nonvoting Common Stock, but
does not have any beneficial ownership in such shares. Jay R. Bloom,
who is a director of Holdings, is a Managing Director of CIBC World
Markets Corp. Concurrent with the Recapitalization Closing, an
affiliate of Chase Capital Partners acquired an approximately 21.7%
interest in Niles L.L.C. An affiliate of Chase Capital Partners also
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<PAGE>
acquired an approximately 8.1% interest in Martin Crane. Accordingly,
Chase Capital Partners holds an indirect equity interest in 6.3% of
the shares of Holdings Voting Common Stock and in 6.8% of the shares
of Holdings Nonvoting Common Stock, but does not have any beneficial
ownership in such shares. Eric Green, who is a director of Holdings,
is a Partner of Chase Capital Partners.
(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
Holdings Voting Common Stock and 100.0% of the Holdings Series C
Junior Voting Preferred Stock. Chartwell L.P. is also the managing
member of Martin Crane L.L.C., a Delaware limited liability company,
which owns 83.4% of the shares of Holdings Nonvoting Common Stock.
Todd R. Berman, who is Chairman of the Board of Holdings and MMH, is a
limited partner of Chartwell L.P. Michael S. Shein, who serves as a
director and Vice President of Holdings and as a director of MMH, is
also a limited partner of Chartwell L.P. Mr. Berman and Mr. Shein are
the managers of Frasier L.L.C., Niles L.L.C. and Martin Crane 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 own $850,000 of equity
interests of Niles L.L.C., constituting 4.2% of the total equity
interest in Niles L.L.C. Accordingly, members of the Company's senior
management collectively hold an indirect equity interest in 1.2% of
the shares of Holdings Voting Common Stock, but do not have any
beneficial ownership interests in such shares.
(d) Certain members of the Company's senior management own $46,759 of
equity interests of Martin Crane L.L.C., constituting 0.93% of the
total equity interest in Martin Crane L.L.C. Accordingly, certain
members of the Company's senior management collectively hold an
indirect equity interest in 0.78% of the shares of Holdings Nonvoting
Common Stock, but do not have any beneficial ownership interests in
such shares.
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Item 13. Certain Relationships and Related Transactions
Relationship with Harnischfeger
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 $1.2 million in fiscal 1998.
Prior to the consummation of the Transactions, the Company also obtained volume
discounts by entering into joint purchase agreements in the United States with
HII, HII's mining equipment operations unit ("Mining") and paper equipment
operations unit ("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 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. Until August 31, 1998, the Company's hourly shop employees at its Oak
Creek, Wisconsin facility were covered by a collective bargaining agreement
between HarnCo and the United Steelworkers of America, Local 1114 that also
covered certain employees of Mining. Effective September 1, 1998, these
employees were covered by a renegotiated collective bargaining agreement between
the Company and the United Steelworkers of America, Local 1114.
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 until March 30, 1998. Effective April 1, 1998, the Company
obtained its own insurance coverage, with the exception of medical, dental, life
and long-term disability insurance, which the Company obtained effective January
1, 1999. 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.
Throughout fiscal 1999 and 1998, the Company also sold certain products and
services to Paper and Mining at negotiated rates and performed certain
administrative functions for HarnCo in Mexico. Sales to Mining and Paper
amounted to $1.0 million and $3.2 million during fiscal 1999 and 1998,
respectively. In addition, Mining and Paper provided certain products and
services to the Company which management estimates amounted to approximately
$14.1 million and $12.4 million in fiscal 1999 and 1998, respectively. 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. Mining
and Paper also acted as motor rewind subcontractors for the Company. It is
contemplated that these transactions, none of which individually or in the
aggregate are significant to the Company, will continue in the future.
Prior to March 30, 1998, in a number of instances, HII, HarnCo and/or the
Non-MHE HarnCo Affiliates 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. 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 and contingently liable for the MHE Business's
obligations (collectively, the "Credit Support Obligations"). In addition, HII
and/or HarnCo guaranteed Company debt and the Company's performance under
certain real estate, vehicle and equipment leases. At October 31, 1999, there
was approximately $27.7 million outstanding under the letters of credit and
bonds provided by HarnCo and Non-MHE HarnCo Affiliates. At October 31, 1999,
HarnCo continues to be shown as the guarantor on the Birmingham, Alabama
facility lease with the Industrial Revenue Board of Birmingham.
Management believes that in the aggregate these products and services can be
obtained on comparable terms from third parties.
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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, HarnCo and
certain of HarnCo's affiliates 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 were 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 the Trademark Licensing Agreement
with Harnischfeger Technologies, Inc. ("HTI"), a subsidiary of HarnCo, pursuant
to which the Company 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 which
commenced March 30, 1999 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. The
Company accrued $1,353,000 of expenses for royalty fees in the period from March
30, 1999 to October 31, 1999. The Company has elected to defer the payment of
the royalty for the period ended October 31, 1999, which would otherwise be
payable on January 30, 2000 pursuant to the terms of Trademark License
Agreement. The Trademark License Agreement provides that the annual royalty fee
may be deferred for up to two years if the Company does not meet certain
financial criteria. The Company can only defer up to two payments during the
term of the agreement. In addition, interest accrues at 12% per year on the
deferred fee payments.
Component and Manufactured Products Supply Agreement
At the Recapitalization Closing, the Company 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 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 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 had
been provided historically, and for all of fiscal 1998, but were not covered by
a written agreement until the date of the Transactions. 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 claims, screening and hiring of hourly employees and
benefits administration), shared space, warehouse services for repair parts at
one of HarnCo's facilities until July 1998, 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
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transportation of materials between Milwaukee area operations until May 1998.
The Company was charged $2.1 million and $5.0 million for such services during
fiscal 1999 and 1998, respectively, and estimates it will be charged $0.3
million in fiscal 2000. The charge will continue to decrease as certain of the
services provided by HarnCo become no longer necessary.
Health and Welfare Arrangements
Under the terms of the Recapitalization Agreement, the current United States
employees of the Company continued to participate, from the Recapitalization
Closing until December 31, 1998, in the medical, dental, life and long-term
disability insurance benefit plans that were sponsored by HarnCo for the benefit
of these employees as of the Recapitalization Closing. The Company paid HarnCo
the cost of all benefits provided under these plans. Beginning on January 1,
1999, the Company sponsored its own medical, dental, life and long-term
disability insurance benefit plans.
Stockholders Agreement
At the Recapitalization Closing, Holdings 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 Holdings Voting 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 Holdings 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 Holdings 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 $27.7 million as of October 31, 1999).
MMH accrued a fee of $223,000 for calendar year 1999. The Company paid a
pro-rated fee of $290,106 for calendar year 1998 at the Recapitalization
Closing. HII refunds 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.
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.
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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 are 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 Senior Notes and/or the New Credit Facility. The
original principal amounts of the loans to Messrs. Erwin, Smith, Kerrick,
Niespodiziani, Doolan, Maddock, Norridge and Ditkof were $250,000, $110,000,
$70,000, $70,000, $100,000, $125,000, $125,000 and $50,000, respectively, and
have been repaid in full. On June 30, 1999, the Company made a loan in the
amount of $150,000 to Mr. Stinnett, who purchased 80% of Mr. Erwin's equity
interest in Niles L.L.C. At October 31, 1999, the principal amount of the note
outstanding for Mr. Stinnett was $150,000. Interest was charged 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 was repaid
in full. The principal amount of the loan to Mr. Stinnett and the interest
thereon will be payable in full in the event he ceases to be employed by the
Company as a result of termination for Cause (as defined therein), or by reason
of his death or resignation for other than Good Reason (as defined therein), or
upon an Event of Default (as defined therein). As collateral for the note to Mr.
Stinnett granted to the Company a security interest in the equity interests in
Niles L.L.C. he acquired with the proceeds of the loans.
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 MMH and both are officers and directors of
Chartwell Investments Inc.
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 MMH and both are officers and directors of Chartwell
Investments Inc. The Company paid Chartwell $1.0 million and $0.6 million plus
expenses during fiscal 1999 and 1998, respectively.
New Credit Facility Participation
On August 2, 1999, the Company obtained an amendment to the New Credit Facility
that cured past financial covenant violations and reset the financial covenants
until April 2001. In connection with, and as a condition to, the New Credit
Facility Amendment, Martin Crane L.L.C., a Delaware limited liability company,
purchased a $5.0 million participation in the New Credit Facility and received
certain non-voting equity interests in Holdings, consisting of 25% of the
outstanding Holdings Common Stock.
Chartwell L.P., a Cayman Islands limited partnership, is the managing member of
Martin Crane. Chartwell L.P. is the managing member of Frasier L.L.C. and Niles
L.L.C., which collectively indirectly own 77.8% of the Holdings Voting Common
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Stock and all of the Holdings Series C Junior Voting Preferred Stock. Todd R.
Berman, who is Chairman of the Board of Holdings and MMH, is a limited partner
of Chartwell L.P. Michael S. Shein, who serves as a director and Vice President
of Holdings and as a director of MMH, is also a limited partner of Chartwell
L.P. Mr. Berman and Mr. Shein are, respectively, Chairman of the Board and a
director of each of Holdings and MMH and both are officers and directors of
Chartwell Investments Inc. Mr. Berman and Mr. Shein are the managers of Martin
Crane.
An affiliate of CIBC World Markets Corp. owns an approximately 25.0% interest in
Martin Crane. Jay R. Bloom, who serves as a director of Holdings, is a Managing
Director of CIBC World Markets Corp. An affiliate of Chase Capital Partners owns
an approximately 8.1% interest in Martin Crane. Eric Green, a director of
Holdings, is a Partner in Chase Capital Partners.
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PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) 1. Financial Statements
Reference should be made to the index included in Item 8 of
this Form 10-K for a complete list of the financial
statements filed as part of this report.
2. Financial Statement Schedules Included in Part IV of this Report
Reference should be made to the index included in Item 8 of
this Form 10-K for a complete list of the financial
statements filed as part of this report.
3. Exhibits and Exhibit Index
Exhibit Number Exhibit
2.1(aa) Recapitalization Agreement, dated January 28, 1998, among
Harnischfeger Corporation, the sellers named therein and MHE Investments,
Inc., as amended.
3.1(aa) Second Amended and Restated Certificate of Incorporation of
MMH Holdings, Inc.
3.2(cc) Certificate of Incorporation of Morris Material Handling, Inc.
3.3(aa) Bylaws of MMH Holdings, Inc.
3.4(cc) Bylaws of Morris Material Handling, Inc.
3.5(aa) 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.
3.6(aa) 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.
3.7(aa) 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(aa) Preferred Stock Registration Rights Agreement, dated as of
March 30, 1998, by and among MMH Holdings, Inc. and CIBC Oppenheimer Corp.
4.2(cc) Registration Rights Agreement, dated as of March 30, 1998, by
and among Morris Material Handling, Inc, the Guarantors named therein and
CIBC Oppenheimer Corp., Goldman, Sachs & Co. and Indosuez Capital.
4.3(aa) Common Stock Registration Rights and Stockholders Agreement,
dated as of March 30, 1998, among MMH Holdings, Inc., Chartwell, L.P. and
CIBC Oppenheimer Corp.
4.4(cc) Indenture, dated as of March 30, 1998, between Morris Material
Handling, Inc. and United States Trust Company of New York, as Trustee,
relating to Morris Material Handling, Inc.'s 9 1/2% Senior Notes due 2008.
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4.5(cc) Form of 9 1/2% Senior Note due 2008.
4.6(bb) 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.
4.7(cc) U.S. Security Agreement, dated as of March 30, 1998, made by
Morris Material Handling, Inc., the Guarantors listed therein, in favor of
Canadian Imperial Bank of Commerce.
4.8(aa) Guarantee, dated as of March 30, 1998, by MMH Holdings, Inc.,
in favor and for the benefit of Canadian Imperial Bank of Commerce.
4.9(aa) 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.
4.10(aa) Stockholders and Registration Rights Agreement, dated as of
March 30, 1998, by and among MMH Holdings, Inc., MHE Investments, Inc. and
Harnischfeger Corporation.
4.11(aa) Form of Indenture dated as of ____________, among MMH
Holdings, Inc., as the Issuer, and _______________, as the Trustee for
$___________ 12% Exchange Debentures Due 2009.
4.12(aa) Form of 12% Exchange Debenture Due 2009.
4.13(dd) Amendment No.1 dated as of August 28, 1998 to the Credit
Agreement, dated March 30, 1998, among MMH Holdings, Inc., Morris Material
Handling, Inc., Material Handling, LLC, Morris Material Handling, Ltd.,
Mondel ULC, Kaverit Steel and Crane ULC and Canadian Imperial Bank of
Commerce, as Administrative Agent, Credit Agricole Indosuez, as Syndication
Agent, Bank Boston, N.A., as Documentation Agent, and the Lending
Institutions listed therein.
4.14(dd) Waiver dated as of March 2, 1999 by and among MMH Holdings,
Inc., Morris Material Handling, Inc., Morris Material Handling, LLC, Morris
Material Handling, Ltd., Mondel ULC, Kaverit Steel and Crane ULC, the
lending institutions listed on the signature pages thereto, Credit Agricole
Indosuez, BankBoston, N.A. and Canadian Imperial Bank of Commerce.
4.15(dd) Waiver No. 2 dated as of June 14, 1999 by and among MMH
Holdings, Inc., its subsidiaries named on the signature pages thereto, and
the Agents and lending institutions named on the signature pages.
4.16* Waiver No. 3 dated as of June 30, 1999 among MMH Holdings, Inc.,
its subsidiaries named on the signature pages thereto, and the Agents and
lending institutions named on the signature pages thereto.
4.17(ee) Amendment No. 2 dated as of August 2, 1999 to the Credit
Agreement dated as of March 30, 1998 among (i) MMH Holdings, Inc., (ii)
Morris Material Handling, Inc., (iii) Morris Material Handling, LLC, (iv)
Morris Material Handling Equipment Limited, (v) Mondel ULC, (vi) Kaverit
Steel and Crane ULC, (vii) the Banks referred to therein, (viii) the New
York branch of Credit Agricole Indosuez, as syndication agent, (ix)
BankBoston, N.A., as documentation agent and (x) Canadian Imperial Bank of
Commerce, as administrative agent and collateral agent.
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4.18(ee) Subordination and Participation Agreement dated as of August
2, 1999 among (i) Canadian Imperial Bank of Commerce; (ii) the Selling
Banks listed therein; (iii) Martin Crane L.L.C.; (iv) MMH Holdings, Inc.;
(v) Morris Material Handling, Inc. and Morris Material Handling, LLC; and
(vi) the Subsidiaries listed therein.
4.19* Amendment No. 3 and Waiver dated as of January 31, 2000 to the
Credit Agreement dated as of March 30, 1998 among (i) MMH Holdings, Inc.,
(ii) Morris Material Handling, Inc., (iii) Morris Material Handling, LLC,
(iv) Morris Material Handling Equipment Limited, (v) Kaverit Steel and
Crane ULC, (vi) the Banks referred to therein, (vii) the New York branch of
Credit Agricole Indosuez, as syndication agent, (viii) BankBoston, N.A., as
documentation agent and (ix) Canadian Imperial Bank of Commerce, as
administrative agent and collateral agent.
10.1(aa) Surety Arrangement, dated March 30, 1998, among Reliance
Insurance Companies, MMH Holdings, Morris Material Handling, Inc. and
certain of their subsidiaries.
10.2(aa) Credit Indemnification Agreement between Harnischfeger
Industries, Inc. and Morris Material Handling, Inc., dated as of March 30,
1998.
10.3(aa) Tax Sharing Agreement between MHE Investments, Inc., MMH
Holdings, Inc. and certain of MMH Holdings, Inc.'s subsidiaries, dated
March 30, 1998.
10.4(aa) Component and Manufactured Products Supply Agreement between
HarnCo and Morris Material Handling, Inc., dated as of March 30, 1998.
10.5(aa) Transition Services Agreement between HarnCo and Morris
Material Handling, Inc., dated as of March 30, 1998.
10.6(aa) Trademark License Agreement between Harnischfeger
Technologies, Inc. and Morris Material Handling, Inc., dated as of March
30, 1998.
10.7(aa) Management Consulting Agreement between Morris Material
Handling, Inc. and Chartwell Investments Inc., dated March 30, 1998.
10.8(aa) Financial Advisory Agreement between Morris Material
Handling, Inc. and Chartwell Investments Inc., dated March 30, 1998.
10.9(aa) Separation Agreement, dated October 26, 1997, between
Harnischfeger Corporation and Material Handling, LLC.
10.10(aa) Share and Asset Purchase Agreement between PHMH Holding
Company, James Gann, Sr., James Gann, Jr. and Gail Gann, dated February 14,
1997.
10.11(bb) Employment Agreement, dated March 30, 1998, between Morris
Material Handling, Inc. and Michael S. Erwin.
10.12(bb) Employment Agreement, dated March 30, 1998, between Morris
Material Handling, Inc. and David D. Smith.
10.13(bb) Employment Agreement, dated March 30, 1998, between Morris
Material Handling, Inc. and Martin L. Ditkof.
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10.14(bb) Employment Agreement, dated March 30, 1998, between Morris
Material Handling, Inc. and Richard J. Niespodziani.
10.15(bb) Employment Agreement, dated March 30, 1998, between Morris
Material Handling, Inc. and Peter A. Kerrick.
10.16(bb) Employment Agreement, dated March 30, 1998, between Morris
Material Handling, Inc. and Edward J. Doolan.
10.17(bb) Service Agreement, dated March 30, 1998, between Morris
Mechanical Handling Limited and M J Maddock.
10.18(bb) Service Agreement, dated March 30, 1998, between Morris
Mechanical Handling Limited and K B Norridge.
10.19(bb) Form of Promissory Note, dated March 30, 1998, between
Michael S. Erwin and Morris Material Handling, Inc.
10.20(bb) Form of Promissory Note, dated March 30, 1998, between David
D. Smith and Morris Material
Handling, Inc.
10.21(bb) Form of Promissory Note, dated March 30, 1998, between
Martin L. Ditkof and Morris Material Handling, Inc.
10.22(bb) Form of Promissory Note, dated March 30, 1998, between
Richard J. Niespodziani and Morris Material Handling, Inc.
10.23(bb) Form of Promissory Note, dated March 30, 1998, between Peter
A. Kerrick and Morris Material Handling, Inc.
10.24(bb) Form of Promissory Note, dated March 30, 1998, between
Edward J. Doolan and Morris Material Handling, Inc.
10.25(bb) Form of Promissory Note, dated March 30, 1998, between M J
Maddock and Morris Material Handling, Inc.
10.26(bb) Form of Promissory Note, dated March 30, 1998, between K B
Norridge and Morris Material Handling, Inc.
10.27(ff) Morris Material Handling Employee Retirement Savings Plan.
10.28* Employment Agreement, dated as of January 27, 1999, between
Jack Stinnett and Morris Material Handling, Inc.
10.29* Promissory Note, dated June 30, 1999, between Jack Stinnett and
Morris Material Handling, Inc.
10.30* Share Purchase Agreement, dated as of December 16, 1999, by and
among 3016117 Nova Scotia ULC, Morris Material Handling, Inc. and Magnetek
Mondel Holding ULC.
96
<PAGE>
10.31* Intellectual Property Transfer Agreement, dated as of December
16, 1999, between MHE Technologies, Inc. and Mondel ULC.
22.* Subsidiaries of MMH Holdings, Inc. and Morris Material Handling,
Inc.
27. Financial Data Schedule.
(aa) Incorporated by reference to Holdings' Registration Statement on
Form S-4 (Registration No. 333-52529) filed with the Commission on May 13,
1998.
(bb) Incorporated by reference to Amendment No. 2 to the Issuer's
Registration Statement on Form S-4 (Registration No. 333-52529) filed with
the Commission on July 22, 1998.
(cc) Incorporated by reference MMH's Registration Statement on Form
S-4 (Registration No. 333-52527) filed with the Commission on May 13, 1998.
(dd) Incorporated by reference to MMH Holdings, Inc.'s and Morris
Material Handling, Inc.'s Quarterly Report on Form 10-Q for the quarterly
period ended April 30, 1999.
(ee) Incorporated by reference to MMH Holdings, Inc.'s and Morris
Material Handling, Inc.'s Quarterly Report on Form 10-Q for the quarterly
period ended July 31, 1999.
(ff) Incorporated by reference to MMH Holdings, Inc.'s and Morris
Material Handling, Inc.'s Annual Report on Form 10-K for the fiscal year
ended October 31, 1998.
* Filed herewith.
(b) Reports on Form 8-K.
None.
97
<PAGE>
<TABLE>
MMH HOLDINGS, INC.
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
(Thousands of dollars)
<CAPTION>
Balance at Additions Currency Balance at
Beginning Charged to Translation End of
Classification of Year Expense Deductions (1) Effects Other (2) Year
-------------- ------- ------- -------------- ------- -------- ---------
Allowance Deducted in Balance Sheet
from Accounts Receivable:
For the year ended October 31, 1999
<S> <C> <C> <C> <C> <C> <C>
Doubtful accounts $ 1,606 $ 2,407 $(2,396) $ (28) $ 136 $ 1,725
======= ======= ======= ======= ===== =======
For the year ended October 31, 1998
Doubtful accounts $ 1,330 $ 1,219 $ (861) $ (16) $ (66) $ 1,606
======= ======= ======= ======= ===== =======
For the year ended October 31, 1997
Doubtful accounts $ 1,408 $ 439 $ (537) $ 20 -- $ 1,330
======= ======= ======= ======= ===== =======
</TABLE>
(1) Represents write-off of bad debts, net of recoveries.
(2) Represents reclasses to other reserve accounts and reserves
acquired in acquisitions.
98
<PAGE>
<TABLE>
MORRIS MATERIAL HANDLING, INC.
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
(Thousands of dollars)
<CAPTION>
Balance at Additions Currency Balance at
Beginning Charged to Translation End of
Classification of Year Expense Deductions (1) Effects Other (2) Year
-------------- --------- ------- -------------- ------- --------- -------
Allowance Deducted in Balance Sheet
from Accounts Receivable:
For the year ended October 31, 1999
<S> <C> <C> <C> <C> <C> <C>
Doubtful accounts $ 1,606 $ 2,407 $(2,396) $ (28) $ 136 $ 1,725
======= ======= ======= ======= ===== =======
For the year ended October 31, 1998
Doubtful accounts $ 1,330 $ 1,219 $ (861) $ (16) $ (66) $ 1,606
======= ======= ======= ======= ===== =======
For the year ended October 31, 1997
Doubtful accounts $ 1,408 $ 439 $ (537) $ 20 -- $ 1,330
======= ======= ======= ======= ===== =======
</TABLE>
(1) Represents write-off of bad debts, net of recoveries.
(2) Represents reclasses to other reserve accounts and reserves acquired
in acquisitions.
99
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
behalf by the undersigned, thereunto duly authorized, on the 14th day of
February, 2000.
MMH HOLDINGS, INC.
By:/s/Jack F.Stinnett
Jack F. Stinnett
Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the date indicated.
Signature Title Date
/s/Jack F. Stinnett President, Chief Executive Officer February 14, 2000
(Jack F. Stinnett) and Chairman of the Board of Directors
(Principal Executive Officer)
/s/David D. Smith Vice President February 14, 2000
(David D. Smith) (Principal Financial and Accounting
Officer)
/s/Michael S. Shein Vice President and Director February 14, 2000
(Michael S. Shein)
/s/Todd R. Berman Director February 14, 2000
(Todd R. Berman)
/s/Jay R. Bloom Director February 14, 2000
(Jay R. Bloom)
/s/Robert W. Hale Director February 14, 2000
(Robert W. Hale)
/s/Michael R. Young Director February 14, 2000
(Michael R. Young)
/s/Larry Zine Director February 14, 2000
(Larry Zine)
/s/Eric Green Director February 14, 2000
(Eric Green)
100
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
behalf by the undersigned, thereunto duly authorized, on the 14th day of
February, 2000.
