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Filed Pursuant to Rule 424(b)(3)
Registration No. 333-51643
PROSPECTUS
OFFER TO EXCHANGE 10 1/2% SENIOR NOTES DUE 2004 WHICH HAVE
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED,
FOR ANY AND ALL OF ITS OUTSTANDING 10 1/2%
SENIOR NOTES DUE 2004 ORIGINALLY ISSUED ON MARCH 19, 1998
HIGH VOLTAGE ENGINEERING CORPORATION
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M.,
BOSTON TIME, ON JUNE 11, 1998,
UNLESS EXTENDED
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High Voltage Engineering Corporation ("HVE" or, together with its
subsidiaries, the "Company") hereby offers, upon the terms and subject to the
conditions set forth in this Prospectus and the accompanying letter of
transmittal (the "Letter of Transmittal," and together with this Prospectus, the
"Exchange Offer"), to exchange up to $20,000,000 in aggregate amount of its
10 1/2% Senior Notes due 2004 (the "Exchange Notes"), which have been registered
under the Securities Act of 1933, as amended (the "Securities Act"), pursuant to
a Registration Statement of which this Prospectus is a part, for a like
principal amount of its outstanding 10 1/2% Senior Notes due 2004 (the "New
Notes"), originally issued on March 19, 1998, of which $20,000,000 in aggregate
principal amount is outstanding as of the date hereof. The terms of the Exchange
Notes are identical in all material respects to the terms of the New Notes,
except for certain transfer restrictions and registration rights relating to the
New Notes. The Exchange Notes will be issued pursuant to, and entitled to the
benefits of, the Indenture, dated as of August 8, 1997, as amended, between the
Company and State Street Bank and Trust Company, as trustee, relating to up to
$155,000,000 of HVE's 10 1/2% Senior Notes due 2004, including $135,000,000 of
its 10 1/2% Senior Notes due 2004 that have been registered under the Securities
Act and were issued on January 16, 1998 (the "Existing Notes" and, together with
the New Notes and the Exchange Notes, the "Notes").
The Company will accept for exchange any and all New Notes that are validly
tendered on or prior to 5:00 p.m., Boston time, on June 11, 1998, unless the
Exchange Offer is extended (the "Expiration Date"). Including any extension, the
Exchange Offer will expire no later than July 11, 1998. Tenders of New Notes may
be withdrawn at any time prior to 5:00 p.m., Boston time, on the business day
prior to the Expiration Date. The Exchange Offer is not conditioned upon any
minimum principal amount of New Notes being tendered for exchange. However, the
Exchange Offer is subject to certain conditions which may be waived by the
Company and to the terms and provisions of a Registration Rights Agreement,
dated as of March 19, 1998, between the Company and the Initial Purchaser named
therein (the "Registration Rights Agreement"). See "Exchange Offer." The Company
has agreed to pay the expenses of the Exchange Offer.
Holders of New Notes whose notes are not tendered and accepted in the
Exchange Offer will continue to hold such New Notes. Following consummation of
the Exchange Offer, the holders of New Notes will continue to be subject to the
existing restrictions upon transfer thereof and, except as provided herein, the
Company will have no further obligation to such holders to provide for the
registration under the Securities Act of the New Notes held by them.
SEE "RISK FACTORS" BEGINNING ON PAGE 16 FOR A DISCUSSION OF CERTAIN RISKS
THAT SHOULD BE CONSIDERED BY HOLDERS OF NEW NOTES AND PROSPECTIVE PURCHASERS OF
EXCHANGE NOTES.
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THE COMPANY WILL NOT RECEIVE ANY PROCEEDS FROM THIS EXCHANGE OFFER AND NO
UNDERWRITER IS BEING UTILIZED IN CONNECTION WITH THE EXCHANGE OFFER.
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.
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The date of this Prospectus is May 12, 1998.
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$20,000,000 aggregate principal amount of the New Notes that were not
registered under the Securities Act were issued and sold on March 19, 1998, in
reliance upon the exemption provided in Section 4(2) of the Securities Act.
Accordingly, the New Notes may not be offered, resold or otherwise pledged,
hypothecated or transferred in the United States unless so registered or unless
an applicable exemption from the registration requirements of the Securities Act
is available. The Exchange Notes are being offered hereby in order to satisfy
the obligations of the Company under the Registration Rights Agreement. See
"Exchange Offer -- Purpose of the Exchange Offer." Based on no-action letters
issued by the staff of the Securities and Exchange Commission (the "Commission")
to third parties, the Company believes Exchange Notes to be issued pursuant to
the Exchange Offer may be offered for sale, resold and otherwise transferred by
holders thereof (other than (i) a broker-dealer who purchases Exchange Notes
directly from the Company to resell pursuant to Rule 144A or any other available
exemption under the Securities Act or (ii) a person that is an "affiliate" of
the Company within the meaning of Rule 405 under the Securities Act), without
compliance with the registration and prospectus delivery provisions of the
Securities Act provided that such Exchange Notes are acquired in the ordinary
course of such holders' business and such holders have no arrangements with any
person to participate in the distribution of such Exchange Notes. Each holder
who participates in the Exchange Offer will be required to represent that any
Exchange Notes received by it will be acquired in the ordinary course of its
business, that at the time of the consummation of the Exchange Offer such holder
will have no arrangement or understanding with any person to participate in the
distribution of the Exchange Notes, and that such holder is not an affiliate of
the Company within the meaning of Rule 405 promulgated under the Securities Act
or if it is such an affiliate, that it will comply with the registration and
prospectus delivery requirements of the Securities Act, to the extent
applicable. Each broker-dealer that receives Exchange Notes for its own account
pursuant to the Exchange Offer must acknowledge that it will deliver a
prospectus in connection with any resale of such Exchange Notes. The Letter of
Transmittal states that by so acknowledging and by delivering a prospectus, a
broker-dealer will not be deemed to admit that it is an "underwriter" within the
meaning of the Securities Act. This Prospectus, as it may be amended or
supplemented from time to time, may be used by a broker-dealer in connection
with resales of shares of Exchange Notes received in exchange for New Notes
where such New Notes were acquired by such broker-dealer as a result of
market-making activities or other trading activities. The Company has agreed to
use its best efforts to make this Prospectus available to participating
broker-dealers for a period necessary to permit compliance of such
broker-dealers with applicable prospectus delivery requirements under the
Securities Act, such period not to exceed 180 days except under specified
circumstances. See "Plan of Distribution."
Interest on the Notes will be payable in cash semiannually on each August 15
and February 15, commencing August 15, 1998 in the case of the New Notes and the
Exchange Notes and February 15, 1998 in the case of the Existing Notes. The
Notes will be redeemable at the option of the Company, in whole or in part, at
any time on or after August 15, 2001, at the redemption prices set forth herein,
plus accrued and unpaid interest to the redemption date. In addition, the
Company, at its option, may redeem in the aggregate up to 35% of the original
principal amount of the Notes at any time prior to August 15, 2000, at a
redemption price equal to 110.500% of the aggregate principal amount thereof,
plus accrued and unpaid interest to the redemption date, with the Net Proceeds
(as defined herein) of one or more Qualified Equity Offerings (as defined
herein) of HVE, or Letitia Corporation, a Delaware corporation and the principal
common stockholder of HVE ("Letitia Corporation"), to the extent such proceeds
were contributed to HVE as common equity; provided that at least $100.8 million
of the principal amount of the Notes originally issued remain outstanding after
giving effect to any such redemption and that any such redemption occurs within
60 days following the closing of any such Qualified Equity Offering. In
addition, the Company will allow each Restricted Subsidiary (as defined herein)
that is an obligor under an Intercompany Note (as defined herein) to effect a
Qualified Subsidiary IPO (as defined herein); provided, among other things, that
any Restricted Subsidiary effecting a Qualified Subsidiary IPO will be obligated
to repay in full its Intercompany Note with the Net Proceeds of such Qualified
Subsidiary IPO; that the Company will be obligated to make an offer to purchase
Notes from the holders thereof equal in aggregate
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principal amount to the Intercompany Note being repaid by such Restricted
Subsidiary at a purchase price equal to 101% of the principal amount thereof,
plus accrued and unpaid interest to the purchase date and that any such purchase
of Notes occurs within 90 days following the closing of any such Qualified
Subsidiary IPO; that immediately after giving pro forma effect to such Qualified
Subsidiary IPO, the Company (excluding the EBITDA and the Consolidated Fixed
Charges (as defined herein) of the Restricted Subsidiary effecting the Qualified
Subsidiary IPO) could incur $1.00 of additional Indebtedness (as defined herein)
under the covenant described under "Description of the Notes -- Certain
Covenants Limitation on Additional Indebtedness," assuming for this purpose
only, that the aforementioned offer to repurchase has been subscribed in full;
and that all remaining Net Proceeds of such Qualified Subsidiary IPO received by
HVE will be deemed an Asset Sale (as defined herein). A Restricted Subsidiary
will become an Unrestricted Subsidiary (as defined herein) upon completion of a
Qualified Subsidiary IPO and the repayment of its Intercompany Note. See
"Description of the Notes -- Offer to Repurchase upon a Qualified Subsidiary
IPO."
The Exchange Notes will be senior unsecured obligations of the Company
ranking PARI PASSU in right of payment with all existing and future senior
indebtedness of the Company and senior in right of payment to any subordinated
indebtedness of the Company. The Exchange Notes will be effectively subordinated
to all existing and future secured indebtedness of the Company, including
indebtedness under the Revolving Credit Facility (as defined herein). Despite
the pledge of the Intercompany Notes to secure the repayment of the Notes, a
bankruptcy court could subordinate such repayments to all existing and future
indebtedness and other liabilities and commitments of any of HVE's subsidiaries.
As of March 28, 1998, pro forma for the Transactions and the General Eastern
Disposition (each as defined herein), HVE would have had $169.3 million of
senior indebtedness outstanding (including the New Notes and the Existing
Notes), of which $10.0 million would have been secured indebtedness, and the
subsidiaries of HVE would have had $66.6 million of additional indebtedness and
other liabilities and commitments outstanding (excluding the Intercompany
Notes), of which $14.9 million would have been secured indebtedness. The
Company's ability to make any cash payments with respect to the Notes may be
adversely affected by any inability of its subsidiaries to make dividend or
other payments to the Company.
Upon the occurrence of a Change of Control (as defined herein), each holder
of the Notes will be entitled to require the Company to purchase such holder's
Notes at a purchase price equal to 101% of the principal amount thereof, plus
accrued and unpaid interest to the purchase date. See "Description of the Notes
- -- Change of Control Offer." In addition, the Company will be obligated in
certain instances to make an offer to purchase the New Notes at a purchase price
in cash equal to 100% of the principal amount thereof, plus accrued and unpaid
interest to the purchase date, with the Available Asset Sale Proceeds (as
defined herein) of certain asset sales. See "Description of the Notes -- Certain
Covenants -- Limitation on Certain Asset Sales."
THE EXCHANGE OFFER IS NOT BEING MADE TO, NOR WILL THE COMPANY ACCEPT
SURRENDERS FOR EXCHANGE FROM, HOLDERS OF NEW NOTES IN ANY JURISDICTION IN WHICH
THE EXCHANGE OFFER OR THE ACCEPTANCE THEREOF WOULD NOT BE IN COMPLIANCE WITH THE
SECURITIES OR BLUE SKY LAWS OF SUCH JURISDICTION.
There can be no assurance that an active public or private market for the
Exchange Notes will develop. Whether or not a market for the Exchange Notes
should develop, the Exchange Notes could trade at a discount from their
aggregate liquidation preference. The Company does not intend to list the
Exchange Notes on a national securities exchange or to apply for quotation of
the Exchange Notes through the National Association of Securities Dealers
Automated Quotation System. To the extent New Notes are tendered and accepted in
the Exchange Offer, the trading market for untendered and tendered but
unaccepted shares of Exchange Notes could be adversely affected.
Market data used throughout this Prospectus was obtained through Company
research, surveys or studies conducted by third parties, or industry or general
publications. The Company has not
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independently verified market data provided by third parties or industry or
general publications. Similarly, internal Company research, while believed by
the Company to be reliable, has not been verified by any independent sources.
