<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended July 25, 1998
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from_________to_________
Commission file number 1-4737
------
HIGH VOLTAGE ENGINEERING CORPORATION
(Exact name of registrant as specified in its charter)
MASSACHUSETTS
(State or other jurisdiction of incorporation)
04-2035796
(I.R.S. Employer Identification No.)
401 Edgewater Place, Suite 680, Wakefield, MA 01880
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code (781) 224-1001
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
Number of Common Shares outstanding at September 8, 1998: 1,082.7429 shares.
<PAGE>
CONTENTS
<TABLE>
<S> <C>
PART I - FINANCIAL INFORMATION
ITEM 1. - FINANCIAL STATEMENTS
Consolidated Balance Sheets July 25, 1998 (unaudited) and
April 25, 1998................................................................................... 3
Consolidated Statements of Operations for the Three Months ended
July 25, 1998 (unaudited) and July 26, 1997 (unaudited).......................................... 4
Consolidated Statements of Stockholders' Deficiency for the Three
Months ended July 25, 1998 (unaudited) and for the Years ended April
25, 1998 and April 26, 1997...................................................................... 5
Consolidated Statements of Cash Flows for the Three Months ended
July 25, 1998 (unaudited) and July 26, 1997 (unaudited).......................................... 6
Notes to Consolidated Financial Statements....................................................... 7
ITEM 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS...... 9
ITEM 3. - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK................................. 14
PART II - OTHER INFORMATION
ITEM 1. - LEGAL PROCEEDINGS.......................................................................... 15
ITEM 2. - CHANGES IN SECURITIES...................................................................... 15
ITEM 3. - DEFAULTS UPON SENIOR SECURITIES............................................................ 15
ITEM 4. - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS........................................ 15
ITEM 5. - OTHER INFORMATION.......................................................................... 15
ITEM 6. - EXHIBITS AND REPORTS ON FORM 8-K........................................................... 15
SIGNATURES................................................................................................ 16
</TABLE>
2
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PART I
FINANCIAL INFORMATION
ITEM 1. - FINANCIAL STATEMENTS
HIGH VOLTAGE ENGINEERING CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
APRIL 25, JULY 25,
1998 1998
--------- ----------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ........................ $ 16,518 $ 17,887
Restricted cash .................................. 14,671 14,802
Accounts receivable - net ........................ 59,403 51,580
Refundable income taxes .......................... 626 607
Inventories ...................................... 36,136 40,588
Prepaid expenses and other current assets ........ 2,018 2,399
--------- ---------
Total current assets ........................... 129,372 127,863
PROPERTY, PLANT AND EQUIPMENT ...................... 54,161 54,383
INVESTMENT IN JOINT VENTURE ........................ 1,735 1,781
ASSETS HELD FOR SALE ............................... 3,830 3,801
OTHER ASSETS - Net ................................. 17,158 16,686
COST IN EXCESS OF NET ASSETS ACQUIRED .............. 25,148 24,789
--------- ---------
$ 231,404 $ 229,303
--------- ---------
--------- ---------
LIABILITIES AND STOCKHOLDERS DEFICIENCY
CURRENT LIABILITIES:
Current maturities of long-term debt obligations . $ 1,351 $ 1,468
Foreign credit line .............................. 2,002 1,452
Accounts payable ................................. 22,923 23,769
Accrued interest ................................. 3,118 7,238
Accrued liabilities .............................. 26,932 21,113
Advance payments by customers .................... 6,613 6,635
Federal, foreign and state income taxes payable .. 2,369 4,081
Deferred income taxes ............................ 1,641 1,427
--------- ---------
Total current liabilities ...................... 66,949 67,183
REDEEMABLE PUT WARRANTS ............................ 2,590 2,590
LONG-TERM OBLIGATIONS, LESS CURRENT MATURITIES ..... 172,976 172,910
DEFERRED INCOME TAXES .............................. 2,698 2,719
OTHER LIABILITIES .................................. 6,951 6,726
REDEEMABLE PREFERRED STOCK ......................... 30,457 31,573
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIENCY
Common stock ..................................... 1 1
Paid-in-capital .................................. 19,527 19,527
Accumulated deficit .............................. (72,603) (75,895)
Common stock warrants ............................ 2,200 2,200
Cumulative foreign currency translation adjustment (342) (231)
--------- ---------
Total stockholders' deficiency ................. (51,217) (54,398)
--------- ---------
$ 231,404 $ 229,303
--------- ---------
--------- ---------
</TABLE>
See accompanying notes to consolidated financial statements.