MORRIS MATERIAL HANDLING, INC.
By:/s/Jack F. Stinnett
Name: Jack F. Stinnett
Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the date indicated.
Signature Title Date
President, Chief Executive Officer February 14, 2000
/s/Jack F. Stinnett and Chairman of the Board of Director
(Jack F. Stinnett) (Principal Executive Officer)
/s/David D. Smith Vice President February 14, 2000
(David D. Smith) (Principal Financial and Accounting
Officer)
/s/Todd R. Berman Director February 14, 2000
(Todd R. Berman)
/s/Michael S. Shein Director February 14, 2000
(Michael S. Shein)
101
<PAGE>
Supplemental Information to be Furnished
With Reports Filed Pursuant to Section 15(d)
Of the Act by Registrants Which Have Not
Registered Securities Pursuant to Section 12 of the Act
No annual report or proxy material has been sent to security holders of either
Holdings or MMH.
102
<PAGE>
WAIVER NO. 3
This WAIVER NO. 3 ("Waiver No. 3") is made as of June 30, 1999
among MMH HOLDINGS, INC., a Delaware corporation ("Holdings"), its subsidiaries
named on the signature pages hereto, and the Agents and the lending institutions
named on the signature pages hereto. This Waiver No. 3 is made with reference to
that certain Waiver dated as of March 2, 1999 (the "March Waiver") and that
certain Waiver dated as of June 14, 1999 (the "June Waiver" and, together with
the March Waiver, the "Waivers") relating to that certain Credit Agreement dated
as of March 30, 1998, as amended as of August 28, 1998, by and among Holdings,
the U.S. Borrowers, the U.K. Borrower, the Canadian Borrowers, the Agents and
the Banks (the "Credit Agreement"). All capitalized terms used herein and not
otherwise defined shall have the meanings assigned to such terms in the Credit
Agreement.
WHEREAS, Holdings, the Borrowers, the Agents and the Banks entered
into the Credit Agreement; and
WHEREAS, the Borrowers have been granted the Waivers relating
to certain outstanding Defaults through June 30, 1999 and have requested an
extension of the Waivers through August 2, 1999, and the Required Banks are
willing to grant such waiver extension on the terms and conditions set forth
herein;
Now, therefore, for good and valuable consideration the
receipt and sufficiency of which are hereby acknowledged, the parties hereto
agree as follows:
SECTION 1. WAIVERS TO THE CREDIT AGREEMENT
The definition of Waiver Period set forth in the Waivers is
hereby amended to extend the period through August 2, 1999 and all references in
the Waivers to the Waiver Period shall be deemed to be references to the Waiver
Period as extended hereby; provided, that during the Waiver Period, as extended,
the conditions set forth in Section 2 of the March Waiver are complied with and
provided, further, that an Event of Default shall be deemed to have occurred as
of August 3, 1999 if the Borrowers are not in compliance with any of the
financial covenants set forth in the Credit Agreement as of that date.
<PAGE>
SECTION 2. RATIFICATION
2.1 To induce the Required Banks to enter into this Waiver No.
3, the Borrowers and the Guarantors jointly and severally represent and warrant
that after giving effect to this Waiver No. 3 no violation of the terms of the
Credit Agreement exists and all representations and warranties contained in the
Credit Agreement are true, correct and complete in all material respects on and
as of the date hereof except to the extent such representations and warranties
specifically relate to an earlier date in which case they were true, correct and
complete in all material respects on and as of such earlier date.
2.2 Except as expressly set forth in this Waiver No. 3 and the
Waivers, the terms, provisions and conditions of the Credit Agreement and the
Credit Documents are unchanged, and said agreements, as amended, shall remain in
full force and effect and are hereby confirmed and ratified. In the event of
inconsistencies between this Waiver No. 3, together with the Waivers, and the
Credit Agreement, the terms of this Waiver No. 3, together with the Waivers,
shall govern.
2.3 Each Borrower hereby confirms and acknowledges to the
Agents and the Banks that it is validly and justly indebted to the Agents and
the Banks for the payment of all Obligations without offset, defense, cause of
action or counterclaim of any kind or nature whatsoever.
SECTION 3. CONSENT TO AGREEMENT IN PRINCIPLE TO AMEND
Holdings, the Borrowers, the Agents and the Required Banks
hereby agree to enter into an amendment to the Credit Agreement on substantially
the terms and conditions set forth on Exhibit A hereto subject to, among other
things, the satisfaction of conditions precedent thereto and the preparation,
execution and delivery of satisfactory legal documentation.
SECTION 4. COUNTERPARTS; EFFECTIVENESS
This Waiver No. 3 may be executed in any number of counterparts, and all
such counterparts taken together shall be deemed to constitute one and the same
instrument. Signature pages may be detached from counterpart documents and
reassembled to form duplicate executed originals. This Waiver No. 3 shall become
effective as of the date hereof upon the execution of the counterparts hereof by
Holdings, the Borrowers, the Guarantors and the Required Banks. Delivery of an
executed counterpart of a signature page of this Waiver No. 3 by telecopy shall
be effective as delivery of a manually executed counterpart of this Waiver No.
3.
SECTION 5. GOVERNING LAW
THIS WAIVER NO. 3 SHALL BE GOVERNED BY, AND SHALL BE CONSTRUED
AND ENFORCED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK WITHOUT
REGARD TO THE PRINCIPLES OF CONFLICTS OF LAW.
SECTION 6. ACKNOWLEDGEMENT AND CONSENT BY
THE GUARANTORS
6.1 Each Guarantor hereby acknowledges that it has read this
Waiver No. 3 and consents to the terms hereof and further confirms and agrees
that, notwithstanding the effectiveness of this Waiver No. 3, its obligations
under its Guarantee shall not be impaired or affected and such Guarantee is, and
shall continue to be, in full force and effect and is hereby confirmed and
ratified in all respects.
6.2 Each Guarantor hereby confirms and acknowledges that it is
validly and justly indebted to the Agents and the Banks for the payment of all
of the Obligations which it has guaranteed, without offset, defense, cause of
action or counterclaim of any kind or nature whatsoever.
[SIGNATURE PAGES FOLLOW]
<PAGE>
Witness the execution hereof by the respective duly authorized
officers of the undersigned as of the date first above written.
MMH HOLDINGS, INC.
By: /s/ David D. Smith
Name: David D. Smith
Title: Vice Pres./Treasurer
MORRIS MATERIAL HANDLING, INC.
By: /s/ David D. Smith
Name: David D. Smith
Title: Vice President
MORRIS MATERIAL HANDLING, LLC
By: /s/ David D. Smith
Name: David D. Smith
Title: Manager
MORRIS MATERIAL HANDLING
EQUIPMENT LTD.
By: /s/ David D. Smith
Name: David D. Smith
Title: Director
MONDEL ULC
By: /s/ David D. Smith
Name: David D. Smith
Title: President
<PAGE>
KAVERIT STEEL AND CRANE ULC
By: /s/ David D. Smith
Name: David D. Smith
Title: President
MHE TECHNOLOGIES, INC.
By: /s/ David Dupert
Name: David Dupert
Title: President
PHMH HOLDING COMPANY
By: /s/ David Dupert
Name: David Dupert
Title: President
MATERIAL HANDLING EQUIPMENT NEVADA CORPORATION
By: /s/ David D. Smith
Name: David D. Smith
Title: Treasurer
CMH MATERIAL HANDLING, LLC
By: /s/ David D. Smith
Name: David D. Smith
Title: Manager
<PAGE>
EPH MATERIAL HANDLING, LLC
By: /s/ David D. Smith
Name: David D. Smith
Title: Manager
HARNISCHFEGER DISTRIBUTION & SERVICE, LLC
By: /s/ David D. Smith
Name: David D. Smith
Title: Manager
HPH MATERIAL HANDLING, LLC
By: /s/ David D. Smith
Name: David D. Smith
Title: Manager
MERWIN, LLC
By: /s/ David D. Smith
Name: David D. Smith
Title: Manager
MORRIS MECHANICAL HANDLING, INC.
By: /s/ David D. Smith
Name: David D. Smith
Title: Vice Pres./Treasurer
MPH CRANE, INC.
By: /s/ David D. Smith
Name: David D. Smith
Title: Vice Pres./Treasurer
<PAGE>
NPH MATERIAL HANDLING, INC.
By: /s/ David D. Smith
Name: David D. Smith
Title: Vice Pres./Treasurer
PHME SERVICE, INC.
By: /s/ David D. Smith
Name: David D. Smith
Title: Vice Pres./Treasurer
SPH CRANE & HOIST, INC.
By: /s/ David D. Smith
Name: David D. Smith
Title: Vice Pres./Treasurer
MHE CANADA ULC
By: /s/ David D. Smith
Name: David D. Smith
Title: President
3016117 NOVA SCOTIA ULC
By: /s/ David D. Smith
Name: David D. Smith
Title: President
HYDRAMACH ULC
By: /s/ David D. Smith
Name: David D. Smith
Title: President
<PAGE>
BUTTERS ENGINEERING SERVICES LIMITED
By: /s/ Martin L. Ditkof
Name: Martin L. Ditkof
Title: Director
INVERCOE ENGINEERING LIMITED
By: /s/ Martin L. Ditkof
Name: Martin L. Ditkof
Title: Director
LOWFILE LIMITED
By: /s/ Martin L. Ditkof
Name: Martin L. Ditkof
Title: Director
RED CROWN ULC
By: /s/ David D. Smith
Name: David D. Smith
Title: Director
MMH (HOLDINGS) LIMITED
By: /s/ David D. Smith
Name: David D. Smith
Title: Director
MORRIS MATERIAL HANDLING LIMITED
By: /s/ David D. Smith
Name: David D. Smith
Title: Director
MMH INTERNATIONAL LIMITED
By: /s/ David D. Smith
Name: David D. Smith
Title: Director
<PAGE>
MORRIS MATERIAL HANDLING MEXICO
S.A. DE C.V.
By: /s/ David D. Smith
Name: David D. Smith
Title: Director
BIRMINGHAM CRANE & HOIST, INC.
By: /s/ David D. Smith
Name: David D. Smith
Title: Vice Pres./Treasurer
ARIZONA MOTOR AND CONTROL CORPORATION
By: /s/ Martin L. Ditkof
Name: Martin L. Ditkof
Title: Director
DAJU HOLDINGS LIMITED
By: /s/ David D. Smith
Name: David D. Smith
Title: Vice Pres./Treasurer
OVERHEAD CRANE SERVICE & SUPPLY COMPANY LTD.
By: /s/ David D. Smith
Name: David D. Smith
Title: Vice Pres./Treasurer
OVERHEAD CRANE SERVICE AND SUPPLY COMPANY (SUDBURY) LTD.
By: /s/ David D. Smith
Name: David D. Smith
Title: Vice Pres./Treasurer
<PAGE>
CANADIAN IMPERIAL BANK OF COMMERCE, as Administrative
Agent and Collateral Agent And as a Bank
By: /s/ Lindsay Gordon
Name: Lindsay Gordon
Title: Executive Director
CIBC Inc., as a Bank
By: /s/ Lindsay Gordon
Name: Lindsay Gordon
Title: Executive Director
CREDIT AGRICOLE INDOSUEZ,
as Syndication Agent and as a Bank
By: /s/ Matthew Linett
Name: Matthew Linett
Title: Vice President
BANKBOSTON, N.A.
as Documentation Agent and as a Bank
By: /s/ Linda E.C. Alto o
Name: Linda E.C. Alto
Title: Vice President
ABN-AMRO BANK N.V., as a Bank
By:
Name:
Title:
<PAGE>
BANK AUSTRIA CREDITANSTALT CORPORATE FINANCE, Inc., as a
Bank
By: /s/ Patrick J. Rounds
Name: Patrick J. Rounds
Title: Vice President
By: /s/ Jack R. Bertges
Name: Jack R. Bertges
Title: Senior Vice President
THE FIRST NATIONAL BANK OF CHICAGO, as a Bank
By: /s/ Deborah Stevens
Name: Deborah Stevens
Title: Authorized Agent
FIRST UNION NATIONAL BANK, as a Bank
By: /s/ Scott Santa Cruz
Name: Scott Santa Cruz
Title: Vice President
FLEET NATIONAL BANK, as a Bank
By:
Name:
Title:
ARCHIMEDES FUNDING, L.L.C., As a Bank
By: ING Capital Advisors, Inc.
As Collateral Manager
By: /s/ Michael P. McAdams
Name: Michael P. McAdams
Title: Managing Director
<PAGE>
RIGGS BANK N.A., as a Bank
By:
Name:
Title:
SANWA BUSINESS CREDIT CORPORATION, As a Bank
By:
Name:
Title:
CRESCENT/MACH I PARTNERS, L.P., as a Bank
By: TCW Asset Management
Company, Its Investment Manager
By: /s/ Justin L. Driscoll
Name: Justin L. Driscoll
Title: Senior Vice President
WELLS FARGO BANK, N.A., as a Bank
By: /s/ Dana D. Cagle
Name: Dana D. Cagle
Title: Vice President
ML CLO XV PILGRIM AMERICA (CAYMAN) LTD., as a Bank
By: Pilgrim America
Investments, Inc., as its Investment Manager
By: /s/ Jason T. Groom
Name: Jason T. Groom
Title: Asst. Vice President
<PAGE>
SENIOR DEBT PORTFOLIO, as a Bank
By: Boston Management and
Research, as Investment Advisor
By: /s/ Payson F. Swaffield
Name: Payson F. Swaffield
Title: Vice President
CYPRESSTREE INVESTMENT
PARTNERS II, LTD., as a Bank
By: CypressTree Investment
Management Company, Inc.,
as Portfolio Manager.
By: /s/ Philip C. Robbins
Name: Philip C. Robbins
Title: Principal
INDOSUEZ CAPITAL FUNDING IIA,
LIMITED, as a Bank
By: Indosuez Capital, as
Portfolio Advisor
By: /s/ Melissa Marcus
Name: Melissa Marcus
Title: Vice President
AMENDMENT NO. 3 and Waiver (the
"Amendment") dated as of January 31, 2000 to
the Credit Agreement dated as of March 30,
1998 (as the same has been, or may hereafter
be, amended, amended and restated,
supplemented or otherwise modified, renewed
or replaced from time to time, the "Credit
Agreement"), among (i) MMH HOLDINGS, INC., a
Delaware corporation ("Holdings"), (ii)
MORRIS MATERIAL HANDLING, INC., a Delaware
corporation (the "Company"), (iii) MORRIS
MATERIAL HANDLING, LLC (formerly known as
Material Handling, LLC), a Delaware limited
liability company, (iv) MORRIS MATERIAL
HANDLING EQUIPMENT LIMITED (formerly known
as Morris Material Handling, Ltd.), a
company organized under the laws of England
and Wales, (v) KAVERIT STEEL AND CRANE ULC,
an unlimited liability company organized
under the laws of Nova Scotia, (vi) the
Banks referred to therein, (vii) the New
York branch of CREDIT AGRICOLE INDOSUEZ, as
syndication agent for the Banks, (viii)
BANKBOSTON, N.A., as documentation agent for
the Banks and (ix) CANADIAN IMPERIAL BANK OF
COMMERCE, as administrative agent and
collateral agent for the Banks (in such
capacities, the "Administrative Agent").
INTRODUCTORY STATEMENT
WHEREAS, all capitalized terms not otherwise defined in this
Amendment are used herein as defined in the Credit Agreement;
WHEREAS, subject to the terms and conditions hereof, the
Credit Parties, the Banks and the Administrative Agent desire to amend certain
Sections of the Credit Agreement, and the Banks and the Administrative Agent
desire to waive compliance by the Credit Parties with certain Sections of the
Credit Agreement; and
NOW, THEREFORE, in consideration of the premises and of the
mutual agreements herein contained, the parties hereto hereby agree as follows:
SECTION 1. Amendment to the Credit Agreement. Subject to the
provisions of Section 5 hereof, the Credit Agreement is hereby amended effective
as of the Effective Date (such term being used herein as defined in Section 5
hereof) as follows:
<PAGE>
- 3 -
(A) Section 8.05 of the Credit Agreement is hereby amended by
deleting the last clause thereof and replacing the same with the following
clause, "or any corporate action is taken by Holdings or any Credit Party or any
of its Subsidiaries to authorize any of the foregoing; or"
(B) Section 11.04(b)(A) of the Credit Agreement is hereby
amended by deleting the phrase "and the Company" appearing in the first sentence
thereof.
(C) The Credit Agreement is hereby amended by adding the following section
immediately after Section 11.18 thereof:
11.19 Treatment of Non-Public Information; Voting.
Notwithstanding anything to the contrary contained in this
Credit Agreement, any Bank which has requested that it not
receive material, non-public information concerning the
Borrowers or any of the other Credit Parties and which is
therefore unable or unwilling to vote with respect to an issue
arising under this Credit Agreement will agree to vote and
will be deemed to have voted its Commitment under this Credit
Agreement pro rata in accordance with the percentage of the
Commitments voted in favor of, and the percentage of the
Commitments voted against, any such issue under this Credit
Agreement.
SECTION 2. Waiver. Compliance with the below listed provisions of the
Credit Agreement are hereby waived for the period commencing January 31, 2000 to
and including 5:00 p.m. on March [29], 2000 (the "Waiver Termination Date"):
(i) Section 4.02(c) and the last sentence of
Section 5.11(b) solely in respect of any
Material Adverse Effect pertaining to the
operations, business, financial condition or
prospects of the Company and its Subsidiary
taken as a whole as reflected in the Bank
Group Meeting Presentation, dated January
14, 2000 and the covenant calculations
furnished to the Agent on January 27, 2000;
(ii) the last sentence of Section 5.11(a);
(iii) Section 6.01(a);
(iv) Section 7.10; and
(v) Section 7.13.
<PAGE>
; provided, that prior to the Waiver Termination Date, the aggregate outstanding
amount of Revolving Loans, Swingline Loans (including UK Swingline Letters of
Credit) and Letters of Credit shall not exceed the lesser of (x) the Borrowing
Base or (y) an amount equal to $12,000,000 plus the aggregate outstanding amount
of Revolving Loans, Swingline Loans (including UK Swingline Letters of Credit)
and Letters of Credit as of January 28, 2000.
As used herein, the term "Waiver Termination Date" shall mean
5:00 p.m. on March [29], 2000, or such later date as may be agreed upon in
writing by the Administrative Agent and the requisite Banks. Upon the occurrence
of any Event of Default, the Administrative Agent and the Banks shall have all
rights and remedies available to them under the Credit Documents, at law or
otherwise with respect to each Event of Default, which rights and remedies are
hereby expressly reserved. Upon the occurrence of the Waiver Termination Date,
the Borrowers shall be obligated to comply with the covenants set forth in
Sections 6.01(a), 7.10 and 7.13 at the levels set forth in the Credit Agreement
for such date and thereafter as provided in the Credit Agreement.
SECTION 3. Confirmation and Acknowledgment of the Obligations;
Release. Each of the Borrowers and the other Credit Parties hereby confirms and
acknowledges to the Agents and the Banks that it is validly and justly indebted
to the Agents and the Banks for the payment of all Obligations without offset,
defense, cause of action or counterclaim of any kind or nature whatsoever. Each
of the Credit Parties, on its own behalf and on behalf of its successors and
assigns, hereby waives, releases and discharges the Agents and each Bank and all
of the affiliates of the Agents and each Bank, and all of the directors,
officers, employees, attorneys and agents of the Agents, each Bank and such
affiliates, from any and all claims, demands, actions or causes of action (known
and unknown) arising out of or in any way relating to the Credit Documents and
any documents, agreements, dealings or other matters connected with any of the
Credit Documents, in each case to the extent arising (x) on or prior to the date
hereof or (y) out of, or relating to, actions, dealings or matters occurring on
or prior to the date hereof. The waivers, releases, and discharges in this
Section 3 shall be effective regardless of whether the conditions to this
Amendment are satisfied and regardless of any other event that may occur or not
occur after the date hereof.
SECTION 4. Agreement by the Borrowers. The Borrowers hereby
agree to pay all out-of-pocket costs and expenses of each of the Agents and each
of the Banks as contemplated by Section 11.01 of the Credit Agreement.
SECTION 5. Conditions to Effectiveness. The effectiveness of
this Amendment is subject to the satisfaction in full of the following
conditions precedent on or before January 31, 2000 (the first date on whic h all
such conditions have been satisfied being herein referred to as the "Effective
Date"):
<PAGE>
(A) the Administrative Agent shall have received executed
counterparts of this Amendment, which, when taken together, bear the signatures
of Holdings, each of the Credit Parties and those Banks required by Section
11.12 of the Credit Agreement; and
(B) the Administrative Agent (for the benefit of each of the
Banks which has executed and delivered counterparts of this Amendment by 5:00 pm
eastern time on January 31, 2000 (each such Bank, an "Executing Bank") shall
have received the following:
(i) an amendment fee in an amount equal to one-tenth of one
percent (1/10%) of each Executing Bank's Commitment;
and
(ii) the payment of all invoiced amounts owing to any of the
Agents and any Bank pursuant to Section 11.01 of the
Credit Agreement after giving effect to Section 4 of
this Amendment; and
(C) the Borrowers shall have complied with all requirements of
Section 6.20(d) and (e) of the Credit Agreement except as such compliance may be
extended by the Agent; and
(D) the Borrowers shall have obtained all consents and waivers
from any Governmental Authority or other Person necessary for the execution,
delivery and performance of this Amendment and any other document or transaction
contemplated by this Amendment; and
(E) no Event of Default (which has not been properly waived in
writing) shall have occurred and then be continuing and no Default or Event of
Default shall occur or be continuing upon the effectiveness of this Amendment
and the Administrative Agent shall have received a certificate of the Borrowers
with respect to the foregoing and the matters set forth in subsection (D) above;
and
(F) all legal matters in connection with this Amendment, the
Credit Documents and/or the Collateral shall be reasonably satisfactory to
Morgan, Lewis & Bockius LLP, counsel for the Administrative Agent.
SECTION 6. Representations and Warranties. Holdings and the
Credit Parties hereby represent and warrant to the Administrative Agent and
Banks that after giving effect to this Amendment (including the waivers
contained in Section 2 hereof):
(A) the representations and warranties contained in the Credit
Agreement and in the other Credit Documents are true and correct in all material
respects on and as of the date hereof as if such representations and warranties
had been made on and as of the date hereof (except to the extent such
representations and warranties expressly relate to an earlier date); and
<PAGE>
(B) Holdings and the Credit Parties are in compliance with all
the terms and provisions set forth in the Credit Agreement and the other Credit
Documents and no Default or Event of Default has occurred or is continuing under
the Credit Agreement or will occur upon the effectiveness of this Amendment.
SECTION 7. Full Force and Effect. Except as expressly set
forth herein, this Amendment does not constitute a waiver or modification of any
provision of the Credit Agreement or a waiver of any Default or Event of Default
under the Credit Agreement, in either case whether or not known to any of the
Agents or the Banks. Except as expressly amended hereby, the Credit Agreement
shall continue in full force and effect in accordance with the provisions
thereof on the date hereof and the Credit Agreement as heretofore amended and as
amended by this Amendment are hereby ratified and confirmed. As used in the
Credit Agreement, the terms "Credit Agreement," "this Agreement," "herein,"
"hereafter," "hereto," "hereof," and words of similar import, shall, unless the
context otherwise requires, mean the Credit Agreement as amended by this
Amendment. References to the terms "Agreement" or "Credit Agreement" appearing
in the Exhibits or Schedules to the Credit Agreement shall, unless the context
otherwise requires, mean the Credit Agreement as amended by this Amendment.
