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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
/X/ Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended October 31, 2000.
/ / Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from _________ to ________.
Commission file number 1-9299
HARNISCHFEGER INDUSTRIES, INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware 39-1566457
(State or Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
3600 South Lake Drive, St. Francis, Wisconsin 53235-3716
(Address of Principal Executive Office) (Zip Code)
Registrant's Telephone Number, Including Area Code: (414) 486-6400
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Title of Each Class
Common Stock, $1 Par Value
Preferred Stock Purchase Rights
Indicate by check mark whether the registrant (1) has 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, and (2) has 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 registrant's 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/
The aggregate market value of Registrant's Common Stock held by
non-affiliates, as of January 9, 2001, based on a closing price of $0.085 per
share, was approximately $4.1 million.
The number of shares outstanding of Registrant's Common Stock, as of
January 11, 2001, was 47,949,089.
HARNISCHFEGER INDUSTRIES, INC.
(Debtor-in-Possession as of June 7, 1999)
INDEX TO
ANNUAL REPORT ON FORM 10-K
For The Year Ended October 31, 2000
Page
Part I
Item 1. Business.....................................................3
Item 2. Properties..................................................10
Item 3. Legal Proceedings...........................................12
Item 4. Submission of Matters to a Vote
of Security Holders.........................................14
Part II
Item 5. Market for Registrant's Common
Equity and Related Stockholder Matters......................15
Item 6. Selected Financial Data.....................................15
Item 7. Management's Discussion and Analysis
of Financial Condition and Results of Operations............18
Item 7a. Quantitative and Qualitative Disclosures
About Market Risk...........................................34
Item 8. Financial Statements and Supplementary Data.................35
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure......................35
Part III
Item 10. Directors and Executive Officers of the
Registrant..................................................36
Item 11. Executive Compensation......................................40
Item 12. Security Ownership of Certain Beneficial
Owners and Management.......................................45
Item 13. Certain Relationships and Related Transactions..............46
Part IV
Item 14. Exhibits, Financial Statement Schedules,
and Reports on Form 8-K.....................................47
Signatures ..........................................................F-57
PART I
Item 1. Business
General
Harnischfeger Industries, Inc. ("Harnischfeger" or the "Company") is the
direct successor to a business begun over 115 years ago which, at October 31,
2000, through its subsidiaries, manufactures and markets products classified
into two business segments: surface mining equipment (P&H Mining Equipment or
"P&H") and underground mining machinery (Joy Mining Machinery or "Joy"). P&H is
a major producer of surface mining equipment for the extraction of ores and
minerals and provides extensive operational support for many types of equipment
used in surface mining. Joy is a major manufacturer of underground mining
equipment for the extraction of bedded minerals and offers comprehensive service
locations near major mining regions worldwide.
This document contains forward-looking statements. When used in this
document, terms such as "anticipate", "believe", "estimate", "expect",
"indicate", "may be", "objective", "plan", "predict", "will be", and the like
are intended to identify such statements. Forward-looking statements are subject
to certain risks, uncertainties and assumptions that could cause actual results
to differ materially from those projected, including without limitation those
described below under the heading "Cautionary Factors".
Reorganization Under Chapter 11
On June 7, 1999, the Company and substantially all of its domestic
operating subsidiaries (collectively, the "Debtors") filed voluntary petitions
for reorganization under Chapter 11 of the U.S. Bankruptcy Code (the "Bankruptcy
Code") in the United States Bankruptcy Court for the District of Delaware (the
"Bankruptcy Court") and orders for relief were entered. The Debtors include the
Company's principal domestic operating subsidiaries, Joy Mining Machinery and
P&H Mining Equipment. The Debtors' Chapter 11 cases are jointly administered for
procedural purposes only under case number 99-2171. The Debtors also include
Beloit Corporation ("Beloit"), the Company's other principal operating
subsidiary at the time of the bankruptcy filing. See Note 3 - Discontinued
Operations in Notes to Consolidated Financial Statements.
On October 26, 2000, the Debtors filed their proposed disclosure statement
and plan of reorganization with the Bankruptcy Court. The disclosure statement
and plan of reorganization were subsequently amended and, on December 20, 2000,
the Bankruptcy Court approved the amended disclosure statement. The disclosure
statement sets forth certain information regarding, among other matters,
significant events that occurred during the Company's Chapter 11 case and the
anticipated organization, operation and financing of reorganized Harnischfeger
Industries, Inc. The disclosure statement also describes the Debtors' proposed
plan of reorganization, certain effects of confirmation of the plan of
reorganization, certain risk factors associated with securities to be issued
under the plan, and the manner in which distributions would be made to the
Company's creditors under the proposed plan. In addition, the disclosure
statement discusses the confirmation process and the voting procedures that
holders of claims must follow for their votes to be counted. The Bankruptcy
Court set January 30, 2001 as the deadline for voting on the Debtors' plan of
reorganization. Debtors' plan of reorganization confirmation hearing is
scheduled for March 5, 2001. If the plan is approved by creditors and the
Bankruptcy Court, the Debtors anticipate emerging from bankruptcy in the spring
of 2001.
In general, the Debtors' proposed plan of reorganization provides that the
existing Harnischfeger common stock would be cancelled and that the creditors of
Harnischfeger would be issued new common stock in reorganized Harnischfeger. As
a result, if the plan is confirmed, current shareholders of Harnischfeger would
receive nothing. Most creditors of P&H and Joy would receive new five-year,
10.75% senior notes issued by reorganized Harnischfeger and guaranteed by
reorganized P&H and reorganized Joy. In certain circumstances, such creditors
could receive a portion of the new common stock. Creditors of Beloit and its
subsidiaries would receive the proceeds of the sale of the assets of Beloit and
its subsidiaries. A copy of Debtors' plan of reorganization and disclosure
statement may be obtained by calling Bankruptcy Management Corporation at
1-888-909-0100. A summary of Debtors' disclosure statement prepared by counsel
to the Equity Committee appointed by the Bankruptcy Court has been mailed to
shareholders. The Company disagrees with the Equity Committee's position
regarding valuation of the Company as set forth in the Equity Committee's
summary of the Company's disclosure statement.
Although the plan of reorganization provides for the Company's emergence
from bankruptcy, there can be no assurance that the plan will be confirmed by
the Bankruptcy Court or that the such plan will be consummated.
Discontinued Operation
On October 8, 1999, the Company announced its plan to dispose of its pulp
and paper machinery segment owned by Beloit and its subsidiaries (the "Beloit
Segment"). See Item 7 - Management's Discussion and Analysis of Financial
Condition and Results of Operations. This segment has been classified as a
discontinued operation as is more fully discussed in Note 3 - Discontinued
Operations in Notes to Consolidated Financial Statements included in Item 8 -
Financial Statements and Supplementary Data and Item 14 - Exhibits, Financial
Statement Schedules, and Reports on Form 8-K. Accordingly, Item 1 - Business and
Item 2 - Properties describe the Company's continuing businesses without the
Beloit Segment.
DIP Facility
On July 8, 1999, the Court approved a two-year, $750 million Revolving
Credit, Term Loan and Guarantee Agreement underwritten by The Chase Manhattan
Bank (the "DIP Facility"). In May, 2000, the Company voluntarily reduced the
size of the DIP Facility to $350 million and on July 6, 2000, an Order was
entered by the Bankruptcy Court approving an amendment to the DIP Facility
modifying the DIP Facility to consist of a Tranche A sub-facility of $250
million and a Tranche B sub-facility of $100 million. The Tranche A sub-facility
has a final maturity of June 6, 2001 (the original maturity date), and the
Tranche B sub-facility matured on December 31, 2000. See Note 3 - Discontinued
Operations in Notes to Consolidated Financial Statements. Additionally, as
permitted by the original order authorizing the DIP Facility, on August 3, 2000
the DIP Facility was further amended to, among other things, effect the
syndication of the DIP Facility among a group of nine lenders, with Chase
Manhattan Bank retaining the agent role. The DIP Facility is more fully
discussed in Item 7- Management's Discussion and Analysis of Financial Condition
and Results of Operations and Note 10 - Borrowings and Credit Facilities in
Notes to Consolidated Financial Statements included in Item 8 - Financial
Statements and Supplementary Data and Item 14 - Exhibits, Financial Statement
Schedules, and Reports on Form 8-K.
Surface Mining Equipment
P&H is the world's largest producer of electric mining shovels and, in
recent years, large walking draglines and is a major provider of manufacturing,
repair and support services for the surface mining industry through it's MinePro
Services group. In addition, P&H is a significant producer of large diameter
blasthole drills and dragline bucket products. P&H products are used in mines,
quarries and earth moving operations in the digging and loading of coal, copper,
gold, iron ore, oil sands, lead, zinc, bauxite, uranium, phosphate, stone, clay
and other minerals and ores. P&H MinePro Services personnel are strategically
located close to customers in major mining centers around the world to provide
service, training, repairs, rebuilds, used equipment services, parts and
enhancement kits.
Electric mining shovels range in capacity from 13 to 80 cubic yards.
Capacities for walking draglines range from 20 to 150 cubic yards. Blasthole
drill models have drilling diameters ranging from 9 to 22 inches and bit load
capacities from 70,000 to 150,000 pounds.
P&H has a relationship in the electric mining shovel business with Kobe
Steel, Ltd. ("Kobe") pursuant to which P&H licenses Kobe to manufacture certain
electric mining shovels and related replacement parts in Japan. P&H has the
exclusive right to market Kobe-manufactured mining shovels and parts outside
Japan. In addition, P&H is party to an agreement with a corporate unit of the
People's Republic of China licensing the manufacture and sale of two models of
electric mining shovels and related components. This relationship provides P&H
with an opportunity to sell component parts for shovels built in China.
Underground Mining Machinery
Joy is a leading manufacturer of underground mining equipment. It
manufactures and services mining equipment for the underground extraction of
coal and other bedded materials. Joy has significant facilities in Australia,
South Africa, the United Kingdom and the United States, as well as sales offices
in Poland, India, Russia, and the People's Republic of China. Joy products
include: continuous miners; complete longwall mining systems; longwall shearers;
roof supports; armored face conveyors; shuttle cars; continuous haulage systems;
battery haulers; flexible conveyor trains; and roof bolters. Joy also maintains
an extensive network of service and replacement parts distribution centers to
rebuild and service equipment and to sell replacement parts in support of its
installed base. This network includes eight service centers in the United States
and five outside of the United States, all of which are strategically located in
major underground mining regions.
Certain Financial Information
Financial information about our business segments and geographic areas of
operation is contained in Note 24 - Business Segment Information in Notes to
Consolidated Financial Statements included in Item 8 - Financial Statements and
Supplementary Data and Item 14 - Exhibits, Financial Statement Schedules, and
Reports on Form 8-K.