3
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HIGH VOLTAGE ENGINEERING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------
JULY 26, JULY 25,
1997 1998
------------ -----------
(Unaudited) (Unaudited)
<S> <C> <C>
Net sales ....................................... $ 41,496 $ 61,173
Cost of sales ................................... 27,084 40,235
---------- ----------
Gross profit .................................. 14,412 20,938
Administrative and selling expenses ............. 9,583 13,202
Research and development expenses ............... 2,143 4,881
Restructuring charge ............................ -- 280
Reimbursed environmental and litigation
costs - net ................................... 45 5
Other ........................................... (98) (73)
---------- ----------
Income from operations ........................ 2,739 2,643
Interest expense ................................ 5,728 4,882
Interest income ................................. (40) (329)
---------- ----------
Loss from continuing operations before income
taxes and discontinued operations ......... (2,949) (1,910)
Income taxes .................................... 162 265
---------- ----------
Loss from continuing operations before
discontinued operations ................... (3,111) (2,175)
Discontinued operations:
Income from discontinued operations, net of
income taxes .............................. 161 --
---------- ----------
Net loss ........................................ (2,950) (2,175)
Preferred dividends ............................. (128) (1,029)
Accretion of redeemable preferred stock ......... -- (88)
---------- ----------
Net loss applicable to common stockholders ...... $ (3,078) $ (3,292)
---------- ----------
---------- ----------
Net loss per common share:
Continuing operations ....................... $(3,239.00) $(3,039.70)
Income from discontinued operations ......... 161.00 --
Net loss applicable to common
stockholders .............................. $(3,078.00) $(3,039.70)
---------- ----------
---------- ----------
Weighted average common stock outstanding ....... 1,000 1,083
---------- ----------
---------- ----------
</TABLE>
See accompanying notes to consolidated financial statements.
4
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HIGH VOLTAGE ENGINEERING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIENCY
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
CUMULATIVE
FOREIGN
COMMON CURRENCY
COMMON PAID-IN ACCUMULATED STOCK TRANSLATION
STOCK CAPITAL DEFICIT WARRANTS ADJUSTMENT TOTAL
------ ------- ----------- -------- ----------- -------
<S> <C> <C> <C> <C> <C> <C>
Balance, April 27, 1996 .... $ 1 $ 17,326 $(50,869) $ -- $ 60 $(33,482)
Net loss ................... (2,756) (2,756)
Preferred stock dividends .. (479) (479)
Change in foreign currency
translation .............. (19) (19)
---- -------- -------- ------- -------- --------
Balance, April 26, 1997 .... 1 17,326 (54,104) -- 41 (36,736)
Net loss ................... (12,744) (12,744)
Preferred stock dividends .. (3,085) (3,085)
Accretion of redeemable
preferred stock .......... (270) (270)
Distribution to fund Letitia
common stock repurchase .. (2,400) (2,400)
Change in foreign currency
translation .............. (383) (383)
Common stock warrants ...... 2,200 2,200
Proceeds from issuance of
common stock ............. 2,201 2,201
---- -------- -------- ------- -------- --------
Balance, April 25, 1998 .... 1 19,527 (72,603) 2,200 (342) (51,217)
Net loss ................... (2,175) (2,175)
Preferred stock dividends .. (1,029) (1,029)
Accretion of redeemable
preferred stock .......... (88) (88)
Change in foreign currency
translation .............. 111 111
---- -------- -------- ------- -------- --------
Balance, July 25, 1998
(Unaudited) .............. $ 1 $ 19,527 $(75,895) $ 2,200 $ (231) $(54,398)
---- -------- -------- ------- -------- --------
---- -------- -------- ------- -------- --------
</TABLE>
See accompanying notes to consolidated financial statements.
5
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HIGH VOLTAGE ENGINEERING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------
JULY 26, JULY 25,
1997 1998
----------- -----------
(Unaudited) (Unaudited)
<S> <C> <C>
Increase (decrease) in Cash and Cash Equivalents
Cash flows from operating activities:
Net loss ............................................... $ (2,950) $ (2,175)
Adjustments to reconcile net loss to net cash
(used in) provided by operating activities:
Depreciation and amortization ........................ 1,222 2,527
Non-cash interest .................................... 3,661 285
Deferred income taxes ................................ 58 (195)
Undistributed earnings of affiliate .................. (31) (36)
Gain on sale of assets ............................... -- (42)
Change in assets and liabilities:
Accounts receivable ................................ 253 7,823
Refundable income taxes ............................ -- 19
Inventories ........................................ (335) (4,452)
Prepaid expenses and other current assets .......... (25) (381)
Accounts payable, accrued interest and accrued
liabilities ...................................... (3,820) (1,839)
Advance payments by customers ...................... 79 22
Federal, foreign and state income taxes payable .... (1,210) 1,712
-------- --------
Net cash (used in) provided by operating activities (3,098) 3,268
-------- --------
Cash flows from investing activities:
Additions to property, plant and equipment ............. (756) (1,743)
Proceeds from sales of assets, net of expenses ......... -- 32
Other .................................................. 49 25
-------- --------
Net cash used in investing activities .............. (707) (1,686)
-------- --------
Cash flows from financing activities:
Cash overdraft ......................................... 631 756
Net payments on foreign credit line .................... (242) (550)
Net (increase) decrease in restricted cash ............. 244 (131)
Net proceeds (payments) under senior credit agreement .. 5,218 --
Principal payments on long-term obligations ............ (2,070) (386)
-------- --------
Net cash (used in) provided by financing activities .. 3,781 (311)
-------- --------
Effect of foreign exchange rate changes on cash ........... (125) 98
-------- --------
Net (decrease) increase in cash and cash equivalents . (149) 1,369
Cash and cash equivalents, beginning of the period ..... 1,542 16,518
-------- --------
Cash and cash equivalents, end of the period ........... $ 1,393 $ 17,887
-------- --------
-------- --------
Supplemental Disclosure of Cash Flow Information:
Cash paid for:
Interest ............................................... $ 3,132 $ 475
Income taxes ........................................... 937 599
Supplemental Schedule of Non-cash Investing and Financing
Activities:
Preferred stock dividends-in-kind and issuable preferred
stock dividends-in-kind .............................. $ 128 $ 1,029
Leased asset additions ................................. 10 430
</TABLE>
See accompanying notes to consolidated financial statements.