SECTION 8. Miscellaneous.
(A) Should there be a need for further amendments or waivers
with respect to the matters addressed herein or any other matters, requests for
such amendments or waivers shall be evaluated by the Banks when formally
requested, in writing, by the Borrower, and the Banks may deny any such requests
for any reason in their sole discretion.
(B) This Amendment shall constitute a Credit Document.
SECTION 9. APPLICABLE LAW. THIS AMENDMENT SHALL BE GOVERNED
BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK WHICH
ARE APPLICABLE TO CONTRACTS MADE AND TO BE PERFORMED WHOLLY WITHIN THE STATE OF
NEW YORK.
SECTION 10. Counterparts. This Amendment may be executed in
two or more counterparts, each of which shall constitute an original, but all of
which when taken together shall constitute but one instrument. Signature pages
may be detached from counterpart documents and reassembled to form duplicate
executed originals. Delivery of an executed counterpart of a signature page of
this Amendment by telecopy shall be effective as delivery of a manually executed
counterpart of this Amendment.
<PAGE>
SECTION 11. Expenses. Whether or not this Amendment becomes effective or
the transactions contemplated hereby are consummated, each of the Borrowers
agrees, on a joint and several basis, to pay all out-of-pocket expenses incurred
by the Administrative Agent in connection with the preparation, execution and
delivery of this Amendment and any other documentation contemplated hereby,
including, but not limited to, the fees and disbursements of counsel for the
Administrative Agent.
SECTION 12. Headings. The headings of this Amendment are for the purposes
of reference only and shall not affect the construction of, or be taken into
consideration in interpreting, this Amendment.
SECTION 13. Acknowledgments and Consent
(A) Each Credit Party hereby acknowledges that Mondel ULC has been sold and
is no longer a party to the Credit Agreement.
(B) Each Guarantor hereby acknowledges that it has read this Amendment and
consents to the terms hereof and further confirms and agrees that,
notwithstanding the effectiveness of this Amendment, (i) its obligations under
its Guarantee shall not be impaired or affected and (ii) such Guarantee is, and
shall continue to be, in full force and effect and is hereby confirmed and
ratified in all respects.
(C) Each Guarantor hereby confirms and acknowledges that it is validly and
justly indebted to the Agents and the Banks for the payment of all of the
Obligations which it has guaranteed, without offset, defense, cause of action or
counterclaim of any kind or nature whatsoever.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this
Amendment to be duly executed by their duly authorized officers, all as of the
date and year first written above.
[signature pages follow]
EMPLOYMENT AGREEMENT
EMPLOYMENT AGREEMENT (this "Agreement"), dated January 27, 1999, by and
between Morris Material Handling, Inc., a Delaware corporation (the "Company"),
and Jack F. Stinnett, an individual residing at 33028 Allenbury Drive, Solon,
Ohio 44139 ("Executive").
W I T N E S S E T H:
WHEREAS, the Company wishes to secure the services of Executive, and
Executive wishes to furnish such services to the Company, pursuant to the terms
and provisions of this Agreement.
NOW, THEREFORE, for and in consideration of the mutual promises,
covenants and obligations contained herein, the Company and Executive agree as
follows:
ARTICLE I: EMPLOYMENT, TERM AND DUTIES
Section 1.1. Term. Unless terminated sooner pursuant to the occurrence of an
"Employment Related Event" or a "Termination Event" (both terms as defined in
Article III) and subject to the other terms and provisions of this Agreement,
the Company agrees to employ Executive and Executive agrees to be employed by
the Company, for the period beginning as of March 2, 1999 (the "Effective Date")
and continuing until the third anniversary of the Effective Date. The Agreement
will be extended for one year on the third anniversary of the Effective Date and
on each anniversary thereafter unless either party gives 60 days' written notice
of failure to renew or termination prior to any such anniversary date; provided,
however, that any such non-renewal by the Company shall void the Executive's
post-employment obligations contained in the Non-Competition Agreement referred
to in Article V of this Agreement. The Executive may voluntarily resign
employment at any time upon providing 60 days' written notice to the Company's
Board of Directors; provided, however, that the obligations of the Executive
under Article IV (Confidential Information) hereof, and the post-employment
obligations of Executive contained in the separate Non-Competition Agreement
referred to in Article V hereof shall survive such resignation. The Executive's
entitlement to any severance benefits or payments following termination of
employment shall be governed solely by Article III of this Agreement, and the
Executive shall have no entitlement to any such benefits or payments other than
as set forth in Article III of this Agreement, or as required to be provided to
the Executive by operation of law.
Section 1.2. Title. From and after the Effective Date, the Company shall employ
Executive in the position of President and Chief Executive Officer, or such
other title as mutually agreed upon by the Company and the Executive.
Section 1.3. Duties. Executive agrees to serve in the position referred to in
Section 1.2 and to perform diligently and to the best of his abilities the
duties and services pertaining to such office, as well as such additional duties
and services appropriate to such office as the Board of Directors of the Company
("Board of Directors") may reasonably assign to Executive from time to time.
Section 1.4. Business Time and Efforts. Executive agrees, during the period of
employment by the Company, to devote all of his business time, energy and best
efforts to the business and affairs of the Company and its affiliates and not to
engage, directly or indirectly, in any other business or businesses, whether or
not similar to that of the Company, except with the prior written consent of the
Board of Directors.
Section 1.5. Board Seat. By its execution of this Agreement, MHE Investments,
Inc. agrees to take all necessary actions to cause Executive to be elected and
maintained as a member of the Board of Directors of the Company and the board of
directors of MMH Holdings, Inc. ("MMH") for so long as the Executive is employed
pursuant to this Agreement. Executive shall receive no additional compensation
for his service on the Board of Directors.
ARTICLE II: COMPENSATION AND BENEFITS
Section 2.1. Base Salary. During the term of this Agreement, Executive
shall receive an annual base salary of $400,000, subject to review by the Board
of Directors.
Section 2.2. Bonus. Executive shall be eligible to receive a target bonus of 50%
of Base Salary (prorated for 1999 in proportion that the number of days from and
including the Effective Date bears to 365) upon the achievement of annually
established performance-based targets established for Executive by the Board of
Directors; provided, that, Executive shall be entitled to a minimum bonus of
$100,000 for the 1999 fiscal year. It is anticipated that, for fiscal year 1999
and after the performance-based targets will be based on EBITDA according to a
plan as mutually agreed upon with the Board of Directors for all senior
executives of the Company. Bonuses will be earned over the Company's fiscal year
ending October 31, and shall be paid by the Company to the Executive as soon as
practicable in accordance with the Company's bonus payment procedures.
Section 2.3. Equity.
(a) Options. Executive shall be eligible to receive an initial option grant of
MMH "Equity Units". Such grant will be for 2% of the Company in the form of A
Options, 1% of the Company in the form of B Options and 1% of the Company in the
form of C Options pursuant to the terms of Schedule A, attached hereto.
(b) Equity. Executive shall purchase an initial amount of
equity in Niles L.L.C. in the amount of $200,000 within 120 days of the
Effective Date. In addition, upon Executive's election, the Company will make a
loan to Executive of up to $300,000 to purchase equity in Niles L.L.C., $150,000
of such loan may be used to satisfy Executive's obligation in the immediately
preceding sentence. The Company loan will be fully recourse against the
Executive and will have a ten-year term, with principal and accrued interest due
upon the tenth anniversary of the loan date; provided, that, such loan may be
repaid, without penalty, and any time during the loan term; provided, further,
that, such loan will immediately become due and payable (including accrued
interest) upon Executive's termination of employment or upon a disposition of
the purchased equity in Niles L.L.C. The loan will have an interest rate equal
to the then current prime rate. Notwithstanding the foregoing, in the event
Executive is terminated by the Company without Cause (as defined below), by the
Executive for Good Reason (as defined below), or the Company provides notice to
Executive such that the Term will expire as provided in Section 1.1 hereof, the
loan will remain outstanding under its original terms until the earlier of such
loan's due date or the disposition of the equity in Niles L.L.C. by Executive.
Section 2.4. Other Perquisites. During his employment hereunder, Executive shall
be afforded the following incidental benefits:
(a) Expenses. Executive shall be entitled to be reimbursed for all
customary and reasonable expenses incurred by Executive in the
performance of his duties and responsibilities, subject to such
reasonable substantiation and documentation as may be required by the
Company in accordance with its normal policies.
(b) Other Company Benefits. Subject to the terms of each plan, program or
arrangement as the case may be, Executive and, to the extent
applicable, Executive's family, dependents and beneficiaries, shall be
allowed to participate in the Company's medical, dental, life
insurance, retirement and all other benefits, plans and programs,
including improvements or modifications of the same, which are now, or
may hereafter be, available to similarly situated employees of the
Company generally. The Company shall not, however, by reason of this
paragraph be obligated to institute, maintain, or refrain from
changing, amending or discontinuing, any such benefit plan or program,
so long as such changes are similarly applicable to employees of the
Company generally.
(c) Vacation. Executive shall be entitled to four (4) weeks of paid
vacation during each year of the Term.
(d) Automobile. Executive shall be entitled to a Company provided
automobile or a reasonable allowance for an automobile during the Term
in accordance with Company policy for other senior executive officers.
(e) Relocation Expenses. Executive shall be entitled to the relocation expenses
as set forth on Schedule B hereto.
Section 2.5. Withholding of Taxes. The Company may withhold from any benefits or
compensation payable under this Agreement all federal, state, city or other
taxes as may be required pursuant to any law or governmental regulation or
ruling.
ARTICLE III: TERMINATION OF EMPLOYMENT
Section 3.1. Employment-Related Event. An "Employment-Related Event" means any
of the following: (a) Executive's resignation for Good Reason (as defined
below), (b) Executive's termination by the Company without Cause (as defined
below), (c) Executive's death or permanent disability (as defined below), or (d)
either party providing notice to the other party such that the Term will expire
as provided in Section 1.1 hereof. Should an Employment Related Event occur, the
Executive shall only be entitled to the benefits and payments set forth below,
and Executive specifically agrees to sign a Release as drafted by the Company
under which the Executive shall agree to waive and release all other rights and
entitlement, whether legal, contractual or equitable (including waiving and
releasing any claims alleging discrimination and/or harassment to the maximum
extent allowed by law) in order to be entitled to such benefits and payments.
(a) Good Reason. Within sixty days after Executive has knowledge of an event of
Good Reason, Executive may terminate his employment under this Agreement for
Good Reason, after having given the Company written notice specifying the reason
the Executive is terminating his employment and having given the Company thirty
days after such notice within which to cure the condition specified. "Good
Reason" means any of the following: (i) a material reduction of the Executive's
duties or authority as provided in the Agreement or as later increased by the
Board of Directors; (ii) a substantial change in work conditions; (iii) a
material decrease in compensation or benefits; (iv) relocation of his principal
workplace over 50 miles from his initial workplace without Executive's consent;
(v) the breach of any material provision of this Agreement by the Company or an
affiliate of the Company; (vi) a termination of employment by Executive for any
reason or no reason within ninety (90) days following the first anniversary of a
change in control of the Company (as defined in Schedule D hereto); or (vii) the
failure by the Company to obtain the assumption of this Agreement by any
successor to or assignee of the Company or any purported termination of this
Agreement which does not satisfy the requirements of this Agreement. If at the
end of such notice period, the Company has not cured such condition, the written
notice shall take effect, and the Executive will be entitled to the following:
(A) continuation of his then current Base Salary (prior to any reduction that
constitutes Good Reason) for twelve months from the date of termination payable
in accordance with Company payroll practice; (B) continuation of health and life
insurance benefits for twenty-four months at the Company's expense subject to
applicable cost-sharing arrangements, co-payments, and deductibles in place
immediately prior the Executive's termination (provided, however, that such
health benefits shall not be counted toward the Executive's entitlement for
COBRA, and that such health and life insurance benefits shall terminate
immediately upon Executive obtaining employment with a third party which
provides health and life insurance benefits); (C) a "pro-rated bonus" for the
fiscal year in which the termination occurs which shall be payable at the time
the Company customarily pays bonuses; (D) the continuation of all other
perquisites for six months; (E) reasonable outplacement assistance for six
months (including out of pocket expenses of the Executive to search for a job
not to exceed $5000); and (F) payment, if requested by the Executive, for all
equity in MMH or the Company owned by the Executive or his family (including but
not limited to Equity Units), payable in equal quarterly installments over the
thirty-six month period following termination, provided, however, that if this
option is requested, the equity shall be valued as of the date of termination at
its fair market value by the Compensation Committee of the Board of Directors
and shall be repurchased so long as permitted under the terms of any financing
documents, including but not limited to indentures or loan agreements applicable
to the Company or any direct or indirect parent entity of the Company at such
time. For purposes of this Agreement, a "pro-rated bonus" means the portion of
the bonus that is arrived at by using the number of days the Executive was
employed by the Company in the year of termination as the numerator of a
fraction of which 365 is the denominator and then multiplying the bonus the
Executive was otherwise eligible to receive by such fraction.
(b) Termination by the Company without Cause. If the Company terminates
the Executive's employment under this Agreement without Cause, the
Executive shall be entitled to the following: (i) a lump sum payment
equal to 1-1/2 times his then current annual Base Salary, and (ii) the
same benefits and compensation and payable at the same time as
provided in clauses (B) through (F) of Section 3.1(a). "Cause" means
any of the following acts by the Executive which, if curable, have not
been cured by Executive within 30 days' written notice thereof: (i)
willful failure to substantially and materially perform his duties as
assigned to him by Board of Directors (other than any such failure
resulting from the Executive's reasonable business judgment or
incapacity due to physical or mental illness); (ii) commission of a
fraud on the Company; (iii) breach of fiduciary duty involving
material personal gain; or (iv) willful misconduct materially and
demonstrably injurious or detrimental to the Company or its
affiliates.
(c) Death or Permanent Disability. This Agreement shall terminate
immediately upon the Executive's Death or Permanent Disability.
Permanent Disability shall have the same meaning as set forth in the
Company's long term disability policy. Upon termination for Death or
Permanent Disability, the Executive, or his estate, shall receive the
following: (i) all accrued Base Salary and other accrued entitlements
earned through the date of termination, (ii) the continuation of Base
Salary for 90 days after such termination, and (iii) the compensation
and benefits set forth in clauses (B), (C), (D) and (F) of Section
3.1(a).
(d) Failure to Renew. This Agreement shall terminate 60 days following
either party providing notice to the other party such that the Term
will expire as provided in Section 1.1 hereof. In the event of a
termination under this paragraph (d), the Executive shall receive his
accrued Base Salary and accrued entitlements through the date of
termination.
Section 3.2. Termination Event. "Termination Event" means the Executive's
resignation without Good Reason or termination by the Company for Cause. In the
event of a termination due to a Termination Event, the Executive shall receive
his accrued Base Salary and accrued entitlements through the date of
termination. In the event the Executive resigns from the Company without Good
Reason, such resignation only becomes effective upon 60 days' written notice to
the Company.
Section 3.3. Resignation from the Board of Directors and Offices. In the event
of Executive's termination of employment for any reason (including the failure
of the Company to renew the Agreement), such termination or non-renewal shall
also be considered a resignation as a member of the Board of Directors, a
resignation from the board of directors of any affiliates or subsidiaries of the
Company and a resignation from any offices held by the Executive with the
Company or with any of its affiliates or subsidiaries.
ARTICLE IV: MISCONDUCT AND CONFIDENTIAL INFORMATION
Executive agrees to be bound by the provisions of the World Wide
Business Conduct Policy and the Employee Proprietary Rights and Confidentiality
Agreement attached hereto as Schedule E. The provisions of such documents are
incorporated into this Agreement.
ARTICLE V: NON-COMPETITION; NON-SOLICITATION; INJUNCTIVE RELIEF
Simultaneously with the execution of this Agreement, Executive shall
execute and deliver to the Company a non-competition agreement in the form
attached hereto as Schedule C (the "Non-Competition Agreement"), which shall
become effective when this Agreement becomes effective as provided in Section
1.1 hereof.
ARTICLE VI: INDEMNIFICATION
The Company shall, to the fullest extent permitted by applicable law
indemnify and hold harmless Executive from all claims or expenses that may be
asserted against the Company and affiliates thereof due to his employment, or
that may otherwise derive from Executive's employment as contemplated under this
Agreement, in accordance with the Company's charter and bylaws. The Company
shall purchase and maintain for the benefit of Executive a director's and
officer's liability policy.
ARTICLE VII: MISCELLANEOUS
Section 7.1. Notices. For purposes of this Agreement, notices and all other
communications provided for herein shall be in writing and shall be deemed to
have been duly given when personally delivered, sent by facsimile or when mailed
by United States registered or certified mail, return receipt requested, postage
prepaid, addressed to such address or sent to such facsimile number as each
party may furnish to the other in writing from time to time. Unless notified
otherwise by Executive, copies of notices or other communications sent to
Executive shall be sent to the address noted on the signature page attached
hereto.
Section 7.2. Applicable Law, Jurisdiction and Venue. This Agreement is entered
into under, and shall be governed for all purposes by, the laws of the State of
New York. The parties agree to submit any dispute under this Agreement and/or
arising out of Executive's employment or termination thereof, to binding
arbitration in New York, New York under the then existing rules for commercial
arbitration as established by the American Arbitration Association; provided,
that, to the extent that it is necessary for the protection of either party to
obtain injunctive relief, either party may proceed to a court of competent
jurisdiction for purposes of obtaining the necessary equitable relief until an
arbitration proceeding can be conducted.
Section 7.3. No Waiver. No failure by either party hereto at any time to give
notice of any breach by the other party of, or to require compliance with, any
condition or provision of this Agreement shall (i) be deemed a waiver of similar
or dissimilar provisions or conditions at the same or at any prior or subsequent
time or (ii) preclude insistence upon strict compliance in the future.
Section 7.4. Severability. If a court of competent jurisdiction determines that
any provision of this Agreement is invalid or unenforceable, then the invalidity
or unenforceability of that provision shall not affect the validity or
enforceability of any other provision of this Agreement, and all other
provisions shall remain in full force and effect.
Section 7.5. Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original, but all of which
together will constitute one and the same Agreement.
Section 7.6. Headings. The paragraph headings have been inserted for purposes of
convenience and shall not be used for interpretive purposes.
Section 7.7. Gender and Plurals. Wherever the context so requires, the masculine
gender includes the feminine or neuter, and the singular number includes the
plural and conversely.
Section 7.8. Affiliate. As used in this Agreement, unless otherwise indicated,
"affiliate" shall mean any person or entity which directly or indirectly through
any one or more intermediaries owns or controls, is owned or controlled by, or
is under common ownership or control with the Company.
Section 7.9. Successors and Assignment. This Agreement is binding on Executive
and the Company and their successors and assigns; provided, however, that the
rights and obligations of the Company under this Agreement may be assigned to a
successor entity which assumes (either by operation of law or otherwise) the
Company's obligations hereunder. No rights or obligations of Executive hereunder
may be assigned by Executive to any other person or entity.
Section 7.10. Effects of Termination of Employment. Except as otherwise provided
herein or under any benefit plan or other agreement between the Company and the
Executive, termination of Executive's employment under this Agreement shall not
affect any right or obligation of either party hereto which is accrued or vested
prior to or upon such termination or the rights and obligations set forth
herein.
Section 7.11. Entire Agreement. This Agreement constitutes the entire agreement
of the parties with regard to the subject matter hereof, contains all the
covenants, promises, representations, warranties and agreements between the
parties with respect to employment of Executive by the Company, and supersedes
all prior employment agreements between the Executive and the Company or any of
its predecessors. Each party to this Agreement acknowledges that no
representation, inducement, promise or agreement, oral or written, has been made
by either party, or by anyone acting on behalf of either party, which is not
embodied herein, and that no agreement, statement, or promise relating to the
employment of Executive by the Company, which is not contained in this
Agreement, shall be valid or binding. Any modification of this Agreement will be
effective only if it is in writing and signed by the party to be charged.
Section 7.12. Attorney's Fees. Executive shall be entitled to be reimbursed for
reasonable attorney's fees incurred in the negotiation of this Agreement;
provided, that, such fees do not exceed $5,000.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first written above.
MORRIS MATERIAL HANDLING, INC.
By: /s/Todd Berman
Name:
Title:
Acknowledged by
MHE INVESTMENTS, INC.
By: /s/Todd Berman
Name:
Title:
/s/Jack F. Stinnett
Jack F. Stinnett
PROMISSORY NOTE
$150,000 Dated: June 30, 1999
FOR VALUE RECEIVED, the undersigned, Jack Stinnett, an
individual residing at _____________________ (the "Borrower"), HEREBY PROMISES
TO PAY to the order of Morris Material Handling, Inc. (the "Lender") on the
dates set forth herein the principal amount of ONE HUNDRED FIFTY THOUSAND U.S.
DOLLARS (US$150,000) in lawful money of the United States of America ("U.S.
Dollars" or "US$") and in same day funds or by certified check.
ARTICLE I.
DEFINITIONS
SECTION 1.1. Certain Defined Terms. As used in this Note, the
following terms shall have the following meanings (such meanings to be equally
applicable to both the singular and plural forms of the terms defined):
"Board" means the Board of Directors of the Lender.
"Borrower" has the meaning specified in the recital of parties to this
Note.
"Business Day" means a day of the year on which banks are not required or
authorized to close in Milwaukee, Wisconsin.
"Employment Agreement" means the Employment Agreement between the Borrower
and the Lender dated January 27, 1999 which sets forth the terms of
the Borrower's employment with the Lender.
"Internal Revenue Code" means the Internal Revenue Code of 1986, as amended
from time to time, and the regulations promulgated and rulings issued
thereunder.
"Lender" has the meaning specified in the recital of parties to this Note.
"LoanDocuments" means this Note and the Security Agreement, in each case
as amended or modified from time to time.
"Prime Rate" means [Rate].
"Security Agreement" means a pledge, assignment and security agreement
entered into by the Borrower for the benefit of the Lender, in
substantially the form of Exhibit A hereto, as such agreement may be
amended or modified from time to time.
"Termination Date" means the earlier of (a) June 30, 2009 or (b) the date
the Loan becomes due and payable hereunder pursuant to Section 2.4 or
5.1.
SECTION 1.2. Computation of Time Periods. In this Note in the computation
of periods of time from a specified date to a later specified date, the word
"from" means "from and including" and the words "to" and "until" each mean "to
but excluding."
SECTION 1.3. Other Terms. All other terms not defined in this Note shall
have the meaning assigned such terms in the Employment Agreement.
ARTICLE II.
AMOUNT AND TERMS OF THE LOAN
SECTION 2.1. The Loan. The Lender agrees, on the terms and conditions
hereinafter set forth, to make a loan (the "Loan") to the Borrower on the date
hereof in the amount set forth above in U.S. Dollars and in same day funds.
SECTION 2.2. Repayment. The Borrower shall repay the unpaid principal
amount of the --------- Loan on the Termination Date.
SECTION 2.3. Interest. The Borrower shall pay interest on the unpaid
principal amount of this Note from the date of this Note until this Note shall
be paid in full at a rate per annum equal at all times to the Prime Rate,
payable in arrears and in a lump sum on the Termination Date.
SECTION 2.4. Mandatory Prepayments. The Borrower shall, on the next
succeeding Business Day following the Borrower's failure to be in the Lender's
employ (x) as a result of a termination of employment for Cause, (y) by reason
of the Borrower's death or a resignation of employment other than for Good
Reason or (z) as a result of the Borrower giving Lender notice of non-renewal
under Section 1.1 of the Employment Agreement, prepay the outstanding principal
amount of the Loan and pay accrued interest to the date of such prepayment on
the entire principal amount of the Loan outstanding as of such date; provided
however that the Borrower shall be considered to be in the Lender's "employ"
during any period of the Borrower's Disability.