Anderson Power Products-Registered Trademark-, AST-TM-,
Datcon-Registered Trademark-, Illuma Deluxe-TM-, IllumaSeal-TM-,
Intellisensor-TM-, Perfect Harmony-TM-, PHI-Registered Trademark-,
Powerpole-Registered Trademark-, Quantum 2000 Scanning ESCA Microprobe-TM-,
SB-Registered Trademark-, Smart Instrument-TM-, SMART-200-TM-,
Stewart-Warner-Registered Trademark-, SW-Registered Trademark- and TRIFT II-TM-
are trademarks, registered trademarks or brands that are owned by, or licensed
to, the Company. All other trademarks or service marks referred to in this
Prospectus are the property of their respective owners.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Exchange Act
and in accordance therewith is required to file reports and other information
with the Commission. The Registration Statement, of which this Prospectus is a
part, and the exhibits thereto have been filed with the Commission, and such
Registration Statement and Exhibits, as well as the regional offices of the
Commission at the Northwest Atrium Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661 and 7 World Trade Center, 13th Floor, New York, New York
10048. Copies of such documents can be obtained from the Public Reference
Section of the Commission at 450 Fifth Street, N.W., Room 1024, Washington, D.C.
20549, at prescribed rates. In addition, the Company is required to file
electronic versions of these documents with the Commission through the
Commission's Electronic Data Gathering, Analysis, and Retrieval (EDGAR) system.
The Commission maintains a World Wide Web site, located at http:// www.sec.gov
that contains reports, proxy and information statements and other information
regarding registrants that file electronically with the Commission.
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PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO, AND
SHOULD BE READ IN CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND THE
CONSOLIDATED FINANCIAL STATEMENTS AND THE NOTES THERETO APPEARING ELSEWHERE IN
THIS PROSPECTUS. AS USED IN THIS PROSPECTUS, UNLESS THE CONTEXT OTHERWISE
INDICATES, THE TERM "HVE" REFERS TO HIGH VOLTAGE ENGINEERING CORPORATION AND THE
TERM THE "COMPANY" REFERS TO HVE AND ITS WHOLLY OWNED SUBSIDIARIES, INCLUDING
STEWART WARNER INSTRUMENT CORPORATION (COLLECTIVELY WITH ITS SUBSIDIARIES,
"STEWART WARNER"). AS USED IN THIS PROSPECTUS, THE TERMS "FISCAL 1993," "FISCAL
1994," "FISCAL 1995," "FISCAL 1996," "FISCAL 1997" AND "FISCAL 1998" REFER TO
HVE'S FISCAL YEARS ENDED MAY 1, 1993, APRIL 30, 1994, APRIL 29, 1995, APRIL 27,
1996 AND APRIL 26, 1997, AND HVE'S FISCAL YEAR ENDING APRIL 25, 1998,
RESPECTIVELY.
THE COMPANY
The Company owns and operates a diversified group of six middle market
industrial manufacturing businesses. These businesses focus on designing and
manufacturing high quality, applications-engineered products which are designed
to address specific customer needs. The Company's products are sold to a broad
range of domestic and foreign original equipment manufacturers ("OEMs") and
end-users in a variety of industries including process automation, freshwater
and wastewater treatment, petrochemicals, semiconductor fabrication, chemicals,
construction, agriculture, materials handling, computers, telecommunications,
medical equipment and for scientific and educational research. The diversified
nature of the products sold and end-markets served by the Company's businesses
limits the effect on the Company of operating performance fluctuations in any
single operating unit and cyclical downturns within individual industries and
end-markets, while the Company believes that its focus on middle market
manufacturing enhances its growth prospects. The Company believes that these
factors have contributed to steady growth in consolidated net sales and Adjusted
EBITDA (as defined in note (e) on page 44). Between Fiscal 1993 and Fiscal 1997,
the Company's historical net sales increased at a 14.3% compound annual growth
rate ("CAGR"), from $101.3 million to $173.1 million, and its Adjusted EBITDA
increased at a 15.6% CAGR from $9.1 million to $16.3 million. Pro forma for the
acquisition of Physical Electronics, Inc. (the "PHI Merger"), the acquisition of
Stewart Warner (the "Stewart Warner Acquisition"), and the disposition (the
"General Eastern Disposition") of the Company's General Eastern Instruments
division ("General Eastern"), the Company had net sales and Adjusted EBITDA of
$267.4 million and $28.1 million, respectively, in the latest twelve month
("LTM") period ended January 24, 1998.
The Company manufactures and markets its products through the following six
operating units:
ROBICON CORPORATION ("ROBICON"). Robicon is a leading designer and
manufacturer of high power conversion products, which are used to regulate
electric power, reduce energy costs and improve process control in a wide
variety of industrial applications. Products include variable frequency drives
("VFDs") for large electric motors and power control systems for other
applications. These products are used in process automation, freshwater and
wastewater treatment, oil and gas extraction and transmission, petrochemical
processing, silicon processing, glass manufacturing, cement production and other
general industrial applications. For the LTM period ended January 24, 1998,
Robicon had net sales of $92.0 million.
PHYSICAL ELECTRONICS, INC. ("PHI"). On August 8, 1997, HVE acquired all of
the capital stock of PHI for an aggregate consideration of $54.6 million,
including transaction costs and net of cash acquired. PHI is a leading designer
and manufacturer of advanced surface analysis instruments and components used to
determine the elemental and/or chemical composition of materials found on or
near the surface of a sample. Advanced surface analysis instruments are used in
commercial applications in central support laboratories and at or near the
production line in the semiconductor fabrication, computer peripherals,
chemicals, aerospace, metals, polymers, automotive and biomaterials industries,
among others, for product and process development, process control, defect
review and failure analysis. Advanced surface analysis
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instruments are also used for materials science research by universities and
government institutions. For the LTM period ended January 24, 1998, PHI had net
sales of $64.7 million.
THE DATCON / STEWART WARNER GROUP ("DATCON"). On March 19, 1998, a wholly
owned subsidiary of HVE acquired, directly or indirectly, all of the capital
stock of Stewart Warner, for an aggregate consideration of $24.7 million in
cash. The operations of Stewart Warner are being operated together with those of
the Company's existing Datcon Instrument Company subsidiary and its wholly owned
subsidiary Industrias Jorda, S.L. ("Jorda"). The Company believes that the
combined entity will be a leading designer, manufacturer and distributor of
customized monitoring instrumentation for heavy duty and off-highway vehicles
and equipment. The products manufactured and marketed, or distributed, by Datcon
will include a broad range of analog and digital instrument clusters and
displays, gauges (including fuel, temperature and pressure gauges), meters
(including speedometers and tachometers), sensing devices (for fuel level,
temperature and pressure), related electronic control units ("ECUs"), and
related vehicle accessory products. These products are used both by OEMs and in
the aftermarket in construction equipment, agricultural machinery and power turf
equipment, heavy duty truck, bus, materials handling equipment and generator and
compressor engines and marine applications. For the LTM period ended January 24,
1998, pro forma for the Stewart Warner Acquisition, Datcon had net sales of
$61.4 million, including net sales of $26.5 million generated by Stewart Warner.
ANDERSON INTERCONNECT, INC. -- ANDERSON POWER PRODUCTS
("ANDERSON"). Anderson is a leading designer and manufacturer of high
efficiency, pluggable power connectors for use in high current, quick disconnect
applications including materials handling equipment and other electric-powered
vehicles, uninterruptible power supply products, telecommunications and
networking equipment and office furniture panel electrification. For the LTM
period ended January 24, 1998, Anderson had net sales of $24.3 million.
NATVAR COMPANY ("NATVAR"). Natvar is a manufacturer of disposable specialty
bulk medical grade plastic tubing used primarily in medical devices and for
less-invasive surgical procedures. For the LTM period ended January 24, 1998,
Natvar had net sales of $16.7 million.
HIGH VOLTAGE ENGINEERING EUROPA B.V. ("HVE EUROPA"). HVE Europa is a
leading designer and manufacturer of particle accelerator systems used in
scientific, educational and industrial research. HVE Europa's products include
ion accelerator systems, research ion implanters, accelerator mass spectrometer
systems and component parts. For the LTM period ended January 24, 1998, HVE
Europa had net sales of $8.3 million.
RECENT DEVELOPMENTS
THE STEWART WARNER ACQUISITION
On March 19, 1998, a wholly owned subsidiary of HVE acquired, directly or
indirectly, all of the capital stock of Stewart Warner, for an aggregate
consideration of $24.7 million in cash. After the repayment of all of Stewart
Warner's outstanding indebtedness, the remainder of the cash purchase price was
distributed to the holders of the outstanding capital stock of Stewart Warner
(the "Stewart Warner Stock"). Following the consummation of the Stewart Warner
Acquisition, Stewart Warner, HVE Acquisition Corp., an Illinois corporation and
wholly owned subsidiary of HVE ("HVE Acquisition Corp."), and each of Stewart
Warner's existing subsidiaries, became Restricted Subsidiaries of HVE.
Immediately following the Stewart Warner Acquisition, Stewart Warner issued
an intercompany note, under which HVE Acquisition Corp. and TTS Mexican Holding
Company Inc., an Illinois corporation and wholly-owned subsidiary of Datcon
("TTS"), are co-obligors, in the principal amount of $20.0 million (the "Stewart
Warner Intercompany Note") which was pledged by HVE, together with existing
intercompany notes in the aggregate principal amount of $120.5 million (such
intercompany notes are referred to herein together with the Stewart Warner
Intercompany Note as the "Intercompany Notes") issued by certain of
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HVE's existing Restricted Subsidiaries, as security for payment of principal and
interest on the Notes. The Stewart Warner Acquisition and issuance of the
Stewart Warner Intercompany Note are referred to, collectively with the
Offering, as the "Transactions."
Stewart Warner is a manufacturer and marketer of a broad range of gauges,
senders, sensors, switches, lamps and other accessories that are sold to both
the OEM and aftermarket segments in specialty applications, including the heavy
duty truck, agricultural, bus, emergency equipment, marine, government and
performance automotive hobby markets. Stewart Warner products are characterized
by strong brand name recognition and a reputation within the industry for
quality. For the LTM period ended January 31, 1998, Stewart Warner had net sales
of $26.5 million, and Adjusted EBITDA of $2.5 million, with such net sales
representing 9.9% of the Company's total net sales during the LTM period ended
January 24, 1998, pro forma for the PHI Merger, the Stewart Warner Acquisition
and the General Eastern Disposition.
The Company believes that the combination of Stewart Warner and Datcon
Instrument Company has created one of the leading suppliers of engine monitoring
instrumentation to the OEM market and engine monitoring instrumentation parts to
the aftermarket. The combined entity is well positioned to benefit from
improvements in product pricing, materials costs, labor costs, manufacturing
efficiencies and product distribution. Datcon Instrument Company's historical
focus on the OEM side of the business acts as a compliment to Stewart Warner's
strength in the aftermarket business. The Company believes that Stewart Warner's
loyal customer relationships, solid market positions, operating and service
expertise, proven operating performance as well as its committed and experienced
management team will continue to help differentiate Datcon from its competitors.
In addition, Datcon will continue to be in a strong position to market its
products and accessories to a wider global customer base than most of its
competitors. The Company believes that the elimination of certain non-recurring
executive compensation and related professional fees, as well as certain
manufacturing synergies, will be realized over time as a result of the Stewart
Warner Acquisition. Although there can be no assurance that the benefit of any
such eliminations or synergies may be actually achieved, the Company believes
that, assuming such synergies had been achieved in full on a pro forma basis for
the LTM period ended January 24, 1998, the Company's Adjusted EBITDA would have
been increased by approximately $0.5 million, which would have resulted in
Supplemental Adjusted EBITDA (as defined) being generated by Stewart Warner of
$3.0 million for such period. See "Unaudited Pro Forma Condensed Consolidated
Financial Data -- Unaudited Supplemental Adjusted Pro Forma Financial Data."
SALE OF ASSETS OF GENERAL EASTERN
On April 15, 1998, the Company sold all of the assets and ordinary course
business trade payables and capital and operating lease obligations of General
Eastern to a subsidiary of Bowthorpe Holdings Corporation formed for the purpose
of the acquisition ("Bowthorpe"), pursuant to an Asset Purchase Agreement, dated
as of March 25, 1998, as amended (the "Asset Purchase Agreement"). The purchase
price for the General Eastern assets was $18.0 million, paid in cash. In
addition, $3.0 million was paid in cash to the Company at closing in
consideration for an agreement on the part of the Company not to compete in the
conduct of the business of General Eastern for a period of three years after the
closing. Of the aggregate $21.0 million received by the Company in connection
with this sale, $850,000 was placed into escrow for a limited period to secure
certain indemnification obligations of the Company and to satisfy possible
purchase price adjustments.