6
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HIGH VOLTAGE ENGINEERING CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
The condensed consolidated financial statements of High Voltage
Engineering Corporation and Subsidiaries (the "Company") include accounts of
the Company and its direct and indirect subsidiaries. All significant
intercompany balances and transactions have been eliminated in consolidation.
The condensed consolidated financial statements have been prepared pursuant
to the rules and regulations of the Securities and Exchange Commission
("SEC") and, in the opinion of management include all adjustments, which are
of a normal and recurring nature, necessary to fairly present the financial
position for the interim periods presented.
The condensed consolidated financial statements do not contain all
disclosures normally included in financial statements normally prepared in
accordance with generally accepted accounting principles pursuant to SEC rules
and regulations. These condensed consolidated financial statements should be
read in conjunction with the consolidated financial statements of the Company as
of and for the fiscal year ended April 25, 1998, as filed with the SEC on July
24, 1998, and are not necessarily indicative of the results that may be expected
for the year ending April 24, 1999.
NOTE 2 - INVENTORIES
Inventories consisted of the following as of:
<TABLE>
<CAPTION>
APRIL 25, JULY 25,
1998 1998
-------- ---------
<S> <C> <C>
Raw materials .......................... $20,232 $22,529
Work-in-process ........................ 6,509 15,355
Finished goods ......................... 9,395 2,704
------- -------
Total ............................... $36,136 $40,588
------- -------
------- -------
</TABLE>
NOTE 3 - ACQUISITIONS AND OTHER TRANSACTIONS
On August 8, 1997, the Company acquired PHI Acquisition Holdings, Inc.
("PHI Holdings") through the merger of a wholly owned subsidiary of the
Company with and into PHI Holdings. Immediately thereafter, PHI Holdings was
merged with and into Physical Electronics, Inc. ("PHI"), its wholly owned
subsidiary, and PHI became a direct, wholly owned subsidiary of the Company.
Under the Agreement and Plan of Merger, the shareholders of PHI received in
exchange for their stock an aggregate of $54,536 in cash. The $54,536 was
reduced by the payment of PHI's debt, certain transaction costs, and
contractual payments to the former Chief Executive Officer of PHI.
On March 19, 1998, a wholly owned subsidiary of the Company acquired,
directly or indirectly, all of the outstanding capital stock of Stewart
Warner Instrument Corporation ("Stewart Warner"), for $24,721 in cash,
subject to a possible reduction based on the net amount of certain of Stewart
Warner's assets and liabilities as of the closing date. Pursuant to the Stock
Purchase Agreement, the sellers have agreed to indemnify the Company, up to
an aggregate of $5,000, for breaches of representations and warranties. Most
of these representations and warranties will expire on the first anniversary
of the closing.
The acquisitions have been accounted for using the purchase method of
accounting, and, accordingly, the purchase prices have been allocated to the
assets purchased and the liabilities assumed based upon the fair values at the
dates of the acquisitions. The excess of the purchase prices over the fair value
of the net assets acquired has been recorded as goodwill, which will be
amortized on a straight-line basis over 20 years.
7
<PAGE>
The net purchase price was allocated as follows:
<TABLE>
<CAPTION>
STEWART
PHI WARNER TOTAL
--------- ---------- ---------
<S> <C> <C> <C>
Working capital, other than cash acquired $ 33,707 $ 8,733 $ 42,440
Property, plant and equipment ........... 18,822 5,856 24,678
Other assets ............................ 14,696 2,300 16,996
Cost in excess of assets acquired ....... 8,985 14,571 23,556
Other liabilities ....................... (21,938) (6,770) (28,708)
-------- -------- --------
Purchase price, net of cash received .... $ 54,272 $ 24,690 $ 78,962
-------- -------- --------
-------- -------- --------
</TABLE>
The operating results of these acquired businesses have been included in
the consolidated statement of operations from the dates of acquisition.
In connection with the PHI acquisition described above, the Company
completed a Rule 144A offering in the amount of $170.2 million including
$135.0 million of Senior Notes, due in 2004 and $35.2 million consisting of
33,000 units comprised in the aggregate of 33,000 shares of Series A Senior
Redeemable Preferred Stock, warrants to purchase 82.7429 shares of common
stock of the Company and 82.7429 shares of common stock of the Company. The
Company also entered into a $25.0 million revolving credit facility. Both of
these financings closed simultaneously with the PHI acquisition, and were
used to finance the acquisition, repay certain indebtedness and all existing
redeemable Preferred Stock, repurchase certain existing put warrants, make
distributions to Letitia, the owner of 92.36% of the Company's common stock,
extinguish the Company's obligations under two existing Contingent Interest
Payments Agreements (the "CIP Agreements"), pay fees and for general
corporate purposes. As a result the Company recorded interest expense of
approximately $1 million during the three months ended July 26, 1997.
In connection with the Stewart Warner acquisition described above, the
Company completed a Rule 144A offering in the amount of $20.0 million of
Senior Notes, due 2004.