SECTION 2.5. Voluntary Prepayments. The Borrower may prepay, in whole or in
part, the principal amount of this Note and any interest thereon at any time,
without penalty.
SECTION 2.6. Payments and Computations. The Borrower shall make each
payment hereunder not later than 3:00 P.M. (Milwaukee time) on the day when due
in U.S. Dollars to the Lender at its address referred to in Section 6.2 in same
day funds. All computations of interest shall be made by the Lender on the basis
of a year of 365 or 366 days, as the case may be, in each case for the actual
number of days (including the first day but excluding the last day) occurring in
the period for which such interest is payable.
SECTION 2.7. Payment on Non-Business Days. Whenever any payment under any
Loan Document shall be stated to be due on a day other than a Business Day, such
payment shall be made on the next succeeding Business Day, and such extension of
time shall in such case be included in the computation of payment of interest.
ARTICLE III.
CONDITIONS OF LENDING
SECTION 3.1. Conditions Precedent to the Loan. The obligation of the Lender
to make the Loan hereunder is subject to the conditions precedent that the
Lender shall have received on or before the date of such Loan the following,
dated such day, in form and substance satisfactory to the Lender:
(a) The Security Agreement, together with:
(i) financing statements, in proper form for filing under the Uniform
Commercial Code of all jurisdictions that the Lender may deem necessary or
desirable in order to perfect the security interests created by the Security
Agreement,
(b) the Lender shall have received such other approvals or documents as
the Lender may reasonably request.
ARTICLE IV.
COVENANTS OF THE BORROWER
SECTION 4.1. Affirmative Covenants. So long as this Note shall remain
unpaid, the Borrower will, unless the Lender shall otherwise consent in writing:
(a) Compliance with Laws, Etc. Comply in all material respects with all
applicable laws, rules, regulations and orders, such compliance to include,
without limitation, paying before the same become delinquent all taxes,
assessments and governmental charges imposed upon the Borrower or upon the
property of the Borrower except to the extent contested in good faith.
(b) Reporting Requirements. Furnish to the Lender:
(i) as soon as possible and in any event within five days after the
occurrence of each Event of Default and each event which, with the giving of
notice or lapse of time, or both, would constitute an Event of Default,
continuing on the date of such statement, a statement of the Borrower setting
forth details of such Event of Default or event and the action which the
Borrower has taken and proposes to take with respect thereto; and
(ii) such other information respecting the condition or operations,
financial or otherwise, of the Borrower as the Lender may from time to time
reasonably request.
ARTICLE V.
EVENTS OF DEFAULT
SECTION 5.1. Events of Default. If any of the following events ("Events of
Default") shall occur and be continuing:
(a) The Borrower shall fail to pay any principal of, or interest on, this
Note or any other amount under any other Loan Document, including, but not
limited to, any mandatory prepayments, within 30 days after the same becomes due
and payable;
(b) The Borrower shall fail to perform or observe (i) any term, covenant or
agreement contained in Section 4.1 or (ii) any other term, covenant or agreement
contained in any Loan Document on the part of the Borrower to be performed or
observed if such failure shall remain unremedied for 30 days after written
notice thereof shall have been given to the Borrower by the Lender;
(c) The Borrower shall admit in writing his inability to pay his debts
generally, or shall make a general assignment for the benefit of creditors; or
any proceeding shall be instituted by or against the Borrower seeking to
adjudicate the Borrower bankrupt or insolvent, or seeking liquidation,
protection, relief, or composition of the Borrower or of his debts under any law
relating to bankruptcy, insolvency or relief of debtors, or seeking the entry of
an order for relief for the Borrower or for any substantial part of his property
and, in the case of any such proceeding instituted against the Borrower (but not
instituted by the Borrower), either such proceeding shall remain undismissed or
unstayed for a period of 30 days, or any of the actions sought in such
proceeding (including, without limitation, the entry of an order for relief
against the Borrower or for any substantial part of his property) shall occur;
(d) Any judgment or order for the payment of money in excess of $100,000
shall be rendered against the Borrower and either (i) enforcement proceedings
shall have been commenced by any creditor upon such judgment or order or (ii)
there shall be any period of 10 consecutive days during which a stay of
enforcement of such judgment or order, by reason of a pending appeal or
otherwise, shall not be in effect;
(e) Any provision of the Security Agreement after delivery thereof pursuant
to Section 3.1 shall for any reason cease to be valid and binding on the
Borrower,
(f) The Security Agreement after delivery thereof pursuant to Section 3.1
shall for any reason (other than pursuant to the terms thereof) cease to create
a valid security interest in any of the collateral purported to be covered
thereby;
(g) The Borrower shall die; or
(h) The Borrower shall be terminated for Cause, resign without Good Reason
or provide notice of non-renewal under Section 1.1 of the Employment Agreement;
then, and in any such event, the Lender may, by notice to the Borrower, declare
this Note, all interest thereon and all other amounts payable under the Loan
Documents to be forthwith due and payable, whereupon this Note, all such
interest and all such amounts shall become and be forthwith due and payable,
without presentment, demand, protest or further notice of any kind, all of which
are hereby expressly waived by the Borrower; provided, that in the event of the
death of the Borrower or in the event of an actual or deemed entry of an order
for relief with respect to the Borrower under the Federal Bankruptcy Code, this
Note, all such interest and all such amounts shall automatically become and be
due and payable, without presentment, demand, protest or any notice of any kind,
all of which are hereby expressly waived by the Borrower.
ARTICLE VI.
MISCELLANEOUS
SECTION 6.1. Amendments, Etc. No amendment or waiver of any provision of
this Note, nor consent to any departure by the Borrower therefrom, shall in any
event be effective unless the same shall be in writing and signed by the Lender
and then any such waiver or consent shall be effective only in the specific
instance and for the specific purpose for which given.
SECTION 6.2. Notices, Etc. All notices and other communications provided
for hereunder shall be in writing (including telecopier, telegraphic, telex or
cable communication) and mailed, telecopied, telegraphed, telexed, cabled or
delivered, if to the Borrower, at its address as indicated in the recital of
parties to this Note; and if to the Lender, at its address at Chartwell
Investments Inc., Attn: Michael Shein; or, as to each party, at such other
address and to such other individual as shall be designated by such party in a
written notice to the other party. All such notices and communications shall,
when mailed, telecopied, telegraphed, telexed or cabled, be effective when
deposited in the mails, telecopied, delivered to the telegraph company,
confirmed by telex answerback or delivered to the cable company, respectively.
SECTION 6.3. No Waiver; Remedies. No failure on the part of the Lender to
exercise, and no delay in exercising, any right under any Loan Document shall
operate as a waiver thereof; nor shall any single or partial exercise of any
such right preclude any other or further exercise thereof or the exercise of any
other right. The remedies provided in the Loan Documents are cumulative and not
exclusive of any remedies provided by law.
SECTION 6.4. Binding Effect. This Note shall (a) be binding upon the
Borrower and his personal representatives, estate, heirs, devisees, legatees and
assigns, (b) inure to the benefit of the Borrower and his assigns and (c) be
binding upon and inure to the benefit of the Lender and its respective
successors and assigns, except that the Borrower shall not have the right to
assign his rights hereunder or any interest herein without the prior written
consent of the Lender.
SECTION 6.5. Governing Law. This Note shall be governed by, and construed
in accordance with, the laws of the State of New York.
IN WITNESS WHEREOF, the Borrower has executed and the Lender has caused
this Note to be executed by its officer thereunto duly authorized, in each case,
as of the date first above written.
/s/Jack Stinnett
Jack Stinnett, as Borrower
CONSENTED TO AND ACKNOWLEDGED:
MORRIS MATERIAL HANDLING, INC.
as Lender
By: ________________________________
Name:
Title:
<PAGE>
Form of Spousal Consent
The undersigned, spouse of Jack Stinnett, a holder of interests in
Niles L.L.C., a Delaware limited liability company (the "Company"), executing
the foregoing Promissory Note and Pledge, Assignment and Security Agreement,
hereunto subscribes her name in evidence of her agreement and consent to the
pledge of interests of the Company referred to in the foregoing Promissory Note
and Pledge, Assignment and Security Agreement, and to all other provisions
thereof.
Effective as of June 30, 1999.
Name:
SHARE PURCHASE AGREEMENT
THIS SHARE PURCHASE AGREEMENT, dated as of December __, 1999, by and
among 3016117 NOVA SCOTIA ULC a Nova Scotia unlimited liability company
("Seller"), MORRIS MATERIAL HANDLING, INC., a Delaware corporation ("Parent"),
and MagneTek Mondel Holding ULC, a Nova Scotia unlimited liability company
("Buyer").
WITNESSETH:
WHEREAS, Buyer desires to purchase from Seller, and Seller desires to
sell to Buyer, all of the issued and outstanding shares in the capital of Mondel
ULC, a Nova Scotia unlimited liability company (the "Company"), all in
accordance with the terms and conditions herein set forth;
AND WHEREAS, Parent is a party to this Agreement for the purposes of
making certain representations, warranties, covenants and indemnities with
Seller for the benefit of Buyer;
NOW, THEREFORE, in consideration of the premises contained herein and
for other good and valuable consideration, the receipt and sufficiency of which
are hereby acknowledged, the parties hereto hereby agree as follows:
ARTICLE 1
DEFINITIONS
1. Definitions. For purposes of this Agreement, the following terms shall
have the meanings set forth below:
1.1 Defined Terms.
"Adjusted Closing Balance Sheet" has the meaning set forth in Section 2.3.5
hereof.
"Affiliate" (and, with a correlative meaning, "Affiliated") means, with
respect to any Person, any other Person that directly, or through one or more
intermediaries, controls or is controlled by or is under common control with
such first Person, and, if such a Person is an individual, any member of the
immediate family (including parents, spouse and children) of such individual and
any trust whose principal beneficiary is such individual or one or more members
of such immediate family and any Person who is controlled by any such member or
trust. As used in this definition, "control" (including, with correlative
meanings, "controlled by" and "under common control with") shall mean
possession, directly or indirectly, of power to direct or cause the direction of
management or policies (whether through ownership of securities or partnership
or other ownership interests or by contract). For greater certainty, the parties
acknowledge that (i) Parent shall be deemed to be the ultimate controlling
Person of the Company and the Seller and (ii) MagneTek, Inc. shall be deemed to
be the ultimate controlling Person of Buyer, for the purposes of this Agreement
and the definition of Affiliate.
"Agreement" means this Share Purchase Agreement, as the same may be
amended, supplemented or otherwise modified from time to time.
"Applicable Law" means with respect to any Person, property,
transaction, event or other matter, any law, rule, statute, regulation, order,
judgment, decree, treaty or other requirement having the force of law
(collectively, "Law") relating to or applicable to such Person, property,
transaction, event or other matter. Applicable Law also includes, where
appropriate, any interpretation of Law (or any part thereof) by any Person
having jurisdiction over it, or charged with its administration or
interpretation.
"April Balance Sheet" means the balance sheet of the Company as of
April 30, 1999, prepared to reflect the elimination of intercompany accounts and
the Excluded Liabilities, a true and complete copy of which is attached as
Exhibit A hereto.
"Base Purchase Price" has the meaning set forth in Section 2.2.1 hereof.
"Benefit Plan" means any Employee Plan or Employee Benefit Plan.
"Business" means the business and operations of the Company.
"Business Days" means any day other than a Saturday or Sunday or a
statutory or bank holiday in Ontario or Nova Scotia.
"Business Employees" has the meaning set forth in Section 3.7(a) hereto.
"Buyer" has the meaning set forth in the recitals hereto.
"Buyer Indemnitees" has the meaning set forth in Section 7.2 hereof.
"Cash" means cash and cash equivalents.
"Certificate" has the meaning set forth in Section 7.2 hereof.
"Claimed Amount" has the meaning set forth in Section 7.4.2 hereof.
"Claim Notice" has the meaning set forth in Section 7.4.2 hereof.
"Class A Preferred Shares" means the shares in the capital of the
Company described as Class A Preferred Shares in the Company's
constating documents.
"Closing" means the consummation of the purchase, assignment and sale
of the Shares as contemplated hereby.
"Closing Balance Sheet" has the meaning set forth in Section 2.3.2 hereof.
"Closing Date" means the date of this Agreement.
"Closing Equity" means the difference between the value of the
Company's total assets and its total liabilities (excluding the Excluded
Liabilities), as shown on the Estimated Closing Balance Sheet or the Final
Closing Balance Sheet or the Adjusted Closing Balance Sheet, as applicable.
"Closing Place" means the offices of Blake, Cassels & Graydon, Suite
2300, Commerce Court West, Toronto, Ontario, M5L 1A9, or such other place as
Seller, Parent and Buyer may agree.
"Common Shares" means shares in the capital of the Company described as
common shares in the Company's constating documents.
"Code" means the Internal Revenue Code of 1986, as amended, and the
regulations promulgated thereunder, as in effect from time to time.
"Contracts" has the meaning set forth in Section 3.5 hereof.
"Controlling Party" has the meaning set forth in Section 7.4.1(b) hereof.
"Damages" has the meaning set forth in Section 7.2 hereof.
"Disclosure Schedule" means the disclosure schedule delivered by
Seller and Parent to Buyer on the date hereof.
"Dollars" or "$" means the lawful currency of the United States of
America, unless otherwise indicated.
"Effective Time" means the end of business in the Province of Ontario
on the Closing Date.
"Employee Benefit Plan" means any employee benefit plan, as defined in
Section 3(3) of ERISA, that is sponsored or contributed to by the Company in the
United States of America or any ERISA Affiliate thereof covering employees or
former employees of the Company.
"Employee Pension Benefit Plan" means any employee pension benefit
plan, as defined in Section 3(2) of ERISA, that is subject to Title IV of ERISA,
other than a Multiemployer Plan covering employees or former employees of the
Company in the United States of America.
"Employee Plan" means any benefit arrangement or agreement covering
employees, former employees, officers, former officers, directors and former
directors of the Company and the beneficiaries of any of them that is not an
Employee Benefit Plan, including (i) each employment, consulting or change of
control agreement; (ii) each arrangement providing for retirement, health
(including retiree health), disability or fringe benefits, insurance coverage
(including any self-insured arrangements), (iii) each bonus, incentive, deferred
bonus, incentive or performance pay arrangement, (iv) each arrangement providing
any termination allowance, severance or similar benefits, (v) each equity
compensation plan; (vi) each deferred compensation plan and (vii) each
compensation policy and practice maintained by the Company, but excluding any
arrangement established pursuant to statute and maintained by a Governmental
Authority.
"Encumbrances" means mortgages, security interests, pledges, claims,
liens, easements, rights of way, restrictions, encroachments, leases,
occupancies, tenancies, options; pre-emptive purchase rights and any other
adverse interests or rights of others.
"Environmental Laws" mean any applicable statute, enactment, ordinance,
rule, regulation, decision, common law, judgment, decree, permit or license,
whether local, state, provincial, territorial or national, in force or effect as
of the Closing:
(a) relating to emissions, discharges, spills, releases or threatened
releases of Hazardous Substances into air, water, or land;
(b) relating to the use, treatment, storage, disposal, handling,
manufacturing or shipment of Hazardous Substances;
(c) relating to noise, odor, wetlands, pollution, contamination or any
injury or threat of injury to persons or property;
(d) relating to the regulation of storage tanks; or
(e) otherwise relating to protection, investigation or restoration of
human health and safety, the environment, or natural resources.
"Environmental Liabilities" means all Liabilities, whether currently
existing or arising hereafter, but in either such case relating to or arising
from conditions existing prior to the Effective Time, which arise under or
relate to any Environmental Laws.
"Environmental Surveys"has the meaning set forth in Section 3.12 hereof.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"ERISA Affiliate" means any other Person or entity under common control
with the Company within the meaning of Section 414(b), (c), (m) or (o) of the
Code and the regulations thereunder.
"Estimated Closing Balance Sheet" has the meaning set forth in Section
2.3.1 hereof.
"Estimated Purchase Price" has the meaning set forth in Section 2.2.2
hereof.
"Excluded Liabilities" means (i) all Liabilities for Taxes that are the
responsibility of Seller pursuant to Section 6.1(d); (ii) all Liabilities of the
Company that are not attributable or related to the Business; (iii) any
liability for any claim relating to the existence or alleged existence of
asbestos in or in connection with any products sold at any time by the Company;
(iv) any Liability for any payment to be made under any severance, change of
control, termination, stay and pay or similar agreement or plan between the
Company and any Business Employee and (v) any Liability arising from or relating
to the Company's having conducted business under any unregistered trade name or
under any name other than its legal corporate name.
"Final Closing Balance Sheet" has the meaning set forth in Section
2.3.2 hereof.
"Financial Statements" mean: (a) the financial statements listed on
Section 3.8 of the Disclosure Schedule, including the April Balance Sheet; and
(b) the interim unaudited financial statements of the Company for the months
commencing November 1, 1998 through the month ended immediately prior to the
Closing (to the extent such statements for the month ended immediately prior to
the Closing are reasonably available), true and complete copies of all of which
(except those for periods not yet available) have previously been made available
to the Buyer.
"GAAP" means generally accepted accounting principles in effect in the
United States of America at the time of determination as consistently applied,
except as expressly contemplated herein.
"Governmental Authority" means any court or federal, state, provincial,
municipal or other governmental authority, department, commission, board, agency
or instrumentality.
"Group Health Plan" means any group health plan, as defined in Section
5000(b)(1) of the Code.
"Hazardous Substance" means (i) any substance listed, classified or
regulated pursuant to any Environmental Law, including any petroleum product or
by-product, asbestos-containing material, lead-containing paint or plumbing,
polychlorinated biphenyls, di-ocytl phthalates ("DOPs"), radioactive materials
or radon, or (ii) any solid, liquid, gas, odor, heat, sound, vibration,
radiation or combination of them that may impair the natural environment, injure
or damage property or plant or animal life or harm or impair the health of any
individual.
"HSRA" means the Hart-Scott-Rodino Antitrust Improvements Act of 1976,
as amended, and the regulations thereunder, as in effect from time to time.
"Improvements" has the meaning set forth in Section 3.3.3(b)(iv) hereof.
"Indemnified Person" has the meaning set forth in Section 8.4.1(a) hereof.
"Indemnifying Person" has the meaning set forth in Section 7.4.1(a) hereof.
"Information Technology" means computer software, computer firmware,
computer hardware (whether general or specific purpose), and other similar or
related items of automated, computerized, and/or software system(s).
"Intellectual Property Transfer Agreement" means the Intellectual Property
Transfer Agreement, to be entered into by and between MHE Technologies, Inc. and
the Company at the Closing.
"Intellectual Property Rights" has the meaning set forth in Section
3.6(a) hereof.
"Intercompany Accounts" means all intercompany accounts except for
intercompany trade receivables accrued by the Company in the ordinary course of
business.
"IRS" means the Internal Revenue Service.
"Knowledge of Buyer" means the knowledge, after due inquiry, of David
Reiland, John P. Colling, Jr. and Samuel A. Miley.
"Knowledge of Seller and Parent" means the knowledge, after due
inquiry, of Mike Birch, Scott Pastorius, Brenda Mayhew, and the actual knowledge
of David Smith and Jack Stinnett.
"Letter of Credit" has the meaning set forth in Section 6.4 hereof.
"Liabilities" means all obligations, indebtedness, commitments, and
other items, whether direct or indirect, absolute, accrued, contingent or
otherwise.
"License Agreement" means the License Agreement to be entered into by and
between the Company and MHE Technologies, Inc. at the Closing.
"Licenses" mean the licenses, authorizations, permits, approvals and
other authorizations issued by any Governmental Authority owned or held by the
Company or by Seller or Parent in connection with the ownership and operation of
the Business, together with any renewals, extensions or modifications thereof
and additions thereto between the date hereof and the Closing.
"Management Employees" has the meaning set forth in Section 3.7(a) hereof.
"Material Adverse Effect" means a change in, or effect on, the
operations, affairs, prospects, financial condition, results of operations,
assets, liabilities, reserves or any other aspect of the Company or the
Business, taken as a whole, that could reasonably be expected to result in a
material adverse effect on, or a material adverse change in, the Company or the
Business, or a material adverse effect on Buyer's ownership of the Shares after
the Closing Date.
"Multiemployer Plan" means a multiemployer plan, as defined in Section
3(37) and 4001(a)(3) of ERISA.
"Multiple Employer Plan" means any Employee Benefit Plan sponsored by
more than one employer, within the meaning of Sections 4063 or 4064 of ERISA or
Section 413(c) of the Code.
"Neutral Auditors" has the meaning set forth in Section 2.3.5 hereof.
"Noncompetition Agreement" means the Noncompetition Agreement to be
entered into by and between Parent and the Company concurrently with this
Agreement.
"Permitted Encumbrances" mean: (i) Encumbrances for Taxes not yet due
and payable or that the taxpayer is contesting in good faith through appropriate
proceedings; (ii) as to the use of the real estate assets used by the Company,
any easements or reservations of, or rights of others for, rights of way,
highway and railroad crossings, sewers, electric lines, telegraph and telephone
lines and other similar purposes, or zoning restrictions which do not materially
interfere with the operation of the Business; (iii) in the case of non-real
estate assets, any security interest disclosed in Section 3.3.1 of the
Disclosure Schedule; (iv) liens created by statute securing the claims of
materialmen, landlords and like Persons incurred in the ordinary course of
business for sums not yet delinquent; (v) purchase money liens and liens
securing rental payments under capital lease arrangements and disclosed in
Section 3.3.1 of the Disclosure Schedule; (vi) liens securing borrowed money to
be released at or prior to the Closing and disclosed in Section 3.3.1 of the
Disclosure Schedule; and (vii) other liens set forth in Section 3.3.1 of the
Disclosure Schedule.
"Person" means any natural person, corporation, partnership, limited
liability company, firm, joint venture, joint-stock company, trust, association,
unincorporated entity of any kind, trust, governmental or regulatory body or
other entity.
"Products" has the meaning set forth in Section 3.15 hereof.
"Purchase Price" has the meaning set forth in Section 2.2.1 hereof.
"Reference Rate" means the borrowing rate in effect from time to time
under the Restated Credit Agreement, dated as of June 20, 1997, between
MagneTek, Inc., as Borrower, NationsBank of Texas, N.A., as Agent, certain other
banks as Co-Agents, and certain Lenders thereunder.
"Representatives" has the meaning set forth in Section 6.1.1 hereof.
"Resolution Period" has the meaning set forth in Section 2.3.4 hereof.
"Response" has the meaning set forth in Section 7.4.2(b) hereof.
"Seller" has the meaning set forth in the Preamble hereof.
"Seller Indemnitees" has the meaning set forth in Section 8.3 hereof.
"Seller Returns" has the meaning set forth in Section 6.1(b) hereof.
"Shares" means all the issued and outstanding Common Shares and Class A
Preferred Shares of the Company.
"Subsidiary" means, as to any Person, any corporation or other entity,
whether now existing or hereafter organised or acquired, of which a majority of
the securities or other ownership interests having ordinary voting power for the
election of directors or other Persons performing similar functions are at the
time owned by such Person and/or one or more Subsidiaries of such Person.
"Supply Agreement" means the Supply Agreement, dated the date hereof,
to be entered into by and between Parent and the Company.
"Tax" or "Taxes" means (A) taxes, charges, fees, levies, imposts and
other assessments, including, but not limited to, all income, sales, use, goods
and services, value added, capital, capital gains, alternative, net worth,
transfer, profits, withholding, payroll, employer health, excise, franchise,
real property and personal property taxes, and any other taxes, customs duties,
fees, assessments or similar charges in the nature of a tax including Canadian
Pension Plan and provincial pension plan contributions, employment insurance
payments and workers' compensation premiums, together with all installments with
respect thereto, and any interest, fines, additions and penalties imposed by any
Governmental Authority in connection with amounts described in this clause (A)
and (B) any liability for payment of amounts described in clause (A) whether as
a result of transferee liability, of being a member of an affiliated,
consolidated, combined or unitary group for any period, or otherwise through
operation of law.
