<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 20, 1998
REGISTRATION STATEMENT NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
COLFAX CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 3561 54-1860933
(STATE OR OTHER (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
JURISDICTION OF CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
INCORPORATION OR
ORGANIZATION)
9211 FOREST HILL AVENUE, SUITE 109
RICHMOND, VA 23235
(804) 560-4070
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
----------------
JOHN A. YOUNG
9211 FOREST HILL AVENUE, SUITE 109
RICHMOND, VA 23235
(804) 560-4070
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
----------------
COPIES TO:
SCOTT V. SIMPSON, STEPHEN W. ROHAN S. WEERASINGHE
HAMILTON SHEARMAN & STERLING
SKADDEN, ARPS, SLATE, MEAGHER & FLOM 599 LEXINGTON AVENUE
LLP NEW YORK, NEW YORK 10022
919 THIRD AVENUE TEL: (212) 848-4000
NEW YORK, NEW YORK 10022 FAX: (212) 848-7179
TEL: (212) 735-3000
FAX: (212) 735-2000
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended, check the following box: [_]
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CALCULATION OF REGISTRATION FEE
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<TABLE>
<CAPTION>
PROPOSED
TITLE OF SECURITIES MAXIMUM AGGREGATE AMOUNT OF
BEING REGISTERED OFFERING PRICE(1)(2) REGISTRATION FEE
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<S> <C> <C>
Common Stock, par value $.01 per
share......................... $250,000,000 $73,750
</TABLE>
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(1) Includes shares of Common Stock which the Underwriters have the option
to purchase to cover over-allotments, if any.
(2) Estimated solely for the purpose of computing the registration fee in
accordance with Rule 457 of the Securities Act.
----------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE
REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION,
ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
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<PAGE>
EXPLANATORY NOTE
This Registration Statement contains two forms of prospectus: one to be used
in connection with an offering in the United States and Canada (the "U.S.
Prospectus") and one to be used in connection with a concurrent offering
outside the United States and Canada (the "International Prospectus"). The
U.S. Prospectus and International Prospectus are identical except for their
respective front cover pages, sections entitled "Underwriting" and back cover
pages. The form of U.S. Prospectus is included herein and is followed by the
alternate pages to be used in the International Prospectus. Each of the
alternate pages for the International Prospectus included herein is labeled
"Alternate Page for International Prospectus."
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS, DATED AUGUST 20, 1998
PROSPECTUS
SHARES
COLFAX CORPORATION
COMMON STOCK LOGO
-----------
All of the shares of Common Stock offered hereby are being sold by Colfax
Corporation (the "Company"). Of the shares of Common Stock offered hereby,
shares are being offered for sale initially in the United States and Canada
by the U.S. Underwriters and shares are being offered for sale initially in
a concurrent offering outside the United States and Canada by the International
Managers. The initial public offering price and the underwriting discount per
share will be identical for both Offerings. See "Underwriting."
Prior to the Offerings, there has been no public market for the Common Stock.
It is currently estimated that the initial public offering price will be
between $ and $ per share. For a discussion relating to factors to be
considered in determining the initial public offering price, see
"Underwriting." Application has been made for listing of the Common Stock on
the New York Stock Exchange under the symbol "CXC."
SEE "RISK FACTORS" BEGINNING ON PAGE 11 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED
HEREBY.
-----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIESAND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HASTHE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIESCOMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THISPROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
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<TABLE>
<CAPTION>
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT(1) COMPANY(2)
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<S> <C> <C> <C>
Per Share.................................... $ $ $
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Total(3)..................................... $ $ $
</TABLE>
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(1) The Company has agreed to indemnify the several Underwriters against
certain liabilities, including liabilities under the Securities Act of
1933, as amended. See "Underwriting."
(2) Before deducting expenses payable by the Company estimated at $ .
(3) The Company has granted the U.S. Underwriters and the International
Managers options to purchase up to an additional shares and shares
of Common Stock, respectively, in each case exercisable within 30 days
after the date hereof, solely to cover over-allotments, if any. If such
options are exercised in full, the total Price to Public, Underwriting
Discount and Proceeds to Company will be $ , $ and $ ,
respectively. See "Underwriting."
-----------
The shares of Common Stock are offered by the several Underwriters, subject
to prior sale, when, as and if issued to and accepted by them, subject to
approval of certain legal matters by counsel for the Underwriters and certain
other conditions. The Underwriters reserve the right to withdraw, cancel or
modify such offer and to reject orders in whole or in part. It is expected that
delivery of the shares of Common Stock will be made in New York, New York on or
about , 1998.
-----------
MERRILL LYNCH & CO.
SCHRODER & CO. INC.
LEHMAN BROTHERS
-----------
The date of this Prospectus is , 1998
<PAGE>
[INSIDE FRONT COVER]
[ARTWORK]
----------------
The Company intends to furnish its stockholders annual reports containing
audited financial statements and will make available copies of quarterly
reports containing unaudited interim financial information for the first three
fiscal quarters of each fiscal year of the Company.
----------------
CERTAIN PERSONS PARTICIPATING IN THE OFFERINGS MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK.
SUCH TRANSACTIONS MAY INCLUDE STABILIZING THE PURCHASE OF COMMON STOCK TO
COVER SYNDICATE SHORT POSITIONS AND THE IMPOSITION OF PENALTY BIDS. FOR A
DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read in
conjunction with, the more detailed information and financial statements and
notes thereto appearing elsewhere in this Prospectus. Unless otherwise
indicated or the context otherwise requires, as used in this Prospectus, (i)
"Colfax" and the "Company" mean Colfax Corporation and its subsidiaries, after
giving effect to the Combination (as defined herein); (ii) "Imo" means Imo
Industries Inc.; (iii) "Constellation Pumps" means Constellation Pumps Corp.,
the indirect parent company of Allweiler AG ("Allweiler"); (iv) "Ameridrives"
means American Enterprises MPT Corp., the parent company of Nuttall Gear LLC
("Nuttall Gear") and Ameridrives International, L.P. ("Ameridrives L.P."); (v)
"Ameridrives Holdings" means American Enterprises MPT Holdings L.P.; (vi)
"Acquired Companies" means, collectively, Imo, Constellation Pumps, Ameridrives
and Ameridrives Holdings; and (vii) "Principal Stockholders" means,
collectively, Steven M. Rales and Mitchell P. Rales (together, the "Rales") and
Philip W. Knisely. Concurrently with the consummation of the Offerings, the
Company, the Principal Stockholders and certain other minority securityholders
of the Acquired Companies will effect the Combination, which will result in
Colfax Corporation being the parent company of Imo, Allweiler and Ameridrives.
See "Certain Relationships and Related Transactions--The Combination." Unless
otherwise indicated, the information contained in this Prospectus assumes no
exercise of the Underwriters' over-allotment options.
THE COMPANY
The Company is a multinational manufacturer of a broad range of engineered
industrial products designed primarily to transfer liquids or regulate and
control motion in a variety of industrial applications. The Company operates in
two distinct industry segments: Fluid Handling and Industrial Positioning. The
Fluid Handling segment designs and produces a broad range of specialty pumps,
including screw, centrifugal, progressive cavity and gear pumps. The Industrial
Positioning segment designs and produces a wide range of power transmission and
motion control products, including enclosed gear drives, speed reducers, open
gearing components, AC and DC motor controllers, couplings, clutches, push-pull
cable and remote control systems. The Company maintains leadership positions in
its primary markets through its recognized global brands, its reputation for
product quality and service, and its innovative new product developments. For
the year ended December 31, 1997, the Company generated pro forma total net
sales of $536.0 million.
Philip W. Knisely, with the support of the other Principal Stockholders,
embarked in 1995 to acquire, manage and grow world class industrial
manufacturing companies in the fluid handling and industrial positioning
industries. These industries were targeted due to their size, highly fragmented
nature and the Principal Stockholders' belief that these industries provided
the opportunity for accelerated growth and for improvements in operating
margins.
The Principal Stockholders have significant experience in acquiring and
leading multinational industrial manufacturing companies. Mr. Knisely, the
Company's President and Chief Executive Officer, has experience in managing
global industrial manufacturing operations for more than 15 years, including as
a group president of Emerson Electric Company and president of AMF Industries.
The Rales, who will serve as directors of the Company, are also directors and
principal stockholders of Danaher Corporation ("Danaher"), a New York Stock
Exchange ("NYSE") listed company and a leading manufacturer of tools,
components and process/environmental controls with a market capitalization of
approximately $5.6 billion as of July 31, 1998.
Through a series of transactions, the Principal Stockholders acquired market
leading manufacturing companies in the fluid handling and industrial
positioning industries. Concurrently with the consummation of the Offerings,
the Principal Stockholders and certain other minority securityholders of the
Acquired Companies will combine their interests in these businesses through the
Combination (as hereinafter defined), which will result in Colfax Corporation
being the parent company of Imo, Allweiler and Ameridrives. See "Business--
History" and "Certain Relationships and Related Transactions."
The Company intends to expand its operations through internal growth and
acquisitions. The Company believes that there is a significant opportunity to
increase the internal growth of the Acquired Companies and of
3
<PAGE>
future acquisitions by implementing the Colfax Business System ("CBS"), a
disciplined strategic planning and execution methodology designed to achieve
world class excellence in customer satisfaction. CBS is a customization of a
system which has its roots in the world-recognized Toyota Production System. A
similar system has been successfully deployed at Danaher for more than 10
years. Management has begun implementing CBS in each of the Acquired Companies
and believes that it has resulted in cost savings that have contributed to an
improvement in the Company's pro forma results of operations, as shown in the
following table:
<TABLE>
<CAPTION>
UNAUDITED PRO FORMA
SIX MONTHS ENDED
JUNE 30, 1997 JULY 3, 1998
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(DOLLARS IN THOUSANDS)
<S> <C> <C>
Net sales......................................... $272,006 $277,201
Adjusted operating income(a) ..................... 22,155 33,364
Adjusted operating income margin.................. 8.1% 12.0%
</TABLE>
--------
(a) Represents income before interest, taxes and unusual items.
OPERATING SEGMENTS
The Company markets its products through worldwide sales and marketing
service networks to a diverse customer base in the following two segments:
Fluid Handling. The pumps designed and produced by the Fluid Handling segment
serve a variety of applications in the following industries: chemicals,
petrochemicals, energy and power generation, marine and offshore engineering,
sewage and environmental engineering, food and beverage, pulp and paper, water
treatment and other process industries. In Fluid Handling, the Company markets
its products principally under the Imo, Warren and Allweiler brand names. The
Imo brand name dates back to 1928, when Bengt Ingestrom, a Swedish
entrepreneur, and Carl Montelius, a Swedish engineer (together, their two last
names formed the acronym Imo), invented the three-screw pump. Today, the Imo
pump is the industry standard for many screw pump applications. The Warren
brand name dates to 1897 and its centrifugal and two-screw pumps are found in
many marine applications. The Allweiler brand name dates to 1860 and is the
leading brand name for screw pumps in Europe. The Company believes that it is
the market leader in the highly fragmented $1.7 billion worldwide rotary pump
market with an 11% market share.
Industrial Positioning. In Industrial Positioning, Boston Gear and Morse
Controls are leaders in their market segments. Boston Gear is one of the most
widely recognized brands in the power transmission market according to
independent awareness studies. Boston Gear products have applications in a wide
range of industrial manufacturing operations, ranging from packaging machinery
and equipment to integrated steel and pulp and paper mills. Boston Gear offers
one of the widest ranges of mechanical power transmission and motion control
products of any manufacturer in North America. Morse Controls cable control
systems have a strong brand awareness as Morse Controls was the originator of
the single lever mechanical engine control and jacketed push-pull cable. Morse
Controls products are sold into a variety of end use markets with a
concentration in the mobile equipment, marine and aviation sectors.
INDUSTRY OVERVIEW
Fluid Handling. Based on analyst reports and trade publications, the Company
believes that the worldwide fluid handling industry generated revenue of
approximately $26.0 billion in 1997. The fluid handling market can be divided
into three segments: pumps, valves and fittings. The Company competes in the
pump segment, which, according to Company estimates, accounted for $13.5
billion in worldwide revenue in 1997. The Company does not currently compete in
the valve or fittings segments (estimated by the Company to be approximately
$10.5 billion and $2.0 billion in 1997 worldwide revenue, respectively), but
believes that these markets present potential future growth opportunities.
4
<PAGE>
The pump market is further segmented into positive displacement and
centrifugal pump products. The Company primarily competes in the positive
displacement pump market, which generated an estimated $2.5 billion in
worldwide revenue in 1997. The Company estimates that the worldwide rotary pump
market, a sub-segment of the positive displacement market, generated $1.7
billion in revenue in 1997. The Company believes that it is the market leader
in the worldwide rotary pump market with an 11% market share. The next two
largest competitors in this segment each have market shares of approximately
7%. The Company is also a niche competitor in what it estimates to be the $11.0
billion centrifugal pump market and views this market as an area for growth
opportunities.
The worldwide pump market is highly fragmented, with over 1,000 competitors.
The Company estimates that 95% of these competitors are privately owned
companies, each generating less than $100.0 million in annual revenue. The
Company also estimates that 65% of the worldwide rotary pump market consists of
competitors that each generate less than $25.0 million in annual rotary pump
sales.
Industrial Positioning. The Company estimates that the total worldwide market
for industrial positioning products generated revenue of approximately $15.0
billion in 1997, which was evenly split between publicly owned and privately
held companies. The total size of the market in which the Company currently
competes is approximately $6.0 billion. The Company believes that the
industrial positioning products market is highly fragmented with over 1,000
companies, each generating total revenues of less than $100.0 million per year.
GROWTH STRATEGY
. INTERNAL GROWTH
The Company believes that there is significant potential to increase the
internal growth of the Acquired Companies and of future acquisitions.
Through the implementation of CBS, the Company will seek to grow internally
by focusing on customer needs and striving to improve product quality,
delivery and cost. Specific actions to accomplish these goals include: (i)
leveraging its established distribution channels; (ii) introducing
innovative new products and applications; (iii) increasing asset
utilization; (iv) using advanced information technology; (v) increasing
sales and marketing efforts; (vi) expanding and diversifying the customer
segments served; and (vii) expanding the geographic markets served.
. ACQUISITION GROWTH
The Company believes that the fragmented nature of the industries in which
it participates presents substantial consolidation and growth opportunities
for companies with access to capital and the management ability to execute
a disciplined acquisition and integration program. The Company's
acquisition growth strategy is to acquire companies in the segments in
which it participates that (i) have leading brands and strong market
positions; (ii) will expand its product lines; (iii) have reputations for
producing high quality products; and (iv) complement or enhance the
Company's existing worldwide sales and distribution networks. The Company
also believes that the extensive experience of its management team and the
Principal Stockholders in acquiring and effectively integrating acquisition
targets should enable the Company to capitalize on these opportunities. The
Company intends to take a proactive approach to acquisitions and has
currently identified approximately 50 potential acquisition targets in each
of its two business segments located both in and outside the United States,
although it does not currently have any agreements or understandings with
respect to the acquisition of any such potential targets.
OPERATING STRATEGY
. LEAD WITH EXPERIENCED MANAGEMENT TEAM
Philip W. Knisely, the Company's President and Chief Executive Officer, has
been a director and president of Imo since 1997 and of Ameridrives since
1996. From 1988 to 1995, he was president of AMF Industries,
5
<PAGE>
a privately held, diversified global manufacturing company. Prior to 1988,
Mr. Knisely spent 10 years at Emerson Electric Company, a major
manufacturer of electronic products and components, in increasingly senior
positions, including president of Emerson Power Transmission Group from
1986 to 1988.
John A. Young, the Company's Vice President and Chief Financial Officer,
has extensive experience in identifying, analyzing and executing
acquisitions of industrial manufacturing companies. Mr. Young was director
of corporate development for AMF Industries from 1992 to 1995 and in that
capacity worked closely with Mr. Knisely in evaluating and completing
acquisitions. Prior to 1992, Mr. Young worked in mergers and acquisitions
for Chase Manhattan Bank and Robert Fleming, Inc.
The Company has also assembled a team of four experienced managers at its
business units. These managers have all joined the Company within the last
year, and have an average of 25 years of industrial management experience.
Three of these executives had previously worked with Mr. Knisely. See
"Management."
The Company's Board of Directors will include the Rales. Mitchell P. Rales,
the Company's Chairman of the Board, has been a director of Danaher since
1984 and has been chairman of its executive committee since 1990. Steven M.
Rales, a member of the Company's Board of Directors, has been Chairman of
the Board of Danaher since 1984. From 1984 to 1997, Danaher's annual
revenue increased from approximately $90.0 million to over $2.0 billion. In
addition, Danaher's market capitalization has grown from approximately
$71.0 million as of December 31, 1984 to approximately $5.6 billion as of
July 31, 1998. The Rales were founders in 1985 of Wabash National
Corporation ("Wabash"), a NYSE listed company and currently the largest
truck trailer manufacturer in the United States.
. IMPLEMENT INNOVATIVE COLFAX BUSINESS SYSTEM
A core element of the Company's management philosophy is CBS which it
intends to implement in each of its businesses. CBS is a customization of a
system which has its roots in the world-recognized Toyota Production System
and was designed and refined by the senior management of Danaher. CBS is a
disciplined strategic planning and execution methodology designed to
achieve world class excellence in customer satisfaction. The basic
principles of CBS include:
. adhering to a philosophy of continuous improvement in quality, delivery,
cost and growth
. utilizing the technique of policy deployment to achieve and sustain
world class results
. hiring people with high integrity, who are results oriented and excel in
a team environment
. analyzing performance against world class benchmarks
. recognizing that profitability can be obtained only by achieving the
best possible customer satisfaction
Management has begun implementing CBS in each of the Acquired Companies,
and the Company intends to implement CBS in each of its future
acquisitions. The Company views CBS as an integral tool to effect
improvements in customer service, product quality, delivery and cost. By
applying the strict methodology of CBS to the businesses that it acquires,
the Company believes that it will be able to improve the operating margins
and increase the asset utilization of such businesses and, in so doing,
improve the Company's cash flow. For more information regarding CBS, see
"Business--Manufacturing."
. CAPITALIZE ON SYNERGIES AND COST EFFICIENCIES IN ACQUIRED COMPANIES
The Company believes that expansion will give it the opportunity to gain
competitive advantages relative to smaller operators. Such competitive
advantages may include greater purchasing power, a larger international
sales and distribution network, a lower cost of capital and the ability to
provide customers with a broader range of products and services. Cost
savings realized by the Acquired Companies contributed substantially to the
improvement in pro forma adjusted operating income, which increased 50%
from $22.2 million for the six months ended June 30, 1997 to $33.4 million
for the six months ended July 3, 1998.
6
<PAGE>
Other aspects of the Company's operating strategy include achieving high
levels of customer service and satisfaction, introducing innovative new
products and maintaining global sales and service networks. See "Business--
Operating Strategy."
----------------
The Company was incorporated in Delaware in July 1997 under the name "II
Acquisition Corp." and changed its name to "Colfax Corporation" in July 1998.
The Company's principal executive office is located at 9211 Forest Hill Avenue,
Suite 109, Richmond, VA 23235 and its telephone number is (804) 560-4070.
CONCURRENT TRANSACTIONS
THE COMBINATION
Prior to the Offerings, the Principal Stockholders and certain other minority
securityholders owned, directly or indirectly, Colfax Corporation (which, in
turn, owned Imo), Allweiler and Ameridrives, each of which was operated
independently. Concurrently with the consummation of the Offerings, the
Principal Stockholders and such other minority securityholders will combine
their interests in these businesses with the Company (the "Combination").
Immediately following the Combination, Colfax Corporation will be the parent
company of Imo, Allweiler and Ameridrives.
For more information concerning the Combination, see "Management's Discussion
and Analysis of Financial Condition and Results of Operations," "Certain
Relationships and Related Transactions" and the Unaudited Pro Forma
Consolidated Financial Statements and the notes thereto included elsewhere in
this Prospectus.
THE REFINANCING
In connection with the Offerings, the Company intends to effect a refinancing
(the "Refinancing") pursuant to which (i) the Company will repay approximately
$ million of indebtedness under certain existing credit facilities
(collectively, the "Subsidiary Credit Facilities") and (ii) Imo will repurchase
(the "Imo Note Repurchase") its 11 3/4% Senior Subordinated Notes due May 1,
2006 (the "Imo Notes"). As a result of the Refinancing, the Company expects to
realize significantly lower interest expense in future periods. In addition,
the Company expects to record an after-tax extraordinary loss of approximately
$ million in the fourth quarter of 1998, representing the premium expected
to be paid in the Imo Note Repurchase and the write-off of related capitalized
debt issuance fees and unamortized discount.
Imo Note Repurchase. On , 1998, Imo commenced the Imo Note Repurchase
through a tender offer for all of the outstanding Imo Notes. In connection with
the tender offer, Imo is soliciting consents from holders of the Imo Notes to
amend the indenture governing the Imo Notes to remove substantially all of the
restrictive covenants and certain other provisions and to permit the
Combination. The Imo Note Repurchase is conditioned upon the closing of the
Offerings.
Colfax Credit Facility. As part of the Refinancing, the Company intends to
enter into a $300 million credit facility (the "Colfax Credit Facility"),
consisting of a $100 million term loan facility and a $200 million revolving
credit facility. The Company intends to use the net proceeds of the Offerings,
together with borrowings under the Colfax Credit Facility (consisting of the
full amount of the term loan facility and approximately $ million of
borrowings under the revolving credit facility), to repay the indebtedness
under the Subsidiary Credit Facilities and to effect the Imo Note Repurchase.
See "Use of Proceeds." The remaining borrowing capacity under the revolving
credit facility will be available for future acquisitions, capital expenditures
and general corporate purposes.
For more information concerning the Refinancing, see "Use of Proceeds,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Certain Relationships and Related Transactions," "Description of
Certain Indebtedness" and the Unaudited Pro Forma Consolidated Financial
Statements and the notes thereto included elsewhere in this Prospectus.
7
<PAGE>
THE OFFERINGS
The offering of shares of the Company's Common Stock, par value $0.01 per
share, in the United States and Canada (the "U.S. Offering") and the offering
of shares of the Common Stock outside the United States and Canada (the
"International Offering") are collectively referred to herein as the
"Offerings."
<TABLE>
<S> <C>
Common Stock Offered by the Com-
pany........................... shares
Common Stock to be Outstanding
after the Offerings(1)......... shares
Use of Proceeds................. The Company will use the net proceeds that it
receives from the Offerings, together with
borrowings under the Colfax Credit Facility,
to refinance the Subsidiary Credit Facilities
and to effect the Imo Note Repurchase.
Proposed New York Stock Exchange
Symbol......................... "CXC"
</TABLE>
- --------
(1) Excludes shares of Common Stock reserved for issuance under the Colfax
Corporation 1998 Stock Incentive Plan (the "Plan"), including shares of
Common Stock subject to outstanding options granted at the initial public
offering price of the Common Stock. See "Management--Stock Incentive Plan."
RISK FACTORS
Purchasers of Common Stock in the Offerings should carefully consider the
risk factors set forth under the caption "Risk Factors" and the other
information included in this Prospectus prior to making an investment decision.
See "Risk Factors."
8
<PAGE>
SUMMARY UNAUDITED PRO FORMA AS ADJUSTED CONSOLIDATED FINANCIAL DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
The summary unaudited pro forma as adjusted consolidated financial data set
forth below have been derived from the Unaudited Pro Forma Consolidated
Financial Statements appearing elsewhere in this Prospectus. The summary
unaudited pro forma as adjusted statement of operations and other data give
effect to the Combination, the acquisition of each of Imo, Allweiler and
Ameridrives (the "Acquisitions"), the financing of the Acquisitions, the
Offerings and the Refinancing (assuming all of the Imo Notes are repurchased)
assuming such transactions were consummated at the beginning of the relevant
period. The summary unaudited pro forma as adjusted balance sheet data give
effect to the Combination, the Offerings and the Refinancing (assuming all of
the Imo Notes are repurchased), assuming such transactions occurred on July 3,
1998. The summary unaudited pro forma as adjusted financial data do not purport
to represent what the Company's operating results would have been had such
transactions occurred on the dates indicated or to project the Company's
operating results for any future period, nor do they purport to represent what
the Company's financial position actually would have been had such transactions
occurred on the dates indicated or to project the Company's financial position
for any future date. All of the data set forth below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations," the Unaudited Pro Forma Consolidated Financial
Statements and the notes thereto, the Colfax Corporation Consolidated Financial
Statements and the notes thereto and the other financial statements and
financial information included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
COLFAX CORPORATION
PRO FORMA AS ADJUSTED(F)
----------------------------------------
YEAR SIX MONTHS SIX MONTHS
ENDED ENDED ENDED
DEC. 31, 1997 JUNE 30, 1997 JULY 3, 1998
------------- ------------- ------------
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales............................ $535,982 $272,006 $277,201
Cost of goods sold................... 355,430 178,006 181,135
-------- -------- --------
Gross profit......................... 180,552 94,000 96,066
Operating expenses................... 141,640 73,005 64,479
Other (income) expense............... (4,532) (1,160) (1,777)
Unusual items(a)..................... 33,085 10,500 --
-------- -------- --------
Income before interest and taxes..... 10,359 11,655 33,364
Other non-operating (gain)/loss...... -- -- (1,364)
Interest expense.....................
-------- -------- --------
Income before taxes..................
Income (loss) from continuing
operations(b)....................... $ $ $
======== ======== ========
Basic earnings per share............. $ $ $
======== ======== ========
Diluted earnings per share........... $ $ $
======== ======== ========
OTHER DATA:
Gross profit margin(c)............... 33.7% 34.6% 34.7%
Adjusted operating income(d)......... $ 43,444 $ 22,155 $ 33,364
Adjusted operating margin(e)......... 8.1% 8.1% 12.0%
</TABLE>
<TABLE>
<CAPTION>
AT JULY 3, 1998
---------------------------
PRO FORMA
PRO FORMA(G) AS ADJUSTED(F)
------------ --------------
<S> <C> <C>
BALANCE SHEET DATA:
Total assets........................................ $636,213 $
Total debt.......................................... 429,011
Stockholders' equity (deficit)...................... $ (1,480) $
</TABLE>
- -------
(a) Unusual items of $33.1 million in 1997 include $10.5 million related to a
legal settlement in favor of International Insurance Company, $15.8 million
related to expenses incurred during the acquisition of Imo, including a
break-up fee, severance and retention bonuses, $5.0 million related to an
additional legal provision, $1.2 million of severance benefits and $0.6
million in plant shutdown costs.
(b) Income (loss) from discontinued operations was $(9.8) million for the year
ended December 31, 1997 and $2.7 million for the six months ended June 30,
1997. Extraordinary items were $3.3 million for the year ended December 31,
1997 and $5.6 million for the six months ended July 3, 1998, each relating
to early extinguishment of debt. There were no extraordinary items recorded
for the six months ended June 30, 1997.
(c) Gross profit margin represents gross profit as a percentage of net sales
for the given period.
(d) Adjusted operating income represents income before interest, taxes and
unusual items.
(e) Adjusted operating margin represents adjusted operating income as a
percentage of net sales for the given period.
(f) Represents the unaudited pro forma combined statements of operations of the
Company for the year ended December 31, 1997, the six months ended June 30,
1997 and the six months ended July 3, 1998 and the unaudited pro forma
combined balance sheet of the Company at July 3, 1998, assuming the
Combination, the Offerings, and the Refinancing (assuming all of the Imo
Notes are repurchased) occurred at the beginning of the respective period
or on the balance sheet date.
(g) Represents the unaudited pro forma combined balance sheet of the Company at
July 3, 1998 adjusted for certain inter-company eliminations, tax
adjustments and equity adjustments.
9
<PAGE>
SUMMARY HISTORICAL CONSOLIDATED FINANCIAL DATA
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
The Company was incorporated in 1997 to acquire the shares of Imo. The
summary historical consolidated financial data set forth below for the years
ended December 31, 1995 and 1996, for the period from January 1, 1997 to August
28, 1997, and for the period from August 29, 1997 to December 31, 1997 have
been derived from the consolidated financial statements of Imo (the
"Predecessor Business"), which were audited by either Arthur Andersen LLP or
Ernst & Young LLP, independent public accountants. The summary historical
consolidated financial data at July 3, 1998 and for the six months ended June
30, 1997 and July 3, 1998 have been derived from the unaudited interim
consolidated financial statements of the Predecessor Business and of the
Company, which, in the opinion of management, include all adjustments necessary
for a fair presentation of the results for the unaudited periods. Operating
results for any interim period are not necessarily indicative of the results
that may be expected for a full fiscal year. The consolidated historical data
of the Predecessor Business and the consolidated historical data of the Company
are not comparable in many respects due to the Acquisitions. All of the data
set forth below should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations," the Unaudited Pro
Forma Consolidated Financial Statements and notes thereto, the Colfax
Corporation Consolidated Financial Statements and the notes thereto and the
other financial statements and financial information included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
COLFAX PREDECESSOR COLFAX
PREDECESSOR BUSINESS CORPORATION BUSINESS CORPORATION
---------------------------- ----------- ----------- -----------
EIGHT SIX SIX
YEAR ENDED MONTHS FROM MONTHS MONTHS
DECEMBER 31, ENDED INCEPTION ENDED ENDED
------------------ AUG. 28, TO DEC. 31, JUNE 30, JULY 3,
1995 1996 1997 1997 1997 1998
-------- -------- -------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Net sales............... $297,114 $309,511 $210,151 $106,711 $160,232 $164,115
Cost of goods sold...... 212,787 220,589 145,276 76,597 109,807 110,923
-------- -------- -------- -------- -------- --------
Gross profit............ 84,327 88,922 64,875 30,114 50,425 53,192
Operating expenses...... 64,387 66,969 50,360 23,325 38,505 32,960
Unusual items(a)........ 8,124 17,440 26,344 5,000 10,500 --
Other (income) expense.. (2,841) (1,063) (22) (1,543) (104) (189)
-------- -------- -------- -------- -------- --------
Income (loss) before
interest and taxes..... 14,657 5,576 (11,807) 3,332 1,524 20,421
Interest expense........ 22,648 25,981 18,190 12,495 13,611 16,524
-------- -------- -------- -------- -------- --------
Income (benefit) before
taxes.................. (7,991) (20,405) (29,997) (9,163) (12,087) 3,897
Income taxes............ (15,169) 12,663 1,254 235 1,036 1,502
-------- -------- -------- -------- -------- --------
Income (loss) from
continuing
operations(b).......... $ 7,178 $(33,068) $(31,251) $ (9,398) $(13,123) $ 2,395
======== ======== ======== ======== ======== ========
OTHER DATA:
Gross profit margin(c).. 28.4% 28.7% 30.9% 28.2% 31.5% 32.4%
Adjusted operating
income(d).............. $ 22,781 $ 23,016 $ 14,537 $ 8,332 $ 12,024 $ 20,421
Adjusted operating
margin(e).............. 7.7% 7.4% 6.9% 7.8% 7.5% 12.4%
</TABLE>
<TABLE>
<CAPTION>
AT JULY 3, 1998
---------------
(UNAUDITED)
<S> <C>
BALANCE SHEET DATA:
Total assets.................................................... $425,495
Total debt...................................................... 313,229
Stockholders' equity (deficit).................................. (24,091)
</TABLE>
- --------
(a) Unusual items of $8.1 million in 1995 represent $3.1 million in severance
benefits and other expenses related to Imo's company-wide program to reduce
general and administrative costs and $5.0 million related to the write-down
of certain non-operating real estate to net realizable value. Unusual items
of $17.4 million in 1996 include $0.3 million related to the restructuring
and cost reduction programs and $17.1 million related to the write-down of
certain businesses being held for sale and certain non-operating real
estate being held for sale to net realizable value. Unusual items of $31.3
million in 1997 include $10.5 million related to a legal settlement in
favor of International Insurance Company, $15.8 million related to expenses
incurred during the acquisition of Imo, including a break-up fee, severance
and retention bonuses and $5.0 million related to an additional legal
provision.
(b) Income (loss) from discontinued operations was $27.0 million, $(16.8)
million and $(9.8) million for the years ended December 31, 1995, December
31, 1996 and December 31, 1997, respectively. Extraordinary items were $4.4
million, $8.5 million and $3.3 million for the years ended December 31,
1995, December 31, 1996 and December 31, 1997, respectively, and $5.6
million for the six months ended July 3, 1998.
(c) Gross profit margin represents gross profit as a percentage of net sales
for the given period.
(d) Adjusted operating income represents income before interest, taxes and
unusual items.
(e) Adjusted operating margin represents adjusted operating income as a
percentage of net sales for the given period.
10
<PAGE>
RISK FACTORS
Prospective purchasers of the Common Stock offered hereby should consider
carefully the factors set forth below, as well as other information set forth
in this Prospectus, in evaluating an investment in the shares of Common Stock
offered hereby.
RECENTLY ORGANIZED COMPANY; ACQUIRED COMPANIES NOT HISTORICALLY OPERATED AS A
COMBINED BUSINESS; INTEGRATION OF ACQUIRED COMPANIES
The Company has a limited operating history upon which to evaluate its
prospects. In addition, the Company's prospects must be considered in light of
the numerous potential risks, expenses and difficulties frequently encountered
in connection with the acquisition and integration of existing businesses and
the installation of new senior management and operating strategies.
The Acquired Companies have not historically been operated as a combined
business. There can be no assurance that the Company will be able to integrate
successfully the businesses of the Acquired Companies, to operate them
profitably on a combined basis, or to manage effectively the combined
businesses. Failure by the Company to integrate successfully or manage
effectively the Acquired Companies without substantial costs, delays or other
operational or financial difficulties could have a material adverse effect on
the Company's business, results of operations or financial condition.
The Company believes that significant cost savings and manufacturing
efficiencies may be available through consolidating the operations of the
Acquired Companies. In addition to the substantial capital investment this may
require, such consolidation of the Company's operations may disrupt its
manufacturing operations and could potentially involve significant production
downtime. There can be no assurance that the nature of any such disruption or
the length of any associated downtime will not result in a material adverse
effect on the Company's business, results of operations or financial
condition. The Company also plans to implement other significant changes in
its operations in order to effect reductions in the Company's cost structure.
Any or all of the planned changes could entail substantial capital investment
or costs and expenses, including employment termination costs. Moreover, there
can be no assurance that any changes implemented will have the intended effect
of reducing the Company's costs and expenses.
RISKS RELATING TO ACQUISITION STRATEGY
The Company expects to derive a major component of its future growth from
acquisitions and the successful integration of acquired businesses into its
existing operations. See "Business--Growth Strategy." There can be no
assurance, however, that the Company will be able to successfully identify
suitable acquisition candidates, negotiate appropriate acquisition terms,
obtain financing which may be needed to consummate acquisitions or complete
proposed acquisitions. In addition, there can be no assurance that the Company
will maintain or accelerate its growth or anticipate all of the changing
demands that expanding operations will impose on its management personnel,
operational and management information systems and financial systems. Further,
there can be no assurance that the Company will be able to successfully
integrate the acquisitions into the Company or that the acquisitions will
perform as planned or prove to be beneficial to the Company's operations and
cash flow. Acquisitions involve numerous risks, including difficulties in the
assimilation of the operations, technologies, services and products of the
acquired companies, the potential loss of key employees of the acquired
companies and the diversion of management's attention from other business
concerns. This is the case particularly in the fiscal quarters immediately
following the completion of acquisitions during which the operations of the
acquired business are being integrated into the Company's operations. In
addition, once integrated, acquired operations may not achieve levels of
revenues, profitability or productivity comparable with those achieved by the
Company's existing operations, or otherwise perform as expected. Furthermore,
although the Company performs a due diligence investigation of each business
that it acquires, there may nevertheless be liabilities of the Acquired
Companies or companies that the Company may acquire in the future that the
Company has failed or fails to discover during its due diligence
investigations and for which the Company, as a successor owner, may be
responsible. The Company may seek to minimize the impact of these liabilities
by
11
<PAGE>
structuring acquisitions to minimize liabilities, obtaining indemnities and
warranties from the seller, as well as other methods. Such methods may not
fully protect the Company from the impact of liabilities. For example,
indemnities or warranties that are limited in scope, amount or duration may
not fully cover the liabilities for which they were intended. The liabilities
that are not covered by such limited indemnities or warranties could have a
material adverse effect on the Company's business, results of operations or
financial condition. Additionally, the incurrence of debt and contingent
liabilities and the amortization of goodwill and other intangible assets could
materially adversely affect the Company's profitability.
DEPENDENCE ON ADDITIONAL CAPITAL TO FINANCE GROWTH
The Company's growth strategy will require substantial capital investment.
Capital will be required by the Company for, among other purposes, completing
acquisitions, integrating completed acquisitions, acquiring production
equipment and maintaining the condition of its production equipment. The
Company intends to pay for future acquisitions using a combination of cash,
capital stock, notes and assumption of indebtedness. To the extent that cash
generated internally and cash available under the Colfax Credit Facility is
not sufficient to provide the capital required for such purposes and future
operations, the Company will require additional debt or equity financing in
order to provide for such capital. There can be no assurance that such
financing will be available or, if available, will be available on terms
satisfactory to the Company. Failure by the Company to obtain sufficient
additional capital in the future could limit the Company's ability to
implement its business strategy. Future debt financing, if available, may
result in increased interest expense, increased term loan payments, increased
leverage and decreased income available to fund further acquisitions and
expansion, and may limit the Company's ability to withstand competitive
pressures and render the Company more vulnerable to economic downturns. Future
equity financing may dilute the equity interests of existing stockholders.
COMPETITION
Most of the Company's products are sold in highly fragmented and competitive
markets. The Company believes that the principal elements of competition in
its markets are product quality, price, design and engineering capabilities,
product development, conformity to customer specifications, quality of post-
sale support, timeliness of delivery and effectiveness of its distribution
organization. Maintaining and improving the Company's competitive position
will require continued investment by the Company in manufacturing quality
standards, marketing, customer service and support, and its distribution
networks. There can be no assurance that the Company will have sufficient
resources to continue to make such investments or that it will be successful
in maintaining its competitive position. The Company's competitors may develop
products that are superior to the Company's products, develop methods of more
efficiently and effectively providing products and services, or adapt more
quickly than the Company to new technologies or evolving customer
requirements. Certain of the Company's competitors may have greater financial,
marketing, and research and development resources than the Company. There can
be no assurance that the Company will be able to compete successfully with its
existing competitors or with new competitors. Failure to continue competing
successfully could have a material adverse effect on the Company's business,
results of operations or financial condition. See "Business--Competition."
INTERNATIONAL OPERATIONS; CURRENCY FLUCTUATIONS
In 1997, approximately 47% of the Company's net sales on a pro forma basis
and approximately 37% of its adjusted operating income on a pro forma basis
were derived from international operations. In addition, approximately 4% of
the Company's 1997 net sales on a pro forma basis were derived from direct
export sales. Both the sales from international operations and export sales
are subject in varying degrees to risks inherent in doing business outside the
United States. Such risks include economic instability; partial or total
expropriation; currency exchange rate fluctuations and restrictions on
currency repatriation; significant adverse changes in taxation policies or
other laws or regulations, the disruption of operations from labor and
political disturbances, insurrection or war and the requirements of partial
local ownership of operations in certain countries. Although net sales to
customers in the Pacific Rim region represented less than 5% of the Company's
1997 pro forma net sales, recent financial instability in the Pacific Rim may
adversely affect the Company's business prospects in that region and in other
markets that rely on business in the Pacific Rim.
12
<PAGE>
The Company is exposed to fluctuations in currency exchange rates. Any
significant change in the value of the currencies of the countries in which
the Company does business against the U.S. dollar could affect the Company's
ability to sell products competitively and control its cost structure, which,
in turn, could have a material adverse effect on the Company's results of
operations and financial condition. Furthermore, a large portion of the
revenues and income of the Fluid Handling segment's European operations are
denominated in Deutsche Marks. Consequently, depreciation of the Deutsche Mark
against the U.S. dollar has a negative impact on the income from operations of
the Fluid Handling segment, whereas appreciation of the Deutsche Mark has a
positive impact. The results of operations and financial condition of the
Fluid Handling segment, and in turn of the Company, could be materially
adversely affected by large fluctuations in the rate of exchange between the
Deutsche Mark and the U.S. dollar. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Overview." Furthermore, the
first stage of European Monetary Union, in which Germany will participate, is
scheduled to occur in January 1, 1999. If large fluctuations occur in the rate
of exchange between the euro and the U.S. dollar, the Company's results of
operations and financial condition could be materially adversely affected.
ENVIRONMENTAL MATTERS
The Company's operations and properties are subject to federal, state, local
and foreign laws, regulations and ordinances relating to the use, storage,
handling, generation, treatment, emission, release, discharge and disposal of
certain materials, substances and wastes. The nature of the Company's
operations exposes it to the risk of liabilities or claims with respect to
environmental matters including off-site disposal matters and there can be no
assurance that material costs will not be incurred in connection with such
liabilities or claims.
Based upon the Company's experience to date, the Company believes that the
future cost of compliance with existing environmental laws, regulations and
ordinances (or liability for known environmental claims) will not have a
material adverse effect on the Company's business, results of operations or
financial condition. However, future events, such as changes in existing laws
and regulations or their interpretation may give rise to additional compliance
costs or liabilities that could have a material adverse effect on the
Company's business, results of operations or financial condition. Compliance
with more stringent laws or regulations, as well as more vigorous enforcement
policies of regulatory agencies or stricter or different interpretations of
existing laws, may require additional expenditures by the Company which may be
material. See "--Litigation; Retained/Contingent Liabilities" and "Business--
Environmental Matters."
LITIGATION; RETAINED/CONTINGENT LIABILITIES
Imo and one of its subsidiaries are two of a large number of defendants in
lawsuits brought in various jurisdictions by approximately 6,000 claimants who
allege injury caused by exposure to asbestos. Although neither Imo nor any of
its subsidiaries has ever been a producer or direct supplier of asbestos, it
is alleged that certain of the industrial and marine products formerly sold by
Imo and such subsidiary contained components which contained asbestos. In
addition, Imo and the subsidiary are named in cases, involving approximately
26,000 claimants, which have been "administratively dismissed" by the U.S.
District Court for the Eastern District of Pennsylvania. Suits against the two
companies have been tendered to their insurers who are defending under stated
reservation of rights pursuant to applicable defense and indemnity agreements.
Although the Company believes it has adequate insurance coverage or has
established appropriate reserves to cover potential liabilities related to
these suits, if the Company's insurers should fail, become insolvent or refuse
to cover claims or if there is any failure of the two companies to be
successful in defending such suits, or in settling such suits on acceptable
terms, there could be a material adverse effect on the Company's business,
results of operations or financial condition. See "Business--Litigation."
Over the past several years Imo has divested several businesses,
subsidiaries and non-operating real estate holdings. In accordance with the
terms of certain of such divestitures, Imo may have retained certain
liabilities related to the divested businesses and subsidiaries or may be
contingently liable for certain aspects (i.e., environmental or product
liability) of the businesses and subsidiaries it has divested. There can be no
assurance
13
<PAGE>
that the Company may not be exposed to retained or contingent liabilities
that, in the aggregate, could have a material adverse effect on the Company's
business, results of operations or financial condition.
CONTROL BY PRINCIPAL STOCKHOLDERS
Upon consummation of the Offerings, the Principal Stockholders will own in
the aggregate approximately % of the outstanding shares of Common Stock
(approximately % if the Underwriters' over-allotment options are exercised
in full). As a result of such share ownership, the Principal Stockholders will
be able to elect the entire Board of Directors of the Company and to control
the Company's management and affairs. See "Management" and "Principal
Stockholders."
POTENTIAL CONFLICTS OF INTEREST
The Rales are directors and principal stockholders of both Danaher and the
Company. While the Company and Danaher operate different businesses at this
time, Danaher may in the future identify, pursue and consummate acquisitions
of businesses that may be complementary, in whole or in part, with the
businesses then operated by the Company. As a result, Danaher may, directly or
indirectly, compete with the Company for the acquisition of such businesses
and, consequently, the interests of Danaher (and the Rales) may conflict with
those of other stockholders of the Company. In addition, following any such
acquisition by Danaher, the Company may compete with such acquired business.
SHARES ELIGIBLE FOR FUTURE SALE
Prior to the Offerings there has been no public market for the Common Stock.
The Company can make no prediction as to the effect, if any, that future sales
of shares of Common Stock or the availability of such shares for future sale
will have on the market price of the Common Stock prevailing from time to
time. Nevertheless, sales of substantial amounts of Common Stock (including
shares issued upon the exercise of stock options) in the public market, or the
perception that such sales may occur, could adversely affect prevailing market
prices for the Common Stock. The number of outstanding shares of Common Stock
available for sale in the public market will be limited by the lock-up
agreements described below.
Upon completion of the Offerings, the Rales will own approximately % of
the outstanding Common Stock (approximately % if the Underwriters' over-
allotment options are exercised in full). Subject to the lock-up agreements
described below, the Rales, as controlling stockholders of the Company, will
be able to cause the Company to register the sale of their shares in one or
more public offerings. Although the Rales have informed the Company that they
do not currently have the intention to sell shares of Common stock following
the 180-day lock-up period described below, depending on market and other
conditions, the Rales may dispose of shares of Common stock owned by them from
time to time.
Upon completion of the Offerings, the Company will have shares of
Common Stock outstanding (assuming no exercise of the Underwriters' over-
allotment options). Of such total number of shares outstanding, the
shares to be sold in the Offerings will be freely tradeable without
restriction or further registration under the Securities Act of 1933, as
amended (the "Securities Act"), except that any shares purchased by
"affiliates" of the Company, as that term is defined in Rule 144 ("Rule 144")
under the Securities Act, may generally only be sold in compliance with the
limitations of Rule 144. The remaining shares of Common Stock which will
be outstanding following the Offerings will become available for resale into
the public market, subject to compliance with the holding periods and volume
limitations prescribed by Rule 144. All of such remaining shares will also be
subject to the lock-up agreements described in the next paragraph.
The Company, the Company's executive officers and directors and other
persons who will be stockholders of the Company immediately after giving
effect to the Combination (but not the Offerings) have agreed, subject to
certain exceptions, not to directly or indirectly (i) offer, pledge, sell,
contract to sell, sell any option or contract to purchase, purchase any option
or contract to sell, grant any option, right or warrant for the sale of or
otherwise dispose of or transfer any shares of Common Stock or securities
convertible into or exchangeable or exercisable for Common Stock, whether now
owned or thereafter acquired by the person executing the agreement or with
respect to which the person executing the agreement thereafter acquires the
power of disposition, or file a registration statement under the Securities
Act with respect to the foregoing or (ii) enter into any swap or other
14
<PAGE>
agreement that transfers, in whole or in part, the economic consequence of
ownership of the Common Stock whether any such swap or transaction is to be
settled by delivery of Common Stock or other securities, in cash or otherwise,
without the prior written consent of Merrill Lynch on behalf of the
Underwriters for a period of 180 days after the date of this Prospectus. See
"Shares Eligible for Future Sale" and "Underwriting."
DEPENDENCE ON KEY PERSONNEL
The success of the Company depends in large part on the services and
expertise of Philip W. Knisely and the Company's senior management. With the
exception of George M. Scheerle, none of the Company's executive officers has
an employment agreement with the Company and the Company does not maintain key
man life insurance policies on any of its executive officers. The death or
loss of the services of Mr. Knisely or any of the senior managers or an
inability to attract and retain additional management personnel could have a
material adverse effect on the Company. There can be no assurance that the
Company will be able to retain its existing senior management personnel or to
attract additional qualified senior management personnel. Notwithstanding the
fact that positive results have been achieved at other companies where the
Principal Stockholders are or have been executive officers, directors or
significant shareholders, there can be no assurance that the Company will be
able to achieve positive results. See "Management."
ALLWEILER MINORITY SHAREHOLDERS
As of July 31, 1998, Constellation Pumps owned 98% of the outstanding common
shares and 92% of the outstanding preferred shares of Allweiler. The remaining
common and preferred shares of Allweiler are held by minority shareholders
that are not affiliated with the Company. There is no "short form" merger
provision under German law analogous to Section 253 of the Delaware General
Corporation Law (the "Delaware Law") that would permit the Company to acquire
the interests of the remaining minority shareholders of Allweiler without
their consent. Under German law, neither Allweiler nor its controlling
shareholders (including the Company) may take any actions that would be unfair
to, or discriminate against, such minority shareholders. For so long as there
are minority shareholders of Allweiler, Allweiler will be required to pay a
pro-rata portion of all dividends and other distributions declared by
Allweiler to such minority shareholders, and the presence of such minority
shareholders could limit the ability of the Company to restructure the assets
and operations of Allweiler or integrate such assets with the other businesses
and operations owned by the Company. See "Certain Relationships and Related
Transactions--Acquisition of Allweiler."
ABSENCE OF DIVIDENDS
The Company has never paid a dividend on the Common Stock and does not
anticipate paying any dividends on the Common Stock in the foreseeable future.
See "Dividend Policy."
DILUTION
Based on an assumed initial public offering price of $ per share of Common
Stock, purchasers of shares in the Offerings will incur immediate and
substantial dilution of $ per share in the net tangible book value of their
purchased shares of Common Stock. See "Dilution." In addition, investors may
experience additional dilution as a result of shares of Common Stock being
issued in connection with future business acquisitions or as a result of the
issuance and exercise of employee stock options.
ABSENCE OF PRIOR PUBLIC MARKET; DETERMINATION OF OFFERING PRICE
Prior to the Offerings, there has been no public market for the Common
Stock. Although the Company has applied to have the Common Stock accepted for
listing on the NYSE, there can be no assurance that an active public market
will develop or, if any such market develops, that it will be sustained. The
initial public offering
15
<PAGE>
price of the Common Stock will be determined through negotiations between the
Company and the Underwriters and may not be indicative of the market price for
the Common Stock after the Offerings. The market price for the shares of the
Common Stock may be volatile and may fluctuate based upon a number of factors,
including, without limitation, business performance, news announcements or
changes in general economic and market conditions. There can be no assurance
that the market price of the Common Stock will not decline below the price at
which the Common Stock is being offered hereby. See "Underwriting."
ANTI-TAKEOVER PROVISIONS
Certain provisions of the Company's Restated Certificate of Incorporation
and By-laws, as well as applicable provisions of the Delaware Law, may have
the effect of discouraging unsolicited acquisition proposals or making it more
difficult for a third party to gain control of the Company. These provisions,
among other things, (i) divide the Company's Board of Directors into three
classes, with directors of each class serving staggered three-year periods;
(ii) provide that directors may be removed only for cause and only upon the
affirmative vote of at least 66 2/3% of the voting power of all the then
outstanding shares of stock entitled to vote; (iii) prohibit stockholders from
taking action by written consent; (iv) prohibit stockholder nominations and
proposals unless specified advance notice requirements are complied with; (v)
prohibit stockholders from calling special meetings of stockholders; and (vi)
authorize the Board of Directors to issue shares of preferred stock in one or
more series and to fix the powers, preferences and rights of any such series
without stockholder approval. In addition, under certain conditions, Section
203 of the Delaware Law may prevent the Company from engaging in a "business
combination" with an "interested stockholder." See "Description of Capital
Stock--Preferred Stock" and "Certain Charter and By-law Provisions."
TAX NET OPERATING LOSS CARRYFORWARDS
As of July 3, 1998, the Company had net operating loss carryforwards
("NOLs") of approximately $107.4 million for United States federal income tax
purposes. These NOLs, if not utilized to offset taxable income in future
periods, will expire at various dates through 2012. If the Company experiences
an "ownership change" within the meaning of Section 382 of the Internal
Revenue Code of 1986, as amended (the "Code"), the Company's ability to use
its NOLs existing at the time of any such ownership change to offset its
taxable income, if any, generated in taxable periods after the ownership
change would be subject to an annual limitation described below. Although the
Combination and the Offerings will not cause the Company to experience an
ownership change, it is possible that certain other changes in the ownership
of the Company's stock which may occur in the future could cause the Company
to experience an ownership change. In that event, the amount of NOLs which the
Company may utilize on an annual basis would generally be equal to the product
of the value of the Company's outstanding stock immediately prior to the
ownership change (less certain capital contributions made during the preceding
two years) and the "long-term tax exempt rate" (determined monthly and, for
ownership changes occurring in the month of August 1998, 5.15%).
FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS
This Prospectus contains forward-looking statements that reflect the
Company's current views with respect to future events and financial
performance, including capital expenditures, planned product introductions,
research and development expenditures, potential future growth, including
potential penetration of developed markets and potential growth opportunities
in emerging markets, potential future acquisitions, potential cost savings
from planned restructuring programs, planned operational changes and research
and development efforts, strategic plans and future cash sources and
requirements. These forward-looking statements are subject to certain risks
and uncertainties, including those identified in "Risk Factors," which could
cause actual results to differ materially from historical results or those
anticipated. The words "believe," "expect," "anticipate" and similar
expressions identify forward-looking statements. Readers are cautioned not to
place undue reliance on these forward-looking statements, which speak only as
of their dates. The Company undertakes no obligation to publicly update or
revise any forward-looking statements, whether as a result of new information,
future events or otherwise.
16
<PAGE>
USE OF PROCEEDS
The Company estimates that it will receive net proceeds from the Offerings
of approximately $ million (approximately $ million if the Underwriters'
over-allotment options are exercised in full) assuming an initial public
offering price of $ per share and after deducting estimated underwriting
discounts and commissions and expenses of the Offerings payable by the
Company. The Company intends to use the net proceeds of the Offerings,
together with borrowings of approximately $ under the Colfax Credit
Facility (consisting of the full $100.0 million term loan facility and
approximately $ million of borrowings under the revolving credit facility),
(i) to effect the Imo Note Repurchase and (ii) to repay approximately $
million of indebtedness under the Subsidiary Credit Facilities. The
outstanding indebtedness under the Subsidiary Credit Facilities has maturities
ranging from 1998 to 2007 and interest rates ranging from 4.4% to 8.9%. See
"Certain Relationships and Related Transactions" and "Description of Certain
Indebtedness--Allweiler Credit Facility."
DIVIDEND POLICY
The Company currently intends to retain its earnings for use in the
operation and expansion of its business and does not anticipate paying any
dividends on the Common Stock in the foreseeable future. Payment of future
dividends, if any, will be determined in the sole discretion of the Company's
Board of Directors and will depend upon, among other things, the future
earnings, operations, capital requirements and general financial condition of
the Company and prevailing business and economic conditions, as well as
statutory restrictions on the Company's ability to pay dividends. See "Risk
Factors--Absence of Dividends."
17
<PAGE>
DILUTION
As of July 3, 1998, the Company had a pro forma deficit in net tangible book
value of $ million, or $ per share of Common Stock. "Net tangible book
value" per share of Common Stock represents the difference between the net
tangible assets and the liabilities of the Company, on a consolidated basis,
divided by the total number of shares of Common Stock outstanding. After
giving effect to the sale by the Company of shares of Common Stock
pursuant to the Offerings and the application of the estimated net proceeds
therefrom and the payment of one-time charges relating to the Refinancing, the
pro forma as adjusted net tangible book value deficit of the Company at July
3, 1998 would have been approximately $ million, or $ per share
(assuming an initial public offering price of $ per share). See "Use of
Proceeds." This represents an immediate dilution of $ per share to new
investors in the Offerings. The following table illustrates this dilution in
net tangible book value per share to new investors at July 3, 1998:
<TABLE>
<S> <C>
Assumed initial public offering price per share...................... $
Net tangible book value (deficit) per share at July 3, 1998..........
Increase in net tangible book value per share attributable to new in-
vestors.............................................................
Pro forma net tangible book value (deficit) per share after the Of-
ferings.............................................................
-----
Immediate dilution per share to new investors in the Offerings....... $
=====
</TABLE>
The following table sets forth, at July 3, 1998 on a pro forma basis, the
number of shares of Common Stock purchased from the Company, the total
consideration paid and the average price per share paid by the existing
holders of Common Stock and by the new investors, before deducting estimated
underwriting discounts and offering expenses payable by the Company.
<TABLE>
<CAPTION>
TOTAL
SHARES PURCHASED CONSIDERATION
------------------- -------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
-------- -------- ------ ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders....
New investors............
-------- -------- --- ---
Total....................
======== ======== === ===
</TABLE>
18
<PAGE>
CAPITALIZATION
The following table sets forth as of July 3, 1998 the Company's (i) total
debt (including current maturities) and capitalization on a pro forma basis
after giving effect to the Acquisitions and the Combination, assuming the
Combination occurred on July 3, 1998; and (ii) total debt (including current
maturities) and capitalization on a pro forma as adjusted basis after giving
further effect to the Offerings and the Refinancing (assuming all of the Imo
Notes are repurchased), assuming such transactions occurred on July 3, 1998.
This table should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations," the Unaudited Pro
Forma Consolidated Financial Statements and the notes thereto, the Colfax
Corporation Consolidated Financial Statements and the notes thereto and the
other financial statements and financial information included elsewhere in
this Prospectus.
<TABLE>
<CAPTION>
AS OF JULY 3, 1998
----------------------------
PRO FORMA
PRO FORMA AS ADJUSTED
------------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Short Term Debt:
Current Portion of Long Term Debt................ $ 10,136
Notes Payable.................................... 52,268
------------- --------
Total Current Debt............................. 62,404 --
Long Term Debt
Colfax Credit Facility(a)........................ --
Subsidiary Credit Facilities..................... 260,097
Imo Notes(b)..................................... 100,756
Other Long Term Debt............................. 15,890
Less: Current Maturities......................... (10,136)
-------------
Total Long Term Debt........................... 366,607
Total Debt......................................... 429,011 --
Stockholders Equity
Common Stock..................................... 275
Additional Paid in Capital....................... 25,725
Accumulated Deficit(c)........................... (26,519)
Currency Translation Adjustment.................. (961)
-------------
Total Stockholders Equity...................... (1,480) --
------------- --------
Total Capitalization............................... $ 427,531 --
============= ========
</TABLE>
- --------
(a) At July 3, 1998, on a pro forma basis after giving effect to the Offerings
and the Refinancing (assuming all of the Imo Notes are repurchased), the
Company and its subsidiaries would have had total availability of
approximately $ under the revolving credit facility of the Colfax
Credit Facility.
(b) Face amount, net of unamortized discount of $1.3 million.
(c) The increase in pro forma accumulated deficit reflects after-tax charges
of approximately $ to be incurred in connection with the Refinancing,
including the refinancing of the existing Subsidiary Credit Facilities and
the premiums to be paid to repurchase the Imo Notes in connection with the
Imo Note Repurchase.
19
<PAGE>
SELECTED UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA
The selected unaudited pro forma consolidated financial data set forth below
have been derived from the Unaudited Pro Forma Consolidated Financial
Statements appearing elsewhere in this Prospectus. The selected unaudited pro
forma statement of operations and other data give effect to the Combination,
the Acquisitions and the financing of the Acquisitions, and the selected
unaudited pro forma as adjusted statement of operations and other data give
further effect to the Offerings and the Refinancing (assuming all of the Imo
Notes are repurchased), assuming in each case that such transactions were
consummated at the beginning of the relevant period. The selected unaudited
pro forma balance sheet data give effect to the Combination, and the selected
unaudited pro forma as adjusted balance sheet data give further effect to the
Offerings and the Refinancing (assuming all of the Imo Notes are repurchased),
assuming in each case that such transactions were consummated on July 3, 1998.
Pro forma adjustments were applied to the historical financial statements of
the Acquired Companies and the Company to account for the Acquisitions under
the purchase method of accounting. Under purchase accounting, the purchase
prices were allocated to the Acquired Company's assets and liabilities based
on their fair values. The purchase price allocations have been completed on a
preliminary basis, and as a result, adjustments to the carrying value of
assets and liabilities may occur.
Certain unusual items totaling $33.1 million are included in the selected
unaudited pro forma statement of operations data for the year ended December
31, 1997. These items consist of the following: a charge of $10.5 million
relating to a legal settlement; a charge of $15.9 million of indirect and
general expenses incurred by the Company in connection with the acquisition of
Imo, including a break-up fee, severance and retention bonuses, a $5.0 million
accrual for certain litigation matters, a $1.1 million charge for severance
benefits at Ameridrives and a $0.6 million charge relating to plant shutdown
costs at Ameridrives. If adjustments had been made to the unaudited pro forma
consolidated statement of operations for the year ended December 31, 1997 to
remove these non-recurring charges, adjusted operating income would have been
approximately $43.4 million and the loss from continuing operations would have
been approximately $5.7 million.
The selected unaudited pro forma and pro forma as adjusted consolidated
financial data do not purport to represent what the Company's operating
results would have been had the transactions described above occurred on the
dates indicated or to project the Company's operating results for any future
period, nor do they purport to represent what the Company's financial position
actually would have been had such transactions occurred on the dates indicated
or to project the Company's financial position for any future date. All of the
information set forth below should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations," the
Unaudited Pro Forma Consolidated Financial Statements and the notes thereto,
the Colfax Corporation Consolidated Financial Statements and the notes thereto
and the other financial statements and financial information included
elsewhere in this Prospectus.
20
<PAGE>
SELECTED UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
COLFAX CORPORATION
-------------------------------------------------------------------------------------
PRO FORMA
PRO FORMA(A) AS ADJUSTED(B)
------------------------------------------ ------------------------------------------
SIX MONTHS SIX MONTHS SIX MONTHS SIX MONTHS
YEAR ENDED ENDED JUNE 30, ENDED JULY 3, YEAR ENDED ENDED JUNE 30, ENDED JULY 3,
DEC. 31, 1997 1997 1998 DEC. 31, 1997 1997 1998
------------- -------------- ------------- ------------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Net sales............... $535,982 $272,006 $277,201 $535,982 $272,006 $277,201
Cost of goods sold...... 355,430 178,006 181,135 355,430 178,006 181,135
-------- -------- -------- -------- -------- --------
Gross profit............ 180,552 94,000 96,066 180,522 94,000 96,066
Selling, general and
administrative
expense................ 131,878 67,037 58,709 131,878 67,037 58,709
Research and
development............ 9,762 5,968 5,770 9,762 5,968 5,770
Unusual items(c)........ 33,085 10,500 -- 33,085 10,500 --
Other (income) expense.. (4,532) (1,160) (1,777) (4,532) (1,160) (1,777)
-------- -------- -------- -------- -------- --------
Income from continuing
operations before
interest and taxes..... 10,359 11,655 33,364 10,359 11,655 33,364
-------- -------- -------- -------- -------- --------
Other non-operating
(gain)/loss............ -- -- (1,364) -- -- (1,364)
Interest expense........ 43,627 20,486 21,469
-------- -------- -------- -------- -------- --------
Income (loss) from
continuing operations
before taxes........... (33,268) (8,831) 13,259
Income taxes............ 5,534 5,682 5,901
-------- -------- -------- -------- -------- -------- ---
Income (loss) from
continuing
operations(d).......... $(38,802) $(14,513) $ 7,358
======== ======== ======== ======== ======== ========
Basic earnings per
share..................
======== ======== ======== ======== ======== ========
Diluted earnings per
share..................
======== ======== ======== ======== ======== ========
OTHER DATA:
Gross profit margin(e).. 33.7% 34.6% 34.7% 33.7% 34.6% 34.7%
Adjusted operating
income(f).............. $ 43,444 $ 22,155 $ 33,364 $ 43,444 $ 21,555 $ 33,364
Adjusted operating
margin(g).............. 8.1% 8.1% 12.0% 8.1% 8.1% 12.0%
</TABLE>
<TABLE>
<CAPTION>
AT JULY 3, 1998
-------------------------------------
PRO FORMA(A) PRO FORMA AS ADJUSTED(B)
------------ ------------------------
<S> <C> <C>
BALANCE SHEET DATA:
Total assets.............................. $636,213
Total debt................................ 429,011
Stockholders' equity (deficit)............ $ (1,480)
</TABLE>
- --------
(a) Represents the unaudited pro forma combined statements of operations of
the Company for the year ended December 31, 1997, the six months ended
June 30, 1997, and the six months ended July 3, 1998, reflecting pre-
acquisition periods combined with historical results and pro forma
adjustments as if all acquisitions occurred at the beginning of the
relevant periods. Represents the combined balance sheet of the Company at
July 3, 1998 adjusted for certain inter-company eliminations, tax
adjustments and equity adjustments.
(b) Represents the unaudited pro forma combined statements of operations of
the Company for the year ended December 31, 1997, the six months ended
June 30, 1997 and the six months ended July 3, 1998, and the unaudited pro
forma combined balance sheet of the Company at July 3, 1998, assuming the
Combination, the Offerings, and the Refinancing (assuming all of the Imo
Notes are repurchased) occurred at the beginning of the respective period
or on the balance sheet date.
(c) Unusual items of $33.1 million in 1997 include $10.5 million related to a
legal settlement in favor of International Insurance Company, $15.8
million related to expenses incurred during the acquisition of Imo,
including a break-up fee, severance and retention bonuses, $5.0 million
related to an additional legal provision, $1.2 million of severance
benefits, and $0.6 million in plant shutdown costs.
(d) Income (loss) from discontinued operations was $(9.8) million for the year
ended December 31, 1997 and $2.7 million for the six months ended June 30,
1997. Extraordinary items were $3.3 million for the year ended December
31, 1997 and $5.6 million for the six months ended July 3, 1998, each
relating to early extinguishment of debt. There were no extraordinary
items recorded in the six months ended June 30, 1997.
(e) Gross profit margin represents gross profit as a percentage of net sales
for the given period.
(f) Adjusted operating income represents income before interest, taxes and
unusual items.
(g) Adjusted operating margin represents adjusted operating income as a
percentage of net sales for the given period.
21
<PAGE>
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
The Company was incorporated in 1997 to acquire the shares of Imo. The
selected historical consolidated financial data set forth below for the years
ended December 31, 1993, 1994, 1995 and 1996, for the period from January 1,
1997 to August 28, 1997 and for the period from August 29, 1997 to December
31, 1997 have been derived from Imo's financial statements, which were audited
by either Arthur Andersen LLP or Ernst & Young LLP, independent public
accountants. The selected historical consolidated financial data for all
periods prior to August 29, 1997, the date of the acquisition of Imo, is
consolidated financial information of the Predecessor Business. The selected
historical consolidated financial data at July 3, 1998 and for the six months
ended June 30, 1997 and July 3, 1998 have been derived from the unaudited
interim consolidated financial statements of the Predecessor Business and of
the Company, which, in the opinion of management, include all adjustments
necessary for a fair presentation of the results for the unaudited periods.
Operating results for any interim period are not necessarily indicative of the
results that may be expected for a full fiscal year. The consolidated
historical data of the Predecessor Business and the consolidated historical
data of the Company are not comparable in many respects due to the
Acquisitions. All of the information set forth below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations," the Unaudited Pro Forma Consolidated Financial
Statements and the notes thereto, the Colfax Corporation Consolidated,
Financial Statements and the notes thereto and the other financial statements
and financial information included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
COLFAX PREDECESSOR COLFAX
PREDECESSOR BUSINESS CORP. BUSINESS CORP.