APPOINTMENT OF CHIEF OPERATING OFFICER
On March 2, 1998, the Company announced that Russell L. Shade, Jr. had
joined its leadership team as Chief Operating Officer, effective March 9, 1998.
Most recently Mr. Shade was Vice President, Industrial Systems at General
Electric Company, where he had worked for 25 years.
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THE CONSENT SOLICITATION
Simultaneously with the distribution of a Preliminary Offering Memorandum of
the Company dated March 5, 1998, the Company solicited the consent (the "Consent
Solicitation") of the holders of a majority of the Existing Notes (the
"Requisite Consents") to (i) make certain amendments (the "Amendments") to
certain provisions of the Indenture dated as of August 8, 1997 (as so amended,
the "Indenture"), governing the Notes; and (ii) to waive a breach of the
Restricted Payments (as defined herein) covenant of the Indenture that was made
as a result of a misinterpretation of the Indenture pursuant to which a cash
dividend was paid to the holders of its Series A Preferred Stock (as defined
herein) in accordance with the terms thereof (the "Waivers"). The principal
purposes of the Amendments are to (a) permit the offer of the New Notes (the
"Offering"), (b) provide for the issuance of the Stewart Warner Intercompany
Note, (c) modify the manner in which Restricted Subsidiaries may be created,
merged and consolidated, and (d) make minor modifications to other Indenture
provisions. The Amendments became effective upon the consummation of the Stewart
Warner Acquisition. The Waivers became effective upon the receipt of the
Requisite Consents. The Requisite Consents were received on March 13, 1998 and
the Company has paid a consent fee in the aggregate amount of $675,000 to the
holders of the Existing Notes.
THE EXCHANGE OF THE EXISTING NOTES AND SERIES A PREFERRED STOCK
On January 16, 1998, the Company issued $135.0 million aggregate principal
amount of 10 1/2% Senior Notes due 2004 that had been registered under the
Securities Act of 1933, as amended (the "Securities Act"), in exchange for the
$135.0 million aggregate principal amount of the Company's outstanding 10 1/2%
Senior Notes due 2004 (the "Original Notes") that had been issued and sold for
their face amount on August 8, 1997 in transactions exempt from the registration
requirements of the Securities Act pursuant to Rule 144A, Regulation S and
Regulation D thereunder. The $135.0 million of 10 1/2% Senior Notes due 2004
that have been registered under the Securities Act are referred to herein as the
"Existing Notes" and, together with the New Notes and the Exchange Notes, as the
"Notes." Concurrent with the issuance of the Original Notes, the Company issued
and sold 33,000 units (the "Units"), consisting of 33,000 shares of the
Company's 12 1/2% Series A Senior Redeemable Preferred Stock (the "Original
Series A Preferred Stock"), warrants to purchase 82.7429 shares of the Company's
Common Stock and 82.7429 shares of the Company's Common Stock, for an aggregate
consideration of $35.2 million. On January 16, 1998, all of the outstanding
Original Series A Preferred Stock was exchanged for shares of the Company's
12 1/2% Series A Exchange Senior Redeemable Preferred Stock (the "Series A
Preferred Stock") having terms substantially identical to those of the Original
Series A Preferred Stock, except that the shares of Series A Preferred Stock
have been registered under the Securities Act and do not bear legends
restricting the transfer of such shares. In connection with the issuance of the
Original Notes and the Units (collectively, the "Original Offering"), the
Company completed the PHI Merger and repaid substantially all of its existing
indebtedness (the "Refinancing"). The New Notes have the same terms as the
Existing Notes and were issued pursuant to the same Indenture, except that the
Existing Notes have been registered under the Securities Act and therefore do
not bear legends restricting the transfer thereof.
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RISK FACTORS
Holders of New Notes and prospective purchasers of Exchange Notes should
consider carefully the information set forth under the caption "Risk Factors"
and all other information set forth in this Prospectus, in connection with the
Exchange Offer. SPECIFICALLY, AND AS DESCRIBED IN GREATER DETAIL UNDER THE
CAPTION "RISK FACTORS," HOLDERS OF NEW NOTES AND PROSPECTIVE PURCHASERS OF
EXCHANGE NOTES SHOULD CONSIDER CAREFULLY: (i) the Company is and will continue
to be highly leveraged and may be unable to generate sufficient cash flow to
meet its various debt service obligations, including under the Notes; (ii) the
Notes are subordinated in right of payment to the Company's secured
indebtedness, and the Intercompany Notes may be effectively subordinated in
right of payment to other indebtedness of HVE's subsidiaries; (iii) the Company
faces significant risks with respect to the PHI Merger, the largest acquisition
undertaken by the Company to date; (iv) the Company may not apply the cash it
received pursuant to the General Eastern Disposition to the repurchase of Notes,
and if such repurchase is made, the repurchase price may be less than the
then-current trading price of the Notes; (v) the Company conducts most of its
business through subsidiaries which are not direct obligors under the Notes;
(vi) if the issuance of the Exchange Notes is determined to be a fraudulent
conveyance, the indebtedness represented thereby could be subordinated to other
indebtedness of the Company; (vii) the Stewart Warner Acquisition was a
signification acquisition by the Company and carries certain risks, such as the
diversion of management's attention from the Company's other operations; (viii)
if any of HVE's subsidiaries effect a Qualified Subsidiary IPO, the cash flow
from such subsidiary will be unavailable to service HVE's debt; (ix) the Company
is dependent on intellectual property protection for certain of its technology,
and such protection is by its nature vulnerable; (x) the Company's results of
operations fluctuate in response to various factors; and (xi) the Company is
dependent on the continued contributions of its key personnel.
5
<PAGE>
THE EXCHANGE OFFER
<TABLE>
<S> <C>
Securities Offered.............. Up to $20,000,000 aggregate principal amount of 10 1/2%
Senior Notes due 2004 (the "Exchange Notes") that have
been registered under the Securities Act. The terms of the
Exchange Notes and those of the New Notes are identical in
all material respects, except for certain transfer
restrictions relating to the New Notes. See "Description
of the Notes."
Registration Rights Agreement... The New Notes were issued on March 19, 1998 to the Initial
Purchaser. The Initial Purchaser resold the New Notes to
certain qualified institutional buyers in reliance on, and
subject to the restrictions imposed pursuant to, Rule 144A
under the Securities Act. In connection therewith, the
Company entered into the Registration Rights Agreement
providing, among other things, for the Exchange Offer. See
"The Exchange Offer."
Resale of Exchange Notes........ Based on interpretations by the Staff of the Commission as
set forth in no-action letters issued to third parties,
the Company believes that the Exchange Notes to be issued
pursuant to the Exchange Offer may be offered for sale,
resold and otherwise transferred by holders thereof (other
than (i) a broker-dealer who purchases Exchange Notes
directly from the Company to resell pursuant to Rule 144A
or any other available exemption under the Securities Act
or (ii) a person that is an "affiliate" of the Company
within the meaning of Rule 405 under the Securities Act),
without compliance with the registration and prospectus
delivery provisions of the Securities Act provided that
such Exchange Notes are acquired in the ordinary course of
such holders' business and such holders have no
arrangements with any person to participate in the
distribution of such exchange Notes. Each holder who
participates in the Exchange Offer will be required to
represent that any Exchange Notes received by it will be
acquired in the ordinary course of its business, that at
the time of the consummation of the Exchange Offer such
holder will have no arrangement or understanding with any
person to participate in the distribution of the Exchange
Notes, and that such holder is not an affiliate of the
Company within the meaning of Rule 405 promulgated under
the Securities Act or if it is such an affiliate, that it
will comply with the registration and prospectus delivery
requirements of the Securities Act, to the extent
applicable. If a holder of New Notes is unable to make the
foregoing representations, such holder may not rely on the
applicable interpretations of the Staff of the Commission
as set forth in such no-action letters, and must comply
with the registration and prospectus delivery requirement
of the Securities Act in connection with any secondary
resale transaction.
The Exchange Offer.............. The Exchange Notes are being offered in exchange for a
like principal amount of New Notes. New Notes may be
exchanged only in existing multiples of $1,000. The
issuance of the Exchange Notes is intended to satisfy
obligations of the Company under the Registration Rights
Agreement. For a description of the procedures for
tendering, see "Exchange Offer -- Procedures for Tendering
New Notes."
</TABLE>
6
<PAGE>
<TABLE>
<S> <C>
Expiration Date; Withdrawal..... The Exchange Offer will expire at 5:00 p.m., Boston time,
on the 30th day after the effective date of the
Registration Statement of which this Prospectus is a part,
or such later date and time to which it may be extended in
the sole discretion of the Company (the "Expiration
Date"). The tender of New Notes pursuant to the Exchange
Offer may be withdrawn at any time prior to any time prior
to 5:00 p.m., Boston time, on the business day prior to
the Expiration Date. Any New Notes not accepted for
exchange for any reason will be returned without expense
to the tendering holders thereof as promptly as
practicable after the expiration or termination of the
Exchange Offer. See "Exchange Offer -- Expiration Date;
Extensions; Termination; Amendments; and Withdrawal
Rights."
Conditions to Exchange Offer.... The Exchange Offer is subject to certain conditions. See
"Exchange Offer -- Certain Conditions to the Exchange
Offer."
Procedures for Tendering
New Notes..................... Each holder of New Notes wishing to accept the Exchange
Offer must complete, sign and date a Letter of
Transmittal, or a facsimile thereof, in accordance with
the instructions contained herein and therein, and mail or
otherwise deliver such Letter of Transmittal, or such
facsimile, together with such New Notes and any other
required documents, to the Exchange Agent (as defined
herein) at the address set forth herein. See "Exchange
Offer -- Procedures for Tendering New Notes."
Use of Proceeds................. There will be no proceeds to the Company from the exchange
of Notes pursuant to the Exchange Offer.
Certain Federal Income Tax
Considerations................ The exchange pursuant to the Exchange Offer should not be
a taxable event to the holder for federal income tax
purposes, and the holder should not recognize any taxable
gain or loss as a result of such exchange. See "Certain
Federal Income Tax Considerations."
Untendered New Notes............ Upon consummation of the Exchange Offer, the holders of
New Notes, if any, will have no further rights under the
Registration Rights Agreement, except as provided herein.
Holders of New Notes who do not tender their New Notes in
the Exchange Offer or whose New Notes are not accepted for
exchange will continue to hold such New Notes and will be
entitled to all the rights and preferences thereof and
will be subject to all the limitations applicable thereto.
All untendered and tendered but unaccepted New Notes will
continue to be subject to the restrictions on transfer
provided therein. To the extent that New Notes are
tendered and accepted in the Exchange Offer, the trading
market for untendered and tendered but unaccepted New
Notes could be adversely affected.
Exchange Agent.................. State Street Bank and Trust Company is serving as the
Exchange Agent (the "Exchange Agent") in connection with
the Exchange Offer.
</TABLE>
7
<PAGE>
TERMS OF NOTES
Except as otherwise indicated, the following description relates both to the
Exchange Notes and to the outstanding $135.0 million in aggregate principal
amount of the Existing Notes. The Exchange Notes will be obligations of the
Company evidencing the same indebtedness as the Existing Notes, and will be
entitled to the benefits of the same Indenture. For a more complete description
of the Notes, including the definitions of certain capitalized terms used below,
see "Description of the Notes."
<TABLE>
<S> <C>
Issuer.......................... High Voltage Engineering Corporation.
Notes Offered................... $20,000,000 principal amount of 10 1/2% Senior Notes due
2004.
Maturity Date................... August 15, 2004.
Interest Payment Dates.......... Interest accrues on the New Notes and the Exchange Notes
from February 15, 1998, and accrues on the Existing Notes
from August 15, 1997, and will be payable in cash
semiannually on each August 15 and February 15,
commencing, in the case of the New Notes and the Exchange
Notes, on August 15, 1998.
Optional Redemption............. The Notes will be redeemable, at the option of the
Company, in whole or in part, at any time on or after
August 15, 2001, at the redemption prices set forth
herein, plus accrued and unpaid interest to the redemption
date. In addition, the Company, at its option, may redeem
in the aggregate up to 35% of the original principal
amount of the Notes at any time and from time to time
prior to August 15, 2000, at a redemption price equal to
110.500% of the aggregate principal amount thereof, plus
accrued and unpaid interest to the redemption date, with
the Net Proceeds of one or more Qualified Equity Offerings
of HVE, or Letitia Corporation to the extent such proceeds
are contributed to HVE as common equity; provided that at
least $100.8 million of the principal amount of the Notes
remains outstanding after giving effect to any such
redemption and that any such redemption occurs within 60
days following the closing of any such Qualified Equity
Offering. See "Description of the Notes -- Optional
Redemption."