"Tax Letter of Credit" has the meaning set forth in Section 6.4 hereof.
"Tax Indemnification Release Provision" has the meaning set forth in
Section 7.2 hereof.
"Tax Return" means any return, declaration, report, or information
return or statement relating to Taxes, including any schedule or attachment
thereto and any amendment thereof.
"Third Party Claim" has the meaning set forth in Section 7.4.1(a) hereof.
"Unresolved Changes" has the meaning set forth in Section 2.3.5 hereof.
"Year 2000 Compliant" means, with respect to the Company's products and
Information Technology, that they are designed to be used prior to, during, and
after the calendar Year 2000 A.D., and that during each such time period they
will accurately receive, provide and process date/time data (including, but not
limited to, calculating, comparing and sequencing) from, into and between the
twentieth and twenty-first centuries, including the years 1999 and 2000, and
leap year calculations and will not malfunction, cease to function, or provide
invalid or incorrect results as a result of date/time data, to the extent that
other products and Information Technology, used in combination with the products
and Information Technology being acquired, properly exchanges date/time data
with them.
1.2 Accounting Terms. All terms of an accounting nature not specifically defined
herein shall have the respective meanings given to them under GAAP.
1.3 Exhibits and Schedules. The following Exhibits and Schedules attached to
this Agreement are incorporated herein and shall be considered a part of this
Agreement for the purposes stated herein, except that in the event of any
conflict between any of the provisions thereof and the provisions of the
Agreement, the provisions in this Agreement shall prevail:
Exhibits
Exhibit A - April Balance Sheet
Exhibit B - Form of Letter of Credit
Exhibit C Form of Tax Letter of Credit
Schedules
Schedule 1 - Disclosure Schedule
Schedule 2 Allocation of Purchase Price for U.S. Taxes
1.4 Other Definition Provisions. The masculine form of words includes the
feminine and the neuter and vice versa, and, unless the context otherwise
requires, the singular form of words includes the plural and vice versa. The
words "herein," "hereof," "hereunder" and other words of similar import when
used in this Agreement refer to this Agreement as a whole, and not to any
particular section or subsection.
ARTICLE 2
PURCHASE OF SHARES; PURCHASE PRICE
2. Purchase of the Shares, Purchase Price and Method of Payment.
2.1 Purchase of the Shares. In accordance with the terms and upon satisfaction
of the conditions contained in this Agreement, at the Closing, Seller shall
sell, assign, transfer, convey and deliver to Buyer, free and clear of all
Encumbrances, and Buyer shall purchase from Seller, the Shares.
2.2 Consideration.
2.2.1 Purchase Price. The aggregate base purchase price for the Shares shall be
Three Million Dollars ($3,000,000) (the "Base Purchase Price"), which shall be
subject to adjustment as described in Section 2.2.2 and Section 2.3 below (as
adjusted, the "Purchase Price").
2.2.2 Payment of Purchase Price at Closing. At the Closing, the Base Purchase
Price shall be adjusted: (a) upward by the amount, if any, by which the Closing
Equity as calculated in accordance with the Estimated Closing Balance Sheet (as
defined below) exceeds $2,551,772.00 or (b) downward by the amount, if any, by
which the Closing Equity as calculated in accordance with the Estimated Closing
Balance Sheet is less than $2,551,772.00 (as adjusted, the "Estimated Purchase
Price"). At the Closing, Buyer shall pay to Seller on account of the Purchase
Price an amount equal to the Estimated Purchase Price by wire transfer, in
immediately available funds, pursuant to wire transfer instructions delivered to
Buyer by Seller at least three (3) Business Days prior to the Closing, or by
certified check, at Seller's sole option.
2.3 Purchase Price Adjustment.
2.3.1 Estimated Closing Balance Sheet. No later than three (3) Business Days or
earlier than ten (10) Business Days prior to the Closing Date, Seller shall, in
consultation with Buyer, prepare an estimated balance sheet of the Company as of
the Effective Time (the "Estimated Closing Balance Sheet") and a calculation of
estimated Closing Equity as of the Effective Time based on the assets and
liabilities of the Company as reflected on the Estimated Closing Balance Sheet.
2.3.2 Final Closing Balance Sheet. As soon as practicable, but in no event later
than sixty (60) days following the Closing, Seller shall, in consultation with
Buyer, prepare a balance sheet of the Company as of the Effective Time (the
"Final Closing Balance Sheet" and collectively with the Estimated Closing
Balance Sheet, the "Closing Balance Sheet") and a calculation of Closing Equity
as of the Effective Time, as calculated in accordance with the Final Closing
Balance Sheet. The Final Closing Balance Sheet and calculation of Closing Equity
shall be prepared so that they present fairly the Closing Equity as of the
Effective Time using practices and procedures consistent with the preparation of
the Financial Statements and in accordance with GAAP; provided, that all
Intercompany Accounts, Excluded Liabilities and any refunds in respect of Taxes
for the period prior to the Closing, will be excluded therefrom (it being the
understanding that Intercompany Accounts have been eliminated in accordance with
Section 3.20 hereof). In addition, the Final Closing Balance Sheet will only
include intercompany trade receivables that are excluded from the definition of
Intercompany Accounts if and to the extent such receivables have been collected
prior to the date the Final Closing Balance Sheet is required to be prepared.
2.3.3 Access. During the preparation of the Closing Balance Sheet and the
calculation of Closing Equity in connection therewith, and throughout the period
of any review or dispute within the contemplation of this Section 2.3: (a)
Seller shall, until the Closing, and Buyer shall, after the Closing, cause the
Company to provide Buyer or Seller, as applicable, and their respective
authorized representatives with access to all relevant books, records,
workpapers and employees of the Company as may reasonably be requested by such
party; and (b) Seller and Buyer shall cooperate fully with each other and their
respective authorized representatives in connection with such preparation and
review, including the provision to one another on a timely basis of all
information reasonably requested in connection with such preparation and review.
2.3.4 Delivery and Review. Seller shall deliver a copy of the Final Closing
Balance Sheet to Buyer promptly after it has been prepared and in no event later
than sixty (60) days after the Closing. After receipt of the Final Closing
Balance Sheet, Buyer shall have thirty (30) days to review the Final Closing
Balance Sheet, together with the workpapers used in the preparation thereof.
Unless Buyer delivers written notice to Seller on or prior to the thirtieth day
after the receipt of the Final Closing Balance Sheet stating that it has
objections to the Final Closing Balance Sheet or the calculation of Closing
Equity made in accordance therewith (and setting forth the disputed items),
Buyer shall be deemed to have accepted and agreed to the Final Closing Balance
Sheet and the calculation of Closing Equity made pursuant thereto. If Buyer so
notifies Seller of its objections to the Final Closing Balance Sheet, the
parties shall, within thirty (30) days (or such longer period as the parties may
agree) following such notice (the "Resolution Period"), attempt to resolve their
differences and any resolution by them as to any disputed amounts shall be
final, binding and conclusive.
2.3.5 Resolution. Any amounts remaining in dispute at the conclusion of the
Resolution Period (the "Unresolved Changes") shall be submitted to a nationally
recognized United States accounting firm that has not advised Buyer or Seller in
the past five (5) years (such firm being referred to as the "Neutral Auditors")
within ten (10) days after the expiration of the Resolution Period. Each party
agrees to execute, if requested by the Neutral Auditors, a reasonable engagement
letter with the Neutral Auditors. All fees and expenses relating to the work, if
any, to be performed by the Neutral Auditors shall be borne pro rata by Buyer
and Seller in proportion to the allocation of the dollar amount of the
Unresolved Changes made by the Neutral Auditors such that the prevailing party
or parties pays a lesser proportion of the fees and expenses. The Neutral
Auditors shall act as an arbitrator to determine, based on the provisions of
this Section 2.3, only the Unresolved Changes. The Neutral Auditors'
determination of the Unresolved Changes shall be made within forty-five (45)
days of the submission of the Unresolved Changes thereto, shall be set forth in
a written statement delivered to Buyer, on the one hand, and Seller, on the
other hand, and shall be final, binding and conclusive. The term "Adjusted
Closing Balance Sheet", as used in this Agreement, shall mean the definitive
Closing Balance Sheet agreed to (or deemed agreed to) by Buyer, on the one hand,
and Seller, on the other hand, under Section 2.3 or, if Unresolved Changes are
submitted to the Neutral Auditors, such definitive Closing Balance Sheet, as
adjusted to reflect the determination of the Neutral Auditors under this Section
2.3.5.
2.3.6 Post-Closing Adjustments. If and to the extent the Closing Equity as
calculated in accordance with the Adjusted Closing Balance Sheet exceeds the
Closing Equity as calculated in accordance with the Estimated Closing Balance
Sheet, then Buyer shall pay an amount equal to such excess (together with
interest on such amount, from the Closing Date to the date of payment, at the
Reference Rate in effect on such date, without compounding) to Seller as an
adjustment to the Purchase Price. If and to the extent that the Closing Equity
as calculated in accordance with the Adjusted Closing Balance Sheet is less than
the Closing Equity as calculated in accordance with the Estimated Closing
Balance Sheet, then Seller shall pay an amount equal to such shortfall (together
with interest on such amount, from the Closing Date to the date of payment, at
the Reference Rate in effect on such date, without compounding) to Buyer as an
adjustment to the Purchase Price. If the amount of post-Closing adjustments are
agreed to (or deemed agreed to) by Buyer, on the one hand, and Seller, on the
other hand, before or during the Resolution Period, then payment of any
adjustment shall be made within five (5) Business Days after the date of such
agreement (or deemed agreement). If there are Unresolved Changes at the end of
the Resolution Period, then (a) the minimum amount which the parties agree is
owed pursuant to this Section 2.3.6 shall be paid within five (5) Business Days
after the end of the Resolution Period and any additional amounts owing with
respect to the Unresolved Changes shall be paid within five (5) Business Days
after the resolution thereof by the Neutral Auditors or (b) in all other cases,
any and all payments shall be made within five (5) Business Days after the
resolution of the Unresolved Changes by the Neutral Auditors. Any payment made
to any party pursuant to this Section 2.3.6 shall be (i) net of any obligations
identified, as of such date, as owed by such party under Article X of this
Agreement and (ii) paid by wire transfer of immediately available funds to a
bank account specified by the party to which such payment is owed.
ARTICLE 3
REPRESENTATIONS AND WARRANTIES RELATING TO THE COMPANY AND THE BUSINESS
3. Representations and Warranties Relating to the Company and the Business. Each
of Seller and Parent hereby represents and warrants to Buyer that, as of the
date hereof:
3.1 Organization and Standing; Capitalization.
3.1.1 Organization and Standing. The Company:
(a) is an unlimited liability company duly organized and validly existing under
the laws of Nova Scotia;
(b) has full corporate power and authority and all governmental Licenses,
authorizations, consents and approvals required to own, lease and use its
properties and to conduct the Business as now being conducted and to perform the
obligations required to be performed by it hereunder and to consummate the
transactions contemplated hereby; and
(c) is duly qualified to do business in every jurisdiction in which the nature
of its business requires such qualification.
3.1.2 Capitalization; Corporate Structure.
(a) The authorized capital of the Company consists of 100,000,000 Common Shares
and 2,600,000 Class A Preferred Shares, of which 8,600 Common Shares and
2,600,000 Class A Preferred Shares are issued and outstanding. The Shares have
been duly authorized and issued and are validly outstanding, fully paid and
nonassessable and were not issued in violation of any preemptive or other rights
or in violation of any Applicable Laws, the Memorandum or Articles of
Association or other constating documents of the Company.
(b) The Shares are held as indicated on Section 3.1.2(b) of the Disclosure
Schedule. Seller is the sole owner of record and beneficial owner of, all of the
Shares and Seller will, as of the Closing, have the full and unrestricted right,
power and authority to sell and transfer the Shares to Buyer. At the Closing,
Seller shall deliver to Buyer duly endorsed certificates evidencing Seller's
ownership of the Shares. Upon delivery of such Shares to Buyer and payment by
Buyer to Seller of the consideration therefor, Buyer will acquire good and
marketable title to and complete ownership of the Shares free and clear of all
Encumbrances.
(c) There are not currently, and as of the Closing there will not be, any
outstanding (i) subscriptions, options, warrants, rights of first refusal or
other rights to purchase from the Company or Seller any shares of capital stock
of the Company or (ii) any securities convertible into or exchangeable for
shares of capital stock of the Company. There is no contract, right or option
outstanding requiring the Company to redeem or repurchase any of its shares of
capital stock and there are no preemptive rights with respect to any shares of
capital stock of the Company.
(d) The Company has no Subsidiaries.
(e) The corporate records and minute books of the Company contain complete and
accurate minutes of all meetings of and corporate actions or written resolutions
of the directors, committees of directors and shareholders of the Company. All
such meetings were duly called and held, all such corporate actions were duly
taken, and all such resolutions duly passed or validly signed. The share
certificates, register of transfers, registers of shareholders and directors,
and other similar records of the Company are complete, accurate and current.
(f) Section 3.1.2(f) of the Disclosure Schedule lists all business, fictitious,
trade or other names under which the Company is currently conducting, or has
historically conducted, business.
3.2 No Contravention. The performance of the Company under this Agreement and
its execution and delivery of, and performance under, any other documents to be
executed in connection herewith do not and will not, after the giving of notice
or the lapse of time: (a) conflict with or violate any provisions of the
Memorandum or Articles of Association or other constating documents of the
Company; (b) subject to obtaining the consents listed on Section 3.2 of the
Disclosure Schedule and taking the actions referenced in Section 4.3.2, result
in the breach of any of the terms of, constitute a default under, conflict with
or result in the termination or alteration of, any Contract or agreement to
which the Company is a party or by which the Company or any of its properties is
bound; or (c) subject to obtaining the consents and taking the actions listed on
Section 3.2 of the Disclosure Schedule and complying with the HSRA, the
Investment Canada Act (Canada) and the Competition Act (Canada), as applicable,
to the Knowledge of Seller and Parent, contravene or conflict with or constitute
a violation of any License or Applicable Law binding upon or applicable to the
Company, the Business or the Shares.
3.3 Tangible Assets.
3.3.1 Title. The Company has good and valid title to, or a good and valid
leasehold interest in, all of the tangible assets and properties it owns or
uses. Except for Permitted Encumbrances or as disclosed on Section 3.3.1 of the
Disclosure Schedule, the Company holds title to each such asset free and clear
of all Encumbrances. To the Knowledge of Seller and Parent, the landlord named
on each real property lease (collectively, the "Leases") to which the Company is
a party has good and valid fee simple title in the real property subject to such
Lease, subject to no exceptions that affect or may reasonably be expected to
affect the use or operation of such real property by the Company.
3.3.2 Asset Rights. At the Closing, all of the rights, properties and assets
necessary for using, owning, operating and conducting the Business shall be
either: (a) owned by the Company; or (b) licensed or leased to the Company under
one of the Contracts or one of the agreements to be entered into pursuant to
this Agreement.
3.3.3 Condition of Assets.
(a) All of the Company's tangible assets and properties are in good operating
condition and repair, ordinary wear and tear excepted, and are adequate for the
uses to which they are currently put and no properties or assets necessary for
the conduct of the Business as currently conducted by the Company are in need of
replacement, maintenance or repair except for routine replacement, maintenance
and repair.
With respect to the real property owned or leased by the Company (the "Real
Property"):
(i) all Real Property is in compliance with all Applicable Laws (including
without limitation laws relating to parking, zoning and land use) and public and
private covenants and restrictions;
(ii) there are no zoning, building code, occupancy restriction or other land-use
regulation proceedings or any proposed change in any Applicable Laws which could
detrimentally affect the use or operation of any parcel of Real Property, nor
has Seller or the Company received any notice of any special assessment
proceedings affecting any parcel of Real Property, or applied for any change to
the zoning or land use status of any parcel of Real Property;
(iii) all water, sewer, gas, electric, telephone and drainage facilities and all
other utilities required by law or for the normal use and operation of each
parcel of Real Property as currently used or operated by the Business are (X)
installed to the property lines of such parcel and (Y) adequate to service such
parcel of Real Property as improved and to permit full compliance with all
Applicable Laws; and
(iv) to the Knowledge of Seller and Parent, except as disclosed on Section 3.3.3
of the Disclosure Schedule, there are no latent defects or adverse physical
conditions affecting any parcel of Real Property or any of the facilities,
buildings, structures, erections, improvements, fixtures, fixed assets and
personal property of a permanent nature affixed, annexed or attached to, located
on or forming part of such Real Property (collectively, the "Improvements").
Except as disclosed on Section 3.3.3 of the Disclosure Schedule, no repairs are
required to be made, or based upon current condition of the Improvements, will
be required to be made to the Improvements in order to permit the Company to
conduct its business as currently conducted or in order to comply with any
Contract.
3.4 Licenses. The Company has the Licenses listed on Section 3.4 of the
Disclosure Schedule, which constitute all of the Licenses and other governmental
authorizations required to conduct the Business as currently conducted by the
Company or as the Business is contemplated to be conducted as of the date of
this Agreement.
3.5 Contracts.
(a) All contracts, leases, instruments and employment and other agreements to
which the Company is a party (other than all purchase orders made in the
ordinary course of business and any agreement for which the Company's aggregate
obligation after the Closing does not exceed $25,000 or which is cancelable by
the Company: (x) on sixty (60) days or less notice; (y) without Liability to the
Company or the Buyer) (the "Contracts") are listed on Section 3.5 of the
Disclosure Schedule. With respect to each Lease, Section 3.5 of the Disclosure
Schedule sets forth the location of the real property leased pursuant to such
Lease, the monthly rental payments due under such Lease, the expiration date of
the Lease, and a brief description of the activities conducted by the Company on
such real property. True and complete copies of each Contract have heretofore
been provided to Buyer.
(b) Neither the Company nor, to the Knowledge of Seller and Parent, any other
party thereto, is in default under any Contract and no event, occurrence or
condition exists, which, with the giving of notice or the lapse of time, may
reasonably be expected to result in a default thereunder.
(c) The Company has not granted any release or waiver under any of the
Contracts.
(d) The Contracts are each in full force and effect and valid and binding and
enforceable against the Company and, to the Knowledge of Seller and Parent, each
other party thereto, in accordance with their respective terms, except as such
enforceability may be limited by bankruptcy, insolvency, moratorium or other
laws relating to or affecting creditors' rights generally.
(e) Subject to obtaining the consents set forth on Section 3.2 of the Disclosure
Schedule, the transfer of the Shares contemplated by this Agreement will not
result in any default, penalty or modification to any of the Contracts,
including, without limitation, the leases to which the Company is a party.
3.6 Intellectual Property Rights.
(a) Section 3.6(a) of the Disclosure Schedule sets forth a complete and correct
list of each patent, patent application and invention, trademark, trade name,
trademark or trade name registration or application, copyright or copyright
registration or application for copyright registration, servicemark, brand mark
or brand name or any pending application related thereto, or any material trade
secret, proprietary know-how, programs or processes or any similar rights, and
each license or licensing agreement for any of the foregoing used or owned by
the Company, or which will be used or owned by the Company after giving effect
to the transfer pursuant to the Intellectual Property Transfer Agreement, or
relating to the Company or the Business (collectively the "Intellectual Property
Rights").
(b) There is no pending nor, to the Knowledge of Seller and Parent, threatened
claim against the Company or, in the case of Intellectual Property Rights to be
transferred to the Company pursuant to the Intellectual Property Transfer
Agreement, against MHE Technologies, in either case that may involve a claim of
misappropriation, infringement, or other violation of any patent, trademark,
copyright, trade secret or other intellectual property right of any Person, or
that may challenge or question the validity of any of the Intellectual Property
Rights, nor is the Company or MHE Technologies aware of any facts that may
reasonably be expected to give rise to any such claim. No Intellectual Property
Right is subject to any outstanding order, judgment, decree, stipulation or
agreement that, after giving effect to the Intellectual Property Transfer
Agreement, would restrict the use thereof by the Company or the licensing
thereof by the Company to any Person. MHE Technologies has the right to assign
the Intellectual Property Rights to the Company as contemplated by the
Intellectual Property Transfer Agreement, including the right to sue for and
recover from past and future violations in connection with or related to such
Intellectual Property Rights. To the Knowledge of Seller and Parent, after
giving effect to the transfer pursuant to the Intellectual Property Transfer
Agreement, the current use of the Intellectual Property Rights by the Company
does not conflict with, infringe upon or violate any patent, patent license,
patent application, trademark, tradename, trademark or tradename registration,
copyright, copyright registration, service mark, brand mark or brand name or any
pending application relating thereto, or any trade secret, know-how, programs or
processes, or any similar rights, of any Person.
(c) After giving effect to the transfer pursuant to the Intellectual Property
Transfer Agreement, the Company owns or has the right to use without payment the
entire right, title and interest, free and clear of all Encumbrances other than
Permitted Encumbrances, in, to and under, all Intellectual Property Rights
listed on Section 3.6(a) of the Disclosure Schedule. No other inventions,
processes, computer programs, know-how, formulae, trade secrets, patents, chip
designs, mask works, trademarks, trade names, brand names, copyrights, licenses
or applications for any of the foregoing are necessary for the unimpaired
continued operation of the Business in the manner that the Business has
heretofore been conducted or is proposed to be conducted as of the date of this
Agreement. Section 3.6(c) of the Disclosure Schedule lists all licenses of any
Intellectual Property Rights to or by the Company, after giving effect to the
transfer pursuant to the Intellectual Property Transfer Agreement. All
agreements relating to the Intellectual Property Rights are in full force and
effect after giving effect to the transfer pursuant to the Intellectual Property
Transfer Agreement.
3.7 Employees; Plans.
(a) Attached hereto as Section 3.7(a) of the Disclosure Schedule is a list of
all salaried employees of the Company with an annual base salary in excess of
$70,000, indicating the positions that such employees currently hold (the
"Management Employees", and together with all other employees of the Company,
the "Business Employees"). Section 3.7(a) of the Disclosure Schedule also lists
each employment agreement, consulting agreement, severance pay, continuation
pay, termination pay and similar agreement between the Company and any Business
Employee. Except as set forth on Section 3.7(a) of the Disclosure Schedule, no
Business Employee is on disability or extended leave.
(b) The Company does not sponsor, maintain, contribute to, or have any
obligation to contribute to, any Employee Plan, except as set forth in Section
3.7(b) of the Disclosure Schedule. Seller has made true and correct copies of
all governing instruments and related agreements pertaining to each Employee
Plan available to Buyer, including, in the case of any Employee Plan not set
forth in writing, a written description thereof. Each Employee Plan has been
maintained in accordance with all Applicable Laws and with the provisions of
such Employee Plan in all material respects.
(c) Schedule 3.7(c) of the Disclosure Schedule lists each Employee Benefit Plan
and Employee Pension Benefit Plan copies of which have been provided to Buyer or
its affiliates, that the Company contributes to or maintains. Each such Employee
Benefit Plan, each such Employee Pension Benefit Plan and each related trust,
insurance contract, or fund complies in form and in operation with the
applicable requirements of ERISA, the Code, and any other Applicable Law. With
respect to each Benefit Plan which is an Employee Pension Benefit Plan, (i) all
contributions which are due have been paid to each such Benefit Plan, (ii) no
event has occurred and no condition has existed that has adversely affected, or
is likely to adversely affect the application and/or receipt of a favourable
determination by the IRS in respect of such Benefit Plan, and (iii) as of the
last day of the most recent prior plan year, the market value of assets under
each such Benefit Plan (other than any Multiemployer Plan) equaled or exceeded
the present value of Liabilities thereunder (determined in accordance with the
then current funding assumptions).