-------------------------------------------------- ------------ ----------- --------
EIGHT SIX SIX
MONTHS FROM MONTHS MONTHS
YEAR ENDED DECEMBER 31, ENDED INCEPTION TO ENDED ENDED
-------------------------------------- AUGUST 28, DEC. 31, JUNE 30, JULY 3,
1993 1994 1995 1996 1997 1997 1997 1998
-------- -------- -------- -------- ---------- ------------ ----------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Net sales............... $344,092 $288,559 $297,114 $309,511 $210,151 $106,711 $160,232 $164,115
Cost of goods sold...... 242,321 205,779 212,787 220,589 145,276 76,597 109,807 110,923
-------- -------- -------- -------- -------- -------- -------- --------
Gross profit............ 101,771 82,780 84,327 88,922 64,875 30,114 50,425 53,192
Selling, general and
administrative
expense................ 83,732 59,883 60,457 62,514 46,724 21,412 35,786 30,134
Research and
development............ 6,697 3,920 3,930 4,455 3,636 1,913 2,719 2,826
Unusual items (a)....... 13,419 -- 8,124 17,440 26,344 5,000 10,500 --
Other (income) expense.. (1,237) (1,249) (2,841) (1,063) (22) (1,543) (104) (189)
-------- -------- -------- -------- -------- -------- -------- --------
Income (loss) before
interest and taxes..... (840) 20,226 14,657 5,576 (11,807) 3,332 1,524 20,421
Interest expense........ 28,062 25,908 22,648 25,981 18,190 12,495 13,611 16,524
-------- -------- -------- -------- -------- -------- -------- --------
Income (loss) before
taxes.................. (28,902) (5,682) (7,991) (20,405) (29,997) (9,163) (12,087) 3,897
Income taxes (benefit).. 12,969 1,704 (15,169) 12,663 1,254 235 1,036 1,502
-------- -------- -------- -------- -------- -------- -------- --------
Income (loss) from
continuing
operations(b).......... $(41,871) $ (7,386) $ 7,178 $(33,068) $(31,251) $ (9,398) $(13,123) $ 2,395
======== ======== ======== ======== ======== ======== ======== ========
OTHER DATA:
Gross profit margin(c).. 29.6% 28.7% $ 28.4% 28.7% 30.9% 28.2% 31.5% 32.4 %
Adjusted operating
income(d).............. $ 12,579 $ 20,226 $ 22,781 $ 23,016 $ 14,537 $ 8,332 $ 12,024 $ 20,421
Adjusted operating
margin(e).............. 3.7% 7.0% 7.7% 7.4% 6.9% 7.8% 7.5% 12.4%
</TABLE>
<TABLE>
<CAPTION>
PREDECESSOR BUSINESS
AT DECEMBER 31, COLFAX COLFAX
------------------------------------- AT DECEMBER 31, AT JULY 3,
1993 1994 1995 1996 1997 1998
-------- -------- -------- -------- --------------- ----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total assets............ $535,338 $510,293 $365,352 $330,992 $454,720 $425,495
Total debt.............. 384,240 390,094 251,390 278,671 333,139 313,229
Shareholders' equity
(deficit).............. $(34,733) $(28,255) $ 3,655 $(56,387) $(20,599) $(24,091)
</TABLE>
- -------
(a) Unusual items of $13.4 million in 1993 represent provisions related to the
restructuring and consolidation of certain operating units and debt
related financing fees associated with obtaining consents of holders of
the Predecessor Business' 12.25% senior subordinated debentures. Unusual
items of $8.1 million in 1995 represent $3.1 million in severance benefits
and other expenses related to Imo's company-wide program to reduce general
and administrative costs and $5.0 million related to the write-down of
certain non-operating real estate to net realizable value. Unusual items
of $17.4 million in 1996 include $0.3 million related to the restructuring
and cost reduction programs and $17.1 million related to the write-down of
certain businesses being held for sale and certain non-operating real
estate being held for sale to net realizable value. Unusual items of $31.3
million in 1997 include $10.5 million related to a legal settlement in
favor of International Insurance Company, $15.8 million related to
expenses incurred during the acquisition of Imo, including a break-up fee,
severance and retention bonuses and $5.0 million related to an additional
legal provision.
(b) Income (loss) from discontinued operations was $(210.6) million, $16.6
million, $27.0 million, $(16.8) million and $(9.8) million for the years
ended December 31, 1993, December 31, 1994, December 31, 1995, December
31, 1996 and December 31, 1997, respectively. Extraordinary items were
$18.1 million, $5.3 million, $4.4 million, $8.5 million, and $3.3 million
for the years ended December 31, 1993, December 31, 1994, December 31,
1995, December 31, 1996 and December 31, 1997, respectively, and $5.6
million for the six months ended July 3, 1998.
(c) Gross profit margin represents gross profit as a percentage of net sales
for the given period.
(d) Adjusted operating income represents income before interest, taxes and
unusual items.
(e) Adjusted operating margin represents adjusted operating income as a
percentage of net sales for the given period.
22
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Unaudited
Pro Forma Consolidated Financial Statements and the notes thereto, the Colfax
Corporation Consolidated Financial Statements and the notes thereto and the
other financial statements and financial information included elsewhere in
this Prospectus.
OVERVIEW
The Company is a multinational manufacturer of a broad range of engineered
industrial products operating in two distinct industry segments: Fluid
Handling and Industrial Positioning. The Fluid Handling segment designs and
produces a broad range of specialty pumps, which are sold principally under
the Imo, Warren, and Allweiler brand names. The Industrial Positioning segment
designs and produces a wide range of power transmission and motion control
products, which are sold principally under the Boston Gear and Morse Controls
brand names.
The Company believes that the fragmented nature of the industries in which
it participates presents substantial consolidation and growth opportunities
for companies with access to capital and the management ability to execute a
disciplined acquisition and integration program. The Company's growth strategy
includes acquiring companies operating in the segments in which it
participates. The Company believes that expansion will give it the opportunity
to gain competitive advantages relative to smaller operators. Such competitive
advantages may include greater purchasing power, a larger international sales
and distribution network, a lower cost of capital and the ability to provide
customers with a broader range of products and services.
Cost savings realized by the Acquired Companies contributed substantially to
the improvement in pro forma earnings before interest and taxes (excluding
unusual items), which increased 50% from $22.2 million for the six months
ended June 30, 1997 to $33.4 million for the six months ended July 3, 1998.
For example, cost reduction programs initiated at Imo reduced expenses by
approximately $3.0 million in the four-month period subsequent to the
Company's August 1997 acquisition of Imo. The Company expects to further
reduce Imo's expenses in 1998, principally from overhead reductions and
increases in operating efficiencies. In the first six months of 1998 compared
to the first six months of 1997, the Company's pro forma selling, general, and
administrative expenses decreased from $67.0 million to $58.7 million. In
addition, management has begun implementing CBS in each of the Acquired
Companies, and the Company intends to implement CBS in each of its future
acquisitions. The Company views CBS as an integral tool to effect improvements
in customer service, product quality and delivery and reductions in costs. The
implementation of CBS at each of the Acquired Companies should allow the
Company to continue to improve operating efficiencies, which should result in
improved operating margins.
The Company expects to incur one-time charges in the fourth quarter of 1998
relating to the Refinancing and the fulfillment of certain management
compensation agreements in the amounts of $ and $ , respectively.
Approximately 50% of the Company's revenues are generated outside the United
States, and in currencies other than the U.S. dollar. Management believes that
this geographic diversity helps to mitigate the Company's economic risk, as it
is not dependent upon the economic strength of any single country. This
geographic diversity, however, makes the Company's operating results subject
to foreign currency fluctuations. In particular, because revenues from
Germany-based Allweiler represent approximately 25% of the Company's total
sales, fluctuations in the rate of exchange between the U.S. dollar and the
Deutsche Mark may have an impact on the Company's results of operations. See
"Risk Factors--International Operations; Currency Fluctuations."
The acquisitions of the Acquired Companies changed the cost structures of
these companies due to changes relating to depreciation and amortization,
interest expense and compensation to former owners. In view of these changes,
the Company believes that the pre-acquisition historical results of the
Acquired Companies are not indicative of future results. Therefore, the
discussion below focuses on the Company's pro forma results of operations
rather than on the pre-acquisition historical results of the Acquired
Companies.
23
<PAGE>
PRO FORMA RESULTS OF OPERATIONS
The pro forma results of operations discussed below give effect to the
Acquisitions, the financing of each Acquisition, and the Combination, assuming
such transactions had occurred at the beginning of the relevant period.
Six Months Ended July 3, 1998 Compared to June 30, 1997
The following table sets forth pro forma net sales, income before interest
and taxes, depreciation and amortization, and capital expenditures with
percentages of net sales for the six months ended June 30, 1997 and July 3,
1998.
<TABLE>
<CAPTION>
SIX MONTHS ENDED SIX MONTHS ENDED
-------------------------- --------------------------
JUNE 30, 1997 JULY 3, 1998 JUNE 30, 1997 JULY 3, 1998
------------- ------------ ------------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
NET SALES
Fluid Handling........ $134,390 $136,448 49.4% 49.2%
Industrial Position-
ing.................. 137,616 140,753 50.6% 50.8%
-------- -------- ----- -----
Total Net Sales......... $272,006 $277,201 100.0% 100.0%
======== ======== ===== =====
INCOME BEFORE INTEREST
AND TAXES
Fluid Handling........ $ 14,059 $ 18,050 10.5% 13.2%
Industrial Position-
ing.................. 12,683 19,929 9.2% 14.2%
Unusual Items......... (10,500) -- -- --
Corporate............. (4,587) (4,615) -- --
-------- --------
Total Income Before In-
terest and Taxes....... $ 11,655 $ 33,364 4.3% 12.0%
======== ========
DEPRECIATION AND AMORTI-
ZATION
Fluid Handling........ $ 2,722 $ 2,324 2.0% 1.7%
Industrial Position-
ing.................. 2,560 2,993 1.9% 2.1%
Corporate............. 3,560 3,428 -- --
-------- --------
Total Depreciation and
Amortization........... $ 8,842 $ 8,745 3.3% 3.2%
======== ========
CAPITAL EXPENDITURES
Fluid Handling........ $ 4,021 $ 4,164 3.0% 3.1%
Industrial Position-
ing.................. 2,346 1,789 1.7% 1.3%
Corporate............. 101 15 -- --
-------- --------
Total Capital Expendi-
tures ................. $ 6,468 $ 5,968 2.4% 2.2%
======== ========
</TABLE>
Net Sales. Total net sales for the six months ended July 3, 1998 were $277.2
million, which represented a 1.9% increase compared to the total net sales for
the six months ended June 30, 1997. On a constant currency basis, total net
sales increased 5.3% from the six months ended June 30, 1997 to the six months
ended July 3, 1998. This increase in sales is due to volume increases and new
product introductions. Price changes were not material factors in the
Company's businesses during the period. Fluid Handling net sales for the six
months ended July 3, 1998 were 1.5% higher than the comparable period in 1997.
This increase resulted from higher volume due primarily to strong demand in
the commercial marine and crude oil markets. The increase was offset by a 1.2%
decrease in the net sales of Allweiler, due to the impact of foreign currency
fluctuations. Allweiler's net sales increased 5.9% on a local currency basis
from the comparable period in 1997, but a 7.2% increase in the value of the
U.S. dollar compared to the Deutsche Mark eliminated this sales increase.
Industrial Positioning net sales for the six months ended June 30, 1998 were
2.3% higher than the comparable period in 1997. This increase resulted
primarily from higher volume in remote control products and new product
introductions in mobile equipment controls and electronic motor controls.
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Gross Profit. Gross profit for the six months ended July 3, 1998 was $96.1
million or 34.7% of net sales compared to $94.0 million or 34.6% of net sales
for the comparable period in 1997.
Selling, General, and Administrative Expenses. Selling, general and
administrative expenses for the six months ended July 3, 1998 were $58.7
million, which represents a decrease of $8.3 million or 12.4% compared to
$67.0 million for the comparable period in 1997. As a percentage of net sales,
selling, general and administrative expenses decreased to 21.2% in 1998 from
24.6% in 1997. This improvement was due primarily to a reduction in corporate
overhead expenses, partly offset by increased spending in the marketing area.
Interest Expense. Interest expense was $21.5 million for the six months
ended July 3, 1998, which represents an increase of 4.8% from $20.5 million
for the six months ended June 30, 1997. This increase was due to the increased
level of debt, resulting from additional borrowings related to funding
payments of one-time charges taken in the second half of 1997 related to the
acquisition of Imo. Adjusted for the Offerings and the Refinancing (assuming
all of the Imo Notes are repurchased), pro forma interest expense for the six
months ended July 3, 1998 would have been $ million.
Income Taxes. Income taxes represent the sum of the income taxes of the
separate companies plus the impact of pro forma adjustments. This information
is not intended to reflect the expected future effective tax rate of the
Company. Among other adjustments, taxable losses and deferred benefits at
certain subsidiaries of the Company have not been used to offset taxable
income at other subsidiaries.
Year Ended December 31, 1997
Net Sales. Total net sales were $536.0 million for the year ended December
31, 1997. Net sales in the Fluid Handling segment were $266.8 million or 49.8%
of total net sales. Net sales in the Industrial Positioning segment were
$269.2 million or 50.2% of total net sales.
Gross Profit. Gross Profit for the year ended December 31, 1997 was $180.6
million or 33.7% of net sales.
Selling, General, and Administrative Expenses. Selling, general and
administrative expenses were $131.9 million or 24.6% of net sales for the year
ended December 31, 1997.
Interest Expense. Interest expense for the year ended December 31, 1997 was
$43.6 million. Adjusted for the Offerings and the Refinancing (assuming all of
the Imo Notes are repurchased), pro forma interest expense would have been
$ million.
Income Taxes. Income taxes represent the sum of the income taxes of the
separate companies plus the impact of pro forma adjustments. This information
is not intended to reflect the expected future effective tax rate of the
Company. Among other adjustments, taxable losses and deferred benefits at
certain subsidiaries of the Company have not been used to offset taxable
income at other subsidiaries.
PREDECESSOR BUSINESS RESULTS OF OPERATIONS
The following discussion relates to the results of Imo, the Predecessor
Business, for the years ended December 31, 1997, 1996 and 1995. The 1997
results represent the combination of the results of Imo for the eight months
ended August 28, 1997 and the results of Imo for the four months ended
December 31, 1997 (which are included in the results of Colfax Corporation for
the four months ended December 31, 1997).
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
Net Sales. Net sales from continuing operations in 1997 increased 2.4% to
$316.9 million, compared with $309.5 million in 1996, as a result of increases
of 4.6% and 1.1% in the Fluid Handling and Industrial Positioning segments,
respectively. Fluid Handling net sales increased due to volume increases in
sales to the crude oil
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market, offset by slightly decreased sales to the power generation market, as
well as to its European operations. Net sales increased in the Industrial
Positioning segment due to volume increases in small center gearboxes, shaft
accessories, electrical products, marine products and mobile equipment sales,
offset by a decrease in European operations sales due to unfavorable effects
of exchange rate changes.
Gross Profit. Gross profit in 1997 increased slightly to 30.0% of net sales
compared with 28.7% in 1996, due in part to the fact that the 1996 period
benefitted from a $2.0 million credit related to the phase-out of certain
post-retirement expenses.
Selling, General, and Administrative Expenses. Selling, general and
administrative expenses increased to $68.1 million or 21.5% of net sales in
the twelve months ended December 31, 1997, as compared with $62.5 million or
20.2% in the 1996 period. The increase in expenses, as a percentage of sales
in 1997, was due primarily to the fact that the 1996 period benefitted from a
favorable adjustment of $3.9 million related to the Company's phase-out of
certain post-retirement expenses. Additionally, goodwill amortization
increased $1.1 million in the last four months of 1997 as a result of the
acquisition of Imo by the Company. The increased selling, general and
administrative expenses in 1997 were partially offset by cost savings realized
from the immediate headcount reductions and other cost cutting measures
implemented after the acquisition of Imo by the Company (primarily at the
corporate headquarters), and net reductions of $0.6 million to previously
recorded provisions.
Interest Expense. Average borrowings in 1997 were approximately $6.1 million
lower than in 1996. Total interest expense (before allocation to discontinued
operations) of $33.6 million in 1997 was $1.5 million, or 4.3% lower than in
1996, due primarily to the reduction in debt with proceeds from the sale of
the Instrumentation business segment in August 1997.
Income (Loss) from Continuing Operations. The Company had a loss from
continuing operations of $36.9 million in 1997, which included unusual charges
of $31.3 million. In 1996, the loss from continuing operations was $33.1
million, which included unusual charges of $17.4 million and a reversal of a
previously recognized deferred tax benefit of $10.0 million.
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
Net Sales. Net sales from continuing operations in 1996 increased 4.2% to
$309.5 million, compared with $297.1 million in 1995. The Company's Fluid
Handling segment had a net sales increase of 14.0%, while net sales in the
Industrial Positioning segment remained flat. The Fluid Handling segment
increase was due to strong export demand, driven by products in crude oil
transfer, power generation and general industrial markets, as well as
increased demand in the U.S. marine market. The flatness in the Industrial
Positioning segment was due to the acquisition of a Swedish manufacturer of
specialized electronic controls, which was completed in late December of 1995,
offset by a market shift from DC to AC drives and a downturn in the U.S. gear
market in 1996.
Gross Profit. The gross profit in 1996 remained relatively constant at 28.7%
of net sales compared with 28.4% in 1995.
Selling, General, and Administrative Expenses. Selling, general and
administrative expenses remained relatively constant at $62.5 million or 20.2%
of sales in 1996, compared with $60.5 million or 20.3% of sales in 1995. The
1996 period benefitted from a decrease in expenses of $2.7 million associated
with the cost reduction program adopted in the fourth quarter of 1995 and net
reductions of approximately $1.2 million to previously recorded provisions.
These favorable items were offset by a planned increase in 1996 in selling
expenses in the Fluid Handling segment, and approximately $1.0 million in
costs associated with the unsuccessful attempt to sell the Roltra Morse
business in 1996.
Interest Expense. Average borrowings in 1996 were approximately $2.8 million
higher than in 1995. Total interest expense (before allocation to discontinued
operations) of $35.1 million in 1996 was $1.3 million, or 3.6%
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less than in 1995, principally due to the refinancing of the corporate debt at
more favorable interest rates. Interest expense for continuing operations
excludes interest expense of the discontinued operations of $9.1 million and
$13.7 million in 1996 and 1995, respectively.
Income (Loss) from Continuing Operations. The Company had a loss from
continuing operations of $33.1 million in 1996, which included unusual charges
of $17.4 million and a reversal of a previously recognized deferred tax
benefit of $10.0 million. In 1995, income from continuing operations was $7.2
million, which included unusual charges of $8.1 million and a deferred tax
benefit of $17.0 million.
YEAR 2000 COMPLIANCE
The Company has conducted a review of the software, databases, microcode,
hardware, systems and devices with date-related functionality used in the
businesses of Imo, Allweiler and Ameridrives (whether used on a stand-alone
basis or in combination with other software, hardware, systems or devices),
and has taken, or is in the process of taking, all steps that the Company
believes are necessary or appropriate to ensure that such software, databases,
microcode, hardware, systems and devices accurately Process all dates,
including those before, on or after January 1, 2000 (taking into account leap
year considerations), without loss of functionality, interoperability or
performance. As used in the preceding sentence, "Process" means all functions,
including but not limited to accepting input, calculating, storing, displaying
and generating as output.
The Company estimates that the aggregate cost of investigating and
remediating (where required) any Year 2000 issues relating to its businesses
will be less than $500,000. In most cases, the Company believes that the only
remediation measures required to address the Year 2000 issue are widely
available software upgrades for its purchase/accounting systems. Due to the
nature of its businesses, the Company does not believe that its customers or
suppliers will be materially adversely affected by the Year 2000 issue.
Although the Company's Boston Gear business unit relies to a significant
extent on online ordering, the Company does not believe that the Year 2000
issue will materially adversely affect the Company's business or results of
operations. As the Company currently believes that the Year 2000 issue will
not materially affect the Company's businesses, the Company does not have any
contingency plans with regard to the Year 2000 issue.
EURO
The Company believes that it has financial planning, risk management,
reporting, billing and accounting systems in operation sufficient and
appropriate (where needed) to address the conversion of the Company to euro-
denominated currency. Following European Monetary Union, the first stage of
which is scheduled to occur on January 1, 1999, large fluctuations in the rate
of exchange between the euro and the U.S. dollar could materially adversely
affect the results of operations and financial condition of the Company. See
"Risk Factors--International Operations; Currency Fluctuations."
LIQUIDITY AND CAPITAL RESOURCES
The Company has a variety of long-term credit facilities at each of its
operating companies.
Imo maintains a $129.0 million senior secured credit facility with a group
of lenders (the "Imo Credit Facility"). The Imo Credit Facility provides for a
five year, $70.0 million revolving credit facility (which includes a $30.0
million letter of credit sub-facility), and a $59.0 million term loan facility
amortizing to August 29, 2002. As of July 3, 1998, Imo had revolver borrowings
of $34.0 million, $16.6 million of outstanding standby letters of credit and
$49.7 million of term loan borrowings. Imo had $5.4 million in foreign short-
term credit facilities with amounts outstanding at July 3, 1998 of $2.2
million. Due to the short-term nature of these debt instruments, it is the
Company's opinion that the carrying amounts approximate the fair value. The
weighted-average interest rate on short-term notes payable was 8.03% at July
3, 1998.
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Ameridrives has a credit facility that is administered by the Bank of Nova
Scotia with a total commitment amount of $50.0 million (the "Ameridrives
Credit Facility"). The credit facility consists of a revolving credit facility
and a term loan. As of July 3, 1998, Ameridrives had $33.9 million outstanding
under the credit facility, of which $21.8 million and $12.1 million were
outstanding under the term loan and revolving credit facility, respectively.
The weighted-average interest rate was 7.21% at July 3, 1998.
Allweiler maintains a $190.0 million long-term credit facility with Merrill
Lynch International (the "Allweiler Credit Facility"). At July 3, 1998, $175.0
million was outstanding under this facility. The weighted-average interest
rate was 6.1%.
In addition, Allweiler maintains availability of $32.7 million under a
number of revolving credit facilities. At June 30, 1998, Allweiler had $8.7
million outstanding under these facilities.
As part of the Refinancing, the Company intends to enter into the Colfax
Credit Facility, consisting of a $100 million term loan facility and a $200
million revolving credit facility, each with an interest rate of %. The
Company intends to use the net proceeds of the Offerings, together with
borrowings under the Colfax Credit Facility (consisting of the full amount of
the term loan facility and approximately $ million of borrowings under the
revolving credit facility), to repay the indebtedness under the Subsidiary
Credit Facilities and to effect the Imo Note Repurchase. See "Use of
Proceeds." The remaining borrowing capacity under the revolving credit
facility will be available for future acquisitions, capital expenditures and
general corporate purposes.
The Company expects that following completion of the Offerings its principal
sources of cash will be cash generated from operations and borrowings under
the Colfax Credit Facility. The Company estimates that such sources will be
sufficient to fund the cash required for the Company's existing operations.
The Company expects that following the Offerings its principal needs for cash
relating to operations will be to fund (i) operating activities and working
capital and (ii) a strategic acquisition program. In the next twelve months,
the Company expects to spend approximately $17.0 million for capital
expenditures.
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BUSINESS
GENERAL
The Company is a multinational manufacturer of a broad range of engineered
industrial products designed primarily to transfer liquids or regulate and
control motion in a variety of industrial applications. The Company operates
in two distinct industry segments: Fluid Handling and Industrial Positioning.
The Fluid Handling segment designs and produces a broad range of specialty
pumps, including screw, centrifugal, progressive cavity and gear pumps. The
Industrial Positioning segment designs and produces a wide range of power
transmission and motion control products, including enclosed gear drives,
speed reducers, open gearing components, AC and DC motor controllers,
couplings, clutches, push-pull cable and remote control systems. The Company
maintains leadership positions in its primary markets through its recognized
global brands, its reputation for product quality and service, and its
innovative new product developments. For the year ended December 31, 1997, the
Company generated pro forma total net sales of $536.0 million.
Philip W. Knisely, with the support of the other Principal Stockholders,
embarked in 1995 to acquire, manage and grow world class industrial
manufacturing companies in the fluid handling and industrial positioning
industries. These industries were targeted due to their size, highly
fragmented nature and the Principal Stockholders' belief that these industries
provided the opportunity for accelerated growth and for improvements in
operating margins.
The Principal Stockholders have significant experience in acquiring and
leading multinational industrial manufacturing companies. Mr. Knisely, the
Company's President and Chief Executive Officer, has experience in managing
global industrial manufacturing operations for more than 15 years, including
as a group president of Emerson Electric Company and president of AMF
Industries. The Rales, who will serve as directors of the Company, are also
directors and principal stockholders of Danaher, a NYSE listed company and a
leading manufacturer of tools, components and process/environmental controls
with a market capitalization of approximately $5.6 billion as of July 31,
1998.
Through a series of transactions, the Principal Stockholders acquired market
leading manufacturing companies in the fluid handling and industrial
positioning industries. Concurrently with the consummation of the Offerings,
the Principal Stockholders and certain other minority securityholders of the
Acquired Companies will combine their interests in these businesses through
the Combination, which will result in Colfax Corporation being the parent
company of Imo, Allweiler and Ameridrives. See "--History" and "Certain
Relationships and Related Transactions."
The Company intends to expand its operations through internal growth and
acquisitions. The Company believes that there is a significant opportunity to
increase the internal growth of the Acquired Companies and of future
acquisitions by implementing CBS, a disciplined strategic planning and
execution methodology designed to achieve world class excellence in customer
satisfaction. CBS is a customization of a system which has its roots in the
world-recognized Toyota Production System. A similar system has been
successfully deployed at Danaher for more than 10 years. Management has begun
implementing CBS in each of the Acquired Companies and believes that it has
resulted in cost savings that have contributed to an improvement in pro forma
results of operations of the Company.
OPERATING SEGMENTS
The Company markets its products through worldwide sales and marketing
service networks to a diverse customer base in the following two segments:
Fluid Handling. The Fluid Handling segment designs and produces a broad
range of pumps, including screw, centrifugal, progressive cavity and gear
pumps. The pumps designed and produced by the Fluid Handling segment serve a
variety of applications in the following industries: chemicals,
petrochemicals, energy and power generation, marine and offshore engineering,
sewage and environmental engineering, food and beverage, pulp and paper, water
treatment and other process industries. In Fluid Handling, the Company markets
its products
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principally under the Imo, Warren and Allweiler brand names. The Imo brand
name dates back to 1928, when Bengt Ingestrom, a Swedish entrepreneur, and
Carl Montelius, a Swedish engineer (together, their two last names formed the
acronym Imo), invented the three-screw pump. Today, the Imo pump is the
industry standard for many screw pump applications. The Warren brand name
dates to 1897 and its centrifugal and two-screw pumps are found in many marine
applications. The Allweiler brand name dates to 1860 and is the leading brand
name for screw pumps in Europe. The Company believes that it is the market
leader in the highly fragmented $1.7 billion worldwide rotary pump market with
an 11% market share.
Industrial Positioning. The Industrial Positioning segment designs and
produces a wide range of power transmission and motion control products,
including enclosed gear drives, speed reducers, open gearing components, AC
and DC motor controllers, couplings, clutches, push-pull cable and remote
control systems. In Industrial Positioning, Boston Gear and Morse Controls are
leaders in their market segments. Boston Gear is one of the most widely
recognized brands in the power transmission market according to independent
awareness studies. Boston Gear products have applications in a wide range of
industrial manufacturing operations, ranging from packaging machinery and
equipment to integrated steel and pulp and paper mills. Boston Gear offers one
of the widest ranges of mechanical power transmission and motion control
products of any manufacturer in North America. Morse Controls cable control
systems have a strong brand awareness as Morse Controls was the originator of
the single lever mechanical engine control and jacketed push-pull cable. Morse
Controls products are sold into a variety of end use markets with a
concentration in the mobile equipment, marine and aviation sectors.
HISTORY
Colfax Corporation was formed in July 1997 to acquire Imo. In August 1997,
Colfax Corporation acquired approximately 93% of Imo's common stock through a
public tender offer. At the time of the acquisition, Imo was a diversified
industrial manufacturer, with $469.0 million in annual revenue and five
business units: Boston Gear, Imo Pump, Morse Controls, Gems Sensors and Roltra
Morse. Simultaneously with the closing of the tender offer, Imo sold its Gems
Sensors unit, a business with $79.0 million in 1996 revenue, to Danaher. In
February 1998, Imo sold Roltra Morse S.p.A., a subsidiary with $80.0 million
in 1996 revenue, to Magna International. These divestitures were made to
narrow the strategic focus of Imo to the Fluid Handling and Industrial
Positioning segments. Imo's Boston Gear business unit designs and produces AC
and DC motor controllers, gears and speed reducers; the Imo Pump business unit
designs and produces a broad range of rotary positive displacement pumps,
including screw pumps; and the Morse Controls business unit designs and
produces push-pull cable and remote control systems. In July 1998, the Company
effected a "short form" merger making Imo a wholly owned subsidiary of the
Company. See "Certain Relationships and Related Transactions--Acquisition of
Imo Industries Inc."
In February 1998, the Principal Stockholders formed Constellation Pumps
which, through an indirect, wholly owned subsidiary, acquired, by means of a
voluntary public tender offer as well as private and open market purchases, an
aggregate, as of July 31, 1998, of 98% of the common stock and 92% of the
preferred stock of Germany-based Allweiler, a major manufacturer of screw,
centrifugal and progressive cavity pumps in Europe. In 1997, Allweiler
generated revenues of $154.0 million. The Allweiler acquisition was made to
further enhance the position in the Fluid Handling segment of the companies
owned by the Principal Stockholders. See "Certain Relationships and Related
Transactions--Acquisition of Allweiler."
In December 1996, the Principal Stockholders formed Ameridrives L.P., which
acquired the Mechanical Power Transmission Group of Zurn Industries Inc., a
manufacturer of couplings, clutches, universal joints, spindles and steel
forgings. In May 1997, Ameridrives L.P. acquired Industrial Clutch Corp., a
manufacturer of clutch and clutch/brake systems, and in June 1997, Ameridrives
acquired Nuttall Gear, a manufacturer of enclosed gear drives.
Concurrently with the consummation of the Offerings, the Company, the
Principal Stockholders and certain other minority securityholders of the
Acquired Companies will effect the Combination, which will result in Colfax
Corporation being the parent company of Imo, Allweiler and Ameridrives. See
"Certain Relationships and Related Transactions--The Combination."
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INDUSTRY OVERVIEW
Fluid Handling. Based on analyst reports and trade publications, the Company
believes that the worldwide fluid handling industry generated revenue of
approximately $26.0 billion in 1997. The fluid handling market can be divided
into three segments: pumps, valves and fittings. The Company competes in the
pump segment, which, according to Company estimates, accounted for $13.5
billion in worldwide revenue in 1997. The Company does not currently compete
in the valve or fittings segments (estimated by the Company to be
approximately $10.5 billion and $2.0 billion in 1997 worldwide revenue,
respectively), but believes that these markets present potential future growth
opportunities.
The pump market is further segmented into positive displacement and
centrifugal pump products. The Company primarily competes in the positive
displacement pump market, which generated an estimated $2.5 billion in
worldwide revenue in 1997. The Company estimates that the worldwide rotary
pump market, a sub-segment of the positive displacement market, generated $1.7
billion in revenue in 1997. The Company believes that it is the market leader
in the worldwide rotary pump market with an 11% market share. The next two
largest competitors in this segment each have market shares of approximately
7%. The Company is also a niche competitor in what it estimates to be the
$11.0 billion centrifugal pump market and views this market as an area for
growth opportunities.
The worldwide pump market is highly fragmented, with over 1,000 competitors.
The Company estimates that 95% of these competitors are privately owned
companies, each generating less than $100.0 million in annual revenue. The
Company also estimates that 65% of the worldwide rotary pump market consists
of competitors that each generate less than $25.0 million in annual rotary
pump sales. Currently, a limited number of companies are truly worldwide
competitors, with most industry participants concentrating on local and niche
markets and offering only a small number of pump technologies. The Company
believes that it has the widest product range in the positive displacement
market with its two- and three-screw, gear and progressive cavity pump lines.
Industrial Positioning. The Company estimates that the total worldwide
market for industrial positioning products generated revenue of approximately
$15.0 billion in 1997, which was evenly split between publicly owned and
privately held companies. The total size of the market in which the Company
currently competes is approximately $6.0 billion. The Company believes that
the industrial positioning products market is highly fragmented with over
1,000 companies, each generating total revenues of less than $100.0 million
per year.
The Company competes in a number of niches within its served market, and
generally has either the largest or second largest market share in each of
these niches. No single industry participant accounts for more than 10% of the
total industrial positioning market. One of the major trends in the industry
over the past 10 years has been the consolidation among distributors of
industrial positioning products. The Company believes that this trend will
continue, and that its leadership position with many of the large, multi-
branch distributors will allow the Company to grow at a rate higher than that
of the underlying market.
GROWTH STRATEGY
. INTERNAL GROWTH
The Company believes that there is significant potential to increase the
internal growth of the Acquired Companies and of future acquisitions.
Through the implementation of CBS, the Company will seek to grow internally
by focusing on customer needs and striving to improve product quality,
delivery and cost. Specific actions to accomplish these goals include: (i)
leveraging its established distribution channels; (ii) introducing
innovative new products and applications; (iii) increasing asset
utilization; (iv) using advanced information technology; (v) increasing
sales and marketing efforts; (vi) expanding and diversifying the customer
segments served; and (vii) expanding the geographic markets served. For
example, management believes that its Industrial Positioning segment is
well-positioned to benefit from increasing customer concentration in the
markets it serves. In particular, the distributor channel, which represents
the substantial majority of sales for most major manufacturers, is
consolidating as large corporate end users demand one-stop shopping. The
Company anticipates increased demand in the Industrial Positioning segment
from distributors preferring its wide product line, strong brands and
ability to provide extensive technical support.
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. ACQUISITION GROWTH
The Company believes that the fragmented nature of the industries in which
it participates presents substantial consolidation and growth opportunities
for companies with access to capital and the management ability to execute
a disciplined acquisition and integration program. The Company's
acquisition growth strategy is to acquire companies in the segments in
which it participates that (i) have leading brands and strong market
positions; (ii) will expand its product lines; (iii) have reputations for
producing high quality products; and (iv) complement or enhance the
Company's existing worldwide sales and distribution networks. The Company
also believes that the extensive experience of its management team and the
Principal Stockholders in acquiring and effectively integrating acquisition
targets should enable the Company to capitalize on these opportunities. The
Company intends to take a proactive approach to acquisitions and has
currently identified approximately 50 potential acquisition targets in each
of its two business segments located both in and outside the United States,
although it does not currently have any agreements or understandings with
respect to the acquisition of any such potential targets.
As part of its acquisition growth strategy, the Company intends to expand
geographically by obtaining new businesses in Europe and other
international markets such as Latin America. The Company's 1998 acquisition
of Allweiler will facilitate additional market penetration in Europe by the
Company's Fluid Handling segment and also provides additional product
breadth for its North American sales force. In addition, the Company's
Industrial Positioning segment is already well-positioned to further
develop its presence in Europe and the higher-growth emerging markets of
Latin America, and management will actively explore opportunities in other
key markets.
OPERATING STRATEGY
. LEAD WITH EXPERIENCED MANAGEMENT TEAM
Philip W. Knisely, the Company's President and Chief Executive Officer, has
been a director and president of Imo since 1997 and of Ameridrives since
1996. From 1988 to 1995, he was president of AMF Industries, a privately
held, diversified global manufacturing company. Prior to 1988, Mr. Knisely
spent 10 years at Emerson Electric Company, a major manufacturer of
electronic products and components, in increasingly senior positions,
including president of Emerson Power Transmission Group from 1986 to 1988.
John A. Young, the Company's Vice President and Chief Financial Officer,
has extensive experience in identifying, analyzing and executing
acquisitions of industrial manufacturing companies. Mr. Young was director
of corporate development for AMF Industries from 1992 to 1995 and in that
capacity worked closely with Mr. Knisely in evaluating and completing
acquisitions. Prior to 1992, Mr. Young worked in mergers and acquisitions
for Chase Manhattan Bank and Robert Fleming, Inc.
The Company has also assembled a team of four experienced managers at its
business units. These managers have all joined the Company within the last
year, and have an average of 25 years of industrial management experience.
Three of these executives had previously worked with Mr. Knisely. See
"Management."
The Company's Board of Directors will include the Rales. Mitchell P. Rales,
the Company's Chairman of the Board, has been a director of Danaher since
1984 and has been chairman of its executive committee since 1990. Steven M.
Rales, a member of the Company's Board of Directors, has been Chairman of
the Board of Danaher since 1984. From 1984 to 1997, Danaher's annual
revenue increased from approximately $90.0 million to over $2.0 billion. In
addition, Danaher's market capitalization has grown from approximately
$71.0 million as of December 31, 1984 to approximately $5.6 billion as of
July 31, 1998. The Rales were founders in 1985 of Wabash, a NYSE listed
company and currently the largest truck trailer manufacturer in the United
States.
. IMPLEMENT INNOVATIVE COLFAX BUSINESS SYSTEM
A core element of the Company's management philosophy is CBS which it
intends to implement in each of its businesses. CBS is a customization of a
system which has its roots in the world-recognized Toyota
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Production System and was designed and refined by the senior management of
Danaher. CBS is a disciplined strategic planning and execution methodology
designed to achieve world class excellence in customer satisfaction. The
basic principles of CBS include:
. adhering to a philosophy of continuous improvement in quality,
delivery, cost and growth
. utilizing the technique of policy deployment to achieve and sustain
world class results
. hiring people with high integrity, who are results oriented and excel
in a team environment
. analyzing performance against world class benchmarks
. recognizing that profitability can be obtained only by achieving the
best possible customer satisfaction
Management has begun implementing CBS in each of the Acquired Companies,
and the Company intends to implement CBS in each of its future
acquisitions. The Company views CBS as an integral tool to effect
improvements in customer service, product quality, delivery and cost. By
applying the strict methodology of CBS to the businesses that it acquires,
the Company believes that it will be able to improve the operating margins
and increase the asset utilization of such businesses and, in so doing,
improve the Company's cash flow. For more information regarding CBS, see
"--Manufacturing."
. CAPITALIZE ON SYNERGIES AND COST EFFICIENCIES IN ACQUIRED COMPANIES
The Company believes that expansion will give it the opportunity to gain
competitive advantages relative to smaller operators. Such competitive
advantages may include greater purchasing power, a larger international
sales and distribution network, a lower cost of capital and the ability to
provide customers with a broader range of products and services. Cost
savings realized by the Acquired Companies contributed substantially to the
improvement in pro forma adjusted operating income, which increased 50%
from $22.2 million for the six months ended June 30, 1997 to $33.4 million
for the six months ended July 3, 1998.
. ACHIEVE HIGH LEVELS OF CUSTOMER SERVICE AND SATISFACTION
The basic tenet of CBS is the voice of the customer. The Company strives
daily to make customer satisfaction its number one priority. For example,
Boston Gear's online distribution information system allows it to interface
directly with its network of over 200 distributors and 2,000 outlets.
Boston Gear guarantees same-day shipment on any one of over 20 million
possible combinations and permutations of its speed reducer products, if an
order is received before noon. In addition, the Fluid Handling segment has
forged long-term partnership arrangements with companies such as Alfa Laval
AB, Asea Brown Boveri and General Electric Company (USA), providing
integrated engineering in designing many of its customers' products.
. INTRODUCE INNOVATIVE NEW PRODUCTS
The Company intends to introduce new products and applications to better
serve its customers and has a successful track record of innovative product
introduction. Morse Controls was awarded the Innovation Award at the 1997
International Marine Trades Exhibit and Conference for its proprietary new
electronic power steering system for marine applications. Boston Gear has
introduced a new line of AC motor controls to better serve this growing
market segment. In Fluid Handling, the Company has introduced five new
product families in 1998 for commercial marine, environmental and chemical
processing applications.
. MAINTAIN GLOBAL SALES AND SERVICE NETWORKS
The Company maintains an extensive global sales and service network for all
its product lines. In the Fluid Handling segment, the Company has
approximately 175 direct field sales associates in 16 countries. This sales
force is augmented by 123 independent representatives who cover an
additional 70 countries. In the Industrial Positioning segment, the Company
utilizes a combination of direct salesmen and independent representatives
and distributors and dealers to cover the worldwide marketplace. A total of
98 direct
33
<PAGE>
sales associates, 26 independent representatives and over 500 distributors
and dealers serve customers in over 50 countries worldwide. This worldwide
network allows the Company to capitalize on growth opportunities virtually
anywhere in the world.
PRODUCTS
A description of the principal products and services offered by the
Company's segments, as well as the principal uses and markets for such
products and services, is set forth below.
Fluid Handling
The Company markets its Fluid Handling products principally under the Imo,
Warren and Allweiler brands. In addition to producing pumps, the Company sells
replacement parts and performs repair services for its manufactured products,
many of which require rebuilding every three to five years as a result of the
wear from pumping abrasive materials. The Company believes it is the market
leader in the $1.7 billion worldwide rotary pump market with an 11% market
share. The Company's Fluid Handling segment is made up of four major product
lines: screw pumps, which provide customers with low noise and pulsationless
liquid flow; centrifugal pumps, which provide low noise level and high shock
resistance to meet exacting industrial and military requirements; progressive
cavity pumps, which accommodate fluids with very high solids content; and gear
pumps, which are utilized for low viscosity fluids in high pressure
applications.
<TABLE>
<CAPTION>
PRODUCT PRINCIPAL BRANDS PRINCIPAL END USE MARKETS
- ------- ---------------- -------------------------
<S> <C> <C>
Two- and Three-Screw Pumps Imo, Allweiler, Warren, Houttuin Hydrocarbon processing, marine
applications, power generation
Centrifugal Pumps Allweiler, Warren Environmental applications,
chemicals, marine applications,
wastewater treatment
Progressive Cavity Pumps Allweiler Food and beverage processing,
chemicals, wastewater treatment
Gear Pumps Imo OEM machinery, pulp &
paper processing
Industrial Positioning
The Industrial Positioning segment produces a wide variety of products and
performs repairs and services for industrial applications that position and
control power and motion. This segment is comprised of two business units:
Boston Gear, a leading producer of gears and enclosed gear drives, speed
reducers, couplings, clutches and adjustable-speed motor controllers which
offers one of the widest ranges of mechanical power transmission/motion
control products of any manufacturer in North America; and Morse Controls, a
manufacturer of precision mechanical and electronic remote control products
and systems that are used for mobile equipment, marine and aviation
applications.
<CAPTION>
PRODUCT PRINCIPAL BRANDS PRINCIPAL END USE MARKETS
- ------- ---------------- -------------------------
<S> <C> <C>
Enclosed Gear Drives Boston, Delroyd, Nuttall General industrial applications
Open Gearing Boston General industrial applications
Couplings Ameriflex, Amerigear Steel, paper, chemicals
Clutches Marland, Centric, Industrial Mining, general OEM, power generation
Electrical Drives Fincor Printing equipment, ski lifts
Cables Morse, Red Jaket(R), Redline(TM) Mobile equipment, marine applications
Controls Morse, Maxx(R), Hynautic Mobile equipment, marine applications,
aviation
</TABLE>
34
<PAGE>
CUSTOMERS
The Company's business is geographically diversified, with 37% of pro forma
1997 net sales derived from customers in Europe, 54% from customers in North
and South America, 5% from customers in Asia and 4% from customers in other
markets. The Company's customer base is highly diversified and includes
commercial, industrial and government customers. Neither of the Company's
business segments is dependent on any single customer or a few customers, the
loss of which would have a material adverse effect on the respective segment,
or on the Company as a whole. The Company's largest single customer accounted
for no more than 3% of 1997 pro forma net sales.
SALES
The Company sells its products through direct sales forces totaling over 270
associates, as well as distributor networks and, in some markets, independent
sales representatives. A significant percentage of the Company's direct sales
force has technical backgrounds, including degrees in engineering. In the
Fluid Handling segment, the Company has approximately 175 direct field sales
associates in 16 countries who are augmented by 123 independent
representatives that cover an additional 70 countries. In the Industrial
Positioning segment, the Company utilizes a combination of direct sales
associates, independent representatives, and distributors and dealers to cover
the global marketplace. A total of 98 direct salesmen, 26 independent
representatives and over 500 distributors and dealers serve customers in over
50 countries worldwide.
The Company believes that its worldwide presence enables it to provide
timely and responsive support and service to its customers, many of whom
operate internationally, and to capitalize on growth opportunities in both
developed and emerging markets around the world.
MANUFACTURING
At July 31, 1998, the Company's manufacturing facilities included
approximately 2,800 associates worldwide, and consisted of product development
teams whose members are from marketing, development, research, manufacturing,
engineering and purchasing. The Company has 29 manufacturing plants, four of
which are joint ventures in which the Company owns a 50% interest. The Company
believes that its manufacturing capacity is sufficient to meet its present and
currently anticipated needs.
Colfax Business System
The Company believes that CBS provides the necessary framework and tools to
continuously strive for world class manufacturing excellence. The system,
which begins with the voice of the customer, emphasizes consistent improvement
in product quality, delivery and cost. As solid foundations are built in these
areas, the Company can position itself to take advantage of growth
opportunities. CBS provides the necessary tools to achieve specific business
objectives with the involvement of all of the Company's associates. Extensive
training programs for all levels of the organization are utilized to integrate
these tools into the daily operation of each of the Company's manufacturing
facilities.
The CBS tools integral to achieving one-piece flow of work product in a
cellular manufacturing environment include, among others: policy deployment,
"5S" (simplify, straighten, scrub, stabilize and sustain), problem solving,
visual management, SMED and Kanban. The starting point is policy deployment, a
framework that links the Company's overall business goals to the entire
organization, through a process that promotes breakthrough thinking. It is the
critical element, driving the use of the remaining CBS tools. "5S" is a tool
that promotes cleanliness and orderliness throughout the Company's facilities.
Problem solving helps associates to solve large or vague problems by gathering
the necessary data, clarifying the problem, defining its root cause, and then
creatively solving the problem and initiating positive change. Visual
management is a tool that allows for clear and concise dissemination of
information to all associates to communicate a standard and then track
performance relative to that standard. SMED, or single minute exchange of
dies, is a key element of one piece flow production,
35
<PAGE>
which concentrates on the reduction of set-up time. Kanban is a visual
management technique for implementing pull production systems to transfer both
information and production raw materials. It is through the use of these tools
that the Company changes its processes to eliminate waste and inefficiencies
in order to achieve world class manufacturing excellence.
Raw Materials
The Company obtains raw materials, component parts and supplies from a
variety of sources, generally from more than one supplier. The Company's
principal raw materials are metals, plastics, castings and bearings. The
Company's suppliers and sources of raw materials are based in both the United
States and other countries and the Company believes that its sources of raw
materials are adequate for its needs for the foreseeable future. The loss of
any one supplier would not have a material adverse effect on the Company's
financial condition or results of operations.
Backlog
Manufacturing turnaround time is generally sufficiently short so as to
permit the Company to manufacture to order for most of its products, which
helps to limit inventory costs. Backlog is therefore generally a function of
requested customer delivery dates and is typically no more than two to three
months of net sales.
RESEARCH AND DEVELOPMENT
The Company closely integrates research and development with marketing,
manufacturing and product engineering in meeting the needs of its customers.
The Company has approximately 140 professionals in research and development
and product engineering. The Company's principal ongoing research and
development programs involve the development of new technologies to enhance
the performance or lower the cost of manufacturing its existing products, the
redesign of existing product lines either to increase the efficiency or to
lower their manufacturing cost and the development of new products.
Expenditures by the Company, on a pro forma basis, for research and
development for the year ended December 31, 1997 and the six months ended June
30, 1998 were $9.8 million and $5.8 million, respectively.
COMPETITION
The Company's products and services are marketed on a worldwide basis. Most
markets in which the Company operates are highly fragmented and competitive.
The Company believes that the principal elements of competition in its markets
are product quality, price, design and engineering capabilities, product
development, conformity to customer specifications, quality of post-sale
support, timeliness of delivery and effectiveness of its distribution
organization. Because the Company competes in certain narrowly defined niche
markets, there is not any single company that competes directly with the
Company across all of the Company's product lines.
PATENTS AND TRADEMARKS
The Company owns numerous unexpired U.S. patents and foreign patents,
including counterparts of certain of its U.S. patents, in major industrial
countries of the world. The Company's products are marketed under various
trade names and registered U.S. and foreign trademarks. The Company, however,
does not consider any one patent or trademark or any group thereof essential
to its business as a whole, or to either of its business segments. The Company
relies, to an extent, on proprietary product knowledge and manufacturing
processes in its operations.
ASSOCIATES
At July 31, 1998, the Company employed approximately 3,800 persons
worldwide. Approximately 1,700 persons were employed in the United States, and
approximately 2,100 persons were employed outside of the
36
<PAGE>
United States. There are approximately 1,000 associates worldwide covered by
collective bargaining agreements with various unions expiring in 1998 through
2000. The Company considers its relations with its associates to be
satisfactory.
Allweiler's associates are not unionized. Under German law, however,
Allweiler is required to have and negotiate with workers councils and other
organizations representing its associates concerning important changes in
operations and working and employment conditions. Although these negotiations
must be taken into account in the timing of certain management decisions,
Allweiler's experience is that such negotiations contribute to good labor
relations. Pursuant to an agreement with its workers council made prior to the
acquisition of Allweiler by Constellation Pumps, in exchange for certain wage
concessions, Allweiler has undertaken not to decrease the size of its
workforce (other than through attrition) until 1999.
PROPERTIES
The following table lists the Company's principal facilities, indicating the
location, principal use and whether the facility is owned or leased.
<TABLE>
<CAPTION>
LOCATION PRINCIPAL USE OWNED/LEASED
- -------- ------------- ------------
<S> <C> <C> <C>
CORPORATE
Lawrenceville, New Jersey.............. Subsidiary Headquarters Leased
Richmond, Virginia..................... Corporate Headquarters Leased
FLUID HANDLING
Columbia, Kentucky..................... Production Owned
Warren, Massachusetts.................. Production Owned
Monroe, North Carolina................. Production Owned
Mississauga, Canada.................... Distribution Leased
Paris, France.......................... Production Leased
Bottrop, Germany....................... Production Owned
Radolfzell, Germany.................... Production Owned
Utrecht, Netherlands................... Production Owned
Stockholm, Sweden...................... Production Owned
INDUSTRIAL POSITIONING
Los Angeles, California................ Distribution Leased
Sarasota, Florida...................... Production Owned
La Grange, Illinois.................... Production Owned
Florence, Kentucky..................... Distribution Leased
New Orleans, Louisiana................. Production Leased
Quincy, Massachusetts.................. Divisional Office Owned
Trenton, New Jersey.................... Production Owned
Niagara Falls, New York................ Production Leased
Charlotte, North Carolina.............. Production Owned
Louisburg, North Carolina.............. Production Owned
Hudson, Ohio........................... Production Owned
Erie, Pennsylvania..................... Production Owned
York, Pennsylvania..................... Production Owned
Waukesha, Wisconsin.................... Production Owned
Sydney, Australia...................... Production Owned
Basildon, England...................... Production Leased
Paris, France.......................... Production Leased
Heiligenhaus, Germany.................. Production Owned
Singapore.............................. Production Leased
Marsta, Sweden......................... Production Owned
</TABLE>
37
<PAGE>
The Company believes that its machinery, plants and offices are in
satisfactory operating condition and are adequate for the uses to which they
are put. The Company believes its manufacturing capacity is sufficient to meet
its present and currently anticipated needs.
LITIGATION
Imo and one of its subsidiaries are two of a large number of defendants in
lawsuits brought in various jurisdictions by approximately 6,000 claimants who
allege injury caused by exposure to asbestos. Although neither Imo nor any of
its subsidiaries has ever been a producer or direct supplier of asbestos, it
is alleged that certain of the industrial and marine products formerly sold by
Imo and the subsidiary named in such complaints contained components which
contained asbestos. In addition, Imo and the subsidiary are named in cases,
involving approximately 26,000 claimants, which have been "administratively
dismissed" by the U.S. District Court for the Eastern District of
Pennsylvania. Cases that have been "administratively dismissed" may be
reinstated only upon a showing to the court that (i) there is satisfactory
evidence of an asbestos-related injury; and (ii) there is probative evidence
that the plaintiff was exposed to products or equipment supplied by each
individual defendant in the case. Suits against the two companies have been
tendered to their insurers who are defending under stated reservation of
rights pursuant to applicable defense and indemnity agreements.
In addition to the potential claims noted above, Imo has several contractual
and warranty claims, arising primarily from discontinued or divested
operations, for which Imo's management believes there are significant legal
and factual defenses, which they intend to pursue vigorously.
In addition to the litigation and matters noted above, the Company and its
subsidiaries are from time to time subject to, and are presently involved in,
litigation or other legal proceedings arising out of the ordinary course of
its business. These matters primarily involve claims for damages arising out
of the use of the subsidiaries' products, some of which include claims for
punitive as well as compensatory damages.
With respect to the litigation and claims described in the preceding
paragraphs, management of the Company believes that its subsidiaries will
either prevail, have adequate insurance coverage or have established
appropriate reserves to cover potential liabilities. There can be no
assurance, however, as to the ultimate outcome of any of these matters, and if
all or substantially all of these legal proceedings were to be determined
adversely to such subsidiary, there could be a material adverse effect on the
financial condition of the Company, or such subsidiary.
For a discussion regarding litigation relating to environmental matters, see
"--Environmental Matters" below.
The disclosure relating to litigation matters in the notes to the Colfax
Corporation and the Imo Industries Inc. Consolidated Financial Statements
contained in this Prospectus contains descriptions of certain matters not
described above as a result of the different materiality thresholds which
apply to Imo as a stand-alone company compared to materiality standards which
apply to the Company. Management of the Company believes that none of such
matters either individually or collectively would have a material adverse
effect on the financial condition of the Company.
38
<PAGE>
ENVIRONMENTAL MATTERS
The operations of the Company, like those of other companies engaged in
similar businesses, involve the use, disposal and clean up of substances
regulated under environmental protection laws. The Company and its
subsidiaries have been identified in a number of instances as a "Potentially
Responsible Party" by the U.S. Environmental Protection Agency, and in some
instances by individual states, with respect to the disposal of hazardous
wastes at a number of facilities that have been targeted for clean-up pursuant
to the Comprehensive Environmental Response Compensation and Liability Act
("CERCLA") or similar state law. Similarly, Imo has received notice that it is
one of a number of defendants named in an action filed in the United States
District Court, for the Southern District of Ohio Western Division by a group
of plaintiffs who are attempting to allocate a share of cleanup costs, for
which they are responsible, to a large number of additional parties, including
Imo. Although CERCLA and corresponding state law liability is joint and
several, the Company believes that the Company's liability will not have a
material adverse effect on the financial condition of the Company since it
believes that Imo either qualifies as a de minimis or minor contributor at
each site. Accordingly, the Company believes that the portion of remediation
costs that Imo will be responsible for will therefore not be material.
The Company has current and former operations and subsidiaries in numerous
locations, some of which require environmental remediation. The Company,
however, does not know of or believe that any such matters or the cost of any
required corrective measure, either individually or in the aggregate, will
have a material adverse effect on the financial condition of the Company.
There can be no assurance, however, that these matters or other environmental
matters not currently known to the Company will not have such a material
adverse effect.
39
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information regarding the individuals
who are currently directors or officers of the Company or who will become
directors or officers of the Company upon consummation of the Offerings. The
ages of the individuals listed below are as of July 31, 1998. Mitchell P.
Rales and Steven M. Rales are brothers. There are no other family
relationships among any of the individuals listed below.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Philip W.
Knisely.......... 44 President and Chief Executive Officer; Director
Mitchell P.
Rales............ 42 Chairman of the Board
Steven M. Rales... 47 Director
Neil D. Cohen..... 43 Director
George P. Stamas.. 47 Director
John A. Young..... 33 Vice President, Chief Financial Officer and Treasurer
Michael K. Dwyer.. 41 Vice President, Colfax Business System
G. Scott Faison... 37 Vice President; Controller and Assistant Treasurer
Charles W. Nims... 50 President, Boston Gear
Thomas M.
O'Brien.......... 48 Vice President, Law and Secretary
George M.
Scheerle......... 56 President, Allweiler
John B. Suddarth.. 39 President, Morse Controls
T. Campbell Wal-
ton.............. 49 President, Imo Pump
</TABLE>
PHILIP W. KNISELY has been a director and the President and Chief Executive
Officer of the Company since 1997. Mr. Knisely has been a director and chief
executive officer and president of Imo since August 1997 and he was named
Chairman of the Board of Imo in November 1997. Mr. Knisely has been president
of Ameridrives since 1996. From 1988 to 1995, he was president of AMF
Industries, a privately held diversified manufacturing company. Prior to that,
Mr. Knisely spent 10 years at Emerson Electric Company in increasingly senior
positions, including president of Emerson Power Transmission Group from 1986
to 1988.
MITCHELL P. RALES will become the Company's Chairman of the Board upon
consummation of the Offerings. Mr. Rales has been a director of the Company
and Imo since 1997. He has been a director of Danaher Corporation since 1984
and has been chairman of Danaher's executive committee since 1990. Mr. Rales
is also a director of Colfax Capital Corp., Ameridrives and Janelia Farm
Corp., and has held those directorships since 1997, 1996 and 1988,
respectively. He is also a founder of Wabash and was a director of Wabash from
1985 to 1995.
STEVEN M. RALES will become Chairman of the Company's Executive Committee
upon consummation of the Offerings. Mr. Rales has been a director of the
Company and of Imo since 1997. Mr. Rales has been Chairman of the Board of
Danaher Corporation since 1984. Mr. Rales is also a director of Colfax Capital
Corp., Ameridrives and Janelia Farm Corp., and has held those directorships
since 1997, 1996 and 1988, respectively. He is also a founder of Wabash and
was the Chairman of the Board of Directors of Wabash from 1985 to 1995.
NEIL D. COHEN will become a director of the Company upon consummation of the
Offerings. He has been a director of Imo since August 1997. During the past
five years, Mr. Cohen has been president of District Photo Inc., a photo
finishing company. He is also a member of the Board of Trustees of the Photo
Marketing Association International, Inc., a trade association for the photo
finishing industry.
GEORGE P. STAMAS will become a director of the Company upon the consummation
of the Offerings. Mr. Stamas is a partner with the law firm of Wilmer, Cutler
& Pickering and Co-Chairman of that firm's Corporate Department. Prior to
joining Wilmer, Cutler & Pickering as a partner in 1996, he was a partner at
Piper & Marbury L.L.P. since 1983. Mr. Stamas is currently a director of FTI
Consulting, Inc., a provider of litigation support services.
40
<PAGE>
JOHN A. YOUNG has been Vice President and Chief Financial Officer of the
Company since 1997 and will become Treasurer upon consummation of the
Offerings. Mr. Young has been the vice president and assistant secretary of
Imo since August 1997. He was named treasurer and chief financial officer of
Imo in November 1997. Mr. Young has also served as a vice president of
Ameridrives since 1996 and vice president of Allweiler since February 1998.
From 1992 to 1995, he was director of corporate development of AMF Industries.
MICHAEL K. DWYER has been Vice President, Colfax Business System since
joining the Company in March 1998. Prior to joining the Company, Mr. Dwyer was
president of Strategic Innovations International, Inc., a consulting firm
specializing in world class manufacturing practices, from 1995 to 1998. From
1988 to 1995, Mr. Dwyer was employed at AMF Industries in a number of
increasingly senior positions in engineering and operations, and most recently
as vice president, engineering of AMF Reece Inc., a manufacturer of industrial
sewing equipment.
G. SCOTT FAISON will become Vice President, Controller and Assistant
Treasurer of the Company upon consummation of the Offerings. Mr. Faison has
been corporate controller of Imo since joining Imo in November 1997. Prior to
joining Imo, Mr. Faison was the chief financial officer for Bullets
Corporation of America from October 1996 to November 1997. From 1987 to 1996,
Mr. Faison worked at AMF Industries in a number of management positions
including controller, AMF-UK; controller, Consumer Products Division; and
corporate controller.
CHARLES W. NIMS has been president of the Boston Gear business unit since
joining Imo in January 1998. Prior to joining Imo, Mr. Nims was employed by
Emerson Electric Company for 18 years. From 1992 to 1997, Mr. Nims was the
president of the Branson Sensor Division of Emerson Electric Company, a
manufacturer of ultrasonic welding equipment.
THOMAS M. O'BRIEN will become Vice President, Law and Secretary of the
Company upon consummation of the Offerings. Mr. O'Brien has been assistant
general counsel at Imo since 1995. He has been a member of the legal
department at Imo since 1985. Mr. O'Brien had previous experience at Hanson
Industries Inc. and the New Jersey Department of Environmental Protection.
GEORGE M. SCHEERLE has been president of Allweiler since October 1996. Prior
to joining Allweiler, Mr. Scheerle was president of Scheerle AG, a distributor
of pump products located in Steckborn, Switzerland for more than five years.
JOHN B. SUDDARTH has been the president of the Morse Controls business unit
since joining Imo in November 1997. Prior to joining Imo, he worked for AMF
Industries from 1990 to 1997. He was president of AMF Reece Inc. from 1994 to
1997 and the manager of Lane Products for AMF Bowling from 1990 to 1994. Mr.
Suddarth had previous experience at General Electric Corporation and as a
captain in the U.S. Army.
T. CAMPBELL WALTON has been president of the Imo Pump business unit since
joining Imo in April 1998. Prior to joining Imo, Mr. Walton was senior vice
president, operations for Marathon Electric Corporation, a manufacturer of
electric motors and compressors where he was employed from 1991 to 1998 in
various positions. Prior to that, Mr. Walton spent 10 years at Emerson
Electric Company and eight years at General Electric Corporation in
increasingly senior manufacturing positions at both companies.
CLASSIFICATION OF BOARD OF DIRECTORS
The Board of Directors is divided into three classes. The term of office of
the first class (currently comprised of ) will expire at the first annual
meeting of stockholders following the date of this Prospectus, the term of
office of the second class (currently comprised of ) will expire at the
second annual meeting of stockholders following the date of this Prospectus,
and the term of office of the third class (currently comprised of ) will
expire at the third annual meeting of stockholders following the date of this
Prospectus. At each annual meeting of stockholders, successors to directors of
the class whose term expires at such meeting will be elected to serve for
three-year terms and until their successors are elected and qualified. See
"Certain Charter and By-law Provisions--Classified Board of Directors."
41
<PAGE>
COMPENSATION OF DIRECTORS
Each director other than Mr. Knisely and the Rales will receive an annual
retainer payable in options to acquire shares of Common Stock at the fair
market value of such shares on the date of grant. The Company currently
contemplates that the value of such options will be approximately $15,000.
None of Mr. Knisely or the Rales will receive additional compensation for
service as a director.
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors has established an Executive Committee, an Audit
Committee and a Compensation Committee. The Executive Committee has full
authority to exercise all the powers of the Board between meetings of the
Board, except as reserved by the Board or as otherwise required by applicable
law. Effective upon consummation of the Offerings, Mr. Knisely and the Rales
will be appointed as the members of the Executive Committee. The Audit
Committee is responsible for recommending to the Board the engagement of the
independent auditors of the Company and reviewing with the independent
auditors the scope and results of the audits, the internal accounting controls
of the Company, audit practices and the professional services furnished by the
independent auditors. The Compensation Committee is responsible for reviewing
and approving all compensation arrangements for officers of the Company, and
is also responsible for administering the 1998 Stock Incentive Plan (the
"Plan"). See "--Stock Incentive Plan." The Company intends to appoint at least
two independent directors as members of each of the Audit Committee and
Compensation Committee.
EXECUTIVE COMPENSATION
Effective upon consummation of the Offerings and for the balance of 1998,
the Company will pay compensation based on the following annual salaries to
the Chief Executive Officer and the four other most highly paid executive
officers of the Company and its affiliates (collectively, the "Named Executive
Officers") for services rendered in all capacities in which they serve during
such period.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION AWARDS
----------------------------
RESTRICTED SECURITIES
ANNUAL STOCK UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION COMPENSATION AWARDS($) OPTIONS/ SAR'S(#) COMPENSATION
- --------------------------- ------------ ---------- ----------------- ------------
<S> <C> <C> <C> <C>
Philip W. Knisely........ $520,000 (1)
President and Chief Ex-
ecutive Officer, Direc-
tor
George M. Scheerle....... 380,000 (1)
President, Allweiler AG.
Charles W. Nims.......... 285,000 (1)(2)
President, Boston Gear
T. Campbell Walton....... 270,000 (1)(2)
President, Imo Pump
John A. Young............ 200,000 (1)(2)
Vice President, Chief
Financial Officer
</TABLE>
- --------
(1) Annual compensation consists of current annual base salary plus
anticipated annual bonus.
(2) Upon consummation of the Offerings, in exchange for their stock
appreciation rights granted pursuant to the Imo Industries Inc. Employee
Appreciation Rights Agreement, dated February 1, 1998, Messrs. ,
and will receive stock options, granted pursuant to the Plan, which
will be immediately exercisable for , and shares of Common
Stock, respectively, at an exercise price of $ per share. Assuming an
initial public offering price of $ per share of Common Stock, the grant
of such stock options will be equivalent in value to $ , $ and $
in the case of Messrs. , and , respectively.
42
<PAGE>
EXECUTIVE COMPENSATION AGREEMENTS
George M. Scheerle entered into an employment agreement with Allweiler on
August 14, 1998 with a term expiring on August 14, 2003. Under such employment
agreement, Mr. Scheerle receives an annual salary of DM 540,000 (approximately
$300,000) and has a targeted annual bonus of DM 250,000 (approximately
$140,000). With the exception of such agreement, neither the Company, nor any
subsidiary of the Company, has entered into any employment agreement with any
of the executive officers of the Company.
Pension Plans
The following table shows the estimated maximum annual retirement benefits
payable to a covered participant under the Imo Industries Inc. U.S. Salaried
Plan (the "Salaried Plan"). Benefits were calculated assuming that
participants and their spouses elect a straight-life annuity rather than a
joint and survivor or other form of annuity, in which case actual benefits
would generally be lower than the amounts shown in the table. Benefits are not
subject to any deduction for Social Security or other offset amounts.
PENSION PLAN TABLE
<TABLE>
<CAPTION>
YEARS OF SERVICE
---------------------------------------------------------------
FINAL
AVERAGE
EARNINGS 10 YEARS 15 YEARS 20 YEARS 25 YEARS 30 YEARS 35 YEARS
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
$100,000 $16,089 $24,134 $32,178 $40,223 $43,635 $47,047
150,000 25,089 37,634 50,178 62,723 68,135 73,547
200,000 26,889 40,334 53,778 67,223 73,035 78,847
250,000 26,889 40,334 53,778 67,223 73,035 78,847
300,000 26,889 40,334 53,778 67,223 73,035 78,847
350,000 26,889 40,334 53,778 67,223 73,035 78,847
400,000 26,889 40,334 53,778 67,223 73,035 78,847
450,000 26,889 40,334 53,778 67,223 73,035 78,847
500,000 26,889 40,334 53,778 67,223 73,035 78,847
550,000 26,889 40,334 53,778 67,223 73,035 78,847
</TABLE>
Final average earnings are based upon the highest 60 months of compensation
during the participant's last 120 months of service. The annual compensation
taken into account under the Salaried Plan is the actual monthly salary and
bonus earned in that year.
As of July 3, 1998, Mr. Knisely, Mr. Young, Mr. Walton and Mr. Nims each
have less than one year of benefit service as defined under the Salaried Plan.
To be vested in the Salaried Plan benefits, a participant must have over 4.5
years of service. Mr. Scheerle does not participate in the Salaried Plan but
does participate in a separate plan of Allweiler. Mr. Scheerle's vested
accrued benefit in such plan is approximately $35,000 per year.
The benefits shown in the Pension Plan Table reflect the applicable
limitations imposed by Sections 415 and 401(a)(17) of the Code. Benefits
payable pursuant to the Salaried Plan are restricted in accordance with the
limitations of Sections 415 and 401(a)(17) of the Code.
STOCK INCENTIVE PLAN
The Plan was approved by the Board on , 1998. The following summary of
the Plan is qualified in its entirety by reference to the complete text of the
Plan, which is included as an exhibit to the Registration Statement of which
this Prospectus forms a part.
The Plan is intended to promote the long term financial interests and growth
of the Company by (a) attracting and retaining executive personnel, (b)
motivating executive personnel by means of growth-related incentives, (c)
providing incentive compensation opportunities that are competitive with those
of other major corporations and (d) furthering the identity of interests of
participants with those of the stockholders of the Company.
43
<PAGE>
The Plan provides for the granting of awards to such key employees of the
Company and its affiliates as the committee of the Board (the "Committee")
appointed to administer the Plan may select from time to time. Approximately
employees are eligible to participate in the Plan.
An aggregate of shares of Common Stock are reserved for issuance under
the Plan, subject to adjustment as described below. Such shares may be
authorized but unissued Common Stock, authorized and issued Common Stock held
in the Company's treasury or a combination thereof. Generally, shares subject
to an award that remain unissued upon expiration or cancellation of the award
will be available for future grant under the Plan. The total number of shares
of Common Stock subject to awards (including awards paid in cash but
denominated as shares of Common Stock) granted to any participant in the Plan
during any calendar year may not exceed . In the event that the Committee
determines that any recapitalization, reorganization, spinoff, stock split,
combination or other increase or reduction in the number of issued shares of
Common Stock affects such Common Stock such that an adjustment is appropriate
in order to prevent dilution or enlargement of the rights of participants in
the Plan, then the Committee may make such equitable changes or adjustments as
it deems necessary to the number and kind of shares of Common Stock which may
thereafter be issued in connection with awards, the limit on individual
awards, the number and kind of shares of Common Stock subject to each
outstanding award and the exercise price of each award.