NOTE 4 - CONTINGENCIES
The nature of the Company's business is such that it is regularly involved
in legal proceedings incidental to its business and the Company believes that
none of these proceedings are material.
In February 1997, the Company commenced litigation seeking damages for
breaches in connection with an aborted acquisition. The other party has filed a
counterclaim. The Company believes the case has merit and there are substantial
defenses to the counterclaim. In light of the preliminary stage of the
proceedings, the Company is unable to assess the likelihood of liability, if
any, arising from this action the amount of any damages that may be assessed
against the Company, and the extent to which any assessed liability will be
covered by the Company's insurance. The Company believes the counterclaim to be
without merit.
In March 1998, the Company initiated litigation against Toshiba
International Corporation ("Toshiba") in the United States District Court for
the Western District of Pennsylvania alleging infringement of one of the
Company's Perfect Harmony patents. In June 1998 Toshiba filed suit against the
Company and several other defendants in the United States District Court for the
Southern District of Texas alleging, among other things, false and disparaging
comments concerning Toshiba, interference with contract, violation of the Texas
Competition and Trade Practices Statute and civil conspiracy to restrict
Toshiba's business and cause the wrongful termination of a purchase order of one
of its customers. Damages under each section are claimed to be in excess of
$75,000, the federal statutory minimum, in addition to a claim for punitive
damages. In its suit, Toshiba has also claimed that the Company is infringing a
patent held by Toshiba and requested a declaratory judgment that the Company's
patent, which is the subject of the Pennsylvania action, is invalid. In light of
the preliminary stage of the proceedings, the Company is unable to assess the
likelihood of liability, if any, arising from this Texas action; however, the
Company believes that it has valid claims against Toshiba.
Certain other claims, suits and complaints have been filed or are pending
against the Company. In the opinion of the Company, all such matters are without
merit or are of such kind, or involve such amounts, as would not have a material
effect on the consolidated financial position or the results of operations of
the Company if disposed of unfavorably. If estimates change, there is no
assurances these items will not require additional accruals by the Company.
8
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NOTE 5 - SEGMENT DATA
The Company operates in six industry segments. Information concerning
operations in these businesses is as follows (all amounts are from continuing
operations only, except identifiable assets):
<TABLE>
<CAPTION>
OPERATING DEPRECIATION
NET INCOME IDENTIFIABLE AND CAPITAL
SALES (LOSS) ASSETS AMORTIZATION EXPENDITURES
-------- -------- -------- ------------ ------------
<S> <C> <C> <C> <C> <C>
THREE MONTHS ENDED JULY 26, 1997
High power conversion
products ..................... $ 21,483 $ 1,820 $ 41,328 $ 125 $ --
Advanced surface analysis
instruments .................. -- -- -- -- --
High performance modular
power connectors ............. 5,401 1,069 14,805 259 120
Customized monitoring
instrumentation .............. 8,975 909 20,481 400 312
Disposable customized medical
grade plastic tubing ......... 4,235 222 9,125 261 207
Corporate and other ............ 1,402 (1,281) 26,707 110 17
-------- -------- -------- -------- --------
Consolidated ................. $ 41,496 $ 2,739 $112,446 $ 1,155 $ 656
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
THREE MONTHS ENDED JULY 25, 1998
High power conversion
products ..................... $ 20,033 $ (137) $ 39,766 $ 156 $ 190
Advanced surface analysis
instruments .................. 11,308 (949) 69,102 994 919
High performance modular
power connectors ............. 6,571 1,541 17,341 338 327
Customized monitoring
instrumentation .............. 16,797 1,988 50,842 629 538
Disposable customized medical
grade plastic tubing ......... 3,894 551 8,601 274 62
Corporate and other ............ 2,570 (351) 43,651 136 137
-------- -------- -------- -------- --------
Consolidated ................. $ 61,173 $ 2,643 $229,303 $ 2,527 $ 2,173
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
</TABLE>
NOTE 6 - NEW ACCOUNTING PRONOUNCEMENTS
Comprehensive Income
In February 1998, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income," which establishes standards for the reporting and display of
comprehensive income. For the three months ended July 25, 1998 and July 26,
1997, respectively, the components of other comprehensive income were
immaterial. The components of other comprehensive income consist solely of
foreign currency translation adjustments.
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosure About
Pension and Other Post Retirement Benefits" which revises employers' disclosures
about pension and other post retirement benefit plans. The Company does not
believe adoption will have a material impact on its financial disclosures.
ITEM 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
This report may make forward-looking statements regarding future events
or the future financial performance of the Company. We caution you that these
statements are only predictions and that actual events or results may differ
materially. We refer you to documents the Company files from time to time
with the SEC, and specifically the most recent Form 10-K and the "Risk
Factors" section of the Company's most recent Registration Statement on Form
S-4 on file. This document identifies and describes important factors that
can cause the after-results to differ materially from those contained in any
forward-looking statements we may make.
The consolidated financial statements of the Company include the accounts of
High Voltage Engineering Corporation and its subsidiaries after elimination of
material intercompany transactions and balances.
9
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As used in this filing, the terms "fiscal year 1998" and "fiscal year 1999"
refer to the Company's fiscal years ended April 25, 1998 and April 24, 1999,
respectively.