(d) With respect to each Benefit Plan that the Company maintains, (x) no such
Benefit Plan which is an Employee Pension Benefit Plan (other than any
Multiemployer Plan) has been completely or partially terminated or been the
subject of a Reportable Event (as defined in ERISA), as to which notices would
be required to be filed with the Pension Benefit Guaranty Corporation ("PBGC"),
and no proceeding by the PBGC to terminate any such Benefit Plan has been
instituted, (y) no action, suit, proceeding, hearing or investigation with
respect to the qualification or registration of such Benefit Plan or the
administration or the investment of the assets of any such Benefit Plan (other
than routine claim for benefits) is pending or, to the Knowledge of Seller and
Parent, threatened, and (z) neither the Company nor any of its ERISA Affiliates
has incurred any liability to the PBGC (other than PBGC premium payments) or
otherwise under Title IV of ERISA, including but not limited to, any withdrawal
liability to any Multiemployer Plan with respect to any such Benefit Plan that
is subject to ERISA or the Code.
(e) No transaction prohibited by Section 406 of ERISA or Section 4975 of the
Code has occurred with respect to any Benefit Plan that is subject to ERISA or
the Code which transaction has or can reasonably be expected to cause the
Company or any of its ERISA Affiliates to incur any Liability under ERISA, the
Code or otherwise, excluding transactions effected pursuant to and in compliance
with a statutory or administrative exemption. Except as disclosed on Section
3.7(c) of the Disclosure Schedule, neither the Company nor any of its ERISA
Affiliates has any current or projected liability in respect of post-employment
or post-retirement health or medical or life insurance benefits for retired,
former or current employees of the Company, except as required under Applicable
Law. Other than as described in Section 3.7(c) of the Disclosure Schedule, no
employee or former employee of the Company or any of its ERISA Affiliates will
become entitled to any bonus, retirement, severance or similar benefit or
enhanced benefit (including acceleration of vesting or exercise of an incentive
award) as a result of the transactions contemplated hereby. With respect to any
Benefit Plan, to the Knowledge of Seller and Parent no event or circumstance
exists which would, either singularly or in the aggregate, have a Material
Adverse Effect.
(f) The Company has not made, or acquiesced in the making of, any amendments to
any of the Employee Plans which are not disclosed in the documents made
available to Buyer. All obligations of the Company (including fiduciary,
funding, investment and administration obligations) required to be performed in
connection with the Employee Plans or the funding agreements therefor have been
performed in a timely fashion in accordance with the terms of the Employee Plans
and Applicable Laws. Where required, the Employee Plans are duly registered
under the Income Tax Act (Canada) and applicable pension standards legislation.
There are no taxes owing in respect of the Employee Plans. There have been no
improper withdrawals, or applications of, the assets held in respect of the
Employee Plans by the Company. No promises of benefit improvements under the
Employee Plans have been made except as may be required under Applicable Laws,
and to the Knowledge of the Seller and Parent, there are no outstanding disputes
concerning the assets held in respect of any of the Employee Plans.
(g) All contributions or premiums required to be paid by the Company in respect
of the Employee Plans have been paid in a timely fashion in accordance with the
terms of the Employee Plans and the Applicable Laws. All employee contributions
to the Employee Plans required to be made by way of authorized payroll deduction
have been properly withheld by the Company and fully paid out in a timely
fashion in accordance with the terms of the Employee Plans and the Applicable
Laws. There are no taxes owing in respect of the Employee Plans.
(h) All reports and other disclosures relating to the Employee Plans required by
this Agreement, or by any Applicable Laws, to be filed or distributed on or
before the execution of this Agreement have been filed or distributed. All such
reports and disclosures required by this Agreement, or by any applicable laws or
regulations, to be filed or distributed on or before the Closing Date shall be
so filed or distributed.
(i) The Employee Plans are fully funded both on an ongoing basis and on a
solvency basis using actuarial methods and assumptions contained in the most
recent actuarial report required to be prepared and filed with the applicable
pension regulatory authority. All employee data respecting any Employee Plan is
correct. None of the Employee Plans is the subject of any investigation,
proceeding, action or claim and to the Knowledge of the Seller and Parent, there
exists no state of facts which after notice or lapse of time or both could
reasonably be expected (i) to give rise to any such investigation, proceeding,
action or claim, or (ii) to affect the registration of the Employee Plans.
(j) The Company is not a party to or bound by any collective agreement and is
not currently conducting negotiations with any labour union or employee
association. To the Knowledge of Seller and Parent, prior to the date of this
Agreement, there has been no attempt to organize, certify or establish any
labour union or employee association in relation to any employees of the
Company. There are no existing or, to the Knowledge of Seller and Parent,
threatened labour strikes or disputes, grievances, controversies or other labour
troubles affecting the Company or the Business.
(k) The Company has complied with all Applicable Laws relating to employment,
including those relating to wages, hours, collective bargaining, occupational
health and safety, workers' hazardous materials, employment standards, pay
equity and workers' compensation. There are no outstanding charges or, to the
Knowledge of the Seller and Parent complaints against the Company relating to
unfair labour practices or discrimination or under any legislation relating to
employees. The Company has paid in full all amounts owing under the Workers'
Compensation Act (Ontario) or comparable provincial legislation. There are no
charges or orders outstanding against the Company under the Occupational Health
and Safety Act (Ontario).
3.8 Financial Statements.
(a) True and complete copies of the Financial Statements listed on Section 3.8
of the Disclosure Schedule, including the April Balance Sheet and monthly and
year to date unaudited financial statements through the month ended immediately
prior to the Closing Date (to the extent such statements for the month ended
immediately prior to the Closing Date are reasonably available), have heretofore
been made available to Buyer.
(b) Except as disclosed on Section 3.8 of the Disclosure Schedule, each of the
Financial Statements listed on Section 3.8 of the Disclosure Schedule:
(i) has been prepared based on the books and records of the Company in
accordance with GAAP and the Company's normal accounting practices, consistent
with past practice and with each other, and presents fairly the financial
position and results of operations of the Company, as of the dates set forth and
for the periods indicated therein, in conformity with GAAP consistently applied
throughout the periods covered thereby (subject, in the case of interim
statements, to the lack of footnotes, and customary year-end audit adjustments,
provided any such adjustments are not, individually or in the aggregate,
material);
(ii) contains and reflects all necessary adjustments, accruals, provisions and
allowances for a fair presentation of the Company's financial condition and the
results of its operations for the periods covered by such financial statement;
(iii) to the extent applicable, contains and reflects adequate provisions for
all reasonably anticipated liabilities for all Taxes (other than Excluded
Liabilities) with respect to the periods then ended and all prior periods;
(iv) with respect to contracts and commitments for the sale of goods or the
provision of services by the Company, contains and reflects adequate reserves
for all reasonably anticipated losses and costs and expenses in excess of
expected receipts; and
(v) has been certified by a responsible financial officer of the Company.
(c) Except as set forth in Section 3.8(c) of the Disclosure Schedule, there are
no Liabilities of the Company other than: (i) Liabilities disclosed on the April
Balance Sheet, (ii) Liabilities specifically disclosed and identified as such on
the Disclosure Schedule, and (iii) Liabilities incurred since the date of the
April Balance Sheet in the ordinary course of business.
3.9 Absence of Certain Changes. Except as set forth on in Section 3.9 of the
Disclosure Schedule, since the date of the April Balance Sheet, the Business has
been conducted in the ordinary course and consistent with past practice and
there has not been:
(a) any event, occurrence, state of circumstances or facts or change in the
Company or in the Business that has had or that may be reasonably expected to
have, either alone or together, a Material Adverse Effect;
(b) (i) any change in any Liabilities of the Company reflected in the April
Balance Sheet or that should be reflected as a Liability on the Company's
balance sheet that has had, or will have, a Material Adverse Effect; or (ii) any
incurrence, assumption or guarantee of any indebtedness for borrowed money by
the Company in connection with the Business or otherwise;
(c) any (i) payments by the Company in satisfaction of any Liabilities of the
Company related to the Business, other than in the ordinary course of business,
or the guarantee by the Company of any indebtedness of any other Person; or (ii)
creation, assumption or sufferance of the existence of (whether by action or
omission) any Encumbrance on any assets reflected on the April Balance Sheet,
other than Permitted Encumbrances;
(d) any change by the Company in its accounting principles, methods or practices
or in the manner it keeps its books and records or any change by the Company of
its current practices with regards to sales, receivables, payables or accrued
expenses;
(e) any (i) single capital expenditure or commitment in excess of $25,000 or
(ii) group of related capital expenditures or commitments in an aggregate amount
in excess of $50,000;
(f) any loan to or guarantee or assumption of any loan or obligation on behalf
of any director, officer, stockholder or employee of the Company, except travel
advances occurring in the ordinary course of business; or
(g) any payment, discharge or satisfaction of any Liabilities of the Company,
other than payments, discharges or satisfactions in the ordinary course of
business.
3.10 Litigation; Compliance.
(a) Except as set forth on Section 3.10(a) of the Disclosure Schedule, there are
no lawsuits, civil, criminal or administrative actions, suits, demands,
hearings, arbitrations, governmental investigations or claims pending or, to the
Knowledge of Seller and Parent, threatened, by or against the Company, nor, to
the Knowledge of Seller and Parent, is there any reasonable basis for any such
claim or proceeding.
(b) Except as set forth on Section 3.10(b) of the Disclosure Schedule, the
Company has not violated or infringed, and is not in violation or infringement
of, any material Applicable Law. The Company has historically been and currently
is in compliance with the requirements of all Applicable Laws, including all
Applicable Laws relating to the importing or exporting of products from their
country of origin.
(c) No outstanding unsatisfied writ, rule, injunction, judgment, award, order or
decree has been rendered against or affecting the Company or the Business.
3.11 Taxes.
(a) Except as set forth in Section 3.11 of the Disclosure Schedule, all Tax
Returns required to be filed by or on behalf of the Company have been properly
and accurately prepared and timely filed. All Taxes shown to be due and payable
on such Tax Returns, and all other Taxes of or with respect to the Company which
are due and payable, have been timely paid.
(b) Except as set forth in Section 3.11 of the Disclosure Schedule, the Company
has withheld from each payment made to any of its present or former employees,
officers and directors, direct or indirect shareholders and all other persons
all amounts required by law to be withheld, and has remitted such withheld
amounts within the prescribed periods to the appropriate governmental body. The
Company has remitted all Canada Pension Plan contributions, provincial pension
plan contributions, employment insurance premiums, employer health taxes and
other Taxes payable by it in respect of its employees to the proper governmental
body within the time required under the applicable legislation.
(c) Except as set forth in Section 3.11 of the Disclosure Schedule, the Company
is not a party to or bound by a Tax sharing, Tax indemnity, Tax allocation or
similar agreement and is not bound by any closing agreement, offer in compromise
or similar agreement with respect to Taxes.
(d) Except as set forth in Section 3.11 of the Disclosure Schedule, there are no
present or pending disputes, audits or other adjustments with respect to Taxes
relating to the Company and, to the Knowledge of Seller and Parent, there is no
basis upon which a Tax authority could impose a liability for Taxes for which
the Company could be held liable in excess of those shown on the Tax Returns
previously filed and Taxes incurred in the ordinary course of business since the
date of such Tax Returns and included as a liability on the Final Closing
Balance Sheet to be prepared by Seller pursuant to Section 2.3.2. None of the
transactions contemplated by this Agreement are anticipated to give rise to any
liability for Taxes of the Company. Neither the Company nor its affiliates has
received notice that the Company is or may be subject to Tax in a jurisdiction
in which it has not filed or does not currently file Tax Returns. No action has
been taken inconsistent with past practice that would have the effect of
deferring any Tax liability with respect to the Company from any taxable period
(or portion thereof) ending on or before or including the Closing Date to any
subsequent taxable period. The Company does not have and has not had a permanent
establishment in any country other than Canada and the United States. Except as
set forth in Section 3.11 of the Disclosure Schedule, the Company has at all
times complied with the contemporaneous documentation requirements under section
247(4) of the Income Tax Act (Canada).
(e) Except as set forth in Section 3.11 of the Disclosure Schedule, at all times
during its existence, for United States federal and applicable United States
state and local income tax purposes, the Company has been "disregarded as an
entity separate from its owner" within the meaning of United States Treasury
Regulation ss. 301.7701-3(b)(2)(i)(C), and has not made an election to be
treated otherwise for any income tax purposes.
3.12 Environmental Matters. Except as disclosed in the environmental surveys
(the "Environmental Surveys") a description of which is set out in Section 3.12
of the Disclosure Schedule: (a) the Company is, and at all times since February
16, 1995 has been, in compliance with all applicable Environmental Laws; (b)
there are no asbestos-containing materials, polychlorinated biphenyls, DOPs,
urea formaldehyde foam insulation, incinerators, underground or aboveground
storage tanks, septic systems or tanks or cesspools located on real property
owned or leased by the Company; (c) the properties currently owned or leased by
the Company (including soils, groundwater, surface water, building or other
structures) are not contaminated with any Hazardous Substances; (d) the
properties formerly owned or leased by the Company were not contaminated with
Hazardous Substances during the period of the Company's ownership or lease; (e)
the Company is not subject to liability for any Hazardous Substance disposal or
contamination on any third party property; (f) the Company has not been
associated with any release or threat of release of any Hazardous Substance; (g)
the Company has not received any notice, demand, letter, claim, or request for
information alleging that the Company may be in violation of or liable under any
Environmental Law; (h) the Company is not subject to any orders, decrees,
injunctions or other arrangements with any Governmental Authority and is not
subject to any indemnity or other agreement with any third party relating to
liability under any Environmental Law; (i) the Company has not been identified
as a potentially responsible party under any Environmental Laws for cleanup
liability with respect to the emission, discharge or release of any Hazardous
Substance and (j) to the Knowledge of Seller and Parent, there are no
circumstances or conditions involving the Company that could reasonably be
expected to result in any claims or Liabilities pursuant to any Environmental
Law. This Section 3.12 sets forth the sole and exclusive representations and
warranties of Seller with respect to environmental, health and safety matters.
3.13 Insurance. Section 3.13 of the Disclosure Schedule contains a complete list
of all policies of insurance currently in force covering the Business or the
Company.
3.14 Brokers. No investment bank, broker, finder, agent or other advisor will be
entitled to any fee, commission or reimbursement of expenses from the Company or
Buyer or any of Buyer's Affiliates upon consummation of or otherwise in
connection with the transactions contemplated by this Agreement.
3.15 Product Warranty and Product Liability. Section 3.15 of the Disclosure
Schedule contains a true, correct and complete copy of the standard warranty or
warranties provided in connection with the sale of the Products (as defined
below). Except as set forth or described on Section 3.15 of the Disclosure
Schedule, there is no outstanding warranty for any Product that differs in any
material respect from such standard warranties and there is no Company practice
or custom not set forth in writing that expands such standard warranties. Except
as set forth on Section 3.15 of the Disclosure Schedule, none of Seller, Parent
or the Company has received notice, since January 1, 1998, from any customer to
the effect that such customer has experienced product quality problems of such
significance that it has reason to believe a concession of over $50,000 would be
required in order to resolve such customer's concerns. Each of the Products is,
and at all times up to and including the sale of such Product has been, (i) in
compliance with all Applicable Laws, and (ii) in conformity with all promises or
affirmations of fact made on the packaging or instructions for such Product or
in connection with its sale. Except as set forth on Section 3.15 of the
Disclosure Schedule, on the date of this Agreement, to the extent required by
Applicable Law or by a customer, all of the Company's Products have been rated
and approved by Underwriters Laboratories or the analogous foreign body, as the
case may be. The Company is in compliance in all material respects with all
requirements relating to such ratings and approvals, and none of Seller, Parent
or the Company has received any notice that such ratings or approvals may be
revoked or withdrawn. None of the Company's products, either as currently or
historically manufactured or sold, contains asbestos. Section 3.15 of the
Disclosure Schedule sets forth a description of all warranty claims processed
since January 1, 1998 and all customer concessions, in each case that have been
recorded in amounts exceeding, in any one such claim or concession, $50,000. The
defined term "Products" as used in this Agreement means any and all products
designed, manufactured, distributed or sold by the Company or that are subject
to ongoing warranty by the Company. The word products as otherwise used includes
all products historically manufactured or sold by the Company.
3.16 Affiliate Transactions. Except as described on Section 3.16 of the
Disclosure Schedule, other than sales of Products by the Company in the ordinary
course of business and consistent with past practice, there have been no
transactions between the Company, on the one hand, and Seller or Parent or any
of their or the Company's Affiliates, on the other (collectively, "Related
Parties"), since January 1, 1997. As of the Closing Date, other than obligations
to the Company arising from sales of Products by the Company in the ordinary
course of business, there are no obligations between the Company and any Related
Party.
3.17 Customers. Section 3.17 of the Disclosure Schedule sets forth a list of the
ten (10) largest customers of, and the ten (10) largest suppliers providing
goods and services to, the Business, for the 12-month period ended October 31,
1999, together with the approximate dollar amounts of goods or services provided
to or by such Persons during each such period and a summary description of the
goods or services provided. Neither the Company nor Seller has received written
notice from any such vendor or customer of such vendor's or customer's intent to
reduce or discontinue its business with the Company.
3.18 Backlog. As of December 7, 1999, the Company's sales order backlog was U.S.
$822,887.55, as set forth on Section 3.18 of the Disclosure Schedule. Neither
the Company nor Seller has received written notice from any customer listed on
Section 3.18 of the Disclosure Schedule of such customer's intent to terminate
any sales order listed on Section 3.18 of the Disclosure Schedule.
3.19 Year 2000. All of the Company's Products and, to the extent used in the
manufacture of such Products, all of its Information Technology (including,
without limitation, all non-customized off-the-shelf software used in the
manufacture of such Products) is Year 2000 Compliant. To the Knowledge of Seller
and Parent, all of the Company's Information Technology (including, without
limitation, non-customized off-the-shelf software) that is used in the operation
of the Business but is not Information Technology used in the manufacture of the
Company's Products (which is addressed in the preceding sentence), is Year 2000
Compliant.
3.20 Satisfaction of Intercompany Accounts. Parent has paid or caused to be paid
all Intercompany Accounts due and owing by Parent or its Affiliates to the
Company, and the Company has paid all Intercompany Accounts due and owing to
Parent and its Affiliates. All applicable withholding Taxes with respect to such
payments have been withheld and remitted to the proper taxing authorities on a
timely basis.
ARTICLE 4
REPRESENTATIONS AND WARRANTIES
OF SELLERS
4. Representations and Warranties of Seller and Parent. Each of Seller and
Parent represents and warrants to Buyer that, as of the date hereof:
4.1 Organization and Standing. Nova Scotia is an unlimited liability company
duly organized and validly existing under the laws of Nova Scotia and Parent is
a corporation duly organized and validly existing under the laws of the State of
Delaware; each of Seller and Parent has full corporate power and authority and
all governmental licenses, authorizations, consents and approvals required to
own, lease and use its properties and to conduct its business and operations as
now being conducted and to perform the obligations required to be performed by
it hereunder and to consummate the transactions contemplated hereby.
4.2 Authorization and Binding Obligations. The execution, delivery and
performance by Seller and Parent of this Agreement and the other documents to be
executed and delivered by each of them in connection herewith have been duly and
validly authorized and, upon execution thereof, will be duly executed and
delivered by Seller or Parent, as the case may be, and constitute or will
constitute (assuming, in each case, the due execution by the other parties
thereto) the legal, valid and binding agreement of each of Seller and Parent,
enforceable in accordance with its terms, except as such enforceability may be
limited by applicable bankruptcy, insolvency, fraudulent conveyance or other
similar laws relating to or affecting creditors' rights generally and the
exercise of judicial discretion in accordance with general equitable principles.
4.3 No Contravention; Consents.
4.3.1 No Contravention. The execution, delivery and performance of this
Agreement and the other documents to be executed in connection herewith by each
of Seller and Parent do not and will not, after the giving of notice, or the
lapse of time: (i) conflict with or violate any provisions of the Memorandum or
Articles of Association, or the Certificate of Incorporation or Bylaws, as
appropriate, or other formative documents of Seller or Parent, as the case may
be; (ii) subject to obtaining the consents listed in Section 3.2 of the
Disclosure Schedule, result in the breach of any of the terms of, constitute a
default under, conflict with or result in the termination or alteration of any
contract or any license or permit to which either Seller or Parent is a party or
by which either Seller or Parent or any of its properties is bound; or (iii) to
the Knowledge of Seller and Parent, contravene or conflict with or constitute a
violation of any Applicable Law.
4.3.2 Consent. Other than compliance with the HSRA, the Investment Canada Act
(Canada) and the Competition Act (Canada), and except for the consents and
actions listed on Section 3.2 of the Disclosure Schedule, no consent, waiver,
authorization or approval from, or filing of any notice or report with, any
Governmental Authority or other Person is necessary in connection with the
execution, delivery or performance by Seller or Parent of this Agreement or any
of the documents or transactions contemplated hereby.
4.4 Tax Status. Seller is not a non-resident of Canada for purposes of Section
116 of the Income Tax Act (Canada). No Tax will be required to be withheld from
any payments to be made to Seller pursuant to this Agreement.
4.5 Brokers. Any fee, commission or reimbursement of expenses of any investment
bank, broker, finder, agent or other advisor, including but not limited to Bank
of New York, in respect of Seller, Parent or the Company, shall be payable by
Seller or Parent, as the case may be, upon consummation of or otherwise in
connection with the transactions contemplated by this Agreement.
ARTICLE 5
REPRESENTATIONS AND WARRANTIES OF BUYER
5. Representations and Warranties of Buyer. Buyer hereby represents and warrants
to Seller and Parent that:
5.1 Organization and Standing. Buyer is a corporation duly organized, validly
existing and in good standing under the laws of the State of Delaware. Buyer has
full corporate power and authority and all governmental licenses,
authorizations, consents and approvals required to own, lease and use its
properties and to conduct its business and operations as now being conducted and
to perform the obligations required to be performed by it hereunder and to
consummate the transactions contemplated hereby. Buyer, on or prior to the
Closing Date, will be qualified to do business in all jurisdictions in which the
nature of the business conducted, or immediately thereafter to be conducted, by
it, makes such qualification necessary or where failure to do so would have a
material adverse effect on its business, financial condition or operations.
5.2 Authorization and Binding Obligations. The execution, delivery and
performance by Buyer of this Agreement and the other documents to be executed
and delivered by Buyer in connection herewith have been duly and validly
authorized and, upon execution thereof, will be duly executed and delivered by
Buyer, and constitute or will constitute (assuming, in each case, the due
execution by each of the other parties thereto), the legal, valid and binding
agreement of Buyer enforceable in accordance with its terms, except as such
enforceability may be limited by applicable bankruptcy, insolvency, fraudulent
conveyance or other similar laws affecting or relating to or affecting
creditors' rights generally and the exercise of judicial discretion in
accordance with general equitable principles.
5.3 No Contravention; Consents.
5.3.1 No Contravention. The execution, delivery and performance of this
Agreement and other documents to be executed in connection herewith by Buyer do
not and will not, after the giving of notice or the lapse of time: (a) conflict
with or violate any provisions of the Certificate of Incorporation, bylaws or
other formative documents of Buyer; (b) subject to obtaining the consents and
taking the actions referenced in Section 5.3.2, result in the breach of any of
the terms of, constitute a default under, conflict with or result in the
termination or alteration of, any contract or license to which Buyer is a party
or by which Buyer or any of its properties is bound; or (c) to the Knowledge of
Buyer, violate any Applicable Law.
5.3.2 Consents. Other than compliance with the HSRA, the Investment Canada Act
(Canada) and the Competition Act (Canada), no consent, waiver, authorization or
approval from, or filing of any notice or report with, any Governmental
Authority or other Person is necessary in connection with the execution,
delivery or performance by Buyer of this Agreement or any of the documents or
transactions contemplated hereby.