Intercompany Notes.............. Upon the issuance of the Original Notes, the principal
amount of the Original Notes was allocated among HVE and
each of its current direct Restricted Subsidiaries in
consideration for the release of certain obligations of
such Restricted Subsidiaries relating to the indebtedness
being repaid in connection with the issuance of such
Notes. Amounts allocated to such Restricted Subsidiaries
were evidenced by Intercompany Notes aggregating $120.5
million in principal amount. Upon the consummation of the
issuance of the New Notes, Stewart Warner issued the
Stewart Warner Intercompany Note in the principal amount
of $20.0 million. The Intercompany Notes are senior
obligations of each Restricted Subsidiary, have terms
substantially similar to the terms of the Notes and have
been pledged by HVE as collateral on the Notes. The
Intercompany Notes may not be forgiven by the Company as
long as the Notes remain outstanding; provided, however,
that the Intercompany Note of a particular Restricted
</TABLE>
8
<PAGE>
<TABLE>
<S> <C>
Subsidiary must be repaid with the Net Proceeds of a
Qualified Subsidiary IPO of such Restricted Subsidiary.
Offer to Repurchase upon a
Qualified Subsidiary IPO...... The Indenture allows each Restricted Subsidiary that is an
obligor under an Intercompany Note to effect a Qualified
Subsidiary IPO; provided, among other things, that: (i)
any Restricted Subsidiary effecting a Qualified Subsidiary
IPO will be obligated to repay in full its Intercompany
Note with the Net Proceeds of such Qualified Subsidiary
IPO; (ii) the Company will be obligated to make an offer
to purchase Notes from the holders thereof equal in
aggregate principal amount to the Intercompany Note being
repaid by such Restricted Subsidiary at a purchase price
equal to 101% of the principal amount thereof, plus
accrued and unpaid interest to the purchase date and that
any such purchase of Notes occurs within 90 days following
the closing of any such Qualified Subsidiary IPO; (iii)
immediately after giving pro forma effect to such
Qualified Subsidiary IPO, the Company (excluding the
EBITDA and the Consolidated Fixed Charges of the
Restricted Subsidiary effecting the Qualified Subsidiary
IPO) could incur $1.00 of additional Indebtedness (other
than Permitted Indebtedness) under the covenant set forth
under "Description of the Notes -- Certain Covenants --
Limitation on Additional Indebtedness," and assuming for
purposes of this calculation only, that the aforementioned
offer to repurchase has been subscribed in full; and (iv)
all remaining Net Proceeds of such Qualified Subsidiary
IPO received by HVE will be deemed an Asset Sale. A
Restricted Subsidiary will become an Unrestricted
Subsidiary upon completion of a Qualified Subsidiary IPO.
See "Description of the Notes -- Offer to Repurchase Upon
a Qualified Subsidiary IPO."
Ranking......................... The Notes are senior unsecured obligations of the Company
ranking PARI PASSU in right of payment with all existing
and future senior indebtedness of the Company and senior
in right of payment to any subordinated indebtedness of
the Company. The Notes will be effectively subordinated to
all existing and future secured indebtedness of the
Company, including indebtedness under the Revolving Credit
Facility. Despite the pledge of the Intercompany Notes to
secure the repayment of the Notes, a bankruptcy court
could subordinate such repayments to all existing and
future indebtedness and other liabilities and commitments
of any of HVE's subsidiaries. As of March 28, 1998, pro
forma for the Transactions and the General Eastern
Disposition, HVE would have had $169.3 million of senior
indebtedness outstanding (including the New Notes and the
Existing Notes), of which $10.0 million would have been
secured indebtedness, and the subsidiaries of HVE would
have had $66.6 million of additional indebtedness and
other liabilities and commitments outstanding (excluding
the Intercompany Notes), of which $14.9 million would have
been secured indebtedness.
</TABLE>
9
<PAGE>
<TABLE>
<S> <C>
Change of Control............... Upon the occurrence of a Change of Control, each holder of
the Notes will be entitled to require the Company to
purchase such holder's Notes at a purchase price equal to
101% of the principal amount thereof, plus accrued and
unpaid interest to the purchase date. There can be no
assurance that the Company will have sufficient funds or
will be contractually permitted by the Revolving Credit
Facility to pay the required purchase price for all Notes
tendered by holders thereof upon the occurrence of a
Change of Control. See "Description of the Notes -- Change
of Control Offer."
Asset Sale Proceeds............. The Company will be obligated in certain instances to make
an offer to purchase the Notes at a purchase price in cash
equal to 100% of the principal amount thereof, plus
accrued and unpaid interest to the purchase date, with the
Available Asset Sale Proceeds of certain asset sales. See
"Description of the Notes -- Certain Covenants --
Limitation on Certain Asset Sales."
Certain Covenants............... The Indenture contains covenants for the benefit of the
holders of the Notes that, among other things, restrict
the ability of HVE and its Restricted Subsidiaries to: (i)
incur additional Indebtedness; (ii) pay dividends or make
certain other restricted payments; (iii) issue capital
stock or preferred stock of Restricted Subsidiaries; (iv)
make certain investments; (v) create liens; (vi) enter
into transactions with affiliates; (vii) transfer or repay
the Intercompany Notes; (viii) enter into sale and
lease-back transactions; (ix) merge or consolidate HVE or
any Restricted Subsidiaries; (x) transfer or sell assets;
(xi) create dividend or other payment restrictions
affecting Restricted Subsidiaries; and (xii) guarantee
certain indebtedness. These covenants are subject to a
number of important exceptions. See "Description of the
Notes -- Certain Covenants."
</TABLE>
10
<PAGE>
COMPARISON OF NEW NOTES WITH EXISTING NOTES
<TABLE>
<S> <C>
Freely Transferable............. Generally, the Exchange Notes will be freely transferable
under the Securities Act by holders thereof other than any
holder that is either an affiliate of the Company or a
broker-dealer that purchased the Notes from the Company to
resell pursuant to Rule 144A or any other available
exemption. The Exchange Notes otherwise will be
substantially identical in all material respects
(including interest rate and maturity) to the New Notes.
See "Exchange Offer."
Registration Rights............. The holders of New Notes currently are entitled to certain
registration rights pursuant to the Registration Rights
Agreement. However, upon consummation of the Exchange
Offer, subject to certain exceptions, holders of New Notes
who do not exchange their New Notes for Exchange Notes in
the Exchange Offer will no longer be entitled to
registration rights and will not be able to offer or sell
their New Notes, unless such New Notes are subsequently
registered under the Securities Act (which, subject to
certain limited exceptions, the Company will have no
obligation to do), except pursuant to an exemption from,
or in a transaction not subject to, the Securities Act and
applicable state securities laws. See "Risk Factors --
Adverse Consequences of Failure to Adhere to Exchange
Offer Procedures."
Absence of a Public Market for
the New Notes................. The Exchange Notes are new securities and there is
currently no established market for the Exchange Notes.
Accordingly, there can be no assurance as to the
development or liquidity of any market for the Exchange
Notes. The Company does not intend to apply for listing on
a securities exchange of the Exchange Notes.
</TABLE>
11
<PAGE>
SUMMARY UNAUDITED PRO FORMA CONDENSED FINANCIAL DATA
(DOLLARS IN THOUSANDS)
The following table sets forth Summary Unaudited Pro Forma Condensed
Financial Data derived from the Unaudited Pro Forma Condensed Consolidated
Financial Data contained elsewhere herein. The "Statement of Operations Data"
for the Company's LTM period ended January 24, 1998 include the results of
operations of PHI Acquisition Holdings, Inc. and subsidiaries for the LTM period
ended January 24, 1998, and the results of operations of Stewart Warner
Instrument Corporation and subsidiaries for the LTM period ended January 31,
1998, and give effect to the PHI Merger, the Original Offering, the Refinancing,
the Transactions and the General Eastern Dispostion as if they had taken place
at the beginning of the period presented. The balance sheet data set forth below
present the financial condition of the Company as if the Transactions had
occurred on January 24, 1998.
The Summary Unaudited Pro Forma Condensed Financial Data do not purport to
be indicative of the actual financial position or results of operations of the
Company that would have actually been attained had the PHI Merger, the Original
Offering, the Refinancing, the Transactions or the General Eastern Disposition
in fact occurred on the dates specified, nor are they necessarily indicative of
the results of operations that may be achieved in the future. The Summary
Unaudited Pro Forma Condensed Financial Data are based on certain assumptions
described in the Notes to Unaudited Pro Forma Condensed Consolidated Financial
Data and should be read in conjunction therewith. In addition, the Supplemental
Adjusted EBITDA information presented below is based on estimates and
assumptions made, and believed to be reasonable, by management of the Company
but are inherently uncertain and subject to change. There can be no assurance
that any of the operational synergies on which such estimates and assumptions
are based will be realized. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations," "Unaudited Pro Forma Condensed
Consolidated Financial Data -- Unaudited Supplemental Adjusted Pro Forma
Financial Data" and the consolidated financial statements of High Voltage
Engineering Corporation and subsidiaries and the notes thereto, the consolidated
financial statements of PHI Acquisition Holdings, Inc. and subsidiaries and the
notes thereto, and the consolidated financial statements of Stewart Warner
Instrument Corporation and subsidiaries and the notes thereto, included
elsewhere herein.
12
<PAGE>
<TABLE>
<CAPTION>
PRO FORMA
LTM PERIOD
ENDED
JANUARY 24,
1998
------------
(UNAUDITED)
<S> <C>
STATEMENT OF OPERATIONS DATA:
Net sales......................................................................................... $ 267,382
Gross profit...................................................................................... 90,957
Income from operations............................................................................ 14,205
Interest expense.................................................................................. 21,748
Interest income................................................................................... 621
Income taxes...................................................................................... 8,994
Loss from continuing operations before extraordinary item......................................... (15,916)
Preferred dividend................................................................................ 4,242
Accretion of redeemable put warrants.............................................................. 310
Loss applicable to common stockholders before extraordinary item.................................. (20,468)
BALANCE SHEET DATA (AT END OF PERIOD):
Working capital (a)............................................................................... $ 63,149
Total assets...................................................................................... 232,888
Total debt (including redeemable put warrants) (b)................................................ 179,475
Redeemable preferred stock........................................................................ 29,567
Stockholders' deficit............................................................................. (48,118)
OTHER DATA:
Adjusted EBITDA (c)............................................................................... $ 28,057
Supplemental Adjusted EBITDA (d).................................................................. 28,591
Depreciation and amortization..................................................................... 10,372
Capital expenditures.............................................................................. 8,716
Cash interest expense............................................................................. 18,098
Ratio of Supplemental Adjusted EBITDA to cash interest expense (e)................................ 1.6x
Ratio of total debt to Supplemental Adjusted EBITDA (f)........................................... 6.3x
Ratio of total debt and redeemable preferred stock to Supplemental
Adjusted EBITDA (g)............................................................................. 7.4x
Ratio of earnings to fixed charges (h)............................................................ --
</TABLE>
(SEE FOOTNOTES ON FOLLOWING PAGE)
13
<PAGE>
NOTES TO SUMMARY UNAUDITED PRO FORMA CONDENSED FINANCIAL DATA
(DOLLARS IN THOUSANDS)
(a) Working capital is defined as total current assets less total current
liabilities.
(b) Total debt includes an amount of $2,500 related to the estimated value of
certain redeemable put warrants issued in connection with the issuance of
$25,000 aggregate principal amount of the Company's Subordinated Notes on
May 9, 1996 (the "Subordinated Notes").
(c) Adjusted EBITDA is defined as earnings from continuing operations before
interest, income taxes, depreciation, amortization and non-recurring items.