The Company conducts its business through six independent operating units,
Robicon Corporation and subsidiaries ("Robicon"), Physical Electronics, Inc. and
subsidiaries ("PHI"), Datcon Instrument Company and subsidiaries ("Maxima
Technologies"), Anderson Interconnect, Inc. ("APP"), Natvar and High Voltage
Engineering Europa B.V. ("HVE Europa").
SEASONALITY; VARIABILITY OF OPERATING RESULTS
The majority of the Company's operating units have historically recorded
the strongest operating results in the fourth quarter of the fiscal year due
in part to seasonal considerations and other factors, although in some recent
years, seasonal fluctuations have been partially mitigated by overall
business growth.
The timing of orders placed by the Company's customers has varied with,
among other factors, the introduction of new products, product life cycles,
customer attempts to manage inventory levels, competitive conditions, general
economic conditions and the availability of funding for scientific and
educational research. The variability of the level and timing of orders has,
from time to time, resulted in significant periodic and quarterly fluctuations
in the operations of the Company's operating units. Such variability is
particularly evident at HVE Europa, which ships on average four particle
accelerator systems per year. These systems are typically sold for between $1.0
million and $2.0 million each and have long lead times. As a result, the timing
of HVE Europa's shipments within any fiscal year can have a material impact on
an individual quarter's results.
THE PHI MERGER
On August 8, 1997, the Company acquired PHI Acquisition Holdings, Inc.
("PHI Holdings") for $54.6 million in cash, excluding transaction costs and
cash acquired. The acquisition was consummated through the merger of Lauren
Corporation, a wholly owned subsidiary of the Company, with and into PHI
Holdings. Immediately thereafter, PHI Holdings was merged with and into PHI,
its wholly owned subsidiary, and PHI became a direct, wholly owned subsidiary
of the Company.
ACQUISITION OF STEWART WARNER
On March 19, 1998, Datcon Instrument Company acquired, directly or
indirectly, all of the capital stock of Stewart Warner, for an aggregate
consideration of $24.7 million in cash, subject to adjustments, as defined in
the Stock Purchase Agreement. After the repayment of all of Stewart Warner's
outstanding indebtedness, the remainder of the cash purchase price was
distributed to the stockholders of Stewart Warner.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JULY 25, 1998 COMPARED TO THREE MONTHS ENDED JULY 26,
1997
Net sales increased $19.7 million, or 47.4%, from $41.5 million in the
first quarter of fiscal year 1998 to $61.2 million in the first quarter of
fiscal year 1999. Excluding net sales from PHI ($11.3 million) and Stewart
Warner ($7.0 million) which were both acquired during fiscal year 1998, net
sales increased $1.4 million, or 3.4%, during the first quarter of fiscal
year 1999. The overall increase was primarily attributable to: (i) $18.3
million related to the operations of PHI and Stewart Warner which were
acquired after the first quarter of fiscal year 1998; (ii) a decrease in
sales of $1.5 million, or 6.7%, at Robicon primarily due to a $3.9 million
decrease in power control systems primarily related to polysilicon
extraction, a $1.7 million decrease in low voltage VFDs primarily related to
the timing of deliveries requested by customers, and offset by a $3.9 million
increase in shipments of medium voltage VFDs; (iii) an increase of $1.2
million, or 21.7%, at APP due to continued growth in the uninterruptible
power supply markets as well as telecommunications and networking equipment
markets in North America and Europe; (iv) an increase of $0.8 million, or
9.5% (excluding the operations of Stewart Warner), at Maxima Technologies due
to higher shipments in both the United States and Europe, (v) an increase of
$1.2 million, or 83.3%, at HVE Europa due to $0.6 million in billings of
prototype development programs which were cancelled by two customers due to
their merger and the resulting combination of their development programs, as
well as $0.6 million due to the revenue associated with the larger size of
the particle accelerator system shipped in the first quarter of fiscal year
1999 compared to the system shipped in the first quarter of fiscal year 1998;
and (vi) a decrease of $341,000, or 8.1%, at Natvar due to the disposition of
certain electrical sleeving product lines in the fourth quarter of fiscal
year 1998.
Gross profit increased $6.5 million, or 45.3%, from $14.4 million during the
10
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first quarter of fiscal year 1998 to $20.9 million in the first quarter of
fiscal year 1999. This increase included $4.0 million at PHI and $2.3 million at
Stewart Warner. The remaining increase of $183,000 was primarily attributable to
incremental revenue offset by a lower gross margin rate. The Company's gross
margin rate decreased from 34.7% to 34.2% overall, primarily related to the
decline in gross margin at Robicon from 34.7% to 31.1% due to lower volume and
the lower mix of higher margin power control systems shipments in fiscal year
1999, but offset by an increase at Natvar from 25.3% to 30.6% due to the recent
disposition of certain low margin electrical sleeving product lines.
Administrative and selling expenses increased $3.6 million, or 37.8%,
from $9.6 million to $13.2 million, including: (i) an increase of $4.3
million related to the operations of PHI and Stewart Warner; (ii) an increase
of $385,000 at Robicon primarily due to a step level increase in information
technology and other selling and administrative costs in the second quarter
of fiscal year 1998 to support higher sales level; and offset by (iii) a
decrease of $331,000, or 18.9% at Maxima Technologies related to the timing
of expenses and productivity increases related to the acquisition of Stewart
Warner; and (iv) a decrease in expenses of $0.7 million, or 54.5%; in
corporate administrative expenses primarily due to a lower headcount and
certain non-capitalizable expenses in connection with the pending acquisition
of PHI and related financing in the first quarter of fiscal year 1998.