International Operations
Foreign sales of the Surface Mining Equipment segment generated
approximately 61% of the segment's consolidated net sales in 2000, 65% in 1999
and 68% in 1998. Foreign sales of the Underground Mining Machinery segment
approximated 35% in 2000, 43% in 1999 and 27% in 1998. See Note 24 - Business
Segment Information in Notes to Consolidated Financial Statements included in
Item 8 - Financial Statements and Supplementary Data and Item 14 - Exhibits,
Financial Statement Schedules, and Reports on Form 8-K.
Harnischfeger's international operations are subject to certain risks not
generally applicable to its domestic businesses, including currency
fluctuations, changes in tariff restrictions, restrictive regulations of foreign
governments (including price and exchange controls), and other governmental
actions. Harnischfeger has entered into various foreign currency exchange
contracts with major international financial institutions designed to minimize
its exposure to exchange rate fluctuations on foreign currency transactions. See
"Cautionary Factors" below for additional risks associated with international
operations.
Employees
As of October 31, 2000, Harnischfeger employed approximately 7,020 people
in its continuing operations, of which approximately 4,000 were employed in the
United States. Approximately 1,700 of the U. S. employees are represented by
local unions under collective bargaining agreements. Harnischfeger believes that
it maintains generally good relationships with its employees.
Cyclicality
P&H's business, excluding aftermarket activity, is subject to cyclical
movements in the markets. The original equipment market is driven to a large
extent by commodity prices. Rising commodity prices lead to the expansion of
existing mines, opening of new mines or re-opening of less efficient mines.
Increased mining activity requires new machinery. Although the aftermarket
segment is much less cyclical, severe reductions in commodity prices result in
removing operating machines from mining production and, thus, dampen demand for
parts and services. Conversely, significant increases in commodity prices result
in higher use of equipment and requirements for more parts and services.
The Joy business has demonstrated cyclicality over the years. This
cyclicality is driven primarily by product life cycles, new product
introductions, competitive pressures and other economic factors affecting the
mining industry, such as commodity prices (particularly coal prices) and company
consolidation in the coal mining industry.
Distribution
P&H and Joy sales are made mostly through the segments' headquarters and
sales offices located around the world. The manufacture and sale of repair and
replacement parts and the servicing of equipment are important aspects of the
Company's businesses.
Competitive Conditions
P&H and Joy conduct their domestic and foreign operations under highly
competitive market conditions, requiring that their products and services be
competitive in price, quality, service and delivery.
P&H is the leading manufacturer of electric mining shovels and, in recent
years, large walking draglines. P&H's shovels and draglines compete with similar
products made by another U.S. manufacturer and, in certain foreign markets in
smaller sizes of such equipment, with foreign manufacturers. These products also
compete with hydraulic mining excavators, large rubber tired front end loaders
and bucket wheel excavators in certain mining applications. P&H's large rotary
blasthole drills compete with several worldwide drill manufacturers. P&H's
aftermarket services compete with a large number of primarily regional
suppliers.
Joy is a leading manufacturer of underground mining equipment. Its
continuous mining machinery, longwall shearers, continuous haulage equipment,
roof supports and armored face conveyors compete with a number of worldwide
manufacturers of such equipment. Joy's rebuild services compete with a large
number of local repair shops. Joy competes with various regional suppliers in
the sale of replacement parts for Joy equipment.
Both P&H and Joy compete on the basis of providing superior productivity,
reliability and service and lower overall cost to their customers. Both P&H and
Joy compete with local and regional service providers in the provision of
maintenance, rebuild and other services to mining equipment users.
Backlog
Backlog by business segment for the Company's continuing operations as of
October 31 was:
In thousands 2000 1999 1998
-----------------------------------------------------------------------
Surface Mining Equipment $ 75,734 $ 93,798 $163,009
Underground Mining Machinery 151,220 190,775 142,260
-------- -------- --------
$226,954 $284,573 $305,269
======== ======== ========
The backlog figures exclude customer arrangements under long-term repair
and maintenance contracts. In reports prior to fiscal 2000 it was the policy of
the Company to include the estimated value of two years of such arrangements as
part of its backlog.
Raw Materials
P&H purchases raw and semi-processed steel, castings, forgings, copper and
other materials from a number of suppliers. In addition, component parts, such
as engines, bearings, controls, hydraulic components and a wide variety of
mechanical and electrical items are purchased from approximately 1,500
suppliers. Purchases of materials and components are made on a competitive basis
with no single source being dominant.
Joy purchases electric motors, gears, hydraulic parts, electronic
components, forgings, steel, clutches and other components and raw materials
from outside suppliers. Although Joy purchases certain components and raw
materials from a single supplier, alternative sources of supply are available
for all such items. Joy believes that it has adequate sources of supply for
component parts and raw materials for its manufacturing requirements. No single
source is dominant.
Patents and Licenses
P&H and Joy and their respective subsidiaries own numerous patents and
trademarks and have patent licenses from others relating to their respective
products and manufacturing methods. Also, patent licenses are granted to others
throughout the world and royalties are received under most of these licenses.
While Harnischfeger does not consider any particular patent or license or group
of patents or licenses to be essential to its respective businesses, it
considers its patents and licenses significant to the conduct of its businesses
in certain product areas.
Research and Development
The Company's businesses maintain strong commitments to research and
development. P&H and Joy pursue technological development through the
engineering of new products and systems, the improvement and enhancement of
licensed technology, and synergistic acquisitions of technology by segment.
Research and development expenses were $6.5 million in 2000, $11.1 million in
1999 and $18.0 million in 1998, not including application engineering.
Environmental and Health and Safety Matters
The Company's domestic activities are regulated by federal, state and local
statutes, regulations and ordinances relating to both environmental protection
and worker health and safety. These laws govern current operations, require
remediation of environmental impacts associated with past or current operations,
and under certain circumstances provide for civil and criminal penalties and
fines as well as injunctive and remedial relief. The Company's foreign
operations are subject to similar requirements as established by their
respective countries.
The Company expends substantial managerial and financial resources in
developing and implementing actions for continued compliance with these
requirements. The Company believes that it has substantially satisfied these
diverse requirements. Because these requirements are complex and, in many areas,
rapidly evolving, there can be no guarantee against the possibility of sizeable
additional costs for compliance in the future. However, these laws have not had,
and are not presently expected to have, a material adverse effect on the
Company.
The Company's operations or facilities have been and may become the subject
of formal or informal enforcement actions or proceedings for alleged
noncompliance with either environmental or worker health and safety laws or
regulations. Such matters have typically been resolved through direct
negotiations with the regulatory agency and have typically resulted in
corrective actions or abatement programs. However, in some cases, fines or other
penalties have been paid. Historically, neither such commitments nor such
penalties have been material.
Cautionary Factors
This report and other documents or oral statements which have been and will
be prepared or made in the future contain or may contain forward-looking
statements by or on behalf of the Company. Such statements are based upon
management's expectations at the time they are made. Actual results may differ
materially. In addition to the assumptions and other factors referred to
specifically in connection with such statements, the following factors, among
others, could cause actual results to differ materially from those contemplated.
The Company's principal businesses involve designing, manufacturing,
marketing and servicing large, complex machines. Significant periods of time are
necessary to plan, design and build these machines. With respect to new machines
and equipment, there are risks of customer acceptances and start-up or
performance problems. Large amounts of capital are required to be devoted by the
Company's customers to purchase these machines and to finance the mines that use
these machines. The Company's success in obtaining and managing a relatively
small number of sales opportunities, including the Company's success in securing
payment for such sales and meeting the requirements of warranties and guarantees
associated with such sales, can affect the Company's financial performance. In
addition, many projects are located in undeveloped or developing economies where
business conditions are less predictable. In recent years, up to 65% of the
Company's total sales occurred outside the United States.
Other factors that could cause actual results to differ materially from those
contemplated include:
o Factors relating to the Company's Chapter 11 filing, such as: the possible
disruption of relationships with creditors, customers, suppliers and
employees; the Company's success of disposing of Beloit's assets; the
Company's success in confirming and implementing its plan of
reorganization; the availability of financing and refinancing; and the
Company's ability to comply with covenants in its DIP Facility and other
financing facilities.
o Factors affecting customers' purchases of new equipment, rebuilds, parts
and services such as: production capacity, stockpiles, and production and
consumption rates of coal, copper, iron, gold, oil and other ores and
minerals; the cash flows of customers; the cost and availability of
financing to customers and the ability of customers to obtain regulatory
approval for investments in mining projects; consolidations among
customers; work stoppages at customers or providers of transportation; and
the timing, severity and duration of customer buying cycles.
o Factors affecting the Company's ability to capture available sales
opportunities, including: customers' perceptions of the quality and value
of the Company's products and services as compared to competitors' products
and services; whether the Company has successful reference installations to
display to customers; customers' perceptions of the health and stability of
the Company as compared to its competitors; the Company's ability to assist
customers with competitive financing programs; and the availability of
manufacturing capacity at the Company's factories.
o Factors affecting the Company's ability to successfully manage sales it
obtains, such as: the accuracy of the Company's cost and time estimates for
major projects; the adequacy of the Company's systems to manage major
projects and its success in completing projects on time and within budget;
the Company's success in recruiting and retaining managers and key
employees; wage stability and cooperative labor relations; plant capacity
and utilization; and whether acquisitions are assimilated and divestitures
completed without notable surprises or unexpected difficulties.
o Factors affecting the Company's general business, such as: unforeseen
patent, tax, product, environmental, employee health and benefit, or
contractual liabilities; nonrecurring restructuring and other special
charges; changes in accounting or tax rules or regulations; reassessments
of asset valuations for such assets as receivables, inventories, fixed
assets and intangible assets; and leverage and debt service.
o Factors affecting general business levels, such as: political and economic
turmoil in major markets such as the United States, Canada, Europe, Asia
and the Pacific Rim, South Africa, Australia and Chile; environmental and
trade regulations; and the stability and ease of exchange of currencies.
Item 2. Properties
As of October 31, 2000, the following principal properties of the Company's
continuing operations were owned, except as indicated. All of these properties
are generally suitable for operations.
Harnischfeger owns a 94,000 square foot office building in St. Francis,
Wisconsin, which is used as its worldwide corporate headquarters. This facility
is being sold under the auspices of the Bankruptcy Court.
Surface Mining Equipment Locations
Floor Space Land Area
Location (Sq. Ft.) (Acres) Principal Operations
-------- --------- ------- --------------------
Milwaukee, Wisconsin....... 1,067,000 46 Electric mining shovels, electric and
diesel-electric draglines and large diameter
rotary blasthole drills.
Milwaukee, Wisconsin...... 180,000 13 Electrical products.
Cleveland, Ohio........... 270,000 8 Gearing manufacturing.