The Plan will be administered by the Committee. The Committee will, at all
times, consist of two or more persons, each of whom is an "outside director"
within the meaning of Section 162(m) of the Code and a "disinterested person"
within the meaning of Rule 16b-3 promulgated under the Securities Exchange Act
of 1934, as amended. The Committee is authorized, among other things, to
interpret and implement the provisions of the Plan, to select the persons to
whom awards will be granted, to determine the terms and conditions of such
awards and to make all other determinations deemed necessary or advisable for
the administration of the Plan.
Awards under the Plan may be made in the form of (a) Incentive Stock
Options, (b) Non-Qualified Stock Options (Incentive and Non-Qualified Stock
Options are collectively referred to as "options"), (c) Stock Appreciation
Rights, (d) Restricted Stock and (e) Other Awards.
Stock Options
Options granted pursuant to the Plan will be exercisable at such time or
times as the Committee determines. The purchase price per share payable upon
the exercise of an option (the "option exercise price") will be established by
the Committee; provided, however, that in the case of an Incentive Stock
Option, the option exercise price may be no less than the fair market value of
a share of Common Stock on the date of grant. The option exercise price is
payable by any one of the following methods or a combination thereof, to the
extent permitted by the Committee: (a) cash; (b) check, bank draft or money
order; (c) by surrender of shares of Common Stock having a fair market value
on the date of the exercise equal to the option exercise price; or (d) by any
other consideration.
Stock Appreciation Rights
Stock appreciation rights may be granted in connection with all or any part
of, or independently of, any option granted under the Plan. A stock
appreciation right granted independently of any option will be subject to the
same vesting rules as described above for options. A stock appreciation right
granted in tandem with any stock option will be exercisable only when and to
the extent the option to which it relates is exercisable. The grantee of a
stock appreciation right has the right to surrender the stock appreciation
right and receive from the Company, in cash, an amount equal to the excess of
the fair market value of a share of Common Stock over the exercise price of
the stock appreciation right for each share of Common Stock in respect of
which such stock appreciation right is being exercised.
44
<PAGE>
Restricted Stock
The Committee may grant restricted shares of Common Stock to such persons,
in such amounts, and subject to such terms and conditions (including the
attainment of performance goals) as the Committee may determine in its
discretion. Except for restrictions on transfer and such other restrictions as
the Committee may impose, participants will have all the rights of a
stockholder with respect to the restricted stock. Unless the Committee
determines otherwise, termination of employment during the restricted period
will result in the forfeiture by the participant of all shares still subject
to restrictions.
Other Awards
Other cash awards and awards valued in whole or in part by reference to, or
otherwise based on, Common Stock may be granted either alone or in addition to
other awards under the Plan. Subject to the provisions of the Plan, the
Committee will have the sole and complete authority to determine the persons
to whom and the time or times at which such Other Awards will be granted, the
number of shares of Common Stock to be granted pursuant to such Other Awards
and all other conditions of such Other Awards. Participants may elect to defer
all or a portion of such Other Awards in accordance with procedures
established by the Committee. The Committee may, in its discretion, make
awards with terms and conditions different from those specified in the Plan to
participants who are employed outside of the United States or who are foreign
nationals.
In the event of a Change in Control (as defined in the Plan), all
outstanding awards will become fully vested and/or immediately exercisable.
The Board or the Committee may suspend, revise, terminate or amend the Plan
at any time; provided, however, that no such action may, without the consent
of a participant, reduce the participant's rights under any outstanding award.
45
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership (as defined in Rule 13d-3 under the Securities Exchange Act of 1934)
of the Company's Common Stock immediately after giving effect to the
Combination by (i) each person known to the Company to be the beneficial owner
of more than five percent of the outstanding Common Stock of the Company, (ii)
each director of the Company, (iii) each of the executive officers listed in
the Summary Compensation Table and (iv) all directors and officers of the
Company as a group.
<TABLE>
<CAPTION>
PERCENTAGE OF COMMON
NUMBER OF SHARES STOCK OWNED (1)
COMMON STOCK --------------------------------
BENEFICIALLY OWNED(2) BEFORE OFFERINGS AFTER OFFERINGS
--------------------- ---------------- ---------------
<S> <C> <C> <C>
Mitchell P. Rales....... 410 41.0
Steven M. Rales......... 410 41.0
Philip W. Knisely....... 45 4.5
Neil D. Cohen........... -- --
George P. Stamas........ -- --
John A. Young........... 13.5 1.35
Charles W. Nims......... *
George M. Scheerle...... -- --
T. Campbell Walton...... -- --
All executive officers
and directors as a
group (13 persons).....
</TABLE>
- --------
* Less than one percent.
(1) Assumes no exercise of the Underwriters' over-allotment options and no
purchases in the Offerings by any of the persons listed in the table.
(2) Based on 1,000 shares of Common Stock currently outstanding at ,
1998.
46
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
THE COMBINATION
The Company, its stockholders, the stockholders of Constellation Pumps and
Ameridrives, the holders of 100% of the partnership interests in Ameridrives
Holdings, and Janelia Farm Corp., a corporation owned by the Rales ("JFC"),
have entered into a combination agreement (the "Combination Agreement"). The
description of the Combination Agreement set forth below is qualified by
reference to the Combination Agreement, which has been filed as an exhibit to
the Registration Statement of which this Prospectus is a part.
Pursuant to the Combination Agreement, concurrently with the consummation of
the Offerings, (i) the stockholders of Constellation Pumps will transfer all
of the outstanding shares of Constellation Pumps to the Company in exchange
for an aggregate of shares of Common Stock; (ii) the stockholders of
Ameridrives will transfer all of the outstanding shares of Ameridrives to the
Company in exchange for an aggregate of shares of Common Stock; (iii) the
holders of the general and limited partnership interests of Ameridrives
Holdings, representing a 100% ownership interest in Ameridrives Holdings, will
transfer such interests to the Company in exchange for an aggregate of
shares of Common Stock; and (iv) JFC will transfer the JFC Note and the Imo
Acquisition Loans (each as defined under "--Acquisition of Imo Industries
Inc.") to the Company in exchange for shares of Common Stock
(collectively, the "Combination Agreement Transactions"). Immediately after
the Combination Agreement Transactions, the Company will own 100% of the
issued and outstanding shares of Imo, Constellation Pumps (which indirectly
owned, as of July 31, 1998, a 98% voting interest in Allweiler) and
Ameridrives, and 100% of the partnership interests in Ameridrives Holdings.
Immediately following the Combination Agreement Transactions, the Company
will (i) liquidate American Enterprises Holdings, whose only asset consists of
the sole limited partnership interest in Ameridrives L.P. (the "Ameridrives
Limited Partnership Interest"), (ii) contribute the Ameridrives Limited
Partnership Interest to the share capital of Ameridrives and (iii) liquidate
Ameridrives L.P. (collectively, the "Ameridrives Restructuring"). As a result
of the Ameridrives Restructuring, Ameridrives will acquire 100% of the assets
and liabilities owned by Ameridrives L.P. immediately prior to the Ameridrives
Restructuring, including the assets of the Mechanical Power Transmission Group
of Zurn Industries Inc. and the assets of Industrial Clutch Corp., together
with 100% of the outstanding shares of Nuttall Gear.
As of July 3, 1998, the JFC Note had an outstanding principal amount of
approximately $12.3 million and the Imo Acquisition Notes had an aggregate
outstanding principal amount of approximately $5.5 million. See "--Acquisition
of Imo Industries Inc." Upon consummation of the Combination Agreement
Transactions, the JFC Note and the Imo Acquisition Notes will be cancelled.
In the Combination Agreement, each of the stockholders of Constellation
Pumps and Ameridrives, the holders of the partnership interests in Ameridrives
Holdings, JFC and the Principal Stockholders (collectively, the "Transferor
Group") acknowledges that the number of shares of Common Stock to be issued by
the Company to it in exchange for the consideration rendered by each such
person or entity is fair and adequate consideration therefor and shall be
deemed to be payment in full satisfaction of all rights pertaining to such
securities. In addition, in the Combination Agreement, each member of the
Transferor Group (i) releases, acquits and discharges the Company,
Constellation Pumps, Ameridrives and Ameridrives Holdings from any and all
liabilities, obligations, claims, demands, actions or causes of action arising
from or relating to any event, occurrence, act, omission or condition
occurring or existing on or prior to the Offerings (other than salary and
benefits payable in the course of business); (ii) waives all breaches,
defaults or violations of any agreement applicable to such securities and
agrees that any and all such agreements are terminated as of the date of the
Offerings; and (iii) waives any and all preemptive or other rights to acquire
any shares of capital stock of such entities and releases any and all claims
arising in connection with any prior default, violation or failure to comply
with or satisfy any such preemptive or other rights.
For purposes of this Prospectus, the term "Combination" includes the
Combination Agreement Transactions and the Ameridrives Restructuring.
47
<PAGE>
ACQUISITION OF IMO INDUSTRIES INC.
In August 1997, the Company acquired approximately 93% of Imo's common stock
through a tender offer (the "Imo Tender Offer"). The Imo Tender Offer was
financed by the Rales and their affiliates. On July 23, 1997, the Company
issued a senior note in the amount of $50.0 million (the "JFC Note") to JFC.
The JFC Note, which will mature on May 15, 2007, bears interest at a variable
rate per annum equal to the sum of (i) the rate published from time to time in
the Wall Street Journal as its "prime" rate determined with respect to the
date that is two business days prior to the applicable interest payment date
("Prime") and (ii) 0.25%, payable on the first day of November and May of each
year. The Company may, through May 15, 2002, at its option pay interest by
adding to the principal amount of the JFC Note, after which time interest will
be payable solely in cash. On June 30, 1998, using proceeds from the Allweiler
Credit Facility, the Company repaid approximately $37.7 million of
indebtedness outstanding under the JFC Note, plus accrued interest of
approximately $4.2 million. See "Description of Certain Indebtedness--
Allweiler Credit Facility." On July 31, 1998 the Company repaid approximately
$3.0 million of indebtedness outstanding under the JFC Note using cash
borrowed from Constellation Verwaltungs. The remaining $9.3 million of
indebtedness outstanding under the JFC Note will be contributed to the Company
in exchange for shares of Common Stock. See "--The Combination."
In addition, on July 23, 1997 the Company issued subordinated notes (the
"Subordinated Notes") in the aggregate amount of $75.0 million to the Rales.
The Subordinated Notes were scheduled to mature on May 15, 2007, and bore
interest at a variable rate per annum equal to the sum of (i) Prime and (ii)
0.375%, payable on the first day of November and May of each year. The
Subordinated Notes were subordinated in right of payment to the JFC Note. On
September 5, 1997, the Company repaid $18.5 million of the indebtedness
outstanding under the Subordinated Notes. The remaining $56.5 million of
indebtedness outstanding under the Subordinated Notes, plus accrued interest
of approximately $4.9 million, was repaid to the Rales on June 30, 1998 using
proceeds from the Allweiler Credit Facility. See "Description of Certain
Indebtedness--Allweiler Credit Facility."
The day after the consummation of the Imo Tender Offer, Imo and certain of
its subsidiaries sold substantially all of the assets of its Gems Sensors
business unit to Danaher for a purchase price of $85.0 million in cash and the
assumption of liabilities. The agreement governing the transactions had been
negotiated by Danaher and the Company, which are affiliates, prior to the
consummation of the Imo Tender Offer. The transaction was negotiated at arm's-
length and each of Imo and Danaher received the opinion of an independent
financial advisor as to the fairness to each respective company, from a
financial standpoint, of the financial terms of the transaction taken as a
whole.
In connection with the Imo Tender Offer, on April 14, 1998, Imo commenced a
consent solicitation seeking the approval of holders of the Imo Notes to amend
the indenture governing the Imo Notes to permit Imo to complete the Merger. On
May 6, 1998, Imo received sufficient consents to effect the proposed
amendments, and entered into a supplemental indenture enacting the proposed
amendments. See "Description of Certain Indebtedness--Imo Notes."
On July 2, 1998, the Company contributed the Imo Shares representing
approximately 93% of Imo to Imo Merger Corp., a newly incorporated and wholly
owned Delaware subsidiary ("Merger Sub"). Effective July 2, 1998, Merger Sub
was merged with and into Imo in a "short-form" merger pursuant to Section 253
of the Delaware law (the "Merger"). Imo was the surviving corporation in the
Merger and, as a result of the Merger, became a wholly owned subsidiary of the
Company. Following the Merger, Imo's shares were delisted from the NYSE.
The total amount of funds required to consummate the Merger was $8.6
million. The Merger was funded through contributions of equity to Imo by the
Company. The Company obtained such funds through revolving loans with the
Rales for this purpose (together, the "Imo Acquisition Loans"). Each such loan
was in the form of a Subordinated Note due May 15, 2008, with a committed face
amount of $4.5 million and a variable interest rate equal to the sum of (a)
Prime and (b) 0.375%, from the date of such note, payable in arrears on the
fifteenth day of November and May of each year. Colfax borrowed $8.6 million
under the Imo Acquisition Loans in June
48
<PAGE>
and July 1998. The $8.6 million of indebtedness currently outstanding under
the Imo Acquisition Loans will be contributed to the Company in exchange for
shares of Common Stock. Prior to the consummation of the Offerings, the Rales
intend to contribute the Imo Acquisition Loans to JFC.
ACQUISITION OF ALLWEILER
Pursuant to a voluntary public tender offer in April 1998, as well as
various private purchases and purchases made on the German public securities
markets during the period of February through July 1998, an indirect wholly
owned subsidiary of Constellation Pumps, Constellation Verwaltungs GmbH & Co.
Beteiligungen KG, a German limited partnership ("Constellation Verwaltungs"),
acquired an aggregate of 98% of Allweiler's common stock and 92% of
Allweiler's preferred stock.
Pursuant to the Combination Agreement, the stockholders of Constellation
Pumps will, contemporaneously with the consummation of the Offerings, transfer
to the Company all of the outstanding shares of Constellation Pumps.
To finance the acquisition of shares of Allweiler common stock and preferred
stock, Constellation Verwaltungs borrowed $70.0 million from an affiliate of
the Rales. On June 30, 1998, using proceeds from one of the Subsidiary Credit
Facilities, Constellation Verwaltungs repaid the $70.0 million, plus accrued
interest of approximately $1.7 million.
Following the transactions described above, a minority of shareholders that
are not affiliated with the Company will continue to own approximately 2% of
Allweiler's common stock and 8% of Allweiler's preferred stock. Under German
law and Allweiler's articles of association, preferred shareholders generally
do not have voting rights, except in instances where certain fundamental
rights as preferred shareholders (e.g., the right to receive preferred
dividends) are affected. See "Risk Factors--Allweiler Minority Shareholders."
In connection with its voluntary public tender offer for the Allweiler
common and preferred stock, Constellation Verwaltungs announced its intention
to, among other things, enter into profit and loss absorption and domination
agreements with Allweiler or undertake an integration or corporate form
conversion of Allweiler within eighteen months of the conclusion of the tender
offer.
49
<PAGE>
DESCRIPTION OF CAPITAL STOCK
GENERAL
The authorized capital stock of the Company consists of shares of Common
Stock, par value $0.01 per share, and shares of Preferred Stock, par value
$0.01 per share (the "Preferred Stock"). After giving effect to the Offerings,
there will be shares of Common Stock outstanding ( if the Underwriters'
over-allotment options are exercised in full). As of the date of this
Prospectus, there are no shares of Preferred Stock outstanding or reserved for
issuance.
The following description of the Company's capital stock is a summary of the
material terms of such stock. The following does not purport to be complete
and is subject in all respects to the Delaware Law and to the provisions of
the Company's Restated Certificate of Incorporation (the "Certificate") and
By-laws, copies of which have been filed as exhibits to the Registration
Statement of which this Prospectus forms a part.
COMMON STOCK
The holders of shares of Common Stock are entitled to one vote per share
held on all matters submitted to a vote at a meeting of stockholders. Each
stockholder may exercise such vote either in person or by proxy. Stockholders
are not entitled to cumulate their votes for the election of directors, which
means that, subject to such rights as may be granted to the holders of shares
of Preferred Stock, if any, the holders of more than 50% of the outstanding
shares of Common Stock are able to elect all of the directors to be elected by
holders of shares of Common Stock and the holders of the remaining shares of
Common Stock will not be able to elect any director. Subject to such
preferences to which holders of shares of Preferred Stock, if any, may be
entitled, the holders of outstanding shares of Common Stock are entitled to
receive ratably such dividends, if any, as may be declared from time to time
by the Board of Directors out of funds legally available therefor. In the
event of a liquidation, dissolution or winding up of the Company, the holders
of outstanding shares of Common Stock are entitled to share ratably in all
assets of the Company which are legally available for distribution to
stockholders, subject to the prior rights on liquidation of creditors and to
preferences, if any, to which holders of shares of Preferred Stock, if any,
may be entitled. The holders of outstanding shares of Common Stock do not have
any preemptive, subscription, redemption or sinking fund rights. The
outstanding shares of Common Stock are, and the shares to be issued in the
Offerings will, upon issuance and sale as contemplated hereby, be, duly
authorized, validly issued, fully paid and nonassessable.
PREFERRED STOCK
The Company is authorized by its Certificate to issue up to shares of
Preferred Stock, in one or more series and containing such rights, privileges
and limitations, including dividend rights, voting rights, conversion
privileges, redemption rights, liquidation rights and/or sinking fund rights,
as may from time to time be determined by the Board of Directors of the
Company. Preferred Stock may be issued in the future in connection with
acquisitions, financings or such other matters as the Board of Directors deems
to be appropriate. In the event that any such shares of Preferred Stock shall
be issued, a Certificate of Designation, setting forth the series of such
Preferred Stock and the relative rights, privileges and limitations with
respect thereto, is required to be filed with the Secretary of State of the
State of Delaware. The effect of having such Preferred Stock authorized is
that the Company's Board of Directors alone, within the bounds and subject to
the federal securities laws and the Delaware Law, may be able to authorize the
issuance of Preferred Stock, which may adversely affect the voting and other
rights of holders of Common Stock. The issuance of Preferred Stock may also
have the effect of delaying or preventing a change in control of the Company.
OPTIONS
There are currently outstanding options to purchase an aggregate of
shares of Common Stock. These options provide for exercise prices ranging from
$ to $ per share, with the weighted average exercise price being per
share. Of these options, options to purchase shares of Common Stock will
become exercisable in installments over specified periods.
TRANSFER AGENT AND REGISTRAR
will serve as transfer agent and registrar for the Common Stock.
50
<PAGE>
CERTAIN CHARTER AND BY-LAW PROVISIONS
Stockholders' rights and related matters are governed by the Delaware Law,
the Certificate and the By-laws. Certain provisions of the Certificate and By-
laws, which are summarized below, may have the effect, either alone or in
combination with each other, of discouraging unsolicited acquisition proposals
or making more difficult a proxy contest, a tender or exchange offer or other
attempt by a third party to gain control of the Company that is opposed by the
Company's Board of Directors but that a stockholder might consider to be in
its best interest. Such provisions may also adversely affect prevailing market
prices for the Common Stock. See "Risk Factors--Anti-Takeover Provisions." The
following description of certain provisions of the Certificate and By-laws
does not purport to be complete and is subject in all respects to the
provisions of the Certificate and By-laws, copies of which have been filed as
exhibits to the Registration Statement of which this Prospectus forms a part.
CLASSIFIED BOARD OF DIRECTORS
The Certificate provides that the Board shall be divided into three classes
and that the number of directors in each class shall be as nearly equal as is
possible based upon the number of directors constituting the entire Board. The
Certificate effectively provides that the term of office of the first class
will expire at the first annual meeting of stockholders following the date of
this Prospectus; the term of office of the second class will expire at the
second annual meeting of stockholders following the date of this Prospectus;
and the term of office of the third class will expire at the third annual
meeting of stockholders following the date of this Prospectus. At each annual
meeting of stockholders, successors to directors of the class whose term
expires at such meeting will be elected to serve for three-year terms and
until their successors are elected and qualified.
The classification of directors has the effect of making it more difficult
for stockholders to change the composition of the Board. At least two annual
meetings of stockholders, instead of one, will generally be required to effect
a change in a majority of the Board. Such a delay may help ensure that the
Company's directors, if confronted by a third party attempting to force a
proxy contest, a tender or exchange offer or other extraordinary corporate
transaction, would have sufficient time to review the proposal as well as any
available alternatives to the proposal and to act in what they believe to be
the best interests of the stockholders. However, such classification
provisions could also have the effect of discouraging a third party from
initiating a proxy contest, making a tender or exchange offer or otherwise
attempting to obtain control of the Company, even though such an attempt might
be beneficial to the Company and its stockholders. The classification of the
Board could thus increase the likelihood that incumbent directors will retain
their positions.
NUMBER OF DIRECTORS; REMOVAL; FILLING VACANCIES
The By-laws provide that, subject to any rights of holders of Preferred
Stock to elect additional directors under specified circumstances, the number
of directors comprising the entire Board will be fixed from time to time by
action of not less than a majority of the directors then in office. Such
number may not be less than three or more than nine, unless approved by action
of not less than two-thirds of the directors then in office. In addition, the
By-laws provide that, subject to any rights of holders of Preferred Stock,
newly created directorships resulting from an increase in the authorized
number of directors or vacancies on the Board resulting from death,
resignation, retirement, disqualification or removal of directors or any other
cause may be filled only by the Board (and not by the stockholders unless
there are no directors then in office), provided that a quorum is then in
office and present, or by a majority of the directors then in office, if less
than a quorum is then in office, or by the sole remaining director.
Accordingly, the Board could prevent any stockholder from enlarging the Board
and filling the new directorships with such stockholder's own nominees.
Under the Delaware Law, unless otherwise provided in the certificate of
incorporation, directors serving on a classified board may only be removed by
the stockholders for cause. The Certificate provides that directors may be
removed only for cause and only upon the affirmative vote of holders of at
least 66 2/3% of the voting power of all the then outstanding shares of stock
entitled to vote generally in the election of directors ("Voting Stock"),
voting together as a single class.
51
<PAGE>
The provisions of the Certificate and the By-laws governing the number of
directors, their removal and the filling of vacancies may have the effect of
discouraging a third party from initiating a proxy contest, making a tender or
exchange offer or otherwise attempting to gain control of the Company, or of
attempting to change the composition or policies of the Board, even though
such attempts might be beneficial to the Company or its stockholders. These
provisions of the Certificate and the By-laws could thus increase the
likelihood that incumbent directors retain their positions.
LIMITATION ON SPECIAL MEETINGS; NO STOCKHOLDER ACTION BY WRITTEN CONSENT
The Certificate and the By-laws provide that (subject to the rights, if any,
of holders of any class or series of Preferred Stock then outstanding) (i)
only the Chairman of the Board or a majority of the Board of Directors will be
able to call a special meeting of stockholders; (ii) the business permitted to
be conducted at a special meeting of stockholders shall be limited to matters
properly brought before the meeting by or at the direction of the Board; and
(iii) stockholder action may be taken only at a duly called and convened
annual or special meeting of stockholders and may not be taken by written
consent. These provisions, taken together, prevent stockholders from forcing
consideration by the stockholders of stockholder proposals over the opposition
of the Board, except at an annual meeting.
ADVANCE NOTICE PROVISIONS FOR STOCKHOLDER NOMINATIONS AND STOCKHOLDER
PROPOSALS
The By-laws establish an advance notice procedure for stockholders to make
nominations of candidates for election as director, or to bring other business
before an annual meeting of stockholders of the Company (the "Stockholder
Notice Procedure").
The Stockholder Notice Procedure provides that, subject to the rights of any
holders of Preferred Stock, only persons who are nominated by or at the
direction of the Board, any committee appointed by the Board, or by a
stockholder who has given timely written notice to the Secretary of the
Company prior to the meeting at which directors are to be elected, will be
eligible for election as directors of the Company. The Stockholder Notice
Procedure provides that at an annual meeting only such business may be
conducted as has been brought before the meeting by, or at the direction of,
the Board, any committee appointed by the Board, or by a stockholder who has
given timely written notice to the Secretary of the Company of such
stockholder's intention to bring such business before such meeting. Under the
Stockholder Notice Procedure, to be timely, notice of stockholder nominations
or proposals to be made at an annual or special meeting generally must be
received by the Company not less than 60 days nor more than 90 days prior to
the scheduled date of the meeting (although under certain circumstances the
notice period may differ).
Under the Stockholder Notice Procedure, a stockholder's notice to the
Company proposing to nominate a person for election as director must contain
certain information about the nominating stockholder and the proposed nominee.
Under the Stockholder Notice Procedure, a stockholder's notice relating to the
conduct of business other than the nomination of directors must contain
certain information about such business and about the proposing stockholder.
If the Chairman of the Board or other officer presiding at a meeting
determines that a person was not nominated, or other business was not brought
before the meeting, in accordance with the Stockholder Notice Procedure, such
person will not be eligible for election as a director, or such business will
not be conducted at such meeting, as the case may be.
By requiring advance notice of nominations by stockholders, the Stockholder
Notice Procedure affords the Board an opportunity to consider the
qualifications of the proposed nominees and, to the extent deemed necessary or
desirable by the Board, to inform stockholders about such qualifications. By
requiring advance notice of other proposed business, the Stockholder Notice
Procedure also provides a more orderly procedure for conducting annual
meetings of stockholders and, to the extent deemed necessary or desirable by
the Board, provides the Board with an opportunity to inform stockholders,
prior to such meetings, of any business proposed to be conducted at such
meetings, together with any recommendations as to the Board's position
regarding action to be taken with respect to such business, so that
stockholders can better decide whether to attend such a meeting or to grant a
proxy regarding the disposition of any such business.
Although the By-laws do not give the Board any power to approve or
disapprove stockholder nominations for the election of directors or proposals
for action, the foregoing provisions may have the effect of precluding a
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contest for the election of directors or the consideration of stockholder
proposals and of discouraging or deterring a third party from conducting a
solicitation of proxies to elect its own slate of directors or to approve its
own proposal, if the proper advance notice procedures are not followed,
without regard to whether consideration of such nominees or proposals might be
harmful or beneficial to the Company and its stockholders.
CERTAIN PROVISIONS RELATING TO ISSUANCE OF SECURITIES
The Board or any committee of the Board is specifically authorized to adopt
plans or to issue securities of the Company including plans, rights, options,
capital stock, notes, debentures or other debt securities, which securities
may be exchangeable or convertible into cash or other securities on such terms
and conditions as the Board or any such committee determines. In addition, the
Board or such committee of the Board may provide that any holder or class of
holders of such designated securities will be treated differently than all
other security holders in respect of the terms, conditions, provisions and
rights of such securities.
The existence of this authority or the actions which may be taken by the
Board pursuant thereto are intended to give the Board flexibility in order to
act in the best interests of stockholders, including in the event of a
potential change of control transaction. Such provision may, however, deter
potential acquirors from proposing unsolicited transactions not approved by
the Board and might enable the Board to hinder or frustrate such a transaction
if proposed.
LIMITATION OF LIABILITY OF DIRECTORS
The Certificate provides that a director will not be personally liable to
the Company or its stockholders for monetary damages for any breach of
fiduciary duty as a director for any act or omission, except to the extent
such exemption from liability or limitation thereof is not permitted under the
Delaware Law as it exists or may hereafter be amended. If the Delaware Law is
subsequently amended to permit further limitation of the personal liability of
directors, the liability of a director of the Company will be eliminated or
limited to the fullest extent permitted by the Delaware Law as so amended.
Currently under the Delaware Law, a corporation may not limit the liability of
a director (i) for any breach of the director's duty of loyalty to the
corporation or its stockholders; (ii) for acts or omissions not in good faith
or which involve intentional misconduct or a knowing violation of law; (iii)
in respect of certain unlawful dividend payments or stock redemptions or
purchases; or (iv) for any transaction from which the director derived an
improper personal benefit. The effect of these provisions of the Certificate
is to eliminate the rights of the Company and its stockholders (through
stockholders' derivative suits on behalf of the Company) to recover monetary
damages against a director for breach of fiduciary duty as a director
(including breaches resulting from grossly negligent behavior), except in the
situations described above. These provisions do not limit the liability of
directors under federal securities laws and do not affect the availability of
equitable remedies such as an injunction or rescission based upon a director's
breach of his duty of care.
AMENDMENT OF THE CERTIFICATE OF INCORPORATION AND BY-LAWS
The Certificate contains provisions requiring the affirmative vote of the
holders of at least 66 2/3% of the voting power of the Voting Stock to amend
certain provisions of the Certificate (including the provisions discussed
above relating to the size and classification of the Board, replacement and/or
removal of directors, action by written consent, special stockholder meetings,
the authorization for the Board to take steps to encourage or oppose, as the
case may be, transactions which may result in a change of control of the
Company, and limitation of the liability of directors) or to amend any
provision of the By-laws by action of stockholders. These provisions make it
more difficult for stockholders to make changes in the Certificate and the By-
laws, including changes designed to facilitate the exercise of control over
the Company.
SECTION 203 OF THE DELAWARE LAW
Section 203 of the Delaware Law prohibits certain transactions between a
Delaware corporation and an "interested stockholder," which is defined as a
person who together with any affiliates and/or associates of such
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person, beneficially owns, directly or indirectly, 15% or more of the
outstanding voting shares of a Delaware corporation. This provision prohibits
certain business combinations (defined broadly to include mergers,
consolidations, sales or other dispositions of assets having an aggregate
value of 10% or more of the consolidated assets of the corporation, and
certain transactions that would increase the interested stockholder's
proportionate share ownership in the corporation) between an interested
stockholder and a corporation for a period of three years after the date the
interested stockholder acquired its stock, unless: (i) the business
combination is approved by the corporation's board of directors prior to the
date that the interested stockholder acquired shares; (ii) the interested
stockholder acquired at least 85% of the voting stock of the corporation in
the transaction in which it became an interested stockholder; or (iii) the
business combination is approved by a majority of the board of directors and
by the affirmative vote of two-thirds of the outstanding voting stock owned by
disinterested stockholders at an annual or special meeting. A Delaware
corporation, pursuant to a provision in its certificate of incorporation or
by-laws, may elect not to be governed by Section 203 of the Delaware Law. The
Certificate does not exclude the Company from the restrictions imposed by
Section 203 of the Delaware Law and, as a result, the Company is subject to
its provisions.
Under certain circumstances, Section 203 of the Delaware Law makes it more
difficult for a person who could be an "interested stockholder" to effect
various business combinations with a corporation for a three-year period,
although the stockholders may elect to exclude a corporation from the
restrictions imposed thereunder. Because the Certificate does not exclude the
Company from the restrictions imposed under Section 203 of the Delaware Law,
the Company anticipates that the provisions of Section 203 of the Delaware Law
may encourage companies interested in acquiring the Company to negotiate in
advance with the Board of Directors, since the stockholder approval
requirement would be avoided if a majority of the directors then in office
approves, prior to the date on which a stockholder becomes an interested
stockholder, either the business combination or the transaction which results
in the stockholder becoming an interested stockholder.
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DESCRIPTION OF CERTAIN INDEBTEDNESS
Set forth below is a summary of certain financing instruments to which the
Company is a party. The summary does not purport to be complete and is
qualified in its entirety by reference to such agreements, copies of which
have been filed as exhibits to the Registration Statement of which this
Prospectus is a part.
COLFAX CREDIT FACILITY
As part of the Refinancing, the Company intends to enter into the $300
million Colfax Credit Facility, consisting of a $100 million term loan
facility and a $200 million revolving credit facility. The Company intends to
use the net proceeds of the Offerings, together with borrowings under the
Colfax Credit Facility (consisting of the full amount of the term loan
facility and approximately $ million of borrowings under the revolving
credit facility), to repay the indebtedness under the Subsidiary Credit
Facilities and to effect the Imo Note Repurchase. See "Use of Proceeds." The
remaining borrowing capacity under the revolving credit facility will be
available for future acquisitions, capital expenditures and general corporate
purposes.
IMO NOTES
In April 1996, Imo issued $155.0 million aggregate principal amount of Imo
Notes. The Imo Notes mature on May 1, 2006 and pay interest at a rate of 11
3/4% per annum on November 1 and May 1 of each year. Imo repurchased $19.9
million and $32.0 million of Imo Notes through open market purchases conducted
in November 1997 and March 1998, respectively. In April 1998, Imo commenced a
consent solicitation seeking the approval of holders of the Imo Notes to amend
the indenture governing the Imo Notes to permit Imo to complete the Merger. In
May 1998, Imo received sufficient consents to effect the proposed amendments,
and entered into a supplemental indenture enacting the proposed amendments.
As part of the Refinancing, on , 1998, Imo commenced the Imo Note
Repurchase by way of a tender offer for all of the outstanding Imo Notes. In
connection with the tender offer, Imo is soliciting consents from holders of
the Imo Notes to amend the indenture governing the Imo Notes to remove
substantially all of the restrictive covenants and certain other provisions
and to permit the Combination. The purchase price for the Imo Notes will be
based on a fixed spread of basis points over the yield of the % U.S.
Treasury Notes due , on the second business day prior to the expiration
date, and a consent fee of $ per $1,000 of Imo Notes will be paid to each
noteholder that timely delivers a written consent. The Imo Notes Repurchase
will be conditioned upon the closing of the Offerings.
ALLWEILER CREDIT FACILITY
Constellation Verwaltungs has borrowed $175.0 million under a $190.0 million
credit facility (the "Allweiler Credit Facility") with Merrill Lynch
International. Any funds drawn under this facility must be repaid no later
than December 31, 1999 and will accrue interest at a rate that approximates
one-week LIBOR plus 0.375%. All funds borrowed under the facility have been
guaranteed by Colfax Capital Corporation and must be secured by assets with an
aggregate market value equal to or greater than the aggregate value of the
funds borrowed and any unpaid accrued interest thereon. The Allweiler Credit
Facility was negotiated between Merrill Lynch International and Constellation
Verwaltungs on an arm's-length basis. Approximately $71.7 million of the
$175.0 million drawn under the Allweiler Credit Facility was used by
Constellation Verwaltungs to repay its indebtedness to Colfax Capital
Corporation, and approximately $103.3 million was lent to the Company with
such loan being evidenced by a note bearing interest at LIBOR plus 0.375%. Of
the approximately $103.3 million borrowed by the Company from Constellation
Verwaltungs, $61.5 million was paid to the Rales in full satisfaction of the
Subordinated Notes including accrued interest, and approximately $41.9 million
was paid in partial satisfaction of amounts owed to JFC. See "Certain
Relationships and Related Transactions--Acquisition of Imo Industries Inc."
and "Certain Relationships and Related Transactions--Acquisition of
Allweiler."
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MISCELLANEOUS ALLWEILER BORROWING FACILITIES
As of June 30, 1998, Allweiler's total borrowing facilities amounted to
approximately DM 64.0 million (approximately $30 million), of which DM 15.4
million (approximately $8.6 million) were drawn in the form of loans, cash
advances or overdrafts. Most of such facilities are multi-purpose and are
provided by banks in Germany. See Note F to Allweiler Financial Statements.
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SHARES ELIGIBLE FOR FUTURE SALE
Prior to the Offerings there has been no public market for the Common Stock.
The Company can make no prediction as to the effect, if any, that future sales
of shares of Common Stock or the availability of such shares for future sale
will have on the market price of the Common Stock prevailing from time to
time. Nevertheless, sales of substantial amounts of Common Stock (including
shares issued upon the exchange of stock options) in the public market, or the
perception that such sales may occur, may adversely affect prevailing market
prices for the Common Stock.
Upon completion of the Offerings, the Company will have shares of Common
Stock outstanding (assuming no exercise of the Underwriters' over-allotment
options). Of such total number of shares outstanding, the shares to be
sold in the Offerings will be freely tradeable without restriction or further
registration under the Securities Act, except that any shares purchased by
"affiliates" of the Company, as that term is defined in Rule 144 under the
Securities Act ("Affiliates"), may generally only be sold in compliance with
the limitations of Rule 144 described below.
Upon completion of the Offerings, the Rales will own approximately % of
the outstanding Common Stock (approximately % if the Underwriters' over-
allotment options are exercised in full). Subject to the lock-up agreements
described below, the Rales, as controlling stockholders of the Company, will
be able to cause the Company to register the sale of their shares in one or
more public offerings. Although the Rales have informed the Company that they
do not currently have the intention to sell shares of Common Stock following
the 180-day lock-up period described below, depending on market and other
conditions, the Rales may dispose of shares of Common Stock owned by them from
time to time, subject to compliance with applicable securities laws,
including, without limitation, Rule 144.
SALES OF RESTRICTED SHARES
The remaining shares of Common Stock which will be outstanding following
the Offerings will be deemed "Restricted Securities" under Rule 144 and will
not be able to be sold other than through registration under the Securities
Act or pursuant to an exemption from the regulations thereunder including the
exemptions provided by Rule 144. All of such remaining shares will also be
subject to lock-up agreements as described below (the "Lock-Up Agreements").
In general, under Rule 144 as in effect on the date of this Prospectus, if a
period of at least one year has elapsed since the later of the date the
Restricted Securities were acquired from the Company and the date they were
acquired from an Affiliate, then the holder of such Restricted Securities
(including an Affiliate) is entitled to sell a number of shares within any
three-month period that does not exceed the greater of 1% of the then
outstanding shares of the Common Stock (approximately shares immediately
after the Offerings) or the average weekly reported volume of trading of the
Common Stock on the NYSE during the four calendar weeks preceding such sale.
The holder may only sell such shares through unsolicited brokers'
transactions. Sales under Rule 144 are also subject to certain requirements
pertaining to the manner of such sales, notices of such sales and the
availability of current public information concerning the Company. Affiliates
may sell shares not constituting Restricted Shares in accordance with the
foregoing volume limitations and other requirements but without regard to the
one year holding period. Under Rule 144(k), if a period of at least two years
has elapsed between the later of the date that the Restricted Securities were
acquired from the Company and the date they were acquired from an Affiliate,
as applicable, a holder of such Restricted Securities who is not an Affiliate
at the time of the sale and who has not been an Affiliate for at least three
months prior to the sale would be entitled to sell the shares immediately
without regard to the volume limitations and other conditions described above.
OPTIONS
The Company intends to file a registration statement on Form S-8 under the
Securities Act to register approximately shares of Common Stock which are
reserved for issuance under the Plan. The Form S-8
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will include, in some cases, shares for which an exemption under Rule 144 or
Rule 701 would also be available, thus permitting the resale of shares issued
under the Plan by non-Affiliates in the public market, without restriction
under the Securities Act. Such registration statement is expected to become
effective immediately upon filing whereupon the shares registered thereunder
will become eligible for sale in the public market, subject to vesting and, in
certain cases, subject to the Lock-Up Agreements. At the date of this
Prospectus, options to purchase shares of Common Stock are outstanding
under the 1998 Stock Incentive Plan.
LOCK-UP AGREEMENTS
The Company, the Company's executive officers and directors and all other
persons who will be stockholders of the Company immediately after giving
effect to the Combination (but not the Offerings) have agreed, subject to
certain exceptions, not to directly or indirectly (i) offer, pledge, sell,
contract to sell, sell any option or contract to purchase, purchase any option
or contract to sell, grant any option, right or warrant for the sale of or
otherwise dispose of or transfer any shares of Common Stock or securities
convertible into or exchangeable or exercisable for Common Stock, whether now
owned or thereafter acquired by the person executing the agreement or with
respect to which the person executing the agreement thereafter acquires the
power of disposition, or file a registration statement under the Securities
Act with respect to the foregoing or (ii) enter into any swap or other
agreement that transfers, in whole or in part, the economic consequence of
ownership of the Common Stock whether any such swap or transaction is to be
settled by delivery of Common Stock or other securities, in cash or otherwise,
without the prior written consent of Merrill Lynch on behalf of the
Underwriters for a period of 180 days after the date of this Prospectus. See
"Underwriting."
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CERTAIN UNITED STATES FEDERAL TAX CONSEQUENCES
TO NON-UNITED STATES HOLDERS
The following is a general summary of certain United States federal income
and estate tax consequences expected to result under current law from the
purchase, ownership and disposition of Common Stock by a holder other than (i)
a citizen or resident of the United States, (ii) a corporation, partnership or
other entity created or organized in or under the laws of the United States or
of any political subdivision thereof, (iii) an estate, the income of which is
subject to United States federal income taxation regardless of its source or
(iv) a trust if its administration is subject to the primary supervision of a
United States court and which has one or more United States persons who have
the authority to control all substantial decisions of the trust (a "Non-United
States Holder"). This summary does not address all of the United States
federal income and estate tax considerations that may be relevant to a Non-
United States Holder in light of its particular circumstances or to Non-United
States Holders that may be subject to special treatment under United States
federal income tax laws. Furthermore, this summary does not discuss any
aspects of state, local or foreign taxation. This summary is based on current
provisions of the Internal Revenue Code of 1986, as amended (the "Code"),
Treasury regulations, judicial opinions, published positions of the United
States Internal Revenue Service (the "IRS") and other applicable authorities,
all of which are subject to change, possibly with retroactive effect. Each
prospective purchaser of Common Stock is advised to consult its tax advisor
with respect to the tax consequences of acquiring, holding and disposing of
Common Stock.
DIVIDENDS
Dividends paid to a Non-United States Holder generally will be subject to
withholding of United States federal income tax at the rate of 30% (or such
lower rate in an applicable income tax treaty) unless the dividend is
effectively connected with the conduct of a trade or business within the
United States by the Non-United States Holder (or if certain tax treaties
apply, is attributable to a United States permanent establishment maintained
by such Non-United States Holder) and the Non-United States Holder files the
appropriate documentation with the Company or its Paying Agent, in which case
the dividend will be subject to United States federal income tax on net income
on the same basis that applies to United States persons generally. In the case
of a Non-United States Holder which is a corporation, such effectively
connected income also may be subject to the branch profits tax at a rate of
30% (or such lower rate specified in an applicable income tax treaty) (which
is generally imposed on a foreign corporation on the repatriation from the
United States of effectively connected earnings and profits). Non-United
States Holders should consult any applicable income tax treaties that may
provide for a lower rate of withholding or other rules different from those
described above. A Non-United States Holder may be required to satisfy certain
certification requirements in order to claim treaty benefits or otherwise
claim a reduction of or exemption from withholding under the foregoing rules.
SALE OR DISPOSITION OF COMMON STOCK
A Non-United States Holder generally will not be subject to United States
federal income tax on gain recognized on a sale or other disposition of Common
Stock unless (i) the gain is effectively connected with the conduct of a trade
or business within the United States by the Non-United States Holder (or if
certain tax treaties apply, is attributable to a United States permanent
establishment maintained by such Non-United States Holder), (ii) in the case
of a Non-United States Holder who is a nonresident alien individual and holds
the Common Stock as a capital asset, such holder is present in the United
States for 183 or more days in the taxable year of disposition and either such
individual has a "tax home" in the United States or the gain is attributable
to an office or other fixed place of business maintained by such individual in
the United States, (iii) the Company is or has been a "United States real
property holding corporation" for United States federal income tax purposes
(which the Company does not believe that it is or is likely to become) and the
Non-United States Holder holds or has held, directly or indirectly, at any
time during the five-year period ending on the date of disposition (or, if
shorter, the Non-United States Holder's holding period), more than 5% of the
Common Stock or (iv) the Non-United States Holder is subject to tax pursuant
to the Code provisions applicable to certain United States expatriates. Gain
that is effectively connected with the conduct of a trade or business within
the United States by
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the Non-United States Holder will be subject to United States federal income
tax on the same basis that applies to United States persons generally (and,
with respect to corporate holders, under certain circumstances, the branch
profits tax) but will not be subject to withholding. Non-United States Holders
should consult any applicable treaties that may provide for different rules. A
non-resident alien holding the stock as a capital asset as described in (ii)
generally will be subject to a 30% (or such lower rate specified in an
applicable income tax treaty) tax on the gain derived from the sale which gain
may be offset by certain United States source capital losses.
FEDERAL ESTATE TAXES
Common Stock owned or treated as owned by an individual who is not a citizen
or resident (as specifically defined for United States federal estate tax
purposes) of the United States at the time of death will be included in such
individual's gross estate for United States federal estate tax purposes,
unless an applicable estate tax treaty provides otherwise.
INFORMATION REPORTING AND BACKUP WITHHOLDING
The Company must report annually to the IRS and to each Non-United States
Holder the amount of dividends paid to, and the tax withheld with respect to,
such holder, regardless of whether any tax was actually withheld. This
information may also be made available to the tax authorities of a country in
which the Non-United States Holder resides.
Under current United States Treasury regulations, United States information
reporting requirements and backup withholding tax at a rate of 31% will
generally apply to dividends paid on the Common Stock to a Non- United States
Holder at an address in the United States and to payments to a Non-United
States Holder by a United States office of a broker of the proceeds of a sale
of Common Stock unless the holder certifies its Non-United States Holder
status under penalties of perjury or otherwise establishes an exemption.
Information reporting requirements (but not backup withholding) will also
apply to payments of the proceeds of sales of Common Stock by foreign offices
of United States brokers, or foreign brokers with certain types of
relationships to the United States, unless the broker has documentary evidence
in its records that the holder is a Non-United States Holder and certain other
conditions are met, or the holder otherwise establishes an exemption.
The United States Treasury Department has issued regulations generally
effective for payments made after December 31, 1999 that will affect the
procedures to be followed by a Non-United States Holder in establishing such
holder's status as a Non-United States Holder for purposes of the withholding,
backup withholding and information reporting rules discussed herein. Among
other things, (i) Non-United States Holders currently required to furnish
certification of foreign status may be required to furnish new certification
of foreign status and (ii) certain Non-United States Holders not currently
required to furnish certification of foreign status may be required to furnish
certification of foreign status in the future. Prospective investors should
consult their tax advisors concerning the effect of such regulations on an
investment in the Common Stock.
Backup withholding is not an additional tax. Any amounts withheld under the
backup withholding rules generally will be refunded or credited against the
Non-United States Holder's United States Federal income tax liability,
provided that the required information is furnished to the IRS.
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UNDERWRITING
Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch"),
Schroder & Co. Inc. and Lehman Brothers Inc. are acting as representatives
(the "U.S. Representatives") of each of the Underwriters named below (the
"U.S. Underwriters"). Subject to the terms and conditions set forth in a U.S.
purchase agreement (the "U.S. Purchase Agreement") among the Company and the
U.S. Underwriters, and concurrently with the sale of shares of Common
Stock to the International Managers (as defined below), the Company has agreed
to sell to the U.S. Underwriters, and each of the U.S. Underwriters severally
and not jointly has agreed to purchase from the Company, the number of shares
of Common Stock set forth opposite its name below.
<TABLE>
<CAPTION>
NUMBER OF
U.S. UNDERWRITER SHARES
---------------- ---------
<S> <C>
Merrill Lynch, Pierce, Fenner & Smith
Incorporated..............................................
Schroder & Co. Inc.................................................
Lehman Brothers Inc................................................
---
Total.........................................................
===
</TABLE>
The Company has also entered into an international purchase agreement (the
"International Purchase Agreement") with certain underwriters outside the
United States and Canada (the "International Managers" and, together with the
U.S. Underwriters, the "Underwriters") for whom Merrill Lynch International,
J. Henry Schroder & Co. and Lehman Brothers International (Europe) are acting
as lead managers (the "Lead Managers"). Subject to the terms and conditions
set forth in the International Purchase Agreement, and concurrently with the
sale of shares of Common Stock to the U.S. Underwriters pursuant to the
U.S. Purchase Agreement, the Company has agreed to sell to the International
Managers, and the International Managers severally have agreed to purchase
from the Company, an aggregate of shares of Common Stock. The initial
public offering price per share and the total underwriting discount per share
of Common Stock are identical under the U.S. Purchase Agreement and the
International Purchase Agreement.
In the U.S. Purchase Agreement and the International Purchase Agreement, the
several U.S. Underwriters and the several International Managers,
respectively, have agreed, subject to the terms and conditions set forth
therein, to purchase all of the shares of Common Stock being sold pursuant to
each such agreement if any of the shares of Common Stock being sold pursuant
to such agreement are purchased. Under certain circumstances, under the U.S.
Purchase Agreement and the International Purchase Agreement, the commitments
of non-defaulting Underwriters may be increased. The closings with respect to
the sale of shares of Common Stock to be purchased by the U.S. Underwriters
and the International Managers are conditioned upon one another.
The U.S. Representatives have advised the Company that the U.S. Underwriters
propose initially to offer the shares of Common Stock to the public at the
initial public offering price set forth on the cover page of this Prospectus,
and to certain dealers at such price less a concession not in excess of $
per share of Common Stock. The U.S. Underwriters may allow, and such dealers
may reallow, a discount not in excess of $ per share of Common Stock on
sales to certain other dealers. After the initial public offering, the public
offering price, concession and discount may be changed.
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The Company has granted options to the U.S. Underwriters, exercisable for 30
days after the date of this Prospectus, to purchase up to an aggregate of
additional shares of Common Stock at the initial public offering price set
forth on the cover page of this Prospectus, less the underwriting discount.
The U.S. Underwriters may exercise these options solely to cover over-
allotments, if any, made on the sale of the Common Stock offered hereby. To
the extent that the U.S. Underwriters exercise these options, each U.S.
Underwriter will be obligated, subject to certain conditions, to purchase a
number of additional shares of Common Stock proportionate to such U.S.
Underwriter's initial amount reflected in the foregoing table. The Company
also has granted options to the International Managers, exercisable for 30
days after the date of this Prospectus, to purchase up to an aggregate of
additional shares of Common Stock to cover over-allotments, if any, on terms
similar to those granted to the U.S. Underwriters.
At the request of the Company, the Underwriters have reserved for sale, at
the initial public offering price, up to of the shares offered hereby to
be sold to certain directors, officers, employees, business associates and
related persons of the Company. The number of shares of Common Stock available
for sale to the general public will be reduced to the extent such persons
purchase such reserved shares. Any reserved shares which are not orally
confirmed for purchase within one day of the pricing of the Offerings will be
offered by the Underwriters to the general public on the same terms as the
other shares offered hereby.
The Company, the Company's executive officers and directors and all other
persons who will be stockholders of the Company immediately after giving
effect to the Combination (but not the Offerings) have agreed, subject to
certain exceptions, not to directly or indirectly (i) offer, pledge, sell,
contract to sell, sell any option or contract to purchase, purchase any option
or contract to sell, grant any option, right or warrant for the sale of or
otherwise dispose of or transfer any shares of Common Stock or securities
convertible into or exchangeable or exercisable for Common Stock, whether now
owned or thereafter acquired by the person executing the agreement or with
respect to which the person executing the agreement thereafter acquires the
power of disposition, or file a registration statement under the Securities
Act with respect to the foregoing or (ii) enter into any swap or other
agreement that transfers, in whole or in part, the economic consequence of
ownership of the Common Stock whether any such swap or transaction is to be
settled by delivery of Common Stock or other securities, in cash or otherwise,
without the prior written consent of Merrill Lynch on behalf of the
Underwriters for a period of 180 days after the date of this Prospectus. The
foregoing agreement will not limit the ability of such stockholder to transfer
shares in a private placement or to pledge shares, provided that the
transferee or pledgee agrees to be bound by such agreement. The foregoing
agreement also will not limit the Company's ability to (i) sell to the
Underwriters the shares of Common Stock in connection with the Offerings
(including upon exercise of the over-allotment option by any of the
Underwriters), (ii) grant stock options under the Plan, (iii) issue shares
upon the exercise of outstanding stock options, (iv) issue shares to third
parties as consideration for the Company's acquisition from such third parties
of fluid handling or industrial positioning businesses, (v) file a shelf
registration statement with respect to the possible resale of outstanding
shares of Common Stock (provided that no sales may be made under such
registration statement during the 180-day lock-up period), (vi) file a
registration statement registering the shares that may be issued pursuant to
options granted or to be granted under the Plan, or (vii) file a registration
statement registering the shares owned by the Rales (provided that no sales
may be made under such registration statement during the 180-day lock-up
period). See "Shares Eligible For Future Sale."
The U.S. Underwriters and the International Managers have entered into an
intersyndicate agreement (the "Intersyndicate Agreement") that provides for
the coordination of their activities. Pursuant to the Intersyndicate
Agreement, the U.S. Underwriters and the International Managers are permitted
to sell shares of Common Stock to each other for purposes of resale at the
initial public offering price, less an amount not greater than the selling
concession. Under the terms of the Intersyndicate Agreement, the U.S.
Underwriters and any dealer to whom they sell shares of Common Stock will not
offer to sell or sell shares of Common Stock to persons who are non-U.S. or
non-Canadian persons or to persons they believe intend to resell to persons
who are non-U.S. or non-Canadian persons, and the International Managers and
any dealer to whom they sell shares of Common Stock will not offer to sell or
sell shares of Common Stock to U.S. persons or to Canadian persons or to
persons they believe intend to resell to U.S. or Canadian persons, except in
the case of transactions pursuant to the Intersyndicate Agreement.
62
<PAGE>
Prior to the Offerings, there has been no public market for the Common Stock
of the Company. The initial public offering price will be determined through
negotiations among the Company and the U.S. Representatives and the Lead
Managers. The factors to be considered in determining the initial public
offering price, in addition to prevailing market conditions, will be price-
earnings ratios of publicly traded companies that the U.S. Representatives
believe to be comparable to the Company, certain financial information of the
Company, the history of, and the prospects for, the Company and the industries
in which it competes, and an assessment of the Company's management, its past
and present operations, the prospects for, and timing of, future revenues of
the Company, the present state of the Company's development, and the above
factors in relation to market values and various valuation measures of other
companies engaged in activities similar to the Company. There can be no
assurance that an active trading market will develop for the Common Stock or
that the Common Stock will trade in the public market subsequent to the
Offerings at or above the initial public offering price.
Application has been made for listing of the Common Stock on the NYSE under
the symbol "CXC." In order to meet the requirements for listing of the Common
Stock on that exchange, the U.S. Underwriters and the International Managers
have undertaken to sell lots of 100 or more shares to a minimum of 2,000
beneficial owners.
In connection with the repayment of amounts owed under the Allweiler Credit
Facility, Merrill Lynch International will receive more than ten percent of
the net proceeds of the Offerings. See "Use of Proceeds." Because more than
ten percent of the net proceeds of the Offerings may be paid to members or
affiliates of members of the National Association of Securities Dealers, Inc.
("NASD") participating in the Offerings, the Offerings will be conducted in
accordance with NASD Conduct Rule 2710(c)(8), which requires that the public
offering price of an equity security be no higher than the price recommended
by a Qualified Independent Underwriter which has participated in the
preparation of the Registration Statement and performed its usual standard of
due diligence with respect thereto. Schroder & Co. Inc. has agreed to act as,
and assume the responsibilities for acting as, Qualified Independent
Underwriter with respect to the Offerings, and the price of the Common Stock
will be no higher than that recommended by Schroder & Co. Inc.
The Underwriters will not confirm sales of the Common Stock to any account
over which they exercise discretionary authority without the prior written
specific approval of the customer.
The Company has agreed to indemnify the U.S. Underwriters and the
International Managers against certain liabilities, including certain
liabilities under the Securities Act, or to contribute to payments the U.S.
Underwriters and International Managers may be required to make in respect
thereof.
Until the distribution of the Common Stock is completed, rules of the
Securities and Exchange Commission (the "Commission") may limit the ability of
the Underwriters and certain selling group members to bid for and purchase the
Common Stock. As an exception to these rules, the U.S. Representatives are
permitted to engage in certain transactions that stabilize the price of the
Common Stock. Such transactions consist of bids or purchases for the purpose
of pegging, fixing or maintaining the price of the Common Stock.
If the Underwriters create a short position in the Common Stock in
connection with the Offerings, i.e., if they sell more shares of Common Stock
than are set forth on the cover page of this Prospectus, the U.S.
Representatives may reduce that short position by purchasing Common Stock in
the open market. The U.S. Representatives may also elect to reduce any short
position by exercising all or part of the over-allotment option described
above.
The U.S. Representatives may also impose a penalty bid on certain
Underwriters and selling group members. This means that if the U.S.
Representatives purchase shares of Common Stock in the open market to reduce
the Underwriters' short position or to stabilize the price of the Common
Stock, they may reclaim the amount of the selling concession from the
Underwriters and selling group members who sold those shares as part of the
Offerings.
63
<PAGE>
In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher
than it might be in the absence of such purchases. The imposition of a penalty
bid might also have an effect on the price of the Common Stock to the extent
that it discourages resales of the Common Stock.
Neither the Company nor any of the Underwriters makes any representation or
prediction as to the direction or magnitude of any effect that the
transactions described above may have on the price of the Common Stock. In
addition, neither the Company nor any of the Underwriters makes any
representation that the U.S. Representatives will engage in such transactions
or that such transactions, once commenced, will not be discontinued without
notice.
Certain of the Underwriters have from time to time provided investment
banking financial advisory services to the Company and its affiliates, for
which they have received customary compensation, and may continue to do so in
the future. In addition, a portion of the proceeds of the Offerings is
expected to be used to repay the amounts owed under the Allweiler Credit
Facility to Merrill Lynch International, an affiliate of Merrill Lynch. See
"Use of Proceeds."
LEGAL MATTERS
Certain legal matters with respect to the validity of the Common Stock
offered hereby and certain other legal matters in connection with the
Offerings will be passed upon for the Company by Skadden, Arps, Slate, Meagher
& Flom LLP, New York, New York. Certain legal matters relating to the
Offerings will be passed upon for the Underwriters by Shearman & Sterling, New
York, New York.
EXPERTS
The consolidated financial statements and schedules of Colfax Corporation
and Imo Industries Inc. included in this Prospectus and elsewhere in the
Registration Statement of which this Prospectus forms a part, to the extent
and for the periods indicated in its reports, have been audited by Arthur
Andersen LLP, independent public accountants, as set forth in its reports with
respect thereto appearing elsewhere herein, and are included herein in
reliance upon the authority of said firm as experts in accounting and auditing
in giving said reports.
The consolidated financial statements of Allweiler Aktiengesellschaft
included in this Prospectus and elsewhere in the Registration Statement of
which this Prospectus forms a part, to the extent and for the periods
indicated in its report, have been audited by Arthur Andersen
Wirtschaftsprufungsgesellschaft Steuerberatungsgesellschaft mbH, as set forth
in its report with respect thereto appearing elsewhere herein, and are
included herein in reliance upon the authority of said firm as experts in
accounting and auditing in giving said report.
The consolidated financial statements of Imo Industries Inc. and
subsidiaries at December 31, 1996 and for each of the two years in the period
ended December 31, 1996, appearing in this Prospectus and Registration
Statement have been audited by Ernst & Young LLP, independent auditors, as set
forth in their report thereon appearing elsewhere herein, and are included in
reliance upon such report given upon the authority of such firm as experts in
accounting and auditing.
64
<PAGE>
AVAILABLE INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-1 (the "Registration Statement") under the Securities Act with respect to
the Common Stock offered hereby. This Prospectus, which is part of the
Registration Statement, does not contain all of the information set forth in
the Registration Statement and the exhibits and schedules thereto, certain
portions of which are omitted as permitted by the rules and regulations of the
Commission. For further information with respect to the Company and the Common
Stock offered hereby, reference is made to the Registration Statement and to
the financial statements, schedules, and exhibits filed as a part thereof.
Statements contained in this Prospectus regarding the contents of any contract
or other document referred to herein or therein are not necessarily complete
and, in each instance, reference is made to the copy of such contract or other
document filed as an exhibit to the Registration Statement or such other
document, each such statement being qualified in all respects by such
reference.
Upon completion of the Offerings, the Company will be subject to the
informational requirements of the Securities Exchange Act of 1934, as amended,
and, in accordance therewith, will file reports, proxy statements and other
information with the Commission. In addition, the Company intends to furnish
its Stockholders with annual reports containing financial statements audited
by independent certified accountants. Such reports, proxy statements and other
information, as well as the Registration Statement, and the schedules and
exhibits thereto, may be inspected, without charge, at the public reference
facility maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549, and at the Commission's regional offices
located at Seven World Trade Center, New York, New York 10048 and Northwestern
Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-
2511. Copies of such material may be obtained from the Public Reference
Section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 at
prescribed rates. Such materials can also be inspected at the offices of the
New York Stock Exchange, Inc., 20 Broad Street, New York, New York 10005 or on
the Commission's site on the Internet at http: / /www.sec.gov.
65
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
Summary of Unaudited Pro Forma Consolidated Financial Statements........ F-2
Pro Forma Consolidated Balance Sheet as of July 3, 1998................. F-3
Pro Forma Consolidated Statement of Operations for the Year Ended
December 31, 1997...................................................... F-4
Pro Forma Consolidated Statement of Operations for the Six Months Ended
June 30, 1997.......................................................... F-5
Pro Forma Consolidated Statement of Operations for the Six Months Ended
July 3, 1998........................................................... F-6
Notes to Unaudited Pro Forma Consolidated Financial Statements.......... F-7
COLFAX CORPORATION CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Public Accountants................................ F-8
Consolidated Balance Sheets as of December 31, 1997 and July 3, 1998
(unaudited)............................................................ F-9
Consolidated Statements of Operations from Inception to December 31,
1997 and Six Months Ended July 3, 1998 (unaudited)..................... F-10
Consolidated Statements of Shareholders' Equity at July 23, 1997,
December 31, 1997 and July 3, 1998 (unaudited)......................... F-11
Consolidated Statements of Cash Flows from Inception to December 31,
1997 and Six Months Ended July 3, 1998 (unaudited)..................... F-12
Notes to Consolidated Financial Statements.............................. F-13
IMO INDUSTRIES INC. CONSOLIDATED FINANCIAL STATEMENTS (PREDECESSOR
COMPANY)
Report of Independent Public Accountants................................ F-30
Report of Independent Auditors.......................................... F-31
Consolidated Balance Sheets as of December 31, 1996 and June 30, 1997
(unaudited)............................................................ F-32
Consolidated Statements of Operations for the Years Ended December 31,
1995 and 1996, Six Months Ended June 30, 1997 (unaudited) and Eight
Months Ended August 28, 1997........................................... F-33
Consolidated Statements of Shareholders' Equity for the Years Ended
December 31, 1995 and 1996 and Eight Months Ended August 28, 1997...... F-34
Consolidated Statements of Cash Flows for the Years Ended December 31,
1995 and 1996, Six Months Ended June 30, 1997 (unaudited) and Eight
Months Ended August 28, 1997........................................... F-35
Notes to Consolidated Financial Statements.............................. F-36
CONSTELLATION PUMPS CORP. CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheet as of June 30, 1998 (unaudited).............. F-60
Consolidated Statement of Income from Inception to June 30, 1998
(unaudited)............................................................ F-61
Consolidated Statement of Cash Flows from Inception to June 30, 1998
(unaudited)............................................................ F-62
Notes to Consolidated Financial Statements.............................. F-63
ALLWEILER AKTIENGESELLSCHAFT RADOLFZELL/BODENSEE FINANCIAL STATEMENTS AND
CONSOLIDATED FINANCIAL STATEMENTS (PREPARED IN ACCORDANCE WITH ACCOUNTING
PRINCIPLES GENERALLY ACCEPTED IN GERMANY) (PREDECESSOR COMPANY OF
CONSTELLATION PUMPS CORP.)
Audit Opinion........................................................... F-66
Consolidated Balance Sheets as of December 31, 1996 and 1997 (German
GAAP).................................................................. F-67
Statements of Income for the Years Ended December 31, 1996 and 1997 and
for the Six Months Ended June 30, 1997 (unaudited) and the Four Months
Ended April 30, 1998 (unaudited) (German GAAP)......................... F-69
Notes to Financial Statements and Consolidated Financial Statements..... F-71
</TABLE>
F-1
<PAGE>
COLFAX CORPORATION
SUMMARY OF UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
The accompanying unaudited pro forma consolidated financial statements have
been prepared based upon the historical financial statements of the Company
and the Acquired Companies. The unaudited pro forma consolidated statements of
operations gives effect to the Combination, the Acquisitions, the financing of
the Acquisitions, the Offerings and the Refinancing (assuming all of the Imo
Notes are repurchased), assuming that such transactions were consummated at
the beginning of the relevant period. The unaudited pro forma consolidated
balance sheet gives effect to the Combination, the Offerings and the
Refinancing (assuming all of the Imo Notes are repurchased), assuming that
such transactions were consummated on July 3, 1998. The pro forma adjustments
are based upon available information and certain assumptions that the Company
believes are reasonable.
Pro forma adjustments were applied to the historical financial statements of
the Acquired Companies and the Company to account for the Acquisitions under
the purchase method of accounting. Under purchase accounting, the purchase
prices were allocated to the Acquired Company's assets and liabilities based
on their fair values. The purchase price allocations have been completed on a
preliminary basis, and as a result, adjustments to the carrying value of
assets and liabilities may occur.
Certain unusual items totaling $33.1 million are included in the unaudited
pro forma consolidated statement of operations for the year ended December 31,
1997. These items consist of the following: a charge of $10.5 million relating
to a legal settlement; a charge of $15.8 million of indirect and general
expenses incurred by the Company in connection with the acquisition of Imo,
including a break-up fee, severance and retention bonuses, a $5.0 million
accrual for certain litigation matters, a $1.2 million charge for severance
benefits at Ameridrives and a $0.6 million charge relating to plant shutdown
costs at Ameridrives. If adjustments had been made to the unaudited pro forma
consolidated statement of operations for the year ended December 31, 1997 to
remove these non-recurring charges, operating income would have been
approximately $43.4 million and the loss from continuing operations would have
been approximately $5.7 million.
The unaudited pro forma consolidated financial statements do not purport to
represent what the Company's operating results would have been had the
transactions described above occurred on the dates indicated or to project the
Company's operating results for any future period, nor do they purport to
represent what the Company's financial position actually would have been had
such transactions occurred on the dates indicated or to project the Company's
financial position for any future date. The accompanying statements should be
read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations," the Colfax Corporation Consolidated
Financial Statements and the notes thereto and the other financial statements
and financial information included elsewhere in this Prospectus.
F-2
<PAGE>
COLFAX CORPORATION
PRO FORMA CONSOLIDATED BALANCE SHEET
JULY 3, 1998
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
PRO FORMA
PRO AS
COLFAX FORMA(A) PRO FORMA ADJUSTED(B)
CORP. AMERIDRIVES ALLWEILER ELIMINATIONS COLFAX ADJUSTMENTS COLFAX
-------- ----------- --------- ------------ -------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash
equivalents.......... $ 4,612 $ (123) $ 7,647 $ 12,136
Trade accounts and
notes receivable..... 49,056 13,117 28,666 90,839
Inventories--net...... 61,234 11,158 29,160 101,552
Deferred income
taxes................ 9,083 -- -- 9,083
Prepaid expenses and
other current
assets............... 1,991 566 3,966 6,523
-------- ------- -------- --------- -------- ---- ----
TOTAL CURRENT ASSETS.. 125,976 24,718 69,439 -- 220,133
Net property, plant and
equipment............. 59,626 29,886 28,802 118,314
Intangible assets,
principally goodwill.. 223,956 7,087 48,857 279,900
Invest. in and advances
to unconsol.
companies............. 4,476 -- 1,488 5,964
Net assets of disc.
ops.--noncurrent...... 53 -- -- 53
Notes receivable--due
from affiliate........ -- -- 103,332 (103,332)(c) --
Other assets........... 11,408 441 -- 11,849
-------- ------- -------- --------- -------- ---- ----
TOTAL ASSETS.......... $425,495 $62,132 $251,918 $(103,332) $636,213
======== ======= ======== ========= ======== ==== ====
LIABILITIES AND SHAREHOLDERS' EQ-
UITY
CURRENT LIABILITIES
Notes payable......... $ 36,184 $12,160 $ 3,924 $ 52,268
Trade accounts
payable.............. 17,636 2,955 7,404 27,995
Accrued expenses and
other liabilities.... 52,022 2,878 26,242 81,142
Accrued costs related
to discontinued
operations........... 4,258 -- -- 4,258
Income taxes payable.. 6,102 (4) -- 6,098
Current portion of
long-term debt....... 7,628 2,508 -- 10,136
-------- ------- -------- --------- -------- ---- ----
TOTAL CURRENT
LIABILITIES.......... 123,830 20,497 37,570 181,897
Long-term debt......... 166,085 19,282 181,240 366,607
Notes payable--due to
affiliate............. 103,332 -- -- (103,332) --
Deferred income taxes.. 4,202 -- 2,532 1,471 (d) 8,205
Accrued postretirement
benefits.............. 7,355 1,066 -- 8,421
Accrued pension exp.
and other
liabilities........... 44,782 -- 26,363 71,145
-------- ------- -------- --------- -------- ---- ----
TOTAL LIABILITIES..... 449,586 40,845 247,705 (101,861) 636,275
Minority Interest...... -- -- 1,418 1,418
SHAREHOLDERS' EQUITY
(DEFICIT)
Preferred stock....... -- -- -- --
Common stock.......... 1 20,000 1 (19,727)(e) 275
Additional paid-in
capital.............. 4,999 -- 999 19,727 25,725
Retained earnings
(deficit)............ (28,137) 1,287 1,802 (1,471) (26,519)
Cumulative foreign
currency translation
adj. ................ (954) -- (7) (961)
-------- ------- -------- --------- -------- ---- ----
TOTAL SHAREHOLDERS'
EQUITY (DEFICIT)..... (24,091) 21,287 2,795 (1,471) (1,480)
-------- ------- -------- --------- -------- ---- ----
TOTAL LIABILITIES AND
SHAREHOLDERS'
EQUITY.............. $425,495 $62,132 $251,918 $(103,332) $636,213
======== ======= ======== ========= ======== ==== ====
</TABLE>
The accompanying notes are an integral part of these pro forma consolidated
financial statements.