Research and development expenses increased $2.7 million, or 127.8%, from
$2.2 million to $4.9 million, including $2.5 million related to the operations
of PHI and Stewart Warner. The remaining increase of $165,000 included increased
new product applications development at Robicon and APP.
Depreciation and amortization from continuing operations increased $1.3
million from $1.2 million to $2.5 million during the first quarter of fiscal
year 1998. The increase was primarily due to the operations of PHI and Stewart
Warner.
The first quarter of fiscal year 1999 includes a restructuring charge of
$280,000 at Robicon primarily related to severance costs for headcount
reductions related to the re-layout of certain assembly operations, more
simplified designs in newer technology products, and a product mix change to
less labor intensive products.
As a result of the factors described above, operating income decreased
$96,000, from $2.7 million in the first quarter of fiscal year 1998 to $2.6
million in the first quarter of fiscal year 1999. Excluding the operating
loss of PHI ($0.9 million) and operating income of Stewart Warner ($0.4
million), operating income increased from $2.7 million in the first quarter
of fiscal year 1998 to $3.2 million in the first quarter of fiscal year 1999.
The operating loss at PHI was attributable to a level of shipments during the
first quarter of fiscal year 1999 which was below the breakeven point, due to
the timing of customer requested delivery dates.
Interest expense decreased $0.8 million, or 14.8%, from $5.8 million in the
first quarter of fiscal year 1998 to $4.9 million in the first quarter of fiscal
year 1999. Excluding interest expense of $2.2 million in accretion of redeemable
put warrants and a $1.0 million provision for contingent interest payments in
the first quarter of fiscal year 1998, interest expense increased $2.3 million,
or 89.3% due to higher average indebtedness associated with the issuance of
Senior Notes; on August 8, 1997 and March 19, 1998. Interest income increased
$289,000 primarily due to a higher average cash balances resulting from the
proceeds from the Senior Notes.
As a result of the above items, the Company recorded a loss from
continuing operations before income taxes and discontinued operations of $3.0
million in the first quarter of fiscal year 1998 compared to a loss of $1.9
million in the first quarter of fiscal year 1999.
Total income tax expense, including amounts allocated to discontinued
operations, was unchanged in the first quarter of fiscal year 1998 as compared
to the first quarter of fiscal year 1999.
As a result of the above, losses from continuing operations before
discontinued operations decreased $0.9 million from $3.1 million to $2.2 million
in the first quarter of fiscal year 1999. Income from discontinued operations of
$162,000 was recorded in the first quarter of fiscal year 1998, relating to the
sale of the General Eastern Instruments division in the fourth quarter of fiscal
year 1998.
The foregoing factors contributed to a net loss of $2.9 million in the first
quarter of fiscal year 1998 compared to a net loss of $2.2 million in the first
quarter of fiscal year 1999.
11
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity needs are primarily for working capital and capital
expenditures. The Company's primary sources of liquidity have been funds
provided by operations, proceeds from the sale of discontinued operations and
asset sales and proceeds from financing activities.
On March 19, 1998, the Company completed a private placement (the "Second
Offering") of $20.0 million in aggregate principal amount of 10 1/2% Senior
Notes due 2004. The net proceeds of the Second Offering were used to finance
part of the purchase price for Stewart Warner.
On August 8, 1997, the Company entered into a $25.0 million revolving credit
facility (the "Revolving Credit Facility") which is being used primarily to fund
the Company's working capital requirements and has a $10.0 million sublimit for
the issuance of standby letters of credit. The Revolving Credit Facility has a
term of five years and replaced the $20.0 million revolving credit facility in
place on such date. There were no borrowings outstanding under the Revolving
Credit Facility as of July 25, 1998; however, there were $5.1 million in letters
of credit commitments outstanding. Accordingly, credit availability under this
facility was $19.9 million as of such date. The Revolving Credit Facility
contains covenants restricting the ability of the Company's operating units to,
among other things, pay dividends or make other restricted payments.
On August 8, 1997, the Company completed a private placement (the
"Original Offering") of $135.0 million in aggregate principal amount of 10
1/2% Senior Notes due 2004 and $35.2 million in Units consisting of the
Company's Series A Redeemable Preferred Stock, common stock of the Company
and warrants to purchase common stock of the Company. A portion of the net
proceeds of the Original Offering was used to repay existing indebtedness,
including accrued and unpaid interest thereon and associated prepayment
penalties. In connection with the issuance of the Company's Series A
Redeemable Preferred Stock, the Company issued to the holders thereof
warrants representing 6.6% of the Company's fully-diluted common stock. On
January 16, 1998, the Company's outstanding Senior Notes and Series A
Redeemable Preferred Stock were exchanged by the holders thereof for a like
amount of Senior Notes and shares of Series A Exchange Redeemable Preferred
Stock registered pursuant to the Securities Act.