Non-recurring items are comprised of: (i) reimbursed environmental and
litigation costs -- net and other, (ii) $210 of severance payments to a
former officer of PHI and $60 of relocation expenses were included in
administrative and selling expenses in connection with the replacement of
such officer of PHI in the LTM period ended January 24, 1998, (iii) $636 of
severance to certain former executives of the Company included in
administrative and selling expenses in the LTM period ended January 24,
1998, (iv) purchase accounting expenses of $7,642 relating to the PHI Merger
(see notes (f) and (i) to "Notes to Unaudited Pro Forma Condensed
Consolidated Statements of Operations"), and (v) $65 of severance payments
to certain former employees of PHI for the LTM period ended January 24,
1998. See Notes F, K and N to "Notes to Consolidated Financial Statements"
of High Voltage Engineering Corporation and subsidiaries. Adjusted EBITDA is
not a measure of performance under generally accepted accounting principles
("GAAP"). While Adjusted EBITDA should not be considered as a substitute for
net income, cash flows from operating activities and other income or cash
flow statement data prepared in accordance with GAAP, or as a measure of
profitability or liquidity, management understands that EBITDA or some form
thereof is often used as a measurement in evaluating companies. In
particular, since Adjusted EBITDA excludes the non-recurring items described
above, the Company believes that trends in Adjusted EBITDA may provide
meaningful information as to the Company's ability to satisfy its cash
requirements on an on-going basis. Moreover, substantially all of the
Company's financing agreements contain covenants in which EBITDA or Adjusted
EBITDA, as defined therein, is used as a measure of financial performance.
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations" for discussion of other measures of performance determined in
accordance with GAAP and analysis of changes in Adjusted EBITDA in recent
periods. Investors should note, however, that "Adjusted EBITDA" or "EBITDA"
as used in this Prospectus may not be comparable to similarly titled
measures presented by other companies and could be misleading, since not all
companies and analysts calculate such measures in the same fashion or on the
same basis.
(d) Management believes that the following supplemental additional adjustments
to Adjusted EBITDA (as so supplemented, "Supplemental Adjusted EBITDA")
relating to operational synergies that may be achieved after the
consummation of the Stewart Warner Acquisition are relevant to evaluating
the future operating performance of the Company. These synergies are based
on estimates and assumptions made, and believed to be reasonable, by
management of the Company but are inherently uncertain and subject to
change. Accordingly, the expected synergies described below can vary
significantly and are not necessarily indicative of future financial
results, including Adjusted EBITDA and net income, which may be affected by
a number of other factors. See "Unaudited Pro Forma Condensed Consolidated
Financial Data -- Unaudited Supplemental Adjusted Pro Forma Financial Data."
The following calculation is provided for informational purposes only and
should not be viewed as indicative of actual or future results.
14
<PAGE>
<TABLE>
<CAPTION>
12 MONTHS 9 MONTHS LTM PERIOD
ENDED ENDED ENDED
APRIL 26, JANUARY 24, JANUARY 24,
1997 1998 1998
--------- ----------- -----------
<S> <C> <C> <C>
Adjusted EBITDA.............................................................. $26,560 $19,747 $28,057
Supplemental adjustments related to Stewart Warner
Certain facility relocations............................................... 42 39 39
Stockholder selling costs.................................................. 0 35 35
Operational synergies...................................................... 115 345 460
--------- ----------- -----------
Subtotal-supplemental adjustments........................................ 157 419 534
--------- ----------- -----------
Supplemental Adjusted EBITDA................................................. $26,717 $20,166 $28,591
--------- ----------- -----------
--------- ----------- -----------
</TABLE>
(e) For the purpose of computing the ratio of Supplemental Adjusted EBITDA to
cash interest expense, cash interest expense excludes $3,700 of non-cash
interest expense comprised of amortization of deferred financing costs,
accretion of redeemable put warrants and the amortization of a premium on
the issuance of the New Notes, for the LTM period ended January 24, 1998.
See "Unaudited Pro Forma Condensed Consolidated Financial Data" and
"Description of Other Indebtedness."
(f) The ratio of total debt to Supplemental Adjusted EBITDA reflects pro forma
total debt as of January 24, 1998 divided by the Supplemental Adjusted
EBITDA for the LTM period ended January 24, 1998.
(g) The ratio of total debt and redeemable preferred stock to Supplemental
Adjusted EBITDA reflects total debt and the liquidation value of redeemable
preferred stock as of January 24, 1998 divided by the Supplemental Adjusted
EBITDA for the LTM period ended January 24, 1998.
(h) For the purpose of this computation, earnings are defined as income or loss
from continuing operations before income taxes, extraordinary items and
fixed charges. Fixed charges are the sum of: (i) interest cost; (ii)
amortization of deferred financing costs; (iii) the portion of operating
lease rental expense that is representative of the interest factor (deemed
to be one-third); (iv) dividends on preferred stock; and (v) accretion of
redeemable put warrants issued in connection with the Subordinated Notes. On
a pro forma basis earnings were inadequate to cover fixed charges by $11,200
for the LTM period ended January 24, 1998.
15
<PAGE>
RISK FACTORS
HOLDERS OF NEW NOTES AND PROSPECTIVE PURCHASERS OF EXCHANGE NOTES SHOULD
CONSIDER CAREFULLY THE FOLLOWING RISK FACTORS IN ADDITION TO THE OTHER
INFORMATION SET FORTH IN THIS PROSPECTUS. CERTAIN OF THE STATEMENTS IN THIS
PROSPECTUS ARE FORWARD-LOOKING IN NATURE AND, ACCORDINGLY, ARE SUBJECT TO MANY
RISKS AND UNCERTAINTIES. THE ACTUAL RESULTS THAT THE COMPANY ACHIEVES MAY DIFFER
MATERIALLY FROM ANY FORWARD-LOOKING STATEMENTS IN THIS PROSPECTUS. FACTORS THAT
COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO,
THOSE DISCUSSED BELOW AND THOSE CONTAINED IN "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" AND "BUSINESS," AS
WELL AS THOSE DISCUSSED ELSEWHERE IN THIS PROSPECTUS.
HIGH LEVEL OF INDEBTEDNESS; ABILITY TO SERVICE INDEBTEDNESS
The Company is, and will continue to be, highly leveraged. At March 28, 1998
the Company had $184.2 million of total indebtedness, mandatorily redeemable
preferred stock with an aggregate liquidation preference of $33.0 million, and a
common stockholders' deficit of $63.2 million. On a pro forma basis for Fiscal
1997, the nine months ended January 24, 1998 and the LTM period ended January
24, 1998, the Company's earnings would have been insufficient to cover fixed
charges (including preferred dividends requirements and accretion of redeemable
put warrants) by approximately $11.2 million, $9.8 million and $11.2 million,
respectively. Furthermore, subject to certain restrictions in the Indenture, the
Company may incur additional indebtedness from time to time to finance
acquisitions, provide for working capital or capital expenditures or for other
purposes. In brief, and subject to certain exceptions, the Indenture permits the
Company to incur additional indebtedness if there is no Default or Event of
Default under the Indenture and, after giving effect to the incurrence of the
additional indebtedness, the Company would satisfy a specified fixed charge
coverage ratio. On February 17, 1998, in connection with a misinterpretation of
certain provisions of the Indenture, the Company paid a cash dividend in the
amount of approximately $2.1 million to the holders of the Series A Preferred
Stock pursuant to the terms thereof. This payment constituted a Restricted
Payment that was at the time prohibited under the terms of the Indenture and
thus constituted a default thereunder. In connection with the Consent
Solicitation, the Company obtained a waiver of this default. In that regard,
interest payments on the Existing Notes and dividend payments on the Series A
Preferred Stock paid as of February 15, 1998 negatively impacted current assets
and stockholders' deficiency and the higher level of indebtedness contributed to
an increase in net loss for the period from January 25, 1998 through the date of
this Prospectus compared to the same period in 1997.
The level of the Company's indebtedness could have important consequences to
holders of the Notes, including, but not limited to, the following: (i) a
substantial portion of the Company's cash flow from operations must be dedicated
to debt service and will not be available for other purposes; (ii) the Company's
ability to obtain additional financing in the future, as needed, may be limited;
(iii) the Company's leveraged position and covenants contained in the Indenture
and other indebtedness of the Company may limit its ability to grow and make
capital improvements and acquisitions; (iv) the Company's level of indebtedness
may make it more vulnerable to economic downturns; and (v) the Company may be at
a competitive disadvantage because some of the Company's competitors are less
leveraged, resulting in greater operational and financial flexibility for such
competitors.
The Company currently anticipates that its operating cash flow, together
with available borrowings, will be sufficient to meet its operating expenses and
to service its debt requirements as they become due. However, the ability of the
Company to pay cash dividends on, and to satisfy the redemption obligations in
respect of, its outstanding Series A Preferred Stock and to satisfy its debt
obligations, including under the Notes, will be primarily dependent upon the
future financial and operating performance of the Company's operating units.
Such performance is dependent upon financial, business and other general
economic factors, many of which are beyond the control of the Company and its
operating units. If the Company is unable to generate sufficient cash flow to
meet its debt service obligations or provide adequate long-term liquidity, it
will have to pursue one or more alternatives, such as reducing or delaying
capital expenditures,
16
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refinancing debt, selling assets or operations, or raising equity capital. There
can be no assurance that such alternatives could be accomplished on satisfactory
terms, if at all, or in a timely manner. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."
EFFECTIVE SUBORDINATION OF THE NOTES
The Notes are senior unsecured obligations of the Company ranking PARI PASSU
in right of payment with all existing and future senior indebtedness of the
Company and senior in right of payment to any subordinated indebtedness of the
Company. The Notes will be effectively subordinated in right of payment to all
existing and future secured indebtedness of the Company, including indebtedness
under the Revolving Credit Facility. Despite the pledge of the Intercompany
Notes to secure the repayment of the Notes, a bankruptcy court could subordinate
such repayments to all existing and future indebtedness and other liabilities
and commitments of any of HVE's subsidiaries. As of March 28, 1998, HVE had
$169.3 million of senior indebtedness outstanding (including the New Notes and
the Existing Notes), of which $10.0 million was secured indebtedness, and the
subsidiaries of HVE would have had $66.6 million of additional indebtedness and
other liabilities and commitments outstanding (excluding the Intercompany
Notes), of which $14.9 million was secured indebtedness. The Indenture will
limit, but not prohibit, the incurrence of additional indebtedness by the
Company. See "Description of Other Indebtedness."
SALE OF ASSETS OF GENERAL EASTERN
On April 15, 1998, the Company sold all of the assets and ordinary course
business trade payables and capital and operating lease obligations of General
Eastern to Bowthorpe, pursuant to the Asset Purchase Agreement. The purchase
price for the General Eastern Assets was $18.0 million, paid in cash. In
addition, $3.0 million was paid in cash at closing in consideration for an
agreement on the part of the Company not to compete in the conduct of the
business of General Eastern for a period of three years after the closing. Of
the aggregate $21.0 million received by the Company in connection with this
sale, $850,000 was placed into escrow for a limited period to secure certain
indemnification obligations of the Company and to satisfy possible purchase
price adjustments. The cash received by HVE in connection with the General
Eastern Disposition is subject to the covenant of the Indenture described under
the caption "Limitation on Certain Asset Sales." There can be no assurance that
HVE will use the cash proceeds of a sale of General Eastern to make an offer to
repurchase Notes, or that any such offer will be at a redemption price in excess
of the then-current trading price of the Notes. See "Description of the Notes --
Certain Covenants -- Limitation on Certain Assets Sales."
RECENT ACQUISITION OF PHI
On August 8, 1997, the Company completed the PHI Merger. The PHI Merger was
the largest acquisition completed by the Company to date. Acquisitions of this
magnitude are inherently subject to significant risk. Although the Company has
operated PHI as a stand-alone subsidiary and intends to continue to do so, the
acquisition will require some additional integration of PHI's management,
control and administrative systems with those of the Company. This may require
substantial additional attention from, and place substantial additional demands
upon, the senior management of the Company, which may divert attention from and
adversely impact their ability to manage the Company's other businesses. In
addition, the representations and warranties made by the principal stockholder
of PHI expired upon the closing of the acquisition of PHI and the Company will
have little or no recourse to such stockholder with respect to such
representations and warranties and the business of PHI. In addition,
unanticipated events or liabilities relating to PHI's business could materially
and adversely affect the Company.