F-3
<PAGE>
COLFAX CORPORATION
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
CONSOLIDATED
COLFAX BEFORE OFFERING AND PRO FORMA
COLFAX PREACQUISITION PRO FORMA OFFERING AND REFINANCING AS ADJUSTED
CORPORATION PERIOD FOR IMO AMERIDRIVES ALLWEILER ADJUSTMENTS REFINANCING(A) ADJUSTMENTS COLFAX(B)
----------- -------------- ----------- --------- ----------- -------------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales......... $106,711 $210,151 $64,847 $154,273 $ -- $535,982 $535,982
Cost of goods
sold............. 76,597 145,276 45,884 94,396 (6,723)(h) 355,430 355,430
-------- -------- ------- -------- ------- -------- ---- --------
Gross profit...... 30,114 64,875 18,963 59,877 6,723 180,552 180,552
Selling, general
and
administrative
expense.......... 21,412 46,724 13,069 48,688 1,985 (h)(i) 131,878 131,878
Research and
development...... 1,913 3,636 355 3,858 -- 9,762 9,762
Unusual items(f).. 5,000 26,344 1,741 -- 33,085 33,085
Other (income)
expense.......... (1,543) (22) 303 (3,270) -- (4,532) (4,532)
-------- -------- ------- -------- ------- -------- ---- --------
Income before
interest and
taxes............ 3,332 (11,807) 3,495 10,601 4,738 10,359 10,359
Interest expense.. 12,495 18,190 2,358 1,581 9,003 (j) 43,627
-------- -------- ------- -------- ------- -------- ---- --------
Income before
taxes............ (9,163) (29,997) 1,137 9,020 (4,265) (33,268)
Income taxes...... 235 1,254 332 4,808 (1,095)(k) 5,534
-------- -------- ------- -------- ------- -------- ---- --------
Income from
continuing
operations(g).... $ (9,398) $(31,251) $ 805 $ 4,212 $(3,170) $(38,802)
======== ======== ======= ======== ======= ======== ==== ========
Basic earnings per
share............ $
========
Diluted earnings
per share........ $
========
</TABLE>
The accompanying notes are an integral part of these pro forma consolidated
financial statements.
F-4
<PAGE>
COLFAX CORPORATION
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1997
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
CONSOLIDATED
PREACQUISITION COLFAX BEFORE OFFERING AND PRO FORMA
PREACQUISITION PERIOD FOR PRO FORMA OFFERING AND REFINANCING AS ADJUSTED
PERIOD FOR IMO AMERIDRIVES ALLWEILER ADJUSTMENTS REFINANCING(A) ADJUSTMENT COLFAX(B)
-------------- ----------- -------------- ----------- -------------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales............... $160,232 $33,511 $78,263 $ -- $272,006 $272,006
Cost of goods sold...... 109,807 23,067 48,493 (3,361)(h) 178,006 178,006
-------- ------- ------- ------- -------- ---- --------
Gross profit............ 50,425 10,444 29,770 3,361 94,000 94,000
Selling, general and
administrative
expense................ 35,786 6,225 23,283 1,743 (h)(l) 67,037 67,037
Research and
development............ 2,719 788 2,461 -- 5,968 5,968
Unusual items(f)........ 10,500 -- -- -- 10,500 10,500
Other (income) expense.. (104) (57) (999) -- (1,160) (1,160)
-------- ------- ------- ------- -------- ---- --------
Income before interest
and taxes.............. 1,524 3,488 5,025 1,618 11,655 11,655
Interest expense........ 13,611 1,011 886 4,978 (m) 20,486
-------- ------- ------- ------- -------- ---- --------
Income before taxes..... (12,087) 2,477 4,139 (3,360) (8,831)
Income taxes............ 1,036 -- 4,955 (309)(k) 5,682
-------- ------- ------- ------- -------- ---- --------
Income from continuing
operations(g).......... $(13,123) $ 2,477 $ (816) $(3,051) $(14,513)
======== ======= ======= ======= ======== ==== ========
Basic earnings per
share.................. $
========
Diluted earnings per
share.................. $
========
</TABLE>
The accompanying notes are an integral part of these pro forma consolidated
financial statements.
F-5
<PAGE>
COLFAX CORPORATION
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JULY 3, 1998
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
CONSOLIDATED
PREACQUISITION COLFAX BEFORE OFFERING AND PRO FORMA
COLFAX PERIOD FOR PRO FORMA OFFERING AND REFINANCING AS ADJUSTED
CORPORATION AMERIDRIVES ALLWEILER ALLWEILER ADJUSTMENTS REFINANCING(A) ADJUSTMENTS COLFAX(B)
----------- ----------- --------- -------------- ----------- -------------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales.......... $164,115 $35,782 $28,511 $48,793 $ -- $277,201 $277,201
Cost of goods
sold.............. 110,923 23,980 16,769 30,184 (721)(h) 181,135 181,135
-------- ------- ------- ------- ------- -------- ---- --------
Gross profit....... 53,192 11,802 11,742 18,609 721 96,066 96,066
Selling, general
and administrative
expense........... 30,134 5,622 8,401 14,518 34 (h)(n) 58,709 58,709
Research and
development....... 2,826 684 782 1,478 -- 5,770 5,770
Other (income)
expense........... (189) (21) (1,126) (441) -- (1,777) (1,777)
-------- ------- ------- ------- ------- -------- ---- --------
Income before
interest and
taxes............. 20,421 5,517 3,685 3,054 687 33,364 33,364
Other non-operating
(gain)/loss....... -- (292) (1,072) -- -- (1,364) (1,364)
Interest expense... 16,524 1,362 2,116 288 1,179 (o) 21,469
-------- ------- ------- ------- ------- -------- ---- --------
Income before
taxes............. 3,897 4,447 2,641 2,766 (492) 13,259
Income taxes....... 1,502 -- 839 2,176 1,384 (k) 5,901
-------- ------- ------- ------- ------- -------- ---- --------
Income from
continuing
operations(g)..... $ 2,395 $ 4,447 $ 1,802 $ 590 $(1,876) $ 7,358
======== ======= ======= ======= ======= ======== ==== ========
Basic earnings per
share............. $
========
Diluted earnings
per share......... $
========
</TABLE>
The accompanying notes are an integral part of these pro forma consolidated
financial statements.
F-6
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(a) Represents the unaudited pro forma combined statements of operations of
the Company for the fiscal year end 1997, the six months ended June 30,
1997, and the six months ended July 3, 1998, reflecting pre-acquisition
periods combined with historical results and pro forma adjustments as if
all acquisitions occurred at the beginning of the relevant periods.
Represents the combined balance sheet of the Company at July 3, adjusted
for inter-company eliminations.
(b) Represents the unaudited pro forma combined statements of operations of
the Company for the fiscal year end 1997 and the six months ended July 3,
1998, and the unaudited pro forma combined balance sheet of the Company at
July 3, 1998, assuming the Combination, the Offerings, and the Refinancing
(assuming all of the Imo Notes are repurchased) occurred at the beginning
of the respective period.
(c) Represents the elimination of an intercompany note.
(d) Represents a tax adjustment related to the conversion of Ameridrives from
a pass-through entity into a C corporation.
(e) Represents an equity adjustment to reflect the amount of Colfax
Corporation shares to be outstanding before the Offerings.
(f) Unusual items of $33,085 in 1997 include $10,500 related to a legal
settlement in favor of International Insurance Company, $15,834 related to
expenses incurred during the acquisition of Imo, including a break-up fee,
severance and retention bonuses, $5,000 related to an additional legal
provision, $1,114 of severance benefits at Ameridrives, and $637 in plant
shut down costs at Ameridrives.
(g) Income (loss) from discontinued operations was $(9.8) million for the year
ended December 31, 1997 and $2.7 million for the six months ended June 30,
1997. Extraordinary items were $3.3 million for the year ended December
31, 1997 and $5.6 million for the six months ended July 3, 1998.
(h) Represents a decrease in depreciation expense resulting from the change in
depreciable lives due to purchase accounting.
(i) Represents $2,720 and $1,134 for Colfax and Allweiler, respectively, of
additional goodwill amortization, as if the acquisitions of Imo and
Allweiler had occurred at the beginning of 1997. Goodwill is amortized
over 40 years.
(j) Represents an increase in interest expense of $3,263 for Colfax and an
increase in interest expense of $5,740 for Allweiler, related to the debt
incurred for the Acquisitions.
(k) Represents pro forma tax adjustments for Ameridrives and the effective tax
on the pro forma adjustments using a 35% effective tax rate.
(l) Represents $2,111 and $567 for Colfax and Allweiler, respectively, of
additional goodwill amortization, as if the acquisitions of Imo and
Allweiler, had occurred at the beginning of 1997.
(m) Represents an increase in interest expense of $2,147 and $2,831 for Colfax
and Allweiler, respectively, related to the debt incurred for the
Acquisitions.
(n) Represents a $47 reduction and a $348 addition for Colfax and Allweiler,
respectively, of goodwill amortization, as if the acquisitions of Imo and
Allweiler, had occurred at the beginning of 1998.
(o) Represents an increase in interest expense of $1,179 for Allweiler,
related to the debt incurred for the Acquisitions.
F-7
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and Board of Directors of
Colfax Corporation:
We have audited the accompanying consolidated balance sheet of Colfax
Corporation (formerly named II Acquisition Corp.) (a Delaware corporation) and
subsidiaries as of December 31, 1997, and the related consolidated statements
of income, shareholders' equity and cash flows for the period from Inception
(July 23, 1997), through December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Colfax
Corporation and subsidiaries as of December 31, 1997, and the results of their
operations and their cash flows for a period from Inception (July 23, 1997),
through December 31, 1997, in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Richmond, Virginia
March 20, 1998
F-8
<PAGE>
COLFAX CORPORATION
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PAR VALUE)
<TABLE>
<CAPTION>
DECEMBER 31, JULY 3,
1997 1998
------------ -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents........................... $ 3,557 $ 4,612
Trade accounts and notes receivable, less allowance
of $1,435 in 1997 and $1,376 in 1998............... 53,732 49,056
Inventories--net.................................... 64,888 61,234
Deferred income taxes............................... 10,088 9,083
Prepaid expenses and other current assets........... 7,568 1,991
-------- --------
TOTAL CURRENT ASSETS.............................. 139,833 125,976
Property, Plant and Equipment--at cost
Land................................................ 5,351 4,988
Buildings and improvements.......................... 22,526 21,956
Machinery and equipment............................. 36,734 38,020
-------- --------
64,611 64,964
Less allowances for depreciation and amortization..... (3,202) (5,338)
-------- --------
Net property, plant and equipment................... 61,409 59,626
Intangible assets, principally goodwill--net........ 224,335 223,956
Investments in and advances to unconsolidated
companies.......................................... 4,780 4,476
Net assets of discontinued operations--noncurrent... 14,927 53
Other assets........................................ 9,436 11,408
-------- --------
TOTAL ASSETS...................................... $454,720 $425,495
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable....................................... $ 28,238 $ 36,184
Trade accounts payable.............................. 22,809 17,636
Accrued expenses and other liabilities.............. 58,170 52,022
Accrued costs related to discontinued operations.... 4,392 4,258
Income taxes payable................................ 5,929 6,102
Current portion of long-term debt................... 6,082 7,628
-------- --------
TOTAL CURRENT LIABILITIES......................... 125,620 123,830
Long-term debt........................................ 298,819 269,417
Deferred income taxes................................. 5,034 4,202
Accrued postretirement benefits--long-term............ 8,373 7,355
Accrued pension expense and other liabilities......... 37,473 44,782
-------- --------
TOTAL LIABILITIES................................. 475,319 449,586
-------- --------
SHAREHOLDERS' EQUITY (DEFICIT)
Preferred stock: $.01 par value; authorized and
unissued 10,000 shares............................. -- --
Common stock: $.01 par value; authorized 2,500
shares; issued 1,000 in 1997 and 1998.............. 1 1
Additional paid-in capital............................ 4,999 4,999
Retained earnings (deficit)........................... (24,929) (28,137)
Cumulative foreign currency translation adjustment.... (670) (954)
-------- --------
TOTAL SHAREHOLDERS' EQUITY (DEFICIT)................ (20,599) (24,091)
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
(DEFICIT)........................................ $454,720 $425,495
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-9
<PAGE>
COLFAX CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FROM INCEPTION TO SIX MONTHS ENDED
DECEMBER 31, 1997 JULY 3, 1998
----------------- ----------------
(UNAUDITED)
<S> <C> <C>
NET SALES................................... $106,711 $164,115
Cost of goods sold.......................... 76,597 110,923
-------- --------
GROSS PROFIT................................ 30,114 53,192
Selling, general and administrative
expense.................................... 21,412 30,134
Research and development expenses........... 1,913 2,826
Unusual item................................ 5,000 --
-------- --------
INCOME FROM OPERATIONS...................... 1,789 20,232
Other (income) expense...................... (1,543) (189)
-------- --------
INCOME FROM CONTINUING OPERATIONS
BEFORE INTEREST, INCOME TAXES AND
EXTRAORDINARY ITEM....................... 3,332 20,421
Interest expense............................ 12,495 16,524
-------- --------
INCOME (LOSS) FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES AND EXTRAORDINARY
ITEM..................................... (9,163) 3,897
Income taxes................................ 235 1,502
-------- --------
INCOME (LOSS) FROM CONTINUING OPERATIONS
BEFORE EXTRAORDINARY ITEM................ (9,398) 2,395
Discontinued operations:
Loss from operations...................... (3,753) --
Estimated loss on disposal................ (8,430) --
-------- --------
Total Loss from Discontinued
Operations............................. (12,183) --
-------- --------
Extraordinary item--loss on extinguishment
of debt.................................... (3,348) (5,603)
-------- --------
NET LOSS.................................... $(24,929) $ (3,208)
======== ========
EARNINGS (LOSS) PER SHARE, BASIC AND
DILUTED:
Continuing operations before extraordinary
item..................................... $ (9,398) $ 2,395
Discontinued operations................... (12,183) --
Extraordinary item........................ (3,348) (5,603)
-------- --------
Net income (loss)......................... $(24,929) $ (3,208)
-------- --------
Weighted average number of shares
outstanding................................ 1,000 1,000
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-10
<PAGE>
COLFAX CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
CUMULATIVE
FOREIGN
ADDITIONAL RETAINED CURRENCY
COMMON PAID-IN EARNINGS TRANSLATION
STOCK CAPITAL (DEFICIT) ADJUSTMENTS TOTAL
------ ---------- --------- ----------- --------
<S> <C> <C> <C> <C> <C>
BALANCE AT JULY 23, 1997... $ -- $ -- $ -- $ -- $ --
Issuance of Common Stock... 1 4,999 -- -- 5,000
Net loss................... -- -- (24,929) -- (24,929)
Foreign currency transla-
tion adjustments.......... -- -- -- (670) (670)
----- ------ -------- ----- --------
BALANCE AT DECEMBER 31,
1997...................... 1 4,999 (24,929) (670) (20,599)
Net loss (Unaudited)....... -- -- (3,208) -- (3,208)
Foreign currency
translation adjustments
(Unaudited)............... -- -- -- (284) (284)
----- ------ -------- ----- --------
BALANCE AT JULY 3, 1998
(UNAUDITED)............... $ 1 $4,999 $(28,137) $(954) $(24,091)
===== ====== ======== ===== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-11
<PAGE>
COLFAX CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FROM INCEPTION SIX MONTHS
TO ENDED
DECEMBER 31, JULY 3,
1997 1998
-------------- -----------
(UNAUDITED)
<S> <C> <C>
OPERATING ACTIVITIES
Net loss........................................... $ (24,929) $ (3,208)
Adjustments to reconcile net income (loss) to net
cash (used by) provided by continuing operations:
Discontinued operations.......................... 12,183 --
Depreciation..................................... 3,674 2,615
Amortization..................................... 2,008 3,311
Extraordinary item............................... 3,348 5,603
Unusual items.................................... 5,000 --
Other............................................ 369 43
Other changes in operating assets and
liabilities:
Accounts and notes receivable................... (6,467) 4,624
Inventories..................................... 1,759 3,654
Accounts payable and accrued expenses........... (12,543) (17,467)
Other operating assets and liabilities.......... (1,719) 6,318
--------- ---------
Net cash (used by) provided by continuing
operations...................................... (17,317) 5,493
Net cash (used by) provided by discontinued
operations...................................... (1,342) (955)
--------- ---------
Net Cash (Used by) Provided by Operating
Activities................................... (18,659) 4,538
--------- ---------
INVESTING ACTIVITIES
Net proceeds from sale of businesses and sales of
property, plant and equipment..................... 88,024 30,738
Purchases of property, plant and equipment......... (3,740) (3,322)
Acquisitions, net of cash acquired................. (111,984) (5,468)
Net investing activities of discontinued
operations........................................ (5,104) (1,164)
Other.............................................. (497) 80
--------- ---------
Net Cash (Used by) Provided by Investing
Activities................................... (33,301) 20,864
--------- ---------
FINANCING ACTIVITIES
Proceeds from issuance of stock.................... 5,000 --
(Decrease) increase in notes payable............... (15,900) 7,326
Proceeds from long-term borrowings................. 254,270 110,433
Principal payments on long-term debt............... (183,219) (137,307)
Payment of debt financing costs.................... (5,368) (4,699)
Other.............................................. 281 (37)
--------- ---------
Net Cash Provided by (Used by) Financing
Activities................................... 55,064 (24,284)
--------- ---------
Effect of exchange rate changes on cash............ 453 (63)
--------- ---------
Increase in cash and cash equivalents.............. 3,557 1,055
Cash and cash equivalents at beginning of period... -- 3,557
--------- ---------
Cash and cash equivalents at end of period......... $ 3,557 $ 4,612
========= =========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest......................................... $ 13,344 $ 21,719
Income taxes..................................... $ 1,263 $ 613
Supplemental schedule of noncash investing and
financing activities:
The Company purchased 92.8% of the capital stock of
Imo Industries Inc. for $112.1 million. In con-
junction with the acquisition, liabilities were
assumed as follows:
Fair value of assets acquired.................... $ 609,490
Cash paid for the capital stock, net of cash
acquired........................................ (111,984)
---------
Liabilities assumed........................... $ 497,506
=========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-12
<PAGE>
COLFAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INCLUDING AMOUNTS AND DISCLOSURES RELATING TO UNAUDITED PERIODS)
NOTE 1 SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation: The results of operations of the period ended
December 31, 1997, reflect the results of Colfax Corporation (the "Company")
formerly known as II Acquisition Corp. since the inception date of July 23,
1997, and the subsidiaries acquired as of August 28, 1997, from the
Predecessor Company. (See Note 2)
Consolidation: The consolidated financial statements include the accounts of
the Company and its majority-owned subsidiaries. Significant intercompany
transactions have been eliminated in consolidation. The Company's subsidiaries
use the equity method to account for investments in corporations in which it
does not own a majority voting interest but has the ability to exercise
significant influence over operating and financial policies.
Translation of Foreign Currencies: Assets and liabilities of international
operations are translated into U.S. dollars at current exchange rates. Income
and expense accounts are translated into U.S. dollars at average rates of
exchange prevailing during the year. Translation adjustments are reflected as
a separate component of shareholders' equity.
Cash Equivalents: Cash equivalents include investments in government
securities funds and certificates of deposit with original maturities of less
than three months. Investment periods are generally less than one month.
Inventories: Inventories are carried at the lower of cost or market, cost
being determined principally on the basis of standards which approximate
actual costs on the first-in, first-out method, and market being determined by
net realizable value. Appropriate consideration is being given to
deterioration, obsolescence and other factors in evaluating net realizable
value.
Revenue Recognition: Revenues are recorded generally when the Company's
products are shipped.
Depreciation and Amortization: Depreciation and amortization of plant and
equipment are computed principally by the straight-line method based on the
estimated useful lives of the assets as follows: buildings, 10 to 40 years and
machinery and equipment, 3 to 15 years.
Fiscal Year: Effective January 1, 1998, the Company adopted a "4-4-5"
accounting calendar.
Earnings Per Share: At December 31, 1997, the Company adopted Financial
Accounting Standards Board ("FASB") Statement No. 128, "Earnings Per Share,"
which specifies the computation, presentation, and disclosure requirements for
earnings per share. Basic and diluted net income (loss) per share is
calculated based on the actual weighted average shares outstanding.
Impact of Recently Issued Accounting Standards: In June 1997, the Financial
Accounting Standards Board ("FASB") issued Statement No. 131, "Disclosures
about Segments of an Enterprise and Related Information," which requires
public companies to report financial and descriptive information about
operating segments. The statement intends to align reportable segments and
certain disclosures with how the operations are managed internally. The impact
of this statement on the Company's disclosure is not expected to be
significant. In February 1998, the FASB issued Statement No. 132, "Employers'
Disclosures about Pensions and Other Postretirement Benefits," which adds
disclosure requirements on changes in the benefit obligations and fair values
of plan assets, and eliminates certain disclosures that are no longer useful.
These statements will be adopted by the Company in fiscal year 1998.
Change in Accounting Policies: The Company adopted FASB Statement No. 130,
"Reporting Comprehensive Income," on January 1, 1998. For the six months ended
July 3, 1998, total comprehensive loss
F-13
<PAGE>
COLFAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
was $3.5 million compared to reported net loss of $3.2 million. For the four
months ended December 31, 1997, total comprehensive loss was $25.6 million
compared to reported net loss of $24.9 million.
Intangible Assets: Goodwill of companies acquired is being amortized on the
straight-line basis over 40 years. The carrying value of goodwill is reviewed
when indicators of impairment are present, by evaluating future cash flows of
the associated operations to determine if impairment exists. Goodwill related
to continuing operations at December 31, 1997 was $226.0 million, net of
respective accumulated amortization of $1.8 million. Patents are amortized
over the shorter of their legal or estimated useful lives.
Management Estimates: The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements, and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
NOTE 2 ACQUISITION OF IMO INDUSTRIES INC.
On August 28, 1997, the Company acquired approximately 93% of the
outstanding shares of common stock of Imo Industries Inc. ("Imo" or the
"Predecessor Company") pursuant to its tender offer for all outstanding shares
of the common stock (the "Acquisition"). The consideration paid was $7.05 per
share of common stock or $112.1 million in total. The Acquisition has been
accounted for under the purchase method. The purchase price was allocated
based on the estimated fair values at the date of acquisition and resulted in
an excess of purchase price over assets acquired, liabilities assumed, and
additional purchase liabilities recorded, for continuing operations of $228.0
million, which is being amortized on a straight-line basis over 40 years.
Additional purchase liabilities recorded included approximately $18.6
million for severance and related costs, and consolidation of certain acquired
facilities. At December 31, 1997, approximately $10.5 million of these costs
remained on the balance sheet. The Company expects to complete its termination
of employees and consolidation of facilities in 1998. See Note 4 for
additional discussion of the 1997 cost reduction program.
In conjunction with the Acquisition, the Company recorded a charge of $15.8
million including a $10.0 million contract fee paid to United Dominion
Industries ("UDI") as a result of the termination of a merger agreement
between UDI and the Company, $3.4 million of commissions, advisory and legal
fees, and $2.4 million of employee retention bonuses.
On July 2, 1998, the Company's wholly owned subsidiary, Imo Merger Corp.,
merged with and into Imo, pursuant to a short-form merger under Delaware law
("back-end merger"). Imo was the surviving corporation in the back-end merger
and as a result became a wholly owned subsidiary of the Company. At July 3,
1998, 775,590 of the outstanding 1,221,888 minority shares have been converted
for $5.5 million in cash. A payable of $3.1 million has been accrued at July
3, 1998 for the remaining 446,298 shares that were not converted as of that
date.
NOTE 3 DISCONTINUED OPERATIONS
Roltra Morse
In February 1998, the Company announced that the Board of Directors had
approved plans to sell its Roltra Morse business. In accordance with APB
Opinion No. 30, the disposal of this business segment has been accounted for
as a discontinued operation and, accordingly, its operating results have been
segregated and reported as Discontinued Operations in the accompanying
Consolidated Statements of Income. Discontinued Operations include
management's best estimates of amounts expected to be realized at the time of
disposal.
F-14
<PAGE>
COLFAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
On February 27, 1998, the Company completed the sale of its Roltra Morse
business to Magna International Inc. for cash proceeds of $30.0 million, plus
the assumption of Roltra Morse's debt. The sale price approximated the
recorded net book value of the business. Net proceeds were used to reduce
domestic senior debt. This transaction was reflected in the Company's
financial statements in the first quarter of 1998.
The Company reviews quarterly the assumptions used in determining the
estimated gain or loss from discontinued operations and the adequacy of the
recorded liabilities. Management believes that the recorded amount of
estimated liabilities related to the Discontinued Operations at December 31,
1997 and July 3, 1998, is adequate, however, the amounts estimated may differ
from actual results.
Net assets and liabilities of the Discontinued Operations consist of the
following:
<TABLE>
<CAPTION>
DECEMBER 31, JULY 3,
1997 1998
(DOLLARS IN THOUSANDS) ------------ -----------
(UNAUDITED)
<S> <C> <C>
Current Assets:
Cash............................................ $ 843 $ --
Receivables..................................... 13,799 --
Inventories..................................... 12,357 --
Other current assets............................ 5,083 --
-------- -----
32,082 --
-------- -----
Current Liabilities:
Notes payable................................... 15,694 --
Trade accounts payable.......................... 22,043 --
Other current liabilities....................... 6,522 --
-------- -----
44,259 --
-------- -----
Net Current Assets (Liabilities).................. (12,177) --
-------- -----
Long-term Assets:
Property........................................ 21,758 --
Other long-term assets.......................... 14,220 128
-------- -----
35,978 128
Long-term Liabilities............................. 8,874 75
-------- -----
Net Long-term Assets.............................. 27,104 53
-------- -----
Net Assets........................................ $ 14,927 $ 53
======== =====
</TABLE>
Net assets related to the Roltra Morse and Turbomachinery businesses are
$15.5 million and $0.1 million, respectively, as of December 31, 1997. The
Electro-Optical Systems business contributes $0.7 million of net liabilities
at December 31, 1997.
Total long-term debt of the Discontinued Operations amounted to $6.0 million
as of December 31, 1997. Of this amount, $1.2 million represents the current
portion of long-term debt as of December 31, 1997.
F-15
<PAGE>
COLFAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
A condensed summary of operations for the Discontinued Operations is as
follows:
<TABLE>
<CAPTION>
FROM INCEPTION TO SIX MONTHS ENDED
DECEMBER 31, 1997 JULY 3, 1998
(DOLLARS IN THOUSANDS) ----------------- ----------------
(UNAUDITED)
<S> <C> <C>
Net Sales............................... $30,257 $14,355
------- -------
Income (loss) from operations before
income taxes and minority interest..... (3,736) --
Income Taxes............................ 77 --
Minority interest....................... (60) --
------- -------
Income (loss) from operations........... $(3,753) $ --
======= =======
</TABLE>
The loss from operations of the Discontinued Operations for the four months
ended December 31, 1997 includes allocated interest expense of $0.3 million.
Allocated interest expense includes interest on debt of the Discontinued
Operations to be assumed by the buyers of these operations, and an allocation
of corporate interest expense to the Discontinued Operations based on the
ratio of net assets to be sold to the sum of the Company's consolidated net
assets, if positive, plus consolidated debt. The operating loss of $0.9
million for Roltra Morse for the two months ended February 28, 1998 was
accrued as a portion of the estimated loss on disposal as of December 31,
1997.
Roltra Morse
The Roltra Morse business had operating losses of $3.8 million for the four
months ended December 31, 1997 and $0.9 million for the six months ended July
3, 1998.
Estimated Loss on Disposal
During the four months ended December 31, 1997, the Company recorded unusual
charges of $5.0 million related to additional losses on disposal of the
Turbomachinery business due to charges related to changes in estimates on
legal and other reserve requirements associated with retained liabilities of
this business.
NOTE 4 RESTRUCTURING PLANS
Asset Sales
On August 29, 1997 the Company completed the sale of its Instrumentation
business segment to Danaher Corporation for proceeds of $85.0 million. The
Company used a portion of the proceeds to reduce domestic senior debt by $68.1
million. The majority shareholders of the Company are also substantial
shareholders of Danaher Corporation.
On December 31, 1997, the Company sold certain assets of its Delroyd
business unit to Nuttall Gear LLC for $2.3 million in cash. Also on December
31, 1997, the Company acquired certain assets of the Centric Clutch business
unit of Ameridrives International, L.P. for $1.3 million in cash. Nuttall Gear
LLC and Ameridrives International, L.P. are subsidiaries of American
Enterprises MPT Corporation. Steven M. Rales and Mitchell P. Rales
collectively own 76% of American Enterprises MPT Corporation. The Rales are
directors and beneficial owners of 81.5% of the Company. The transactions were
negotiated on an arm's-length basis, and were based on the valuations of
independent appraisers.
On February 27, 1998, the Company sold its Roltra Morse business segment to
Magna International for $30.0 million in cash plus the assumption of Roltra
Morse's debt. Net proceeds have been used by the Company to reduce domestic
senior debt.
Cost Reduction Programs
1997 PROGRAM
In connection with the Acquisition, the Company implemented a cost reduction
program. The cost of this program is estimated to be $18.6 million and was
accrued for in accordance with the purchase method of
F-16
<PAGE>
COLFAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
accounting. It is comprised of $10.5 million related to severance and
termination benefits as a result of headcount reductions at Imo's corporate
headquarters. In addition, $6.9 million and $1.2 million of costs are
estimated for the Company's Industrial Positioning and Fluid Handling
segments, respectively, related to severance and termination benefits
resulting from headcount reductions and the consolidation of certain
manufacturing facilities.
The 1997 cost reduction program reduced expenses by approximately $3.0
million in the 1997 period subsequent to the Acquisition and is expected to
reduce expenses by approximately $19.5 million in 1998 and $20.6 million
annually thereafter. The program includes a reduction of 237 associates, or
10.3% of the total number of Company associates in continuing operations at
the date of the Acquisition. The required cash outlay related to this program
was $8.1 million in 1997 and the expected cash requirements during 1998 are
$10.5 million.
NOTE 5 INVENTORIES
Inventories are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31, JULY 3,
1997 1998
(DOLLARS IN THOUSANDS) ------------ -----------
(UNAUDITED)
<S> <C> <C>
Finished products................................... $18,823 $22,485
Work in process..................................... 23,218 19,929
Materials and supplies.............................. 23,481 19,928
------- -------
65,522 62,342
Less customers' progress payments................... 634 1,108
------- -------
$64,888 $61,234
======= =======
</TABLE>
NOTE 6 ACCRUED EXPENSES AND OTHER LIABILITIES
Accrued expenses and other liabilities consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, JULY 3,
1997 1998
(DOLLARS IN THOUSANDS) ------------ -----------
(UNAUDITED)
<S> <C> <C>
Accrued product warranty costs...................... $ 1,844 $ 1,804
Accrued litigation and claims costs................. 16,683 15,798
Payroll and related items........................... 11,836 9,594
Accrued interest payable............................ 7,552 2,675
Accrued restructuring costs......................... 11,970 3,917
Accrued divestiture costs........................... 1,835 --
Other............................................... 6,450 18,234
------- -------
$58,170 $52,022
======= =======
</TABLE>
NOTE 7 UNUSUAL ITEMS
During 1997, the Company recorded an annual charge of $5.0 million related
to an additional legal provision concerning litigation.
F-17
<PAGE>
COLFAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 8 INCOME TAXES
The components of income tax expense (benefit) from continuing operations
are:
<TABLE>
<CAPTION>
FROM INCEPTION TO SIX MONTHS ENDED
DECEMBER 31, 1997 JULY 3, 1998
(DOLLARS IN THOUSANDS) ----------------- -----------------
(UNAUDITED)
<S> <C> <C>
Current:
Federal.............................. $ -- $ 128
Non-U.S.............................. 94 1,298
State................................ 141 76
----- ------
235 1,502
----- ------
Deferred:
Federal.............................. -- --
Non-U.S. and State................... -- --
----- ------
-- --
----- ------
$ 235 $1,502
===== ======
</TABLE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components
of the Company's deferred tax assets and liabilities as of December 31, 1997
are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1997 JULY 3, 1998
------------------- -------------------
CURRENT LONG-TERM CURRENT LONG-TERM
(DOLLARS IN THOUSANDS) -------- --------- -------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C>
Deferred tax assets:
Postretirement benefit
obligation................... $ 595 $ 5,809 $ 805 $ 5,662
Expenses not currently
deductible................... 28,911 7,280 24,340 7,152
Net operating loss carryover.. -- 35,436 -- 33,225
Tax credit carryover.......... -- 2,783 -- 2,966
-------- -------- -------- --------
Total deferred tax assets....... 29,506 51,308 25,145 49,005
Valuation allowance for deferred
tax assets..................... (19,418) (33,839) (16,062) (30,767)
-------- -------- -------- --------
Net deferred tax assets......... 10,088 17,469 9,083 18,238
-------- -------- -------- --------
Deferred tax liabilities:
Tax over book depreciation.... -- 15,271 -- 15,271
Other......................... -- 7,232 -- 7,169
-------- -------- -------- --------
Total deferred tax liabilities.. -- 22,503 -- 22,440
-------- -------- -------- --------
Net deferred tax assets
(liabilities).................. $ 10,088 $ (5,034) $ 9,083 $ (4,202)
======== ======== ======== ========
</TABLE>
At December 31, 1997, unremitted earnings of non-U.S. subsidiaries were
approximately $21.4 million. Since it is the Company's intention to
indefinitely reinvest these earnings, no U.S. taxes have been provided.
Determination of the amount of unrecognized deferred tax liability on these
unremitted earnings is not practicable. The amount of non-U.S. withholding
taxes that would be payable upon remittance of those earnings is approximately
$0.9 million.
F-18
<PAGE>
COLFAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The components of income (loss) from continuing operations before income
taxes and extraordinary item are as follows:
<TABLE>
<CAPTION>
FROM INCEPTION TO SIX MONTHS ENDED
DECEMBER 31, 1997 JULY 3, 1998
(DOLLARS IN THOUSANDS) ----------------- ----------------
(UNAUDITED)
<S> <C> <C>
United States........................... $(11,321) $(2,725)
Non-U.S................................. 2,158 6,622
-------- --------
$ (9,163) $ 3,897
======== ========
</TABLE>
U.S. income tax expense (benefit) at the statutory tax rate is reconciled
below to the overall U.S. and non-U.S. income tax expense (benefit).
<TABLE>
<CAPTION>
FROM INCEPTION TO SIX MONTHS ENDED
DECEMBER 31, 1997 JULY 3, 1998
(DOLLARS IN THOUSANDS) ----------------- ----------------
(UNAUDITED)
<S> <C> <C>
Tax at U.S. federal income tax rate... $(3,207) $1,492
State taxes, net of federal income tax
effect............................... 92 49
Impact of non-U.S. tax rates and
credits.............................. 228 (1,020)
Net U.S. tax on distributions of
current foreign earnings............. 355 226
Goodwill amortization and write-off... 458 2,450
Change in valuation reserve........... 3,018 (6,428)
Nondeductible foreign losses.......... 89 --
Other................................. (798) 4,733
------- ------
Income tax expense (benefit).......... $ 235 $1,502
======= ======
</TABLE>
At July 3, 1998, the Company has net operating loss carryforwards of
approximately $107.4 million, $68.9 million of which is subject to Section 382
limitations, expiring in years 2002 through 2012, and minimum tax credits of
approximately $2.8 million, which may be carried forward indefinitely. $6.8
million of the net operating loss carryforwards will be available for use each
year exclusive of built-in gains. Included in the net operating loss
carryforwards are foreign tax credits of approximately $7.4 million, expiring
through 2001, which, for financial and tax reporting purposes, are reflected
as deductible foreign taxes. These carryforwards are available to offset
future federal taxable income, subject to the Section 382 limitations.
The Company establishes valuation allowances in accordance with the
provisions of FASB Statement No. 109, "Accounting for Income Taxes." The
Company continually reviews the adequacy of the valuation allowance and is
recognizing these benefits only as reassessment indicates that it is more
likely than not that the benefits will be realized.
The total amount of future taxable income in the U.S. necessary to realize
the asset is approximately $14.5 million. The Company will generate this
income principally through the completed sale of Roltra Morse in February
1998. The remaining valuation allowance is necessary due to the uncertainty of
future income estimates.
NOTE 9 NOTES PAYABLE AND LONG-TERM DEBT
On July 23, 1997, the Company borrowed $37.5 million from Steven M. Rales,
$37.5 million from Mitchell P. Rales, and $50.0 million from Janelia Farm
Corp., which is owned by the Rales. On September 5, 1997, the Company repaid
$9.2 million of the Steven M. Rales note and $9.2 million of the Mitchell P.
Rales note. Proceeds of $107.0 million borrowings, net of repayments
("Acquisition Debt") were used to acquire Imo's common stock.
F-19
<PAGE>
COLFAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
On June 30, 1998, the Company repaid the remaining principal balance of
$28.3 million plus interest accrued to date each for the Steven M. Rales and
Mitchell P. Rales notes, and $37.7 million plus interest accrued to date for
the Janelia Farm Corp. note. On June 30, 1998, the Company borrowed $103.3
million from an affiliate, Constellation Verwaltungs GmbH & Co. Beteiligungen
KG ("CV") and an additional $2.8 million each from Steven M. Rales and
Mitchell P. Rales. Proceeds from the CV note were used to repay the notes
mentioned above. Proceeds from the Steven M. Rales and Mitchell P. Rales notes
were used to fund the back-end merger.
On August 29, 1997, Imo completed the refinancing of its domestic senior
debt. Under terms of the refinancing, Imo entered into an agreement for $143.0
million in senior secured credit facilities with a group of lenders (the "New
Credit Agreement"). Initial borrowings under the New Credit Agreement were
approximately $127.1 million. Proceeds of the New Credit Agreement were used
to refinance all obligations under Imo's previous credit agreement. The cost
of the implementation of the New Credit Agreement will be amortized over its
term.
The New Credit Agreement, which is secured by the assets of the Company's
domestic operations and all or a portion of the stock of certain subsidiaries,
provided for a five year, $70.0 million revolving credit facility (which
includes a $30.0 million letter of credit sub-facility), and a $73.0 million
term loan facility ("Term Loans") amortizing to August 29, 2002. Proceeds from
the August 29, 1997 sale of the Instrumentation business were used to repay
amounts on the revolving credit facility and Term Loans of $54.2 million and
$13.9 million, respectively (See Note 3). At the same time, and in keeping
with the terms of the New Credit Agreement, the $73.0 million term loan
facility was reduced to $59.0 million, which reduced the total facility to
$129.0 million.
On February 27, 1998, the Company completed the sale of its Roltra Morse
business to Magna International Inc. (See Note 3). This transaction was
reflected in the Company's financial statements in the first quarter of 1998.
The net proceeds were used to reduce domestic senior debt by $30.0 million on
February 27, 1998, including $8.0 million of the outstanding Term Loans. The
sale of Roltra Morse and use of the proceeds to reduce its domestic senior
debt increased the availability under its revolving credit facility to
purchase a portion of its 11.75% senior subordinated notes (the "Notes") on
the open market. During the first quarter of 1998, the Company purchased, in
the open market at a premium, a portion of its Notes in the face amount of
$33.1 million. As a result of the early extinguishment of these Notes, and a
portion of the term loan facility with the proceeds from the Roltra Morse
sale, an extraordinary charge of $5.6 million was recognized in the first
quarter of 1998.
Notes Payable
As of December 31, 1997 and July 3, 1998, the Company had under the New
Credit Agreement, borrowings of $25.0 million and $34.0 million outstanding
under the revolving credit facility, as well as $13.9 million and $16.6
million of outstanding standby letters of credit, respectively. The Company's
continuing operations had $8.0 million and $5.4 million in foreign short-term
credit facilities with amounts outstanding at December 31, 1997 and July 3,
1998 of $1.9 million and $2.2 million, respectively. Due to the short-term
nature of these debt instruments it is the Company's opinion that the carrying
amounts approximate the fair value. The weighted average interest rate on
short-term notes payable was 8.03% at December 31, 1997 and July 3, 1998.
F-20
<PAGE>
COLFAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Long-Term Debt
Long-term debt of continuing operations consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, JULY 3,
1997 1998
(DOLLARS IN THOUSANDS) ------------ -----------
(UNAUDITED)
<S> <C> <C>
Acquisition Debt(1)............................... $106,500 $121,120
Term Loans(2)(3).................................. 59,000 49,725
Senior subordinated notes with interest at 11.75%,
due May 1, 2006, net of unamortized discount..... 133,381 100,756
Other............................................. 6,020 5,444
-------- --------
304,901 277,045
Less current portion.............................. 6,082 7,628
-------- --------
$298,819 $269,417
======== ========
</TABLE>
- --------
(1) These notes bear interest at prime plus 0.375%, prime plus 0.25% or LIBOR
plus 0.375% and mature May 15, 2007 or May 15, 2008. The Company may at
any time, upon notice of the holder of the notes, prepay all or a portion
of the indebtedness represented by the notes, with interest accrued to the
date fixed for prepayment.
(2) Quarterly principal payments are as follows: $1.28 million due August 29,
1998; $1.91 million due quarterly November 29, 1998 to August 29, 1999;
$2.23 million due quarterly November 29, 1999 to August 29, 2000; $3.18
million due quarterly November 29, 2000 to August 29, 2001; and $4.78
million due quarterly November 29, 2001 to August 29, 2002.
(3) These loans bear interest at prime plus 1.25%, or LIBOR plus 2.5%. The
prime and LIBOR margins are a sliding scale based on the Company's total
debt to EBITDA (Earnings Before Interest, Taxes, Depreciation and
Amortization.)
The aggregate annual maturities of long-term debt from continuing
operations, in thousands, for the four years subsequent to 1998 are: 1999--
$9,690; 2000--$11,770; 2001--$17,018; and 2002--$16,927.
Total debt of the Discontinued Operations, in thousands, amounted to $21,652
as of December 31, 1997. The long term portion is $4,797. There was no
remaining debt of Discontinued Operations at July 3, 1998.
The Term Loans have required mandatory prepayments under certain conditions
such as from proceeds from asset sales, specified percentages of net proceeds
of debt or equity issuances, and a percentage of excess cash flow. The
mandatory prepayments will be applied to the Term Loans pro rata, and then to
the repayment of the revolving credit facility. Mandatory prepayments applied
to the Term Loans reduce the scheduled quarterly principal payments on a pro
rata basis. The interest rates on the Term Loans are based on current market
rates. Consequently, the carrying value of the Term Loans approximates fair
value.
The Notes are not redeemable prior to May 1, 2001, except that, until May 1,
1999, Imo may redeem, at its option, up to an aggregate of $55.0 million of
the principal amount of the Notes at 110% of their principal amount plus
accrued interest with the net proceeds of one or more public equity offerings
provided that at least $100.0 million of the principal amount of the Notes
remains outstanding after each such redemption. On or after May 1, 2001, the
Notes are redeemable at the option of Imo, in whole or in part, at 106% of
their principal amount, plus accrued interest, declining to 100% of their
principal amount plus accrued interest on or after May 1, 2004. Interest is
payable semi-annually on May 1 and November 1. On September 16, 1997, Imo
offered to purchase all of the Notes at 101% of the principal amount, as
required under the indenture governing the Notes as a result of the
Acquisition. No Notes were tendered in the offer. On November 25, 1997, Imo
purchased, through an open
F-21
<PAGE>
COLFAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
market transaction, Notes in the face amount of $19.9 million at a purchase
price of 111.47% of the principal amount. The fair value of the $135.1 million
face value of these instruments outstanding at December 31, 1997, based on
market bid prices, was $152.3 million.
The New Credit Agreement requires Imo to meet certain objectives with
respect to financial ratios. The New Credit Agreement and the Notes contain
provisions, which place certain limitations on dividend payments and outside
borrowings. Under the most restrictive of such provisions, the New Credit
Agreement requires Imo to maintain certain minimum interest coverage, fixed
charge coverage and maximum permitted debt levels and prohibits dividends. Imo
was in compliance with all of its covenants under the New Credit Agreement at
December 31, 1997.
During the period from inception to December 31, 1997, a $0.3 million
extraordinary charge consisting of the write-off of deferred debt expense was
recorded related to the repayment of a portion of the Term Loans under the New
Credit Agreement with the proceeds from the sale of the Instrumentation
business. An extraordinary charge of $3.0 million was recorded in the fourth
quarter of 1997, as a result of the open market purchase of $19.9 million of
the Notes in November 1997. This charge represents a cash outlay of $2.3
million incurred in connection with the early extinguishment of the debt as
well as the write-off of previously deferred loan costs.
NOTE 10 SHAREHOLDERS' EQUITY
On July 23, 1997, the Company issued 1,000 shares of the Company's common
stock, par value $.01 per share, for $5,000 per share. The Company received
total payment for the shares in the amount of $5.0 million.
F-22
<PAGE>
COLFAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 11 OPERATIONS BY INDUSTRY SEGMENT AND GEOGRAPHIC AREA
The Company classifies its continuing operations into two business segments:
Industrial Positioning and Fluid Handling. Information about the business of
the Company by business segment, non-U.S. operations and geographic area is
presented below:
<TABLE>
<CAPTION>
FROM INCEPTION TO SIX MONTHS ENDED
DECEMBER 31, 1997 JULY 3, 1998
(DOLLARS IN THOUSANDS) ----------------- ----------------
(UNAUDITED)
<S> <C> <C>
Net Sales
Industrial Positioning................ $ 66,314 $104,971
Fluid Handling........................ 40,397 59,144
-------- --------
Total net sales......................... 106,711 164,115
-------- --------
Segment operating income
Industrial Positioning................ 2,959 14,326
Fluid Handling........................ 6,118 10,644
-------- --------
Total segment operating income.......... 9,077 24,970
-------- --------
Equity in loss of unconsolidated
companies.............................. (133) (40)
Unallocated corporate expenses(1)....... (6,952) (4,908)
Net interest expense.................... (11,155) (16,125)
-------- --------
Income (loss) from continuing operations
before income taxes and extraordinary
item................................... $ (9,163) $ 3,897
======== ========
</TABLE>
A reconciliation of segment operating income to income from operations
follows:
<TABLE>
<CAPTION>
FROM INCEPTION TO SIX MONTHS ENDED
DECEMBER 31, 1997 JULY 3, 1998
(DOLLARS IN THOUSANDS) ----------------- ----------------
(UNAUDITED)
<S> <C> <C>
Segment operating income.................. $ 9,077 $24,970
Unallocated corporate expenses(1)......... (6,952) (4,908)
Other (income) expense.................... (336) 170
------- -------
Income (loss) from operations............. $ 1,789 $20,232
======= =======
</TABLE>
- --------
(1) Unallocated corporate expenses include unusual items of $5.0 million for
the four months ended December 31, 1997. (See Note 7)
F-23
<PAGE>
COLFAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
FROM INCEPTION TO SIX MONTHS ENDED
DECEMBER 31, 1997 JULY 3, 1998
(DOLLARS IN THOUSANDS) ----------------- ----------------
(UNAUDITED)
<S> <C> <C>
Identifiable assets
Industrial Positioning................. $116,488 $118,177
Fluid Handling......................... 66,932 64,924
Corporate.............................. 256,373 242,341
Discontinued Operations................ 14,927 53
-------- --------
Total identifiable assets................ $454,720 $425,495
======== ========
Depreciation and amortization
Industrial Positioning................. $ 2,984 $ 1,604
Fluid Handling......................... 1,239 846
Corporate.............................. 1,459 3,476
-------- --------
Total depreciation and amortization...... $ 5,682 $ 5,926
======== ========
Capital expenditures
Industrial Positioning................. $ 2,017 $ 1,449
Fluid Handling......................... 1,718 1,858
Corporate.............................. 5 15
-------- --------
Total capital expenditures............... $ 3,740 $ 3,322
======== ========
</TABLE>
Identifiable assets of corporate include goodwill related to the Acquisition
of $217 million and $224 million at December 31, 1997 and July 3, 1998,
respectively. As such, at December 31, 1997 and July 3, 1998, the identifiable
assets of the segments in continuing operations do not include goodwill.
Discontinued operations had goodwill of $8.0 million included in identifiable
assets as of December 31, 1997.
The continuing operations of the Company on a geographic basis are as
follows:
<TABLE>
<CAPTION>
FROM INCEPTION TO
DECEMBER 31, 1997
----------------------
(DOLLARS IN THOUSANDS)
<S> <C>
Net sales
United States..................................... $ 70,638
Non-U.S. (principally Europe)..................... 36,073
--------
Total net sales....................................... $106,711
========
Segment operating income
United States..................................... $ 10,241
Non-U.S........................................... (1,164)
--------
Total segment operating income........................ $ 9,077
========
Identifiable assets...................................
Continuing Operations:
United States..................................... $371,683
Non-U.S........................................... 68,110
Discontinued Operations:
United States..................................... (562)
Non-U.S........................................... 15,489
--------
Total identifiable assets............................. $454,720
========
</TABLE>
F-24
<PAGE>
COLFAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
FROM INCEPTION TO
DECEMBER 31, 1997
----------------------
(DOLLARS IN THOUSANDS)
<S> <C>
Export sales
Asia.............................................. $2,153
Canada............................................ 1,403
Europe............................................ 1,037
Latin America..................................... 356
Middle East & North Africa........................ 291
South America..................................... 3,116
Other............................................. 1,410
------
Total export sales.................................. $9,766
======
</TABLE>
No one customer accounted for 10% or more of consolidated sales in 1997.
NOTE 12 PENSION PLANS
The Company and its subsidiaries have various pension plans covering
substantially all of their employees. Benefits are based on either years of
service or years of service and average compensation during the years
immediately preceding retirement. It is the general policy of the Company to
fund its pension plans in conformity with requirements of applicable laws and
regulations.
Pension expense was $3.8 million for the twelve month period ended December
31, 1997, and includes amortization of prior service cost and transition
amounts for periods of 5 to 15 years. Pension expense also includes costs
related to retained pension liabilities of discontinued operations.
<TABLE>
<CAPTION>
FROM INCEPTION TO
DECEMBER 31, 1997
----------------------
(DOLLARS IN THOUSANDS)
<S> <C>
Service cost........................................ $ 1,037
Interest cost on projected benefit obligation....... 4,903
Actual return on plan assets........................ (8,559)
Net amortization and deferral....................... 3,896
-------
Net pension expense................................. $ 1,277
=======
</TABLE>
Assumptions used to determine the net pension expense of the Company-
sponsored defined benefit plans are as follows:
<TABLE>
<CAPTION>
1997
----
<S> <C>
Weighted average discount rate........................................ 7.5%
Rate of increase in compensation levels............................... 5.3%
Expected long-term rate of return on assets........................... 9.0%
</TABLE>
F-25
<PAGE>
COLFAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following table sets forth the funded status and amounts recognized in
the consolidated balance sheets for the defined benefit pension plans using
discount rates of 7.25% at December 31, 1997. The assumed rate of increase in
compensation levels was 5.3%.
<TABLE>
<CAPTION>
DECEMBER 31, 1997
-----------------------
ASSETS ACCUMULATED
EXCEED BENEFITS
ACCUMULATED EXCEED
BENEFITS ASSETS
----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Actuarial present value of benefit obligations:
Vested benefit obligation........................ $186,675 $ 7,417
-------- -------
Accumulated benefit obligation................... 191,421 7,849
-------- -------
Projected benefit obligation....................... 200,929 7,849
Plan assets at fair value.......................... 196,807 4,831
-------- -------
Plan assets in excess of (less than) projected
benefit obligation................................ (4,122) (3,018)
Unrecognized net (gain) or loss.................... -- --
Prior service cost not yet recognized in net
periodic pension cost............................. -- --
Unrecognized net (asset) obligation at transition.. -- --
Adjustment required to recognize minimum
liability......................................... -- --
-------- -------
Pension asset (liability) recognized in the balance
sheet............................................. $ (4,122) $(3,018)
======== =======
</TABLE>
Plan assets at December 31, 1997 are invested in fixed dollar guaranteed
investment contracts, U.S. Government obligations, fixed income investments,
guaranteed annuity contracts and equity securities whose values are subject to
fluctuations of the securities market.
The Company maintains two defined contribution plans covering substantially
all domestic, non-union employees. Eligible employees may generally contribute
from 1% to 15% of their compensation on a pre-tax basis. Company contributions
to the plans are based on 25% of the first 6% of each participant's pre-tax
contribution. The Company's expense from inception to December 31, 1997 was
$0.2 million.
NOTE 13 POSTRETIREMENT BENEFITS
In addition to providing pension benefits, the Company provides certain
health care and life insurance benefits for certain retired union employees.
The Company's unionized retiree benefits are determined by their individually
negotiated contracts. The Company's contribution toward the full cost of the
benefits is based on the retiree's age and continuous unbroken length of
service with the Company. The Company's policy is to pay the cost of medical
benefits as claims are incurred. Life insurance costs are paid as insured
premiums are due.
F-26
<PAGE>
COLFAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following tables set forth the plans' combined status reconciled with
the amounts included in the consolidated balance sheet:
<TABLE>
<CAPTION>
DECEMBER 31, 1997
------------------------
LIFE
MEDICAL INSURANCE
PLANS PLANS TOTAL
------- --------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Accumulated postretirement benefit obligation:
Retirees........................................ $7,165 $1,869 $9,034
Fully eligible active plan participants......... 76 49 125
Other active plan participants.................. 144 42 186
------ ------ ------
7,385 1,960 9,345
Plan assets....................................... -- -- --
Unrecognized prior service cost................... -- -- --
Unrecognized net gain............................. -- -- --
------ ------ ------
Postretirement benefit liability recognized in the
balance sheet.................................... $7,385 $1,960 $9,345
====== ====== ======
</TABLE>
The accrued postretirement benefits amount is classified as $0.9 million in
current liabilities and $8.4 million in long-term liabilities.
Net periodic postretirement benefit cost included the following components:
<TABLE>
<CAPTION>
FROM INCEPTION TO
DECEMBER 31, 1997
-----------------------
LIFE
MEDICAL INSURANCE
PLANS PLANS TOTAL
------- --------- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Service cost......................................... $ 2 $ 1 $ 3
Interest cost........................................ 190 51 241
Amortization of prior service cost................... -- -- --
Amortization of gain................................. -- -- --
---- --- ----
Net periodic postretirement benefit cost............. $192 $52 $244
==== === ====
</TABLE>
Actual negotiated health care premiums were used in calculating health care
costs. It is expected that the annual increase in medical costs will be 6.0%
from 1997 to 1998, grading down to 5% general medical inflation level in
future years. The health care cost trend rate assumption has a significant
effect on the amounts reported. For example, a 1% increase in the health care
trend rate would increase the accumulated postretirement benefit obligation at
December 31, 1997 by $0.6 million and the net periodic cost by $0.1 million
for the period from inception to December 31, 1997.
F-27
<PAGE>
COLFAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 14 LEASES
The Company leases certain manufacturing and office facilities, equipment,
and automobiles under long-term leases. Future minimum rental payments
required under operating leases of continuing operations that have initial or
remaining noncancellable lease terms in excess of one year, as of December 31,
1997, are:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
----------------------
<S> <C>
1998................................................ $ 4,975
1999................................................ 3,477
2000................................................ 2,532
2001................................................ 2,176
2002................................................ 1,973
Thereafter.......................................... 5,230
-------
Total minimum lease payments...................... $20,363
=======
</TABLE>
Total rental expense under operating leases charged against continuing
operations was $2.7 million during the four months ended December 31, 1997.
NOTE 15 INCENTIVE COMPENSATION AGREEMENTS
The Company has entered into incentive compensation agreements with certain
executives. The incentive compensation is based upon the growth in the value
(as defined in the agreements) of the Company from the date of each of the
agreements. Amounts earned under these agreements as of December 31, 1997 and
July 3, 1998 are not material.
NOTE 16 CONTINGENCIES
The Company's subsidiary, Imo, and one of Imo's subsidiaries are two of a
large number of defendants in a number of lawsuits brought in various
jurisdictions by approximately 6,000 claimants who allege injury caused by
exposure to asbestos. Although neither Imo nor any of its subsidiaries has
ever been a producer or direct supplier of asbestos, it is alleged that
certain of the industrial and marine products formerly sold by Imo and the
subsidiary named in such complaints contained components which contained
asbestos. In addition, Imo and the subsidiary are named in cases, involving
approximately 25,000 claimants, which have been "administratively dismissed"
by the U.S. District Court for the Eastern District of Pennsylvania. Cases
that have been "administratively dismissed" may be reinstated only upon a
showing to the court that (i) there is satisfactory evidence of an asbestos-
related injury; and (ii) there is probative evidence that the plaintiff was
exposed to products or equipment supplied by each individual defendant in the
case.
Imo and certain of its subsidiaries are defendants in a lawsuit filed in the
Superior Court of New Jersey which alleges that Imo and the subsidiaries
failed to disclose a "reasonably anticipated loss" pursuant to a contract of
sale of a former business. The complaint seeks damages in excess of $10.0
million and alleges among other matters breach of warranty and contract, fraud
and negligent misrepresentation. Although the matter is in the preliminary
stages of discovery, Imo believes that there are legal and factual defenses to
the claims and intends to defend the action vigorously.
Imo is a defendant in a lawsuit brought in the Superior Court of New Jersey
that alleges failure in performance of equipment sold in 1986 by a former
business of Imo. The complaint, filed on April 3, 1998, seeks damages in
excess of $17.0 million. Few of the facts underlying the action are known by
Imo, however it believes there are legal and factual defenses to the claim and
intends to defend the action vigorously.
F-28
<PAGE>
COLFAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In addition to the potential claims noted above, Imo has several contractual
and warranty claims, arising primarily from discontinued or divested
operations, for which Imo's management believes there are significant legal
and factual defenses, which they intend to pursue vigorously.
In addition to the litigation and matters noted above, the Company and its
subsidiaries are from time to time subject to, and are presently involved in,
litigation or other legal proceedings arising out of the ordinary course of
its business. These matters primarily involve claims for damages arising out
of the use of the subsidiaries' products, some of which include claims for
punitive as well as compensatory damages. The Company's subsidiaries are also
involved in proceedings with respect to environmental matters, including sites
where the subsidiaries have been identified as a potentially responsible party
under federal and state environmental laws and regulations.
With respect to the litigation and claims described in the preceding
paragraphs, management of the Company believes that its subsidiaries will
either prevail, have adequate insurance coverage or have established
appropriate reserves to cover potential liabilities. There can be no
assurance, however, as to the ultimate outcome of any of these matters, and if
all or substantially all of these legal proceedings were to be determined
adversely to such subsidiary, there could be a material adverse effect on the
financial condition of the Company, or such subsidiary.
F-29
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and Board of Directors of Imo Industries Inc:
We have audited the accompanying consolidated statements of income,
shareholders' equity and cash flows of Imo Industries Inc. (a Delaware
corporation) and subsidiaries for the period from January 1, 1997 through
August 28, 1997. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the results of operations and cash
flows of Imo Industries Inc. and subsidiaries for the period January 1, 1997,
through August 28, 1997, in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Richmond, Virginia
March 20, 1998
F-30
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors,
Imo Industries Inc.
We have audited the accompanying consolidated balance sheet of Imo
Industries Inc. and subsidiaries as of December 31, 1996 and the related
consolidated statements of income, shareholders' equity, and cash flows for
each of the two years in the period ended December 31, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Imo
Industries Inc. and subsidiaries at December 31, 1996, and the consolidated
results of their operations and their cash flows for each of the two years in
the period ended December 31, 1996, in conformity with generally accepted
accounting principles.
Ernst & Young LLP
Princeton, New Jersey
February 19, 1997, except for Notes 2,
3 and 15 as to which the dates are August 28,
1997, February 27, 1998 and April 3, 1998,
respectively
F-31
<PAGE>
IMO INDUSTRIES INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(DOLLARS IN THOUSANDS, EXCEPT PAR VALUE)
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1996* 1997
------------ -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents............................ $ 1,419 $ 308
Trade accounts and notes receivable, less allowance
of $1,346 in 1996 and $1,366 in 1997................ 47,088 47,568
Inventories--net..................................... 68,465 70,917
Deferred income taxes................................ 9,165 8,871
Net assets of discontinued operations--current....... 11,749 8,562
Prepaid expenses and other current assets............ 2,992 8,806
--------- ---------
TOTAL CURRENT ASSETS............................... 140,878 145,032
--------- ---------
Property, plant and equipment
Land................................................. 7,757 7,301
Buildings and improvements........................... 34,068 33,583
Machinery and equipment.............................. 94,146 91,370
--------- ---------
135,971 132,254
Less allowances for depreciation and amortization...... (69,225) (69,100)
--------- ---------
Net property, plant and equipment...................... 66,746 63,154
Intangible assets, principally goodwill--net........... 58,670 57,262
Investments in and advances to unconsolidated
companies............................................. 5,704 4,937
Net assets of discontinued operations--noncurrent...... 36,927 30,839
Other assets........................................... 21,997 15,393
--------- ---------
TOTAL ASSETS....................................... $ 330,922 $ 316,617
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable........................................ $ 21,998 $ 31,437
Trade accounts payable............................... 18,765 21,519
Accrued expenses and other liabilities............... 28,379 37,666
Accrued costs related to discontinued operations..... 8,586 5,574
Income taxes payable................................. 7,359 6,579
Current portion of long-term debt.................... 11,666 15,961
--------- ---------
TOTAL CURRENT LIABILITIES.......................... 96,753 118,736
--------- ---------
Long-term debt......................................... 245,007 222,916
Deferred income taxes.................................. 3,890 3,632
Accrued postretirement benefits--long-term............. 17,418 17,212
Accrued pension expense and other liabilities.......... 24,241 23,037
--------- ---------
TOTAL LIABILITIES.................................. 387,309 385,533
--------- ---------
SHAREHOLDERS' EQUITY (DEFICIT)
Preferred stock: $1.00 par value; authorized and
unissued 5,000,000 shares........................... -- --
Common stock: $1.00 par value; authorized 25,000,000
shares; issued 18,796,897 and 18,799,397............ 18,797 18,799
Additional paid-in capital............................. 80,466 80,471
Retained earnings (deficit)............................ (134,962) (145,375)
Cumulative foreign currency translation adjustments.... 554 (1,608)
Minimum pension liability adjustment................... (2,503) (2,503)
Unearned compensation.................................. (719) (680)
Treasury stock at cost--1,672,788 shares............... (18,020) (18,020)
--------- ---------
TOTAL SHAREHOLDERS' EQUITY (DEFICIT)............... (56,387) (68,916)
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
(DEFICIT)....................................... $ 330,922 $ 316,617
========= =========
</TABLE>
- -------
* Restated to conform to 1997 presentation.
The accompanying notes are an integral part of these consolidated financial
statements.
F-32
<PAGE>
IMO INDUSTRIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SIX MONTHS EIGHT MONTHS
YEAR ENDED DECEMBER 31, ENDED ENDED
------------------------ JUNE 30, AUGUST 28,
1995* 1996* 1997 1997
----------- ----------- ----------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
NET SALES................... $ 297,114 $ 309,511 $ 160,232 $ 210,151
Cost of goods sold.......... 212,787 220,589 109,807 145,276
----------- ----------- ---------- ----------
GROSS PROFIT................ 84,327 88,922 50,425 64,875
Selling, general and
administrative expense..... 60,457 62,514 35,786 46,724
Research and development
expenses................... 3,930 4,455 2,719 3,636
Unusual items............... 8,124 17,440 10,500 26,344
----------- ----------- ---------- ----------
INCOME (LOSS) FROM
OPERATIONS................. 11,816 4,513 1,420 (11,829)
Interest expense............ 22,648 25,981 13,611 18,190
Interest income............. (2,169) (1,450) (806) (921)
Other (income) expense...... (370) 355 302 513
Equity in loss (income) of
unconsolidated companies... (302) 32 400 386
----------- ----------- ---------- ----------
LOSS FROM CONTINUING
OPERATIONS BEFORE INCOME
TAXES AND EXTRAORDINARY
ITEM....................... (7,991) (20,405) (12,087) (29,997)
Income taxes (benefit):
Current................... 1,831 2,663 1,036 1,254
Deferred.................. (17,000) 10,000 -- --
----------- ----------- ---------- ----------
Total Income Taxes
(Benefit).............. (15,169) 12,663 1,036 1,254
----------- ----------- ---------- ----------
Income (Loss) From
Continuing Operations
Before Extraordinary item.. 7,178 (33,068) (13,123) (31,251)
Discontinued operations:
Income (loss) from
operations............... 5,351 (8,705) 2,710 2,372
Estimated (loss) gain on
disposal................. 21,625 (8,142) -- --
----------- ----------- ---------- ----------
TOTAL INCOME (LOSS) FROM
DISCONTINUED
OPERATIONS............. 26,976 (16,847) 2,710 2,372
----------- ----------- ---------- ----------
Extraordinary Item--Loss on
Extinguishment of Debt..... (4,444) (8,455) -- --
----------- ----------- ---------- ----------
Net Income (Loss)........... $ 29,710 $ (58,370) $ (10,413) $ (28,879)
=========== =========== ========== ==========
Earnings (loss) per share,
basic and diluted:
Continuing operations
before extraordinary
item..................... $ .42 $ (1.93) $ (.77) $ (1.82)
Discontinued operations... 1.58 (.99) 0.16 0.14
Extraordinary item........ (.26) (0.49) -- --
----------- ----------- ---------- ----------
Net income (loss)......... $ 1.74 $ (3.41) $ (.61) $ (1.68)
----------- ----------- ---------- ----------
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING......... 17,048,622 17,100,359 17,125,716 17,126,192
=========== =========== ========== ==========
</TABLE>
- --------
* Restated to conform to 1997 presentation.
The accompanying notes are an integral part of these consolidated financial
statements.
F-33
<PAGE>
IMO INDUSTRIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
CUMULATIVE
FOREIGN MINIMUM
ADDITIONAL RETAINED CURRENCY PENSION
COMMON PAID-IN EARNINGS TRANSLATION LIABILITY UNEARNED TREASURY
STOCK CAPITAL (DEFICIT) ADJUSTMENTS ADJUSTMENT COMPENSATION STOCK TOTAL
------- ---------- --------- ----------- ---------- ------------ -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT JANUARY 1,
1995*.................. $18,680 $79,789 $(106,302) $(1,549) $ (853) $ -- $(18,020) $(28,255)
Net income.............. -- -- 29,710 -- -- -- -- 29,710
Foreign currency
translation
adjustments............ -- -- -- 2,586 -- -- -- 2,586
Minimum pension
liability adjustment... -- -- -- -- (948) -- -- (948)
Shares issued under
stock option plan...... 73 462 -- -- -- -- -- 535
Restricted shares issued
under the equity
incentive plans........ 3 24 -- -- -- -- -- 27
------- ------- --------- ------- -------- ------ -------- --------
BALANCE AT DECEMBER 31,
1995*.................. 18,756 80,275 (76,592) 1,037 (1,801) -- (18,020) 3,655
Net income (loss)....... -- -- (58,370) -- -- -- -- (58,370)
Foreign currency
translation
adjustments............ -- -- -- (483) -- -- -- (483)
Minimum pension
liability adjustment... -- -- -- -- (702) -- -- (702)
Restricted shares issued
under the equity
incentive plans........ 41 191 -- -- -- (166) -- 66
Other................... -- -- -- -- -- (553) -- (553)
------- ------- --------- ------- -------- ------ -------- --------
BALANCE AT DECEMBER 31,
1996*.................. 18,797 80,466 (134,962) 554 (2,503) (719) (18,020) (56,387)
Net income (loss)....... -- -- (28,879) -- -- -- -- (28,879)
Foreign currency
translation
adjustments............ -- -- -- (3,346) -- -- -- (3,346)
Restricted shares issued
under the equity
incentive plans........ 4 11 -- -- -- 48 -- 63
------- ------- --------- ------- -------- ------ -------- --------
BALANCE AT AUGUST 28,
1997................... $18,801 $80,477 $(163,841) $(2,792) $ (2,503) $ (671) $(18,020) $(88,549)
======= ======= ========= ======= ======== ====== ======== ========
</TABLE>
- --------
* Restated to conform to 1997 presentation.