At July 25, 1998, the Company had outstanding redeemable put warrants
representing 6.25% of its fully-diluted common stock. The holders of such
warrants have the right, after May 1, 2000, to require the Company to
purchase all or any portion of such warrants or any shares of common stock
issued upon exercise of such warrants at the greater of (i) a valuation
prepared by an independent financial advisor or (ii) a formula value
calculated as 8.0 times the Company's EBITDA (as defined therein) less
preferred stock and debt outstanding plus excess cash. During fiscal year
1998, the Company used $2.5 million of the net proceeds of the Original
Offering to repurchase redeemable put warrants previously issued by the
Company representing 6.25% of the Company's fully-diluted common stock.
As of July 25, 1998, the Company had total indebtedness (including
redeemable put warrants) of $178.4 million and mandatory redeemable preferred
stock with an aggregate liquidation preference of $33.0 million.
The Company does not anticipate any significant principal payment
obligations under any of its outstanding indebtedness prior to maturity of the
Senior Notes except with respect to the Revolving Credit Facility which has a
term of five years, as well as $1.6 million of unsecured seller notes related to
the Jorda acquisition which are due on March 16, 2000. The ability of the
Company to satisfy its obligations under existing indebtedness and preferred
stock will be primarily dependent upon the future financial and operating
performance of its operating units and upon the Company's ability to renew or
refinance borrowings or to raise additional equity capital as necessary.
The Company's working capital was $62.4 million and $60.7 million at
April 25, 1998 and July 25, 1998, respectively. The $1.7 decrease in working
capital from April 25, 1998 to July 25, 1998 is primarily attributable to (i)
a $1.4 million increase in unrestricted cash on hand primarily a result of
higher accounts receivable collections arising from higher shipments in the
fourth quarter of fiscal year 1998; (ii) decrease in accounts receivable of
$7.8 million due to lower shipments in the first quarter of fiscal year 1999
compared to the fourth quarter of fiscal year 1998; (iii) an increase in
inventories of $4.5 million during the quarter attributable to procurement
and assembly related to an increase in the backlog of approximately $14.0
million during the quarter; and (iv) an increase in current liabilities of
$234,000.
Net cash used in operating activities was $3.1 million in the first quarter
of fiscal year 1998 compared to net cash provided of $3.3 million in the first
quarter fiscal year 1999. The increase in net cash provided by operations of
12
<PAGE>
$6.4 million was primarily attributable to an increase in accounts receivable
collections and a decrease in cash interest payments, which were both offset
offset by higher procurement of inventories. The increases in accounts
receivable collections and inventory procurement were primarily related to the
acquisition of PHI and Stewart Warner in fiscal year 1998.
The increase in net cash used in investing activities from $0.7 million in
the first quarter of fiscal year 1998 to $1.7 million in the first quarter of
fiscal year 1999 was primarily due to the acquisition of PHI which incurred $0.9
million of capital expenditures in the latest quarter.
Net cash provided by financing activities was $3.8 million in the first
quarter of fiscal year 1998 compared to net cash used in financing activities
of $311,000 in the first quarter of fiscal year 1999. In the first quarter of
fiscal year 1998, credit availability under a senior credit agreement was
used to finance operating and investing activities.
As of July 25, 1998, the Company had assets held for sale, consisting of two
former manufacturing facilities, of $3.8 million. These properties are recorded
at the lower of the carrying amount or fair value less selling costs.
The Indenture governing the Company's 10 1/2% Senior Notes due 2004 (the
"Indenture") permits each Restricted Subsidiary, as defined therein, that is
an obligor under an Intercompany Note, as defined therein, to effect a
Qualified Subsidiary IPO, as defined therein. Upon completion of a Qualified
Subsidiary IPO, such Restricted Subsidiary will become an Unrestricted
Subsidiary, as defined under the Indenture, and the cash flow of such
Unrestricted Subsidiary will no longer be available (i) to service debt
obligations of the Company or its remaining Restricted Subsidiaries or (ii)
for purposes of determining whether the Company or its remaining Restricted
Subsidiaries will be able to incur additional indebtedness, either of which
could affect the liquidity of the Company.
On April 15, 1998, the Company sold all of the assets and ordinary course
business trade payables and capital and operating lease obligations of its
General Eastern Instruments division ("General Eastern") to Bowthorpe, plc,
pursuant to an asset purchase agreement. This sale generated cash, net of
expenses and cash acquired, of approximately $20.1 million. The cash received
by the Company in connection with the disposition of General Eastern is
subject to a covenant of the Indenture which requires the Company to apply
such cash to (i) repay debt ranking PARI PASSU to the Senior Notes within 180
days, (ii) contractually commit to make an acquisition relating to the
Company's presently conducted business within 180 days or (iii) offer to
repurchase the Senior Notes pursuant to an Excess Proceeds Offer (as defined
in the Indenture). While the Company has and may continue to explore
acquisition opportunities, the Company has no definitive plans for the use of
the cash proceeds from the disposition of General Eastern and unless the
Company develops a plan for such proceeds in the interim, the Company will be
required to commence an offer to repurchase the Senior Notes on October 15,
1998. The Company has classified $12.1 million as restricted cash to reflect
Asset Sale Proceeds, as defined under the Indenture.
While the Company believes that internally generated funds, funds generated
by sales of assets and amounts available under the Revolving Credit Facility
will be sufficient to satisfy its operating cash requirements and make required
interest and principal payments under the Revolving Credit Facility, the Senior
Notes and existing capital leases, industrial revenue bonds, mortgage notes,
notes payable and the foreign credit line and payments with respect to the
redeemable put warrants, there can be no assurance that such sources will be
adequate and that the Company will not require additional capital from
borrowings or securities offerings to satisfy such requirements. In addition,
the Company may require additional capital to fund future acquisitions. There
can be no assurance that such capital will be available.