Cleveland, Ohio........... 70,000 (2) 2 Rebuild service center.
Elko, NV.................. 30,000 5 Rebuild service center.
Gillette, Wyoming......... 60,000 6 Rebuild service center.
Mesa, Arizona............. 17,000 5 Rebuild service center.
Kilgore, Texas............ 12,400 4 Rebuild service center.
Bassendean, Australia..... 72,500 5 Components and parts for mining machinery.
Mt. Thorley, Australia.... 81,800 11 Components and parts for mining machinery.
Mackay, Australia......... 35,500 3 Components and parts for mining machinery.
Johannesburg, So. Africa. 44,000 (3) 1 Rebuild service center.
Belo Horizonte, Brazil.... 37,700 1 Components and parts for mining shovels.
Santiago, Chile........... 6,800 1 Rebuild service center.
Antofagasta, Chile........ 21,000 1 Rebuild service center.
Calama, Chile............. 5,500 1 Rebuild service center.
Underground Mining Machinery Locations
Floor Space Land Area
Location (Sq. Ft.) (Acres) Principal Operations
-------- --------- ------- --------------------
Franklin, Pennsylvania.... 739,000 58 Underground mining machinery, components and parts.
Reno, Pennsylvania........ 121,400 22 Components and parts for mining machinery.
Brookpark, Ohio........... 85,000 4 Components and parts for mining machinery.
Solon, Ohio............... 101,200 10.6 Components and parts for mining machinery.
Abingdon, Virginia........ 63,400 22 Underground mining machinery and components.
Bluefield, Virginia....... 102,160 15
Duffield, Virginia........ 90,000 11
Homer City, Pennsylvania.. 79,920 10
Meadowlands, Pennsylvania. 117,899 13 Mining machinery rebuild, service and parts sales.
Mt. Vernon, Illinois...... 107,130 12
Price, Utah............... 44,200 6
Wellington, Utah.......... 68,000 60
McCourt Road, Australia... 101,450 33 Underground mining machinery, components and parts.
Parkhurst, Australia...... 33,500 15 Rebuild service center.
Cardiff, Australia........ 22,600 (1) 3 Repair service center.
Wollongong, Australia..... 27,000 (1) 4 Roof bolting equipment.
Steeledale, South Africa.. 285,140 12.6 Underground mining machinery, components and parts.
Wadeville, South Africa... 184,620 28.6 Underground mining machinery assembly and service.
Hendrina, South Africa.... 1,334 30.6 Underground mining machinery, components and parts.
Pinxton, England.......... 76,000 10 Service and rebuild.
Wigan, England............ 60,000 (4) 3 Engineering and administration.
Worcester, England........ 178,000 13.5 Mining machinery, components and parts.
- -------------------------
(1) Under a lease expiring in 2001.
(2) Under a lease expiring in 2002.
(3) Under a lease expiring in 2005.
(4) Under a lease expiring in 2010.
P&H operates warehouses in Gillette, Wyoming; Cleveland, Ohio; Hibbing,
Minnesota; Charleston, West Virginia; Milwaukee, Wisconsin; Mesa, Arizona; Elko,
Nevada; Negaunee, Michigan; Hinton, Sparwood, and Cornwall, Canada; Mt. Thorley,
Australia; Belo Horizonte, Brazil; Santiago, Iquique and Calama, Chile;
Johannesburg, South Africa; and Puerto Ordaz, Venezuela. The warehouses in
Hibbing, Milwaukee, Elko, Gillette, Mt. Thorley, Belo Horizonte and Johannesburg
are owned; the others are leased. In addition, P&H leases sales offices
throughout the United States and in principal surface mining locations in other
countries.
Joy operates warehouses in Green River, Wyoming; Pineville, West Virginia;
Brookwood, Alabama; Carlsbad, New Mexico; Norton, Virginia; Lovely and
Henderson, Kentucky; Cardiff, Emerald, Kurri Kurri, Moranbah and Lithgow,
Australia; Hendrina and Secunda, South Africa. All warehouses are owned except
for the warehouses in Lovely and Henderson, Kentucky, and Secunda, South Africa,
which are leased.
Item 3. Legal Proceedings
Chapter 11 Bankruptcy Filing
As a result of the bankruptcy filings, litigation relating to prepetition
claims against the Debtors is stayed. The Bankruptcy Court has, however, lifted
the stay with regard to certain litigation. See also Item 1 - Reorganization
under Chapter 11 and Item 7 - Management's Discussion and Analysis of Financial
Condition and Results of Operations for information regarding our bankruptcy
proceedings, which is incorporated herein by reference.
General
The Company is a party to litigation matters and claims that are normal in
the course of its operations. Although the outcome of these matters cannot be
predicted with certainty and favorable or unfavorable resolution may affect
income on a quarter-to-quarter basis, the Company believes that such matters
will not have a materially adverse effect on its consolidated financial
position.
Environmental
The Company is also involved in a number of proceedings and potential
proceedings relating to environmental matters. Although it is difficult to
estimate the potential exposure to the Company related to these environmental
matters, the Company believes that the resolution of these matters will not have
a materially adverse effect on its consolidated financial position.
Contingent Liabilities
Contingent liabilities as of the Chapter 11 filing date are subject to
compromise. At October 31, 2000, the Company was contingently liable to banks,
financial institutions and others for approximately $191.9 million for
outstanding letters of credit, bank guarantees and surety bonds securing
performance of sales contracts and other guarantees in the ordinary course of
business. Of the $191.9 million, approximately $84.5 million was issued at the
request of the Company on behalf of Beloit and approximately $107.4 million was
issued at the request of non-Beloit Debtor entities prior to the bankruptcy
filing. Included in the $191.9 million outstanding as of October 31, 2000 were
$35.5 million issued under the DIP Facility (See Note 10 - Borrowings and Credit
Facilities). Additionally, at October 31, 2000, there were $22.2 million of
outstanding letters of credit or other guarantees issued by non-US banks for
non-US subsidiaries.
As of January 11, 2001, the Debtors had not completed their review of
prepetition executory contracts to determine whether to assume or reject such
contracts. Rejection of executory contracts could result in additional
prepetition claims against Debtors. Accordingly, it is not possible to estimate
the amount of additional prepetition claims that could arise out of the
rejection of executory contracts. In the case of Beloit, the Debtors' proposed
plan of reorganization provides for the rejection of virtually all of Beloit's
prepetition executory contracts.
The Company and its subsidiaries are party to litigation matters and claims
that are normal in the course of their operations. Also, as a normal part of
their operations, the Company's subsidiaries undertake certain contractual
obligations, warranties and guarantees in connection with the sale of products
or services. Although the outcome of these matters cannot be predicted with
certainty and favorable or unfavorable resolution may affect the results of
operations on a quarter-to-quarter basis, management believes that such matters
will not have a materially adverse effect on the Company's consolidated
financial position. Generally, litigation against Debtors related to "claims",
as defined by the Bankruptcy Code, is stayed.
The Potlatch lawsuit, filed originally in 1995, related to a 1989 purchase
of pulp line washers supplied by Beloit for less than $15.0 million. In June
1997, a Lewiston, Idaho jury awarded Potlatch $95.0 million in damages in the
case which, together with fees, costs and interest to April 2, 1999,
approximated $120.0 million. On April 2, 1999 the Supreme Court of Idaho vacated
the judgement of the Idaho District Court in the Potlatch lawsuit and remanded
the case for a new trial. This litigation has been stayed as a result of the
bankruptcy filings.
In fiscal 1996 and 1997, Beloit's Asian subsidiaries received orders for
four fine papermaking machines from Asia Pulp & Paper Co. Ltd. ("APP") for a
total of approximately $600.0 million. The first two machines were substantially
paid for and installed at APP facilities in Indonesia. Beloit sold approximately
$44.0 million of receivables from APP on these first two machines to a financial
institution. Beloit agreed to repurchase the receivables in the event APP
defaulted on the receivables and the Company guaranteed this repurchase
obligation. As of January 11, 2001, the Company believes APP is not in default
with respect to the receivables. On October 25, 2000, the Bankruptcy Court
approved a settlement with APP which resolved disputes that had arisen between
Beloit's Asian subsidiaries and APP in connection with its contracts for the
first two paper making machines. Under this settlement, APP and certain of its
affiliates drew $17 million from two letters of credit issued on behalf of the
Company and APP and certain of its affiliates agreed to pay Beloit $0.8 million.
Disputes arose between Beloit and APP regarding the two remaining machines.
On March 3, 2000, the Company announced the signing of a definitive agreement to
settle the disputes and related arbitration and legal proceedings. Under the
settlement, APP paid $135.0 million to Beloit on April 6, 2000 and $15.9 million
the Company had deposited with a bank with respect to related letters of credit
was released to the Company. The $15.9 million was classified as other assets in
the Company's consolidated financial statements as of October 31, 1999. The
$135.0 million was paid in the form of $25.0 million in cash and $110.0 million
in a three-year note issued by an APP subsidiary and guaranteed by APP. The note
is governed by an indenture and bears a fixed interest rate of 15%. On October
2, 2000, Beloit received the first interest payment of $8.3 million. Beloit
retained Merrill Lynch to assist in a possible sale of the note. In view of the
possible sale of the note and volatility in the applicable capital markets for
the note, no value of the note has been recognized in the financial statements
as of October 31, 2000. The value for the note and its effect on the financial
statements will be recognized in the period that the note is sold or as
amortization payments are made under the terms of the note. As part of the
settlement, Beloit retained a $46.0 million down payment it received from APP
for the second two papermaking machines and APP released all rights with respect
to letters of credit issued for the aggregate amount of the down payment for the
second two papermaking machines. Also as part of the settlement, APP acquired
certain rights to take possession of components and spare parts produced or
acquired by Beloit in connection with the two papermaking machines on an as is,
where is basis. In addition, Beloit returned to APP certain promissory notes
given to Beloit by APP. The notes were initially issued in the amount of $59.0
million and had an aggregate principal balance of $19.0 million when they were
returned to APP.
The Company and certain of its present and former senior executives have
been named as defendants in a class action, captioned In re: Harnischfeger
Industries, Inc. Securities Litigation, in the United States District Court for
the Eastern District of Wisconsin. This action seeks damages in an unspecified
amount on behalf of an alleged class of purchasers of the Company's common
stock, based principally on allegations that the Company's disclosures with
respect to the APP contracts of Beloit discussed above violated the federal
securities laws. As regards the Company, this matter is stayed by the automatic
stay imposed by the Bankruptcy Code.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the last
quarter of fiscal 2000.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Harnischfeger common stock (including the associated preferred stock
purchase rights) traded on the New York Stock Exchange (NYSE) and Pacific
Exchange under the symbol "HPH" until December 8, 1999. Currently, the Company's
stock is traded over the counter, Bulletin Board, using the symbol "HRZIQ". At
January 11, 2001, there were approximately 2,300 holders of record of
Harnischfeger common stock.