The accompanying notes are an integral part of these consolidated financial
statements.
F-34
<PAGE>
IMO INDUSTRIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS EIGHT MONTHS
YEAR ENDED DECEMBER 31, ENDED ENDED
------------------------ JUNE 30, AUGUST 28,
1995* 1996* 1997 1997
----------- ----------- ----------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss).......... $ 29,710 $ (58,370) $(10,413) $(28,879)
Adjustments to reconcile
net income (loss) to net
cash used by continuing
operations:
Discontinued operations.. (5,351) 16,847 (2,710) (2,372)
Depreciation............. 10,287 10,123 5,093 6,747
Amortization............. 3,095 3,275 1,379 1,867
Provision (benefit) for
deferred income taxes... (17,000) 10,000 199 --
Extraordinary item....... 4,444 8,455 -- --
Gain on sale of segment.. (21,625) -- -- --
Unusual items............ 8,124 17,440 10,500 26,344
Other.................... 94 1,592 397 750
Other changes in
operating assets and
liabilities:
Accounts and notes
receivable............. 566 (5,440) (679) 1,730
Inventories............. (6,253) 4,300 (2,452) (1,930)
Accounts payable and
accrued expenses....... (14,078) (16,009) 1,291 (9,794)
Other operating assets
and liabilities........ (3,338) 3,038 (934) (3,855)
----------- ----------- -------- --------
Net cash (used by)
provided by continuing
operations.............. (11,325) (4,749) 1,671 (9,392)
Net cash (used by)
provided by discontinued
operations.............. (20,008) (10,353) (1,260) (1,377)
----------- ----------- -------- --------
NET CASH (USED BY)
PROVIDED BY OPERATING
ACTIVITIES........... (31,333) (15,102) 411 (10,769)
----------- ----------- -------- --------
INVESTING ACTIVITIES
Net proceeds from sale of
businesses and sales of
property, plant and
equipment................. 174,920 12,570 15,045 25,235
Purchases of property,
plant and equipment....... (13,155) (10,032) (3,338) (4,555)
Acquisitions, net of cash
acquired.................. (5,247) (7,218) -- --
Net investing activities of
discontinued operations... (10,858) (8,072) (2,205) (3,692)
Other...................... (133) 63 581 141
----------- ----------- -------- --------
NET CASH PROVIDED BY
(USED BY) INVESTING
ACTIVITIES........... 145,527 (12,689) 10,083 17,129
----------- ----------- -------- --------
FINANCING ACTIVITIES
Increase in notes payable.. 23,607 6,159 9,667 18,786
Proceeds from long-term
borrowings................ 5,257 266,895 119 119
Principal payments on long-
term debt................. (166,196) (233,350) (20,048) (25,792)
Payment of debt financing
costs..................... (401) (14,660) (384) (384)
Proceeds from stock options
exercised................. 535 -- -- --
Other...................... 59 89 (443) (102)
----------- ----------- -------- --------
NET CASH (USED BY)
PROVIDED BY FINANCING
ACTIVITIES........... (137,139) 25,133 (11,089) (7,373)
----------- ----------- -------- --------
Effect of exchange rate
changes on cash........... 222 80 (516) (253)
----------- ----------- -------- --------
(DECREASE) INCREASE IN CASH
AND CASH EQUIVALENTS...... (22,723) (2,578) (1,111) (1,266)
Cash and cash equivalents
at beginning of the
period.................... 26,720 3,997 1,419 1,419
----------- ----------- -------- --------
CASH AND CASH EQUIVALENTS
AT END OF THE PERIOD...... $ 3,997 $ 1,419 $ 308 $ 153
=========== =========== ======== ========
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION:
Cash paid during the
period for:
Interest............... $ 39,519 $ 36,664 $ 16,544 $ 19,564
Income taxes........... $ 6,341 $ 4,798 $ 2,029 $ 2,006
</TABLE>
- -------
* Restated to conform to 1997 presentation.
The accompanying notes are an integral part of these consolidated financial
statements.
F-35
<PAGE>
IMO INDUSTRIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 SIGNIFICANT ACCOUNTING POLICIES
Consolidation: The consolidated financial statements include the accounts of
Imo Industries Inc. (the "Company") and its majority-owned subsidiaries.
Significant intercompany transactions have been eliminated in consolidation.
The Company uses the equity method to account for investments in corporations
in which it does not own a majority voting interest but has the ability to
exercise significant influence over operating and financial policies.
Translation of Foreign Currencies: Assets and liabilities of international
operations are translated into U.S. dollars at current exchange rates. Income
and expense accounts are translated into U.S. dollars at average rates of
exchange prevailing during the year. Translation adjustments are reflected as
a separate component of shareholders' equity.
Cash Equivalents: Cash equivalents include investments in government
securities funds and certificates of deposit. Investment periods are generally
less than one month.
Inventories: Inventories are carried at the lower of cost or market, cost
being determined principally on the basis of standards which approximate
actual costs on the first-in, first-out method, and market being determined by
net realizable value. Appropriate consideration is being given to
deterioration, obsolescence and other factors in evaluating net realizable
value.
Revenue Recognition: Revenues are recorded generally when the Company's
products are shipped.
Depreciation and Amortization: Depreciation and amortization of plant and
equipment are computed principally by the straight-line method based on the
estimated useful lives of the assets as follows: buildings, 10 to 40 years and
machinery and equipment, 3 to 15 years.
Impact of Recently Issued Accounting Standards: In June 1997, the FASB
issued Statement No. 130, "Reporting Comprehensive Income," which establishes
standards for reporting and display of comprehensive income and its components
in a full set of general purpose financial statements. The impact on the
Company's financial statements compared to information presently available is
not expected to be significant. Also in June 1997, the FASB issued Statement
No. 131, "Disclosures about Segments of an Enterprise and Related
Information," which requires public companies to report financial and
descriptive information about operating segments. The statement intends to
align reportable segments and certain disclosures with how the operations are
managed internally. The impact of this statement on the Company's disclosure
is not expected to be significant. In February 1998, the FASB issued Statement
No. 132, "Employers' Disclosures about Pensions and Other Postretirement
Benefits," which adds disclosure requirements on changes in the benefit
obligations and fair values of plan assets, and eliminates certain disclosures
that are no longer useful. These statements will be adopted by the Company in
fiscal year 1998.
Intangible Assets: Goodwill of companies acquired is being amortized on the
straight-line basis over 40 years. The carrying value of goodwill is reviewed
when indicators of impairment are present, by evaluating future cash flows of
the associated operations to determine if impairment exists. Goodwill related
to continuing operations at December 31, 1996 was $48.2 million, net of
respective accumulated amortization of $12.3 million. Patents are amortized
over the shorter of their legal or estimated useful lives.
Management Estimates: The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements, and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
F-36
<PAGE>
IMO INDUSTRIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Restatements: The Consolidated Financial Statements and the notes thereto,
have been restated to reflect the Company's Roltra Morse and Instrumentation
business segments in discontinued operations. Certain prior year amounts have
been reclassified to conform to the current year presentation.
NOTE 2 ACQUISITION BY COLFAX CORPORATION
On August 28, 1997, Colfax Corporation ("Acquisition Corp.") acquired
approximately 93% of the Company's outstanding shares of common stock pursuant
to its tender offer for all outstanding shares of the common stock of the
Company (the "Acquisition"). The consideration paid was $7.05 per share of
common stock or $112.1 million in total.
NOTE 3 DISCONTINUED OPERATIONS
In August 1997 and in February 1998, the Company announced that the Board of
Directors had approved plans to sell its Instrumentation and Roltra Morse
businesses, respectively. In 1995, the Company sold its Turbomachinery and
most of its Electro-Optical Systems businesses, which sales were approved by
the Board of Directors in August 1994 and in January 1994, respectively. In
accordance with APB Opinion No. 30, the disposals of these business segments
have been accounted for as discontinued operations and, accordingly, their
operating results have been segregated and reported as Discontinued Operations
in the accompanying Consolidated Statements of Income.
Discontinued operations include management's best estimates of amounts
expected to be realized at the time of disposal. The amounts the Company will
ultimately realize could differ materially in the near term from the amounts
used to determine the gain or loss on disposal of the discontinued operations.
Roltra Morse
On February 27, 1998, the Company completed the sale of its Roltra Morse
business to Magna International Inc. for cash proceeds of $30.0 million, plus
the assumption of Roltra Morse's debt. The sale price approximated the
recorded net book value of the business.
Instrumentation
On August 29, 1997, the Company completed the sale of its Instrumentation
business segment to Danaher Corporation for approximately $85.0 million, which
approximated its net book value after the Acquisition. The majority
shareholders of the Company are also substantial shareholders of Danaher
Corporation. The purchase price was determined on the basis of arms length
negotiations between the Company and Danaher Corporation. A portion of the
proceeds was used to reduce domestic senior debt by $68.1 million.
Electro-Optical Systems
On April 28, 1997, the Company completed the sale of the Varo Electronic
Systems division to a small defense contractor for $12.0 million, which was
used to reduce senior domestic debt. The sale of this business completed the
disposal of the Electro-Optical Systems business. On January 3, 1995, the
Company completed the sale of its Baird Analytical Instruments Division to
Thermo Instruments Systems Inc. for approximately $12.3 million, which was
used to repay a portion of the Company's domestic senior debt outstanding
under a previous credit facility. On June 2, 1995, the Company completed the
sale of the Optical Systems and Ni-Tec divisions of Varo Inc. and the Optical
Systems division of Baird Corporation, which represented the major part of its
Electro-Optical Systems business, to Litton Industries for approximately book
value. The proceeds were used to reduce amounts outstanding under its previous
credit facility by $8.0 million and to redeem $40.0 million of the Company's
then outstanding 12.25% senior subordinated debentures.
F-37
<PAGE>
IMO INDUSTRIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company retained certain liabilities related to the Electro-Optical
Systems business of approximately $24.0 million. At December 31, 1993, the
Company provided for estimated losses on disposal of this segment in the
amount of $168.0 million, which included a provision for anticipated operating
losses prior to disposal. During 1995, the Company recognized an additional
$13.3 million loss on disposal. The additional loss included $6.8 million
related to the resolution of contingencies associated with the sale of the
business and charges of $6.5 million recorded primarily to write down
remaining non-operating real estate to net realizable value. During 1996, the
Company recorded an additional $5.2 million loss on disposal ($0.8 million in
the fourth quarter), which related to changes in estimates on legal and other
reserve requirements associated with retained liabilities of this business. In
the third quarter of 1997, the Company recorded an additional $3.4 million
loss on disposal related to changes in estimates on certain reserve
requirements associated with the retained liabilities of this business.
Turbomachinery
On January 17, 1995, the Company completed the sale of its Delaval Turbine
and TurboCare divisions and its 50% interest in Delaval-Stork, to Mannesmann
Demag. The final purchase price was $119.0 million, of which $109.0 million
was received at closing, with the remainder earning interest to the Company
and to be received at specified future contract dates subject to adjustment as
provided in the agreement. It is management's expectation that there will be
no further adjustment to the purchase price. A portion of the proceeds was
used by the Company to pay off its domestic senior debt and $40.0 million of
its then outstanding 12.25% senior subordinated debentures.
The Company retained certain liabilities related to the Turbomachinery
business of approximately $33.0 million. As a result of the sale of this
business in 1995, the Company recognized an estimated gain on disposal of
$35.0 million, net of income taxes of $5.2 million. During 1996, the Company
recorded additional losses on disposal of $2.9 million. The additional losses
included charges related to changes in estimates on legal and other reserve
requirements associated with retained liabilities of this business.
The Company reviews quarterly the assumptions used in determining the
estimated gain or loss from discontinued operations and the adequacy of the
recorded liabilities. Management believes that the recorded amount of
estimated liabilities related to the Discontinued Operations at December 31,
1996 is adequate, however, the amounts estimated may differ from actual
results.
F-38
<PAGE>
IMO INDUSTRIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Net assets and liabilities of the Discontinued Operations consist of the
following:
<TABLE>
<CAPTION>
DECEMBER 31,
1996
------------
(DOLLARS IN
THOUSANDS)
<S> <C>
CURRENT ASSETS:
Cash...................................... $ 3,125
Receivables............................... 33,816
Inventories............................... 33,705
Other current assets...................... 6,762
-------
77,408
-------
CURRENT LIABILITIES:
Notes payable............................. 21,340
Trade accounts payable.................... 25,690
Other current liabilities................. 18,629
-------
65,659
-------
NET CURRENT ASSETS (LIABILITIES)............ 11,749
-------
LONG-TERM ASSETS:
Property.................................. 35,053
Other long-term assets.................... 21,490
-------
56,543
-------
LONG-TERM LIABILITIES....................... 19,616
-------
NET LONG-TERM ASSETS........................ 36,927
-------
NET ASSETS.................................. $48,676
=======
</TABLE>
Net assets related to the Roltra Morse and Turbomachinery businesses are
$11.3 million and $0.5 million as of December 31, 1996. Net assets related to
the Instrumentation business are $22.5 million as of December 31, 1996. The
Electro-Optical Systems business contributed $14.4 million of net assets as of
December 31, 1996.
Total long-term debt of the Discontinued Operations amounted to $11.7
million as of December 31, 1996. Of these amounts, $3.4 million represents the
current portions of long-term debt as of December 31, 1996.
A condensed summary of operations for the Discontinued Operations is as
follows:
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED EIGHT MONTHS
------------------------ JUNE 30, ENDED
1995 1996 1997 AUGUST 28, 1997
(DOLLARS IN THOUSANDS) ----------- ----------- ----------- ---------------
(UNAUDITED)
<S> <C> <C> <C> <C>
NET SALES............... $ 235,452 $ 181,948 $95,098 $117,730
INCOME (LOSS) FROM
OPERATIONS BEFORE
INCOME TAXES AND
MINORITY INTEREST...... $ 5,882 $ (7,963) $ 3,282 $ 3,025
INCOME TAXES............ 1,256 1,037 571 664
MINORITY INTEREST....... (725) (295) 1 (11)
----------- ----------- ------- --------
INCOME (LOSS) FROM
OPERATIONS............. $ 5,351 $ (8,705) $ 2,710 $ 2,372
=========== =========== ======= ========
</TABLE>
F-39
<PAGE>
IMO INDUSTRIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The income (loss) from operations of the Discontinued Operations for the six
months ended June 30, 1997, eight months ended August 28, 1997, and for the
years ended 1996 and 1995 includes allocated interest expense of $1.4 million,
$2.4 million, $4.5 million, and $10.3 million, respectively. Allocated
interest expense includes interest on debt of the Discontinued Operations to
be assumed by the buyers of these operations, and an allocation of corporate
interest expense to the Discontinued Operations based on the ratio of net
assets to be sold to the sum of the Company's consolidated net assets, if
positive, plus consolidated debt.
Roltra Morse
The Roltra Morse business had operating losses of $2.3 million, $3.0 million
and $13.8 million for the six months ended June 30, 1997, the eight months
ended August 28, 1997 and the year ended December 31, 1996, respectively, and
operating income of $0.5 million in 1995.
The 1997 operating loss included an unusual charge of $0.7 million due to
fees incurred related to the previously failed attempt to sell the Roltra
Morse business. The operating loss in 1996 included unusual charges of $6.2
million consisting of restructuring measures taken to reduce operating
expenses and goodwill write-offs. Included in the 1995 operating income was an
unusual charge of $1.2 million related to the shutdown of a plant in southern
Italy and the related loss on the sale of that building.
Instrumentation
The Instrumentation business had income from operations of $5.1 million,
$5.3 million, $5.1 million and $4.9 million for the six months ended June 30,
1997, the eight months ended August 28, 1997, and the years ended December 31,
1996 and 1995, respectively.
Operating income in both 1996 and 1995 included unusual charges of $0.9
million related to restructuring of operations in Europe.
Electro-Optical Systems
The Electro-Optical Systems business had income from operations of $0.8
million, $0.8 million and $0.4 million for six months ended June 30, 1997, the
eight months ended August 28, 1997 and the year ended December 31, 1996,
respectively. The income in 1997 and 1996 offset increases in estimated
reserve requirements in those respective periods. The 1995 loss of $1.0
million, including allocated interest, was charged against the reserve for
anticipated losses previously established by the Company.
NOTE 4 RESTRUCTURING PLANS
Asset Sales
The Company divested its Turbomachinery and substantially all of its
Electro-Optical Systems businesses in 1995. The Company used the proceeds, net
of related expenses, to repay domestic senior debt in the amount of $89.7
million and to redeem $80.0 million of its then outstanding 12.25% senior
subordinated debentures. During 1996, the Company completed the sales of five
of its non-operating real estate holdings for net proceeds of $8.6 million.
The proceeds were used to repay the Company's domestic senior debt.
On April 28, 1997 the Company completed the sale of its Varo Electronic
Systems division, the remaining portion of its former Electro-Optical Systems
business. Proceeds of $12.0 million were used to reduce senior domestic debt
under its previous credit agreement.
F-40
<PAGE>
IMO INDUSTRIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
On August 29, 1997 the Company completed the sale of its Instrumentation
business segment to Danaher Corporation for proceeds of $85.0 million. The
Company used a portion of the proceeds to reduce domestic senior debt by $68.1
million.
During the eight months ended August 28, 1997, the Company completed the
sales of certain of its non-operating real estate for total proceeds of $14.1
million. Net proceeds were used to repay domestic senior debt.
On February 27, 1998, the Company sold its Roltra Morse business segment to
Magna International for $30.0 million in cash, plus certain assumed
liabilities. Net proceeds have been used by the Company to reduce domestic
senior debt.
Cost Reduction Programs
1997 PROGRAM
In connection with the Acquisition, the Company implemented a cost reduction
program. The cost of this program is estimated to be $18.6 million and was
accrued for in accordance with the purchase method of accounting. It is
comprised of $10.5 million related to severance and termination benefits as a
result of headcount reductions at the Company's corporate headquarters. In
addition, $1.7 million, $1.2 million, and $5.2 million of costs are estimated
for the Company's Power Transmission, Pumps, and Morse Controls segments,
respectively, related to severance and termination benefits resulting from
headcount reductions and the consolidation of certain manufacturing
facilities.
The 1997 cost reduction program reduced expenses by approximately $3.0
million in the 1997 period subsequent to the Acquisition and is expected to
reduce expenses by approximately $19.5 million in 1998 and $20.6 million
annually thereafter. The program includes a reduction of 237 employees, or
10.3% of the total number of Company employees in continuing operations at the
date of the Acquisition. The required cash outlay related to this program was
$8.1 million in 1997 and the expected cash requirements during 1998 are $10.5
million.
1996 PROGRAM
The fourth quarter of 1996 includes a charge of $0.3 million to continuing
operations for restructuring measures taken at the Company's Morse Germany
operation.
1995 PROGRAM
In the fourth quarter of 1995, the Company recorded a charge to continuing
operations of $3.1 million, including severance and other expenses related to
a company-wide program to reduce general and administrative costs. This
program included a reduction of 56 employees, or 2.4% of the total number of
Company employees in continuing operations at the end of 1995, including a
reduction of the corporate headquarters staff by 20%. The program reduced
general and administrative expenses by approximately $2.7 million and $3.2
million in 1996 and 1997, respectively, and is expected to reduce general and
administrative expenses from the 1995 level by approximately $4.1 million in
1998 and annually thereafter. The required cash outlays related to this
program were $0.4 million, $2.4 million, and $0.3 million in 1995, 1996 and
1997, respectively.
F-41
<PAGE>
IMO INDUSTRIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 5 INVENTORIES
Inventories are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, JUNE 30, AUGUST 28,
1995 1996 1997 1997
(DOLLARS IN THOUSANDS) ------------ ------------ ----------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Finished products......... $30,521 $ 23,537 $ 22,941 $22,335
Work in process........... 26,451 25,828 27,163 27,583
Materials and supplies.... 15,906 21,810 22,412 21,532
------- -------- -------- -------
72,878 71,175 72,516 71,450
Less customers' progress
payments................. 689 2,710 1,599 1,055
------- -------- -------- -------
$72,189 $ 68,465 $ 70,917 $70,395
======= ======== ======== =======
</TABLE>
NOTE 6 ACCRUED EXPENSES AND OTHER LIABILITIES
Accrued expenses and other liabilities consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1996
------------
(DOLLARS IN
THOUSANDS)
<S> <C>
Accrued product warranty costs.............. $ 2,007
Accrued litigation and claims costs......... 2,132
Payroll and related items................... 12,109
Accrued interest payable.................... 3,641
Accrued restructuring costs................. 445
Accrued divestiture costs................... 2,460
Other....................................... 5,585
-------
$28,379
=======
</TABLE>
NOTE 7 UNUSUAL ITEMS
1997
The first eight months of 1997 included an unusual charge of $10.5 million
relating to the judgment against the Company in favor of International
Insurance Company ("International"), awarding International $11.2 million,
plus interest from March 1995. The Company recorded a charge to income in the
first quarter of 1997 of $12.9 million as an unusual item, which represented
the amount of the judgment plus interest to date. On July 15, 1997, the
Company agreed to settle with International by dropping an appeal and paid a
reduced amount on July 30, 1997 in complete settlement of all outstanding
amounts. As a result of the settlement, the Company recorded a favorable
adjustment of $2.4 million as an unusual item in the second quarter of 1997.
In addition, the Company recorded unusual charges of $15.8 million in August
1997. These charges, which related to the sale of the Company, represented
indirect and general expenses incurred by the Company in connection with the
sale process and were paid in 1997.
F-42
<PAGE>
IMO INDUSTRIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
1996
During the fourth quarter of 1996, the Company recognized unusual charges of
$17.4 million ($1.02 per share) in income from continuing operations. These
charges include $0.3 million related to the restructuring and cost reduction
programs within the Company's operating units, and $17.1 million related to
the write-down of certain businesses being held for sale and certain non-
operating real estate being held for sale to net realizable value.
1995
During the fourth quarter of 1995, the Company recognized unusual charges of
$8.1 million ($0.48 per share) in income from continuing operations. These
charges include $3.1 million in severance benefits and other expenses related
to a Company-wide program to reduce general and administrative costs (See Note
4) and $5.0 million related to the write-down of certain non-operating real
estate to net realizable value.
NOTE 8 INCOME TAXES
The components of income tax expense (benefit) from continuing operations
are:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, EIGHT MONTHS
------------------------- ENDED
1995 1996 AUGUST 28, 1997
------------ ----------- ---------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Current:
Federal........................ $ -- $ -- $ --
Foreign........................ 1,528 2,386 994
State.......................... 303 277 260
------------ ----------- ------
1,831 2,663 1,254
------------ ----------- ------
Deferred:
Federal........................ (17,000) 10,000 --
Foreign and State.............. -- -- --
------------ ----------- ------
(17,000) 10,000 --
------------ ----------- ------
$ (15,169) $ 12,663 $1,254
============ =========== ======
</TABLE>
F-43
<PAGE>
IMO INDUSTRIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components
of the Company's deferred tax assets and liabilities as of December 31, 1996
are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1996
-------------------------
CURRENT LONG-TERM
----------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Postretirement benefit obligation............. $ 595 $ 6,367
Expenses not currently deductible............. 21,516 7,185
Net operating loss carryover.................. -- 37,269
Tax credit carryover.......................... -- 2,133
----------- -----------
Total deferred tax assets................... 22,111 52,954
Valuation allowance for deferred tax assets..... (12,946) (31,119)
----------- -----------
Net deferred tax assets......................... 9,165 21,835
----------- -----------
Deferred tax liabilities:
Tax over book depreciation.................... -- 18,289
Other......................................... -- 7,436
----------- -----------
Total deferred tax liabilities.............. -- 25,725
----------- -----------
Net deferred tax assets (liabilities)........... $ 9,165 $ (3,890)
=========== ===========
</TABLE>
The components of income (loss) from continuing operations before income
taxes and extraordinary item are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, EIGHT MONTHS
------------------------ ENDED
1995 1996 AUGUST 28, 1997
----------- ----------- ---------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
United States.................... $ (14,722) $ (22,663) $(29,023)
Non-U.S.......................... 6,731 2,258 (974)
----------- ----------- --------
$ (7,991) $ (20,405) $(29,997)
=========== =========== ========
</TABLE>
U.S. income tax expense (benefit) at the statutory tax rate is reconciled
below to the overall U.S. and non-U.S. income tax expense (benefit).
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, EIGHT MONTHS
------------------------- ENDED
1995 1996 AUGUST 28, 1997
------------ ----------- ---------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Tax at U.S. federal income tax
rate........................... $ (2,797) $ (7,142) $(10,499)
State taxes, net of federal
income tax effect.............. 197 188 169
Impact of non-U.S. tax rates and
credits........................ (828) (331) (660)
Net U.S. tax on distributions of
current non-U.S. earnings...... 586 755 --
Goodwill amortization and write-
off............................ 643 4,276 222
Change in valuation reserve..... (21,685) 12,390 7,472
Nondeductible foreign losses.... -- 1,914 1,017
Other........................... 8,715 613 3,533
------------ ----------- --------
Income tax expense (benefit).... $ (15,169) $ 12,663 $ 1,254
============ =========== ========
</TABLE>
F-44
<PAGE>
IMO INDUSTRIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company has net operating loss carryforwards of approximately $101.0
million expiring in years 2002 through 2012, and minimum tax credits of
approximately $2.8 million, which may be carried forward indefinitely.
Included in the net operating loss carryforwards are foreign tax credits of
approximately $7.4 million, expiring through 2001, which, for financial and
tax reporting purposes, are reflected as deductible foreign taxes. These
carryforwards are available to offset future federal taxable income, subject
to the Section 382 limitations.
The Company establishes valuation allowances in accordance with the
provisions of FASB Statement No. 109, "Accounting for Income Taxes." The
Company continually reviews the adequacy of the valuation allowance and is
recognizing these benefits only as reassessment indicates that it is more
likely than not that the benefits will be realized.
In 1995, the Company reduced the valuation allowance applied against the net
operating loss carryforwards by $17.0 million based upon reasonable and
prudent tax planning strategies and future income projections including the
planned sale of Roltra Morse. As a result of withdrawing Roltra Morse from
potential sale in 1996, the Company recorded a provision of $10.0 million
against deferred tax benefits previously recognized based on an anticipated
gain on this sale. This reduced the deferred tax benefit to $5.3 million at
December 31, 1996, to a level where management believes that it is more likely
than not that the tax benefit will be realized. The total amount of future
taxable income in the U.S. necessary to realize the asset is approximately
$14.5 million. Although the Company has a history of prior losses, these
losses were primarily attributable to divested businesses and unusual items.
The remaining valuation allowance is necessary due to the uncertainty of
future income estimates.
NOTE 9 NOTES PAYABLE AND LONG-TERM DEBT
On August 29, 1997, the Company completed the refinancing of its domestic
senior debt. Under terms of the refinancing, the Company entered into an
agreement for $143.0 million in senior secured credit facilities with a group
of lenders (the "New Credit Agreement"). Initial borrowings under the New
Credit Agreement were approximately $127.1 million. Proceeds of the New Credit
Agreement were used to refinance all obligations under the Company's previous
credit agreement. The cost of the implementation of the New Credit Agreement
will be amortized over its term.
The New Credit Agreement, which is secured by the assets of the Company's
domestic operations and all or a portion of the stock of certain subsidiaries,
provided for a five year, $70.0 million revolving credit facility (which
includes a $30.0 million letter of credit sub-facility), and a $73.0 million
term loan facility ("Term Loans") amortizing to August 29, 2002. Proceeds from
the August 29, 1997 sale of the Instrumentation business were used to repay
amounts on the revolving credit facility and Term Loans of $54.2 million and
$13.9 million, respectively (See Note 3). At the same time, and in keeping
with the terms of the New Credit Agreement, the $73.0 million term loan
facility was reduced to $59.0 million, which reduced the total facility to
$129.0 million.
Notes Payable
As of December 31, 1996, the Company had under the New Credit Agreement,
borrowings of $19.3 million outstanding under the revolving credit facility,
as well as $5.5 million of outstanding standby letters of credit. As of June
30, 1997, the Company had under the Old Credit Agreement, borrowings of $28.8
million outstanding under the revolving credit facility, as well as $12.2
million of outstanding standby letters of credit. The Company's continuing
operations had $12.7 million and $11.9 million in foreign short-term credit
facilities with amounts outstanding at December 31, 1996 and June 30, 1997 of
$4.2 million and $4.7 million, respectively. Due to the short-term nature of
these debt instruments it is the Company's opinion that the carrying amounts
F-45
<PAGE>
IMO INDUSTRIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
approximate the fair value. The weighted average interest rate on short-term
notes payable was 8.35% and 8.49% at December 31, 1996 and June 30, 1997.
Long-Term Debt
Long-term debt of continuing operations consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1996
------------
(DOLLARS IN
THOUSANDS)
<S> <C>
Term Loan A, $1.25 million due quarterly July 31, 1996 to
April 30, 2001.............................................. $ 22,500
Term Loan B, $2.2 million due quarterly July 31, 1997 to
April 30, 2001.............................................. 28,122
Term Loan C, $.125 million due quarterly July 31, 1996 to
April 30, 2001 and $5.3 million due quarterly July 31, 2001
to April 30, 2003........................................... 44,750
Senior subordinated notes with interest at 11.75%, due May 1,
2006, net of unamortized discount of $2.1 million in 1996... 152,858
Other........................................................ 8,443
--------
256,673
Less current portion......................................... 11,666
--------
$245,007
========
</TABLE>
The aggregate annual maturities of long-term debt from continuing
operations, in thousands, for the four years subsequent to 1997 are: 1998--
$14,960; 1999--$14,580; 2000--$14,580; and 2001--$18,212.
Total debt of the Discontinued Operations, in thousands, amounted to $33,012
as of December 31, 1996. Of this amount, $8,295 represents the long-term
portion.
The Term Loans have required mandatory prepayments under certain conditions
such as from proceeds from asset sales, specified percentages of net proceeds
of debt or equity issuances, and a percentage of excess cash flow. The
mandatory prepayments will be applied to the Term Loans pro rata, and then to
the repayment of the revolving credit facility. Mandatory prepayments applied
to the Term Loans reduce the scheduled quarterly principal payments on a pro
rata basis. The interest rates on the Term Loans are variable and based on
current market rates. Consequently, the carrying value of the Term Loans
approximates fair value.
The Notes are not redeemable prior to May 1, 2001, except that, until May 1,
1999, the Company may redeem, at its option, up to an aggregate of $55.0
million of the principal amount of the Notes at 110% of their principal amount
plus accrued interest with the net proceeds of one or more public equity
offerings provided that at least $100.0 million of the principal amount of the
Notes remains outstanding after each such redemption. On or after May 1, 2001,
the Notes are redeemable at the option of the Company, in whole or in part, at
106% of their principal amount, plus accrued interest, declining to 100% of
their principal amount plus accrued interest on or after May 1, 2004. Interest
is payable semi-annually on May 1 and November 1. On September 16, 1997, the
Company offered to purchase all of the Notes at 101% of the principal amount,
as required under the indenture governing the Notes as a result of the
Acquisition. No Notes were tendered in the offer. On November 25, 1997, the
Company purchased, through an open market transaction, Notes in the face
amount of $19.9 million at a purchase price of 111.47 % of the principal
amount.
The New Credit Agreement requires the Company to meet certain objectives
with respect to financial ratios. The New Credit Agreement and the Notes
contain provisions, which place certain limitations on dividend payments and
outside borrowings. Under the most restrictive of such provisions, the New
Credit Agreement
F-46
<PAGE>
IMO INDUSTRIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
requires the Company to maintain certain minimum interest coverage, fixed
charge coverage and maximum permitted debt levels and prohibits dividends.
An extraordinary charge of $8.5 million ($0.49 per share) was recorded in
the second quarter of 1996, as a result of the April 1996 refinancing of the
Company's domestic senior debt and its then outstanding 12% and 12.25% senior
subordinated debentures. This charge represents cash outlays of $5.1 million
incurred in connection with the early extinguishment of the debt as well as
the write-off of previously deferred loan costs.
In connection with the early repayment and redemption of domestic senior
debt and $80.0 million of the then outstanding 12.25% senior subordinated
debentures in 1995, the Company recorded a $4.4 million ($0.26 per share)
charge as an extraordinary item. The charge consisted of the write-off of
deferred debt expense associated with portions of the domestic senior debt
repaid and the 12.25% senior subordinated debentures redeemed.
NOTE 10 SHAREHOLDERS' EQUITY
Equity Incentive Plans
On August 29, 1997, the Board of Directors accelerated the exercisability
and deemed exercised for cash all stock options outstanding under the
Company's Equity Incentive Plan for Key Employees, the Equity Incentive Plan
for Outside Directors, and the 1995 Equity Incentive Plan for Outside
Directors, (collectively the "Plans"). The cash paid for outstanding stock
options deemed exercised was based upon the greater of the excess of the
tender offer price of Acquisition Corp. of $7.05 per share over the per share
option exercise price and zero. The cash payment of outstanding options
resulted in no options remaining outstanding as of August 29, 1997. In
addition, on November 5, 1997, pursuant to resolution of the Board of
Directors, the Plans were terminated effective August 29, 1997.
Stock options granted during 1997 under the Plans have been valued based
upon the difference between the exercise price on the date of grant and
Acquisition Corp.'s tender offer price of $7.05 per share. The Company has
followed Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees" ("APB 25") in accounting for its stock option plans, but
has disclosed the supplemental information as required under FASB Statement
No. 123, "Accounting for Stock-Based Compensation" ("Statement 123"). Under
APB 25, because the exercise price of the Company's employee stock options
equals the market price of the underlying stock on the date of grant, no
compensation expense is recognized other than for restricted stock awards.
Under the Company's Equity Incentive Plan for Key Employees, up to 3,050,000
shares of the Company's $1.00 par value common stock were issuable pursuant to
the granting of stock options, stock appreciation rights, restricted stock
awards and restricted unit awards to key employees. Options were granted at no
less than 100 percent of the fair market value of the Company's common stock
on the date of grant or on the prospective date fixed by the Board of
Directors. None of these options were exercisable for at least a one-year
period from the date of grant. After this waiting period, 25 percent of each
option, on a cumulative basis, could be exercised in each of the following
four years. Additionally, each option terminated no later than 10 years from
the date of grant.
The Equity Incentive Plan for Key Employees permitted awards of restricted
stock to key employees subject to a restricted period and a purchase price, if
any, to be paid by the employee as determined by the committee administering
the Equity Incentive Plan. The vesting of restricted stock awards was subject
to a defined vesting period and to the Company's common stock achieving
certain performance levels during such period. No grants of restricted stock
were made in 1997 or 1995. Grants of 35,000 shares of restricted stock were
made in 1996.
F-47
<PAGE>
IMO INDUSTRIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
All employees, who held vested restricted stock as August 29, 1997, were
compensated for the stock in cash at the Acquisition Corp. tender offer price
of $7.05 per share.
A summary of the Company's stock option activity under the Equity Incentive
Plan for Key Employees and related information is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------- EIGHT
WEIGHTED- WEIGHTED- MONTHS WEIGHTED-
AVERAGE AVERAGE ENDED AVERAGE
EXERCISE EXERCISE AUGUST 28, EXERCISE
1995 PRICE 1996 PRICE 1997 PRICE
------ --------- ------ --------- ---------- ---------
(SHARES IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Options:
Granted............... 250 $ 6.00 254 $4.08 15 $3.00
Exercised............. (73) $ 7.32 -- -- (455) $4.77
Forfeited............. (210) $10.27 (292) $8.12 (101) $8.30
Canceled.............. -- -- -- -- -- $8.44
Outstanding at end of
period................. 1,464 $ 8.02 1,426 $7.32 885 --
Exercisable at end of
period................. 691 $ 8.24 718 $8.15 -- --
Available for grant at
end of period.......... 865 868 --
Weighted-average fair
value of options
granted during the
period................. $ 3.53 $2.50 $4.05
====== ===== =====
</TABLE>
The Company has no options outstanding under the plan pursuant to the
termination of the plan by the Board of Directors on November 5, 1997,
effective August 29, 1997.
During 1988, the Company adopted the Equity Incentive Plan for Outside
Directors. This plan provided for the granting of non-qualified stock options
of up to 360,000 shares of the Company's common stock to directors of the
Company who are not employees of the Company or any of its affiliates.
Pursuant to this plan, options could be granted at no less than 100 percent of
the fair market value of the Company's common stock on a date five business
days after the option was granted and no option granted could be exercised
during the first year after its grant. After this waiting period, 25 percent
of each option, on a cumulative basis, could be exercised in each of the
following four years. Each option terminated no later than 10 years from the
date of grant. In February 1988, 320,000 stock options were granted at $16.19
per share. In December 1990, 40,000 stock options were granted at $10.375 per
share. In June 1995, the plan was amended to reduce the number of shares
issuable to an aggregate of 360,000 and to provide that no future options
could be granted thereunder. All outstanding stock options under the plan were
canceled effective August 29, 1997 pursuant to resolution of the Company's
Board of Directors. On November 5, 1997, the plan was terminated pursuant to
resolution of the Board of Directors effective August 29, 1997.
In June 1995, the Company adopted the 1995 Equity Incentive Plan for Outside
Directors. This plan provided for the granting of restricted stock awards and
non-qualified stock options of up to 240,000 shares of the Company's common
stock to outside directors of the Company who are not employees of the Company
or any of its affiliates. Pursuant to this plan, each outside director was
granted, on an annual basis, options to purchase 4,000 shares of the Company's
common stock. The exercise price of the options was 100 percent of the fair
market value of the common stock at the date of grant and no options granted
could be exercised during the first year after its grant subject to certain
plan provisions. After this waiting period, the options became exercisable in
four equal annual installments of 1,000 shares. Additionally, each option
terminated no later than 10 years from the date of grant. This plan also
provided for the granting of an annual restricted stock award of 1,000 shares
of the Company's common stock. Each award was made in four quarterly
installments of 250 shares
F-48
<PAGE>
IMO INDUSTRIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
beginning July 1, 1995. The shares comprising the restricted stock awards
could not be sold or otherwise transferred by the outside director until
termination from service. Restricted stock awards of 3,750 shares, 5,500
shares and 3,000 shares were granted during 1997, 1996 and 1995, respectively.
A summary of the Company's stock option activity under the 1995 Equity
Incentive Plan for Outside Directors and related information is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------- EIGHT
WEIGHTED- WEIGHTED- MONTHS WEIGHTED-
AVERAGE AVERAGE ENDED AVERAGE
EXERCISE EXERCISE AUGUST 28, EXERCISE
1995 PRICE 1996 PRICE 1997 PRICE
---- --------- ---- --------- ---------- ----------
(SHARES IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Options:
Granted............... 24 $8.00 20 $7.88 20 $2.87
Exercised............. -- -- -- -- (20) $2.87
Canceled.............. -- -- -- -- -- $7.83
Outstanding at end of
period................. 24 $8.00 44 $7.94 44 --
Exercisable at end of
period................. -- -- 6 $8.00 -- --
Available for grant at
end of period.......... 213 188 --
Weighted-average fair
value of options
granted during the
period................. $5.61 $5.58 $4.18
===== ===== =====
</TABLE>
The Company had no options outstanding under the plan pursuant to the
termination of the plan by the Board of Directors on November 5, 1997,
effective August 29, 1997.
Pro forma net income (loss) and earnings (loss) per share determined as if
the Company has accounted for its employee stock options granted subsequent to
December 31, 1994 under the fair value method of Statement 123 follows:
<TABLE>
<CAPTION>
FOR THE
YEAR ENDED DECEMBER 31, EIGHT MONTHS
------------------------ ENDED
(DOLLARS IN THOUSANDS, 1995 1996 AUGUST 28, 1997
EXCEPT PER SHARE AMOUNTS) ----------- ------------ --------------- ---
<S> <C> <C> <C> <C>
Net income (loss)--as re-
ported..................... $ 29,710 $ (58,370) $(28,879)
Net income (loss)--pro
forma...................... $ 29,668 $ (58,643) $(28,879)
Earnings (loss) per share--
as reported................ $ 1.74 $ (3.41) $ (1.68)
Earnings (loss) per share--
pro forma.................. $ 1.74 $ (3.42) $ (1.68)
</TABLE>
The fair value for options and restricted stock awards granted in 1996 and
1995 was estimated at the date of grant using a Black-Scholes option pricing
model with the following weighted-average assumptions for the Equity Incentive
Plans:
<TABLE>
<CAPTION>
1995 1996
------- ------------------------
EQUITY INCENTIVE PLAN STOCK STOCK RESTRICTED STOCK
FOR KEY EMPLOYEES OPTIONS OPTIONS AWARDS
--------------------- ------- ------- ----------------
<S> <C> <C> <C>
Expected stock price volatility............. 0.495 0.528 0.510
Risk-free interest rate..................... 5.93% 6.16% 6.26%
Expected life of equity instrument.......... 7 years 7 years 5 years
Expected dividend yield..................... 0% 0% 0%
</TABLE>
F-49
<PAGE>
IMO INDUSTRIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Stock options granted under the plan during 1997 have been valued based upon
the difference between the exercise price on the date of grant and Acquisition
Corp.'s tender offer price of $7.05 per share.
During 1995, there were no restricted stock awards under the Equity
Incentive Plan for Key Employees.
<TABLE>
<CAPTION>
1995 1996
------------------------ ------------------------
1995 EQUITY INCENTIVE PLAN STOCK RESTRICTED STOCK STOCK RESTRICTED STOCK
FOR OUTSIDE DIRECTORS OPTIONS AWARDS OPTIONS AWARDS
-------------------------- ------- ---------------- ------- ----------------
<S> <C> <C> <C> <C>
Expected stock price
volatility............... 0.512 0.497 0.522 0.523
Risk-free interest rate... 6.31% 5.93% 6.31% 5.93%
Expected life of equity
instrument............... 7 years 5 years 7 years 4 years
Expected dividend yield... 0% 0% 0% 0%
</TABLE>
For 1996 and 1995, the expected life of the restricted stock awards under
the plan represents the weighted-average of the remaining years until each of
the members of the Board of Directors attains the mandatory retirement age of
72. This assumed that each of the directors would continue their directorships
until the mandatory retirement age.
The risk-free interest rates are based on U.S. Treasury Notes on the date of
grant with maturities equal to the respective stock option and restricted
stock award expected lives.
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options and restricted stock awards. Option and
restricted stock valuation models require the input of highly subjective
assumptions including the expected stock price volatility.
For purposes of pro forma disclosures, the estimated fair value of the
options and restricted stock awards is amortized to expense over the options'
vesting period. Total compensation expense related to stock-based compensation
awards under Statement 123 for 1996 and 1995 was approximately $300,000 and
$48,000, respectively. In 1997, actual compensation expense is included in the
net income pro forma disclosures table. Compensation expense recorded by the
Company under APB 25 in 1997, 1996 and 1995 for awards granted during those
years was approximately $1.2 million, $27,000 and $6,000, respectively.
Employees Stock Savings Plan
Prior to August 1, 1997, up to 1,600,000 shares of the Company's common
stock were reserved for issuance under the Company's Employee Stock Savings
Plan ("ESSP"). The Committee of the ESSP approved a policy change, effective
August 1, 1997, in that employer matching contributions to the ESSP are to be
paid in cash rather than through issuance of Company common stock. As of
August 1, 1997, this plan policy change effectively eliminated the restriction
on the use of authorized but unissued shares of common stock.
Common Stock Warrants
In July 1993, the Company issued warrants to purchase 200,000 shares of its
common stock at $9.02 per share (subject to adjustment in certain events), to
one of its senior lenders in connection with the restructuring of its senior
credit facilities. The warrants are exercisable on or before December 31,
1998.
Treasury Stock
On August 29, 1997, the Company canceled the shares of treasury stock
outstanding as of that date totaling 1,672,788 shares of the Company's common
stock with a cost basis of approximately $18.0 million.
F-50
<PAGE>
IMO INDUSTRIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 11 OPERATIONS BY INDUSTRY SEGMENT AND GEOGRAPHIC AREA
The Company classifies its continuing operations into three business
segments: Power Transmission, Pumps, and Morse Controls. The 1996 and 1995
amounts have been restated to reflect Instrumentation and Roltra Morse
segments as discontinued operations. Information about the business of the
Company by business segment, foreign operations and geographic area is
presented below:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
------------------ EIGHT MONTHS ENDED
1995 1996 AUGUST 28, 1997
-------- -------- ------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Net Sales
Power Transmission................. $ 95,075 $ 89,456 $ 61,541
Pumps.............................. 94,375 107,567 72,089
Morse Controls..................... 107,664 112,488 76,521
-------- -------- --------
Total net sales.................. $297,114 $309,511 $210,151
-------- -------- --------
Segment operating income
Power Transmission................. $ 10,673 $ 8,618 $ 5,524
Pumps.............................. 9,219 11,229 8,385
Morse Controls..................... 4,748 8,299 4,501
-------- -------- --------
Total segment operating income... 24,640 28,146 18,410
-------- -------- --------
Equity in income (loss) of
unconsolidated companies............ 302 (32) (386)
Unallocated corporate expenses(1).... (12,454) (23,988) (30,752)
Net interest expense................. (20,479) (24,531) (17,269)
-------- -------- --------
Income (loss) from continuing
operations before income taxes and
extraordinary item.................. $ (7,991) $(20,405) $(29,997)
======== ======== ========
A reconciliation of segment operating income to income from operations
follows:
<CAPTION>
YEAR ENDED
DECEMBER 31,
------------------ EIGHT MONTHS ENDED
1995 1996 AUGUST 28, 1997
-------- -------- ------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Segment operating income............. $ 24,640 $ 28,146 $ 18,410
Unallocated corporate expenses(1).... (12,454) (23,988) (30,752)
Other (income) expense............... (370) 355 513
-------- -------- --------
Income (loss) from operations........ $ 11,816 $ 4,513 $(11,829)
======== ======== ========
</TABLE>
- --------
(1) Unallocated corporate expenses include unusual items of $26.3 million for
the eight months ended August 28, 1997, $10.5 million for the six months
ended June 30, 1997, and $17.1 million and $6.6 million for the years
ended December 31, 1996 and 1995, respectively.
F-51
<PAGE>
IMO INDUSTRIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Segment operating income includes $0.3 million and $1.5 million of unusual
items related to the Morse Controls segment for the years ended December 31,
1996 and 1995, respectively.
<TABLE>
<CAPTION>
DECEMBER 31, 1996
----------------------
(DOLLARS IN THOUSANDS)
<S> <C>
Identifiable assets
Power Transmission.................................. $ 70,533
Pumps............................................... 73,806
Morse Controls...................................... 110,141
Corporate........................................... 27,766
Discontinued Operations:
Electro-Optical................................... 14,356
Instrumentation................................... 22,516
Roltra Morse...................................... 11,331
Turbomachinery.................................... 473
--------
Total identifiable assets....................... $330,922
========
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
--------------- EIGHT MONTHS ENDED
1995 1996 AUGUST 28, 1997
------- ------- ------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Depreciation and
amortization
Power Transmission........ $ 4,618 $ 4,438 $3,004
Pumps..................... 3,972 4,114 2,456
Morse Controls............ 3,392 3,335 2,497
Corporate................. 1,400 1,511 657
------- ------- ------
Total depreciation and
amortization........... $13,382 $13,398 $8,614
------- ------- ------
Capital expenditures
Power Transmission........ $ 3,384 $ 2,699 $ 537
Pumps..................... 7,367 4,568 1,988
Morse Controls............ 2,131 2,554 1,923
Corporate................. 273 211 107
------- ------- ------
Total capital
expenditures........... $13,155 $10,032 $4,555
======= ======= ======
</TABLE>
Identifiable assets at December 31, 1996 include $26.5 million, $6.7 million
and $28.5 million of goodwill for the Power Transmission, Pumps, and Morse
Controls segments, respectively, and goodwill of $0.6 million and $9.5 million
for the Instrumentation and Roltra Morse discontinued segments, respectively.
F-52
<PAGE>
IMO INDUSTRIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The continuing operations of the Company on a geographic basis are as
follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
----------------- EIGHT MONTHS ENDED
1995 1996 AUGUST 28, 1997
-------- -------- ------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Net sales
United States........................ $205,717 $210,196 $143,512
Foreign (principally Europe)......... 91,397 99,315 66,639
-------- -------- --------
Total net sales.................... $297,114 $309,511 $210,151
======== ======== ========
Segment operating income
United States........................ $ 20,572 $ 20,948 $ 14,809
Foreign.............................. 4,068 7,198 3,601
-------- -------- --------
Total segment operating income..... $ 24,640 $ 28,146 $ 18,410
======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1996
----------------------
(DOLLARS IN THOUSANDS)
<S> <C>
Identifiable assets
Continuing Operations:
United States..................................... $196,373
Foreign........................................... 85,873
Discontinued Operations:
United States..................................... 23,210
Foreign........................................... 25,466
--------
Total identifiable assets....................... $330,922
========
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
--------------- EIGHT MONTHS ENDED
1995 1996 AUGUST 28, 1997
------- ------- ------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Export sales
Asia.................................... $ 3,469 $ 5,724 $ 2,858
Canada.................................. 4,641 3,236 3,475
Europe.................................. 2,590 3,133 1,708
Latin America........................... 470 906 423
Middle East & North Africa.............. 231 1,943 313
South America........................... 2,678 6,739 4,233
Other................................... 2,208 3,333 826
------- ------- -------
Total export sales.................... $16,287 $25,014 $13,836
======= ======= =======
</TABLE>
No one customer accounted for 10% or more of consolidated sales in 1997, 1996
or 1995.
NOTE 12 PENSION PLANS
The Company and its subsidiaries have various pension plans covering
substantially all of their employees. Benefits are based on either years of
service or years of service and average compensation during the years
immediately preceding retirement. It is the general policy of the Company to
fund its pension plans in conformity with requirements of applicable laws and
regulations. Effective December 31, 1996, all domestic pay-related plans were
merged into the Imo Industries Inc. Retirement Plan for U.S. Salaried
Employees. Pension benefits were not affected by the merger.
F-53
<PAGE>
IMO INDUSTRIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Pension expense was $2.5 million for the eight months ended August 28, 1997,
$4.3 million in 1996 and $4.2 million in 1995, and includes amortization of
prior service cost and transition amounts for periods of 5 to 15 years. The
1997, 1996 and 1995 expense includes costs related to retained pension
liabilities of discontinued operations. The Company included $2.0 million of
curtailment and settlement losses in its gain on disposal related to the
discontinued operations in 1995. Net pension expense is comprised of the
following:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
------------------ EIGHT MONTHS ENDED
1995 1996 AUGUST 28, 1997
-------- -------- ------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Service cost........................ $ 4,297 $ 4,282 $ 2,071
Interest cost on projected benefit
obligation......................... 13,429 14,471 9,807
Actual return on plan assets........ (17,797) (20,868) (17,119)
Net amortization and deferral....... 4,274 6,374 7,793
-------- -------- --------
Net pension expense............... $ 4,203 $ 4,259 $ 2,552
======== ======== ========
</TABLE>
Assumptions used to determine the net pension expense of the Company-
sponsored defined benefit plans are as follows:
<TABLE>
<CAPTION>
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Weighted average discount rate.............................. 8.5% 7.5% 7.5%
Rate of increase in compensation levels..................... 5.3% 5.3% 5.3%
Expected long-term rate of return on assets................. 9.0% 9.0% 9.0%
</TABLE>
The following table sets forth the funded status and amounts recognized in
the consolidated balance sheets for the defined benefit pension plans using a
discount rate of 7.75% at December 31, 1996. The assumed rate of increase in
compensation levels was 5.3%.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1996
-----------------------
ASSETS ACCUMULATED
EXCEED BENEFITS
ACCUMULATED EXCEED
BENEFITS ASSETS
----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Actuarial present value of benefit obligations:
Vested benefit obligation........................ $163,375 $ 29,395
-------- --------
Accumulated benefit obligation................... $166,927 $ 29,783
-------- --------
Projected benefit obligation....................... $182,288 $ 30,723
Plan assets at fair value.......................... 180,889 16,800
-------- --------
Plan assets in excess of (less than) projected
benefit obligation................................ (1,399) (13,923)
Unrecognized net (gain) or loss.................... (2,908) 2,734
Prior service cost not yet recognized in net
periodic pension cost............................. 2,884 1,097
Unrecognized net (asset) obligation at transition.. 1,836 4
Adjustment required to recognize minimum
liability......................................... -- (3,797)
-------- --------
Pension asset (liability) recognized in the balance
sheet............................................. $ 413 $(13,885)
======== ========
</TABLE>
Effective with the December 31, 1996 measurement date, the discount rate,
expected long-term rate of return on assets and mortality assumptions were
revised to reflect current market and demographic conditions. As a result of
these changes, the December 31, 1996 projected benefit obligation increased by
approximately $11.0
F-54
<PAGE>
IMO INDUSTRIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
million. These changes had no effect on the 1996 pension expense and are not
expected to have a material effect on future years' expense.
Plan assets are invested in fixed dollar guaranteed investment contracts,
U.S. Government obligations, fixed income investments, guaranteed annuity
contracts and equity securities whose values are subject to fluctuations of
the securities market.
The Company maintains two defined contribution plans covering substantially
all domestic, non-union employees. Eligible employees may generally contribute
from 1% to 15% of their compensation on a pre-tax basis. Company contributions
to the plans are based on a percentage of employee contributions. In July
1995, the Company restored its matching contribution at 25% of the first 6% of
each participant's pre-tax contribution. The Company's expense for 1997, 1996
and 1995 was $0.6 million, $0.7 million and $0.3 million, respectively.
NOTE 13 POSTRETIREMENT BENEFITS
In addition to providing pension benefits, the Company provides certain
health care and life insurance benefits for certain retired union employees.
The Company's unionized retiree benefits are determined by their individually
negotiated contracts. The Company's contribution toward the full cost of the
benefits is based on the retiree's age and continuous unbroken length of
service with the Company. The Company's policy is to pay the cost of medical
benefits as claims are incurred. Life insurance costs are paid as insured
premiums are due.
In March 1994, the Company amended its policy regarding non-union retiree
medical and life insurance. This amendment, which affects all current and
future non-union retirees, phased out the Company subsidy for retiree medical
and life insurance over the three-year period ended December 31, 1996. The
pre-tax amount amortized to income from continuing operations was $3.9 million
in 1996 and in 1995. The amendment did not result in a significant increase or
decrease in cash requirements during the phase-out period.
The following tables set forth the plans' combined status reconciled with
the amounts included in the consolidated balance sheet:
<TABLE>
<CAPTION>
DECEMBER 31, 1996
-------------------------
LIFE
MEDICAL INSURANCE
PLANS PLANS TOTAL
------- --------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Accumulated postretirement benefit obligation:
Retirees....................................... $ 7,551 $1,965 $ 9,516
Fully eligible active plan participants........ 206 46 252
Other active plan participants................. 395 47 442
------- ------ -------
8,152 2,058 10,210
Plan assets...................................... -- -- --
Unrecognized prior service cost.................. -- 1,605 1,605
Unrecognized net gain............................ 6,502 801 7,303
------- ------ -------
Postretirement benefit liability recognized in
the balance sheet............................... $14,654 $4,464 $19,118
======= ====== =======
</TABLE>
These amounts are classified as $1.7 million current liabilities and $17.4
million long-term liabilities.
F-55
<PAGE>
IMO INDUSTRIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Effective January 1, 1997, the Company subsidy for medical coverage under
the Warren Pump Union plan was terminated. This termination resulted in a
curtailment gain of $0.6 million for the year ended December 31, 1996. Net
periodic postretirement benefit cost included the following components:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1995
--------------------------
LIFE
MEDICAL INSURANCE
PLANS PLANS TOTAL
------- --------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Service cost.................................... $ 59 $ 5 $ 64
Interest cost................................... 1,057 415 1,472
Amortization of prior service cost.............. (3,110) (2,319) (5,429)
Amortization of (gain) loss..................... (166) 102 (64)
------- ------- -------
Net periodic postretirement benefit cost........ $(2,160) $(1,797) $(3,957)
======= ======= =======
<CAPTION>
YEAR ENDED DECEMBER 31,
1996
--------------------------
LIFE
MEDICAL INSURANCE
PLANS PLANS TOTAL
------- --------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Service cost.................................... $ 24 $ 2 $ 26
Interest cost................................... 650 157 807
Amortization of prior service cost.............. (3,110) (2,318) (5,428)
Amortization of gain............................ (449) (44) (493)
------- ------- -------
Net periodic postretirement benefit cost........ $(2,885) $(2,203) $(5,088)
======= ======= =======
<CAPTION>
EIGHT MONTHS ENDED AUGUST
28, 1997
--------------------------
LIFE
MEDICAL INSURANCE
PLANS PLANS TOTAL
------- --------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Service cost.................................... $ 5 $ 1 $ 6
Interest cost................................... 381 103 484
Amortization of prior service cost.............. -- (97) (97)
Amortization of gain............................ (311) (27) (338)
------- ------- -------
Net periodic postretirement benefit cost........ $ 75 $ (20) $ 55
======= ======= =======
</TABLE>
Actual negotiated health care premiums were used in calculating 1997, 1996
and 1995 health care costs. It is expected that the annual increase in medical
costs will be 6.0% from 1997 to 1998, grading down to 5% general medical
inflation level in future years. The health care cost trend rate assumption
has a significant effect on the amounts reported. For example, a 1% increase
in the health care trend rate would increase the accumulated postretirement
benefit obligation at December 31, 1997 by $0.6 million and the net periodic
cost by $0.1 million for the year. Effective January 1, 1995, the Company
changed its medical inflation rate to reflect actual experience. Such change
resulted in a reduction of the 1995 net periodic cost of $0.8 million. The
weighted average discount rate used in determining the accumulated
postretirement benefit obligation was 7.75% in 1997 and 1996.
F-56
<PAGE>
IMO INDUSTRIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 14 LEASES
The Company leases certain manufacturing and office facilities, equipment,
and automobiles under long-term leases. Future minimum rental payments
required under operating leases of continuing operations that have initial or
remaining noncancelable lease terms in excess of one year, as of December 31,
1996, are:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
<S> <C>
1997................................................ $ 5,406
1998................................................ 4,468
1999................................................ 3,160
2000................................................ 1,444
2001................................................ 1,235
Thereafter.......................................... 5,845
-------
Total minimum lease payments........................ $21,558
=======
</TABLE>
Total rental expense under operating leases charged against continuing
operations was $5.1 million for the eight months ended August 28, 1997 and
$7.2 million and $6.7 million in 1996 and 1995, respectively.
NOTE 15 CONTINGENCIES
LILCO Insurance Litigation. In January 1993, the Company was served with a
complaint in a case brought in the U.S. District Court for the Northern
District of California by International alleging that International was
entitled to recover $10.0 million in defense costs, and $1.2 million of a
judgment, each of which was paid on behalf of the Company in connection with
litigation between the Company and Long Island Lighting Company ("LILCO")
which was concluded in October 1993. International's principal contention was
that the International policies did not cover the matters in question in the
LILCO case. In June 1995, the Court entered a judgment in favor of
International awarding it $11.2 million, plus interest from March 1995 (the
"International Judgment"). The International Judgment, however, was not
supported by an order, and in July 1995, the Court vacated the International
Judgment as being premature because certain outstanding issues of
recoverability of the $10.0 million in defense costs had not been finally
determined. On May 8, 1997, the Company was informed that the Court had
reinstated the International Judgment. The Company therefore recorded a charge
to income in the first quarter of 1997 of $12.9 million as an unusual item,
which represented the amount of the judgment plus interest to date. On July
15, 1997 the Company agreed to settle with International by dropping an appeal
and paid a reduced amount on July 30, 1997 in complete settlement of all
outstanding amounts. As a result of the settlement, the Company recorded a
favorable adjustment of $2.4 million as an unusual item in the second quarter
of 1997 (See Note 7).
Additional Litigation and Claims. The Company and one of its subsidiaries
are two of a large number of defendants in a number of lawsuits brought in
various jurisdictions by approximately 6,900 claimants who allege injury
caused by exposure to asbestos. Although neither the Company nor any of its
subsidiaries has ever been a producer or direct supplier of asbestos, it is
alleged that the industrial and marine products sold by the Company and the
subsidiary named in such complaints contained components which contained
asbestos. Suits against the Company and its subsidiary have been tendered to
their insurers, who are defending under their stated reservation of rights. In
addition, the Company and the subsidiary are named in cases involving
approximately 22,000 claimants which in 1996 were "administratively dismissed"
by the U.S. District Court for the Eastern District of Pennsylvania. Cases
that have been "administratively dismissed" may be reinstated only upon a
showing to the Court that (i) there is satisfactory evidence of an asbestos-
related injury; and (ii) there is probative evidence that the plaintiff was
exposed to products or equipment supplied by each individual defendant in the
case. The Company believes that it has adequate insurance coverage or has
established appropriate reserves to cover potential liabilities related to
these cases.
F-57
<PAGE>
IMO INDUSTRIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company was a defendant in a lawsuit in the U.S. District Court for the
Western District of Pennsylvania, which alleged component failures in
equipment sold by its former diesel engine division. The complaint sought
damages of approximately $3.0 million. On September 30, 1997 the Court granted
a Summary Judgment motion filed by the Company which effectively dismissed all
claims against it. Plaintiffs have appealed this judgment to the United States
Court of Appeals for the Third Circuit.
The Company is a defendant in a lawsuit in the Circuit Court of Cook County,
Illinois alleging performance shortfalls in products delivered by the
Company's former Delaval Turbine Division and claiming damages of
approximately $8.0 million. To date the Court has granted a series of Summary
Judgment motions filed by the Company which have significantly reduced the
scope of damages which the Plaintiff may claim but has permitted additional
discovery to determine whether any other damages exist which plaintiff may be
entitled to seek at a trial.
The Company is a defendant in a lawsuit brought in the Superior Court of New
Jersey that alleges failure in performance of equipment sold in 1986 by a
former business of Imo. The complaint, filed on April 3, 1998, seeks damages
in excess of $17.0 million. Few of the facts underlying the action are known
by the Company; however, the Company believes there are legal and factual
defenses to the claim and intends to defend the action vigorously.
On June 3, 1997 the Company was served with a complaint in a case brought in
the Superior Court of New Jersey which alleges damages in excess of $10.0
million plus interest incurred as a result of losses under a Government
Contract Bid transferred in connection with the sale of the Company's former
Electro-Optical Systems business. The Electro-Optical Systems business was
sold in a transaction that closed on June 2, 1995. The sales contract provided
certain representations and warranties as to the status of the business at the
time of sale. The complaint alleges that the Company failed to provide notice
of a "reasonably anticipated loss" under a bid that was pending at the time of
the transfer of the business and therefore a representation was breached. The
contract was subsequently awarded to the Company's Varo subsidiary and
thereafter transferred to the buyer. The case is in the preliminary stages of
pleading but the Company believes that there are legal and factual defenses to
the claims and intends to defend the action vigorously.
The Company is one of five defendants in an action brought in the United
States District Court for the Middle District of Louisiana. In April 1991 the
Company's former Deltex Division performed a repair of a turbine. Following
the repair the turbine was included in a spare parts pool until January 1995.
The plaintiff alleges that following installation in its plant the turbine
experienced severe vibrations requiring the turbine to be run at less than
optimal speed. They further allege that the shortfall in performance caused
them to incur repair costs, and consequential damages in excess of $5.0
million. The lawsuit is in the early discovery stage, however, the Company
believes that there are legal and factual defenses to the claims and intends
to defend the action vigorously.
The operations of the Company, like those of other companies engaged in
similar businesses, involve the use, disposal and clean up of substances
regulated under environmental protection laws. In a number of instances the
Company has been identified as a Potentially Responsible Party by the U.S.
Environmental Protection Agency, and in one instance by the State of
Washington, with respect to the disposal of hazardous wastes at a number of
facilities that have been targeted for clean-up pursuant to CERCLA or similar
state law. Similarly, the Company has received notice that it is one of a
number of defendants named in an action filed in the United States District
Court, for the Southern District of Ohio Western Division by a group of
plaintiffs who are attempting to allocate a share of cleanup costs, for which
they are responsible, to a large number of additional parties, including the
Company. Although CERCLA and corresponding state law liability is joint and
several, the Company believes that its liability will not have a material
adverse effect on the financial condition of the Company since it believes
that it either qualifies as a de minimis or minor contributor at each site.
Accordingly, the Company believes that the portion of remediation costs that
it will be responsible for will not be material.
F-58
<PAGE>
IMO INDUSTRIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company is also involved in various other pending legal proceedings
arising out of the ordinary course of the Company's business. None of these
legal proceedings is expected to have a material adverse effect on the
financial condition of the Company. With respect to these proceedings and the
litigation and claims described in the preceding paragraphs, management of the
Company believes that it either will prevail, has adequate insurance coverage
or has established appropriate reserves to cover potential liabilities. There
can be no assurance, however, as to the ultimate outcome of any of these
matters, and if all or substantially all of these legal proceedings were to be
determined adversely to the Company, there could be a material adverse effect
on the financial condition of the Company.
The Company is self-insured for a portion of its product liability and
certain other liability exposures. Depending on the nature of the liability
claim, and with certain exceptions, the Company's maximum self-insured
exposure ranges from $250,000 to $500,000 per claim with certain maximum
aggregate policy limits per claim year. With respect to the exceptions, which
relate principally to diesel and turbine units sold before 1991, the Company's
maximum self-insured exposure is $5.0 million per claim.
F-59
<PAGE>
CONSTELLATION PUMPS CORP.
CONSOLIDATED BALANCE SHEET
(DOLLARS IN THOUSANDS, EXCEPT PAR VALUE)
<TABLE>
<CAPTION>
JUNE 30, 1998
-------------
(UNAUDITED)
<S> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents....................................... $ 7,647
Trade accounts and notes receivable, less allowance of $1,429... 28,666
Inventories--net................................................ 29,160
Prepaid expenses and other current assets....................... 3,966
--------
TOTAL CURRENT ASSETS.......................................... 69,439
Net property, plant and equipment............................... 28,802
Intangible assets, principally goodwill--net.................... 48,857
Notes receivable from Colfax Corporation........................ 103,332
Other assets.................................................... 1,488
--------
TOTAL ASSETS.................................................. $251,918
========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable................................................... $ 3,924
Trade accounts payable.......................................... 7,404
Accrued expenses................................................ 9,366
Other current liabilities....................................... 16,876
--------
TOTAL CURRENT LIABILITIES..................................... 37,570
Long-term debt.................................................. 181,240
Deferred income taxes........................................... 2,532
Accrued pension expense and other liabilities................... 26,363
--------
TOTAL LIABILITIES............................................. 247,705
--------
Minority Interest............................................... 1,418
SHAREHOLDERS' EQUITY (DEFICIT)
Preferred stock: $.01 par value; 10,000 authorized shares and
unissued....................................................... --
Common stock: $.01 par value; 2,500 authorized shares; 1,000
issued......................................................... 1
Additional paid in capital...................................... 999
Retained earnings............................................... 1,802
Cumulative foreign currency translation adjustment.............. (7)
--------
TOTAL SHAREHOLDERS' EQUITY.................................... 2,795
--------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.................. $251,918
========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-60
<PAGE>
CONSTELLATION PUMPS CORP.