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SUBSIDIARY OPERATIONS; RELIANCE ON SUBSIDIARIES AS PAYMENT SOURCE
The Company conducts most of its business through HVE's direct or indirect
subsidiaries. HVE's subsidiaries are separate and distinct legal entities and
have no obligations, contingent or otherwise, to pay any amounts due under the
Notes, to meet HVE's obligations to other creditors or to make funds available
therefor. Because the Notes are direct obligations of HVE, it must rely on (i)
the ability of those of HVE's subsidiaries which have issued Intercompany Notes
to HVE to pay principal and interest thereon; and (ii) the ability of HVE's
subsidiaries to pay dividends and make other advances and transfers of funds to
generate the funds necessary to meet the Company's obligations, including
payment of amounts due under the Notes. There can be no assurance that such
payments and distributions will be adequate to fund payments due under the
Notes. The ability of HVE's subsidiaries to make such payments, advances and
transfers will be subject to applicable state law regulating the payment of
dividends. In addition, none of HVE's subsidiaries or Letitia Corporation will
initially be a guarantor under the Notes, and the Indenture expressly provides
that by accepting the Notes, each holder of the Notes waives and releases the
liability of any person or entity other than HVE relating to the Notes, which
waiver and release are part of the consideration for the Notes. See "Description
of Other Indebtedness" and "Description of the Notes -- Certain Covenants --
Limitation on Additional Indebtedness."
The Intercompany Notes are unsecured obligations of HVE's subsidiaries. The
principal amount of the Notes has been allocated among HVE and each of its
direct Restricted Subsidiaries, evidenced by the Intercompany Notes, in
consideration for the release of certain obligations of such Restricted
Subsidiaries relating to the indebtedness that was repaid in connection with the
issuance of the Existing Notes. Persons seeking to enforce payments under any
Intercompany Note will only have the rights of a general unsecured creditor of
the issuer of such Intercompany Note with respect thereto and, as a result, the
benefits which might be realized in connection with the enforcement of such
obligations may be limited.
POSSIBLE EFFECTS OF FRAUDULENT CONVEYANCE LAWS
Management of the Company believes that the indebtedness of the Company
represented by the Notes was and is being incurred for proper purposes and in
good faith, and that, based on present forecasts, asset valuations and other
financial information, the Company is solvent, has sufficient capital for
carrying on its business and will be able to pay its debts as they mature.
Notwithstanding management's belief, if a court of competent jurisdiction in a
suit by an unpaid creditor or a representative of creditors (such as a trustee
in bankruptcy or a debtor-in-possession) were to find that, at the time the
Company issued the Notes, the Company (i) intended to hinder, delay or defraud
any existing or future creditor or contemplated insolvency with a design to
prefer one or more creditors to the exclusion in whole or in part of others or
(ii) did not receive fair consideration or reasonably equivalent value for
issuing the Notes, and the Company (a) was insolvent; (b) was rendered insolvent
by reason of the issuance of the Notes or the transactions consummated in
connection therewith; (c) was engaged or about to engage in a business or
transaction for which its remaining assets constituted unreasonably small
capital to carry on its business; or (d) intended to incur, or believed that it
would incur, debts beyond its ability to pay such debts as they matured, such
court could avoid such indebtedness. A possible consequence of such avoidance
would be the subordination of the indebtedness represented by the Notes to
existing and future indebtedness of the Company. Similarly, despite the pledge
of Intercompany Notes to secure the repayment of the Notes, a bankruptcy court
could subordinate the repayment of the Intercompany Notes to all existing and
future indebtedness and other liabilities and commitments of any of HVE's
subsidiaries.
The measure of insolvency for purposes of the foregoing will vary depending
upon the law of the relevant jurisdiction. Generally, however, a company would
be considered insolvent for purposes of the foregoing if the present fair
salable value of the company's assets is less than the amount that will be
required to pay its probable liability on existing debts as they become absolute
and mature. In rendering their respective opinions on the validity of the New
Notes in connection with the issuance thereof, counsel
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for each of the Company and the Initial Purchaser expressed no opinion as to
federal or state laws relating to fraudulent transfers.
RISKS ASSOCIATED WITH STEWART WARNER ACQUISITION
The acquisition of Stewart Warner represented a significant acquisition for
the Company. Acquisitions of this magnitude are inherently subject to
significant risk. The Stewart Warner Acquisition required some integration of
Stewart Warner's management, control and administrative systems with those of
the Datcon Instrument Company and Jorda. The Stewart Warner Acquisition required
and will continue to require substantial attention from, and place substantial
demands upon, the senior management of the Company, which may divert attention
from and adversely impact their ability to manage the Company's other
businesses.
The representations and warranties made by the direct and indirect
stockholders of Stewart Warner in the Stock Purchase Agreement governing the
terms of the Stewart Warner Acquisition (the "Stock Purchase Agreement"), and
certain of the indemnities made therein with respect to such representations and
warranties will expire on March 19, 1999. In addition, although one of the
stockholders of Stewart Warner has agreed to guarantee the obligations of
certain of the other stockholders under the Stock Purchase Agreement, the
indemnification obligations of the Stewart Warner stockholders under the Stock
Purchase Agreement are several and not joint, and are subject in each case to a
maximum liability equal to their proportional share (based on their direct or
indirect ownership of the Stewart Warner Stock prior to the closing of the
Stewart Warner Acquisition) of an aggregate liability cap of $5.0 million
dollars. In addition, only $2.0 million of the purchase price for the Stewart
Warner Stock was placed into escrow to secure the obligations of the Stewart
Warner stockholders under the Stock Purchase Agreement, with the majority of
such amount to be released on or before March 19, 1999. As a result, the Company
has limited recourse to the Stewart Warner stockholders after the Stewart Warner
Acquisition. In addition, unanticipated events or liabilities related to Stewart
Warner's business could materially and adversely affect the Company and the
success of the Stewart Warner Acquisition.
EFFECT OF POSSIBLE QUALIFIED SUBSIDIARY IPO
Robicon, PHI, Datcon Instrument Company, Stewart Warner, Anderson and HVE
Europa are direct or indirect subsidiaries of HVE. The Indenture allows each
Restricted Subsidiary that is an obligor under an Intercompany Note to effect a
public offering of shares of its capital stock and any rights, warrants or
options to acquire such capital stock (a "Qualified Subsidiary IPO"); provided,
among other things, that: (i) any Restricted Subsidiary effecting a Qualified
Subsidiary IPO will be obligated to repay in full its Intercompany Note with the
net proceeds of such Qualified Subsidiary IPO; (ii) that the Company make a pro
rata offer to purchase Notes from the holders thereof equal in aggregate
principal amount to the Intercompany Note being repaid by such Restricted
Subsidiary at a purchase price equal to 101% of the principal amount thereof,
plus accrued and unpaid interest to the purchase date; and (iii) that
immediately after giving effect to such Qualified Subsidiary IPO, and assuming
that the offer to repurchase is fully-subscribed, the Company (excluding the
Adjusted EBITDA and the Consolidated Fixed Charges of the Restricted Subsidiary
effecting the Qualified Subsidiary IPO) could incur $1.00 of additional
Indebtedness (other than Permitted Indebtedness) under a covenant set forth in
the Indenture. Upon completion of a Qualified Subsidiary IPO, a Restricted
Subsidiary will become an Unrestricted Subsidiary and the cash flow of such
Unrestricted Subsidiary will no longer be available (i) to service debt
obligations of HVE or its remaining Restricted Subsidiaries; or (ii) for
purposes of determining whether HVE or its remaining Restricted Subsidiaries
will be able to incur additional indebtedness, either of which could affect the
ability of the Company to meet the requirements of certain financial covenants
in the Revolving Credit Facility and certain of its other indebtedness. There
can be no assurance that such events will not have an adverse effect on the
price at which the Notes may be traded. See "Description of the Notes -- Offer
to Repurchase upon a Qualified Subsidiary IPO."
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UNCERTAINTIES REGARDING PATENTS AND PROTECTION OF PROPRIETARY TECHNOLOGY
The Company currently relies on a combination of patents, trade secrets,
licenses, technical expertise and continuing technological research and
development to establish and protect proprietary rights in its products. There
can be no assurance that the Company's patents will not be successfully
challenged, that any patents that have been applied for will issue, or that
competitors will not find ways to design around such patents to provide similar
or functionally equivalent products, processes or technologies. In addition, the
Company recognizes that the exclusive rights to make, use and sell a technology
are granted for only a finite time and that new technologies must be developed
on an ongoing basis to replace those under expired patents or which have become
obsolete. The Company attempts to ensure that its products and processes do not
infringe patents and other proprietary rights of third parties, but there can be
no assurance that such an infringement may not be alleged by third parties in
the future. If infringement is alleged, there can be no assurance that the
Company would prevail in any such challenge, or that if the Company did not
prevail, that the necessary licenses would be available on acceptable terms, if
at all. In addition, patent and proprietary rights litigation can be extremely
protracted and expensive. See "Business -- Patents and Trademarks."
VARIABILITY OF CUSTOMER REQUIREMENTS; FLUCTUATIONS IN OPERATING RESULTS
The timing of orders placed by the customers of the Company's operating
units varies 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 funding of scientific and
educational research. Historically, the industries served by the Company have
been cyclical, affected by both general economic conditions and
industry-specific cycles. Depressed general economic conditions, exposure to
fluctuations in demand from emerging global markets and cyclical downturns in
these industries have had adverse effects on the Company's customers,
contributing to fluctuations in the Company's operating results. The variability
of the level and timing of orders from, and shipments to, customers may result
in significant periodic and quarterly fluctuations in the Company's results of
operations. In addition, the Company's operating units rely upon suppliers or
subcontractors for custom components in their respective manufacturing
processes, the loss of which could adversely affect an operating unit's business
until alternate suppliers could be found.
Because the Company's operating expenses are based on anticipated revenue
levels and a high percentage of the Company's operating expenses is relatively
fixed, any unanticipated shortfall in revenue in a quarter may have an adverse
impact on the Company's results of operations for that quarter, which could
impact the Company's ability to pay amounts due under the Notes. In addition to
the factors affecting customer requirements noted above, the Company's operating
results may also fluctuate due to factors such as changes in the product mix of
sales; changes in manufacturing, raw material and other costs or expenses;
competitive pricing pressures; the gain or loss of significant customers and
increased research and development expenses. The Company believes that
quarter-to-quarter comparisons of results of operations are not necessarily
meaningful or indicative of future performance. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
DEPENDENCE ON KEY PERSONNEL
The success of the Company depends upon the efforts, abilities and expertise
of its executive officers and other key employees, including its Chairman of the
Board and Chief Executive Officer, President, Chief Operating Officer and the
president or managing director of each of the Company's operating units. The
loss of the services of such individuals and/or other key individuals could have
a material adverse effect on the Company's operations. Generally, the Company
does not offer employment agreements to its executive officers or key employees,
nor does the Company maintain key man life insurance on such individuals. See
"Management."
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TECHNOLOGICAL CHANGE; MANUFACTURING PROCESS DEVELOPMENTS
The markets for the Company's products may be affected by technological
change, continuing process development and new product introductions. The
Company's success will depend, in part, upon its continued ability to
manufacture products that meet changing customer needs, successfully anticipate
or respond to technological changes in manufacturing processes on a
cost-effective and timely basis and enhance and expand its existing product
offerings. Current competitors or new market entrants may develop new products
with features that could adversely affect the competitive position of the
Company's products. The Company has invested and continues to invest substantial
resources in research and development for new products and improved
manufacturing processes; however, there can be no assurance that the Company's
new product or process development efforts will be successful or that the
emergence of new technologies, industry standards or customer requirements will
not render the Company's technology, equipment or processes obsolete or
uncompetitive. Any failure or delay in accomplishing these goals could have a
material adverse effect on the Company's business, results of operations and
financial condition. In addition, to the extent that the Company determines that
new manufacturing equipment or processes are required to remain competitive, the
acquisition and implementation of the technologies, equipment and processes
required are likely to require significant capital investment by the Company.
FOREIGN OPERATIONS
The Company has manufacturing operations in four foreign countries and sells
its products in a significant number of foreign countries. Approximately $85.2
million, or 37.3%, of the Company's net sales during Fiscal 1997, pro forma for
the PHI Merger and General Eastern Disposition, were generated by products sold
overseas, including approximately $31.8 million, or 13.9%, of the Company's net
sales during such period that were sold to Japan and other countries in Asia and
the Far East. Approximately $35.1 million, or 51.7%, of PHI's net sales during
its fiscal year ended June 27, 1997 were generated by products sold overseas,
including approximately $23.7 million, or 34.9% of PHI's net sales during such
period, that were sold to Japan and other countries in Asia and the Far East. In
addition, substantially all of the products manufactured by Stewart Warner are
produced at its Maquiladora plant in Juarez, Mexico. Risks inherent in foreign
operations include fluctuations in foreign currency exchange rates and changes
in social, political and economic conditions. Changes in currency exchange rates
may affect the relative prices at which the Company and foreign competitors
purchase component materials and sell their finished products in the same
market. Except with respect to certain of its European operations, the Company
generally does not hedge its exposure to foreign currency exchange rate changes.