5.4 Brokers. Any fee, commission or reimbursement of expenses of any investment
bank, broker, finder, agent or other advisor in respect of Buyer shall be
payable by Buyer upon consummation of or otherwise in connection with the
transactions contemplated by this Agreement.
5.5 Litigation; Compliance.
(a) There are no lawsuits, civil, criminal or administrative actions, suits,
demands or claims pending, or to the Knowledge of Buyer, threatened against or
affecting Buyer or any of its Affiliates before or by any Governmental Authority
that would affect Buyer's ability to consummate the transactions contemplated
hereby;
(b) Neither Buyer nor any of its Affiliates is in default under, or in violation
of, any Applicable Law that would affect Buyer's ability to consummate the
transactions contemplated hereby; and
(c) no writ, rule, injunction, award, order or decree has been rendered against
or affecting Buyer or any of its Affiliates or any of its assets or properties
that would affect Buyer's ability to consummate the transactions contemplated
hereby.
5.6 Financial Capacity. Buyer has all funds on hand to satisfy and perform all
of Buyer's obligations under this Agreement and the documents to be executed and
exchanged at Closing.
5.7 Sophistication; Due Diligence. Buyer hereby certifies and represents that
(i) it is experienced, sophisticated and knowledgeable in the making of
investments, (ii) has had access to the Company and the Business, and (iii) is
not relying on any representation relating to the Company other than the
representations and warranties contained in this Agreement or in any certificate
or legal opinion delivered pursuant hereto.
5.8 Purchase for Investment. Buyer is acquiring the Shares for its own account,
for investment purposes only, and not with a view to, or for, resale,
distribution or granting a participation therein, in whole or in part.
ARTICLE 6
COVENANTS OF THE PARTIES
6. Covenants of the Parties.
6.1 Tax Matters.
(a) Tax Treatment. Buyer, Seller and Parent agree that they shall, and shall
cause their Affiliates to, treat the sale of the Shares pursuant to this
Agreement as a sale of the assets of the Company for all United States federal,
state and local income tax purposes. The parties agree to file all United States
Tax Returns in a manner consistent with such treatment.
(b) Preparation of Tax Returns.
(i) Seller and Parent covenant to prepare at their own expense and deliver to
Buyer any and all Tax Returns relating to a Tax reporting period ending on or
prior to the Closing Date ("Seller Returns"). In addition to and not by way of
limitation on the foregoing, Seller Returns shall include all Pennsylvania
income, franchise and sales and use Tax Returns for all periods that ended prior
to the Closing Date and for which such Seller Returns have not been filed
(including but not limited to all Pennsylvania sales and use Tax Returns for all
open periods). With respect to any Seller Returns that are not due as of the
Closing Date, Seller and Parent shall deliver such Seller Returns to Buyer not
later than the earlier of (A) fifteen (15) days prior to the date on which such
return is required to be filed and (B) one hundred and twenty (120) days after
the Closing Date. With respect to any Seller Return that is due but has not been
filed as of the Closing Date, such Seller Returns shall be submitted to Buyer in
draft form within ninety (90) days after the Closing Date (provided that such
time period shall be extended for so long as Seller is negotiating in good faith
with the relevant taxing authority and provides copies of all communications to
or from such taxing authority to Buyer), together with Seller's calculation of
all applicable penalties, additions to Tax, interest and other amounts owed with
respect to such Seller returns, for Buyer's review and approval (not to be
unreasonably withheld).
(ii) Upon Buyer's review and approval of any Seller Returns and (if applicable)
Seller's calculations of other amounts owing, such Seller Return shall be
submitted to Buyer in final form, accompanied by a cheque from Seller or Parent
made payable to the applicable taxing jurisdiction in an amount equal to all
Taxes and other amounts payable as provided in such Seller Return and, if
applicable, such agreed calculations of other amounts owing (the amount of such
cheque shall be based on an assumption that such Seller Return will be filed and
the related Taxes paid ten (10) days from the date Buyer receives such Seller
Return and cheque). Provided such final Seller Return and cheque are in the form
and amounts agreed to by Buyer, Buyer shall cause such Seller Return to be
executed by the appropriate corporate officer and shall file such Seller Return
and remit the payment received from Seller. Delivery of such final Seller Return
by Seller or Parent to Buyer shall constitute a representation and warranty by
Seller that such Seller Return is complete and accurate.
(iii) In the event Seller does not deliver a Seller Return within the time
prescribed herein, Buyer may, but shall not be required to, cause such Seller
Return to be prepared and filed and cause to be paid the related Taxes and other
amounts owing with respect thereto, upon which Seller and Parent shall
immediately reimburse Buyer for all such Taxes and other amounts, as well as
costs, charges (including reasonable professional fees), and other amounts
incurred in connection with the operation of this Section 6.1(b).
(iv) Buyer's approval, execution, preparation, filing, payment or other action
with respect to any Seller Return shall not in any way reduce Seller's
obligations under this Agreement, and in accordance with Sections 6.1(d) and
7.2(c) Seller and Parent shall indemnify, defend and hold Buyer and its
Affiliates (including the Company) harmless from and against all Damages with
respect to any such Seller Return, whether prepared by or at the request of
Seller, Parent, Buyer or their Affiliates.
(c) Cooperation. The parties hereto agree to furnish or cause to be furnished to
one another, upon request, as promptly as practicable, such information and
assistance relating to the Company and the Business as is reasonably necessary
for the filing of all Tax Returns, and making of any election related to Taxes,
the preparation for any audit by any taxing authority, and the prosecution or
defense of any claim, suit or proceeding relating to any Tax Return. The parties
hereto shall cooperate with each other in the conduct of any audit or other
proceeding, including the filing of any amended Tax Returns, related to Taxes
involving the Business and each shall execute and deliver such powers of
attorney and other documents as are necessary to carry out the intent of this
Section 6.1(c). Seller and Parent also shall provide such information to Buyer
and the Company as reasonably requested by Buyer and the Company for the purpose
of enabling the Company to comply with the contemporaneous documentation
requirements under section 247(4) of the Income Tax Act (Canada).
(d) Responsibility for Payment. Subject to Liabilities for Taxes for the period
prior to Closing which have been reflected in the calculation of the Purchase
Price, Seller shall pay as and when due, and Seller and Parent shall jointly and
severally indemnify, defend and hold the Buyer and its Affiliates (including,
following the Closing, the Company) harmless from and against, any and all
Liabilities for Taxes and related Damages (as defined in Section 7.2) of or
relating to the Company or Seller, and reasonable professional fees and other
reasonable out-of-pocket costs associated with such Taxes (i) accrued with
respect to all taxation periods ending on or before the Closing Date, (ii)
accrued with respect to or attributable to the Business during all periods up to
and including the Closing Date (including but not limited to Taxes relating to
any transactions between the Company and any other Person occurring at or prior
to Closing) whether or not such periods are taxation periods, or (iii) are
incurred and become payable as a result of the transfer of the Shares to the
Buyer contemplated by this Agreement (including but not limited to any transfer,
documentary, sales, use or other Taxes with respect to the transfer of the
Shares to Buyer, and any recording or filing fees with respect thereto). The
amounts described in the preceding sentence are Excluded Liabilities and are
subject to indemnification under Sections 7.2(c) and 7.2(d). The obligation of
Seller and Parent to indemnify Buyer and its Affiliates under this Section
6.1(d) shall not be reduced by reason of any disclosure or representation made,
or information provided, to Buyer or its Affiliates and representatives,
including but not limited to disclosure information provided in the Disclosure
Schedule.
(e) Allocation of Purchase Price. For United State federal, state and local
income tax purposes, the Purchase Price shall be allocated in accordance with
Schedule 2. Each of the parties hereto agrees to report the transactions
contemplated hereby for United States federal, state and local income Tax
purposes in accordance with such allocation of the Purchase Price.
6.2 Regulatory Filings.
6.2.1 Cooperation. The parties shall cooperate in the timely and expeditious
preparation and prosecution of any filings with any federal, state, provincial
or local authorities that may be required in connection with the transactions
contemplated by this Agreement.
6.2.2 Certain Filings. Within thirty (30) days after the execution and delivery
of this Agreement, Buyer and Seller shall file, or cause to be filed, with the
appropriate Canadian authorities any and all reports or notifications which are
required to be filed under the Investment Canada Act (Canada) and the
Competition Act (Canada). Seller, Parent and Buyer shall furnish to each other
such information as may be necessary and such assistance as the other may
reasonably request in connection with the preparation and filing of all notices
and filings referenced in this Section 6.2.2
6.3 Employee Matters. The parties agree that, until January 1, 2000, when the
Business Employees in the United States are integrated into Buyer's benefit
plans and payroll system, Parent shall continue to provide benefits and pay
payroll for such Business Employees. Buyer agrees that, within thirty (30) days
of receiving a summary of the expenses incurred by Parent in connection with
providing such benefits and payroll from the Effective Time until December 31,
1999, it shall reimburse Parent fully for all such expenses.
6.4 Collateral Agreements. Concurrently with the execution and delivery of this
Agreement, (a) Buyer and Parent, or any of their respective Subsidiaries as the
same shall designate, shall each execute and deliver the following agreements:
(i) the Supply Agreement, (ii) the Intellectual Property Transfer Agreement,
(iii) the Noncompetition Agreement and (iv) the License Agreement and (b) Parent
shall deliver (i) an irrevocable letter of credit in the amount of $350,000 from
Canadian Imperial Bank of Commerce for the benefit of Buyer and the Company, in
the form attached as Exhibit B hereto (the "Letter of Credit"), and (ii) an
irrevocable letter of credit in the amount of $650,000 from Canadian Imperial
Bank of Commerce for the benefit of Buyer, in the form attached as Exhibit C
hereto (the "Tax Letter of Credit").
6.5 Refunds in Respect of Audits/Taxes. If Seller or its Affiliates receives a
refund of Taxes (including interest) in respect of the Company for the period
prior to the Closing, such refund shall be paid immediately to the Company. If
Buyer or the Company receives such refund (whether from Seller or otherwise),
Buyer shall cause to be remitted to Seller an amount equal to the amount of such
refund, net of any Taxes incurred or to be incurred by Buyer or its Affiliates
(including the Company) by virtue of such refund.
ARTICLE 7
INDEMNIFICATION
7. Indemnification.
7.1 Survival. The representations and warranties of the parties set forth in
this Agreement (or in any document delivered in connection herewith) shall
survive the Closing Date and, except as set forth in the remainder of this
Section 7.1, terminate on the close of business on the date which is eighteen
(18) months after the Closing Date. The representations and warranties contained
in Section 3.11 shall survive the Closing Date until the expiration of the
normal reassessment period under Applicable Laws (as the same may be extended
from time to time after consultation with Seller and Parent), except that
representations and warranties of Seller in connection with any Tax matter
relating to the Company which are based on misrepresentation or fraud shall
continue in full force indefinitely. The representations and warranties
contained in Section 3.12 shall survive the Closing Date and terminate on the
close of business on the fifth anniversary of the Closing Date. The
representations and warranties contained in Sections 3.1 and 4.1 shall not
expire and shall remain in full force and effect without any time limitation.
The covenants and agreements of the parties contained in this Agreement (and in
any document delivered in connection herewith) shall remain operative and in
full force and effect without any time limitation, except as any such covenant
or agreement shall be limited in duration by the express terms thereof. If a
notice is given with respect to a bona fide claim in accordance with this
Article VIII before expiration of such periods, then (notwithstanding the
subsequent expiration of such time period) the representation, warranty,
covenant or agreement applicable to such claim shall survive until, but only for
purposes of, the resolution of such claim.
7.2 Indemnification by Seller and Parent. Subject to the limitations contained
in Section 7.5 and Section 7.6, Seller and Parent shall jointly and severally
indemnify, defend and hold harmless, Buyer and its officers, directors,
employees, agents and Affiliates (the "Buyer Indemnitees"), from and against,
and pay or reimburse the Buyer Indemnitees for, any and all obligations and
other Liabilities, monetary damages, fines, fees, penalties, losses (excluding
diminution in value of any asset) and reasonable expenses (including without
limitation reasonable amounts paid in settlement, court costs and reasonable
fees and expenses of attorneys), excluding consequential damages (except to the
extent included in monetary damages paid or payable by the Buyer Indemnitees to
third parties) (collectively, "Damages") incurred by the Buyer Indemnitees,
relating to or arising from:
(a) any breach by either Seller or Parent at any time of any of its
covenants or agreements contained in this Agreement;
(b) any inaccuracy or misrepresentation in or breach of any representation or
warranty of Seller or Parent contained in this Agreement;
(c) any Excluded Liability; and
(d) without limiting the generality of Section 7.2(c) above, and for purposes of
delineating the scope of the Tax Letter of Credit, Excluded Liabilities include
all Liabilities of the Company in respect of Taxes for the period up to the
Closing, including but not limited to the matters described in Section 3.11 of
the Disclosure Schedule.
The indemnification obligations of Seller and Parent under this Section 7.2
shall be secured by the Letter of Credit. In addition, the indemnification
obligations of Seller and Parent under Section 7.2(d) shall be secured by the
Tax Letter of Credit. For greater certainty, the parties acknowledge that the
Letter of Credit shall not be replaced by Parent at the end of its term if
Parent is in compliance with those financial covenants set forth in the Credit
Agreement between Parent and others and Canadian Imperial Bank of Commerce as
administrative agent and collateral agent for the banks identified therein dated
March 30, 1998 as amended August 28, 1998 and August 2, 1999 as in effect on the
date hereof (the "Credit Agreement"), which covenants are the subject of the
detailed compliance certificate that is required to be delivered by Parent's
Chief Executive Officer under the Credit Agreement as of the date hereof (the
"Certificate"). Compliance with the foregoing financial covenants will be
evidenced by the Certificate actually delivered to the agent under the Credit
Agreement, if both the financial covenants and form of required Certificate are
unchanged from the date hereof, and otherwise will be evidenced by a pro forma
Certificate prepared as though such covenants and required Certificate remained
in effect. Parent will provide Buyer with copies of the Certificate regularly
prepared as and when it is provided to the agent under the Credit Agreement.
The parties acknowledge that the Tax Letter of Credit is not required to be
replaced at the end of its term if the Tax Indemnification Release Provision is
satisfied. For the purposes of this Agreement, the "Tax Indemnification Release
Provision" is satisfied if, as of the quarter preceding the expiration of the
term of the Tax Letter of Credit, Buyer is reasonably satisfied that all
liabilities of the Company in respect of Taxes for the period prior to Closing
including but not limited to those matters described in Schedule 3.11(d) of the
Disclosure Schedule have been resolved and that all Taxes of the Company for the
period prior to the Closing have been paid by or on behalf of Parent. The
parties further acknowledge that Parent may replace the Letter of Credit or the
Tax Letter of Credit with substantially similar letters of credit from a
recognized financial institution upon the expiration of the Credit Agreement,
which agreement is scheduled to expire on or about the last business day of
March, 2003.
7.3 Buyer's Indemnification. Subject to the limitations contained in Section 7.5
and Section 7.7, Buyer shall indemnify, defend and hold harmless, each of Seller
and Parent and their respective Affiliates (the "Seller Indemnitees"), from and
against, and pay or reimburse the Seller Indemnitees for, all Damages incurred
by the Seller Indemnitees, relating to or arising from:
(a) Buyer's breach of any of its covenants or agreements contained in this
Agreement;
(b) any inaccuracy or misrepresentation in or breach of any representation or
warranty of Buyer contained in this Agreement; and
(c) except for the Excluded Liabilities, any Liabilities of the Company arising
from and after the Closing Date.
7.4 Method of Asserting Claims.
7.4.1 Third Party Claims.
(a) A Person seeking indemnification under this Article VIII (an "Indemnified
Person") shall give written notification to the Person from whom indemnification
is sought (the "Indemnifying Person") of the commencement of any suit or
proceeding relating to a third party claim or any other assertion of Liabilities
by a third party (a "Third Party Claim") which the Indemnified Person has a
reasonable basis to believe may give rise to any Damages for which
indemnification pursuant to this Article VIII may be sought. Such notification
shall be given within ten (10) Business Days after the Indemnified Person
receives notice of such Third Party Claim, and shall describe the nature of, and
(to the extent known by the Indemnified Person) the facts constituting the basis
for, such Third Party Claim and the amount of the claimed Damages; provided,
however, that no delay on the part of the Indemnified Person in notifying the
Indemnifying Person shall relieve the Indemnifying Person of any Liability or
obligation hereunder except to the extent of any Damages caused by or arising
out of such delay. Such notice shall be accompanied by copies of all material
relevant documentation with respect to such Third Party Claim, including, but
not limited to, any summons, complaint or other pleading which may have been
served, any written demand or any other documentation.
(b) Within thirty (30) days after delivery of such notification, the
Indemnifying Person may, upon written notice thereof to the Indemnified Person,
assume control of the defense of such suit or proceeding with counsel reasonably
satisfactory to the Indemnified Person. If the Indemnifying Person does not so
assume control of such defense, the Indemnified Person shall control such
defense. The party not controlling such defense (the "Non-Controlling Party")
may participate therein at its own expense. The party controlling such defense
(the "Controlling Party") shall keep the Non-Controlling Party advised of the
status of such suit or proceeding and the defense thereof and shall consider in
good faith recommendations made by the Non-Controlling Party with respect
thereto. The Non-Controlling Party shall furnish the Controlling Party with such
information as it may have with respect to such suit or proceeding (including
copies of any summons, complaint or other pleading that may have been served on
such party and any written claim, demand, invoice, billing or other document
evidencing or asserting the same) and shall otherwise cooperate with and assist
the Controlling Party in the defense of such suit or proceeding. The
Indemnifying Person shall not agree to any settlement of, or the entry of any
judgment arising from, any such suit or proceeding without the prior written
consent of the Indemnified Person, which shall not be unreasonably withheld or
delayed. The Indemnified Person shall not agree to any settlement of, or the
entry of any judgment arising from, any such suit or proceeding without the
prior written consent of the Indemnifying Person, which shall not be
unreasonably withheld or delayed.
(c) With respect to the indemnity obligation of Seller and Parent under Section
7.2(d), the parties acknowledge that Buyer shall, or shall cause the Company, to
notify Seller and Parent of any developments with respect to the Company's Taxes
for the period prior to Closing, including not limited to any developments with
respect to the matters set forth in Section 3.11 of the Disclosure Schedule. The
parties further acknowledge that Parent and Seller have the right to communicate
with Governmental Authorities with respect to such Tax matters from and after
the Closing Date prior to formal demands by any Governmental Authority in
respect of Taxes of or related the Company for the period prior to the Closing.
(d) Notwithstanding the foregoing provisions of this Section 7.4.1, in the event
a Third-Party Claim is made against an Indemnified Person as to which such
Indemnified Person is entitled to seek indemnification hereunder and (i) such
Indemnified Person reasonably concludes that the Indemnifying Person lacks the
financial and personnel resources to vigorously defend such Indemnified Person,
or that the Indemnifying Person is not diligently defending such Indemnified
Person, or (ii) if there is a reasonable probability that a Third Party Claim
may materially and adversely affect an Indemnified Person other than as a result
of money damages or money payments, then in each such case the Indemnified
Person may elect to retain the defense of such Third-Party Claim and will be
entitled to be reimbursed by the Indemnifying Person for the Indemnified
Person's reasonable expenses incurred in such defense, such expenditures to be
reimbursed promptly after submission of invoices therefor.
7.4.2 Indemnification Claims by the Parties. In order to seek indemnification
under this Article VII, an Indemnified Person shall give written notification (a
"Claim Notice") to the Indemnifying Person which contains (i) a description and
the amount, if known (the "Claimed Amount"), including the basis therefor, of
any Damages incurred by the Indemnified Person, (ii) a statement that the
Indemnified Person is entitled to indemnification under this Article VII for
such Damages and a reasonable explanation of the basis therefor, and (iii) a
demand for payment in the amount of such Damages, if known, subject to the
limitations contained in this Article VII.
7.5 Limitations; Sole Recourse..
7.5.1 Sole Recourse. The parties hereto expressly acknowledge that the sole
recourse of the parties for any breach of this Agreement subsequent to the
Closing, or the inaccuracy of any representation or warranty in this Agreement
by the other party, is that set forth in Section 6.1 and this Article VII.
7.6 Limitation on Obligations of Seller and Parent. The obligations of Seller
and Parent under Section 7.2 shall be subject to the following limitations:
(a) the aggregate Liability of Seller and Parent to indemnify the Buyer
Indemnitees pursuant to Section 7.2(b) of this Agreement shall not exceed
$2,500,000;
(b) Each of Seller and Parent shall have no obligation to indemnify the Buyer
Indemnitees pursuant to Section 7.2(b) of this Agreement unless and until the
aggregate amount of Damages incurred by the Buyer Indemnitees exceeds $100,000,
after which time Seller and Parent shall collectively be liable to indemnify the
Buyer Indemnitees fully for all Damages incurred by the Buyer Indemnitees in
excess of $100,000;
(c) The obligations of Seller and Parent to indemnify the Buyer Indemnitees
pursuant to Sections 7.2(a), 7.2(c) and 7.2(d) of this Agreement shall not be
subject to any cap or other limitation; and
(d) the fact that any Excluded Liability is the subject matter of a
representation or warranty that has terminated, or for which indemnification is
limited as set forth in this Section 7.6, shall not limit or affect in any
respect of the indemnification obligations of Seller and Parent with respect to
such Excluded Liability.
7.7 Limitation on Buyer's Obligations. Buyer's obligations under Section 7.3
shall be subject to the following limitations:
(a) the aggregate Liability of Buyer to indemnify the Seller Indemnitees
pursuant to Section 7.3(b) of this Agreement shall not exceed $2,500,000;
(b) Buyer shall have no obligation to indemnify the Seller Indemnitees pursuant
to Section 7.3(b) of this Agreement unless and until the aggregate amount of
Damages incurred by the Seller Indemnitees exceeds $100,000, after which time
Buyer shall be liable to indemnify the Seller Indemnitees fully for all Damages
incurred by the Seller Indemnitees in excess of $100,000.
ARTICLE 8
MISCELLANEOUS
8. Miscellaneous.
8.1 Retention of Records. After the Closing Date, copies of all books,
management, contracts and records of Seller and its Affiliates relating to the
Company prior to the Closing Date shall, for a period of six years following the
Closing Date, be made available promptly, at the written request of Seller and
at Seller's expense, to Seller and its authorized representatives, accountants
and attorneys for any reasonable business purpose.
8.2 Assignment. No party hereto may assign or transfer its rights or obligations
arising under this Agreement, without the prior written consent of the other
party hereto, which consent shall not be unreasonably withheld; provided,
however, that Seller shall be permitted to assign its right to receive cash
under this Agreement to one or more of its Affiliates, and provided further that
Buyer shall be permitted to assign its rights hereunder in connection with any
sale of the Business or a division of Buyer that operates the Business
subsequent to the date hereof. This Agreement shall be binding upon and shall
inure to the benefit of the respective successors and assigns of the parties.
8.3 Notice. All notices and other communications provided for herein shall be by
facsimile transmission, or in writing and telecopied, or delivered by a
nationally recognized overnight delivery service, to the intended recipient at
the telephone number, telecopier number, or "Address for Notices" specified:
If to Buyer to: MagneTek, Inc.
26 Century Boulevard
Nashville, Tennessee 37214
Attention: Samuel A. Miley, Esq.
Telephone: (615) 316-5260
Telecopy: (615) 316-5192
with a copy to: Gibson, Dunn & Crutcher LLP
333 South Grand Avenue
Los Angeles, California 90071
Attention: Jennifer Bellah Maguire, Esq.