The high and low sales prices as reported on the NYSE for the period during
the first quarter of fiscal 2000 that the common stock traded on the NYSE were
$1.25 and $0.25, respectively. The following table sets forth the high and low
sales prices as reported over the counter, Bulletin Board, for the periods
during fiscal 2000 that the common stock traded over the counter, Bulletin
Board:
Fiscal 2000
High Low
------------ ----------------
First Quarter $ 1.50 $ 0.13
Second Quarter 0.94 0.38
Third Quarter 0.66 0.30
Fourth Quarter 0.52 0.03
The following table sets forth the high and low sales prices as reported on
the NYSE for the periods indicated:
Fiscal 1999
High Low
------------ ----------------
First Quarter $ 11.38 $ 8.06
Second Quarter 11.25 5.25
Third Quarter 10.19 0.69
Fourth Quarter 2.00 1.00
The Company last paid a dividend in the first quarter of fiscal 1999 when
it paid a dividend of $0.10 per share of common stock. The Company's DIP
Facility restricts the payment of dividends on the Company's existing common
stock. If the Company's proposed plan of reorganization is confirmed, the
existing common stock will be cancelled. The proposed indenture for the
five-year, 10.75% senior notes to be issued under the Company's proposed plan of
reorganization contains covenants which would restrict the declaration and
payment of dividends on the new common stock to be issued by reorganized
Harnischfeger.
Item 6. Selected Financial Data
The following table sets forth certain selected historical financial data
of the Company as of October 31, on a consolidated basis. The selected
consolidated financial data was derived from the Consolidated Financial
Statements of the Company. Beloit has been classified as a discontinued
operation as of October 31, 2000 and 1999 and, accordingly, the results of
operations of prior years have been restated to reflect classifying the Beloit
Segment as a discontinued operation. The balance sheet data has not been
restated for 1998 and other prior years. The selected consolidated financial
data should be read in conjunction with the Consolidated Financial Statements of
the Company appearing in Item 8 - Financial Statements and Supplementary Data
and Item 14 - Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
RESULTS OF OPERATIONS
Years Ended October 31,
In thousands except per
share amounts 2000* 1999* 1998 1997 1996
- ------------------------------------- ------------ ------------ ----------- ------------ -------------
Revenues
Net sales $ 1,117,955 $ 1,114,146 $ 1,212,307 $ 1,467,341 $ 1,405,936
Other income 6,860 3,909 1,324 18,023 5,769
----------- ----------- ----------- ----------- -----------
1,124,815 1,118,055 1,213,631 1,485,364 1,411,705
Cost of sales 853,344 922,806 916,970 1,090,947 1,035,812
Product development, selling and
administrative expenses 208,933 238,952 235,268 217,629 213,492
Reorganization items 65,388 20,304 - - -
Restructuring charge 4,518 11,997 - - -
Charge related to executive changes - 19,098 - - -
Strategic and financing initiatives - 7,716 - - -
----------- ---------- ----------- ----------- -----------
Operating income (loss) (7,368) (102,818) 61,393 176,788 162,401
Interest expense - net (23,961) (28,865) (70,600) (70,259) (60,988)
----------- ---------- ----------- ----------- -----------
Income (loss) before (provision) benefit
for income taxes and minority interest (31,329) (131,683) (9,207) 106,529 101,413
(Provision) benefit for income taxes 3,000 (220,448) 24,608 (36,519) (36,898)
Minority interest (1,224) (957) (1,035) (2,129) (1,547)
----------- ---------- ----------- ---------- -----------
Income (loss) from continuing operations (29,553) (353,088) 14,366 67,881 62,968
Income (loss) from discontinued operations,
net of applicable income taxes 66,200 (798,180) (184,399) 70,399 51,249
Gain (loss) on disposal of discontinued
operations, net of applicable income taxes 227,977 (529,000) 151,500 - -
Extraordinary loss on retirement of debt,
net of applicable income taxes - - - (12,999) -
----------- ---------- ----------- ---------- -----------
Net income (loss) $ 264,624 $(1,680,268) $ (18,533) $ 125,281 $ 114,217
=========== =========== =========== =========== ===========
Earnings (Loss) Per Share - Basic
Income (loss) from continuing operations $ (0.63) $ (7.62) $ 0.31 $ 1.42 $ 1.34
Income (loss) from and net gain (loss)
on disposal of discontinued operations 6.30 (28.65) (0.71) 1.47 1.08
Extraordinary loss on retirement of debt - - - (0.27) -
----------- ----------- ----------- ----------- -----------
Net income (loss) per common share $ 5.67 $ (36.27) $ (0.40) $ 2.62 $ 2.42
=========== =========== =========== =========== ===========
Earnings (Loss) Per Share - Diluted
Income (loss) from continuing operations $ (0.63) $ (7.62) $ 0.31 $ 1.41 $ 1.32
Income (loss) from and net gain (loss)
on disposal of discontinued operations 6.30 (28.65) (0.71) 1.45 1.08
Extraordinary loss on retirement of debt - - - (0.27) -
----------- ----------- ----------- ----------- -----------
Net income (loss) per common share $ 5.67 $ (36.27) $ (0.40) $ 2.59 $ 2.40
=========== =========== =========== =========== ===========
Average Shares Outstanding
Basic 46,717 46,329 46,445 47,827 47,196
Diluted 46,717 46,329 46,445 48,261 47,565
Dividends Per Common Share $ - $ 0.10 $ 0.40 $ 0.40 $ 0.40
Bookings $ 1,041,520 $ 1,081,838** $ 1,198,531** $ 1,390,161 $ 1,406,381
Backlog $ 226,954 $ 284,573** $ 305,269** $ 358,340 $ 453,480
* Beloit was classified as a discontinued operation on October 31, 1999. The
results of operations of prior years have been restated accordingly.
** Amounts restated to exclude long-term repair and maintenance contracts as
per Company's new policy. See Item 1 - Backlog.
OTHER FINANCIAL DATA
In thousands except per As of October 31,
share amounts 2000* 1999* 1998 1997 1996
- ------------------------- ----------- ----------- ----------- ----------- -----------
Working Capital:
Current assets $ 709,424 $ 758,385 $ 1,463,144 $ 1,588,712 $ 1,410,250
Current liabilities 490,628 571,216 1,026,280 1,180,497 1,077,127
----------- ----------- ----------- ----------- -----------
Working capital $ 218,796 $ 187,169 $ 436,864 $ 408,215 $ 333,123
Current ratio 1.4 1.3 1.4 1.3 1.3
------------ ----------- ----------- ----------- -----------
Plant and Equipment
Net properties $ 177,413 $ 210,747 $ 613,581 $ 657,100 $ 634,045
Capital expenditures 32,410 26,610 133,925 126,401 76,555
Depreciation expense 25,802 26,613 66,769 67,156 63,342
----------- ----------- ----------- ----------- -----------
Total Assets $ 1,292,928 $ 1,711,813 $ 2,787,259 $ 2,924,535 $ 2,690,029
----------- ----------- ----------- ----------- ------------
Debt and Capitalized Lease
Obligations
Long-term obligations (1) $ 80,933 $ 226,126 $ 1,001,573 $ 725,193 $ 662,137
Short-term notes payable 30,965 86,539 117,607 214,126 45,261
Liabilities subject to compromise 1,220,675 1,193,554 - - -
----------- ----------- ----------- ----------- -----------
$ 1,332,573 $ 1,506,219 $ 1,119,180 $ 939,319 $ 707,398
Minority Interest $ 6,533 $ 6,522 $ 43,838 $ 97,724 $ 93,652
----------- ----------- ----------- ----------- -----------
Debt to Capitalization Ratio (2), (3) - - 61.2% 52.6% 48.0%
----------- ----------- ----------- ----------- ------------
Shareholders' Equity (Deficit) $ (794,692) $(1,025,151) $ 666,850 $ 749,660 $ 673,485
Book value per common share (3) $ - $ - $ 14.52 $ 15.93 $ 14.15
Common shares outstanding (4) 46,816 46,516 45,916 47,046 47,598
----------- ----------- ----------- ----------- ------------
Number of (End of Year):
Employees 7,000 6,800 13,700 17,700 17,100
Common shareholders of record 2,300 2,300 2,100 1,861 1,972
* Items for the years ended October 31, 2000 and 1999 exclude the
discontinued Beloit operation.
(1) Includes amounts classified as current portion of long-term obligations.
(2) Total debt to the sum of total debt, minority interest and shareholders'
equity (deficit).
(3) Data omitted for 2000 and 1999 due to lack of comparability with prior
periods.
(4) As of end of year, excluding SECT shares.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
On June 7, 1999, the Company and substantially all of its domestic
operating subsidiaries (collectively, the "Debtors") filed voluntary petitions
for reorganization under Chapter 11 of the U.S. Bankruptcy Code (the "Bankruptcy
Code") in the United States Bankruptcy Court for the District of Delaware (the
"Bankruptcy Court") and orders for relief were entered. The Debtors include the
Company's principal domestic operating subsidiaries, Joy Mining Machinery and
P&H Mining Equipment. The Debtors' Chapter 11 cases are jointly administered for
procedural purposes only under case number 99-2171. The Debtors also include
Beloit Corporation ("Beloit"), the Company's other principal operating
subsidiary at the time of the bankruptcy filing. See Note 3 - Discontinued
Operations in Notes to Consolidated Financial Statements. The Debtors filed
their draft disclosure statement and proposed plan of reorganization and, in the
case of Beloit and its Debtor subsidiaries, liquidation with the Bankruptcy
Court on October 26, 2000. The plan and disclosure statement were subsequently
amended and on December 20, 2000, the Bankruptcy Court approved the disclosure
statement as amended and set January 30, 2001 as the deadline for creditors to
vote on the plan. If the plan is approved by creditors and the Bankruptcy Court,
the Debtors anticipate emerging from bankruptcy in the spring of 2001.
The Debtors are currently operating their businesses as
debtors-in-possession pursuant to the Bankruptcy Code. Pursuant to the
Bankruptcy Code, actions to collect prepetition indebtedness of the Debtors and
other contractual obligations of the Debtors generally may not be enforced. In
addition, under the Bankruptcy Code, the Debtors may assume or reject executory
contracts and unexpired leases. Additional prepetition claims may arise from
such rejections, and from the determination by the Bankruptcy Court (or as
agreed by the parties in interest) to allow claims for contingencies and other
disputed amounts. From time to time since the Chapter 11 filing, the Bankruptcy
Court has approved motions allowing the Company to reject certain business
contracts that were deemed burdensome or of no value to the Company. As of the
date of this report, the Debtors had not completed their review of all their
prepetition executory contracts and leases for assumption or rejection. See also
Note 9 - Liabilities Subject to Compromise in Notes to Consolidated Financial
Statements included in Item 8 - Financial Statements and Supplementary Data and
Item 14 - Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
The Debtors received approval from the Bankruptcy Court to pay or otherwise
honor certain of their prepetition obligations, including employee wages and
product warranties. In addition, the Bankruptcy Court authorized the Debtors to
maintain their employee benefit programs. Funds of qualified pension plans and
savings plans are in trusts and protected under federal regulations. All
required contributions are current in the respective plans.