CONSOLIDATED STATEMENT OF INCOME
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FROM
INCEPTION TO
JUNE 30, 1998
-------------
(UNAUDITED)
<S> <C>
NET SALES......................................................... $28,511
COST OF PRODUCTS SOLD............................................. 16,769
-------
GROSS PROFIT...................................................... 11,742
Selling, general and administrative expenses...................... 8,401
Research and development expenses................................. 782
-------
INCOME FROM OPERATIONS............................................ 2,559
Other (income) expense............................................ (1,126)
-------
INCOME BEFORE INTEREST AND INCOME TAXES........................... 3,685
Interest expense.................................................. 2,116
Other non-operating (gain)/loss................................... (1,072)
-------
INCOME BEFORE INCOME TAXES........................................ 2,641
Income taxes...................................................... 839
-------
NET INCOME........................................................ $ 1,802
=======
EARNINGS PER SHARE, BASIC AND DILUTED:
Net income...................................................... $ 1,802
-------
Weighted average number of shares outstanding..................... 1,000
=======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-61
<PAGE>
CONSTELLATION PUMPS CORP.
CONSOLIDATED STATEMENT OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FROM
INCEPTION TO
JUNE 30, 1998
-------------
(UNAUDITED)
<S> <C>
OPERATING ACTIVITIES
Net income...................................................... $ 1,802
Adjustments to reconcile net income to net cash used by operat-
ing activities:
Depreciation.................................................. 376
Amortization.................................................. 226
Other changes in operating assets and liabilities:
Accounts and notes receivable............................... (3,924)
Inventories................................................. 2,056
Accounts payable and accrued expenses....................... (1,551)
Other operating assets and liabilities...................... (2,611)
---------
NET CASH USED BY OPERATING ACTIVITIES........................... (3,626)
---------
INVESTING ACTIVITIES
Purchases of property, plant and equipment...................... (596)
Cash paid for acquisition, net of cash acquired................. (61,099)
---------
NET CASH USED BY INVESTING ACTIVITIES........................... (61,695)
---------
FINANCING ACTIVITIES
Proceeds from issuance of stock................................. 1,000
Repayment of notes payable...................................... (7,959)
Proceeds from long-term borrowings.............................. 175,000
Loan to affiliate............................................... (103,418)
Other........................................................... 8,353
---------
NET CASH PROVIDED BY FINANCING ACTIVITIES....................... 72,976
---------
Effect of exchange rate changes on cash......................... (8)
---------
DECREASE IN CASH AND CASH EQUIVALENTS........................... 7,647
Cash and cash equivalents at beginning of year.................. --
---------
CASH AND CASH EQUIVALENTS AT END OF YEAR........................ $ 7,647
=========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest.................................................... --
Income taxes................................................ --
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-62
<PAGE>
CONSTELLATION PUMPS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 ORGANIZATION
Constellation Pumps Corporation (the "Company") is a Delaware corporation
organized in March 1998 to acquire the stock of Allweiler AG ("Allweiler") a
German stock corporation. Allweiler is a leading manufacturer of pumps that
are distributed primarily in Europe. The Company, through its wholly owned
interest in three German subsidiaries, Constellation Verwaltungs GmbH,
Constellation Beteiligungs and Constellation Verwaltungs GmbH & Co.
Beteiligungen KG ("CV"), acquired a total of 97.2% of the common shares of
Allweiler and 91.1% of its preferred shares through a series of transactions.
The acquisition of the stock was substantially completed in April 1998 and has
been accounted for under the purchase method. Total consideration paid was
$38.2 million for the common shares and $27.4 million for the preferred
shares. The purchase price was allocated based on the estimated fair values at
the date of acquisition and resulted in an excess of purchase price over
assets and liabilities acquired of $48.4 million, which is being amortized
over 40 years.
NOTE 2 BASIS OF PRESENTATION
Basis of Presentation: The results of operations since inception include
those of the Company and its wholly owned subsidiaries, CV, Allweiler,
Constellation Verwaltungs and Constellation Beteiligungs.
Consolidation: Significant intercompany transactions have been eliminated in
consolidation. The Company's subsidiaries use the equity method to account for
investments in corporations in which it does not own a majority voting
interest but has the ability to exercise significant influence over operating
and financial policies.
Translation of Foreign Currencies: Assets and liabilities of international
operations are translated into U.S. dollars at current exchange rates. Income
and expense accounts are translated into U.S. dollars at average rates of
exchange prevailing during the year. Translation adjustments are reflected as
a separate component of shareholders' equity.
Cash Equivalents: Cash equivalents include investments in government
securities funds and certificates of deposit with original maturities of less
than three months. Investment periods are generally less than one month.
Inventories: Inventories are carried at the lower of cost or market, cost
being determined principally on the basis of standards which approximate
actual costs on the first-in, first-out method, and market being determined by
net realizable value. Appropriate consideration is given to deterioration,
obsolescence and other factors in evaluating net realizable value.
Revenue Recognition: Revenues are recorded generally when the Company's
products are shipped.
Depreciation and Amortization: Depreciation and amortization of plant and
equipment are computed principally by the straight-line method based on the
estimated useful lives of the assets as follows: buildings, 10 to 40 years and
machinery and equipment, 3 to 15 years.
Earnings Per Share: At December 31, 1997, the Company adopted Financial
Accounting Standards Board ("FASB") Statement No. 128, "Earnings Per Share,"
which specifies the computation, presentation, and disclosure requirements for
earnings per share. Basic and diluted net income (loss) per share is
calculated based on the actual weighted average shares outstanding.
Impact of Recently Issued Accounting Standards: In June 1997, the Financial
Accounting Standards Board ("FASB") issued Statement No. 131, "Disclosures
about Segments of an Enterprise and Related Information,"
F-63
<PAGE>
CONSTELLATION PUMPS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
which requires public companies to report financial and descriptive
information about operating segments. The statement intends to align
reportable segments and certain disclosures with how the operations are
managed internally. The impact of this statement on the Company's disclosure
is not expected to be significant. In February 1998, the FASB issued Statement
No. 132, "Employers' Disclosures about Pensions and Other Postretirement
Benefits," which adds disclosure requirements on changes in the benefit
obligations and fair values of plan assets, and eliminates certain disclosures
that are no longer useful.
Intangible Assets: Goodwill of companies acquired is being amortized on the
straight-line basis over 40 years. The carrying value of goodwill is reviewed
when indicators of impairment are present, by evaluating future cash flows of
the associated operations to determine if impairment exists. Goodwill related
to continuing operations at June 30, 1998 was $48.2 million, net of respective
accumulated amortization of $0.2 million. Patents are amortized over the
shorter of their legal or estimated useful lives.
Management Estimates: The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements, and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
NOTE 3 NOTE RECEIVABLE
The Note Receivable represents the principal plus accrued interest of a Note
between CV and Colfax Corporation (the "Colfax Note"). The Colfax Note accrues
interest at a rate of one-week LIBOR plus 0.375%.
NOTE 4 INVENTORY
Inventories (in thousands of dollars) are summarized as follows:
<TABLE>
<CAPTION>
JUNE 30,
1998
-----------
(UNAUDITED)
<S> <C>
Finished products................ $ 6,990
Work in process.................. 16,234
Materials and supplies........... 5,936
-------
$29,160
=======
</TABLE>
NOTE 5 DEBT
To finance the acquisition of shares of Allweiler stock the Company, through
CV, borrowed $70 million under a loan facility provided by Colfax Capital (the
"CC Facility"). The CC Facility was replaced on June 30, 1998, with a facility
provided by Merrill Lynch International (the "MLI Facility").
At July 3, 1998, CV had a total of $175 million outstanding under the $190
million MLI Facility. In addition to the initial borrowing to repay the
principal and accrued interest under the CC Facility in the amount of $71.7
million, CV borrowed $103.3 million under the MLI Facility which it in turn
loaned to Colfax Corporation.
All funds drawn under the MLI Facility must be repaid no later than December
31, 1999 and will accrue interest at a rate of one-week LIBOR plus 0.375%. In
addition, the MLI Facility has been guaranteed by Colfax Corporation and all
funds borrowed must be secured by assets with an aggregate market value equal
to or greater than the aggregate value of the funds borrowed and any unpaid
interest thereon.
F-64
<PAGE>
CONSTELLATION PUMPS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 6 SHAREHOLDERS' EQUITY
At its incorporation in April 1998, the Company issued 1,000 shares of its
common stock, $.01 par value per share, for a price of $1,000 per share.
NOTE 7 ACQUISITION OF ALLWEILER
The unaudited pro forma information for the period set forth below gives
effect to the acquisition of Allweiler as if it had occurred on January 1,
1998. The pro forma information is presented for informational purposes only
and is not necessarily indicative of the results of operations that actually
would have been achieved had the acquisition been consummated at that time.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30, 1998
-------------------
(IN THOUSANDS,
EXCEPT PER SHARE)
<S> <C>
Net Sales................ $ 77,304
Net Loss................. (2,172)
Loss Per Share, Basic and
Diluted................. $ (2,172)
</TABLE>
F-65
<PAGE>
AUDIT OPINION
Based on the audit performed in accordance with our professional duties, the
accounting records and the financial statements comply with the legal
regulations and the articles of association. The financial statements and the
consolidated financial statements present, in compliance with required
accounting principles, a true and fair view of the net worth, financial
position and results of ALLWEILER AKTIENGESELLSCHAFT and the ALLWEILER Group.
The combined management report and group management report are in agreement
with the financial statements and the consolidated financial statements.
Stuttgart, February 20, 1998
Arthur Andersen
Wirtschaftsprufungsgesellschaft
Steuerberatungsgesellschaft mbH
Dr. Langenbucher Dr. Schmidt
Wirtschaftsprufer Wirtschaftsprufer
F-66
<PAGE>
ALLWEILER AKTIENGESELLSCHAFT, RADOLFZELL/BODENSEE
BALANCE SHEET OF ALLWEILER AG AS OF DECEMBER 31, 1997
<TABLE>
<CAPTION>
NOTES 1997 1996
----- ------- -------
(DOLLARS IN
THOUSANDS)
<S> <C> <C> <C>
ASSETS
FIXED ASSETS
Intangible assets........................................ (1) $ 812 $ 1,159
Tangible assets.......................................... (2) 16,799 19,820
Financial assets......................................... (3) 5,133 5,624
------- -------
22,744 26,603
------- -------
CURRENT ASSETS
Inventories.............................................. (4) 22,213 26,813
Receivables and other assets............................. (5) 22,585 24,705
Cash..................................................... (6) 1,236 1,410
------- -------
46,034 52,928
------- -------
PREPAID EXPENSES......................................... (7) 306 360
------- -------
$69,084 $79,891
------- -------
EQUITY AND LIABILITIES
EQUITY
Subscribed capital....................................... (8) $ 6,696 $ 7,718
Capital reserves......................................... 1,970 2,270
Revenue reserves......................................... (9) 9,156 10,553
Net retained profits..................................... (10) 1,329 975
------- -------
19,151 21,516
------- -------
Accruals for pensions and similar obligations............ 11,551 6,699
Other accruals........................................... (11) 10,353 10,910
------- -------
21,904 17,609
------- -------
LIABILITIES (12)
Trade payables........................................... 3,765 5,264
Other liabilities........................................ 24,264 35,502
------- -------
28,029 40,766
------- -------
$69,084 $79,891
======= =======
</TABLE>
F-67
<PAGE>
ALLWEILER GROUP, RADOLFZELL/BODENSEE
CONSOLIDATED BALANCE SHEET OF ALLWEILER GROUP AS OF DECEMBER 31, 1997
<TABLE>
<CAPTION>
NOTES 1997 1996
----- ------- -------
(DOLLARS IN
THOUSANDS)
<S> <C> <C> <C>
ASSETS
FIXED ASSETS
Intangible assets........................................ (1) $ 814 $ 1,169
Tangible assets.......................................... (2) 20,453 23,508
Financial assets......................................... (3) 1,310 1,421
------- -------
22,577 26,098
------- -------
CURRENT ASSETS
Inventories.............................................. (4) 26,849 31,064
Receivables and other assets............................. (5) 28,919 31,468
Cash..................................................... (6) 2,865 3,090
------- -------
58,633 65,622
------- -------
PREPAID EXPENSES......................................... (7) 769 735
------- -------
$81,979 $92,455
------- -------
EQUITY AND LIABILITIES
EQUITY
Subscribed capital....................................... (8) $ 6,696 $ 7,718
Capital reserves......................................... 1,970 2,270
Revenue reserves......................................... (9) 10,012 11,487
Net retained profits..................................... (10) 2,686 1,690
------- -------
21,364 23,165
------- -------
Accruals for pensions and similar obligations............ 11,653 6,806
Other accruals........................................... (11) 14,230 14,590
------- -------
25,883 21,396
------- -------
LIABILITIES (12)
Trade payables........................................... 7,494 8,570
Other liabilities........................................ 27,238 39,324
------- -------
34,732 47,894
------- -------
$81,979 $92,455
======= =======
</TABLE>
F-68
<PAGE>
ALLWEILER AKTIENGESELLSCHAFT, RADOLFZELL/BODENSEE
INCOME STATEMENT
FOR THE FINANCIAL YEAR 1997
<TABLE>
<CAPTION>
NOTES 1997 1996
----- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Sales............................................... (13) $123,617 $123,734
Increased/decrease in inventories of finished goods
and work in progress............................... (155) 2,509
Own work capitalized................................ 391 652
Other operating income.............................. (14) 2,997 4,418
Cost of materials................................... (15) (43,619) (45,953)
Personnel expenses.................................. (16) (51,296) (56,952)
Depreciation on intangible and tangible assets...... (5,706) (7,350)
Other operating expenses............................ (17) (17,566) (17,608)
Financial and investment results.................... (18) 23 (112)
-------- --------
Results of ordinary activities...................... 8,686 3,338
-------- --------
Extraordinary expenses.............................. (19) (5,900) (2,951)
Taxes on income..................................... (20) (1,266) 497
Other taxes......................................... (259) (347)
-------- --------
Net income for the year............................. 1,261 537
-------- --------
Amount carried forward from prior year.............. 109 456
Effect of foreign exchange rate..................... (41) (18)
-------- --------
Net retained profit................................. $ 1,329 $ 975
======== ========
</TABLE>
F-69
<PAGE>
ALLWEILER GROUP, RADOLFZELL/BODENSEE
CONSOLIDATED INCOME STATEMENT
FOR THE FINANCIAL YEAR 1997
<TABLE>
<CAPTION>
1997 1996
NOTES $ $ 1-4/1998 1-6/1997
----- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Sales........................... (13) $154,288 $155,580 $ 48,662 $ 78,126
Increase in inventories of
finished goods and work in
progress....................... 781 1,981 1,298 (454)
Own work capitalized............ 391 652 123 211
Other operating income.......... (14) 3,270 4,104 426 997
Cost of materials............... (15) (56,570) (58,162) (18,290) (28,881)
Personnel expenses.............. (16) (61,764) (67,751) (20,711) (31,142)
Depreciation of intangible and
tangible assets................ (5,991) (7,031) (1,511) (2,787)
Other operating expenses........ (17) (22,204) (22,272) (6,811) (10,274)
Financial and investment
result......................... (18) (1,581) (1,714) (277) (885)
-------- -------- -------- --------
Result of ordinary activities... 10,620 5,387 2,909 4,911
-------- -------- -------- --------
Extraordinary expenses.......... (19) (5,900) (2,951) (3,323) 0
Taxes on income................. (2,337) (323) (444) (2,669)
Other taxes..................... (363) (456) (84) (128)
-------- -------- -------- --------
Group net income for the year... 2,020 1,657 $ (942) $ 2,114
-------- -------- -------- --------
Amount carried forward from
prior year..................... 730 87
Effect of foreign exchange
rate........................... (64) (54)
-------- --------
Group net retained profit....... $ 2,686 $ 1,690
======== ========
</TABLE>
F-70
<PAGE>
ALLWEILER AKTIENGESELLSCHAFT, RADOLFZELL/BODENSEE
NOTES TO THE FINANCIAL STATEMENTS AND
TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FINANCIAL YEAR 1997
(DOLLARS IN THOUSANDS, UNLESS OTHERWISE INDICATED)
A. ACCOUNTING
The financial statements and the consolidated financial statements of
Allweiler AG for the financial year 1997 were each prepared in accordance with
the provisions of the 3rd book of the German Commercial Code (HGB) and the
German Stock Corporation Law (AktG).
The income statement and the consolidated income statement were prepared
according to the method of total costs.
Various items of the balance sheet and the income statements in both the
consolidated and the individual company financial statements have been
combined for purposes of clarity. Each of these items is disclosed separately
in the notes to both the consolidated and the individual company financial
statements.
The notes to the financial statements of Allweiler AG and to the
consolidated financial statements are presented together in the following.
B. ACCOUNTING AND VALUATION PRINCIPLES
The financial statements of Allweiler AG and the financial statements of the
subsidiaries are prepared according to uniform accounting and valuation
principles. Carrying values in the financial statements of an associated
enterprise that diverge from the uniform group principles were retained due to
their immateriality.
Intangible assets are valued at acquisition cost, less scheduled
depreciation.
Tangible assets are valued at acquisition or manufacturing cost, less
scheduled depreciation. Own work capitalized considers direct production and
material costs as well as appropriate material and production overheads.
Scheduled depreciation is computed on the basis of tax-allowed depreciation
rates for buildings both according to the straight-line method and the
declining balance method, for moveable tangible assets according to the
declining balance method and then changing to the straight-line method.
Depreciation allowances on additions to moveable assets during the first and
second half of the year are calculated using the full year or half-year rates
respectively. Low-value assets are fully written off in the year of
acquisition.
Financial assets are stated at acquisition cost or the lower attributable
value as of the balance sheet date.
Raw materials, consumables and supplies are valued at acquisition cost or
cost prices plus incidental acquisition costs, taking the lower of cost or
market principle into account. Valuation allowances are made for known risks
due to long periods of storage or technical obsolescence.
Work in progress and finished goods are valued at manufacturing cost in
accordance with the pertinent tax law provisions. Valuation allowances are
made for known risks due to long periods of storage or technical obsolescence.
Receivables and other assets are stated at their nominal value, tenant loans
at present value. Specific allowances are recorded for individual trade
receivables and other receivables deemed uncollectible; a general allowance
for doubtful accounts of 2.5% is recorded in recognition of general credit
risks inherent in trade
F-71
<PAGE>
ALLWEILER AKTIENGESELLSCHAFT, RADOLFZELL/BODENSEE
NOTES TO THE FINANCIAL STATEMENTS AND
TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE FINANCIAL YEAR 1997
receivables (prior year: 3.0% on domestic receivables, 4.0% on foreign
receivables). The income from the decrease in the percentage of the general
bad debt allowance in 1997 amounts to $123,000.
Debt discount amounts are capitalized as prepaid expenses and written off
over the term of the loans.
Accruals for pensions and similar commitments are recorded in accordance
with the respective local provisions. At Allweiler AG accruals for pensions
and similar obligations are computed according to actuarial principles,
applying the present value method pursuant to (S) 6a German Income Tax Law
(EStG) at an interest rate of 6%. In the financial year 1997 Allweiler AG
assumed pension commitments of Versorgungs- und Unterstutzungsvereins der
Allweiler AG, Radolfzell., e.V. of $5,900,000.
On the balance sheet date there is a deficit of $1,116,000 (prior year:
$7,353,000) between the present value pursuant to (S) 6a EStG of the pension
obligations assumed by Versorgungs-und Unterstutzungsverein der Allweiler AG,
Radolfzell e.V. and its assets.
Tax accruals and other accruals were established on the basis of prudent
commercial judgment and cover all known risks and uncertain liabilities as of
the balance sheet date. Accruals for potential losses from orders on hand are
set up on a full-cost basis. The accrual for vacation and flexi-time credits
has been computed according to tax principles.
Liabilities are stated at their repayment amount.
C. INVESTMENTS AND COMPANIES INCLUDED IN CONSOLIDATION
The Company is parent company of the following subsidiaries as defined in
(S) 290 HGB, which are in turn affiliated companies in the sense of (S) 271
(2) HGB.
In addition to the parent company Allweiler AG, the following major
subsidiaries are included in the consolidated financial statements.
<TABLE>
<CAPTION>
SHARE
SUBSIDIARY, DOMICILE AS % CURRENCY EQUITY(*)
-------------------- ----- -------- ---------
<S> <C> <C> <C>
Allweiler International AG, Zug, Switzerland......... 100 CHF 121
Allweiler Gesellschaft m.b.H., Vienna, Austria....... 100 ATS 1,867
Allweiler Belgium S.A., Brussels, Belgium............ 100 BEF 13,411
Allweiler A/S, Sonderborg, Denmark................... 100 DKK 962
Allweiler Espana S.A., Barcelona, Spain.............. 100 ESP 49,706
Pompes Allweiler S.a.r.l., Paris, France............. 100 FRF 5,594
Allweiler Italia S.p.A., Fizzonasco di Pieve
Emanuele, Milan, Italy.............................. 100 ITL 1,534,475
Allweiler A/S, Nesbru, Norway........................ 100 NOK 8,388
Allweiler Finland Oy Ab, Espoo, Finland.............. 100 FIM 1,021
Allweiler Pumps Ltd., Poole, Dorset, Great Britain... 100 GBP 160
HOUTTUIN B.V., Utrecht, Netherlands.................. 100 NLG 1,403
</TABLE>
- --------
(*): Figures in accordance with Commercial Balance Sheet II. Resolved dividend
distributions were reduced. Figures in thousands of local currency.
F-72
<PAGE>
ALLWEILER AKTIENGESELLSCHAFT, RADOLFZELL/BODENSEE
NOTES TO THE FINANCIAL STATEMENTS AND
TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE FINANCIAL YEAR 1997
ALLWEILER AG has direct and indirect interests of more than 20% in the
following investments:
<TABLE>
<CAPTION>
SHARE
SUBSIDIARIES AND EQUITY INVESTMENTS, DOMICILE AS % CURRENCY EQUITY(*)
- --------------------------------------------- ----- -------- ---------
<S> <C> <C> <C>
Allweiler Marine, Inc., Seattle, USA................. 100 $ (43)
Allweiler s.r.o., Prague, Czech Republic............. 100 CZK 177
Allweiler s.r.o., Bratislava, Slovakia............... 100 SKK 187
Allweiler K. e. S. Kft., Budaors, Hungary............ 100 HUF 846
Rapid Allweiler Pump and Engineering Co. (Pty.) Ltd.,
Isando, South Africa (1)............................ 35 ZAR 4,006
Allweiler Al-Farid Pumps Co. (S.A.E.), Cairo, Egypt
(2)................................................. 28 EGP 8,786
</TABLE>
- --------
(*): The figures have been extracted from the respective local financial
statements. Figures in thousands of local currency.
(1): Balance sheet date June 30, 1997
(2): This is the equity as of December 31, 1996 as the current financial
statements are not yet available.
Allweiler Marine, Inc. Seattle, USA, that was founded in 1994 and the
companies Allweiler s.r.o., Prague, Czech Republic and Allweiler s.r.o.,
Bratislava, Slovakia that were founded in 1995, as well as the company
Allweiler K. e. S. Kft., Budaors, Hungary, founded in 1997 are not included in
the consolidation in accordance with (S) 296 (2) HGB due to immateriality. The
companies in the Czech Republic, Slovakia and in Hungary are direct
subsidiaries of Allweiler Gesellschaft m. b. H., Vienna, Austria.
The equity value in Allweiler Al-Farid Pumps Co. (S.A.E.), Cairo/Egypt,
could only be rolled forward on the basis of the 1996 financial statements as
the local financial statements of this company for 1997 were not available
prior to the preparation of the consolidated balance sheet. Rapid Allweiler
Pump and Engineering Co. (Pty.) Ltd., Isando, South Africa is not consolidated
as Allweiler AG does not exercise a decisive influence on the business and
financial policy of this company.
A complete list of subsidiaries of Allweiler AG will be filed with the
Commercial Register of the District Court Singen/Hohentwiel (HRB-5 R).
D. PRINCIPLES OF CONSOLIDATION
Capital consolidation is performed according to the book value method. The
date of first-time inclusion in consolidation was taken to be January 1, 1989
or the acquisition date, if later.
Applying the book value method, the investment in one associated enterprise
is included in the consolidated financial statements in accordance with the
equity method.
Accounts receivable and payable between companies included in the
consolidation are offset against each other; any differences compared to the
prior year from the consolidation of intercompany balances are included in the
income statement.
Intercompany sales and intercompany revenues are offset against the
corresponding intercompany expenses.
The intercompany results in the inventories resulting from intercompany
trade are eliminated in the year of origin with effect on income.
F-73
<PAGE>
ALLWEILER AKTIENGESELLSCHAFT, RADOLFZELL/BODENSEE
NOTES TO THE FINANCIAL STATEMENTS AND
TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE FINANCIAL YEAR 1997
Special items with an equity portion set up for tax reasons in the
individual financial statements were reversed in the consolidated financial
statements.
Deferred tax assets shown in the consolidated balance sheet resulted from
consolidation adjustments and differences between book and tax income of the
companies included in the consolidated financial statements. Deferred tax
assets ($596,000) and liabilities ($265,000) due to consolidation adjustments
and from the individual company financial statements are aggregated in the
consolidated financial statements and disclosed under "prepaid expenses."
E. PRINCIPLES OF CURRENCY TRANSLATION
In the individual financial statements receivables denominated in foreign
currency are translated at bid rate and liabilities in foreign currency at
offer rate on the date of origin. Exchange rate losses that occur prior to the
balance sheet are considered.
Any foreign currency receivables or liabilities hedged by forward exchange
or other hedging transaction are valued at the respective hedge rate.
Acquisition costs of fixed assets acquired in foreign currencies are
translated at the exchange rate prevailing at the time of the acquisition.
Acquisition costs for shares in foreign subsidiaries are translated at
historical rates.
In the consolidated financial statements the balance sheet items of foreign
subsidiaries are translated at the spot rate on the balance sheet date. Equity
is translated at the rate prevailing at the time of first-time consolidation
or the acquisition date, if later. Translation differences from exchange rate
fluctuations since the previous balance sheet date are offset against the
revenue reserves without effect on income. In the case of investments valued
according to the equity method, the pro rata equity is translated using the
spot rate on the respective balance sheet date.
Income and expenses of the foreign subsidiaries are translated at the
average exchange rate for the year, while the net results for the period are
calculated at the rate prevailing at the balance sheet date. Any resulting
differences are recorded as other operating income or expenses.
F. EXPLANATIONS TO THE BALANCE SHEET
The development of the fixed assets in the financial year 1997 is shown in
detail in the fixed assets movement schedules of Allweiler AG and the
Allweiler Group, respectively.
(1) INTANGIBLE ASSETS
This relates to industrial rights and trademarks, CAD programs and other IT
software.
(2) TANGIBLE ASSETS
During the financial year low value assets as defined in (S) 6 (2) EStG
totaling $364,000 (prior year: $404,000) were fully written off.
In the consolidated financial statements low value assets totaling $444,000
(prior year: $455,000) were written off.
F-74
<PAGE>
ALLWEILER AKTIENGESELLSCHAFT, RADOLFZELL/BODENSEE
NOTES TO THE FINANCIAL STATEMENTS AND
TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE FINANCIAL YEAR 1997
Effective November 30, 1997 the business operations of Actium Leasobjekt
Gesellschaft mbH & Co. Grundstucksverwaltungsgesellschaft Objekt Aschaffenburg
KG, Dusseldorf, were transferred by merger to Allweiler AG. This resulted
primarily in the take-over of the operating premises in Aschaffenburg and of a
bank loan in the balance sheet of Allweiler AG. The operating premises were
sold during financial year 1997.
(3) FINANCIAL ASSETS
Financial assets in the individual financial statements mainly relate to
shares in foreign subsidiaries and equity investments.
F-75
<PAGE>
ALLWEILER AKTIENGESELLSCHAFT, RADOLFZELL/BODENSEE
NOTES TO THE FINANCIAL STATEMENTS AND
TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE FINANCIAL YEAR 1997
DEVELOPMENT OF FIXED ASSETS OF THE ALLWEILER AG IN THE FINANCIAL YEAR 1997
<TABLE>
<CAPTION>
EFFECT OF
ACCUMULATED FOREIGN
ACQUISITION AND MANUFACTURING COST DEPRECIATION EXCHANGE RATE NET BOOK VALUE
------------------------------------------------------ ------------- ------------- ---------------------------
JAN. 1, 1997 ADDITIONS DISPOSALS RECLASSIFICATIONS DEC. 31, 1997 DEC. 31, 1997 DEC. 31, 1997 DEC. 31, 1996
------------ --------- --------- ----------------- ------------- ------------- ------------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INTANGIBLE
ASSETS.......... $ 3,889 $ 331 $ 79 $ 2 $ 2,816 $ (515) $ 812 $ 1,159
------- ------ ------ ---- ------- -------- ------- -------
Land, land
rights and
buildings
including
buildings on
third party
land............ 20,678 2,537(2) 1,387(2) 295 10,076 (2,738) 9,309 10,131
Technical
equipment and
machines........ 41,115 1,239 930 467 32,676 (5,445) 3,770 4,559
Other equipment,
factory and
office
equipment....... 24,633 1,642 1,965 110 17,929 (3,261) 3,230 4,079
Payments on
account and
assets on
construction.... 1,051 453 0 (874) 0 (140) 490 1,051
------- ------ ------ ---- ------- -------- ------- -------
TANGIBLE
ASSETS.......... 87,477 5,871 4,282 (2) 60,681 (11,584) 16,799 19,820
------- ------ ------ ---- ------- -------- ------- -------
Shares in
affiliated
enterprises..... 5,908 223 0 0 1,224 (783) 4,124 4,496
Participations.. 1,198 40 59 0 226 (159) 794 890
Long term
investments..... 52 0 0 0 0 (7) 45 52
Other loans..... 186 39 30 0 0 (25) 170 186
------- ------ ------ ---- ------- -------- ------- -------
FINANCIAL
ASSETS.......... 7,344 302 89 0 1,450 (974) 5,133 5,624
------- ------ ------ ---- ------- -------- ------- -------
FIXED ASSETS.... $98,710 $6,504 $4,450 $ 0 $64,947 $(13,073) $22,744 $26,603
======= ====== ====== ==== ======= ======== ======= =======
<CAPTION>
DEPRECIATION
OF THE
FINANCIAL
YEAR
------------
<S> <C>
INTANGIBLE
ASSETS.......... $ 545
------------
Land, land
rights and
buildings
including
buildings on
third party
land............ 1,126(1)
Technical
equipment and
machines........ 1,950
Other equipment,
factory and
office
equipment....... 2,085
Payments on
account and
assets on
construction.... 0
------------
TANGIBLE
ASSETS.......... 5,161
------------
Shares in
affiliated
enterprises..... 0
Participations.. 0
Long term
investments..... 0
Other loans..... 0
------------
FINANCIAL
ASSETS.......... 0
------------
FIXED ASSETS.... $5,706
============
</TABLE>
- ----
(1) This contains extraordinary depreciation in accordance with (S)6b ESoG of
$386.
(2) This contains the book value of the Aschaffenburg premises of $1,209 that
transferred to Allweiler AG in connection with the merger with Actram
Leasubjekt Gesellschaft gmbH & Co. Grundsolcksverwaltungsgesellschaft
Objekt Aschaffenburg, KG, Dusseldorf, and that was sold during the
reporting year.
See analysis of fixed assets of AAG
F-76
<PAGE>
ALLWEILER AKTIENGESELLSCHAFT, RADOLFZELL/BODENSEE
NOTES TO THE FINANCIAL STATEMENTS AND
TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE FINANCIAL YEAR 1997
DEVELOPMENT OF FIXED ASSETS OF THE ALLWEILER GROUP
IN THE FINANCIAL YEAR 1997
<TABLE>
<CAPTION>
EFFECT
OF
FOREIGN
ACCUMULATED EXCHANGE
ACQUISITION AND MANUFACTURING COST DEPRECIATION RATE NET BOOK VALUE DEPRECIATION
------------------------------------------------- ------------ -------- ----------------- OF THE
JAN. 1, DEC. 31, DEC. 31, DEC. 31, DEC. 31, FINANCIAL
1997 ADDITIONS DISPOSALS RECLASSIFICATIONS 1997 1997 1997 1996 YEAR
------- --------- --------- ----------------- ------------ -------- -------- -------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INTANGIBLE ASSETS.. $ 3,597 $ 333 $ 79 $ 2 $ 2,563 $ (476) $ 814 $ 1,169 $ 552
------- ------ ------ ---- ------- -------- ------- ------- ------
Land, land rights
and buildings
including buildings
on third party
land............... 21,854 2,539(1) 1,387(1) 295 8,785 (2,894) 11,622 12,515 876
Technical equipment
and machines....... 43,111 1,399 936 468 34,017 (5,708) 4,317 5,167 2,094
Other equipment,
factory and office
equipment.......... 27,345 2,146 2,136 109 19,902 (3,621) 3,941 4,776 2,469
Payments on account
and assets under
construction....... 1,050 535 0 (874) 0 (138) 573 1,050 0
------- ------ ------ ---- ------- -------- ------- ------- ------
TANGIBLE ASSETS.... 93,360 6,619 4,459 (2) 62,704 (12,361) 20,453 23,508 5,439
------- ------ ------ ---- ------- -------- ------- ------- ------
Shares in
affiliated
enterprises........ 26 6 0 0 0 (4) 28 26 0
Participation in
associated
enterprises........ 749 86 0 0 105 (99) 631 627 0
Participations..... 713 0 75 0 170 (95) 373 469 0
Long term
investments........ 77 8 2 0 0 (9) 74 76 0
Other loans........ 223 42 31 0 0 (30) 204 223 0
------- ------ ------ ---- ------- -------- ------- ------- ------
FINANCIAL ASSETS... 1,788 142 108 0 275 (237) 1,310 1,421 0
------- ------ ------ ---- ------- -------- ------- ------- ------
FIXED ASSETS....... $98,745 $7,094 $4,646 $ 0 $65,542 $(13,074) $22,577 $26,098 $5,991
======= ====== ====== ==== ======= ======== ======= ======= ======
</TABLE>
- ----
(1) This contains the book values of the Aschaffenburg premises of $1,209 that
transferred to Allweiler AG in connection with the merger with Actram
Leasubjekt Gesellschaft gmbH & Co Grundsolcksverwaltungsgesellschaft Objekt
Aschaffenburg, KG, Dusseldorf, and that was sold during the reporting year.
See analysis of fixed assets of A Group
F-77
<PAGE>
ALLWEILER AKTIENGESELLSCHAFT, RADOLFZELL/BODENSEE
NOTES TO THE FINANCIAL STATEMENTS AND
TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE FINANCIAL YEAR 1997
(4) INVENTORIES
<TABLE>
<CAPTION>
ALLWEILER AG ALLWEILER GROUP
---------------- ----------------
1997 1996 1997 1996
------- ------- ------- -------
<S> <C> <C> <C> <C>
Raw materials, consumables and supplies.... $ 4,965 $ 5,458 $ 5,652 $ 6,388
Work in process............................ 15,567 16,892 16,570 17,869
Finished goods and merchandise............. 3,371 5,638 6,923 8,209
------- ------- ------- -------
23,903 27,988 29,145 32,466
less
. Payments on account..................... (1,690) (1,175) (2,296) (1,402)
------- ------- ------- -------
$22,213 $26,813 $26,849 $31,064
======= ======= ======= =======
</TABLE>
Payments on account have a residual term of up to one year.
(5) RECEIVABLES AND OTHER ASSETS
<TABLE>
<CAPTION>
ALLWEILER AG ALLWEILER GROUP
--------------- ---------------
1997 1996 1997 1996
------- ------- ------- -------
<S> <C> <C> <C> <C>
Trade payables................................. $13,380 $14,603 $24,985 $26,869
Receivables due from affiliated enterprises.... 6,464 6,246 318 171
--of which with a residual term of more than 1
year......................................... 223 0 0 0
Receivables due from enterprises in which a
participation is held......................... 74 770 74 770
--of which with a residual term of more than 1
year......................................... 0 564 0 564
Other assets................................... 2,667 3,086 3,542 3,658
--of which with a residual term of more than 1
year......................................... 1,319 1,344 1,361 1,397
------- ------- ------- -------
$22,585 $24,705 $28,919 $31,468
======= ======= ======= =======
</TABLE>
(6) CASH
Cash and cash equivalents comprise bank balances, postal bank balances as
well as cash in hand.
(7) PREPAID EXPENSES
<TABLE>
<CAPTION>
ALLWEILER AG ALLWEILER GROUP
------------- ---------------
1997 1996 1997 1996
------ ------ ------- -------
<S> <C> <C> <C> <C>
Debt discount..................................... $ 179 $ 195 $ 179 $ 195
Other............................................. 127 165 259 307
------ ------ ------- -------
306 360 438 502
------ ------ ------- -------
Deferred taxes.................................... 0 0 331 233
------ ------ ------- -------
$ 306 $ 360 $ 769 $ 735
====== ====== ======= =======
</TABLE>
F-78
<PAGE>
ALLWEILER AKTIENGESELLSCHAFT, RADOLFZELL/BODENSEE
NOTES TO THE FINANCIAL STATEMENTS AND
TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE FINANCIAL YEAR 1997
(8) SUBSCRIBED CAPITAL
The capital stock amounts to $6.7 million (DM 12.0 million). It is divided
up into:
<TABLE>
<S> <C> <C>
$3.35 million (DM 6.0 120,000 shares at DM 50
million) ordinary shares each
$3.35 million (DM 6.0 preference shares without 120,000 shares at DM 50
million) voting rights each
</TABLE>
In accordance with the resolution of the ordinary shareholders' meeting on
June 14, 1996 the board of management was authorized, with the consent of the
supervisory board, to increase the capital stock by $3.35 million (DM $6
million) once or several times until June 13, 2001 by issuing new shares made
out to the bearer in return for a cash contribution. Both ordinary shares and
preference shares without voting rights may be issued. The preference rights
should be equipped with the same rights laid down in the by-laws as the
preference shares previously issued. If ordinary and preference shares are
issued at the same time, the board of management is authorized, with the
consent of the supervisory board, to preclude the subscription rights or
bearers of shares of one category to shares of the other category if the
subscription ratio for the two categories is set the same. The management
board is authorized, with the consent of the supervisory board, to exclude any
fractional shares from the preference right of the shareholders.
In the financial year 1997 the board of management of Allweiler AG did not
make use of the authorization to increase the capital stock in accordance with
a resolution of the annual shareholders' meeting on June 14, 1996.
(9) REVENUE RESERVES
This relates to other revenue reserves which developed as follows:
<TABLE>
<CAPTION>
ALLWEILER
----------------
AG GROUP
------- -------
<S> <C> <C>
January 1, 1997............................................. $10,553 $11,487
Changes due to consolidation measures (including currency
translation)............................................... (1,397) (1,475)
------- -------
December 31, 1997........................................... $ 9,156 $10,012
======= =======
</TABLE>
(10) NET RETAINED PROFIT
The board of management and the supervisory board propose to the
shareholders' meeting to use the net retained profit of Allweiler AG as
follows:
<TABLE>
<S> <C>
Distribution to shareholders.................................... $1,004
Profit carried forward.......................................... 325
------
Net retained profit............................................. $1,329
======
</TABLE>
(11) OTHER ACCRUALS
<TABLE>
<CAPTION>
ALLWEILER
ALLWEILER AG GROUP
--------------- ---------------
1997 1996 1997 1996
------- ------- ------- -------
<S> <C> <C> <C> <C>
Tax accruals.................................... $ 898 $ 639 $ 1,936 $ 1,229
Other accruals.................................. 9,455 10,271 12,294 13,361
------- ------- ------- -------
$10,353 $10,910 $14,230 $14,590
======= ======= ======= =======
</TABLE>
F-79
<PAGE>
ALLWEILER AKTIENGESELLSCHAFT, RADOLFZELL/BODENSEE
NOTES TO THE FINANCIAL STATEMENTS AND
TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE FINANCIAL YEAR 1997
The tax accruals relate to corporate income tax and trade tax amounts for the
current year and past financial years.
Other accruals mainly take account of obligations in the personnel and social
security area, recultivation obligations, warranty obligations and potential
losses from pending transactions.
(12) LIABILITIES
ALLWEILER AG
<TABLE>
<CAPTION>
OF WHICH
OF WHICH WITH A WITH A
RESIDUAL TERM OF RESIDUAL
TOTAL -------------------- TOTAL TERM OF
AMOUNT UP TO 1-5 OVER 5 AMOUNT UP TO 1
1997 1 YEAR YEARS YEARS 1996 YEAR
------- ------ ------ ------ ------- --------
<S> <C> <C> <C> <C> <C> <C>
Trade payables................... $ 3,765 $3,765 $ 0 $ 0 $ 5,264 $ 5,264
------- ------ ------ ------ ------- -------
Other liabilities
. Liabilities to banks........... 8,962 2,449 3,831 2,682 15,485 8,560
.Payable to enterprises in which
a participation is held....... 15 15 0 0 113 113
.Payable to Versorgungs- und
Unterstutzungsverein der
ALLWEILER AG, Radolfzell,
e.V. ......................... 13,090 1,263 5,052 6,775 16,907 1,459
. Other liabilities.............. 2,197 2,197 0 0 2,997 2,997
--of which taxes................ 461 461 0 0 651 651
--of which relating to social
security....................... 1,167 1,167 0 0 1,298 1,298
------- ------ ------ ------ ------- -------
24,264 5,924 8,883 9,457 35,502 13,129
------- ------ ------ ------ ------- -------
$28,029 $9,689 $8,883 $9,457 $40,766 $18,393
======= ====== ====== ====== ======= =======
</TABLE>
F-80
<PAGE>
ALLWEILER AKTIENGESELLSCHAFT, RADOLFZELL/BODENSEE
NOTES TO THE FINANCIAL STATEMENTS AND
TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE FINANCIAL YEAR 1997
ALLWEILER Group
<TABLE>
<CAPTION>
OF WHICH
OF WHICH WITH A WITH A
RESIDUAL TERM OF RESIDUAL
TOTAL --------------------- TOTAL TERM OF
AMOUNT UP TO 1-5 OVER 5 AMOUNT UP TO 1
1997 1 YEAR YEARS YEARS 1996 YEAR
------- ------- ------ ------ ------- --------
<S> <C> <C> <C> <C> <C> <C>
Trade payables(1)............... $ 7,494 $ 7,494 $ 0 $ 0 $ 8,570 $ 8,570
------- ------- ------ ------ ------- -------
Other liabilities
. Liabilities to banks(2)....... 10,435 3,912 3,841 2,682 17,993 11,062
.Liabilities from bills drawn
and accepted................. 116 116 0 0 141 141
.Payable to enterprises in which
a participation is held...... 131 131 0 0 113 113
.Payable to Versorgungs-und
Unterstutzungsverein der
ALLWEILER AG,
Radolfzell, e.V.(3).......... 13,090 1,263 5,052 6,775 16,907 1,459
.Other liabilities.............. 3,466 3,466 0 0 4,170 4,170
--of which taxes............... 1,101 1,101 0 0 1,172 1,172
--of which relating to social
security...................... 1,558 1,558 0 0 1,656 1,656
------- ------- ------ ------ ------- -------
27,238 8,888 8,893 9,457 39,324 16,945
------- ------- ------ ------ ------- -------
$34,732 $16,382 $8,893 $9,457 $47,894 $25,515
======= ======= ====== ====== ======= =======
</TABLE>
- --------
(1): Trade payables are subject to the customary retention of title.
(2): Of the liabilities to banks, $6,529,000 are secured by mortgages at
Allweiler AG.
(3): The residual terms for the liabilities due from Versorgungs-und
Unterstutzungsverein der Allweiler AG, Radolfzell e.V. have been
allocated according to their expected utilization.
G. CONTINGENT LIABILITIES AND OTHER FINANCIAL OBLIGATIONS
Contingent liabilities
<TABLE>
<CAPTION>
ALLWEILER
ALLWEILER AG GROUP
------------- -------------
1997 1996 1997 1996
------ ------ ------ ------
<S> <C> <C> <C> <C>
Notes payable...................................... $ 123 $ 111 $ 123 $ 111
Warranties, guarantees(1).......................... 6,406 6,358 6,290 5,119
Membership liability cooperative shares............ 2 2 2 2
------ ------ ------ ------
$6,531 $6,471 $6,415 $5,232
====== ====== ====== ======
</TABLE>
- --------
(1): Of the amount Allweiler AG is obligated as guarantor for an amount of
$1,781,000 (prior year: $2,192,000). The other warrantees were given by
banks as guarantor on behalf of Allweiler AG (individual financial
statements) and its subsidiaries (consolidated financial statements).
F-81
<PAGE>
ALLWEILER AKTIENGESELLSCHAFT, RADOLFZELL/BODENSEE
NOTES TO THE FINANCIAL STATEMENTS AND
TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE FINANCIAL YEAR 1997
Other financial commitments
<TABLE>
<CAPTION>
ALLWEILER
ALLWEILER AG GROUP
------------- --------------
1997 1996 1997 1996
------ ------ ------ -------
<S> <C> <C> <C> <C>
Rent, lease and leasing obligations............... $4,975 $7,742 $6,760 $10,625
--of which due within 5 years.................... 4,965 7,406 6,489 9,588
Purchase commitments.............................. 339 544 339 544
------ ------ ------ -------
$5,314 $8,286 $7,099 $11,169
====== ====== ====== =======
</TABLE>
H. EXPLANATIONS TO THE INCOME STATEMENT
(13) SALES
Sales are mainly generated from the manufacture and sale of pumps and
systems and can be split up by geographically defined area as follows:
<TABLE>
<CAPTION>
ALLWEILER
ALLWEILER AG GROUP
------------- -------------
1997 1996 1997 1996
MILL. MILL. MILL. MILL.
OF USD OF USD OF USD OF USD
------ ------ ------ ------
<S> <C> <C> <C> <C>
Germany............................................. $ 64.6 $ 66.0 $ 65.0 $ 66.0
Rest of the World................................... 59.0 57.7 89.3 89.6
------ ------ ------ ------
$123.6 $123.7 $154.3 $155.6
====== ====== ====== ======
</TABLE>
(14) OTHER OPERATING INCOME
Other operating income in the individual and consolidated financial
statements mainly contains income from the reversal of accruals and from the
sale of fixed assets. Other operating income contains income of $788,000 in
the individual and consolidated financial statements that relates to other
periods.
(15) COST OF MATERIALS
<TABLE>
<CAPTION>
ALLWEILER AG ALLWEILER GROUP
--------------- ---------------
1997 1996 1997 1996
------- ------- ------- -------
<S> <C> <C> <C> <C>
Cost of raw materials, consumables and
supplies and of purchased goods.............. $41,513 $43,958 $53,695 $55,741
Cost of purchased services.................... 2,106 1,995 2,875 2,421
------- ------- ------- -------
$43,619 $45,953 $56,570 $58,162
======= ======= ======= =======
</TABLE>
(16) PERSONNEL EXPENSES
<TABLE>
<CAPTION>
ALLWEILER AG ALLWEILER GROUP
--------------- ---------------
1997 1996 1997 1996
------- ------- ------- -------
<S> <C> <C> <C> <C>
Wages and salaries............................. $42,454 $46,566 $50,601 $55,066
Social security and other pension costs........ 8,842 10,386 11,163 12,685
of which for old age pensions................. 606 1,284 951 1,617
------- ------- ------- -------
$51,296 $56,952 $61,764 $67,751
======= ======= ======= =======
</TABLE>
F-82
<PAGE>
ALLWEILER AKTIENGESELLSCHAFT, RADOLFZELL/BODENSEE
NOTES TO THE FINANCIAL STATEMENTS AND
TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE FINANCIAL YEAR 1997
(17) OTHER OPERATING EXPENSES
In the individual and consolidated financial statements other operating
expenses relate in particular to maintenance costs, sales commission, freight
out, legal and consulting costs, postage as well as rent and leasing expenses.
At Allweiler AG the financial statements contain other operating expenses of
$287,000 that relate to other periods.
In the consolidated financial statements other operating expenses contain
expenses of $299,000 that relate to other periods.
(18) FINANCIAL AND INVESTMENT RESULT
<TABLE>
<CAPTION>
ALLWEILER
ALLWEILER AG GROUP
-------------- ----------------
1997 1996 1997 1996
------ ------ ------- -------
<S> <C> <C> <C> <C>
Investment income............................ $1,461 $1,468 $ 6 $ 17
--of which from affiliated enterprises...... 1,456 1,468 0 0
Result from associated enterprises........... 12 19 61 (2)
Income from securities and other long-term
loans....................................... 14 7 16 9
Other interested and similar income.......... 111 180 172 223
--of which from affiliated enterprises
affiliated enterprises..................... 61 73 3 3
Interest and similar expenses................ (1,575) (1,786) (1,836) (1,961)
--of which to affiliated enterprises........ 0 9 0 0
------ ------ ------- -------
$ 23 $ (112) $(1,581) $(1,714)
====== ====== ======= =======
</TABLE>
(19) EXTRAORDINARY EXPENSES
The extraordinary expenses in the financial statements of Allweiler AG and
in the consolidated financial statements contains exclusively expenses in
connection with the assumption of pension pledges from Versorgungs-und
Unterstutzungsverein der Allweiler AG, Radolfzell, e. V. by Allweiler AG. In
the prior year this item contained extraordinary expenses in connection with
the closures of the Aschaffenburg plant.
(20) TAXES ON INCOME
Taxes on income contain subsequent payments on account of the tax field
audit in an amount of $679,000.
In the financial year 1997 the extraordinary depreciation charged in
connection with the transfer of hidden reserves in accordance with (S) 6b EstG
of $399,000 resulted in a reduction in taxable income; it will however lead to
an increase in the future tax burden.
Extraordinary expenses are fully tax deductible.
F-83
<PAGE>
ALLWEILER AKTIENGESELLSCHAFT, RADOLFZELL/BODENSEE
NOTES TO THE FINANCIAL STATEMENTS AND
TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE FINANCIAL YEAR 1997
J. OTHER DISCLOSURES
Employees
On average the Company employed the following number of persons during the
year:
<TABLE>
<CAPTION>
ALLWEILER
ALLWEILER AG GROUP
------------- -----------
1997 1996 1997 1996
------ ------ ----- -----
<S> <C> <C> <C> <C>
Wage earners.......................................... 520 525 574 577
Salaried employees.................................... 477 465 642 617
Trainees.............................................. 70 70 75 71
------ ------ ----- -----
1,067 1,060 1,291 1,265
====== ====== ===== =====
</TABLE>
K. RECONCILIATION TO US GAAP
<TABLE>
<CAPTION>
1997 1996
------- -------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
NET INCOME AS REPORTED IN THE CONSOLIDATED INCOME STATEMENTS
UNDER GERMAN GAAP.......................................... $ 2,020 $ 1,657
Leasing contracts......................................... 0 (1)
Goodwill.................................................. (19) (22)
Pensions and other postretirement benefits................ 4,681 (1,335)
Deferred Taxes............................................ 0 (665)
Deferred Taxes on the adjustments......................... (2,471) 1,072
------- -------
NET INCOME IN ACCORDANCE WITH US GAAP....................... $ 4,211 $ 706
======= =======
<CAPTION>
1997 1996
------- -------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
EQUITY AS REPORTED IN THE CONSOLIDATED FINANCIAL STATEMENTS
UNDER GERMAN GAAP.......................................... $21,364 $23,165
Leasing contracts......................................... 0 (1)
Goodwill.................................................. 680 805
Pensions and other postretirement benefits................ 136 (5,053)
Deferred Taxes............................................ 0 (14)
Deferred Taxes on the adjustments......................... (432) 2,259
------- -------
US GAAP SHAREHOLDERS' EQUITY--END OF PERIOD................. $21,748 $21,161
======= =======
</TABLE>
The Allweiler consolidated financial statements have been prepared in
accordance with German GAAP, which differs in certain significant respects
from US GAAP. The following items describe the material variations in
accounting principles between German GAAP and US GAAP included in the table
above reconciling net income and shareholders' equity from German GAAP to US
GAAP.
a) Pension
Allweiler provides for pension costs and similar obligations including
postretirement benefits based on actuarial studies using the entry age method
as defined in the German tax code. US GAAP, as defined by SFAS No. 87, is more
prescriptive particularly as to the use of actuarial assumptions and requires
that a different actuarial method (the projected unit credit method) be used.
F-84
<PAGE>
ALLWEILER AKTIENGESELLSCHAFT, RADOLFZELL/BODENSEE
NOTES TO THE FINANCIAL STATEMENTS AND
TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE FINANCIAL YEAR 1997
b) Goodwill
In accordance with German GAAP, goodwill may be charged directly to
stockholder's equity or capitalized and amortized over its useful life,
generally ranging between 5 years and 20 years. Under US GAAP, the difference
between the purchase price and fair value of net assets acquired as part of a
business combination is capitalized as goodwill and amortized through the
income statement over 40 years.
c) Taxes
The deferred tax adjustment included in the reconciliation to US GAAP contains
the income tax effects of the above US GAAP adjustments, where appropriate.
L. CONSOLIDATED STATEMENTS OF CASH FLOWS (US GAAP) FOR THE ALLWEILER GROUP
<TABLE>
<CAPTION>
FOUR
MONTHS
YEAR YEAR ENDED
ENDED ENDED APRIL 30,
YEAR ENDED DECEMBER 31, 1997 1996 1998
- ----------------------- ------- -------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................... $ 2,020 $ 1,657 $ (941)
Depreciation and amortization................. 5,991 7,031 1,510
Change in pension reserve..................... 5,938 (478) 5,011
Change in accrued liabilities................. 1,624 (545) 1,464
Change in inventories......................... 105 (1,667) (3,159)
Change in trade receivables and other accounts
receivable................................... (1,671) (2,862) 1,012
Change in deferred income..................... (135) (31) (318)
Change in trade payables...................... 62 656 (58)
Change in other accounts payable.............. (130) 422 (1,016)
------- -------- -------
TOTAL OPERATING CASH FLOW.................... 13,804 4,183 3,505
------- -------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for additions to intangibles and
property, plant and equipment, net........... (7,182) (10,144) (1,605)
Payments for additions to investments, net.... (146) (171) (114)
Sales of fixed assets......................... 1,398 162 55
------- -------- -------
CASH USED FOR INVESTING ACTIVITIES........... (5,930) (10,153) (1,664)
------- -------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings (repayments) of debt............... (6,977) 7,551 (130)
Dividends paid................................ (761) (1,676) 0
------- -------- -------
CASH PROVIDED BY (USED IN) FINANCING
ACTIVITIES.................................. (7,738) 5,875 (130)
------- -------- -------
Effect of foreign exchange rate on fixed
assets....................................... 7 93 1
Effect of foreign exchange rate on earnings
reserves..................................... 47 144 (25)
Effect of foreign exchange rate on net cash... (415) (255) 9
------- -------- -------
EFFECT OF EXCHANGE RATE CHANGES............... (361) (18) (15)
------- -------- -------
NET CHANGE IN CASH AND CASH EQUIVALENTS....... (225) (113) 1,696
------- -------- -------
Opening balance of cash and cash equivalents.. 3,090 3,203 2,837
Closing balance of cash and cash equivalents.. 2,865 3,090 4,533
------- -------- -------
CHANGE IN CASH AND CASH EQUIVALENTS........... $ (225) $ (113) $ 1,696
======= ======== =======
</TABLE>
F-85
<PAGE>
ALLWEILER AKTIENGESELLSCHAFT, RADOLFZELL/BODENSEE
NOTES TO THE FINANCIAL STATEMENTS AND
TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE FINANCIAL YEAR 1997
Boards of ALLWEILER AG
During the financial year the Management Board comprised the following
persons:
<TABLE>
<S> <C>
George M.
Scheerle Chairman
Hans-Peter
Schmidt
During the financial year the Supervisory Board comprised the following
persons:
Dr. Franz-Peter
Groh Chairman
Ludwig Fischer Deputy Chairman
Ludwig Merckle
Dr. Kurt E.
Stirnemann
Adolf Zanner Employee representative
Georg Quetting Employee representative since February 25, 1997
</TABLE>
Total remuneration of the board of management for the financial year 1997
amounted to $714,000. The remuneration of the supervisory board of Allweiler
AG amounts to $92,000.
During the fiscal year 1997 pension payments of $240,000 were made to former
members of the Management Board and their survivors. Pension commitments for
current and future pension claims of these persons amounted to $1,533,000
(present values pursuant to (S) 6a EStG; accruals have been established for
the full amount).
Radolfzell, February 1998
ALLWEILER AKTIENGESELLSCHAFT
The Board of Management
/s/ George M. Scheerle /s/ Hans-Peter Schmidt
_____________________________ _____________________________
George M. Scheerle Hans-Peter Schmidt
F-86
<PAGE>
ALLWEILER AKTIENGESELLSCHAFT, RADOLFZELL
MANAGEMENT REPORT AND GROUP MANAGEMENT REPORT
FOR THE FINANCIAL YEAR 1997
(DOLLARS IN THOUSANDS, UNLESS SPECIFICALLY INDICATED OTHERWISE)
GENERAL ECONOMIC SITUATION
In 1997, the German economy showed a revival, but this was almost completely
due to a significant increase in export activity. In Germany, the development
in domestic demand was appreciably weaker and disappointing. In spite of
generally positive economic developments, unemployment remained at a high
level, and the lack of positive political signals is paralyzing any
reorientation or new start in Germany.
BUSINESS DEVELOPMENTS
For Allweiler AG, financial year 1997 was marked by high foreign demand for
our products. Sales followed the development in incoming orders, and led to
good capacity utilization in all ALLWEILER divisions. Increased efforts in
sales to push through urgently needed price increases on the one hand and, on
the other, cost reductions caused by value-analytical measures were
successful.
At DM 214.0 million ($123.0 million), sales of Allweiler AG in the financial
year 1997 were 15 per cent above the prior-year figure (DM 186.0 million
($124.0 million)). In the group, sales also increased by 15 per cent, with the
share of exports increasing to 48%.
At year-end 1997, order backlog was slightly lower than the prior year
level, at DM 47.6 million ($26.6 million) compared with DM 48.6 million ($31.3
million).
INTEGRATION OF THE ASCHAFFENBURG PLANT'S ACTIVITIES IN RADOLFZELL
The relocation of activities from Aschaffenburg to Radolfzell, which was
completed at the end of 1996, led in the first half of 1997 to redoubled
efforts to transfer technological know-how and optimize technological
capacities. From the middle of 1997, it was largely possible to rely on normal
business operations. For our customers, this was noticeable in clearly
improved delivery reliability.
EARNINGS SITUATION
At DM 15.0 million ($8.6 million), the result of ordinary activities of
Allweiler AG was well above the level of the prior year (DM 5.0 million ($3.3
million)). (Group DM 18.0 million ($10.4 million), prior year DM 8.0 million
($5.3 million)).
Given actually existing orders which are pending delivery at the beginning
of 1998, inventories of finished goods and work in progress have risen
slightly by DM 1.4 million ($0.8 million).
The improvement in the result from ordinary activities is caused by a clear
growth in sales coupled with proportionally lower increases in personnel
expenses. This was made better by employees' willingness to offset the
negotiated 1.5% wage increase against voluntary benefits. The improved average
earnings quality of our orders was a further positive influence on the
increase in earnings.
The profit from the sale of land and buildings in Aschaffenburg in 1997 is
neutralized in the financial statements of Allweiler AG by recourse to (S) 6b
EStG, but is disclosed in the consolidated result as improving result.
In past years, the board of management of Allweiler AG has repeatedly
pointed out that it is the company's aim to close the shortfall of the
pensions and benefit association. As a result of an alteration in the
financing structure of our retirement scheme, this has now been possible. In
1997, the management of Allweiler AG
F-87
<PAGE>
decided to convert the pension commitments of the pensions and benefit
association into a direct undertaking by Allweiler AG. In a first stage, this
was done for all employees born before 1941. In 1997, an accrual of DM 10.2
million ($5.9 million) was made for the extraordinary expenses in connection
with this direct undertaking, and disclosed as an extraordinary expense.
Net income for the year at Allweiler AG came to DM 2.2 million ($1.3
million) (prior year DM 0.8 million ($0.5 million)).
At DM 3.5 million ($2.0 million), net income for the group was approximately
DM 1.0 million ($0.6 million) higher than the DM 2.5 million ($1.7 million)
earned in the prior year.
PROCUREMENT MARKET
The number of suppliers was reduced in 1997. With our key suppliers we
worked together constantly in a spirit of partnership to improve our trading
relationship. This partnership between Allweiler and its suppliers has been
described in a brochure and is to serve as a guiding principle in the future.
RESEARCH AND DEVELOPMENT
At Allweiler, activities in the research and development sphere were
continued at a high level. In the area of screw pumps, the TRILUB, a pump
which was developed on the principle of an optimum cost-benefit ratio, was
launched on the market worldwide. The speed of product innovation has
increased. This is the basic precondition for achieving our goal of
introducing new products every year.
INVESTMENTS
At DM 11.7 million ($6.5 million), transfers to fixed assets were DM 3.5
million ($2.0 million) lower than in the prior year. Investments mainly served
to replace and rationalize administrative processes and manufacturing
processes.
DATA AND INFORMATION MANAGEMENT/ORGANIZATION
In the financial year 1997, activities focused on two major projects:
. Transition to a new release version for our entire business software;
this means that we are prepared both for the year 2000 and the
introduction of the euro.
. Updating of all PC workstations, both in terms of hardware and software.
As part of this measure, all PC software at Allweiler AG was brought up
to a uniform modern standard.
ENVIRONMENTAL MANAGEMENT
One major feature of our environmental protection efforts in 1997 was the
survey and modernization of the entire sewage system on the Radolfzell plant
site.
With our activities in the area of power and heat supplies, we succeeded in
making a major contribution to a better environment by means of perfect
control technology and process control techniques in combination with a block-
type thermal power station. For this, Allweiler received the 1997 Radolfzell
Environment Prize.
BALANCE-SHEET STRUCTURE AND LIQUIDITY
The slight rise in total assets in the consolidated balance sheet is caused
by a sales-related increase in trade receivables.
Equity of Allweiler AG increased to DM 34.3 million ($19.1 million) (prior
year: DM 33.5 million ($21.5 million)). In the group, equity also increased
from DM 36.0 million ($23.2 million) to DM 38.3 million ($21.3 million).
F-88
<PAGE>
At Allweiler AG, the capital ratio comes to 28 per cent (26 per cent in the
group).
PERSONNEL
In 1997, the average number of employees at Allweiler AG during the year
increased by seven employees to 1,067. In the group, an average of 1,291
persons were employed during the year (1996: 1,265 employees). The increase in
the group reflects greater sales efforts and the further expansion of the
sales team.
The number of trainees was maintained at the high level of 70 during 1997;
in the group, the number of trainees increased by 4 to 75 employees.
DIVIDENDS
On the basis of the retained earnings of TDM 2,383 ($1,374) at Allweiler AG,
the management proposes to the shareholders' meeting that shareholders be paid
a dividend of DM 7.00 ($4.04) per common share with a nominal value of
DM 50.00 and DM 8.00 ($4.61) per preferred share with a nominal value of
DM 50.00. As the dividend is financed by the distribution of profits from
foreign subsidiaries, resident shareholders with unlimited tax liability will
not receive any tax credit on the inflow of dividends.
TAKEOVER BID BY CONSTELLATION CAPITAL PARTNERS LLC
In an ad hoc publication at the end of February 1998, the board of
management of Allweiler AG announced that Constellation Capital Partners LLC,
Virginia, USA, intends to submit the shareholders of Allweiler AG a takeover
bid for their shares. Negotiations with Constellation Capital Partners LLC are
progressing positively, and management therefore assumes that a takeover of
the shares will be performed successfully in the first half of 1998.
The board of management of Allweiler AG welcomes the activities of
Constellation and will recommend Allweiler shareholders to accept the offer.
OUTLOOK
The introduction of new products in 1998, supported by continuing high
demand for our products throughout the world, means that we can expect
developments to be as good as for the financial year 1997. We assume that the
result from ordinary activities can be kept at the high level achieved in
1997. However, as in 1997, the transfer of pension commitments from the
pensions and benefit association will give rise to extraordinary expenses for
Allweiler AG. Once this second phase of refinancing benefits rights has been
completed, all active employees will have a direct undertaking from Allweiler
AG for their pensions. The pensions and benefit association will thus be
closed to applicants and will use its cash assets to pay out benefits to
existing pensioners, widows and orphans.
Radolfzell, February 1998
Allweiler Aktiengesellschaft
The Board of Management
/s/ George M. Scheerle /s/ Hans-Peter Schmidt
_____________________________ _____________________________
George M. Scheerle Hans-Peter Schmidt
F-89
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR ANY OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPEC-
TUS IN CONNECTION WITH THE OFFERING COVERED BY THIS PROSPECTUS. IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, THE COMMON
STOCK IN ANY JURISDICTION WHERE, OR TO ANY PERSON TO WHOM, IT IS UNLAWFUL TO
MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR
ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION
THAT THERE HAS NOT BEEN ANY CHANGE IN THE FACTS SET FORTH IN THIS PROSPECTUS
OR IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF.
----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary....................................................... 3
Risk Factors............................................................. 11
Use of Proceeds.......................................................... 17
Dividend Policy.......................................................... 17
Dilution................................................................. 18
Capitalization........................................................... 19
Selected Unaudited Pro Forma Consolidated Financial Data................. 20
Selected Historical Consolidated Financial Data.......................... 22
Management's Discussion and Analysis of Financial Condition and Results
Of Operations........................................................... 23
Business................................................................. 29
Management............................................................... 40
Principal Stockholders................................................... 46
Certain Relationships and Related Transactions........................... 47
Description of Capital Stock............................................. 50
Certain Charter and By-law Provisions.................................... 51
Description of Certain Indebtedness...................................... 55
Shares Eligible for Future Sale.......................................... 57
Certain United States Federal Tax Consequences to Non-United States
Holders................................................................. 59
Underwriting............................................................. 61
Legal Matters............................................................ 64
Experts.................................................................. 64
Available Information.................................................... 65
Index to Financial Statements............................................ F-1
</TABLE>
----------------
UNTIL , 1998 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING IN
THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DELIVERY RE-
QUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS
WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SHARES
LOGO
COLFAX CORPORATION
COMMON STOCK
----------------
PROSPECTUS
----------------
MERRILL LYNCH & CO.
SCHRODER & CO. INC.
LEHMAN BROTHERS
, 1998
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
[ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS]
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS, DATED AUGUST 20, 1998
PROSPECTUS
SHARES
COLFAX CORPORATION
COMMON STOCK LOGO
-----------
All of the shares of Common Stock offered hereby are being sold by Colfax
Corporation (the "Company"). Of the shares of Common Stock offered hereby,
shares are being offered for sale initially outside the United States and
Canada by the International Managers and shares are being offered for sale
initially in a concurrent offering in the United States and Canada by the U.S.
Underwriters. The initial public offering price and the underwriting discount
per share will be identical for both Offerings. See "Underwriting."
Prior to the Offerings, there has been no public market for the Common Stock.
It is currently estimated that the initial public offering price will be
between $ and $ per share. For a discussion relating to factors to be
considered in determining the initial public offering price, see
"Underwriting." Application has been made for listing of the Common Stock on
the New York Stock Exchange under the symbol "CXC".
SEE "RISK FACTORS" BEGINNING ON PAGE 11 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED
HEREBY.
-----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT(1) COMPANY(2)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share.................................... $ $ $
- --------------------------------------------------------------------------------
Total(3)..................................... $ $ $
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(1) The Company has agreed to indemnify the several Underwriters against
certain liabilities, including liabilities under the Securities Act of
1933, as amended. See "Underwriting."
(2) Before deducting expenses payable by the Company estimated at $ .
(3) The Company has granted the International Managers and the U.S.
Underwriters options in each case exercisable within 30 days after the date
hereof, to purchase up to an additional shares and shares of Common
Stock, respectively, solely to cover over-allotments, if any. If such
options are exercised in full, the total Price to Public, Underwriting
Discount and Proceeds to Company will be $ , $ and $ , respectively.
See "Underwriting."
-----------
The shares of Common Stock are offered by the several Underwriters, subject
to prior sale, when, as and if issued to and accepted by them, subject to
approval of certain legal matters by counsel for the Underwriters and certain
other conditions. The Underwriters reserve the right to withdraw, cancel or
modify such offer and to reject orders in whole or in part. It is expected that
delivery of the shares of Common Stock will be made in New York, New York on or
about , 1998.
-----------
MERRILL LYNCH INTERNATIONAL
SCHRODERS
LEHMAN BROTHERS
-----------
The date of this Prospectus is , 1998.