The Company is also exposed to risks associated with changes in the laws and
policies that govern foreign investments in countries where it has operations as
well as, to a lesser extent, changes in United States laws and regulations
relating to foreign trade and investment. While such changes in laws,
regulations and conditions to date have not had a material adverse effect on the
Company's business or financial condition, there can be no assurance as to the
future effect of any such changes.
COMPETITION
The markets for the Company's products are highly competitive. Many of the
Company's competitors are large companies, or divisions or parts of large
companies, that have greater financial resources than the Company. The Company
believes that the principal points of competition in its market niches are
product quality, design and engineering capabilities, product development,
conformity to customer specifications, quality of post-sale support, timeliness
of delivery and price. The rapidly evolving nature of the markets in which the
Company competes may attract new entrants as they perceive opportunities, and
the Company's competitors may foresee the course of market development more
accurately than the Company. In addition, the Company's competitors may develop
products that are superior to the Company's products or may adapt more quickly
than the Company to new technologies or evolving customer requirements. The
Company expects competitive pressures in these markets to remain strong. These
pressures arise from
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existing competitors, other companies that may enter the Company's existing or
future markets and, in certain cases, the Company's customers, which may decide
to move production in-house of certain items sold by 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 compete successfully
could adversely affect the Company's business, results of operations and
financial condition. See "Business -- The Operating Units."
RESTRICTIVE DEBT COVENANTS
Certain loan agreements relating to the financing of Robicon's facility in
New Kensington, Pennsylvania, as well as the Revolving Credit Facility (and any
other indebtedness incurred to provide for working capital or other cash needs),
contain a number of covenants that, among other things, limit the ability of the
Company to incur additional indebtedness, pay certain dividends, prepay
indebtedness, dispose of certain assets, create liens, make capital expenditures
and make certain investments or acquisitions and otherwise restrict corporate
activities. The Revolving Credit Facility also contains (and any indebtedness
incurred to provide for working capital or other needs likely will contain)
provisions relating to a change of control of the Company. The Revolving Credit
Facility also requires the Company to comply with certain financial ratios and
tests, under which the Company will be required to achieve certain financial and
operating results. The ability of the Company to comply with such provisions may
be affected by events beyond its control, including changes in prevailing
economic conditions and in the Company's competitive environment, which could
impair the Company's operating performance. A breach of any of these covenants
would result in a default under the Revolving Credit Facility, in which event
the lenders under the Revolving Credit Facility could elect to declare all
outstanding amounts borrowed thereunder, together with accrued and unpaid
interest thereon, to be due and payable. Such acceleration may also constitute
an event of default under the Indenture. As a result of the security interest
granted to the lender under the Revolving Credit Facility, there can be no
assurance that the Company would have sufficient funds to pay amounts due under
the Revolving Credit Facility or the Notes, in the event of such acceleration.
Acceleration of such indebtedness would have a material adverse effect on the
Company. See "Description of Other Indebtedness."
In addition, the Indenture contains covenants that, among other things,
limit the ability of the Company to incur additional indebtedness, incur liens,
pay dividends and make certain other restricted payments, make certain
investments, consummate certain assets sales, enter into certain transactions
with affiliates, issue subsidiary stock, consolidate or merge with any other
person or transfer all or substantially all of the assets of the Company. See
"Description of Other Indebtedness."
As of the date of this Prospectus, the Company is not in default under any
of the foregoing covenants. However, the Company would not at such date satisfy
a Fixed Charge Coverage Ratio in the Indenture that would be a condition to
incurring certain types of additional indebtedness or making or entering into
certain other payments or transactions. The Company obtained the consent of the
holders of a majority in aggregate principal amount of the outstanding Existing
Notes to the incurrence by the Company of the indebtedness represented by the
New Notes and the Exchange Notes and to waive its breach of the Restricted
Payments Covenant. The Company has no present intention and believes that it has
no need in the foreseeable future to incur such indebtedness or make or enter
into such payments or transactions.
ENVIRONMENTAL COMPLIANCE
The Company is subject to a variety of environmental laws and regulations
that regulate the use, handling, treatment, storage, discharge and disposal of
solid and hazardous substances and hazardous wastes used or generated during the
Company's manufacturing processes. A failure by the Company to comply with
present and future environmental laws and regulations could subject it to future
liabilities or the suspension of production. Such environmental laws and
regulations could also restrict the Company's ability to expand its facilities
or could require the Company to acquire costly equipment or to incur other
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significant expenses in connection with its manufacturing processes. Although
the Company believes it has made sufficient capital expenditures to maintain
compliance with existing laws and regulations, future expenditures may be
necessary as compliance standards and technology change. See "Business --
Environmental and Insurance Matters."
PRODUCT LIABILITY
The Company's businesses expose it to potential product liability risks that
are inherent in the design, manufacture and sale of its products. While the
Company currently maintains what it believes to be suitable product liability
insurance, there can be no assurance that it will be able to maintain such
insurance on acceptable terms or that any such insurance will provide adequate
protection against potential liabilities. In the event of a claim against the
Company, a lack of sufficient insurance coverage could have a material adverse
effect on the Company. Moreover, even if the Company maintains adequate
insurance, any successful claim could materially and adversely affect the
reputation and prospects of the Company. See "Business -- Legal Proceedings."
CHANGE OF CONTROL
Upon the occurrence of a Change of Control, the Company will, subject to
certain conditions, be required to offer to purchase all of the Notes then
outstanding at a purchase price equal to 101% of the principal amount thereof,
plus accrued and unpaid interest to the purchase date and all of the shares of
the Series A Preferred Stock then outstanding at a purchase price equal to 101%
of the liquidation preference thereof, plus, without duplication, accumulated
and unpaid dividends to the purchase date. If a Change of Control were to occur,
there can be no assurance that the Company would have sufficient funds to pay
the purchase price for all of the Notes and all of the shares of the Series A
Preferred Stock that the Company might be required to purchase. The exercise by
the respective holders of the Notes and the Series A Preferred Stock of their
right to require the Company to repurchase the Notes and the Series A Preferred
Stock upon the occurrence of a Change of Control could also cause a default
under other indebtedness of the Company, even if the Change of Control itself
does not, because of the financial effect of such repurchase on the Company. The
Company's ability to pay cash to holders of the Notes and the Series A Preferred
Stock upon a repurchase may be limited by the Company's then existing financial
resources. There can be no assurance that, in the event of a Change of Control,
the Company will have, or will have access to, sufficient funds or will be
contractually permitted under the terms of other outstanding indebtedness and
obligations, including the Revolving Credit Facility, to pay the required
purchase price for all of the Notes tendered by holders thereof upon the
occurrence of a Change of Control. See "Description of Other Indebtedness" and
"Description of the Notes -- Change of Control Offer."
CONTROL BY PRINCIPAL STOCKHOLDERS
Letitia Corporation beneficially owns 92.4% of the outstanding HVE Common
Stock. Messrs. Laurence S. Levy, the Chairman of the Board, Chief Executive
Officer, Vice President and a Director of HVE, and Clifford Press, the Deputy
Chairman of the Board, President and a Director of HVE, are the sole directors
of Letitia Corporation and, together with certain of their affiliates and family
members, indirectly beneficially own 100% of the outstanding common stock of
Letitia Corporation. As a result, Messrs. Levy and Press, and such affiliates
and family members, through their control of Letitia Corporation, are currently
able to elect all of the directors of HVE, retain the voting power to approve
all matters requiring stockholder approval and will continue to control HVE. See
"Principal Stockholders."
ADVERSE CONSEQUENCES OF FAILURE TO ADHERE TO EXCHANGE OFFER PROCEDURES
Issuance of the Exchange Notes in exchange for the New Notes pursuant to the
Exchange Offer will be made only after a timely receipt by the Company of such
New Notes, a properly completed and duly executed Letter of Transmittal and all
other required documents. All questions as to the validity, form,
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eligibility (including time of receipt) and acceptance of the New Notes tendered
for exchange will be determined by the Company in its sole discretion, which
determination will be final and binding on all parties. Holders of the New Notes
desiring to tender such the New Notes in exchange for Exchange Notes should
allow sufficient time to ensure timely delivery. The Company is under no duty to
give notification of defects or irregularities with respect to the tenders of
the New Notes for exchange. New Notes that are not tendered or are tendered but
not accepted will, following the consummation of the Exchange Offer, continue to
be subject to the existing restrictions upon transfer thereof and, except as
provided herein, the Company will have no further obligations to provide for the
registration under the Securities Act of such New Notes. To the extent that New
Notes are tendered and accepted in the Exchange Offer, the trading market for
untendered and tendered but unaccepted New Notes could be adversely affected.
See "Exchange Offer."
LACK OF PUBLIC MARKET FOR THE SECURITIES; RESTRICTIONS ON RESALE
There is no existing trading market for the Exchange Notes. There can be no
assurance regarding the future development of a market for the Exchange Notes,
or the ability of holders of any of the Exchange Notes to sell their Exchange
Notes, or the price at which such holders may be able to sell their Exchange
Notes. If such a market were to develop, the Exchange Notes could trade at
prices that may be lower than the initial offering price for the Exchange Notes
depending on many factors, including prevailing interest rates, the Company's
operating results and the market for similar securities. There can be no
assurance as to the liquidity of any trading market for the Exchange Notes, or
that an active public market for the Exchange Notes will develop. The Company
does not intend to apply for listing or quotation of the Notes on any securities
exchange or stock market. See "Plan of Distribution."
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THE COMPANY
The Company owns and operates a diversified group of six middle market
industrial manufacturing businesses. HVE was incorporated in Massachusetts in
1946 by Robert J. van de Graaff, a Massachusetts Institute of Technology
professor of nuclear physics. In the 1970s, HVE began acquiring a diversified
group of industrial manufacturing businesses. In 1988, the Company was acquired
by Letitia Corporation, which is beneficially owned primarily by Laurence S.
Levy, the Chairman of the Board, Chief Executive Officer, Vice President and a
Director of HVE, and Clifford Press, the Deputy Chairman of the Board, President
and a Director of HVE, and certain of their affiliates and family members. Since
the Company's acquisition by Letitia Corporation, the Company has disposed of 13
non-core businesses and will have made five acquisitions.
The Company operates Robicon, PHI, Datcon Instrument Company, Stewart
Warner, Anderson and HVE Europa as direct or indirect wholly owned subsidiaries.
Natvar is operated as a division of the Company. Stewart Warner, Datcon
Instrument Company and Jorda (a subsidiary of Datcon Instrument Company) are
operated as a group.
The Company's executive offices are located at 401 Edgewater Place, Suite
680, Wakefield, Massachusetts 01880 and its telephone number is (781) 224-1001.
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THE TRANSACTIONS
THE CONSENT SOLICITATION
Simultaneously with the distribution of a Preliminary Offering Memorandum of
the Company, dated March 5, 1998, the Company solicited the consent of the
holders of a majority of the Existing Notes to (i) make certain amendments to
certain provisions of the Indenture governing the Notes; and (ii) to waive a
breach of the Restricted Payments covenant of the Indenture that was made as a
result of a misinterpretation of the Indenture pursuant to which a cash payment
was made to the holders of the Series A Preferred Stock in accordance with the
terms thereof. The principal purposes of the Amendments are to (a) permit the
Offering, (b) provide for the issuance of the Stewart Warner Intercompany Note
after the Stewart Warner Acquisition, (c) modify the manner in which Restricted
Subsidiaries are created, merged or consolidated, and (d) make minor
modifications to other Indenture provisions. The Requisite Consents were
received on March 13, 1998 and the Company has paid a consent fee in the
aggregate amount of $675,000 to the holders of the Existing Notes.
ACQUISITION OF STEWART WARNER
On March 19, 1998, a wholly owned subsidiary of HVE acquired, directly or
indirectly, all of the capital stock of Stewart Warner, for an aggregate
consideration of $24.7 million in cash. After the repayment of certain
obligations of Stewart Warner, including all of Stewart Warner's outstanding
indebtedness, the remainder of the purchase price was distributed to the holders
of the Stewart Warner Stock.