Subject to certain exceptions set forth in the Bankruptcy Code, acceptance
of a plan of reorganization requires approval of the Bankruptcy Court and the
affirmative vote (i.e. more than 50% of the number and at least 66-2/3% of the
dollar amount, both with regard to claims actually voted) of each class of
creditors and equity holders whose claims are impaired by the plan.
Alternatively, absent the requisite approvals, the Company may seek Bankruptcy
Court approval of its reorganization plan under "cramdown" provisions of the
Bankruptcy Code, assuming certain tests are met.
February 29, 2000 was set by the Bankruptcy Court as the last date
creditors could file proofs of claim under the Bankruptcy Code. There may be
differences between the amounts recorded in the Company's financial statements
and the amounts claimed by the Company's creditors. Litigation may be required
to resolve such disputes. The Company's schedules are available from the
Poorman-Douglas Corporation, telephone: 503-350-5954.
The Company has incurred and will continue to incur significant costs
associated with the reorganization. The amount of these expenses, which are
being expensed as incurred, is expected to significantly affect future results.
See Note 6 - Reorganization Items in Notes to Consolidated Financial Statements.
Although the Company currently anticipates emerging from Bankruptcy during
the first half of calendar year 2001, it is not possible to predict with
certainty the length of time the Company will operate under the protection of
Chapter 11, the outcome of the Chapter 11 proceedings in general, or the effect
of the proceedings on the business of the Company or on the interests of the
various creditors. Under the Bankruptcy Code, postpetition liabilities and
prepetition liabilities (i.e., liabilities subject to compromise) must be
satisfied before shareholders can receive any distribution. Under the terms of
the Company's proposed plan of reorganization, the Company's existing common
stock will be cancelled and the holders of the Company's existing common stock
will receive nothing for their stock. The U.S. Trustee for the District of
Delaware has appointed an Official Committee of Equity Holders to represent
shareholders in the proceedings before the Bankruptcy Court.
The accompanying Consolidated Financial Statements have been prepared on a
going concern basis which contemplates continuity of operations, realization of
assets, and liquidation of liabilities in the ordinary course of business and do
not reflect adjustments that might result if the Debtors (other than Beloit and
its Debtor subsidiaries) are unable to continue as going concerns. As a result
of the Debtors' Chapter 11 filings, such matters are subject to significant
uncertainty. The Debtors have filed a plan of reorganization with the Bankruptcy
Court. Continuing on a going concern basis is dependent upon, among other
things, acceptance of Debtors' plan of reorganization by creditors, the success
of future business operations, and the generation of sufficient cash from
operations and financing sources to meet the Debtors' obligations. Other than
recording the estimated loss on the sale of the Beloit discontinued operations
in fiscal 1999, the Consolidated Financial Statements do not reflect: (a) the
realizable value of assets on a liquidation basis or their availability to
satisfy liabilities; (b) aggregate prepetition liability amounts that may be
allowed for claims or contingencies, or their status or priority; (c) the effect
of any changes to the Debtors' capital structure or in the Debtors' business
operations as the result of an approved plan of reorganization; or (d)
adjustments to the carrying value of assets (including goodwill and other
intangibles) or liability amounts that may be necessary as the result of actions
by the Bankruptcy Court.
The Company's financial statements as of October 31, 2000 have been
presented in conformity with the AICPA's Statement of Position 90-7, "Financial
Reporting By Entities In Reorganization Under the Bankruptcy Code," issued
November 19, 1990 ("SOP 90-7"). SOP 90-7 requires a segregation of liabilities
subject to compromise by the Bankruptcy Court as of the bankruptcy filing date
and identification of all transactions and events that are directly associated
with the reorganization of the Company.
Surface Mining Equipment
The following table sets forth certain data with respect to the surface
mining equipment segment from the Consolidated Statement of Operations of the
Company for the fiscal years ended October 31:
In thousands 2000 1999 1998
------------------------------------------------------
Net sales $ 506,311 $ 498,343 $ 443,330
Operating Profit 57,432 33,976 31,416
Bookings 488,247 429,132 440,352
Sales for the surface mining equipment segment were $506.3 million in
fiscal 2000, a 2% increase from 1999 sales of $498.3 million. Capital sales
increased 16% as product innovation and high levels of support for customers led
to a 38% increase in sales of electric mining shovels. Aftermarket sales
decreased 6% as a result of a combination of mine closures and production
cutbacks. Sales in 1998 were $443.3 million and included capital sales that were
2% greater than 1999 and 12% less than 2000 and aftermarket sales that were 18%
less than 1999 and 13% less than 2000.
Operating profit was $57.4 million or 11.3% of sales in 2000, compared to
operating profit of $34.0 million and 6.8% in 1999 and $31.4 million and 7.1% in
1998, respectively. The higher operating profit in 2000 as compared to 1999 was
primarily due to increased machine sales and lower operating expenses. Operating
profit in 1999 was greater than 1998 because of higher aftermarket sales in 1999
and the negative effect of the 1998 United Steelworkers' strike on 1998
operating profit.
Bookings amounted to $488.2 million in 2000 compared to $429.1 million in
1999. The increase is primarily due to an increase in demand for electric mining
shovels. Bookings in 1998 were $440.4 million and included capital bookings that
were 22% greater than 1999. The P&H order backlog was $75.7 million at the end
of 2000 compared with $93.8 million at the end of 1999 and $163.0 million at the
end of 1998. These booking and backlog figures exclude customer arrangements
under long-term repair and maintenance contracts. In financial reports prior to
fiscal 2000 it was the policy of the Company to include two years of estimated
value of such arrangements as part of its reported backlog. The total estimated
value of long-term repair and maintenance arrangements with P&H customers, which
extend for periods of up to thirteen years, amounted to approximately $300
million at the end of 2000.
The Chapter 11 filing in the third quarter of 1999 impacted operating
results in several ways. Supplier shipments in the latter part of 1999 were
lower than expected resulting in lost sales and production inefficiencies.
Collection difficulties increased in the latter part of fiscal 1999 and
continued in fiscal 2000 as some customers delayed paying outstanding
receivables due to their own operating difficulites and their concern about the
Company's financial condition. As a result, the third quarter of 1999 reflected
charges amounting to approximately $5.0 million for changes in estimates for
warranty and excess and obsolete inventory accruals.
Underground Mining Machinery
The following table sets forth certain data with respect to the underground
mining machinery segment from the Consolidated Statement of Operations of the
Company for the fiscal years ended October 31:
In thousands 2000 1999 1998
- --------------------------------------------------------------------------------
Net sales $ 611,644 $ 615,803 $ 768,977
Operating profit (loss) * 16,956 (65,893) 50,568
Bookings 553,273 652,706 758,179
* after charges of $11,165 for prepetition lawsuit settlements in 2000, after
net restructuring charges of $4,518 (See Note 8 - Restructuring Charges in
Notes to Consolidated Financial Statements) and $11,997 in 2000 and 1999,
respectively, and after charges against operating profit of $63,520 in 1999
for changes in estimates for allowances for doubtful accounts, warranty,
and excess and obsolete inventory.
Sales of the underground mining machinery segment in fiscal 2000
approximated fiscal 1999 levels. Higher sales of new machines in the United
States substantially offset lower sales of new machines in markets outside of
the U. S. The increase in new machine sales in the U. S. was attributable to
increases in the sales of longwall mining related equipment. The decrease in
non-U. S. new machine sales was attributable to a decrease in the sales of
longwall mining related equipment. Even though the global market for the
segment's, new machines did not improve significantly, market conditions
stabilized from the conditions that caused the reduction in new machine sales in
1999 as compared to 1998. After market sales were flat in 2000 as compared to
1999. Increases in complete machine rebuild sales in the United States and
increases in repair parts sales into China were partially offset by lower
aftermarket sales in South Africa. The decrease in aftermarket sales in South
Africa was due to strengthening of the U.S. dollar relative to the South African
rand and the corresponding impact on the translation of South African
aftermarket sales denominated in rand into U.S. dollars for financial reporting
purposes.
Net sales in 1999 were 20% lower than net sales in 1998. Shipments of new
machines declined in the United States and Australia. In the U. S., excess coal
stockpiles, depressed coal prices, and continuing consolidation of the
underground coal mining industry led to the closure of less efficient mines. In
Australia, overcapacity in the coal mining industry and depressed prices for
coal led coal producers to close mines and cut costs which reduced their
spending on new equipment. Aftermarket net sales in 1999 were approximately 7%
lower than aftermarket net sales in 1998. This decrease was the result of lower
complete machine rebuild sales in the United Kingdom and lower component repair
sales in the United States. The reduction in machine rebuilds in the United
Kingdom was the result of a reduction in the number of underground coal mines in
operation in that market.
Operating profit in 2000 was $17.0 million compared to an operating loss of
$65.9 million in 1999. These figures reflect reductions in 2000 and 1999 for
charges related to lawsuit settlements, restructuring, and changes in accounting
estimates. The $11.2 million charge in fiscal 2000 for lawsuit settlements was
due to the Company's desire to finalize as many outstanding contingent
prepetition liabilities as possible in support of the Company's proposed plan of
reorganization. Before these reductions, operating profit was $32.7 million in
2000 compared to operating profit of $9.6 million in 1999. This improvement in
operating results, despite net sales being flat in 2000 compared to 1999, was
the result of cost reduction programs. Spending for manufacturing overhead,
selling, engineering, and administrative expenses were $23 million lower in
fiscal 2000 than in fiscal 1999.
In the 1999 fiscal year the segment reported an operating loss of $65.9
million compared to an operating profit of $50.6 million in fiscal 1998. During
1999 the segment incurred restructuring charges of $12 million associated with
actions taken to reduce its cost structure in response to reductions in sales
revenue from earlier periods. In addition, the segment recorded charges of $63.5
million associated with revised valuation estimates concerning accounts
receivables, inventories, and warranty reserves. The remaining reduction in
operating profit in 1999 as compared to 1998 was the result of the decrease in
net sales partially offset by approximately $45 million of cost reductions.