<PAGE>
[ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS]
UNDERWRITING
Merrill Lynch International, J. Henry Schroder & Co. and Lehman Brothers
International (Europe) are acting as lead managers (the "Lead Managers") of
the International Managers named below (the "International Managers"). Subject
to the terms and conditions set forth in an international purchase agreement
(the "International Purchase Agreement") among the Company and the
International Managers, and concurrently with the sale of shares of Common
Stock to the U.S. Underwriters (as defined below), the Company has agreed to
sell to the International Managers, and each of the International Managers
severally and not jointly has agreed to purchase from the Company, the number
of shares of Common Stock set forth opposite its name below.
<TABLE>
<CAPTION>
NUMBER OF
INTERNATIONAL MANAGER SHARES
--------------------- ---------
<S> <C>
Merrill Lynch International........................................
J. Henry Schroder & Co.............................................
Lehman Brothers International (Europe).............................
---
Total.........................................................
===
</TABLE>
The Company has also entered into a U.S. purchase agreement (the "U.S.
Purchase Agreement") with certain underwriters in the United States and Canada
(the "U.S. Underwriters" and, together with the International Managers, the
"Underwriters") for whom Merrill Lynch, Pierce, Fenner & Smith Incorporated
("Merrill Lynch"), Schroder & Co. Inc. and Lehman Brothers Inc. are acting as
representatives (the "U.S. Representatives"). Subject to the terms and
conditions set forth in the U.S. Purchase Agreement, and concurrently with the
sale of shares of Common Stock to the International Managers pursuant to
the International Purchase Agreement, the Company has agreed to sell to the
U.S. Underwriters, and the U.S. Underwriters severally have agreed to purchase
from the Company, an aggregate of shares of Common Stock. The initial
public offering price per share and the total underwriting discount per share
of Common Stock are identical under the International Purchase Agreement and
the U.S. Purchase Agreement.
In the International Purchase Agreement and the U.S. Purchase Agreement, the
several International Managers and the several U.S. Underwriters,
respectively, have agreed, subject to the terms and conditions set forth
therein, to purchase all of the shares of Common Stock being sold pursuant to
each such agreement if any of the shares of Common Stock being sold pursuant
to such agreement are purchased. Under certain circumstances, under the
International Purchase Agreement and the U.S. Purchase Agreement, the
commitments of non-defaulting Underwriters may be increased. The closings with
respect to the sale of shares of Common Stock to be purchased by the
International Managers and the U.S. Underwriters are conditioned upon one
another.
The Lead Managers have advised the Company that the International Managers
propose initially to offer the shares of Common Stock to the public at the
initial public offering price set forth on the cover page of this Prospectus,
and to certain dealers at such price less a concession not in excess of $
per share of Common Stock. The International Managers may allow, and such
dealers may reallow, a discount not in excess of $ per share of Common
Stock on sales to certain other dealers. After the initial public offering,
the public offering price, concession and discount may be changed.
The Company has granted options to the International Managers, exercisable
for 30 days after the date of this Prospectus, to purchase up to an aggregate
of additional shares of Common Stock at the initial public offering price
set forth on the cover page of this Prospectus, less the underwriting
discount. The International Managers may exercise these options solely to
cover over-allotments, if any, made on the sale of the Common Stock offered
hereby. To the extent that the International Managers exercise these options,
each International
61
<PAGE>
[ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS]
Manager will be obligated, subject to certain conditions, to purchase a number
of additional shares of Common Stock proportionate to such International
Manager's initial amount reflected in the foregoing table. The Company also has
granted options to the U.S. Underwriters, exercisable for 30 days after the
date of this Prospectus, to purchase up to an aggregate of additional
shares of Common Stock to cover over-allotments, if any, on terms similar to
those granted to the International Managers.
At the request of the Company, the Underwriters have reserved for sale, at
the initial public offering price, up to of the shares offered hereby to
be sold to certain directors, officers, employees, business associates and
related persons of the Company. The number of shares of Common Stock available
for sale to the general public will be reduced to the extent such persons
purchase such reserved shares. Any reserved shares which are not orally
confirmed for purchase within one day of the pricing of the Offerings will be
offered by the Underwriters to the general public on the same terms as the
other shares offered hereby.
The Company, the Company's executive officers and directors and all other
persons who will be stockholders of the Company immediately after giving effect
to the Combination (but not the Offerings) have agreed, subject to certain
exceptions, not to directly or indirectly (i) offer, pledge, sell, contract to
sell, sell any option or contract to purchase, purchase any option or contract
to sell, grant any option, right or warrant for the sale of, or otherwise
dispose of or transfer any shares of Common Stock or securities convertible
into or exchangeable or exercisable for Common Stock, whether now owned or
thereafter acquired by the person executing the agreement or with respect to
which the person executing the agreement thereafter acquires the power of
disposition, or file a registration statement under the Securities Act with
respect to the foregoing or (ii) enter into any swap or other agreement that
transfers, in whole or in part, the economic consequence of ownership of the
Common Stock whether any such swap or transaction is to be settled by delivery
of Common Stock or other securities, in cash or otherwise, without the prior
written consent of Merrill Lynch on behalf of the Underwriters for a period of
180 days after the date of this Prospectus. The foregoing agreement will not
limit the ability of such stockholder to transfer shares in a private placement
or to pledge shares, provided that the transferee or pledgee agrees to be bound
by such agreement. The foregoing agreement also will not limit the Company's
ability to (i) sell to the Underwriters the shares of Common Stock in
connection with the Offerings (including upon exercise of the over-allotment
option by any of the Underwriters), (ii) grant stock options under the Plan,
(iii) issue shares upon the exercise of outstanding stock options, (iv) issue
shares to third parties as consideration for the Company's acquisition from
such third parties of fluid handling or industrial positioning businesses, (v)
file a shelf registration statement with respect to the possible resale of
outstanding shares of Common Stock (provided that no sales may be made under
such registration statement during the 180-day lock-up period), (vi) file a
registration statement registering the shares that may be issued pursuant to
options granted or to be granted under the Plan, or (vii) file a registration
statement registering the shares owned by the Rales (provided that no sales may
be made under such registration statement during the 180-day lock-up period).
See "Shares Eligible For Future Sale."
The International Managers and the U.S. Underwriters have entered into an
intersyndicate agreement (the "Intersyndicate Agreement") that provides for the
coordination of their activities. Pursuant to the Intersyndicate Agreement, the
International Managers and the U.S. Underwriters are permitted to sell shares
of Common Stock to each other for purposes of resale at the initial public
offering price, less an amount not greater than the selling concession. Under
the terms of the Intersyndicate Agreement, the U.S. Underwriters and any dealer
to whom they sell shares of Common Stock will not offer to sell or sell shares
of Common Stock to persons who are non-U.S. or non-Canadian persons or to
persons they believe intend to resell to persons who are non-U.S. or non-
Canadian persons, and the International Managers and any dealer to whom they
sell shares of Common Stock will not offer to sell or sell shares of Common
Stock to U.S. persons or to Canadian persons or to persons they believe intend
to resell to U.S. or Canadian persons, except in the case of transactions
pursuant to the Intersyndicate Agreement.
Prior to the Offerings, there has been no public market for the Common Stock
of the Company. The initial public offering price will be determined through
negotiations among the Company and the U.S. Representatives and the Lead
Managers. The factors to be considered in determining the initial public
offering price, in addition to prevailing market conditions, will be price-
earnings ratios of publicly traded companies that the U.S. Representatives
believe to be comparable to the Company, certain financial information of the
Company, the
62
<PAGE>
[ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS]
history of, and the prospects for, the Company and the industries in which it
competes, and an assessment of the Company's management, its past and present
operations, the prospects for, and timing of, future revenues of the Company,
the present state of the Company's development, and the above factors in
relation to market values and various valuation measures of other companies
engaged in activities similar to the Company. There can be no assurance that an
active trading market will develop for the Common Stock or that the Common
Stock will trade in the public market subsequent to the Offerings at or above
the initial public offering price.
Application has been made for listing of the Common Stock on the NYSE under
the symbol "CXC." In order to meet the requirements for listing of the Common
Stock on that exchange, the U.S. Underwriters and the International Managers
have undertaken to sell lots of 100 or more shares to a minimum of 2,000
beneficial owners.
In connection with the repayment of amounts owed under the Allweiler Credit
Facility, Merrill Lynch International will receive more than ten percent of the
net proceeds of the Offerings. See "Use of Proceeds." Because more than ten
percent of the net proceeds of the Offerings may be paid to members or
affiliates of members of the National Association of Securities Dealers, Inc.
("NASD") participating in the Offerings, the Offerings will be conducted in
accordance with NASD Conduct Rule 2710(c)(8), which requires that the public
offering price of an equity security be no higher than the price recommended by
a Qualified Independent Underwriter which has participated in the preparation
of the Registration Statement and performed its usual standard of due diligence
with respect thereto. Schroder & Co. Inc. has agreed to act as, and assume the
responsibilities for acting as, Qualified Independent Underwriter with respect
to the Offerings, and the price of the Common Stock will be no higher than that
recommended by Schroder & Co. Inc.
The Underwriters will not confirm sales of the Common Stock to any account
over which they exercise discretionary authority without the prior written
specific approval of the customer.
The Company has agreed to indemnify the International Managers and the U.S.
Underwriters against certain liabilities, including certain liabilities under
the Securities Act, or to contribute to payments the U.S. Underwriters and the
International Managers may be required to make in respect thereof.
Until the distribution of the Common Stock is completed, rules of the
Securities and Exchange Commission (the "Commission") may limit the ability of
the Underwriters and certain selling group members to bid for and purchase the
Common Stock. As an exception to these rules, the U.S. Representatives are
permitted to engage in certain transactions that stabilize the price of the
Common Stock. Such transactions consist of bids or purchases for the purpose of
pegging, fixing or maintaining the price of the Common Stock.
If the Underwriters create a short position in the Common Stock in connection
with the Offerings, i.e., if they sell more shares of Common Stock than are set
forth on the cover page of this Prospectus, the U.S. Representatives may reduce
that short position by purchasing Common Stock in the open market. The U.S.
Representatives may also elect to reduce any short position by exercising all
or part of the over-allotment option described above.
The U.S. Representatives may also impose a penalty bid on certain
Underwriters and selling group members. This means that if the U.S.
Representatives purchase shares of Common Stock in the open market to reduce
the Underwriters' short position or to stabilize the price of the Common Stock,
they may reclaim the amount of the selling concession from the Underwriters and
selling group members who sold those shares as part of the Offerings.
In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher than
it might be in the absence of such purchases. The imposition of a penalty bid
might also have an effect on the price of the Common Stock to the extent that
it discourages resales of the Common Stock.
Neither the Company nor any of the Underwriters makes any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of the Common Stock. In addition, neither
the Company nor any of the Underwriters makes any representation that the U.S.
Representatives will engage in such transactions or that such transactions,
once commenced, will not be discontinued without notice.
63
<PAGE>
[ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS]
Each International Manager has agreed that (i) it has not offered or sold
and, prior to the expiration of the period of six months from the Closing
Date, will not offer or sell any shares of Common Stock to persons in the
United Kingdom, except to persons whose ordinary activities involve them in
acquiring, holding, managing or disposing of investments (as principal or
agent) for the purposes of their businesses or otherwise in circumstances
which do not constitute an offer to the public in the United Kingdom within
the meaning of the Public Offers of Securities Regulations 1995; (ii) it has
complied and will comply with all applicable provisions of the Financial
Services Act 1986 with respect to anything done by it in relation to the
Common Stock in, from or otherwise involving the United Kingdom; and (iii) it
has only issued or passed on and will only issue or pass on in the United
Kingdom any document received by it in connection with the issuance of Common
Stock to a person who is of a kind described in Article 11(3) of the Financial
Services Act 1986 (Investment Advertisements) (Exemptions) Order 1996 or is a
person to whom such document may otherwise lawfully be issued or passed on.
No action has been or will be taken in any jurisdiction (except in the
United States) that would permit a public offering of the shares of Common
Stock, or the possession, circulation or distribution of this Prospectus or
any other material relating to the Company or shares of Common Stock in any
jurisdiction where action for that purpose is required. Accordingly, the
shares of Common Stock may not be offered or sold, directly or indirectly, and
neither this Prospectus nor any other offering material or advertisements in
connection with the shares of Common Stock may be distributed or published, in
or from any country or jurisdiction except in compliance with any applicable
rules and regulations of any such country or jurisdiction.
Purchasers of the shares offered hereby may be required to pay stamp taxes
and other charges in accordance with the laws and practices of the country of
purchase in addition to the offering price set forth on the cover page hereof.
Certain of the Underwriters have from time to time provided investment
banking financial advisory services to the Company and its affiliates, for
which they have received customary compensation, and may continue to do so in
the future. In addition, a portion of the proceeds of the Offerings is
expected to be used to repay the amounts owed under the Allweiler Credit
Facility to Merrill Lynch International, an affiliate of Merrill Lynch. See
"Use of Proceeds."
LEGAL MATTERS
Certain legal matters with respect to the validity of the Common Stock
offered hereby and certain other legal matters in connection with the
Offerings will be passed upon for the Company by Skadden, Arps, Slate, Meagher
& Flom LLP, New York, New York. Certain legal matters relating to the
Offerings will be passed upon for the Underwriters by Shearman & Sterling, New
York, New York.
EXPERTS
The consolidated financial statements and schedules of Colfax Corporation
and Imo Industries Inc. included in this Prospectus and elsewhere in the
Registration Statement of which this Prospectus forms a part, to the extent
and for the periods indicated in its reports, have been audited by Arthur
Andersen LLP, independent public accountants, as set forth in its reports with
respect thereto appearing elsewhere herein, and are included herein in
reliance upon the authority of said firm as experts in accounting and auditing
in giving said reports.
The consolidated financial statements of Allweiler Aktiengesellschaft
included in this Prospectus and elsewhere in the Registration Statement of
which this Prospectus forms a part, to the extent and for the periods
indicated in its report, have been audited by Arthur Andersen
Wirtschaftsprufungsgesellschaft Steuerberatungsgesellschaft mbH, as set forth
in its report with respect thereto appearing elsewhere herein, and are
included herein in reliance upon the authority of said firm as experts in
accounting and auditing in giving said report.
The consolidated financial statements of Imo Industries Inc. and
subsidiaries at December 31, 1996 and for each of the two years in the period
ended December 31, 1996, appearing in this Prospectus and Registration
Statement have been audited by Ernst & Young LLP, independent auditors, as set
forth in their report thereon appearing elsewhere herein, and are included in
reliance upon such report given upon the authority of such firm as experts in
accounting and auditing.
64
<PAGE>
[ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS]
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY IN-
FORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THE OFFERING COVERED BY THIS PROSPECTUS. IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHO-
RIZED BY THE COMPANY OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE
AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, THE COMMON STOCK IN ANY
JURISDICTION WHERE, OR TO ANY PERSON TO WHOM, IT IS UNLAWFUL TO MAKE SUCH OFFER
OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS
NOT BEEN ANY CHANGE IN THE FACTS SET FORTH IN THIS PROSPECTUS OR IN THE AFFAIRS
OF THE COMPANY SINCE THE DATE HEREOF.
IN THE PROSPECTUS, REFERENCES TO "DOLLARS" AND "$" ARE TO UNITED STATES DOL-
LARS.
---------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary....................................................... 3
Risk Factors............................................................. 11
Use of Proceeds.......................................................... 17
Dividend Policy.......................................................... 17
Dilution................................................................. 18
Capitalization........................................................... 19
Selected Unaudited Pro Forma Consolidated Financial Data................. 20
Selected Historical Consolidated Financial Data.......................... 22
Management's Discussion and Analysis of Financial Condition and Results
Of Operations........................................................... 23
Business................................................................. 29
Management............................................................... 40
Principal Stockholders................................................... 46
Certain Relationships and Related Transactions........................... 47
Description of Capital Stock............................................. 50
Certain Charter and By-law Provisions.................................... 51
Description of Certain Indebtedness...................................... 55
Shares Eligible for Future Sale.......................................... 57
Certain United States Federal Tax Consequences to Non-United States
Holders................................................................. 59
Underwriting............................................................. 61
Legal Matters............................................................ 64
Experts.................................................................. 64
Available Information.................................................... 65
Index to Financial Statements............................................ F-1
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SHARES
LOGO
COLFAX CORPORATION
COMMON STOCK
---------------
PROSPECTUS
---------------
MERRILL LYNCH INTERNATIONAL
SCHRODERS
LEHMAN BROTHERS
, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
Set forth below is a table of the registration fee for the Securities and
Exchange Commission, the filing fee for the National Association of Securities
Dealers, Inc. (the "NASD"), the listing fee for the New York Stock Exchange,
Inc. ("NYSE") and estimates of all other expenses to be incurred in connection
with the issuance and distribution of the securities described in this
Registration Statement, other than underwriting discounts and commissions, all
of which will be paid by the Registrant:
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee............... $73,750
NASD filing fee................................................... 25,500
NYSE listing fee.................................................. *
Printing and engraving expenses................................... *
Legal fees and expenses........................................... *
Accounting fees and expenses...................................... *
Transfer Agent and registrar fees................................. *
Miscellaneous..................................................... *
-------
Total......................................................... $ *
=======
</TABLE>
- --------
* To be supplied by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Certificate of Incorporation of the Registrant provides as follows: (a)
The Registrant shall, to the fullest extent permitted by Section 145 of the
Delaware General Corporation Law (the "DGCL"), as the same exists or may
hereafter be amended (but, in the case of any such amendment, to the fullest
extent permitted by law, only to the extent that such amendment permits the
Registrant to provide broader indemnification rights than said law permitted
the Registrant to provide prior to such amendment), indemnify any person who
was or is a party or is threatened to be made a party to any threatened,
pending or completed action, suit or proceeding, whether civil, criminal,
administrative or investigative (including any action by or in the right of
the Registrant) against any expenses (including attorneys' fees), judgments,
fines and amounts paid or to be paid in settlement, excise taxes or penalties
arising under the Employee Retirement Income Security Act of 1974, as amended,
actually and reasonably incurred by such person in connection with such
action, suit or proceeding (and such indemnification shall continue as to a
person who has ceased to be a director, officer, employee or agent and shall
inure to the benefit of his heirs, executors and administrators) by reason of
the fact that he, or a person of whom he is a legal representative, is or was
an officer, director, employee or agent of the Registrant or is or was serving
at the request of the Registrant as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise if
such person acted in good faith and in a manner he reasonably believed to be
in or not opposed to the best interests of the Registrant, and, with respect
to any criminal action or proceedings, had no reasonable cause to believe that
his conduct was unlawful; provided, however, that with certain exceptions, the
Registrant shall indemnify any such person seeking indemnification in
connection with a proceeding or part thereof initiated by such a person only
if such proceeding (or part thereof) was authorized by the Board of Directors
of the Registrant. The termination of any action, suit or proceeding by
judgment, order, settlement, conviction or upon a plea of nolo contendere or
its equivalent, shall not, of itself, create a presumption that the person did
not act in good faith and in a manner which he reasonably believed to be in or
not opposed to the best interests of the Registrant, and, with respect to any
criminal action or proceedings, had reasonable cause to believe that his
conduct was unlawful. The rights to indemnification pursuant to this section
(including advancement of expenses) shall be a contract right.
(b) Any indemnification under subsection (a) above (unless ordered by a
court) shall be made by the Registrant only as authorized in the specific case
upon a determination that indemnification of the director, officer, employee
or agent is proper in the circumstances because he has met the applicable
standard of conduct
II-1
<PAGE>
set forth in subsection (a) above. Such determination shall be made (1) by a
majority vote of the directors who are not parties to such action, suit or
proceeding even though less than a quorum, or (2) if there are no such
directors, or if such directors so direct, by independent legal counsel in a
written opinion, or (3) by the stockholders.
(c) Expenses (including attorneys' fees) incurred by an officer or director
in defending any civil, criminal, administrative or investigative action, suit
or proceeding shall be paid by the Registrant in advance of the final
disposition of such action, suit or proceeding upon receipt of an undertaking
(to the extent required by the DGCL) by or on behalf of such director or
officer to repay such amount if it shall ultimately be determined that such
person is not entitled to be indemnified by the Registrant as authorized in
this section. Such expenses (including attorneys' fees) incurred by other
employees and agents may be so paid upon such terms and conditions, if any, as
the Board of Directors of the Registrant deems appropriate.
(d) The indemnification and advancement of expenses provided by, or granted
pursuant to, the other subsections of this section shall not be deemed
exclusive of any other rights to which those seeking indemnification or
advancement of expenses may be entitled under any by-law, agreement, vote of
stockholders or disinterested directors or otherwise, both as to action in
such person's official capacity and as to action in another capacity while
holding such office.
(e) The Registrant shall have the power to purchase and maintain insurance
on behalf of any person who is or was a director, officer, employee or agent
of the Registrant, or is or was serving at the request of the Registrant as a
director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise, against any liability asserted
against and incurred by such person in any such capacity or arising out of
such person's status as such, whether or not the Registrant would have the
power to indemnify such person against such liability under this section.
(f) The indemnification and advancement of expenses provided by, or granted
pursuant to, this section shall continue as to a person who has ceased to be a
director or officer and shall inure to the benefit of the heirs, executor and
administrators of such a person. The indemnification and advancement of
expenses provided by, or grants pursuant to, this section shall, unless
otherwise provided when authorized or ratified, continue as to a person who
has ceased to be an employee or agent (other than an officer or director), and
shall inure to the benefit of the heirs, executors and administrators of such
a person.
The Registrant's Certificate of Incorporation also provides that a director
of the Registrant shall not be personally liable to the Registrant or its
stockholders for monetary damages for breach of fiduciary duty as a director
for any act or omission, except to the extent such exemption from liability or
limitation thereof is not permitted under the DGCL as the same exists or may
hereafter be amended. If the DGCL is hereafter amended to permit further
elimination or limitation of the personal liability of directors, then the
liability of a director of the Registrant shall be eliminated or limited to
the fullest extent permitted by the DGCL as so amended. Any repeal or
modification of this section by the stockholders of the Registrant or
otherwise shall not apply to or have any adverse effect on any right or
protection of a director of the Registrant existing hereunder for or with
respect to any acts or omissions of such director occurring prior to such
amendment or repeal.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
On 1997, an aggregate of shares of Common Stock were issued to
the founding shareholders of the Registrant in connection with the initial
formation of the Registrant. Such shares were issued pursuant to the exemption
from registration provided by Section 4(2) of the Securities Act.
Concurrently with the consummation of the Offerings, in connection with the
Combination, the stockholders of Allweiler and Ameridrives, the holders of
100% of the partnership interests in Ameridrives Holdings and JFC will
transfer certain securities to the Company in exchange for an aggregate of
shares of Common Stock in reliance on Section 4(2) of the Securities Act.
For a more complete description of the Combination, refer to "Certain
Relationships and Related Transactions--The Combination" in the Prospectus of
which this Registration Statement forms a part and the Combination Agreement
which has been filed as an exhibit to the Registration Statement.
II-2
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits:
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
*1.1 Form of U.S. Purchase Agreement
*1.2 Form of International Purchase Agreement
*2.1 Combination Agreement dated as of [ ], 1998
*3.1 Certificate of Incorporation of the Registrant
*3.2 By-laws of the Registrant
4.1 Indenture dated as of April 15, 1996 with respect to the 11 3/4%
Senior Subordinated Notes due May 1, 2006 between Imo Industries
Inc., as Issuer and IBJ Schroder Bank & Trust Company, as
Trustee (the "Imo Notes") (incorporated by reference to Exhibit
4.1 to Imo's Registration Statement on Form S-4 (File No. 333-
03477))
4.1(a) Supplemental Indenture dated as of August 26, 1997 with respect
to the Imo Notes (incorporated by reference to Exhibit 4.1(B) to
Imo's Annual Report on Form 10-K for the fiscal year ended
December 31, 1997)
4.1(b) Supplemental Indenture dated as of May 6, 1998 with respect to
the Imo Notes (incorporated by reference to Exhibit 10.28 to
Imo's Quarterly Report on Form 10-Q for the quarter ended April
3, 1998)
*4.1(c) Supplemental Indenture dated [ ] with respect to the Imo Notes
*4.2 Specimen of Common Shares of the Registrant
*5.1 Opinion of Skadden, Arps, Slate, Meagher & Flom LLP as to the
legality of the Shares
*10.1 Colfax Corporation 1998 Stock Incentive Plan
*10.2 Colfax Credit Facility dated as of [ ], 1998 by and between
the Registrant and [ ]
10.3(a) Allweiler Credit Facility: Arrangement Letter dated June 23,
1998 between Constellation Verwaltungs GmbH & Co. Beteiligungen
KG and Merrill Lynch International
10.3(b) Allweiler Credit Facility: Terms Sheet
10.3(c) Allweiler Credit Facility: Collateralized Limited Recourse
Guarantee
*10.4 Employment Agreement of George M. Scheerle
*21.1 List of subsidiaries of the Registrant
23.1 Consent of Arthur Andersen LLP
23.2 Consent of Arthur Andersen Wirtschaftsprufungsgesellschaft
Steuerberatungsgesellschaft mbH
23.3 Consent of Ernst & Young LLP
23.4 Consent of Neil D. Cohen
23.5 Consent of George P. Stamas
*23.6 Consent of Skadden, Arps, Slate, Meagher & Flom LLP (included as
part of Exhibit 5.1)
*24.1 Power of Attorney (included as part of signature page)
*27.1 Financial Data Schedule
</TABLE>
- --------
* To be filed by amendment.
(b) Financial Statement Schedules:
Report of Independent Public Accountants on Schedules I and II
Schedule I--Parent only Financial Statements
Schedule II--Valuation and Qualifying Accounts
II-3
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULES I AND II
To the Board of Directors of
Colfax Corporation:
We have audited in accordance with generally accepted auditing standards the
consolidated financial statements of Colfax Corporation (formerly named II
Acquisition Corp.) (a Delaware corporation) and subsidiaries included in this
Registration Statement on Form S-1 (the "Registration Statement") for the
period from inception (July 23, 1997) through December 31, 1997, and have
issued our report thereon dated March 20, 1998. Our audit was made for the
purpose of forming an opinion on the basic consolidated financial statements
taken as a whole. Schedules I and II filed as part of the Registration
Statement are the responsibility of the Company's management and are presented
for purposes of complying with the Securities and Exchange Commission's rules
and are not part of the basic financial statements. The schedules have been
subjected to the auditing procedures applied in the audit of the basic
consolidated financial statements and, in our opinion, fairly state, in all
material respects, the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Richmond, Virginia
March 20, 1998
II-4
<PAGE>
SCHEDULE I
COLFAX CORPORATION (PARENT ONLY)
CONDENSED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PAR VALUE)
<TABLE>
<CAPTION>
DECEMBER 31, JULY 3,
1997 1998
------------ -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Cash................................................. $ 29 $ 83
Investments in Subsidiaries.......................... 90,247 100,140
Other Assets......................................... 110 109
-------- --------
TOTAL ASSETS....................................... $ 90,386 $100,332
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable..................................... $ 59 $ 59
Accrued interest payable............................. 4,426 98
Accrued other........................................ -- 3,146
-------- --------
TOTAL CURRENT LIABILITIES.......................... 4,485 3,303
Long-Term Debt....................................... 106,500 121,120
-------- --------
TOTAL LIABILITIES.................................. 110,985 124,423
-------- --------
SHAREHOLDERS' EQUITY (DEFICIT)
Preferred stock: $.01 par value; authorized and
unissued 10,000 shares.............................. -- --
Common stock: $.01 par value; authorized 2,500
shares; issued 1,000 in
1997 and 1998....................................... 1 1
Additional paid-in capital........................... 4,999 4,999
Retained earnings (deficit).......................... (24,929) (28,137)
Cumulative foreign currency translation adjustment... (670) (954)
-------- --------
TOTAL SHAREHOLDERS' EQUITY (DEFICIT)............... (20,599) (24,091)
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
(DEFICIT)......................................... $ 90,386 $100,332
======== ========
</TABLE>
The accompanying notes are an integral part of these condensed financial
statements.
II-5
<PAGE>
COLFAX CORPORATION (PARENT ONLY)
CONDENSED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE)
<TABLE>
<CAPTION>
FROM INCEPTION TO SIX MONTHS ENDED
DECEMBER 31, 1997 JULY 3, 1998
----------------- ----------------
(UNAUDITED)
<S> <C> <C>
Selling, general and administrative
expense................................... 1 1
Income (loss) of subsidiaries continuing
operations................................ (5,689) 7,166
-------- -------
LOSS FROM OPERATIONS....................... (5,690) 7,165
Other (income) expense..................... (718) (22)
-------- -------
INCOME (LOSS) FROM CONTINUING OPERATIONS
BEFORE INTEREST AND EXTRAORDINARY ITEM.... (4,972) 7,187
Interest expense........................... 4,426 4,792
-------- -------
INCOME (LOSS) FROM CONTINUING OPERATIONS
BEFORE EXTRAORDINARY ITEM................. (9,398) 2,395
-------- -------
Equity in loss of subsidiaries discontinued
operations................................ (12,183) --
Equity in loss of subsidiaries
extraordinary item........................ (3,348) (5,603)
-------- -------
NET LOSS................................... $(24,929) $(3,208)
======== =======
EARNINGS (LOSS) PER SHARE, BASIC AND
DILUTED:
Continuing Operations Before
Extraordinary Item...................... $ (9,398) $ 2,395
Discontinued Operations.................. (12,183) --
Extraordinary Item....................... (3,348) (5,603)
-------- -------
Net income (loss).......................... $(24,929) $(3,208)
-------- -------
Weighted average number of shares
outstanding............................... 1,000 1,000
======== =======
</TABLE>
The accompanying notes are an integral part of these condensed financial
statements.
II-6
<PAGE>
COLFAX CORPORATION (PARENT ONLY)
CONDENSED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
CUMULATIVE
FOREIGN
ADDITIONAL RETAINED CURRENCY
COMMON PAID-IN EARNINGS TRANSLATION
STOCK CAPITAL (DEFICIT) ADJUSTMENT TOTAL
------ ---------- --------- ----------- --------
<S> <C> <C> <C> <C> <C>
BALANCE AT JULY 23, 1997... $ -- $ -- $ -- $ -- $ --
Issuance of Common Stock... 1 4,999 -- -- 5,000
Net loss................... -- -- (24,929) -- (24,929)
Foreign currency
translation adjustments of
subsidiaries.............. -- -- -- (670) (670)
----- ------ -------- ----- --------
BALANCE AT DECEMBER 31,
1997...................... $ 1 $4,999 $(24,929) $(670) $(20,599)
Net loss (Unaudited)....... -- -- (3,208) -- (3,208)
Foreign currency
translation adjustment of
subsidiaries (Unaudited).. -- -- -- (284) (284)
----- ------ -------- ----- --------
BALANCE AT JULY 3, 1998
(UNAUDITED)............... $ 1 $4,999 $(28,137) $(954) $(24,091)
===== ====== ======== ===== ========
</TABLE>
The accompanying notes are an integral part of these condensed financial
statements.
II-7
<PAGE>
COLFAX CORPORATION (PARENT ONLY)
CONDENSED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FROM INCEPTION TO SIX MONTHS ENDED
DECEMBER 31, 1997 JULY 3, 1998
----------------- ----------------
(UNAUDITED)
<S> <C> <C>
OPERATING ACTIVITIES
Net loss................................... $ (24,929) $(3,208)
Adjustments to reconcile net income (loss)
to net cash (used by) provided by
continuing operations:
Amortization............................. 1 1
Equity in loss on investment in
subsidiaries.............................. 21,220 (1,563)
Other changes in operating assets and
liabilities:
Decrease (increase) in accounts payable
and accrued expenses.................. 4,485 (1,182)
Other operating assets and
liabilities........................... (111) (1)
--------- -------
NET CASH USED BY OPERATING ACTIVITIES...... 666 (5,953)
--------- -------
INVESTING ACTIVITIES
Acquisitions............................... (112,137) (8,614)
--------- -------
NET CASH USED BY INVESTING ACTIVITIES...... (112,137) (8,614)
FINANCING ACTIVITIES
Proceeds from issuance of stock............ 5,000 --
Proceeds from long-term borrowings......... 125,000 108,832
Principal payments on long-term debt....... (18,500) (94,211)
--------- -------
NET CASH PROVIDED BY FINANCING ACTIVITIES.. 111,500 14,621
--------- -------
INCREASE IN CASH AND CASH EQUIVALENTS...... 29 54
Cash and cash equivalents at beginning of
period.................................... -- 29
--------- -------
CASH AND CASH EQUIVALENTS AT END OF
PERIOD.................................... $ 29 $ 83
========= =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during the period for:
Interest............................... $ -- $ 9,121
Income taxes........................... $ -- $ --
</TABLE>
The accompanying notes are an integral part of these condensed financial
statements.
II-8
<PAGE>
NOTES TO CONDENSED FINANCIAL STATEMENTS
(INCLUDING AMOUNTS IN DISCLOSURES RELATING TO UNAUDITED PERIODS.)
NOTE 1 ACQUISITION OF IMO INDUSTRIES INC.
On August 28, 1997, Colfax Corporation (the "Company"), formerly known as II
Acquisition Corp., acquired approximately 93% of the outstanding shares of
common stock of Imo Industries Inc. ("Imo") pursuant to its tender offer for
all outstanding shares of Imo's common stock. The consideration paid was $7.05
per share of common stock or $112.1 million in total. The acquisition has been
accounted for under the purchase method.
On July 2, 1998, the Company's wholly owned subsidiary, Imo Merger Corp.,
merged with and into Imo, pursuant to a short-form merger under the Delaware
Law ("back-end merger"). Imo was the surviving corporation in the back-end
merger and as a result became a wholly owned subsidiary of the Company.
Pursuant to the back-end merger, shares previously held by the minority
interest shareholders, were converted into a right to receive $7.05 per share.
At July 3, 1998, 775,590 of the outstanding 1,221,888 minority shares were
submitted to the Company in exchange for $5.5 million in cash. At July 3,
1998, the Company accrued a payable for $3.1 million for the remaining shares
that have not yet been submitted as of that date.
NOTE 2 LONG-TERM DEBT
On July 23, 1997, the Company borrowed $37.5 million from Steven M. Rales,
$37.5 million from Mitchell P. Rales, and $50.0 million from Janelia Farm
Corp, owned by the Rales. Proceeds were used to acquire Imo common stock. On
September 5, 1997, the Company repaid $9.25 million on each of the Steven M.
Rales and Mitchell P. Rales notes. Outstanding balances at December 31, 1997,
interest rates, and maturity dates are as follows:
<TABLE>
<CAPTION>
OUTSTANDING AT
LENDER 12/31/97 INTEREST RATE MATURITY DATE
------ -------------- ------------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Steven M. Rales................... $ 28,250 Prime + .375% May 15, 2007
Mitchell P. Rales................. 28,250 Prime + .375% May 15, 2007
Janelia Farm Corp................. 50,000 Prime + .25% May 15, 2007
--------
$106,500
========
</TABLE>
On June 30, 1998, the Company repaid the remaining principal balance of
$28.3 million plus interest accrued to date on each of the Rales notes, and
$37.7 million plus interest accrued to date on the Janelia Farm Corp. note. On
June 29, 1998, the Company borrowed $103.3 million from an affiliate,
Constellation Verwaltungs GmbH & Co. Beteiligungen KG ("CV") and an additional
$2.8 million each from Steven M. Rales and Mitchell P. Rales. Proceeds from
the CV note were used to pay down the notes mentioned above. Proceeds from the
Rales notes were used to fund the back-end merger. Outstanding balances at
July 3, 1998, interest rates, and maturity dates are as follows:
<TABLE>
<CAPTION>
OUTSTANDING AT
LENDER 7/3/98 INTEREST RATE MATURITY DATE
------ -------------- ------------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
CV................................ $103,332 LIBOR + .375% May 15, 2007
Steven M. Rales................... 2,750 Prime + .375% May 15, 2008
Mitchell P. Rales................. 2,750 Prime + .375% May 15, 2008
Janelia Farm Corp................. 12,288 Prime + .25% May 15, 2007
--------
$121,120
========
</TABLE>
The Company may at any time, upon notice of the holder of the notes, prepay
all or a portion of the indebtedness represented by the notes, with interest
accrued to the date fixed for prepayment. The Company is the guarantor for the
Imo credit agreement for $143.0 million in senior secured credit facilities.
The guarantee is
II-9
<PAGE>
limited to the value of the stock that the Company holds in Imo. At December
31, 1997 and July 3, 1998, there was $84.0 million outstanding under this
credit facility.
NOTE 3 SHAREHOLDERS' EQUITY
On July 23, 1997, the Company issued 1,000 shares of the Company's par value
$.01 per share, stock for $5,000 per share. The Company received total payment
for the shares in the amount of $5.0 million.
NOTE 4 EARNINGS PER SHARE
At December 31, 1997, the Company adopted Financial Accounting Standards
Board ("FASB") Statement No. 128, "Earnings Per Share," which specifies the
computation, presentation, and disclosure requirements for earnings per share.
Basic and diluted net income (loss) per share for December 31, 1997 and July
3, 1998 is calculated based on the actual weighted average shares outstanding.
NOTE 5 INCOME TAXES
No provision for income taxes is made in these statements because the
Company incurred losses for both financial reporting and income tax purposes.
In addition, there have been no income taxes paid by the Company. For income
tax purposes, the Company has a net operating loss of $1.3 million as of
December 31, 1997. However, based upon present Internal Revenue Service
regulations governing the utilization of net operating loss carryovers where
the corporation has issued substantial additional stock, most of this loss
carryover may not be available to the Company. Accordingly, no deferred tax
asset is reflected in the accompanying financial statements.
II-10
<PAGE>
SCHEDULE II
COLFAX CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONS
-----------------
CHARGED
BALANCE TO COSTS OTHER-- DEDUCTIONS-- BALANCE
AT 7/23/97 EXPENSES DESCRIBE DESCRIBE 12/31/97
---------- -------- -------- ------------ --------
<S> <C> <C> <C> <C> <C>
FROM INCEPTION TO
DECEMBER 31, 1997:
Allowance for doubtful $ -- $ 148 $ 10(2) $ 1,435
accounts.............. $ 123 (3)
1,409(6) 9 (1)
===== ====== ======= ====== =======
Inventory valuation
allowance............. $ -- $1,637 $ 341(2) $2,713 (5) $ 9,508
10,204(6) (39)(1)
===== ====== ======= ====== =======
Valuation allowance for
deferred tax assets... $ -- $7,475 $45,782(6) $ -- $53,257
===== ====== ======= ====== =======
Accrued product
warranty liability.... $ -- $ 863 $ 333(2) $1,074 (4) $ 1,844
1,718(6) (4)(1)
===== ====== ======= ====== =======
</TABLE>
- --------
(1) Foreign exchange adjustments.
(2) Reclassifications and adjustments.
(3) Uncollectible accounts written off, net of recoveries.
(4) Product warranty claims honored during the year.
(5) Charges against inventory valuation account during the year.
(6) Balances assumed in the Imo Industries acquisition.
II-11
<PAGE>
ITEM 17. UNDERTAKINGS
The undersigned Registrant hereby undertakes that:
(1) Insofar as indemnification for liabilities arising under the
Securities Act of 1933, as amended (the "Act") may be permitted to
directors, officers and controlling persons of the Registrant pursuant to
the foregoing provisions, or otherwise, the Registrant has been advised
that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of
expenses incurred or paid by a director, officer or controlling person of
the Registrant in the successful defense of any action, suit or proceeding)
is asserted by such director, officer or controlling person in connection
with the securities being registered, the Registrant will, unless in the
opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question
whether such indemnification by it is against public policy as expressed in
the Act and will be governed by the final adjudication of such issue.
(2) The undersigned Registrant hereby undertakes to provide to the
Underwriters at the closing specified in the U.S. Purchase Agreement and
the International Purchase Agreement, certificates in such denominations
and registered in such names as required by the Underwriters to permit
prompt delivery to each purchaser.
(3) For purposes of determining any liability under the Act, the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
(4) For the purpose of determining any liability under the Act, each
post-effective amendment that contains a form of prospectus shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
II-12
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THE
REGISTRANT HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS
BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF RICHMOND
IN THE STATE OF VIRGINIA, ON AUGUST 19, 1998.
Colfax Corporation
/s/ Philip W. Knisely
By: _________________________________
PHILIP W. KNISELY
PRESIDENT AND CHIEF EXECUTIVE
OFFICER
POWER OF ATTORNEY
EACH OF THE UNDERSIGNED OFFICERS AND DIRECTORS OF COLFAX CORPORATION, A
DELAWARE CORPORATION, HEREBY CONSTITUTES AND APPOINTS JOHN A. YOUNG AND THOMAS
M. O'BRIEN AND EACH OF THEM, SEVERALLY, AS HIS TRUE AND LAWFUL ATTORNEY-IN-
FACT AND AGENT, WITH FULL POWER OF SUBSTITUTION AND RESUBSTITUTION, IN HIS
NAME AND ON HIS BEHALF, TO SIGN IN ANY AND ALL CAPACITIES THIS REGISTRATION
STATEMENT AND ANY AND ALL AMENDMENTS (INCLUDING POST-EFFECTIVE AMENDMENTS) AND
EXHIBITS TO THIS REGISTRATION STATEMENT, ANY SUBSEQUENT REGISTRATION STATEMENT
FOR THE SAME OFFERING WHICH MAY BE FILED UNDER RULE 462(B) UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, AND ANY AND ALL AMENDMENTS, SUPPLEMENTS
(INCLUDING POST-EFFECTIVE AMENDMENTS) AND EXHIBITS THERETO, AND ANY AND ALL
APPLICATIONS AND OTHER DOCUMENTS RELATING THERETO, WITH THE SECURITIES AND
EXCHANGE COMMISSION, WITH FULL POWER AND AUTHORITY TO PERFORM AND DO ANY AND
ALL ACTS AND THINGS WHATSOEVER WHICH ANY SUCH ATTORNEY OR SUBSTITUTE MAY DEEM
NECESSARY OR ADVISABLE TO BE PERFORMED OR DONE IN CONNECTION WITH ANY OR ALL
OF THE ABOVE-DESCRIBED MATTERS, AS FULLY AS EACH OF THE UNDERSIGNED COULD DO
IF PERSONALLY PRESENT AND ACTING, HEREBY RATIFYING AND APPROVING ALL ACTS OF
ANY SUCH ATTORNEY OR SUBSTITUTE.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES INDICATED ON AUGUST 19, 1998.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
/s/ Philip W. Knisely President, Chief Executive Officer and
------------------------------------------- Director
PHILIP W. KNISELY (Principal Executive Officer)
/s/ John A. Young Vice President and Chief Financial Officer
------------------------------------------- (Principal Financial and Accounting
JOHN A. YOUNG Officer)
/s/ Mitchell P. Rales
___________________________________________ Chairman of the Board of Directors
MITCHELL P. RALES
Steven M. Rales
/s/
___________________________________________ Director
STEVEN M. RALES
</TABLE>
II-13
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
*1.1 Form of U.S. Purchase Agreement
*1.2 Form of International Purchase Agreement
*2.1 Combination Agreement dated as of [ ], 1998
*3.1 Certificate of Incorporation of the Registrant
*3.2 By-laws of the Registrant
4.1 Indenture dated as of April 15, 1996 with respect to the 11 3/4%
Senior Subordinated Notes due May 1, 2006 between Imo Industries
Inc., as Issuer, and IBJ Schroder Bank & Trust Company, as Trustee
(the "Imo Notes") (incorporated by reference to Exhibit 4.1 to Imo's
Registration Statement on Form S-4 (File No. 333-03477))
4.1(a) Supplemental Indenture dated as of August 26, 1997 with respect to
the Imo Notes (incorporated by reference to Exhibit 4.1(B) to Imo's
Annual Report on Form 10-K for the fiscal year ended December 31,
1997)
4.1(b) Supplemental Indenture dated as of May 6, 1998 with respect to the
Imo Notes (incorporated by reference to Exhibit 10.28 to Imo's
Quarterly Report on Form 10-Q for the quarter ended April 3, 1998)
*4.1(c) Supplemental Indenture dated [ ] with respect to the Imo Notes
*4.2 Specimen of Common Shares of the Registrant
*5.1 Opinion of Skadden, Arps, Slate, Meagher & Flom LLP as to the
legality of the Shares
*10.1 Colfax Corporation 1998 Stock Incentive Plan
*10.2 Colfax Credit Facility dated as of [ ], 1998 by and between the
Registrant and [ ]
10.3(a) Allweiler Credit Facility: Arrangement Letter dated June 23, 1998
between Constellation Verwaltungs GmbH & Co. Beteiligungen KG and
Merrill Lynch International
10.3(b) Allweiler Credit Facility: Terms Sheet
10.3(c) Allweiler Credit Facility: Collateralized Limited Recourse Guarantee
*10.4 Employment Agreement of George M. Scheerle
*21.1 List of subsidiaries of the Registrant
23.1 Consent of Arthur Andersen LLP
23.2 Consent of Arthur Andersen Wirtschaftsprufungsgesellschaft
Steuerberatungsgesellschaft mbH
23.3 Consent of Ernst & Young LLP
23.4 Consent of Neil D. Cohen
23.5 Consent of George P. Stamas
*23.6 Consent of Skadden, Arps, Slate, Meagher & Flom LLP (included as part
of Exhibit 5.1)
*24.1 Power of Attorney (included as part of signature page)
*27.1 Financial Data Schedule
</TABLE>
- --------
* To be filed by amendment.
(b) Financial Statement Schedules:
Report of Independent Public Accountants on Schedules I and II
Schedule I--Parent only Financial Statements
Schedule II--Valuation and Qualifying Accounts
<PAGE>
EXHIBIT 10.3(a)
Merrill Lynch International
20 Farringdon Road
P.O. Box 293
London EC 1M 3NH
Telephone: 0171-772-1000
Telex: 9413941
Fax: 0171-772-2917-2980
23rd June 1998
Constellation Verwaltungs GmbH & Co. Beteiligungen KG
Frankfurter Strasse 14B
61118 Bad Vilbel
Germany
Attn: Michael Ryan
Dear Sirs
We write to set out the terms and conditions on which Merrill Lynch
International ("MLI") offer a facility (the "Facility") to Constellation
Verwaltungs GmbH & Co. Beteiligungen KG (the "Borrower") under which until
further notice from MLI:-
(A) MLI makes available a credit facility, under which MLI is prepared to
consider making to the Borrower cash advances (each such advance an
"Advance") up to a maximum principal amount of US $190,000,000 or
equivalent in other currencies at any one time outstanding. Any amounts so
drawn under this facility shall have a repayment date of 31/st/ December
1999.
(B) All references in the Terms Sheet to securities lending facility or
Securities Loan shall be ignored.
(C) All references in the Terms Sheet to Merrill Lynch International Bank
("MLIB"), FX Transaction or foreign exchange facility shall be ignored.
(D) All references in the Terms Sheet to guarantee facility ("Guarantee") shall
be ignored.
all on the security of, among other things, the collateral provided by the
Borrower as set out in the Terms Sheet referred to below.
<PAGE>
The spread for the purposes of the facility shall be 0.375%.
In consideration of MLI agreeing to accept a guarantee (the "Guarantee") of
Colfax Capital Corporation the ("Guarantor") and (if relevant) the Guarantor
Collateral referred to therein, the Borrower and MLI, agree that the Terms Sheet
is hereby amended as follows:
1 So long as the Collateral and/or Guarantor Collateral comprises only
(a) commercial paper issued by Merrill Lynch & Co. and/or US Treasury
Bills, then it shall be deemed, under Clauses 6.4 and 6.5 of the Terms
Sheet and Clauses 3.3 and 3.4 of the Collateralised Limited Recourse
Guarantee Agreement between the Guarantor and MLI, that there is
satisfactory collateral if the aggregate market value of the
Collateral and Guarantor Collateral equals or exceeds the aggregate
value of the secured liabilities and any unpaid accrued interest
thereon.
2 The following words shall be added at the end of the following Clauses
of the Terms Sheet:
2.1 In Clause 10.7, "MLI reasonably determines by written notice to the
Guarantor that the security (in whole or in part) created by or
pursuant to the Guarantee is not in full force and effect or does not
have the priority stated therein or"
2.2 In Clause 10.8, "a distress, attachment, execution or other legal
process is levied, enforced or sued out on or against any item of
Guarantor Collateral by any third party or",
for which purpose "Guarantor", "Guarantee" and "Guarantor Collateral" have the
meanings given in this letter.
The Facilities are subject to the terms and conditions set out in the attached
Terms Sheet, and by its execution of the enclosed copy of this letter, the
Borrower acknowledges receipt of the Terms Sheet and agrees to the terms and
conditions set out in it.
Please confirm your agreement to the above and your acceptance of the provisions
of this letter and the Terms Sheet by completing, signing and returning the
enclosed copy of this letter.
Yours faithfully
2
<PAGE>
For and on behalf of
MERRILL LYNCH INTERNATIONAL
...........................................
To: Merrill Lynch International
20 Farringdon Road
P.O. Box 293
London
EC1M 3NH
Dated day of 1998
We accept the Facilities on the terms and conditions detailed in your letter and
the attached Terms Sheet. Our address and other details for the purpose of
Clause 19 of the Terms Sheet are set out below.
Yours faithfully,
............................................
Address: Constellations Verwaltungs GmbH & Co. Beteiligungen KG,
Frankfurter Strasse 14B, 61118 Bad Vilbel, Germany
Attention: Michael Ryan
Fax No. USA 202 828 0865
Telephone No. USA 202 828 0060
3
<PAGE>
EXHIBIT 10.3(b)
MERRILL LYNCH INTERNATIONAL
TERMS SHEET
1 DEFINITIONS
In this Agreement:
"Base Rate" means the floating annual rate equal to the rate of interest as
quoted to MLI determined by Merrill Lynch International Bank ("MLIB") rate
on the second Business Day before the first Business Day of each week at
which MLIB offers deposits in the relevant currency in the London inter-
bank market for a term of one week or if at any time such rate in a
currency other than Dollars, does not accurately reflect the cost to MLI of
funding the relevant Advance or other amount, the floating annual rate
certified by MLI to be equal to its cost of funding at the relevant time
(Base Rate to change when and as the applicable floating annual rate
changes)
"Business Day" means a day on which (1) Dollar deposits may be dealt in on
the London inter-bank market, (2) if the context so requires, deposits in
any other relevant currency may be dealt in on the London inter-bank
market, (3) banks are open in London and New York City and, if the context
so requires, the principal financial centre of the country of each other
relevant currency (or, in relation to ECU, those banks which operate a
clearing system in ECU will clear payments in ECU through that clearing
system), and (4) if the context so requires, the exchange or settlement
system through which Securities are to be loaned, transferred or
redelivered or Equivalent Securities are to be returned is open to settle
such transfer
"Collateral" means all Securities, including any certificates and documents
of or evidenc ing title to the same (and the claim represented thereby)
and cash balances (and the debt represented thereby) in or credited to the
Collateral Account all right, title and interest in and to which are, to
the satisfaction of MLI, subject to the security created by or pursuant to
this Agreement
"Collateral Account" means the one or more accounts, having such
designations as MLI may determine, opened or to be opened by MLI pursuant
to, or used for the purposes of, the Facilities for the Borrower with the
Custodian or any other person (including MLIB or any other member of the
Merrill Lynch Group) chosen by MLI in respect of Collateral, all such
Collateral Accounts to be maintained under the complete discretion of MLI
"Custodian" means MLI in its capacity as such under the Custodian Agreement
<PAGE>
"Custodian Agreement" means the Custodian Agreement between MLI and the
Borrower, as amended from time to time
"Dollar(s)" and "$" means lawful currency of the United States of America
"ECU" means European Currency Units, being units of account for the time
being used in the European Monetary System
"Equivalent Securities" or "Securities equivalent to" means securities
of an identical type, nominal value, description and amount to
particular Securities the subject of a Securities Loan or, as the case
may be, a utilisation under Clause 13 (including any certificates and
other documents of or evidencing title to the same). If and to the
extent that such Securities are partly paid and a call is made or have
been converted, subdivided, consolidated, redeemed, made the subject
of a takeover, merger, capitalisation issue, rights issue or similar,
the Equivalent Securities shall be as accordingly determined by MLI
"Hedging Contract" means any contract entered into by the Borrower and
designated as such by the Borrower and MLI by exchange of letters
substantially in the form set out in Schedule 1
"Letter" means the cover letter to, and forming part of, this Agreement
"Merrill Lynch Group" means Merrill Lynch & Co., Inc. together with any
company (whether now existing or hereafter formed) of which Merrill Lynch &
Co., Inc. is or becomes a Subsidiary and all companies (whether now
existing or hereafter formed or acquired) which are Subsidiaries of Merrill
Lynch & Co., Inc. or any such company including, but not limited to,
Merrill Lynch, Pierce, Fenner & Smith Incorporated, and any partnership,
association, firm or other organisation (whether now existing or hereafter
formed or acquired) which is owned or controlled (whether directly or
indirectly and whether by the ownership of share capital, possession of
voting power, contract or otherwise) by Merrill Lynch & Co., Inc. and/or
any such company and/or one or more of their Subsidiaries including, but
not limited to, Merrill Lynch International & Co.
"Secured Liabilities" means all the Borrower's liabilities under or in
connection with this Agreement, including any Advances, Securities Loans,
FX Transactions and Guarantees (including amounts payable under Clause 5.2)
"Securities" includes all investments, as defined in the Financial Services
Act 1986 (as amended or re-enacted from time to time) and physical
commodities (or any certificates or documents of or evidencing title to any
of the same), in each case acceptable to MLI
2
<PAGE>
"Subsidiary" means at any time, in relation to a company, any other company
which is directly or indirectly controlled, or more than 50% of whose
issued or outstanding shares or stock having general voting power in
ordinary circumstances is beneficially owned directly or indirectly, by
that first company.
In this Terms Sheet, references to the "Agreement" or "this Agreement" mean
and include (1) the Letter, (2) this Terms Sheet, (3) all letters (if any)
exchanged in respect of Hedging Contracts and (4) all confirmations (if
any), all as amended and supplemented from time to time, and it is
acknowledged and agreed that all Advances and Securities Loans are made,
all FX Transactions are entered into, and all Guarantees are issued, in
reliance on the fact that this Agreement forms a single agreement between
the parties, and that the parties would not otherwise make or do any of the
foregoing.
Headings shall be ignored in construing this Agreement.
2 CREDIT FACILITY
2.1 Drawdown: Without prejudice to (A) any other requirements of MLI in
relation to any Advance, and (B) MLI's right to refuse to make an
Advance in its absolute discretion, Advances will be made as follows:
2.1.1 the Borrower may give to MLI notice satisfactory to MLI not
later than 2 p.m. (London time) on the first (in the case of a
Dollar Advance) or (in any other case) third Business Day before
the proposed date (which must itself be a Business Day) of the
relevant Advance requesting the Advance of all or part of the
unused portion of the Facilities or
2.1.2 the Borrower hereby requests and authorises MLI to make Advances
(without any further request by the Borrower) for the purposes
of financ ing the payment by the Custodian on behalf of the
Borrower pursuant to the Custodian Agreement for Securities
purchased by the Borrower, to reimburse MLI or, as the case may
be, MLIB in accordance with Clause 5.2 for any payment which has
been made by it pursuant to a Guarantee, and for such other
purposes as may be agreed by the Borrower and MLI from time to
time.
For this purpose, the unused portion of the Facilities at any date is
the amount specified in paragraph (A) of the Letter less the aggregate
Dollar equivalent (as determined by MLI as at that date) of all
outstanding Advances.
2.2 Repayment: The Borrower may, if it gives MLI not less than one
Business Day's notice (in the case of a Dollar Advance) or (in any
other case) three Business
3
<PAGE>
Days' notice (which shall be irrevocable) repay any Advance at any
time, except that any Advance which has a fixed Interest Period shall
be repaid (and shall, subject as otherwise provided in this Agreement,
only be repaid) on the last day of that fixed Interest Period. Any
such repayment must be accompanied by interest accrued on the amount
repaid.
In addition, the Borrower hereby requests and authorises MLI to apply
funds made available to it by the Custodian pursuant to the Custodian
Agreement in or towards repayment of any Advances (or any other amount
debited to the Collat eral Account) in the same currency, Funds so
received which cannot be so applied will be credited to the Collateral
Account.
2.3 Interest: Interest shall be calculated on the outstanding principal
amount from time of each Advance at the rate per annum equal to the
sum of the Spread specified in the Letter and Base Rate. The Borrower
shall pay the unpaid interest accrued on each Advance monthly in
arrears in the currency in which the relevant Advance is denominated.
However, if MLI and the Borrower so agree in relation to an Advance,
that Advance shall have a fixed Interest Period (and shall be repaid
accordingly) and shall bear interest at the rate agreed between MLI
and the Borrower for such Advance. The Borrower shall pay the unpaid
interest accrued on any such Advance in arrears on the last day of the
Interest Period for which it was made and in the currency in which the
relevant Advance is denominated.
3 SECURITIES LENDING FACILITY
3.1 Making: MLI shall be entitled but not bound to act on the request of
the Bor rower to make a Securities Loan to the Borrower.
A Securities Loan shall be effected by MLI delivering or crediting the
relevant Securities in accordance with the Borrower's instructions,
together with any appropriate instruments of transfer or the like.
3.2 Return: The Borrower shall return Securities equivalent to the
Securities the subject of a Securities Loan by delivering or crediting
those Equivalent Securities in accordance with MLI's instructions:
3.2.1 in accordance with the terms of the request for that Securities
Loan or
3.2.2 if earlier, upon notice from MLI of not less than the standard
settlement time for those Equivalent Securities according to
the exchange or settle-
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ment system through which the Securities the subject of the
relevant Securities Loan were originally delivered.
All returns of Equivalent Securities must be made together with
any appropriate instruments of transfer or the like, and so that
all right, title and interest in and to those Equivalent
Securities shall vest in MLI, free from all liens, charges and
encumbrances.
3.3 Interest and Dividends: Where a Securities Loan is outstanding over
an income payment date or a record date for the relevant Securities,
the Borrower shall, on the date of the payment or distribution of any
interest, dividend or other distribu tion of any kind whatsoever
(each a "Distribution") on or with respect to any Securities the
subject of a Securities Loan, or on such other date as MLI and the
Borrower may from time to time agree (the "Relevant Payment Date") pay
and deliver a sum of money or property equivalent to the same (with
any such en dorsements or assignments as shall be customary and
appropriate to effect the delivery) to MLI, irrespective of whether
the Borrower received the same. In the case of any Distribution
comprising a payment, unless agreed otherwise:
3.3.1 where and to the extent that MLI has funded a Securities Loan
with Securities borrowed by MLI under a securities loan from a
third party, the Borrower shall pay such amount and deliver
such tax vouchers as may be relevant and appropriate so as to
enable MLI (out of those payments/tax vouchers paid/delivered
by the Borrower under this Clause 3.3) to meet its own
obligations to pay amounts and/or deliver tax vouchers to the
third party in respect of those same Distributions under the
securities loan from the third party to MLI, and after taking
account of all taxes of whatever nature arising in connection
with either the payments from the Borrower to MLI under this
Clause 3.3 or the payments from MLI to the third party and
3.3.2 where and to the extent MLI has funded a Securities Loan with
Securities from MLI's own books, the Borrower shall pay to MLI
such amount and deliver such tax vouchers as may be relevant
and appropriate as shall ensure that MLI is placed in the same
after-tax position (including for these purposes and for the
avoidance of doubt any taxation arising under paragraph 4(3) of
Schedule 23A of the Income and Corporation Taxes Act 1988 and
associated provisions concerning manufactured payments, but
ignoring any taxation by reference to MLI's general profits) as
if MLI had been the Holder of the relevant Securities at all
relevant times. For the purposes of this Clause 3.3.2 "Holder"
in relation to registered securities means the person whose
name or whose nominee is shown on the relevant
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register of ownership and in relation to bearer Securities means
the bearer thereof.
3.4 Fees: The Borrower shall pay such fees in respect of Securities Loans
as shall be agreed with MLI from time to time. Such fees shall be
payable monthly in arrears.
3.5 Title: Notwithstanding the use of expressions such as "Securities
Loan", "Bor rower", "loan", "loaned", "borrowed", "return" and
"returned" which are used in relation to Securities Loans to reflect
market terminology, title to Securities the subject of a Securities
Loan shall pass to the Borrower, and the Borrower shall be obliged to
return Equivalent Securities.
3.6 Rights and Remedies: It is agreed in relation to legal proceedings
that neither party will seek specific performance of the other's
obligation to deliver, redeliver, credit or return Securities or
Equivalent Securities, but without prejudice to any other rights it
may have.
4 FOREIGN EXCHANGE FACILITY
4.1 Entry Into: MLIB shall be entitled but not bound to act on the
request of the Borrower to enter into an FX Transaction.
4.2 Payments: MLIB and the Borrower shall each make each payment to be
made by it in accordance with the terms of each FX Transaction, but
subject to the other provisions of this Agreement. Each amount
payable by MLIB shall be paid by it direct into the Collateral
Account.
5 GUARANTEE FACILITIES
5.1 Issue: Either MLI or MLIB (in this Clause 5 and Clause 7 and in
relation to a Guarantee provided by it, each an "Issuer") shall be
entitled but not bound to act on the request of the Borrower to
provide a Guarantee.
5.2 Indemnity: The Borrower hereby unconditionally and irrevocably:
5.2.1 agrees on demand to indemnify the Issuer of any Guarantee from
and against any and all actions, proceedings, costs, claims,
demands, damages, expenses, losses, charges and liabilities
which may be brought, made or preferred against the Issuer or
which the Issuer may suffer, incur or sustain in relation to or
arising out of its providing any Guarantee (including (A)
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any payment(s) which may be payable by or claimed or demanded
from the Issuer pursuant to a Guarantee, and (B) any taxes
required to be paid by the Issuer on account of which it makes
any deduction or withholding from any such payment) together
with interest on all such amounts from the date(s) on which the
same are incurred by the Issuer in accordance with Clause 8.2
5.2.2 authorises the Issuer to rely without further enquiry on
documents pre sented under any Guarantee which appear on their
face to be in compli ance with the terms and conditions of that
Guarantee (for which purpose the Issuer shall apply the same
standards and have the same protections as set out in the
Uniform Customs and Practice for Documentary Credits (1993
Revision, ICC Publication No. 500 or its subsequent revisions))
and on first claim or demand to make any payment which may or
may appear to be claimed or demanded from the Issuer in
relation to or arising out of any Guarantee without requiring
or obtaining any evidence or proof that the amount claimed or
demanded is due and payable and without any notice or reference
to or the agreement of or further authority from the Borrower
and
5.2.3 agrees that any payment which the Issuer shall make in
accordance Or purported accordance with a Guarantee shall be
binding on the Borrower and shall be accepted by the Borrower
as conclusive evidence of the Issuer's liability to make such
payment.
5.3 Fees: The Borrower shall pay to the Issuer of any Guarantee such fees
in respect thereof and at such times as shall be agreed with the
Issuer from time to time.
6 SECURITY
6.1 Charging Provisions:
6.1.1 The Borrower, as continuing security for the due payment of the
Secured Liabilities and with full title guarantee, hereby (A)
pledges and charges by way of first fixed legal mortgage (in
priority to all other security whatso ever, whether fixed or
floating) in favour of MLI for itself and as trustee for MLIB
all the Borrower's right, title and interest in and to all
Securities and all related documents from time to time held by
or for the account or to the order of MLI (whether in its
capacity as Custodian under the Custo dian Agreement or
otherwise) or in or credited to the Collateral Account and the
claims represented thereby (together, the "Charged Securities")
and (B) pledges and charges in favour of MLI for itself and as
trustee for
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MLIB all the Borrower's right, title and interest in and to all
monies, debts, claims, Securities and other property whatsoever
from time to time depos ited with or held by or for the account
or to the order of or owed or owing by MLI, MLIB and/or any other
member of the Merrill Lynch Group, in whatever capacity. The
security created by or pursuant to this Agreement shall affect
and include all dividends, distributions and interest on and
other proceeds of the Charged Securities or other property hereby
pledged or charged, whether capital or income, and all property
distributed, paid, accruing or offered at any time on, to, in
respect of or in substitution for, any of the Charged Securities
or other property hereby pledged or charged, and all of the
foregoing which relate to the Charged Securities shall be
promptly paid or delivered to MLI for credit to the Collateral
Account.
6.1.2 The Borrower, as continuing security for the due payment of the
Secured Liabilities and with full title guarantee, hereby charges
by way of first fixed legal mortgage (in priority to all other
security whatsoever, whether fixed or floating) in favour of MLI
for itself and as trustee for MLIB all monies (and all the
Borrower's right, title and interest in and to such monies and
the debt represented thereby) from time to time standing to the
credit of the Collateral Account, in whatever currency, and
including any interest accrued or accruing thereon.
6.1.3 The Borrower, as continuing security for the due payment of the
Secured Liabilities and with full title guarantee, hereby assigns
absolutely to MLI for itself and as trustee for MLIB all its
rights and benefits under or in connection with the Custodian
Agreement, the FX Transactions, utilisations of Securities under
Clause 13 and the Hedging Contracts, including in particular all
monies paid or payable in respect thereof, in the case of FX
Transactions whether in accordance with Clause 4.2 or 7 or
otherwise, all securities delivered or deliverable in respect
thereof, and all other rights or benefits thereunder or in
connection therewith (together, the "Charged Rights"). Provided
that, upon receipt from the Borrower of a request made after
termination of the Facilities and subject to the Secured
Liabilities having been duly and properly paid in full, MLI shall
at the expense of the Borrower re-assign to the Borrower so much
(if any) of the Charged Rights as then remains.
6.1.4 None of the monies from time to time standing to the credit of
the Collat eral Account (nor the Borrower's right, title and
interest in and to such monies) shall, during the continuance of
the Facilities and until the Se cured Liabilities have been duly
and properly paid in full, be capable of being withdrawn,
assigned or otherwise disposed of or encumbered except with MLI's
prior written consent or as otherwise specifically provided in
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this Agreement. Any such consent of MLI (and any payment whether
with or without such consent) shall operate as a release of the
relevant monies and the provisions of this Agreement shall
continue to apply to the Collateral Account and the monies from
time to time standing to the credit thereof.
6.1.5 The Borrower hereby undertakes to MLI for itself and as trustee
for MLIB that, at all times during the continuance of the
Facility and until the Secured Liabilities have been properly and
duly paid in full:
(i) it will on demand duly pay any calls, subscription monies
and/or other monies payable on or in respect of any of the
Charged Securities and will perform all obligations under
taken by it under or in connection with Hedging Contracts in
accordance with their terms. If it does not do so, MLI may
(but shall not be obliged to) do so and, if MLI does so, the
Borrower shall on demand indemnify MLI against such payment
or performance and
(ii) it will not (nor will it agree, conditionally or uncondition
ally, to) create or have outstanding any call option,
pledge, assignment, transfer, hypothecation, mortgage,
charge, encumbrance, security interest or lien on or
affecting any of the Charged Securities (except as
contemplated by this Agreement or the Custodian Agreement or
with MLI's prior written consent).
MLI and MLIB each acknowledge that the Borrower may request
consent to options, assignments and transfers (including
agreements therefor) on or of Charged Securities in the normal
course of its trading operations and MLI will consider any such
request in good faith.
6.1.6 Without prejudice to 6.1.4 above or Clause 11.2, each of MLI and
MLIB is authorised to debit the Secured Liabilities to any
account of the Bor rower with MLI and MLI is authorised to
combine or consolidate such account with the Collateral Account
and/or set off, transfer or apply any monies standing to the
credit of the Collateral Account in or towards satisfaction of
any of the Secured Liabilities.
6.1.7 The security created by or pursuant to this Agreement shall be a
continu ing security notwithstanding any intermediate payment or
settlement of account and, without prejudice to the generality of
the foregoing, shall continue in full force and effect until MLI
executes a formal release of
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such security, which it may do in whole or from time to time in
part, and any withdrawal or other disposal of any of the property
subject to the security created by or pursuant to this Agreement
shall operate as a release of such property, and the provisions
of this Agreement shall continue to apply to the remainder
thereof. The security created by or pursuant to this Agreement
shall be in addition to and shall not prejudice any other secu
rity, guarantee, indemnity, right or remedy of whatever nature
which MLI and/or MLIB may now or at any time have in respect of
any of the Se cured Liabilities.