NEW ACCOUNTING PRONOUNCEMENTS
In February of 1998, the FASB issued SFAS No. 132, "Employers' Disclosure
about Pension and Other Post Retirement Benefits" which revises employers'
disclosures about pension and other post-retirement benefits plans. The Company
does not believe adoption will have a material impact on its financial statement
disclosures.
YEAR 2000
An issue affecting the Company is whether computer systems and applications
will recognize and process the Year 2000 and beyond. The Company is currently in
various stages of the assessment, remediation and internal testing of the
systems affected by this issue at each operating unit with respect to the impact
on business operations, product offerings, customers, suppliers and others.
13
<PAGE>
Management believes that it is devoting the necessary resources to timely
address all Year 2000 issues over which it has control and all critical systems
are scheduled to be Year 2000 compliant by the end of fiscal year 1999. The
Company is also monitoring the adequacy of the processes and progress of its
customers, suppliers and others. However, there can be no assurance that the
customers, suppliers and others will timely resolve their own Year 2000
compliance issues.
Costs related to the Year 2000 issues are being expensed during the period
in which they are incurred. The financial impact to the Company of implementing
the systems changes necessary to become Year 2000 compliant has not been and is
not anticipated to be material to its business, operations, financial condition,
liquidity and capital resources. However, there are uncertainties as to the
future costs associated with the Year 2000 which may affect the Company's
expectations. Factors that could influence the amount and timing of future costs
include the success of the Company in identifying systems and programs that are
not Year 2000 compliant, the nature and amount of programming required to
upgrade or replace each of the affected programs or systems, the availability,
rate and magnitude of related labor and consulting costs and the success of the
Company's customers and suppliers. Recognizing the many factors that are outside
its control, the Company cannot state that it will be unaffected by the Year
2000 issue.
ITEM 3. - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable.
14
<PAGE>
PART II
OTHER INFORMATION
ITEM 1. - LEGAL PROCEEDINGS
The nature of the Company's business is such that it is regularly involved
in legal proceedings incidental to its business and the Company believes that
none of these proceedings are material.
In February 1997, the Company commenced litigation in Massachusetts federal
court against TVM Group, Inc., ("TVM") of Fremont, California, and TVM's
principal stockholder, Mr. T. Lyn Morris, seeking damages on account of breach
by TVM and Mr. Morris of a December 1996 agreement pursuant to which a
subsidiary of the Company was to acquire TVM. The Company is seeking total
damages of approximately $31.0 million. In April 1997, TVM and Mr. Morris filed
a counterclaim alleging breaches by the Company and its subsidiary of that
agreement. In September 1997, TVM and Mr. Morris amended their counterclaim to
add, among other things, a claim for fraudulent inducement. TVM and Mr. Morris
are seeking damages of an unspecified amount in excess of $1.0 million. In light
of the current stage of the proceedings, the Company is unable to assess the
likelihood of liability, if any, in this action, the amount of any damages that
may be assessed against the Company, and the extent to which any assessed
liability will be covered by the Company's insurance. The Company believes the
counterclaim to be without merit. A final pre-trial conference in the case has
been scheduled for October 5, 1998.
In March 1998, Robicon initiated litigation against Toshiba International
Corporation ("Toshiba") in the United States District Court for the Western
District of Pennsylvania alleging infringement of one of Robicon's Perfect
Harmony patents. In June 1998 Toshiba filed suit against Robicon and several
other defendants in the United States District Court for the Southern District
of Texas alleging, among other things, false and disparaging comments concerning
Toshiba, interference with contract, violation of the Texas Competition and
Trade Practices Statute and civil conspiracy to restrict Toshiba's business and
cause the wrongful termination of a purchase order of one of its customers.
Damages under each section are claimed to be in excess of $75,000, the federal
statutory minimum, in addition to a claim for punitive damages. In its suit,
Toshiba has also claimed that Robicon is infringing a patent held by Toshiba and
requested a declaratory judgment that Robicon's patent, which is the subject of
the Pennsylvania action, is invalid. In light of the preliminary stage of the
proceedings, Robicon is unable to assess the likelihood of liability, if any,
arising from this Texas action; however, Robicon believes that it has valid
claims against Toshiba.
Certain other claims, suits and complaints have been filed or are pending
against the Company. In the opinion of the Company, all such matters are without
merit or are of such kind, or involve such amounts, as would not have a material
effect on the consolidated financial position or the results of operations of
the Company if disposed of unfavorably. If estimates change, there is no
assurances these items will not require additional accruals by the Company.
ITEM 2. - CHANGES IN SECURITIES
None.
ITEM 3. - DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. - OTHER INFORMATION
None.
ITEM 6. - EXHIBITS AND REPORTS ON FORM 8-K
27 Financial Data Schedule
(b) Reports on Form 8-K
None.
15
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereto duly authorized.
HIGH VOLTAGE ENGINEERING CORPORATION
Dated: September 8, 1998 By: /s/ Joseph W. McHugh, Jr.
----------------------------------------
Joseph W. McHugh, Jr.
Chief Financial Officer and Principal
Accounting Officer
16
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