New order bookings were $100 million less in fiscal 2000 than 1999. This
decrease was primarily due to continued softness in the global market for the
segment's new equipment and the timing of the receipt of new orders for longwall
system equipment. A slight improvement in new machine orders in the United
States in fiscal 2000 was more than offset by a $75 million decrease in orders
for longwall system equipment for the United Kingdom and China.
In fiscal 1999, new order bookings were 14% lower than they were in fiscal
1998. This decrease was experienced for both new machines and aftermarket
products, primarily in the United States and in the United Kingdom. In the
United States, consolidations among coal producers, combined with the supply of
coal exceeding demand, led to a continued soft market for underground mining
equipment and services in 1999. In the United Kingdom, activity in the coal
industry was at a low level as the few remaining mines were concentrating on
reducing costs.
The Chapter 11 filing in the third quarter of fiscal 1999 impacted
operating results in several ways. Supplier shipments in the latter part of
fiscal 1999 were lower than expected resulting in lost sales and production
inefficiencies. The decision was made to discontinue several equipment models
that were either not required by customers or that no longer provided sufficient
margins to be attractive. Collection difficulties increased in the latter part
of fiscal 1999 and continued in fiscal 2000 as some customers delayed paying
outstanding receivables due to their own operating difficulties and their
concerns about the Company's financial condition and continued ability to
fulfill commitments.
The third and fourth quarters of fiscal 1999 reflected the following
charges against earnings:
Underground Mining
In thousands Machinery
- --------------------------------------------------------------------------------
Changes in estimates:
Allowance for doubtful accounts $ 5,300
Warranty and other 22,000
Excess and obsolete inventory 36,200
--------
63,500
Restructuring charges 11,997
--------
$ 75,497
========
During fiscal 1999, restructuring charges of $12.0 million were recorded
for rationalization of certain of Joy's original equipment manufacturing
facilities and the reorganization and reduction of its operating structure on a
global basis. Costs of $7.3 million were charged in the third quarter of fiscal
1999, primarily for the impairment of certain assets related to a facility
rationalization. In addition, charges amounting to $4.7 million (third quarter
$0.9 million; fourth quarter $3.8 million) were made for severance of
approximately 240 employees.
During fiscal 2000, additional charges amounting to $6.1 million were
recorded, primarily for severance associated with facilities rationalization and
to a lesser extent for severance associated with global operating structure
reorganization and reduction. A prior reserve amounting to $1.6 million was
reversed as it was no longer needed for facility rationalization.
The Company anticipates that the restructuring reserves will be
substantially utilized during fiscal 2001.
Strategic and Financing Initiatives
The Company incurred $7.7 million of charges in fiscal 1999 related to
certain consulting and legal costs associated with strategic financing and
business alternatives investigated prior to the Chapter 11 filing.
Reorganization Items
Reorganization expenses are items of income, expense and loss that were
realized or incurred by the Company as a result of its decision to reorganize
under Chapter 11 of the Bankruptcy Code.
Net reorganization expenses in fiscal 2000 and 1999 consisted of the
following:
In thousands
- -----------------------------------------------------------------------------------------------
Expense Cash payment
-------------------- --------------------
2000 1999 2000 1999
-------- -------- -------- --------
Professional fees directly related to the filing $ 39,061 $ 14,457 $ 33,644 $ 2,567
Amortization of DIP financing costs 10,602 3,125 2,563 15,000
Accrued retention plan costs 3,603 730 2,350 -
Write-down of property to be sold 9,000 - - -
Settlement of performance guarantees 2,991 - 2,991 -
Rejected equipment leases 1,399 2,322 - -
Interest earned on DIP proceeds (1,268) (330) (1,268) (330)
--------------------------------------------
$ 65,388 $ 20,304 $ 40,280 $ 17,237
============================================
Charge Related to Executive Changes
A charge to earnings of $19.1 million was made in fiscal 1999 in connection
with certain management organizational changes that occurred during the third
quarter of that year. The charge was primarily associated with supplemental
retirement, restricted stock, and long-term compensation plan obligations. This
charge consisted of $0.6 million paid prior to the Chapter 11 filing,
adjustments of $10.0 million reducing the carrying value of the applicable plan
assets and an accrued liability of $8.5 million which has been classified in the
consolidated balance sheet as part of the liabilities subject to compromise.
Income Taxes
As a result of continuing losses in fiscal 2000 and its Chapter 11 filing,
the Company has continued to record valuation reserves to offset any future U.S.
income tax benefits until it is more likely than not that the Company will be
able to realize such benefits.
The Company believes that realization of net operating loss and tax credit
benefits in the near term is unlikely. The Company's proposed plan of
reorganization would result in a significantly modified capital structure. If
the plan of reorganization is approved by creditors, SOP 90-7 would require the
Company to apply fresh start accounting. Under fresh start accounting,
realization of net operating loss and tax credit benefits first reduces any
reorganization goodwill until exhausted and thereafter is reported as additional
paid in capital. Because the Company's proposed plan of reorganization also
provides for certain substantial changes in the Company's ownership, if the
Company's proposed plan of reorganization is confirmed, it is likely that there
will be annual limitations on the amount of the federal carryforwards which the
Company will be able to utilize on its income tax returns. This annual
limitation is an amount equal to the value of the stock of the Company
immediately before the ownership change adjusted to reflect the increase in
value of the Company resulting from the cancellation of creditors' claims,
multiplied by a federally mandated long-term tax exempt rate.
Discontinued Operations
Beloit Corporation
In light of continuing losses at Beloit and following an evaluation of the
prospects of reorganizing the Beloit Segment, on October 8, 1999 the Company
announced its plan to dispose of the Beloit Segment. Subsequently, Beloit
notified certain of its foreign subsidiaries that they could no longer expect
funding of their operations to be provided by either Beloit or the Company.
Certain of the notified subsidiaries filed for or were placed into receivership
or other applicable forms of judicial supervision in their respective countries.
On May 12, 2000 the U.S. Trustee for the District of Delaware appointed an
Official Committee of Unsecured Creditors of Beloit Corporation to represent the
creditors of Beloit in proceedings before the Bankruptcy Court.
On November 7, 1999, the Bankruptcy Court approved procedures and an
implementation schedule for the divestiture plan (the "Court Sales Procedures")
for the Beloit Segment. Between February and August 2000, sales agreements were
approved under the Court Sales Procedures with respect to the sale of
substantially all of the segment's domestic operating assets. In addition,
approval was received for the sale of all of Beloit's significant foreign
subsidiaries (apart from those that had previously filed for or been placed into
receivership or other applicable forms of judicial supervision in their
respective countries). As of January 11, 2001, all approved sales of domestic
assets had taken place, as had sales of the majority of Beloit's foreign
subsidiaries. Beloit expects that closings on the remaining approved sales of
foreign subsidiaries will occur by the middle of fiscal 2001.
The Company classified the Beloit Segment as a discontinued operation in
its consolidated financial statements as of October 31, 2000 and 1999 and has
accordingly restated the Company's consolidated statements of operations for all
periods presented. The Company has not restated its consolidated balance sheets
or consolidated statements of cash flows for periods prior to fiscal 1999.
Revenues for the Beloit Segment were $170.4 million for fiscal 2000 and $684.0
million for fiscal 1999. Income(loss) from and net gain(loss) on disposal of
discontinued operations relating to the Beloit Segment was $294.2 million,
($1,327.1 million) and ($188.8 million) in 2000, 1999 and 1998, respectively.
The income from and net gain on disposal of discontinued operations of
$294.2 million recorded in the fourth quarter of fiscal 2000 consists of income
from discontinued operations of $66.2 million and a gain on disposal of
discontinued operations of $228.0 million. These gains are comprised of the
following:
In thousands
- --------------------------------------------------------------------------------
APP settlement $ 62,000
Norscan settlement 4,200
---------
Income from discontinued operations 66,200
---------
Foreign liabilities released 227,467
Domestic liabilities released 8,130
Partial release from Princeton Paper lease reserve 15,000
Loss on domestic entities sold (22,620)
---------
Net gain on the disposal of discontinued operations 227,977
---------
Income from and net gain on disposal of discontinued operations $ 294,177
=========
The elements of the income and gain are discussed below:
The $62.0 million APP income included $33.0 million of cash receipts and
the release of a $46.0 million bank guarantee offset by a $17.0 million draw
upon an outstanding bank guarantee by APP. See Item 3 - Contingent Liabilities.
The $4.2 million represents a cash settlement of litigation with Norscan.
The $228.0 million gain on disposal of discontinued operations included (i)
$227.5 million gain associated with the Company's release from the liabilities
of foreign subsidiaries that were disposed of during fiscal 2000, (ii) $15.0
million reduction in a facility long-term lease obligation for a domestic
business that was sold, (iii) settlements of obligations at less than recorded
amounts, and (iv) losses in excess of established reserves related to the sale
of domestic entities.
The loss from discontinued operations of $798.2 million in fiscal 1999
included (i) allocated interest expense of approximately $30.0 million based on
Beloit's portion of the consolidated debt, (ii) restructuring charges of $78.7
million in the third quarter and $3.6 million in the fourth quarter, (iii)
additional estimated losses on APP contracts of $87.0 million in the second
quarter and $163.5 million in the third quarter, (iv) additional expenses of
$143.1 million in the third quarter reflecting the effects of changes in other
accounting estimates and (v) reorganization expenses of $136.1 million in the
third quarter associated with the closing of a pulp and paper mill and the
related rejection of a 15-year operating lease. The Company did not record an
income tax benefit with respect to the 1999 loss. See Note 12 - Income Taxes.
The elements of the 1999 loss from discontinued operations are discussed below.
|X| The restructuring charges primarily related to a strategic reorganization
of Beloit. This reorganization rationalized certain product offerings from
a full breadth of product lines to more specific offerings. As part of the
restructuring, outsourcing was expected to increase significantly. The
charge consisted of facility closure charges including estimated amounts
for reductions in assets to net realizable values of $74.1 million and
accruals for closing and disposal costs of $8.2 million related to closing
certain manufacturing facilities, engineering offices and research and
development centers. In connection with these restructuring charges, the
Company expected to reduce headcount at Beloit by at least 600 employees.