6.2 Further Assurance: The Borrower, at its own expense, will execute or
cause to be executed all such documents, and will do or cause to be
done all such things, which are reasonably requested by MLI (1) to
enable MLI for itself and as trustee for MLIB to enjoy, exercise or
enforce its rights as a secured party under the Facilities and (2) to
evidence, and to establish and maintain the perfection and first
priority of, MLI's security interest in the Charged Securities, the
Collateral Account (and the monies for the time being standing to the
credit thereof and the debt represented thereby) and the Charged
Rights and the perfection of MLI's security interest in the other
property hereby pledged or charged. Without limiting the generality
of the foregoing the Borrower, at its own expense, will execute and
give or file, or both, all notices and documents (including, but not
limited to, notice of the security created by or pursuant to this
Agreement) in such manner, to such persons and at such places as may
be reasonably requested by MLI to establish and maintain the
perfection and, as appropriate, first priority of MLI's said security
interest. The Borrower irrevocably and by way of security authorises
MLI, if the Borrower does not do so, to take any step contemplated by
this Clause 6.2 (but MLI shall have no obligation to do so).
6.3 MLI's Responsibilities: Except as provided in the Custodian
Agreement, MLI shall at all times while any Collateral remains
credited to the Collateral Account use reasonable care in connection
therewith but shall not thereby be responsible for the value of the
Collateral or the other property hereby pledged or charged or, except
to the extent otherwise specifically agreed, for the collection or
payment of any dividends, distributions, interest or other receipts in
respect of Charged Securities, other property hereby pledged or
charged or Hedging Contracts or the delivery or receipt of any
securities or other property in respect of Hedging Contracts nor to
ensure the taking up of any securities, rights, monies or other
property distributed, paid, accruing or offered at any time on, to, in
respect of or in substitution for any of the Collateral or the other
property hereby pledged or charged.
6.4 Value and Margin Calls: The Borrower hereby agrees that it will,
immediately upon MLI at any time making a request or delivering to the
Borrower (whether
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under this Agreement or in its capacity as Custodian under the
Custodian Agree ment) a statement reflecting a shortfall in the margin
referred to below, deposit additional Securities acceptable to MLI
and/or monies with MLI for the credit of the Collateral Account as MLI
may require in order to ensure that the aggregate of the market value
of the Charged Securities and the monies standing to the credit of the
Collateral Account will at all times exceed by a margin satisfactory
to MLI the Secured Liabilities (all as determined by MLI).
6.5 Release: Until such time as an Event of Default as set out in Clause
10 occurs, and without prejudice to any other requirements of MLI, the
Borrower may at any time request MLI to release and reconvey to the
Borrower (or as it may direct) Charged Securities and/or monies
standing to the credit of the Collateral Account and, provided that
the margin as aforesaid after any such release or reconveyance would
be satisfactory to MLI, MLI will give effect to such request.
7 CANCELLATION AND REPAYMENT
7.1 General: The Borrower will (A) upon not less than 30 days' written
notice from MLI given at any time on or after 1 December 1999 or (B)
after an Event of Default has occurred on demand of MLI at any time
or (C) after MLI has given written notice to the Borrower that it has
determined that it is or will become unlawful or contrary to any
directive or the like (whether or not having the force of law) of any
governmental or other regulatory body or authority for MLI and/or
MLIB to carry out all or any of its obligations under or in
connection with this Agreement on demand of MLI at any time:
7.1.1 repay to MLI all or any Advances then outstanding together with
accrued interest thereon and any other sum then payable under
or in connection with this Agreement and/or
7.1.2 return to MLI Securities equivalent to all or any Securities
the subject of any Securities Loan(s) and/or
7.1.3 close out through MLIB all or any FX Transactions which have
not been closed out by entering into a transaction for purchase
or sale (as the case may require) equal and opposite to the
relevant FX Transaction and having the same value date and
otherwise matching the relevant FX Transaction, so as to fix
the amount of profit or loss arising to the Borrower from the
relevant FX Transaction (and the parties' liabilities shall be
adjusted accordingly) and/or
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7.1.4 pay to the Issuer an amount (as conclusively determined by the
Issuer) equal to the Issuer's maximum outstanding liability
(whether actual or contingent) under all Guarantees provided by
it. Without prejudice to Clause 6 or any other provision of this
Agreement any amount so received by the Issuer in respect of its
liability under Guarantees may be retained by the Issuer for the
purpose of payment and/or paid in accordance with the relevant
Guarantee and/or paid into the Collateral Account and retained
there for the purpose of application and/or applied by MLI in or
towards satisfaction of the Borrower's obligations under or in
connection with this Agreement.
Upon the making of any such demand under (B) or (C) above the
Facilities shall be cancelled and, on giving any notice under A above
and the expiry of the 30 day period referred to therein MLI shall have
the option to cancel the Facilities by notice to the Borrower (but in
each case without prejudice to rights and obliga tions then
existing).
7.2 Securities Loans: If the Borrower fails or is unable to MLI's
satisfaction to return any Securities equivalent to the Securities the
subject of a Securities Loan in accordance with any notice or demand
under 7.1.2 above or on such other date on which in accordance with
this Agreement it is obliged to do so, MLI shall have the right on the
Borrower's behalf to purchase from such source(s), at such time(s) and
at such price(s) as it thinks appropriate Equivalent Securities and
the Bor rower shall on demand pay in the currency/ies specified by
MLI to MLI all amounts (including costs, expenses, commissions and
taxes thereon) incurred in connection with such purchase, together
with interest on all such amounts from the date(s) on which the same
are incurred by MLI in accordance with Clause 8.2. However, if for any
reason MLI does not or is unable to exercise such right, upon notice
to the Borrower, the Borrower's obligation to return the relevant
Equivalent Securities will be automatically replaced by an obligation
on the Borrower to pay to MLI an amount in cash equal to the market
value of those Equivalent Securities as derived from rates offered by
a dealer reasonably chosen by MLI or, if in MLI's reasonable belief
that would not produce a commercially reasonable result, the amount it
would cost MLI to purchase those Equivalent Securities, together with
all costs, expenses, commissions and taxes thereon which would be
incurred in connection therewith (such value or, as the case may be,
amount and the currency to be as determined by MLI).
7.3 FX Transactions: If the Borrower fails or is unable to MLI's
satisfaction to close out any FX Transaction in accordance with any
notice or demand under 7.1.3 above (an "Open Transaction"), MLIB shall
have the right on the Borrower's behalf to close out all or from time
to time any part of that Open Transaction at MLIB's applicable spot
rate of exchange at the relevant time (and the parties'
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liabilities shall be adjusted accordingly). However, if for any reason
MLIB does not or is unable to exercise its right to close out any Open
Transaction, upon notice to the Borrower:
7.3.1 no further payments by MLIB or the Borrower under that Open
Transac tion shall be required to be made (and the obligations
to make any such payments shall be cancelled) and
7.3.2 an amount of compensation (calculated by MLIB in accordance
with (i) to (iii) below) shall automatically become immediately
due and payable by the Borrower to MLIB (or, subject to the
proviso in Clause 11.1, vice versa):
(i) MLIB shall ascertain in relation to each Open Transaction
as to witch notice was given to the Borrower in accordance
with the preceding paragraph on the date of such notice
(the "Calculation Date") the amount (if any) which would
fall to be paid to MLIB (expressed as a negative amount)
or which would have to be paid by MLIB (expressed as a
positive amount) if it were to enter into a transaction in
the foreign exchange market at or about 11 a.m. (London
time) on that Calculation Date which would have the effect
of closing out that Open Transaction.
(ii) If any such amount is in a currency other than Dollars, it
shall be converted into Dollars at the rate of exchange at
which, at or about 11 a.m. (London time) on the relevant
Calculation Date, MLIB could enter into a transaction on
the foreign exchange market to purchase or sell, as appro
priate, for delivery on the second Business Day after that
Calculation Date (whichever is later) that other currency
in exchange for Dollars.
(iii) MLIB shall then ascertain the difference between:
(a) the sum of the positive amounts ascertained under (i)
(each converted where applicable in accordance with
(ii)) and
(b) the sum of the negative amounts ascertained under (i)
(each converted where applicable in accordance with
(ii)) together with any costs and expenses aris ing
as a result of the operation of 7.3.1 above.
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If the amount in (b) exceeds the amount in (a) the differ
ence shall be due and payable immediately by the Borrower to
MLIB. If the amount in (a) exceeds the amount in (b) the
difference shall be paid by MLIB direct into the Collat
eral Account or, subject to the proviso in Clause 11.1, be
due and payable by MLIB to the Borrower.
It is agreed that the amount of compensation recoverable by a party
under this Clause 7.3 is a reasonable pre-estimate of loss in respect
of Open Transactions and not a penalty. Such amount is payable for the
loss of bargain and, except as otherwise provided in this Agreement,
neither MLIB nor the Borrower will be entitled to recover additional
damages as a consequence of such loss of bargain.
7.4 Margin Call not Required: Any action referred to in this Clause 7 may
be taken by MLI and/or MLIB without request for additional Securities
or monies by way of margin call.
8 PAYMENTS
8.1 Taxes: All sums payable by the Borrower under or in connection with
this Agreement shall be paid free and clear of any restrictions or
conditions, without set-off or counterclaim, and free and clear of,
and (subject as hereinafter provided) without deduction tor, any
taxes, deductions or withholdings of any nature. If any deduction or
withholding on account of any such tax or other amount is required by
law to be made from any such sum, the Borrower shall pay in the same
manner and at the same time such additional amounts as will result in
receipt by MLI or, as the case may be, MLIB, free from any liability
in respect of any such deduction or withholding, of such amount as
would have been received by it had no such deduction or withholding
been required to be made.
8.2 Default Interest: If the Borrower does not pay any sum payable under
or in connection with this Agreement when due, it shall pay interest
on the amount from time to time outstanding in respect of that overdue
sum for the period beginning on its due date and ending on the date of
its receipt by MLI or (as appropriate) MLIB (the "payee"), both before
and after judgement. Such interest shall be calculated from time to
time at the rate per annum equal to the sum of the Spread and the rate
certified by the payee as being equal to its cost of funding that
overdue sum for such period(s) as the payee may from time to time
reasonably select. Such interest shall be payable on demand. All
interest payable under this Clause 8.2 which is not paid when due
shall be added to the overdue sum and itself bear interest
accordingly.
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8.3 Non-Business Days: If any payment falls to be made on a day which is
not a Business Day, it shall be postponed so as to fall on the next
succeeding Business Day in the same calendar month (if there is one)
or the preceding Business Day (if there is not). Interest shall be
adjusted accordingly.
9 WARRANTIES
The Borrower represents and warrants to and for the benefit of each of MLI
and MLIB that:
9.1 the Borrower is duly organised and validly existing under the laws of
its jurisdic tion of establishment and has the power and authority to
own its assets and to conduct the business which it conducts
9.2 its entry into, exercise of its rights and/or performance of or
compliance with its obligations under this Agreement do not and will
not violate (1) any law to which it is subject, (2) any of its
constitutional documents or (3) any agreement to which it is a party
or which is binding on it or its assets
9.3 it has the power to enter into, exercise its rights and perform and
comply with its obligations under this Agreement and has taken all
necessary action to authorise the execution, delivery and performance
of this Agreement
9.4 it will obtain and maintain in effect and comply with the terms of all
necessary consents, registrations and the like of or with any
government or other regulatory body or authority applicable to this
Agreement
9.5 its obligations under this Agreement are valid, binding and
enforceable at law
9.6 it is not in default under any agreement to which it is a party or by
which it or its assets is or are bound and no litigation, arbitration
or administrative proceedings are current or pending, which default,
litigation, arbitration or administrative proceedings are material in
the context of this Agreement
9.7 it is not necessary or advisable in order to ensure the validity,
effectiveness, performance or enforceability of this Agreement or the
perfection of the security created by or pursuant to this Agreement
that any document be filed, registered or recorded in any public
office or elsewhere
9.8 except by this Agreement and the Custodian Agreement, it has not
assigned, transferred or otherwise disposed of the Collateral (or its
rights, title and interest to and in the Collateral) or its rights and
benefits under or in connection with the
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Custodian Agreement, the FX Transactions and the Hedging Contracts,
either in whole or in part, nor agreed to do so, and will not at any
time do so or agree to do so, and it will at all times be the sole
beneficial owner of and fully guarantee title to all Collateral and
rights and benefits which are now or may at any time hereaf ter
become subject to the security created by or pursuant to this
Agreement
9.9 except for the security created by or pursuant to this Agreement and
the Custodian Agreement, no mortgage, charge, pledge, lien or other
encumbrance or security of any kind exists on or over the Collateral
(or its right, title and interest in and to the Collateral) or its
rights and benefits under or in connection with the Custodian
Agreement, the FX Transactions and the Hedging Contracts, either in
whole or in part, nor has it agreed to create any such other security
nor will it at any time do so or agree to do so and
9.10 each of the above representations and warranties will be correct and
complied with in all respects during the continuance of the
Facilities and until all the Secured Liabilities have been duly and
properly paid in full, as if repeated then by reference to then
existing circumstances.
10 EVENTS OF DEFAULT
it shall be an Event of Default if:
10.1 the Borrower does not pay any sum payable under or in connection with
this Agreement or any other agreement with MLI, MLIB or any other
member of the Merrill Lynch Group on its due date or
10.2 the Borrower does not return any Equivalent Securities required to be
returned under this Agreement on their due date or
10.3 any representation, warranty or statement by the Borrower in this
Agreement or in any document delivered under this Agreement is not
complied with or is or proves to have been incorrect in any material
respect when made or, if it had been made on any later date by
reference to the circumstances then existing, would have been
incorrect in any material respect on that later date or
10.4 the Borrower does not comply with its obligations under Clause 6.4
promptly, which may i the circumstances at MLI's discretion be
immediately, and in any event not later than MLI's close of business
on the next Business Day after the shortfall occurs or
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10.5 the Borrower fails duly to perform any one or more of its other
obligations under this Agreement or any other agreement with MLI, MLIB
or any other member of the Merrill Lynch Group and, other than in the
case of Clause 6.4, if, in MLI's opinion, that default is capable of
remedy it is not, in MLI's opinion, remedied within 15 days after
notice of that default has been given to the Borrower or
10.6 any provision of this Agreement which is material to the interests of
MLI and/or MLIB is not (or is claimed by the Borrower not to be) in
full force and effect and, other than in the case of Clause 6.4, if,
in MLI's opinion, such circumstance is capable of remedy it is not, in
MLI's opinion, remedied within 30 days after notice thereof has been
given to the Borrower or
10.7 MLI reasonably determines by written notice to the Borrower that the
security (in whole or in part) created by or pursuant to this
Agreement is not in full force and effect or does not have the
priority stated herein or
10.8 a distress, attachment, execution or other legal process is levied,
enforced or sued out on or against any item of Collateral by any third
party or
10.9 a distress, attachment, execution or other legal process is levied,
enforced or sued out on or against any other asset of the Borrower and
is not discharged or stayed within 7 days and, in MLI's conclusive
opinion, such event has or could have a material adverse effect on MLI
and/or MLIB or
10.10 any step is taken or legal proceeding started by any person in the
bankruptcy or insolvency of the Borrower or for the appointment of a
receiver, administrator, trustee or similar of the Borrower or of any
or all of the revenues and assets of the Borrower or for the
liquidation, winding-up, administration, dissolution or reorganisation
of the Borrower or its merger With or into any other person(s)
(together "Winding-up") (except on terms approved by MLI before that
step is taken) and, in the case of any such step or proceeding taken
or started against it, the same (1) results in a judgement of
bankruptcy or insolvency or the making of any such appointment or the
making of an order for Winding-up, or (2) is not discharged within 60
days or
10.11 any indebtedness of the Borrower in respect of monies borrowed or
raised of not less than $500,000 or its equivalent (1) is not paid
when due nor within any applicable grace period in any agreement
relating to that indebtedness, or (2) becomes due and payable before
its normal maturity by reason of a default or event of default,
however described or
10.12 the Borrower is insolvent, is unable to pay its debts as they fall
due, stops, suspends or threatens to stop or suspend payment of all or
a material part of its
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debts, begins negotiations or takes any proceeding or other step with
a view to readjustment, rescheduling or deferral of all of its
indebtedness or any part of its indebtedness which it would or might
otherwise be unable to pay when due or proposes or makes a general
assignment or an arrangement or composition with or for the benefit of
creditors or
10.13 any event occurs which under the laws of any relevant jurisdiction has
an effect equivalent to any of the events referred to in this Clause
10.
If any person (the "Guarantor") has provided to MLI and MLIB a
guarantee or other performance assurance (the "Performance Assurance
Agreement") of the Borrower's obligations under this Agreement and the
Custodian Agreement, then it shall also be an Event of Default if any
of the events referred to in any of Clauses 10.1, 10.3, 10.5, 10.6 and
10.9 to 10.13 (all inclusive) occurs in relation to the Guarantor (and
for this purpose references, however expressed, to "the Borrower" and
"this Agreement" respectively shall be deemed to be references to "the
Guarantor" and "the Performance Assurance Agreement").
11 ENFORCEMENT
If the Borrower fails or is unable to MLI's satisfaction duly to comply
with any demand under Clause 7.1 (B) or (C), MLI may at any time
thereafter:
11.1 without further notice to the Borrower and without prejudice to any
other right or remedy, dispose or procure the disposal, by sale or
otherwise, of all or from time to time part of the Charged Securities
(including any securities or other property delivered or deliverable
under Clause 13, any Hedging Contracts or the Custodian Agreement) or
other property hereby pledged or charged or otherwise realise or
procure the realisation of the same, in such manner and at such price
or prices (whether payable or deliverable immediately, on a deferred
basis or by instal ments) without being responsible for any loss or
diminution in price, as it may think fit, close out or liquidate any
option, future, long position or short position which the Borrower
may have (by sale, purchase or otherwise howsoever), take possession
of all or from time to time part of such Charged Securities or other
property hereby pledged or charged and proceed forthwith to sell,
assign, give options to purchase, contract to sell or otherwise
dispose of and deliver such Charged Securities or other property
hereby pledged or charged or any part thereof in one or more parts at
public or private sale at any exchange, broker's board or at any of
MLI's offices or elsewhere at such prices and on such terms as MLI
deems appropriate, and exercise all or any rights conferred by and
collect any proceeds of and monies, securities or other property paid
or delivered under or otherwise receive and realise the benefits of
the Hedging Contracts and the
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Custodian Agreement, all without demand for performance, advertisement
or other notice of any kind, and apply the proceeds thereof and all
cash balances in the Collateral Account or otherwise hereby pledged or
charged as follows:
11.1.1 first, in or towards payment of all amounts (including costs,
expenses, commissions and taxes) arising as a result thereof
11.1.2 secondly, in or towards payment and satisfaction of the Secured
Liabilities in such order and manner as MLI may determine
11.1.3 thirdly, in payment of any surplus to the Borrower or other
person entitled thereto. Provided always that MLI shall not be
obliged to apply any part of such proceeds in accordance with
sub-clause 11.1.3 and MLIB shall not be obliged to pay any
amount of compensation in accordance with Clause 7.3 until all
liabilities (including future and contingent liabilities) to,
and/or amounts due or owing to, MLI and MLIB under or in
connection with this Agreement have been discharged to the
satisfaction of each of MLI and MLIB and until after each of
them has exercised all set-offs and other rights which it is
expressed to be entitled to make or exercise under this
Agreement. Until such time such proceeds and compensation shall
be held in or credited to the Collateral Account or such other
account with MLI as MLI may (in its absolute discretion)
decide.
Upon any disposal of any such Charged Securities or other property
hereby pledged or charged or realisation in respect of any Hedging
Contracts or the Custodian Agreement made or purported to be made
under the provisions of this Clause, a certificate of any officer or
employee of MLI that a default has occurred and that the power to do
so has become exercisable shall be conclusive evidence of that fact in
favour of any purchaser or other person to whom any of such Charged
Securities or other property hereby pledged or charged may be trans
ferred under such disposal or, as the case may be, any person liable
under or in respect of any such Hedging Contract or the Custodian
Agreement and the Borrower agrees to indemnify MLI (on a full
indemnity basis) against any claim which may be made against it by
such purchaser or person by reason of any defect in title to any such
Charged Securities or other property hereby pledged or charged unless
such claim has arisen as a result of the negligence or wilful
misconduct of MLI.
11.2 in addition to any general lien, right to combine or consolidate
accounts, set-off or other similar right to which it may be entitled
at law, by contract, or otherwise, each of MLI and MLIB may at any
time without notice to the Borrower, debit any liabilities of the
Borrower under or in connection with this Agreement to any account of
the Borrower with either of them (including without limitation the
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Collateral Account) and combine or consolidate all or any one or more
of the Borrower's then existing accounts (including without
limitation the Collateral Account) with, and liabilities of the
Borrower to, it and/or set off, transfer or apply any sum(s) standing
to the credit of any one or more of the Borrower's accounts with it
(including without limitation the Collateral Account) in or towards
satisfaction of any of the liabilities of the Borrower to MLI and/or
MLIB, whether present or future, actual or contingent.
11.3 do all such other acts and things as it may consider necessary or
desirable in connection with the realisation of the security created
by or pursuant to this Agreement.
Each of MLI and MLIB shall have authority to purchase one currency
with another for purposes of this Clause 11.
12 INDEMNITY
The Borrower shall on demand indemnify each of MLI and MLIB (in this Clause
12, each an "Indemnified Party") against:
12.1 any funding and any other costs, expenses or liabilities (including
loss of profit and including taxes (other than taxes on the overall
net income of the Indemnified Party), any stamp duty or similar tax,
legal fees and value added tax) sustained or incurred by the
Indemnified Party (1) to render this Agreement (including the
security created by or pursuant to this Agreement) enforceable and
admissible in evidence in the courts referred to in Clause 20; (2) in
the administration of this Agreement (including the making of
Securities Loans and the return of Equivalent Securities); (3) as a
result of the assignment, exercise or performance of any Hedging
Contract(s); (4) in protecting or enforcing the Indemnified Party's
rights under this Agreement and/or any amendment; (5) as a result of
the occurrence or continuance of any Event of Default or default by
the Borrower under this Agreement (whether in connection with any act
or thing done as set out in Clause 11 or otherwise); or (6) as a
result of the receipt or recovery by the Indemnified Party (whether
or not as a result of any application in accordance with Clause 2.2)
of all or any part of an Advance which has a fixed Interest Period
otherwise than on the last day of that fixed Interest Period and
12.2 all costs, expenses and losses sustained or incurred by the
Indemnified Party as a result of or in connection with the payment of
any amount due under this Agree ment, whether as a result of any
judgement or order, the winding up or bankruptcy of the Borrower, or
otherwise, in a currency other than that due under this Agree ment,
including any variation between the rate of exchange at which such
amount
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is converted into such currency for the purpose of such judgement or
order or otherwise, and the rate prevailing on the date on which the
Indemnified Party first receives actual payment of such amount in
such currency other than that due under this Agreement.
13 UTILISATION OF COLLATERAL BY MLI
13.1 Authorisation: The Borrower hereby authorises MLI from time to time
to utilise Securities comprised in the Collateral for MLI's own
purposes or the purposes of any third party. To enable MLI so to
utilise Securities comprised in the Collateral the following
provisions of this Clause 13 shall have effect.
13.2 Transfer of Securities by Borrower to MLI: Where MLI wishes to use
Securities comprised in the Collateral for any purpose the Securities
in question shall be simultaneously released from the security
created by or pursuant to this Agree ment and transferred by the
Borrower to MLI in accordance with the provisions of this Clause
13.2. The Borrower authorises MLI to take such steps to deliver or
credit the relevant Securities to MLI (or, as appropriate, the third
party in ques tion) and execute such instruments of transfer or the
like as MLI considers necessary or desirable to vest the full legal
and beneficial right, title and interest in and to those Securities
in MLI (or, as the case may be, that third party).
13.3 Return of Securities:
13.3.1 Where Securities have been utilised by MLI for any purpose
and those Securities cease to be required for that purpose,
MLI shall thereupon return or procure redelivery of those
Securities or of Equivalent Securities to the Borrower by
redelivering or crediting those Securities or Equivalent
Securities to the Collateral Account, whereupon those
Securities or Equiv alent Securities shall automatically be
subject to the security created by or pursuant to this
Agreement.
13.3.2 All returns and redeliveries of Securities or Equivalent
Securities must be made together with any appropriate
instruments of transfer or the like, and so that all right,
title and interest in and to those Securities or Equivalent
Securities shall vest in the Borrower, free from all liens,
charges and encumbrances, other than the security created by
or pursuant to this Agreement.
13.3.3 MLI shall be obliged to return or procure redelivery of
Equivalent Securi ties not necessarily the original
Securities and Clause 3.6 shall apply (with any necessary
modifications) to a return or redelivery under this Clause
13.3 as it applies to a Securities Loan under Clause 3.
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13.4 Distributions:
13.4.1 Where any Securities have been transferred by the Borrower
under this Clause 13 and have not been returned or redelivered
to the Borrower before an applicable income payment date or
record date in respect of those Securities, MLI shall, on the
date of payment of any dividend, interest or other distribution
on or with respect to the Securities in question or on such
other date as MLI and the Borrower may agree, pay to the
Borrower such amount in relation to such dividend, interest or
distribution and deliver such tax vouchers as may be available
or appropriate as shall ensure that the Borrower is placed in
the same after-tax position (but ignoring for these purposes
any tax by reference to the general income or profits of the
Borrower or other similar reference) as if it had been the
Holder of the relevant Securities at all relevant times.
However, MLI's obligations under this sub-clause 13.4.1 are
subject to the Borrower where appropriate delivering to MLI a
duly completed and certified Certificate (MOD2) or a photocopy
thereof bearing an Inland Revenue acknowledge ment and unique
number which Certificate or photocopy remains valid and/or
taking all such further steps as are necessary and reasonable
to enable MLI to make payment under this Clause 13.4 without
accounting to the Inland Revenue for any relevant withholding
tax and/or UK tax. If in consequence of a failure by the
Borrower to observe its obligations set out in this sub-clause
13.4.1 MLI is or will become liable to account to the Inland
Revenue for any relevant withholding tax and/or UK tax the
amount otherwise payable by MLI under this Clause 13.4 shall be
reduced by the amount of such tax.
13.4.2 For the purposes of this Clause 13.4 "Holder" in relation to
registered securities means the person whose name or whose
nominee is shown on the relevant register of ownership and in
relation to bearer Securities means the bearer thereof.
13.5 Miscellaneous:
13.5.1 If on the due date for return or redelivery thereof MLI shall
for any reason be unable to return or redeliver any Securities
or Equivalent Securities in connection with any transfer of
Securities to MLI under this Clause 13, MLI's obligation to
return or redeliver those Securities or Equivalent Securities
shall be replaced by an obliga tion to pay to the Borrower an
amount in cash equal to the market value of those Securities or
Equivalent Securities derived from rates offered by a dealer
reasonably chosen by
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MLI. Any such amount shall be paid or credited to the Collateral
Account.
13.5.2 The Borrower shall, subject as otherwise provided in this Agree
ment and in particular to the security created by or pursuant to
this Agreement, have all the incidents of ownership of Securities
transferred under this Clause 13, including the right to transfer
them to others, and such Securities shall continue to be taken
into account for the purpose of Clause 6.4.
14 SUCCESSORS AND ASSIGNS
14.1 The Borrower may not assign or transfer all or any part of its rights
or obligations under this Agreement. However, this Agreement shall be
binding on the Bor rower and its successors as from time to time
constituted.
14.2 Where the Borrower is a partnership, this Agreement is being executed
on behalf of the Borrower by one of its general partners and, by such
execution, such general partner agrees and warrants that the
partnership of which he or it is a general partner is and will be
fully bound by this Agreement as the Borrower.
14.3 Each of MLI and MLIB may at any time assign or transfer all or part
of its rights and/or obligations under this Agreement to any other
member of the Merrill Lynch Group or, with the prior written consent
of the Borrower (such consent not to be unreasonably withheld), to
any other person. MLI shall after any such assignment or transfer and
to the extent (if at all) appropriate or required hold the security
created by or pursuant to this Agreement for itself and as trustee
for MLIB and each assignee or transferee. Any reference in this
Agreement to MLI or MLIB shall be construed accordingly and shall
also include their respective successors. Any such assignee or
transferee shall be entitled to the full benefit of this Agreement to
the same extent as if it were an original party in respect of the
rights or obligations assigned or transferred to it.
14.4 Each of MLI and MLIB may disclose to any other member of the Merrill
Lynch Group or, subject to prior notice to the Borrower, any other
potential assignee or transferee or person who has entered or
proposes to enter into contractual arrange ments with it in relation
to or concerning this Agreement such information about the Borrower
and this Agreement as it may think fit.
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15 INFORMATION
During the continuance of the Facilities and until the Secured Liabilities
have been duly and properly paid in full, the Borrower shall furnish to MLI
within 90 days after the end of each of its financial years its annual
audited accounts and promptly such other financial and other information as
MLI may reasonably request from time to time.
16 REMEDIES AND WAIVERS
No failure by MLI or MLIB to exercise, and no delay by MLI or MLIB in
exercising, any right or remedy will operate as a waiver thereof, nor will
any single or partial exercise of any such right or remedy preclude any
other or further exercise thereof or the exercise of any other right or
remedy. The authority to debit, charge and pledge and the right of set-off
and other rights and remedies provided in this Agreement are separate,
independent and cumulative and not exclusive of any rights or remedies
(including any other security, right of set-off, lien, right to combine or
consolidate accounts or similar right) to which MLI or MLIB is at any time
entitled anywhere, whether by operation of law or otherwise.
17 PARTIAL INVALIDITY
If at any time any provision of this Agreement is or becomes illegal,
invalid or unenforce able in any respect under the law of any
jurisdiction, neither the legality, validity or enforceability of the
remaining provisions of this Agreement, nor the legality, validity or
enforceability of such provisions under the law of any other jurisdiction
shall in any way be affected or impaired thereby. If and to the extent
that the security expressed to be created by or pursuant to this Agreement
is at any time and for any reason not effective as a fixed charge, it shall
instead take effect as a floating charge.
18 MISCELLANEOUS
18.1 All interest shall accrue from day to day and shall be calculated on
the basis of a 360-day year (365 days where that is market practice,
as determined by MLI) and the number of days elapsed.
18.2 The certificate of an officer or employee of MLI as to any sum
payable to MLI or MLIB under this Agreement shall be final,
conclusive and binding on the Bor rower save in the case of manifest
error.
18.3 Except to the extent otherwise specifically provided in any other
agreement between MLI and the Borrower, if there is any conflict or
inconsistency between
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this Agreement and any other such agreement, the terms of this
Agreement shall prevail.
18.4 MLIB appoints MLI its agent for the purposes of this Agreement and
authorises it to take such action as contemplated by this Agreement,
and in particular author ises it to receive payment of any monies
payable to MLIB under or in connection with this Agreement.
Notwithstanding that appointment, and MLI's holding the security
created by or pursuant to this Agreement for itself and as trustee
for MLIB, the rights and obligations of each of MLI and MLIB with
respect to the facilities provided by it shall be several and not
joint or joint and several, and neither of them shall be responsible
for the obligations of the other.
19 NOTICES
19.1 The Borrower and MLI may from time to time issue instructions,
notices, de mands or requests either orally or in writing (but in
writing only where so pro vided under this Agreement) and MLI shall
be entitled to rely on and shall not be liable for any action taken
or omitted to be taken in good faith pursuant to instruc tions,
notices, demands or requests (believed by it to be genuine and to be
given or made by the appropriate person(s)) from the Borrower shall
indemnify each of MLI and MLIB against all costs, expenses and
liabilities arising from MLI's relying on any such instructions,
notices, demands or requests.
19.2 Each oral communication under this Agreement shall be directed, if to
MLI, to such of its officer(s) as may be notified by MLI to the
Borrower from time to time, and if to the Borrower, to such of its
representative(s) as may be notified to MLI from time to time. Each
written communication under this Agreement shall be addressed as
follows:
MLI: 20 Farringdon Road
P.O. Box 293
London EC1M 3NH
Attention: International Prime Brokerage
Fax No: 4471 892 4985
The Borrower: As set out in the Letter
or to such other address, telex or facsimile number or marked for the
attention of such other person as may be notified by the relevant
addressee from time to time to the other party. Notices shall be
deemed to have been received seven days after being posted and
immediately in the case of a telex, fax or oral communication.
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20 GOVERNING LAW
This Agreement shall be governed by and construed in accordance with
English law and, in relation to any legal action or proceedings arising out
of or in connection with this Agreement ("Proceedings"), the Borrower
hereby and for the benefit of each of MLI and MLIB irrevocably submits to
the jurisdiction of the courts of England and any New York State or United
States Federal court sitting in New York City, and waives any objection to
Proceedings in such courts on the grounds of venue or on the grounds that
the Proceed ings have been brought in an inconvenient forum. Those
submissions shall not affect MLI's or MLIB's right to take Proceedings in
any other court of competent jurisdiction, nor shall the taking of
Proceedings in any court of competent jurisdiction preclude MLI and/or MLIB
from taking Proceedings in any other court of competent jurisdiction
(whether concurrently or not).
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SCHEDULE 1
. , 199.
[Borrower]
Dear Sirs,
This letter is supplemental to the facility letter (the "Facility Letter") dated
., 199. addressed to you and confirmed and accepted by you on ., 199 . and this
letter (including your acceptance of it) and the Facility Letter shall be read
and construed as one document.
Further to your request, we agree that the following contracts entered or to be
entered into by you shall, for the purposes of the Facility Letter, be "Hedging
Contracts" (and accordingly are subject to the security created by or pursuant
to the Facility Letter):
[Contract Description]
[All options, futures, etc. now or at any time held in Account No. . with . of.]
We also agree that the guarantee dated ., 199. issued by [us/Merrill Lynch
International Bank Limited] in favour of . in relation to your obligations under
the above Hedging Contract(s) shall be a "Guarantee" for the purpose of the
Facility Letter.
You will [at our request/promptly after execution of the enclosed copy of this
letter] (but without prejudice to Clause 6.2 of the Facility Letter) give notice
in the form attached to . of such security, and you will in any event ensure
that all monies and securities payable or deliverable pursuant to the above
Hedging Contract(s) are paid or delivered direct by . to us, without set-off or
deduction except on account of liabilities under the same Hedging Contract, for
credit to the Collateral Account.
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Please signify your agreement to the foregoing by executing and returning the
enclosed copy of this letter.
For and on behalf of
MERRILL LYNCH INTERNATIONAL
By:
---------------------------
Name:
Title:
To: Merrill Lynch International
. hereby confirm agreement to the above, and also that any necessary consent of
. has been obtained.
Dated ., 199.
For and on behalf of
[ .]
By:
Name:
Title:
28
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NOTICE OF ASSIGNMENT
.,199.
[
]
We refer to the [Contract Description] (the "Hedging Contract(s)") made between
ourselves and yourselves.
We hereby give you notice:
1 that we have assigned to Merrill Lynch International (for itself and as
trustee for Merrill Lynch International Bank Limited) all our rights and
benefits under or in connection with the Hedging Contract(s) including (but
without prejudice to the generality of the foregoing) any monies payable to
us, any securities deliverable to us, and the right to exercise any option
conferred thereby. Nothing in that assignment or this notice affects our
obligations to you under the Hedging Contract(s).
2 that you are hereby authorised and instructed to:
2.1 pay any such monies to [account details] and
2.2 deliver any such securities to [account details].
3 the authority and instructions herein contained cannot be revoked or varied
by us without the consent of Merrill Lynch International.
Please execute and return the enclosed copy of this notice to Merrill Lynch
International, Ropemaker Place, 25 Ropemaker Street, London EC2Y 9LY, Fax
No: 4471-867-4550, Attention: Special Finance Group. Such execution and
return will constitute your agreement to the foregoing and that you will
not exercise any right to net or set-off for any liability (except for any
liability of ours to you under the same Hedging Contract) or any competing
lien, charge or other security interest as against any Hedging Contract or
any monies or securities payable or deliverable to us under it.
[BORROWER]
By:
-----------------------------
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EXHIBIT 10.3(c)
COLLATERALISED LIMITED RECOURSE GUARANTEE
To: Merrill Lynch International ("MLI")
20 Farringdon Road
P.O. Box 293
London EC1M 3NH
1 GUARANTEE
In consideration of entering into a facilities agreement (as amended and
supplemented from time to time, the "Facilities Agreement", which shall
include each transaction entered into and each document issued or given
pursuant to the Facilities Agreement) constituted by a letter dated 23rd
June 1998 from MLI, to Constellation Verwaltungs Gmbh & Co Beteiligungen KG
(the "Customer") and (where relevant) of MLI entering into a custodian
agreement (as amended and supplemented from time to time, the "Custodian
Agreement" and, together with the Facilities Agreement, the "Agreements")
with the Customer, and of MLI making available to the Customer the
facilities and services provided for in the Agreements, we, Colfax Capital
Corporation (the "Guarantor"), a corporation duly incorporated or organised
under the laws of and having our principal place of business at
,hereby unconditionally and irrevocably:
1.1 guarantee that, if for any reason the Customer does not pay any sum payable
by it under the Agreements by the time, on the date and otherwise in the
manner required by the Agreements, whether on the normal due date, on
acceleration or otherwise (together the "Guaranteed Liabilities"), the
Guaran tor will pay that Guaranteed Liability on demand by MLI and
1.2 as separate, independent and alternative stipulations, agree:
1.2.1 that any Guaranteed Liability which, although expressed to be
payable by the Customer under the Agreements, is for any reason
(whether or not now existing and whether or not now known or
becoming known to MLI not recoverable from the Guarantor on the
basis of a guarantee
<PAGE>
shall nevertheless be recoverable from it as if it were the sole
principal debtor and shall be paid by it to MLI on demand and
1.2.2 as a primary obligation to indemnify each of MLI against any loss
suffered by it as a result of any Guaranteed Liability expressed to
be payable by the Customer under the Agreements not being paid by
the time, on the date and otherwise in the manner required by the
Agree ments or any Guaranteed Liability being or becoming void,
voidable or unenforceable for any reason (whether or not now
existing and whether or not now known or becoming known to MLI, the
amount of that loss being the amount expressed to be payable by the
Customer in respect of the relevant Guaranteed Liability
PROVIDED ALWAYS that, although this Guarantee applies to all Guaran teed
Liabilities, it is agreed that the amount actually recoverable from the
Guarantor under this Guarantee is limited to whichever proves to be the
lower of the following:
(i) an amount equal to the Guaranteed Liabilities and
(ii) an amount equal to the Guarantor Proceeds (as defined in Clause
4).
2 CHARGING PROVISIONS
2.1 The Guarantor, as continuing security for the due payment of the Guaranteed
Liabilities and with full title guarantee, hereby (1) pledges and charges
by way of first fixed legal mortgage (in priority to all other security
whatsoever, whether fixed or floating) in favour of MLI all the Guarantor's
right, title and interest in and to all Securities and all related
documents from time to time held by or for the account or to the order of
MLI (whether in its capacity as Custodian or otherwise) or in or credited
to the Guarantor Collateral Account and the claims represented thereby
(together, the "Guarantor Charged Securi ties") and (2) pledges and
charges in favour of MLI all the Guarantor's right, title and interest in
and to all monies, debts, claims, Securities and other property whatsoever
from time to time deposited with or held by or for the account or to the
order of or owed or owing by MLI and/or any other member of the Merrill
Lynch Group, in whatever capacity. The security created by or pursuant to
this Guarantee shall affect and include all dividends, distributions
2
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and interest on and other proceeds of the Guarantor Charged Securities or
other property hereby pledged or charged, whether capital or income, and
all property distributed, paid, accruing or offered at any time on, to, in
respect of or in substitution for, any of the Guarantor Charged Securities
or other property hereby pledged or charged, and all of the foregoing which
relate to the Guarantor Charged Securities shall be promptly paid or
delivered to MLI for credit to the Guarantor Collateral Account.
2.2 The Guarantor, as continuing security for the due payment of the Guaranteed
Liabilities and with full title guarantee, hereby charges by way of first
fixed legal mortgage (in priority to all other security whatsoever, whether
fixed or floating) in favour of MLI all monies (and all the Guarantor's
right, title and interest in and to such monies and the debt represented
thereby) from time to time standing to the credit of the Guarantor
Collateral Account, in whatever currency, and including any interest
accrued or accruing thereon.
2.3 None of the monies from time to time standing to the credit of the
Guarantor Collateral Account (nor the Guarantor's right, title and interest
in and to such monies) shall, during the continuance of the Facilities and
until the Guaranteed Liabilities have been duly and properly paid in full,
be capable of being withdrawn, assigned or otherwise disposed of or
encumbered except with MLI's prior written consent or as otherwise
specifically provided in this Guarantee. Any such consent of MLI (and any
payment whether with or without such consent) shall operate as a release of
the relevant monies and the provisions of this Guarantee shall continue to
apply to the Guarantor Collat eral Account and the monies from time to
time standing to the credit thereof.
2.4 The Guarantor hereby undertakes to MLI for itself that, at all times during
the continuance of the Facilities and until the Guaranteed Liabilities have
been properly and duly paid in full:
2.4.1 it will on demand duly pay any calls, subscription monies and/or
other monies payable on or in respect of any of the Guarantor
Charged Securities. If it does not do so, MLI may (but shall not be
obliged to) do so and, if MLI does so, the Guarantor shall on demand
indemnify MLI against such payment and
2.4.2 it will not (nor will it agree, conditionally or unconditionally,
to) create or have outstanding any call option, pledge, assignment,
trans-
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fer, hypothecation, mortgage, charge, encumbrance, security interest
or lien on or affecting any of the Guarantor Charged Securities
(except as contemplated by this Guarantee or with MLI's prior
written consent).
MLI acknowledges that the Guarantor may request consent to options,
assignments and transfers (including agreements therefor) on or of
Guarantor Charged Securities in the normal course of its trading operations
and MLI will consider any such request in good faith.
2.5 Without prejudice to Clause 2.3 or 4.2, MLI is authorised to debit the Guar
anteed Liabilities then due and owing to any account of the Guarantor with
MLI and MLI is authorised to combine or consolidate such account with the
Guarantor Collateral Account and/or set off, transfer or apply any monies
standing to the credit of the Guarantor Collateral Account in or towards
satisfaction of any of the Guaranteed Liabilities.
2.6 The security created by or pursuant to this Guarantee shall be a continuing
security notwithstanding any intermediate payment or settlement of account
and, without prejudice to the generality of the foregoing, shall continue
in full force and effect until MLI executes a formal release of such
security, which it may do in whole or from time to time in part, and any
withdrawal or other disposal of any of the property subject to the security
created by or pursuant to this Guarantee shall operate as a release of such
property, and the provi sions of this Guarantee shall continue to apply to
the remainder thereof. The security created by or pursuant to this
Guarantee shall be in addition to and shall not prejudice any other
security, guarantee, indemnity, right or remedy of whatever nature which
MLI may now or at any time have in respect of any of the Guaranteed
Liabilities.
2.7 In this Guarantee:
"CUSTODIAN" means such person (including MLI or any other member of the
Merrill Lynch Group) as may be notified by MLI to the Guarantor from time
to time for purposes of this Guarantee
"GUARANTOR COLLATERAL" means all Securities, including any certificates and
documents of or evidencing title to the same (and the claim represented
thereby), and cash balances (and the debt represented thereby) in or
credited
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to the Guarantor Collateral Account all right, title and interest in and to
which are, to the satisfaction of MLI, subject to the security created by
or pursuant to this Guarantee
"GUARANTOR COLLATERAL ACCOUNT" means the one or more accounts, having such
designations as MLI may determine, opened or to be opened by MLI pursuant
to, or used for the purposes of, this Guarantee for the Guarantor with the
Custodian or any other person (including any other member of the Merrill
Lynch Group) chosen by MLI in respect of Guarantor Collateral, all such
Guarantor Collateral Accounts to be maintained under the complete
discretion of MLI.
Headings shall be ignored in construing this Guarantee.
3 GUARANTOR COLLATERAL
3.1 The Guarantor, at its own expense, will execute or cause to be executed all
such documents, and will do or cause to be done all such things, which are
reasonably requested by MLI (1) to enable MLI to enjoy, exercise or enforce
its rights as a secured party under this Guarantee and (2) to evidence, and
to establish and maintain the perfection and first priority of, MLI's
security interest in the Guarantor Charged Securities and the Guarantor
Collateral Account (and the monies for the time being standing to the
credit thereof and the debt represented thereby) and the perfection of
MLI's security interest in the other property hereby pledged or charged.
Without limiting the generality of the foregoing, the Guarantor, at its own
expense, will execute and give or file, or both, all notices and documents
(including, but not limited to, notice of the security created by or
pursuant to this Guarantee) in such manner, to such persons and at such
places as may be reasonably requested by MLI to estab lish and maintain
the perfection and, as appropriate, first priority of MLI's said security
interest. The Guarantor irrevocably and by way of security authorises MLI,
if the Guarantor does not do so, to take any step contemplated by this
Clause 3.1 (but MLI shall have no obligation to do so).
3.2 Except as otherwise agreed by the Guarantor and MLI, MLI shall at all times
while any Guarantor Collateral remains credited to the Guarantor Collateral
Account use reasonable care in connection therewith but shall not thereby
be responsible for the value of the Guarantor Collateral or the other
property hereby pledged or charged or, except to the extent otherwise
specifically
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agreed, for the collection or payment of any dividends, distributions,
interest or other receipts in respect of Guarantor Charged Securities or
other property hereby pledged or charged nor to ensure the taking up of any
securities, rights, monies or other property distributed, paid, accruing or
offered at any time on, to, in respect of or in substitution for any of the
Guarantor Collateral or other property hereby pledged or charged.
3.3 The Guarantor hereby agrees that it will, immediately upon MLI at any time
making a request or delivering to the Guarantor (whether under this Guaran
tee or in its capacity as Custodian under this Guarantee or under the Custo
dian Agreement) a statement reflecting a shortfall in the margin referred
to below, deposit additional Securities acceptable to MLI and/or monies
with MLI for the credit of the Guarantor Collateral Account as MLI may
require in order to ensure that the aggregate of the market value of the
Guarantor Charged Securities, the monies standing to the credit of the
Guarantor Collat eral Account and any other Securities and monies (whether
provided by the Customer or any other person) will at all times exceed by a
margin satisfactory to MLI the Guaranteed Liabilities (all as determined by
MLI).
3.4 Until such time as an Event of Default as set out in Clause 10 of the
Facility Agreement (each an "Event of Default") occurs, and without
prejudice to any other requirements of MLI, the Guarantor may at any time
request MLI to release and reconvey to the Guarantor (or as it may direct)
Guarantor Charged Securities and/or monies standing to the credit of the
Guarantor Collateral Account and, provided that the market value of the
Guarantor Charged Securities, the monies standing to the credit of the
Guarantor Collat eral Account and any other Securities and monies (whether
provided by the Customer or any other person) securing the Guaranteed
Liabilities to MLI's satisfaction (all as determined by MLI) would after
any such release or reconveyance exceed the Guaranteed Liabilities by a
margin satisfactory to MLI, MLI will give effect to such request.
4 ENFORCEMENT
If the Guarantor fails or is unable to ML's satisfaction duly to comply
with any demand under Clause 1:
4.1 MLI may at any time thereafter, without notice to the Guarantor and without
prejudice to any other right or remedy, dispose or procure the disposal, by
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sale or otherwise, of all or from time to time part of the Guarantor
Charged Securities or other property hereby pledged or charged or otherwise
realise or procure the realisation of the same, in such manner and at such
price or prices (whether payable or deliverable immediately, on a deferred
basis or by instal ments) without being responsible for any loss or
diminution in price, as it may think fit, close out or liquidate any
option, future, long position or short position which the Guarantor may
have (by sale, purchase or otherwise howsoever), take possession of all or
from time to time of part of the Guaran tor Charged Securities or other
property hereby pledged or charged and proceed forthwith to sell, assign,
give options to purchase, contract to sell or otherwise dispose of and
deliver the Guarantor Charged Securities or other property hereby pledged
or charged or any part thereof in one or more parts at public or private
sale at any exchange, broker's board or at any of MLI's offices or
elsewhere at such prices and on such terms as MLI deems appropri ate, all
without demand for performance, advertisement or other notice of any kind,
and apply the proceeds thereof and all cash balances in the Guarantor
Collateral Account or otherwise hereby pledged or charged (together, the
"Guarantor Proceeds") as follows:
4.1.1 first, in or towards payment of all amounts (including costs,
expenses, commissions and taxes) arising as a result thereof
4.1.2 secondly, in or towards payment and satisfaction of the Guaranteed
Liabilities in such order and manner as MLI may determine
4.1.3 thirdly, in payment of any surplus to the Guarantor or other person
entitled thereto.
Provided always that MLI shall not be obliged to apply any part of such
proceeds in accordance with sub-clause 4.1.3 until all the Guaranteed
Liabili ties (including future and contingent Guaranteed Liabilities) have
been dis charged to the satisfaction of MLI and until MLI has exercised
all set-offs and other rights which it is expressed to be entitled to make
or exercise under this Guarantee and/or the Facilities Agreement. Until
such time the proceeds shall be held in or credited to the Guarantor
Collateral Account or such other account with MLI as MLI may (in its
absolute discretion) decide.
Upon disposal of any Guarantor Charged Securities or other property hereby
pledged or charged made or purported to be made under the provisions of
this
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Clause, a certificate of any officer or employee of MLI that a default
has occurred and that the power of disposal has become exercisable shall be
conclusive evidence of that fact in favour of any purchaser or other person
to whom any of the Guarantor Charged Securities or other property hereby
pledged or charged may be transferred under such disposal and the Guarantor
agrees to indemnify MLI (on a full indemnity basis) against any claim which
may be made against it by such purchaser or person by reason of any defect
in title to such Guarantor Charged Securities or other property hereby
pledged or charged unless such claim has arisen as a result of the
negligence or wilful misconduct of MLI
4.2 In addition to any general lien, right to combine or consolidate accounts,
set-off or similar right to which it may be entitled at law, by contract,
or other wise, MLI may at any time, without notice to the Guarantor, debit
any of the Guaranteed Liabilities to any account of the Guarantor with
either of them (including without limitation the Guarantor Collateral
Account) and combine or consolidate all or any one or more of the
Guarantor's then existing ac counts (including without limitation the
Guarantor Collateral Account) with, and liabilities of the Guarantor to,
it and/or set off, transfer or apply any sum(s) standing to the credit of
any one or more of the Guarantor's accounts with it (including without
limitation the Guarantor Collateral Account) in or towards satisfaction of
any of the liabilities of the Guarantor to MLI, whether present or future,
actual or contingent
4.3 MLI may do all such other acts and things as it may consider necessary or
desirable in connection with the realisation of the security created by or
pursuant to this Guarantee.
MLI shall have authority to purchase one currency with another for purposes
of this Clause 4.
5 GUARANTOR AS PRINCIPAL DEBTOR
As between the Guarantor and MLI but without affecting the Customer's
obligations, the Guarantor shall be liable under this Guarantee as if it
were the sole principal debtor and not merely a surety. Accordingly, it
shall not be discharged, nor shall its liability be affected, by anything
which would not discharge it or affect its liability if it were the sole
principal debtor (including (1) any time, indulgence, concession, waiver or
consent at any time given to
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the Customer or any other person, (2) any amendment or supplement to the
Agreements or to any other security or guarantee, (3) the making or absence
of any demand on the Customer or any other person for payment, (4) the
enforcement or absence of enforcement of the Agreements or of any other
security or guarantee, (5) the taking, existence or release of any other
security or guarantee, (6) the winding-up or dissolution of the Customer or
any other person or (7) the illegality, invalidity or unenforceability of
or any defect in any provision of the Agreements or any of the Customer's
obligations under them).
6 GUARANTEE CONTINUING
The Guarantor's obligations under this Guarantee are and will remain in
full force and effect by way of continuing security until the Facilities
have termi nated and MLI has irrevocably received or recovered all sums
payable under the Agreements. Furthermore, those obligations of the
Guarantor are addi tional to, and not instead of, any other security or
guarantee at any time existing in favour of MLI, whether from the Guarantor
or otherwise, and may be enforced without first having recourse to the
Customer, any other person or any other security or guarantee. The
Guarantor irrevocably waives all notices and (except as required by Clause
1) demands of any kind.
7 ACCOUNTS
If this Guarantee ceases for any reason to be binding on the Guarantor as a
continuing security in relation to the Customer, or if MLI becomes aware of
any other mortgage, charge, pledge, lien or other encumbrance or security
of any kind on or over the Guarantor Collateral or any part thereof, then
MLI may break any account or accounts of the Customer with it and open a
new account for the Customer. If that is done, no monies then or
subsequently credited to such new account shall have the effect of reducing
the amount due to MLI on the original account. If that is not done, MLI
shall still be treated as if it had done so at the time of such cessation
or, as the case may be, of the creation of the other mortgage, charge,
pledge, lien or other encumbrance or security, and as if all payments then
or subsequently made by or on behalf of the Customer to it had been
credited to such new account with the same result.
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8 EXERCISE OF GUARANTOR'S RIGHTS
So long as the Facilities are outstanding or any sum remains payable under
the Agreements:
8.1 any right of the Guarantor, by reason of the performance of any of its
obliga tions under this Guarantee, to be indemnified by the Customer or to
take the benefit of or enforce any other security or guarantee shall be
exercised and enforced only in such manner and on such terms as MLI may
require and
8.2 any amount received or recovered by the Guarantor (a) as a result of any
exercise of any such right or (b) in the winding-up or dissolution of the
Customer shall be held in trust for MLI and immediately paid to MLI.
9 AVOIDANCE OF PAYMENTS
The Guarantor shall on demand by MLI indemnify MLI against any funding or
other cost, loss, expense or liability (including loss of profit) sustained
or incurred by it as a result of its being required for any reason
(including any bankruptcy, insolvency, winding-up, dissolution or similar
law of any jurisdic tion) to refund all or part of any amount received or
recovered by it in respect of any Guaranteed Liability and shall in any
event pay to it on demand by MLI the amount so refunded by it.
10 SUSPENSE ACCOUNTS
For the purpose of enabling MLI to maximise its recoveries in any actual or
potential winding-up or dissolution, any amount received or recovered by
MLI (otherwise than as a result of a payment to it by the Customer) in
respect of any Guaranteed Liability may be placed by the recipient in a
suspense account. That amount may be kept there unless and until MLI is
satisfied that it is not obliged to pay any further sums under the
Agreements and that it has irrevocably received or recovered all sums
payable to it under the Agreements.
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11 CERTIFICATES CONCLUSIVE
The certificate of an officer or employee of MLI as to any amount payable
to MLI under this Guarantee shall, save for manifest error, be final,
conclusive and binding on the Guarantor.
12 PAYMENTS, TAXES
All payments by the Guarantor shall be made free and clear of any
restrictions or conditions, without set-off or counterclaim, and free and
clear of, and (subject as hereinafter provided) without deduction for, any
taxes, deductions or withholdings of any nature. If any deduction or
withholding on account of any such tax or other amount is required by law
to be made from any pay ment, the Guarantor shall pay in the same manner
and at the same time such additional amounts as will result in receipt by
MLI free from any liability in respect of any such deduction or
withholding, of such amount as would have been received by it had no such
deduction or withholding been required to be made.
13 CURRENCY
The Guarantor shall pay all amounts hereby guaranteed to such account as
MLI may notify to the Guarantor and in the same currency and funds as such
amounts are payable by the Customer under the Agreements (the "Currency of
Account"). Any amount received or recovered by MLI in a currency other
than the appropriate Currency of Account (whether as a result of, or of the
enforcement of, a judgment or order of any court of any jurisdiction, in
the winding-up or dissolution of the Customer, the Guarantor, or otherwise)
in respect of any sum due to it from the Guarantor under this Guarantee
shall only constitute a discharge to the Guarantor to the extent of the
amount in that Currency of Account which MLI is able, in accordance with
its usual practice, to purchase with the amount so received or recovered in
that other currency on the date of that receipt or recovery (or, if it is
not practicable to make that purchase on that date, on the first date on
which it is practicable to do so). If that amount in that Currency of
Account is less than the amount expressed to be due to MLI under this
Guarantee, the Guarantor shall indem nify it against any loss sustained by
it as a result. In any event, the Guarantor shall indemnify it against the
cost of making any such purchase.
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14 REPRESENTATIONS AND WARRANTIES
The Guarantor represents and warrants to and for the benefit of each of
MLI that:
14.1 it is a corporation or limited partnership duly organised or incorporated
and validly existing under the laws of the jurisdiction of its
establishment and has the power and authority to own its assets and to
conduct the business which it conducts
14.2 its entry into and/or performance of or compliance with its obligations
under this Guarantee do not and will not violate or exceed any
guaranteeing, charg ing or other powers or restrictions granted or imposed
under any law to which it is subject, its constitutional documents or any
agreement to which it is a party or which is binding on it or its assets
14.3 all acts, conditions and things required to be done, fulfilled and
performed in order to enable it lawfully to execute and perform its
obligations under this Guarantee and to ensure that its obligations are
legal, valid and binding have been done, fulfilled and performed
14.4 it has the power to enter into and perform and comply with its obligations
under this Guarantee and has taken all necessary action to authorise such
execution and performance
14.5 it will obtain and maintain in effect and comply with the terms of all
necessary consents, registrations and the like of or with any governmental
or other regulatory body or authority applicable to this Guarantee
14.6 its obligations under this Guarantee are binding and enforceable at law
14.7 it is not in default under any agreement to which it is a party or by
which it or its assets is or are bound and no litigation, arbitration or
administrative proceedings are current or pending, which default,
litigation, arbitration or administrative proceedings are material in the
context of this Guarantee
14.8 it is not necessary or advisable in order to ensure the validity,
effectiveness, performance or enforceability of this Guarantee or the
perfection of the
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security created by or pursuant to this Guarantee that any document be
filed, registered or recorded in any public office or elsewhere
14.9 except by this Guarantee, it has not assigned, transferred or otherwise
dis posed of the Guarantor Collateral (or its rights, title and interest
to and in the Guarantor Collateral), either in whole or in part, nor
agreed to do so, and will not at any time do so or agree to do so, and it
will at all times be the sole beneficial owner of and fully guarantee
title to all Guarantor Collateral which is now or may at any time
hereafter become subject to the security created by or pursuant to this
Guarantee
14.10 except for the security created by or pursuant to this Guarantee, no
mortgage, charge, pledge, lien or other encumbrance or security of any
kind exists on or over the Guarantor Collateral (or its right, title and
interest in and to the Guarantor Collateral), either in whole or in part,
nor has it agreed to create any such other security nor will it at any
time do so or agree to do so and
14.11 each of the above representations and warranties will be correct and
complied with in all respects during the continuance of the Facilities and
so long as any sum remains payable under the Agreements, as if repeated
then by reference to the then existing circumstances.
15 INFORMATION
During the continuance of the Facilities and for so long as any sum remains
payable under the Agreements, the Guarantor shall furnish to MLI such
financial and other information as to its affairs and, as the case may be,
its subsidiaries as MLI may reasonably request from time to time.
16 UTILISATION OF COLLATERAL BY MLI
16.1 The Guarantor hereby authorises MLI from time to time to utilise
Securities comprised in the Guarantor Collateral for MLI's own purposes or
the pur poses of any third party. To enable MLI so to utilise Securities
comprised in the Guarantor Collateral the following provisions of this
Clause 16 shall have effect.
16.2 Where MLI wishes to use Securities comprised in the Guarantor Collateral
for any purpose the Securities in question shall be simultaneously
released
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from the security created by or pursuant to this Guarantee and transferred
by the Guarantor to MLI in accordance with the provisions of this Clause
16.2. The Guarantor authorises MLI to take such steps to deliver or credit
the relevant Securities to MLI (or, as appropriate, the third party in
question) and execute such instruments of transfer or the like as MLI
considers necessary or desir able to vest the full legal and beneficial
right, title and interest in and to those Securities in MLI (or, as the
case may be, that third party).
16.3 Where Securities have been utilised by MLI for any purpose and those
Securities cease to be required for that purpose, MLI shall thereupon
return or procure redelivery of those Securities or of Equivalent
Securities to the Guarantor by redelivering or crediting those Securities
or Equivalent Securi ties to the Collateral Account, whereupon those
Securities or Equivalent Securities shall automatically be subject to the
security created by or pursuant to this Guarantee. All returns and
redeliveries of Securities or Equivalent Securities must be made together
with any appropriate instruments of transfer or the like, and so that all
right, title and interest in and to those Securities or Equivalent
Securities shall vest in the Guarantor, free from all liens, charges and
encumbrances, other than the security created by or pursuant to this
Guarantee.
16.4 MLI shall be obliged to return or procure redelivery of Equivalent
Securities not necessarily the original Securities and it is agreed in
relation to legal proceedings that neither party will seek specific
performance of the other's obligation to deliver, redeliver, credit or
return Securities or Equivalent Securities, but without prejudice to any
other rights it may have.
16.5 Where any Securities have been transferred by the Guarantor under this
Clause 16 and have not been returned or redelivered to the Guarantor
before an applicable income payment date or record date in respect of
those Securi ties, MLI shall, on the date of payment of any dividend,
interest or other distribution on or with respect to the Securities in
question or on such other date as MLI and the Guarantor may agree, pay to
the Guarantor such amount in relation to such dividend, interest or
distribution and deliver such tax vouchers as may be available or
appropriate as shall ensure that the Guarantor is placed in the same
after-tax position (but ignoring for these purposes any tax by reference
to the general income or profits of the Guarantor or other similar
reference) as if it had been the Holder of the relevant Securities at all
relevant times.
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16.6 If on the due date for return or redelivery thereof MLI shall for any
reason be unable to return or redeliver any Securities or Equivalent
Securities in connec tion with any transfer of Securities to MLI under
this Clause 16, MLI's obligation to return or redeliver those Securities
or Equivalent Securities shall be replaced by an obligation to pay to the
Guarantor an amount in cash equal to the market value of those Securities
or Equivalent Securities derived from rates offered by a dealer reasonably
chosen by MLI. Any such amount shall be paid or credited to the Guarantor
Collateral Account.
16.7 The Guarantor shall, subject as otherwise provided in this Guarantee and
in particular to the security created by or pursuant to this Guarantee,
have all the incidents of ownership of Securities transferred under this
Clause 16, includ ing the right to transfer them to others, and such
Securities shall continue to be taken into account for the purpose of
Clause 3.3.
16.8 For the purposes of this Clause 16:
"EQUIVALENT SECURITIES" or "SECURITIES EQUIVALENT TO" means securities of
an identical type, nominal value, description and amount to particular
Securities the subject of a utilisation under this Clause 16 (including
any certificates and other documents of or evidencing title to the same).
If and to the extent that such Securities are partly paid and a call is
made or have been converted, subdivided, consolidated, redeemed, made the
subject of a takeover, merger, capitalisation issue, rights issue or
similar, the Equivalent Securities shall be as accordingly determined by
MLI
"HOLDER" in relation to registered securities means the person whose name
or whose nominee is shown on the relevant register of ownership and in
relation to bearer Securities means the bearer thereof.
17 ASSIGNMENTS
MLI may at any time assign all or part of its rights under this Guarantee.
MLI shall after any such assignment and to the extent (if at all)
appropriate or required hold the security created by or pursuant to this
Guarantee for itself and each assignee. Any reference in this Guarantee to
MLI shall be construed accordingly and shall also include their respective
successors. Any such assignee shall be entitled to the full benefit of
this Guarantee to the same
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extent as if it were an original party in respect of the rights assigned
to it. MLI may disclose to each other and to any potential assignee or any
other person who has entered or proposes to enter into contractual
arrangements with it in relation to or concerning the Agreements or this
Guarantee such information about the Customer, the Guarantor, the
Agreements and this Guarantee as it may think fit.
18 [LEFT BLANK INTENTIONALLY]
19 THE AGREEMENTS
19.1 Terms defined in the Agreements (and not defined in this Guarantee) shall
have the same meanings in this Guarantee.
19.2 This Guarantee is a Performance Assurance Agreement for the purposes of
the Facilities Agreement.
20 PARTIES
This Guarantee shall not be discharged nor shall the liability of the
Guarantor be affected by any amalgamation or merger of MLI, or the
Guarantor with any other company, or any reconstruction or change in the
constitution of MLI, or the Guarantor, or any change in the name, style or
constitution of MLI, or the Guarantor or, as the case may be, in the
persons who from time to time constitute the general and/or limited
partners in the Guarantor, and this Guarantee shall be binding on the
Guarantor and on all such persons.
21 COMMUNICATIONS
Any demand or other notice under this Guarantee shall be made in writing
by MLI acting by one of its officers or employees and may be sent by post
or hand delivered to the address of the Guarantor specified below, or sent
by facsimile to the facsimile number specified below, or in each case to
such other address and/or facsimile number as the Guarantor has from time
to time notified to MLI in writing. Notices shall be deemed to have been
received seven days after being posted and immediately in the case of hand
delivered or facsimile communication.
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22 REMEDIES AND WAIVERS
No failure by MLI to exercise, and no delay by MLI in exercising any right
or remedy will operate as a waiver thereof, nor will any single or partial
exercise of any such right or remedy preclude any other or further exercise
thereof or the exercise of any other right or remedy. The authority to
debit, charge and pledge and the right of set-off and other rights and
remedies provided in this Guarantee are separate, independent and
cumulative and not exclusive of any rights or remedies (including any other
security, right of set-off, lien, right to combine or consolidate accounts
or similar right) to which MLI is at any time entitled anywhere, whether by
operation of law or otherwise.
23 PARTIAL INVALIDITY
If at any time any provision of this Guarantee is or becomes illegal,
invalid or unenforceable in any respect under the law of any jurisdiction,
neither the legality, validity or enforceability of the remaining
provisions of this Guaran tee, nor the legality, validity or
enforceability of such provisions under the law of any other jurisdiction
shall in any way be affected or impaired thereby. If and to the extent
that the security expressed to be created by or pursuant to this Guarantee
is at any time and for any reason not effective as a fixed charge, it shall
instead take effect as a floating charge.
24 COUNTERPART EXECUTION
This Guarantee may be executed in any number of counterparts, all of which
taken together shall constitute one and the same instrument.
25 GOVERNING LAW
This Guarantee shall be governed by and construed in accordance with
English law.
26 PROCEEDINGS
In relation to any legal action or proceedings arising out of or in
connection with this Guarantee ("PROCEEDINGS") the Guarantor, for the
benefit of MLI, irrevocably submits to the jurisdiction of the courts of
England and any New York State or United States Federal court sitting in
New York City, and
17
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waives any objection to Proceedings in such courts on
the grounds of venue or on the grounds that the Proceedings have been
brought in an inconvenient forum. Those submissions shall not affect MLI's
right to take Proceedings in any other court of competent jurisdiction, nor
shall the taking of Proceedings in any court of competent jurisdiction
preclude MLI from taking Proceedings in any other court of competent
jurisdiction (whether concurrently or not).
Dated
COLFAX CAPITAL CORPORATION
By:
Address:
Facsimile No.:
MERRILL LYNCH INTERNATIONAL
By:
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EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
reports (and to all references to our Firm) included in or made a part of this
registration statement.
/s/ Arthur Andersen llp
ARTHUR ANDERSEN LLP
Richmond, Virginia
August 19, 1998
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
report (and to all references to our Firm) included in or made a part of this
registration statement.
/s/ Arthur Andersen
ARTHUR ANDERSEN
WIRTSCHAFTSPRUFUNGSGESELLSCHAFT
STEUERBERATUNGSGESELLSCHAFT MBH
Stuttgart
August 19, 1998
<PAGE>
EXHIBIT 23.3
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions "Summary
Historical Consolidated Financial Information," "Selected Historical
Consolidated Financial Information" and "Experts" and to the use of our report
dated February 19, 1997, except for Notes 2, 3 and 15 as to which the dates
are August 28, 1997, February 27, 1998 and April 3, 1998, respectively, in the
Registration Statement (Form S-1 No. 33-00000) and related Prospectus of
Colfax Corporation dated August 20, 1998.
/s/ Ernst & Young LLP
Ernst & Young LLP
Princeton, New Jersey
August 18, 1998
<PAGE>
EXHIBIT 23.4
CONSENT TO BE
NAMED AS DIRECTOR
I hereby consent to serve as a director of Colfax Corporation (the
"Registrant") as described in the Registrant's Registration Statement on Form
S-1 filed with the Securities Exchange Commission on August 20, 1998.
/s/ Neil D. Cohen
-------------------------------------
Name: Neil D. Cohen
<PAGE>
EXHIBIT 23.5
CONSENT TO BE NAMED AS DIRECTOR
I hereby consent to serve as a director of Colfax Corporation (the
"Registrant") as described in the Registrant's Registration Statement on Form
S-1 filed with the Securities Exchange Commission on August 20, 1998.
/s/ George P. Stamas
-------------------------------------
Name: George P. Stamas