Telephone: (213) 229-7986
Telecopy: (213) 229-7520
If to Parent or Seller: Morris Material Handling, Inc.
4915 South Howell Avenue
Milwaukee, Wisconsin 53207
Attention: President
Telephone: (414) 764-6200
Telecopier: (414) 486-6144
with a copy to: Morris Material Handling, Inc.
315 West Forest Hill Ave
Oak Crest, Wisconsin 53184-2999
Attention: President
Telephone: (414) 486-6100
Telecopier: (414) 486-6146
and a copy to: Blake, Cassels & Graydon
Commerce Court West, Suite 2300
Toronto, Ontario
M5L 1A9
Attention: Managing Partner
Telephone: (416) 863-2400
Telecopier: (416) 863-2653
or, as to any party, at such other telecopier number, or address as shall be
designated by such party in a notice to the other parties. Except as otherwise
provided in this Agreement, all notices and other communications hereunder shall
be deemed to have been duly given when transmitted by telecopier or, if
delivered by overnight delivery service, one Business Day after mailing.
8.4 Entire Agreement.
8.4.1 Other Agreements. This Agreement, together with the Exhibits and the
Disclosure Schedule hereto and all other agreements entered into pursuant to
this Agreement, contain the entire understanding between the parties hereto
concerning the subject matter hereof, and supersedes and terminate any and all
prior representations, warranties, undertakings, covenants and agreements
between the parties.
8.4.2 Modification. This Agreement may not be changed, modified, altered or
terminated except by an agreement in writing executed by Buyer and Seller.
8.5 Third Parties. Except as expressly set forth herein (including, without
limitation, the provisions of Article VIII), nothing herein expressed or implied
is intended or shall be construed to confer upon or give to any Person or entity
other than the parties hereto and their successors or permitted assigns, any
rights or remedies under or by reason of this Agreement.
8.6 Captions. Captions and descriptive headings are for convenience of reference
only and shall not control or affect the meaning or construction of any
provisions of this Agreement.
8.7 Waiver. No waiver of a breach of, or default under, any provision of this
Agreement shall be deemed a waiver of such provision or of any subsequent breach
or default of the same or similar nature or of any other provision or condition
of this Agreement.
8.8 Rights Cumulative. Except as set forth herein, all rights, powers and
remedies herein given to Buyer, Seller and Parent are cumulative and not
alternative, and are in addition to all statutes or rules of law.
8.9 Governing Law; Submission to Jurisdiction. This Agreement, and the rights
and obligations of Buyer, Seller and Parent hereunder, shall be governed by and
construed in accordance with the internal laws of the Province of Ontario
applicable to contracts made and to be performed therein. Each of the parties
hereto submits to the jurisdiction of any state or federal court sitting in the
Province of Ontario, in any action or proceeding arising out of or relating to
this Agreement and agrees that all claims in respect of the action or proceeding
may be heard and determined in such court. Each of Buyer, Seller and Parent
agree to appoint and maintain an agent for service of process in the Province of
Ontario and each of the parties hereto hereby waives any defense of inconvenient
forum to the maintenance of any action or proceeding so brought and waives any
bond, surety, or other security that might be required of any other party with
respect thereto.
8.10 Attorney for Service. Seller and Parent irrevocably appoint Blake, Cassels
and Graydon, Box 25 Commerce Court West, Toronto, Ontario M5L 1A9, and Buyer
irrevocably appoints McMillan Binch, Royal Bank Plaza, Suite 3800, South Tower,
Toronto, Ontario M5J 2J7, as their respective authorized attorney and agent to
accept and acknowledge, for and on behalf of the respective attorning party,
service or any and all process in the Province of Ontario, Canada in any suit,
agrees that service of process upon such attorney and agent by delivering a copy
thereof, addressed to the respective attorney, in care of such attorney and
agent, at the above address, shall be conclusively deemed to have come to the
notice of the respective attorning party at the time of such delivery and shall
constitute in every respect valid and effective personal service upon the
respective attorning party at the time of such delivery, and that failure by
such attorney and agent to give notice of such service to the respective
attorning party shall not affect the validity or effect of such service or any
judgment or order based thereon or arising therefrom. Each of the attorning
parties irrevocably authorizes and directs such attorney and agent to accept
service on its behalf and agrees to appear in such suit, action or proceeding.
Each of the attorning parties further agrees to take all action as may be
necessary to confirm and continue in full force and effect the appointment of
such attorney and agent for so long as a party to the Agreement continues to
have obligations outstanding in respect of the Agreement.
8.11 Severability. If any provision of this Agreement or the application thereof
to any Person or circumstance, is held invalid, such invalidity shall not affect
any other provision which can be given effect without the invalid provision or
application, and to this end the provisions hereof shall be severable.
8.12 Costs, Expenses, Etc. Except as expressly provided elsewhere herein, each
of Seller, Parent, the Company and Buyer shall bear all costs and expenses
incurred by it and its respective Affiliates in connection with this Agreement
and in the preparation for and consummation of the transactions provided for
herein.
8.13 Specific Performance. Seller and Buyer hereby agree that Buyer shall be
entitled, in addition to any other remedies or damages available to Buyer in the
event of any breach of this Agreement by Seller or Parent, to specific
performance of the obligations of Seller or Parent, as the case may be, under
this Agreement.
8.14 Counterparts. This Agreement may be executed in any number of counterpart
copies, each of which shall be deemed an original, but which together shall
constitute a single instrument. This Agreement may be executed by facsimile
signatures.
<PAGE>
8.15 Further Assurances. Subject to the terms and conditions of this Agreement,
each of the parties hereto agrees to execute and deliver all such other
documents, certificates and agreements and to take, or cause to be taken, all
actions, and to do, or cause to be done, anything else that may reasonably be
deemed necessary to perfect and give effect to the transactions contemplated by
this Agreement.
IN WITNESS WHEREOF, the parties have duly executed this Agreement as of
the date first above written.
MORRIS MATERIAL HANDLING, INC.
By:
Name:
Title:
3016117 NOVA SCOTIA ULC
By:
Name:
Title:
By:
Name:
Title:
MAGNETEK MONDEL HOLDING, ULC
By:
Name:
Title:
By:
Name:
Title:
<PAGE>
Exhibit A
April Balance SheeT
<PAGE>
EXHIBIT B
FORM OF LETTER OF CREDIT
<PAGE>
EXHIBIT C
FORM OF TAX LETTER OF CREDIT
<PAGE>
SCHEDULE 1
Disclosure schedule
<PAGE>
SCHEDULE 2
ALLOCATION OF PURCHASE PRICE FOR U.S. TAX
<PAGE>
SHARE PURCHASE AGREEMENT
BY AND AMONG
3016117 NOVA SCOTIA ULC
AND
MAGNETEK MONDEL HOLDING ULC
AND
MORRIS MATERIAL HANDLING, INC.,
Regarding the sale of all the
shares in the capital of
Mondel ULC
dated as of
December _____, 1999
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
Page
-i-
<S> <C> <C>
ARTICLE 1 DEFINITIONS....................................................................................1
1. Definitions....................................................................................1
1.1 Defined Terms..................................................................................1
1.2 Accounting Terms...............................................................................8
1.3 Exhibits and Schedules.........................................................................8
1.4 Other Definition Provisions....................................................................9
ARTICLE 2 PURCHASE OF SHARES; PURCHASE PRICE.............................................................9
2. Purchase of the Shares, Purchase Price and Method of Payment...................................9
2.1 Purchase of the Shares.........................................................................9
2.2 Consideration..................................................................................9
2.2.1 Purchase Price........................................................................9
2.2.2 Payment of Purchase Price at Closing..................................................9
2.3 Purchase Price Adjustment......................................................................9
2.3.1 Estimated Closing Balance Sheet.......................................................9
2.3.2 Final Closing Balance Sheet..........................................................10
2.3.3 Access...............................................................................10
2.3.4 Delivery and Review..................................................................10
2.3.5 Resolution...........................................................................10
2.3.6 Post-Closing Adjustments.............................................................11
ARTICLE 3 REPRESENTATIONS AND WARRANTIES RELATING TO THE COMPANY AND THE BUSINESS.......................12
3. Representations and Warranties Relating to the Company and the Business.......................12
3.1 Organization and Standing; Capitalization.....................................................12
3.1.1 Organization and Standing............................................................12
3.1.2 Capitalization; Corporate Structure..................................................12
3.2 No Contravention..............................................................................13
3.3 Tangible Assets...............................................................................13
3.3.1 Title................................................................................13
3.3.2 Asset Rights.........................................................................13
3.3.3 Condition of Assets..................................................................13
3.4 Licenses......................................................................................14
3.5 Contracts.....................................................................................14
3.6 Intellectual Property Rights..................................................................15
3.7 Employees; Plans..............................................................................16
3.8 Financial Statements..........................................................................19
3.9 Absence of Certain Changes....................................................................19
3.10 Litigation; Compliance........................................................................20
3.11 Taxes.........................................................................................20
3.12 Environmental Matters.........................................................................21
3.13 Insurance.....................................................................................22
3.14 Brokers.......................................................................................22
3.15 Product Warranty and Product Liability........................................................22
3.16 Affiliate Transactions........................................................................23
3.17 Customers.....................................................................................23
3.18 Backlog.......................................................................................23
3.19 Year 2000.....................................................................................23
3.20 Satisfaction of Intercompany Accounts.........................................................23
ARTICLE 4 REPRESENTATIONS AND WARRANTIES OF SELLERS.....................................................24
4. Representations and Warranties of Seller and Parent...........................................24
4.1 Organization and Standing.....................................................................24
4.2 Authorization and Binding Obligations.........................................................24
4.3 No Contravention; Consents....................................................................24
4.3.1 No Contravention.....................................................................24
4.3.2 Consent..............................................................................24
4.4 Tax Status....................................................................................25
4.5 Brokers.......................................................................................25
ARTICLE 5 REPRESENTATIONS AND WARRANTIES OF BUYER.......................................................25
5. Representations and Warranties of Buyer.......................................................25
5.1 Organization and Standing.....................................................................25
5.2 Authorization and Binding Obligations.........................................................25
5.3 No Contravention; Consents....................................................................25
5.3.1 No Contravention.....................................................................25
5.3.2 Consents.............................................................................26
5.4 Brokers.......................................................................................26
5.5 Litigation; Compliance........................................................................26
5.6 Financial Capacity............................................................................26
5.7 Sophistication; Due Diligence.................................................................26
5.8 Purchase for Investment.......................................................................26
ARTICLE 6 COVENANTS OF THE PARTIES......................................................................27
6. Covenants of the Parties......................................................................27
6.1 Tax Matters...................................................................................27
6.2 Regulatory Filings............................................................................29
6.2.1 Cooperation..........................................................................29
6.2.2 Certain Filings......................................................................29
6.3 Employee Matters..............................................................................29
6.4 Collateral Agreements.........................................................................29
6.5 Refunds in Respect of Audits/Taxes............................................................29
ARTICLE 7 INDEMNIFICATION...............................................................................30
7. Indemnification...............................................................................30
7.1 Survival......................................................................................30
7.2 Indemnification by Seller and Parent..........................................................30
7.3 Buyer's Indemnification.......................................................................31
7.4 Method of Asserting Claims....................................................................32
7.4.1 Third Party Claims...................................................................32
7.4.2 Indemnification Claims by the Parties................................................33
7.5 Limitations; Sole Recourse....................................................................33
7.5.1 Sole Recourse........................................................................33
7.6 Limitation on Obligations of Seller and Parent................................................33
7.7 Limitation on Buyer's Obligations.............................................................34
ARTICLE 8 MISCELLANEOUS.................................................................................34
8. Miscellaneous.................................................................................34
8.1 Retention of Records..........................................................................34
8.2 Assignment....................................................................................34
8.3 Notice........................................................................................34
8.4 Entire Agreement..............................................................................36
8.4.1 Other Agreements.....................................................................36
8.4.2 Modification.........................................................................36
8.5 Third Parties.................................................................................36
8.6 Captions......................................................................................36
8.7 Waiver........................................................................................36
8.8 Rights Cumulative.............................................................................36
8.9 Governing Law; Submission to Jurisdiction.....................................................36
8.10 Attorney for Service..........................................................................36
8.11 Severability..................................................................................37
8.12 Costs, Expenses, Etc..........................................................................37
8.13 Specific Performance..........................................................................37
8.14 Counterparts..................................................................................37
8.15 Further Assurances............................................................................38
</TABLE>
INTELLECTUAL PROPERTY TRANSFER AGREEMENT
This Agreement, dated as of December 16, 1999
BETWEEN:
MHE TECHNOLOGIES, INC., a corporation organized and existing
under the laws of the State of Delaware,
(the "Transferor")
- and -
MONDEL ULC., an unlimited liability company organized and
existing under the laws of province of Nova Scotia
(the "Transferee")
WHEREAS:
A. The Transferor was established as an indirect subsidiary of Morris
Material Handling, Inc., a corporation existing under the laws of the
State of Delaware, for the purpose of providing a separate, single
entity for owning certain intellectual property used in the Material
Handling Division of Harnischfeger Corporation, a corporation existing
under the laws of the State of Delaware ("HarnCo").
B. Effective October 10, 1997, HarnCo assigned to the Transferor its
entire right, title and interest in and to certain letters patent,
patent applications, inventions, improvements, know-how and technical
or other proprietary information, used by HarnCo's then Material
Handling Division, pursuant to the Assignment of Patents, Inventions
and Know-How Agreement effective as of October 10, 1997 by and between
HarnCo and Grantor (the "October 1997 Intellectual Property Assignment
Agreement").
C. Effective October 10, 1997, HarnCo assigned to the Transferor its
entire right, title and interest in and to certain registered
trademarks and service marks and the registrations therefor and certain
common law trademarks, service marks and trade names together with the
goodwill symbolized by and associated therewith, which was previously
used by HarnCo's then Material Handling Division, pursuant to the
Trademark and Goodwill Assignment Agreement effective as of October 10,
1997 by and between HarnCo and the Transferor (the "October 1997
Trademark Assignment Agreement").
D. The Transferee is desirous of obtaining from the Transferor, and the
Transferor is desirous of transferring to the Transferee, certain
intellectual property assets previously licensed by the Transferor to
the Transferee pursuant to a Technology Sharing Agreement between
Harnco and the Transferee dated as of November 1, 1996 (the "Technology
Sharing Agreement"), which agreement has been terminated.
E. Capitalized terms not defined herein have the meanings ascribed in the
share purchase agreement dated the date hereof between 3016117 Nova
Scotia ULC, MagneTek Mondel Holding ULC and Morris Material Handling,
Inc. relating to the purchase and sale of all of the issued and
outstanding shares in the capital of the Transferee.
NOW THEREFORE, for the consideration contemplated herein, the receipt and
sufficiency of which is acknowledged, the Transferor and the Transferee hereby
agree as follows:
1. TRANSFER OF INTELLECTUAL PROPERTY
The Transferor does hereby ASSIGN, SELL, TRANSFER and CONVEY
to the Transferee, its successors, assigns, and other legal
representatives, the Transferor's entire right, title, and interest in
and to the intellectual property assets listed on Schedule 1
(collectively, the "Transferred Intellectual Property"), and the
Transferee hereby accepts such assignment. This assignment shall
include the right to sue for and recover from past and future
violations in connection with or related to the Transferred
Intellectual Property.
2. PAYMENT OF PURCHASE PRICE
The purchase price for the Transferred Intellectual Property
shall be $1,250,000 payable in United States dollars by the Transferee
to the Transferor in accordance with a written direction from the
Transferor to the Transferee delivered by the Transferor to the
Transferee in connection with the execution of this Agreement.
3. REPRESENTATION AND WARRANTY
The Transferor warrants that at the time of execution of this
Agreement, subject to the rights of third parties identified in the
October 1997 Intellectual Property Assignment Agreement and the October
1997 Trademark Assignment Agreement, the Transferor has not received,
and is unaware of, any third party claims contesting or disputing its
ownership rights to the Transferred Intellectual Property, and further
warrants that the Transferor has the right to assign the Transferred
Intellectual Property, such assignment including the right to sue for
and recover from past and future violations in connection with or
related to the Transferred Intellectual Property.
4. GOVERNING LAW
This Agreement shall be governed by and construed in
accordance with the laws of the Province of Ontario without giving
effect to any choice or conflict of law provision or rule that would
cause the application of laws of any jurisdiction other than the
Province of Ontario.
5. COUNTERPARTS
This Agreement may be executed in counterparts, each of which
shall be deemed to be an original, but all of which taken together
shall constitute one and the same instrument. This Agreement may be
executed by facsimile signatures.
6. ASSIGNMENT
Neither party may assign or transfer its rights or obligations
arising under this Agreement without the prior written consent of the
other party hereto, which consent shall not be unreasonably withheld;
provided, however that the Transferee shall be permitted to assign its
rights and obligations hereunder to an Affiliate without obtaining the
prior written consent of the Transferor.
7. SUPPLY OF KITS AND PANELS
Until such time that the Transferor has completed the transfer
of the kit and panel technology (as defined in Schedule 1) in a manner
sufficient to allow the Transferee to independently manufacture the
kits and panels for its own benefit, the Transferor shall supply kits
and panels (as defined in Schedule 1), or cause such kits and panels to
be supplied, to the Transferee consistent with current practice (and in
addition, a one (1) year repair or replacement warranty) for a period
of one (1) year from the date hereof, a description of such current
practices being attached hereto as Schedule 2. The Transferor shall
commence the transfer of the kit and panel technology within thirty
(30) days from the date of this Agreement and shall use its
commercially reasonable efforts to complete such transfer within ninety
(90) days thereafter.
The Transferor will provide such assistance, training and
information as the Transferee may reasonably request, at no charge to
the Transferee, in connection with the Transferred Intellectual
Property described in Schedule 2 in connection with the use of such
Transferred Intellectual Property by the Transferee and the
commencement by it of the manufacture and sale of the products to which
such Transferred Intellectual Property relates.
<PAGE>
8. FURTHER ASSURANCES
Each of the Transferor and the Transferee agrees to execute
and deliver all such other documents, certificates and agreements and
to take, or cause to be taken, all actions, and to do, or cause to be
done, anything else that may reasonably be deemed necessary to perfect
and give effect to the transactions contemplated by this Agreement
IN WITNESS WHEREOF, the parties have executed this agreement as of the date
noted above.
MHE TECHNOLOGIES, INC.
By:
Name:
Title:
MONDEL ULC
By:
Name:
Title:
<PAGE>
- 1 -
SCHEDULE 1
TRANSFERRED INTELLECTUAL PROPERTY
1. "Mondel" common law trademark, as listed on Exhibit C of the Trademark and
Goodwill Assignment Agreement effective as of October 10, 1997, and "Mondel
Engineering" trade name, and all goodwill associated therewith.
2. Proprietary know how for selection criteria for brakes to be used in movable
structures, and selection criteria for coils used in both brakes and magnets.
3. Computer programs for coil winding control.
4. Processes for coil winding of aluminium strip for use in magnets, and coil
winding of copper wire/strip for use in brakes and magnets.
5. All related service manuals and price books.
6. License with Boxmag Rapid Limited as referred to in both the Trademark and
Goodwill Assignment Agreement effective as of October 10, 1997 by and between
Harnischfeger Corporation and MHE Technologies, Inc., and the Assignment of
Patents, Inventions and Know-How Agreement effective as of October 10, 1997 by
and between Harnischfeger Corporation and MHE Technologies, Inc.
7. Notwithstanding anything else in this Schedule 1, Transferred Intellectual
Property does not include any intellectual property related to or which may be
applied to internally mounted disc brakes.
8. All technology needed by the Transferee to independently manufacture
hydraulic brake kits ("kits") and brake rectifier panels ("panels") that have
been supplied to the Transferee by the Transferor and/or by Morris Material
Handling , Inc., such technology to include drawings, patterns, parts lists,
information about suppliers, and related manufacturing know-how (collectively,
the "kit and panel technology").
<PAGE>
SCHEDULE 2
SUPPLY OF KITS AND PANELS
[Please see attached.]
- ----------------------------------- ----------------------------
Name Jurisdiction of Organization
- ----------------------------------- ----------------------------
3016117 Nova Scotia ULC Nova Scotia
Birmingham Crane & Hoist, Inc. Alabama
Butters Engineering Services Limited Scotland
EPH Material Handling, LLC Pennsylvania
Harnischfeger Distribution & Service, LLC Wisconsin
Morris Material Handling Mexico S.A. de C.V. Mexico
HPH Material Handling, LLC Wisconsin
Hydramach ULC Nova Scotia
Invercoe Engineering Limited Scotland
Kaverit Steel and Crane ULC Nova Scotia
Linear Motors Limited U.K.
Lowfile Limited U.K.
Material Handling Equipment Nevada Corporation Nevada
Merwin, LLC Delaware
MHE Technologies, Inc. Delaware
MHE Canada ULC Canada
MMH (Holdings) Limited U.K.
MMH International Limited U.K.
Mondel ULC Nova Scotia
Morris Blooma Pte Ltd. Singapore
Morris Material Handling, Inc. Delaware
Morris Material Handling, LLC Delaware
Morris Material Handling Limited U.K.
Morris Material Handling Equipment Limited U.K.
Morris Mechanical Handling (Pty.) Limited South Africa
MPH Crane, Inc. Ohio
P&H Middle East Ltd. Cayman Islands
PHME Service, Inc. Delaware
PHMH Holding Company Delaware
RedCrown, ULC U.K.
Royce Limited U.K.
SPH Crane & Hoist, Inc. Delaware
U.K. Crane Services Limited U.K.
The Vaughan Crane Company Limited U.K.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from
financial information for MMH Holdings, Inc. and is qualifified in
its entirety by reference to such financial statements.
</LEGEND>
<CIK> 0001060948
<NAME> MMH Holdings, Inc.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> OCT-31-1999
<PERIOD-START> NOV-01-1998
<PERIOD-END> OCT-31-1999
<CASH> 3,929
<SECURITIES> 0
<RECEIVABLES> 66,206
<ALLOWANCES> (1,725)
<INVENTORY> 39,994
<CURRENT-ASSETS> 116,246
<PP&E> 71,803
<DEPRECIATION> (30,829)
<TOTAL-ASSETS> 226,836
<CURRENT-LIABILITIES> 353,064
<BONDS> 2,784
108,245
0
<COMMON> 0
<OTHER-SE> (239,068)
<TOTAL-LIABILITY-AND-EQUITY> 226,836
<SALES> 294,195
<TOTAL-REVENUES> 294,587
<CGS> 218,703
<TOTAL-COSTS> 291,142
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 30,027
<INCOME-PRETAX> (26,582)
<INCOME-TAX> (71,680)
<INCOME-CONTINUING> (98,205)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (98,205)
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from
financial information for Morris Material Handling, Inc. and is qualifified in
its entirety by reference to such financial statements.
</LEGEND>
<CIK> 0001060951
<NAME> Morris Material Handling, Inc.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> OCT-31-1999
<PERIOD-START> NOV-01-1998
<PERIOD-END> OCT-31-1999
<CASH> 3,929
<SECURITIES> 0
<RECEIVABLES> 66,206
<ALLOWANCES> (1,725)
<INVENTORY> 39,994
<CURRENT-ASSETS> 116,246
<PP&E> 71,803
<DEPRECIATION> (30,829)
<TOTAL-ASSETS> 226,836
<CURRENT-LIABILITIES> 353,064
<BONDS> 2,784
0
0
<COMMON> 0
<OTHER-SE> (130,823)
<TOTAL-LIABILITY-AND-EQUITY> 226,836
<SALES> 294,195
<TOTAL-REVENUES> 294,587
<CGS> 218,703
<TOTAL-COSTS> 291,142
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 30,027
<INCOME-PRETAX> (26,582)
<INCOME-TAX> (71,680)
<INCOME-CONTINUING> (98,205)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (98,205)
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