These actions included staff reductions in manufacturing, engineering,
marketing, product development and administrative support functions.
|X| The additional estimated losses on APP contracts primarily related to the
Company's efforts to mitigate damages with respect to the APP matter more
fully discussed below and to improve short-term liquidity. Beloit's Asian
subsidiaries had sought to sell the assets associated with two papermaking
machines to alternative customers. The Company recorded an $87.0 million
reserve in the second quarter against the decrease in realizable value of
certain paper machines for Asian customers, primarily the second two paper
machines ordered by APP. The Company recorded an additional $147.7 million
reserve in the third quarter to reflect the Company's determination that
the foreseeable market conditions for this type of large paper machine did
not support valuing these machines at greater than estimated liquidation
values. The Company also recorded a $15.8 million charge in the third
quarter for changes in estimates of costs associated with the first two
machines sold to APP.
|X| The additional estimated losses on contracts and other expenses reflecting
changes in other accounting estimates related to the Company's provisions
for excess and obsolete inventory, doubtful accounts receivable, and
anticipated losses on contracts. These changes in estimates were based on
the Company's best estimates of costs to complete contracts, customer
demand for new machines, rebuilds and services, costs of financing,
material and labor costs, and overall levels of customer satisfaction with
machine performance. The need for these changes in estimates arose as a
result of the Chapter 11 filing and a combination of adverse factors
impacting the Company during the third quarter, including reductions in
product line offerings and material supply delays caused by prepetition
liquidity limitations and postpetition resupply timing difficulties. The
third quarter charges were originally classified in the consolidated
statement of operations as follows:
In thousands
--------------------------------------------------
Charged to product development,
selling, and administrative expenses:
Allowance for doubtful accounts $ 35,900
--------
Charged to cost of sales:
Warranties and other 32,400
Excess and obsolete inventory 25,000
Losses on contracts 49,800
---------
107,200
---------
$ 143,100
=========
|X| Reorganization expenses of $136.1 million related to Princeton Paper
Company, LLC, ("Princeton Paper"), a subsidiary of Beloit and one of
the Debtors, who had, until July 1999, operated a pulp and paper mill
located in Fitchburg, Massachusetts (the "Mill"). Beloit originally
became responsible for the operations of Princeton Paper and the Mill
in 1997 through settlement of a dispute with the former owner of the
Mill and the holders of bonds which had been issued to finance the
Mill. Under that settlement, Princeton Paper committed to make lease
payments under a fifteen-year operating lease of the Mill. Beloit
guaranteed those obligations. On July 8, 1999, the Company obtained
authority from the Bankruptcy Court for Princeton Paper to fully cease
operating, and shortly thereafter the Mill was shut down.
Subsequently, the Company rejected the lease and settlement agreement,
pursuant to the Bankruptcy Code. The Company recorded a charge of
$82.1 million relating to the decision to close Princeton Paper
including a charge of $54.0 million relating to the rejection of the
lease. The characterization and treatment of the lease in the
bankruptcy case could affect Beloit's ultimate liability for the lease
payments.
Cash flow used by Beloit in operating activities during fiscal 1999 was
$222.2 million. The principal sources of funding for Beloit was provided by its
operations, credit facilities of its subsidiaries and the Company. Between the
Chapter 11 filing on June 7, 1999 and October 31, 1999, the cash used by Beloit
was $116.0 million and was provided primarily through the DIP Facility. Beloit
and the other Debtors are jointly and severally liable under the DIP Facility.
During 1999, the Company recorded an estimated loss of $529.0 million on
the disposal of the Pulp and Paper Machinery segment. The Company did not record
an income tax benefit associated with this estimated loss. See Note 12 - Income
Taxes in Notes to Consolidated Financial Statements included in Item 8 -
Financial Statements and Supplementary Data and Item 14 - Exhibits, Financial
Statement Schedules, and Reports on Form 8-K. This estimated loss is comprised
of the following:
In thousands
- ----------------------------------------------------------------------------
Estimated loss on the disposal of the businesses and assets $(472,118)
Accrued estimated operating losses and facility wind-down costs (43,304)
Accrued postpetition letters of credit, guarantees and sureties (12,500)
Accrued post-closing environmental costs (7,000)
Accrued employee termination costs (12,000)
Gain on curtailment of defined benefit pension plans 17,922
---------
Net estimated loss on the disposal of discontinued operations $(529,000)
=========
The elements of the estimated loss on the disposal of the segment are
discussed below.
|X| The estimated loss on the disposal of the Beloit businesses and assets
of $472.1 million anticipated that there would be approximately $243.2
million in sales proceeds from the five sales agreements approved
under the Court Sales Procedure and an additional $34.4 million in
proceeds, based primarily on appraisals, from the disposition of the
remaining 13 domestic and 18 international operations that will be
sold or liquidated by the end of the wind-down process.
|X| The accrual for estimated operating losses and wind-down costs
represented approximately $28.3 million in estimated operating losses
from October 31, 1999 until the facilities are sold or operations
otherwise cease and approximately $15.0 million for the wind-down
costs for facilities that will be sold or liquidated.
|X| The accrual for estimated additional costs under postpetition letters
of credit, guarantees and sureties of $12.5 million represents
estimated additional customer contract claims as a result of the
divestiture plan.
|X| The accrual for estimated employee termination costs reflected
estimated severance and related benefits costs with respect to
approximately 1,071 employees, the majority of whom received
applicable notifications during January 2000.
|X| The accrual for estimated post-closing environmental costs of $7.0
million relate to (i) cost estimates for the removal of asbestos and
hazardous wastes at certain facilities being sold or closed and (ii)
increased estimated costs associated with the completion of certain
remediation activities at one of Beloit's domestic manufacturing
facilities assuming the activities will be performed by a buyer or
subcontracted to a third-party.
|X| The gain on the curtailment of defined benefit plans of $17.9 million
reflects the elimination of future years of service accruals.
At October 31, 2000, Beloit was contingently liable to banks, financial
institutions, and others for approximately $84.4 million for outstanding letters
of credit and bank guarantees. This amount was all issued by U.S. banks for U.S.
Beloit subsidiaries. Beloit also may have guaranteed performance of its
equipment at levels specified in sales contracts without the requirement of a
letter of credit.
The assets and liabilities of discontinued operations are comprised of the
following:
In thousands October 31
- ---------------------------------------------------------------------------------------
2000 1999
--------- ---------
Assets:
Cash and cash equivalents $ 9,622 $ 19,290
Accounts receivable - net 17,642 153,761
Inventories 5,531 110,770
Other current assets 6,524 18,662
Property, plant and equipment - net 31,396 311,424
Other non-current assets 1,006 39,691
Goodwill and other intangibles - 96,520
Allowance for estimated loss on disposal (56,490) (472,118)
---------- ---------
Total assets, representing estimated disposal cash proceeds $ 15,231* $ 278,000
========= =========
Liabilities:
Postpetition liabilities:
Trade accounts payable $ (12,351) $ (57,111)
Employee compensation and benefits (14,420) (14,605)
Accrued contract losses, restructuring costs and other (8,016) (76,859)
Funded debt and capitalized lease obligations - (24,080)
Operating losses and facility wind-down costs (10,519) (43,304)
Postpetition letters of credit, guarantees and sureties (10,974) (12,500)
Employee termination costs - (12,000)
Post-closing environmental costs (7,677) (7,000)
--------- ---------
Total postpetition liabilities (63,957) (247,459)
--------- ----------
Prepetition liabilities:
Trade accounts payable (89,438) (145,955)
Funded debt (2,471) (14,128)
Advance payments and progress billings (24,883) (125,696)
Accrued warranties (25,000) (34,054)
Princeton Paper lease (39,000) (54,000)
APP claims - (46,000)
Pension and other (47,339) (53,437)
Minority interest (18,023) (21,536)
--------- --------
Total prepetition liabilities (246,154) (494,806)
--------- --------
Total liabilities, including liabilities
subject to compromise $(310,111) $(742,265)
========= =========
* Total assets as of October 31, 2000 exclude a $16 million postpetition
intercompany receivable from Harnischfeger Industries, Inc. and the APP
Note. See Note 9 - Liabilities Subject to Compromise in the Notes to
Consolidated Financial Statements.
All intercompany accounts, including Beloit intracompany accounts, have
been eliminated in the Consolidated Financial Statements in accordance with
generally accepted accounting principles and are not included in the numbers
above. While such intercompany obligations are eliminated in the preparation of
consolidated financial statements, they remain obligations on a separate legal
entity basis. On September 21, 2000, the committee to represent the interests of
creditors of Harnischfeger and its non-Beloit subsidiaries and the committee
appointed to represent the interests of the creditors of Beloit and its
subsidiaries reached agreement to settle certain intercompany and intercreditor
issues. The committee settlement agreement has been incorporated into the
Debtors' proposed plan of reorganization. Under the committee settlement
agreement the Company and its non-Beloit subsidiaries will receive nothing on
account of their prepetition intercompany claims, including the Company's $780
million claim against Beloit. Similarly, Beloit will receive nothing on account
of its $9.95 million claim against P&H. The committee settlement agreement also
provides for (i) a sharing of professional fees and expenses relating to the
Beloit bankruptcy filing, (ii) an agreement to limit claims against officers and
directors, (iii) an agreement that none of the Debtors will be substantively
consolidated, (iv) an agreement that Beloit and its subsidiaries are not
entitled to compensation for certain tax attributes, including tax loss
carryforwards, and (v) an agreement by the Company not to require the separation
or termination of two pension plans covering employees of Beloit and its
subsidiaries. The committee settlement agreement contemplates that the Company's
plan be effective on or before March 5, 2001.
Other Beloit Matters:
o The Potlatch lawsuit, filed originally in 1995, related to a 1989 purchase
of pulp line washers supplied by Beloit for less than $15 million. In June
1997, a Lewiston, Idaho jury awarded Potlatch $95 million in damages in the
case which, together with fees, costs and interest to April 2, 1999,
approximated $120.0 million. On April 2, 1999 the Supreme Court of Idaho
vacated the judgement of the Idaho District Court in the Potlatch lawsuit
and remanded the case for a new trial. This litigation has been stayed as a
result of the bankruptcy filings. Potlatch filed a motion with the
Bankruptcy Court to lift the stay. The Company opposed this motion and the
motion was denied.
o The Company, Beloit and certain of their officers and employees have been
named as defendants in an action in the Bankruptcy Court in which Omega
Papier Wernhausen GmbH ("Omega") is the plaintiff. This action concerns
prepetition and postpetition commitments allegedly made by the Company,
Beloit and the officers and employees named in the action with respect to a
prepetition contract between Omega and Beloit's Austrian subsidiary under
which Beloit's Austrian subsidiary agreed to supply a tissue paper making
machine for Omega's factory in Wernshausen, Germany. The action makes
claims of breach of guarantee, tortuous interference with business, breach
of covenant of good faith, fraud in the inducement and negligent
misrepresentation and seeks damages of $12 million for each of nine counts
plus punitive damages of $24 million for four of the nine counts. Omega has
represented to the Bankruptcy Court that it is seeking a total of $36
million in damages. As of October 31, 2000, the Company was not able to
assess its ultimate liability, if any, in the matter.
Material Handling
On March 30, 1998, the Company completed the sale of approximately 80% of
the common stock of the Company's P&H material handling ("Material Handling")
segment to Chartwell Investments, Inc. in a leveraged recapitalization
transaction. As such, the accompanying financial statements have been
reclassified to reflect Material Handling as a discontinued operation. The
Company retained approximately 20% of the outstanding common stock and 11% of
the outstanding voting securities of Material Handling and held one director
seat in the new company until December, 2000. In addition, the Company licensed
Material Handling to use the "P&H" trademark on existing Material
Handling-produced products on a worldwide basis for periods specified in the
agreement for a royalty fee payable over a ten year period. The material
handling segment recorded revenues of $130.5 million in 1998 prior to the
divestiture. Income (loss) from discontinued operations for the company for
fiscal 1999 included income of $4.4 million in 1998 derived from this segment.
The Company reported a $151.5 million after-tax gain on the sale of this
discontinued operation in the second quarter of fiscal 1998. Proceeds consisted
of $341.0 million in cash and preferred stock, originally valued at $4.8
million, with a 12.25% payment-in-kind dividend, and $7.2 million in common
stock that was not reflected in the Company's balance sheet or gain calculations
due to the nature of the leveraged recapitalization transaction. Material
Handling subsequently issued additional shares of common stock, reducing the
Company's holding to 15.6% of the outstanding common stock. In view of
continuing operating losses by Material Handling, the Company reduced to zero
the $5.4 million carrying value of its investment in this business during the
third quarter of 1999. Material Handling filed for Chapter 11 bankruptcy
protection on May 17, 2000.
Material Handling and its affiliates have asserted more than 200 claims
against the Debtors in their bankruptcy cases and Debtors have filed a similar
number of claims against Material Handling in Material Handling's bankruptcy
case. Most of Material Handling's claims against the Debtors are duplicative and
the Company has objected to many of these claims. The liquidated claimed amount
is approximately $0.5 million, although all of the claims assert additional
unliquidated amounts. In addition, Material Handling has advised Debtors that it
may assert additional claims for approximately $340 million based on theories
that the transactions in which Material Handling was sold to Chartwell
Investments, Inc. are voidable. The Company disputes the assertion of any such
claims.
Liquidity and Capital Resources
Chapter 11 Proceedings
The matters described under this caption "Liquidity and Capital Resources",
to the extent that they relate to future events or expectations, may be
significantly affected by the Chapter 11 proceedings. Those proceedings will
involve, or may result in, various restrictions on the Company's activities,
limitations on financing, the need to obtain Bankruptcy Court approval for
various matters and uncertainty as to relationships with vendors, suppliers,
customers and others with whom the Company may conduct or seek to conduct
business. In addition, the recorded amounts of: (i) the estimated cash proceeds
to be realized upon the disposal of Beloit's assets to be sold or liquidated,
and (ii) the estimated cash requirements to fund Beloit's remaining costs and
claims, could be materially different from the actual amounts.
Under the Bankruptcy Code, postpetition liabilities and prepetition
liabilities (i.e., liabilities subject to compromise) must be satisfied before
shareholders can receive any distribution. Under the terms of the Company's
proposed plan of reorganization, the Company's existing common stock will be
cancelled and the holders of the Company's existing common stock will receive
nothing for their stock. The U.S. Trustee for the District of Delaware has
appointed an Official Committee of Equity Holders to represent the shareholders
in the proceedings before the Bankruptcy Court.
Working Capital
Working capital of continuing operations, excluding liabilities subject to
compromise, as of October 31, 2000, was $218.8 million including $72.1 million
of cash and cash equivalents as compared to working capital of $187.2 million
including $57.5 million of cash and cash equivalents as of October 31, 1999. The
increase in working capital during the 2000 fiscal year was due to decreases in
accounts receivable and inventories, offset by a reduction in non-U.S.
short-term borrowings, reduction in customer advance payments and progress
billings and reduction in accrued liabilities associated with restructuring
charges recorded in fiscal 1999.
Cash Flow from Continuing Operations
Cash provided by continuing operations in fiscal 2000 was $36.7 million
compared to cash provided by continuing operations of $10.6 million in 1999. The
improvement in cash provided by operations was primarily due to improved
operating results of the Company's two business segments. During fiscal 2000,
$170 million was used for investments, financing activities and other
transactions compared to $258 million of cash being provided by these categories
in fiscal 1999. Approximately $180 million of the fiscal 2000 cash usage was
associated with a net reduction in the Company borrowings. In fiscal 1999,
additional borrowings by the company provided approximately $294 million.
In connection with discontinued operations, $152 million of cash was
provided in fiscal 2000 compared to a $241 million cash usage in fiscal 1999.
The cash provided in fiscal 2000 was primarily associated with the sales of the
assets of the discontinued operations. In total, cash increased approximately
$15 million during fiscal 2000.
DIP Facility
On July 8, 1999 the Bankruptcy Court approved a two-year, $750 million
Revolving Credit, Term Loan and Guarantee Agreement underwritten by the Chase
Manhattan Bank (the "DIP Facility"). In May, 2000, the Company voluntarily
reduced the size of the DIP Facility to $350 million and on July 6, 2000, an
order was entered by the Court approving an amendment to the DIP Facility
resulting in a voluntary reduction of the DIP Facility to $350 million
consisting of a Tranche A sub-facility of $250 million and a Tranche B
sub-facility of $100 million. The Tranche A sub-facility has a final maturity of
June 6, 2001 (the original maturity date), and the Tranche B sub-facility
matured on December 31, 2000. Additionally; as permitted by the original order
authorizing the DIP Facility, on August 3, 2000 the DIP Facility was further
amended to, among other things, effect the syndication of the DIP Facility among
a group of nine lenders, with Chase Manhattan Bank retaining the agent role.
Proceeds from the DIP Facility may be used to fund postpetition working
capital and for other general corporate purposes during the term of the DIP
Facility and to pay up to $35 million of prepetition claims of critical vendors.
Approximately $8.3 million of such disbursements have been made. Under the
amended terms of the DIP Facility, the Company is permitted to make loans and
issue letters of credit in favor of or on behalf of foreign subsidiaries for
specified limited purposes, including individual limits for loans and advances
of up to $75 million for working capital needs and $100 million for loans and
letters of credit used for support or repayment of existing foreign credit
facilities, and an aggregate limit of $150 million for all such loans and
letters of credit, including any stand-by letters of credit issued to support
foreign business opportunities. Beginning June 1, 2000, the amended DIP Facility
imposed monthly minimum EBITDA tests and quarterly limits on capital
expenditures.
DIP Facility lenders benefit from superpriority administrative claim status
as provided for under the Bankruptcy Code. Under the Bankruptcy Code, a
superpriority claim is senior to unsecured prepetition claims and all other
administrative expenses incurred in the Chapter 11 case. Direct borrowings under
the DIP Facility are priced at LIBOR + 2.75% per annum on the outstanding
borrowings. Letters of credit are priced at 2.75% per annum (plus a fronting fee
of 0.25% to the Agent) on the outstanding face amount of each letter of credit.
In addition, the Company pays a commitment fee of 0.50% per annum on the unused
amount of the DIP Facility, payable monthly in arrears. The DIP Facility matures
on the earlier of the substantial consummation of a plan of reorganization or
June 6, 2001.
In proceedings filed with the Bankruptcy Court, the Company agreed with the
Official Committee of Unsecured Creditors appointed by the U.S. Trustee (the
"Creditors Committee") and with MFS Municipal Income Trust and MFS Series Trust
III (collectively, the "MFS Funds"), holders of certain debt issued by Joy, to a
number of restrictions regarding transactions with foreign subsidiaries and
Beloit:
|X| The Company agreed to give at least five days prior written notice to the
Creditors Committee and to the MFS Funds of the Debtors' intention to (a)
make loans or advances to, or investments in, any foreign subsidiary for
working capital purposes in an aggregate amount in excess of $90 million;
(b) make loans or advances to, or investments in, any foreign subsidiary to
repay the existing indebtedness or cause letters of credit to be issued in
favor of a creditor of a foreign subsidiary in an aggregate amount,
cumulatively, in excess of $30 million; or (c) make postpetition loans or
advances to, or investments in, Beloit or any of Beloit's subsidiaries in
excess of $115 million. In September 1999, the Company notified the
Creditors Committee and MFS Funds that it intended to exceed the stipulated
$115 million amount. The Company subsequently agreed, with the approval of
the Bankruptcy Court, to provide the Creditors Committee with weekly cash
requirement forecasts for Beloit, to restrict funding of Beloit to
forecasted amounts, to provide the Creditors Committee access to
information about the Beloit divestiture and liquidation process, and to
consult with Creditors Committee regarding the Beloit divestiture and
liquidation process. All such reports and notices have been provided to the
Creditors Committee as agreed.
|X| In addition, the Company agreed to give notice to the Creditors Committee
and to the MFS Funds with respect to any liens created by or on a foreign
subsidiary or on any of its assets to secure any indebtedness. In
accordance with this requirement, the Company has provided such notice in
connection with the refinancing of the credit facilities of certain foreign
subsidiaries.
|X| The Company also agreed to notify the MFS Funds of any reduction in the net
book value of Joy of ten percent or more from $364 million after which MFS
Funds would be entitled to receive periodic financial statements for Joy.
As of October 31, 1999, MFS Funds is entitled to receive periodic financial
statements for Joy.
As of January 31, 2000, the Company and the Chase Manhattan Bank entered
into a Waiver and Amendment Letter which waived compliance with certain negative
covenants of the DIP Facility as they related to the sale of the assets of
Beloit and among other things, amended the EBITDA tests in the DIP Facility to
levels that are appropriate for the Company's continuing businesses.
Continuation of unfavorable business conditions or other events could require
the Company to seek further modifications or waivers of certain covenants of the
DIP Facility. In such event, there is no certainty that the Company would obtain
such modifications or waivers to avoid default under the DIP Facility.
The principal sources of liquidity for the Company's operating requirements
have been cash flows from operations and the sale of Beloit assets. While the
Company expects that cash flows from operations and the DIP Facility will
provide sufficient working capital to operate its businesses, there can be no
assurances that such sources will prove to be sufficient. The Debtors are
jointly and severally liable under the DIP Facility. At October 31, 2000, $30
million in direct borrowings had been drawn under the DIP Facility and are
classified as a short-term obligation on the Company's Balance Sheet.
Additionally, letters of credit in the face amount of $35.6 million had been
issued and were outstanding under the DIP Facility as of October 31, 2000.
Market Risk
Volatility in interest rates and foreign exchange rates can impact the
Company's earnings, equity and cash flow. From time to time the Company
undertakes transactions to hedge this impact. The hedge instrument is considered
effective if it offsets partially or completely the negative impact on earnings,
equity and cash flow due to fluctuations in interest and foreign exchange rates.
In accordance with the Company's policy, the Company does not execute
derivatives that are speculative or that increase the Company's risk from
interest rate or foreign exchange rate fluctuations. At October 31, 20