Pursuant to the Stock Purchase Agreement, each of the direct or indirect
stockholders of Stewart Warner have agreed, severally and not jointly, to
indemnify the Company for breaches of representations and warranties made by
such stockholders with respect to the business of Stewart Warner. Most of these
representations and warranties will expire on March 19, 1999. This
indemnification is subject to an aggregate maximum liability of $5.0 million,
with each Stewart Warner stockholder's liability being limited to the portion of
the maximum cap equal to its proportional direct interest in the Stewart Warner
Stock at the time the Stock Purchase Agreement was executed.
The Stewart Warner Acquisition was consummated through the purchase of all
of the Stewart Warner Stock held by certain stockholders of Stewart Warner
(constituting 52% of the Stewart Warner Stock then outstanding ), and the
purchase of all of the outstanding capital stock of Benner Berg, Inc. (which
held the remaining 48% of the outstanding Stewart Warner Stock). The purchase
price for the Stewart Warner Stock was distributed through HVE Acquisition Corp.
for payment by Datcon Instrument Company. Upon the consummation of the Stewart
Warner Acquisition, the Company acquired, indirectly through Stewart Warner, all
of the capital stock of Stewart Warner's existing subsidiaries, TTS, Stewart
Warner de Mexico, S.A. de C.V. (a Mexican corporation) and Stewart Warner
Instruments (Barbados), Inc. (a Barbados corporation). The Company currently
intends to merge Benner Berg, Inc. into Stewart Warner and Stewart Warner and
each of its existing subsidiaries are indirect Restricted Subsidiaries of HVE.
STEWART WARNER INTERCOMPANY NOTE
At the closing of the Offering, Stewart Warner issued the Stewart Warner
Intercompany Note in the principal amount of $20.0 million. HVE Acquisition
Corp. and TTS are co-obligors under the Stewart Warner Intercompany Note. At the
closing of the issuance of the $135.0 million in aggregate principal amount of
the Original Notes on August 8, 1997 (which Notes were exchanged for the
Existing Notes), the Company's existing direct Restricted Subsidiaries issued
the original Intercompany Notes to the Company in consideration for the release
of certain obligations of such Restricted Subsidiaries relating to the
indebtedness repaid in connection with the issuance of such Notes. These
Intercompany Notes are in the following principal amounts: (i) Robicon: $39.5
million; (ii) PHI: $39.5 million; (iii) Datcon Instrument Company: $19.0
million; (iv) Anderson: $19.0 million; and (v) HIVEC Holdings, Inc., a direct,
wholly
26
<PAGE>
owned subsidiary of HVE which in turn owns all the capital stock of HVE Europa
("HIVEC Holdings"): $3.5 million. The Intercompany Notes: (i) are senior
obligations of each Restricted Subsidiary; (ii) have terms substantially similar
to the terms of the Notes; and (iii) may not be forgiven by the Company as long
as the Notes remain outstanding; provided, however, that the Intercompany Note
of a particular Restricted Subsidiary must be repaid with the Net Proceeds of a
Qualified Subsidiary IPO of such Restricted Subsidiary. See "Description of
Other Indebtedness." Other than with respect to the principal amount thereof,
the Stewart Warner Intercompany Note has the same terms as the other
Intercompany Notes. The respective principal amounts of the Intercompany Notes
do not limit the amount of funds that may be generated by a particular
Restricted Subsidiary and used by the Company to make payments on the Notes or
for other purposes.
27
<PAGE>
USE OF PROCEEDS
No proceeds will be received by the Company from the Exchange Offer. The
following table sets forth the uses of the proceeds as of the closing date of
the Transactions (dollars in thousands):
<TABLE>
<CAPTION>
SOURCE OF FUNDS:
<S> <C>
Notes offered hereby (a)......................................... $ 20,100
Existing cash.................................................... 6,686
---------
Total sources of funds....................................... $ 26,786
---------
---------
USE OF FUNDS:
Cash purchase price of Stewart Warner (b)........................ $ 24,721
Estimated fees and expenses of the Transactions.................. 2,065
---------
Total uses of funds.......................................... $ 26,786
---------
---------
</TABLE>
- ------------
(a) Includes purchase premium of $100,000.
(b) The purchase price for the Stewart Warner Stock included the repayment of
all amounts outstanding under the Loan Agreement, dated as of January 22,
1996, between Stewart Warner and LaSalle National Bank (the "Stewart Warner
Loan Agreement"). As of the closing of the Offering, borrowings under the
Stewart Warner Loan Agreement bore interest at a rate of LaSalle National
Bank's prime rate for the first $1.0 million of borrowings and the balance
at a rate of 2.6% over LIBOR, and matured on September 1, 1999. The
outstanding balance under the Stewart Warner Loan Agreement as of March 19,
1998, was approximately $4.3 million.
28
<PAGE>
CAPITALIZATION
(DOLLARS IN THOUSANDS)
The following table sets forth the consolidated capitalization of High
Voltage Engineering Corporation and subsidiaries as of January 24, 1998, Stewart
Warner and its subsidiaries as of January 31, 1998 and the Company pro forma as
of January 24, 1998, as adjusted to reflect the Transactions and the General
Eastern Disposition. This table should be read in conjunction with "Use of
Proceeds," "Unaudited Pro Forma Condensed Consolidated Financial Data,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the consolidated financial statements and the notes thereto
included elsewhere herein.
<TABLE>
<CAPTION>
HISTORICAL
------------------------
DISPOSITION PRO FORMA PRO FORMA
------------- -------------------------- HISTORICAL --------------------------
HVE(A) GEI(B) ADJUSTMENTS COMBINED SWI(C) ADJUSTMENTS COMBINED
--------- ------------- ------------- ----------- ----------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
(UNAUDITED) (UNAUDITED) (UNAUDITED)
Revolving Credit Facility
(d)....................... $ -- $ -- $ -- $ -- $ -- $ -- $ --
Notes....................... 135,000 -- -- 135,000 -- 20,000 155,000
Premium on New Notes........ -- -- -- -- -- 100 100
Other debt (e).............. 21,915 125 85 21,875 3,934 (3,934) 21,875
Redeemable put warrants..... 2,500 -- -- 2,500 -- -- 2,500
--------- ------ ------------- ----------- ----------- ------------- -----------
Total debt.......... 159,415 125 85 159,375 3,934 16,166 179,475
--------- ------ ------------- ----------- ----------- ------------- -----------
Series A Exchange Redeemable
Preferred Stock........... 29,567 -- -- 29,567 -- -- 29,567
Stockholders' (Deficiency)
Equity --
Common stock............ 1 -- -- 1 1002 (1,002) 1
Paid-in capital......... 19,527 -- -- 19,527 -- -- 19,527
Retained earnings
(accumulated
deficit).............. (81,155) 3,671 10,584 (67,380) 2,408 (2,300) (69,680)
6,947 (2,408)
(85)
Common Stock Warrants... 2,200 -- -- 2,200 -- -- 2,200
Cumulative foreign
currency translation
adjustment............ (166) -- -- (166) $ -- -- (166)
--------- ------ ------------- ----------- ----------- ------------- -----------
Total stockholders'
(deficiency)
equity............ (59,593) 3,671 $ 17,446 (45,818) 3,410 (5,710) (48,118)
--------- ------ ------------- ----------- ----------- ------------- -----------
Total
capitalization.... $ 129,389 $ 3,796 $ 17,531 $ 143,124 $ 7,344 $ 10,456 $ 160,924
--------- ------ ------------- ----------- ----------- ------------- -----------
--------- ------ ------------- ----------- ----------- ------------- -----------
</TABLE>
- ------------
(a) For purposes of this table, the term "HVE" refers to High Voltage
Engineering Corporation and subsidiaries, including PHI.
(b) For purposes of this table, the term "GEI" refers to General Eastern
Instruments, a division of HVE.
(c) For purposes of this table, the term "SWI" refers to Stewart Warner
Instrument Corporation and subsidiaries.
(d) The Revolving Credit Facility is a $25.0 million senior secured revolving
credit facility that bears interest at (i) the Lender's Base Rate plus 0.25%
or (ii) LIBOR plus 1.50%. See "Description of Other Indebtedness."
(e) Other debt is comprised of capital leases, industrial revenue bonds
("IRBs"), mortgage notes, notes payable and a foreign credit line for HVE
and its existing subsidiaries, and the outstanding Stewart Warner Loan
Agreement. This senior secured credit facility will be repaid out of the
proceeds of the Offering. See "Use of Proceeds."
29
<PAGE>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL DATA
The following Unaudited Pro Forma Condensed Consolidated Balance Sheet
presents the pro forma financial position of the Company as if the Transactions
and the General Eastern Disposition had occurred on January 24, 1998. The
following Unaudited Pro Forma Condensed Consolidated Statements of Operations
for Fiscal 1997, the nine months ended January 24, 1998 and the LTM period ended
January 24, 1998 present the results of operations of the Company as if the PHI
Merger, the Original Offering, the Refinancing, the Transactions and the General
Eastern Disposition had occurred at the beginning of the periods presented. The
Unaudited Pro Forma Condensed Consolidated Financial Data for Fiscal 1997, the
nine months ended January 24, 1998 and the LTM period ended January 24, 1998
have been prepared by the Company's management and are not necessarily
indicative of the Company's financial position and results of operations had the
PHI Merger, the Original Offering, the Refinancing, the Transactions and the
General Eastern Disposition actually occurred on the assumed dates, nor are they
necessarily indicative of the Company's financial position and results of
operations for any future period. In the opinion of management, all necessary
adjustments have been made to fairly present this pro forma information. The
Unaudited Pro Forma Condensed Consolidated Financial Data are based on the
historical financial statements of High Voltage Engineering Corporation and
subsidiaries, PHI Acquisition Holdings, Inc. and subsidiaries and Stewart Warner
Instrument Corporation and subsidiaries, and give effect to the assumptions and
adjustments set forth in the accompanying notes. References in this Prospectus
to the Company's pro forma fiscal year ended April 26, 1997, combine, on a pro
forma basis, the results of operations of High Voltage Engineering Corporation
and subsidiaries for Fiscal 1997, after giving effect to the General Eastern
Disposition, PHI Acquisition Holdings, Inc. and subsidiaries for its fiscal year
ended June 27, 1997, and Stewart Warner Instrument Corporation and subsidiaries
for its fiscal year ended April 30, 1997. References in this Prospectus to the
Company's pro forma nine months ended January 24, 1998, and pro forma LTM period
ended January 24, 1998, combine, on a pro forma basis, (i) the results of
operations of High Voltage Engineering Corporation and subsidiaries after giving
effect to the General Eastern Disposition (excluding PHI Acquisition Holdings,
Inc. and subsidiaries), for the nine months ended January 24, 1998 and the LTM
period ended January 24, 1998, the results of operations of PHI Acquisition
Holdings, Inc. and subsidiaries for the nine months ended January 24, 1998 and
the LTM period ended January 24, 1998, and the results of operations of Stewart
Warner Instrument Corporation and subsidiaries for the nine months ended January
31, 1998 and the LTM period ended January 31, 1998. The fiscal year end of
Stewart Warner Instrument Corporation and subsidiaries is April 30 of each year.
The allocation of the aggregate purchase price for the Stewart Warner
Acquisition, together with the liabilities assumed pursuant thereto, to the net
assets acquired has been based on management's preliminary estimate of the fair
value of such assets and liabilities. Adjustments to asset values, including
inventories, fixed assets, intangibles and liabilities in the final allocation
may differ from these estimates, which could impact future earnings. The Company
believes that such adjustments will not have a material impact on the pro forma
financial statements.
The Unaudited Pro Forma Condensed Consolidated Financial Data should be read
in conjunction with the "Selected Historical Consolidated Financial Data,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "The Transactions," the audited and unaudited consolidated
financial statements of High Voltage Engineering Corporation and subsidiaries
and the notes thereto, the audited financial statements of PHI Acquisition
Holdings, Inc. and subsidiaries and the notes thereto, and the audited financial
statements of Stewart Warner Instrument Corporation and subsidiaries and the
notes thereto, included elsewhere in this Prospectus.
30
<PAGE>
HIGH VOLTAGE ENGINEERING CORPORATION AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
AS OF JANUARY 24, 1998
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
HISTORICAL
----------------------
DISPOSITION PRO FORMA HISTORICAL PRO FORMA
----------- -------------------------- ----------- --------------------------
HVE (A) GEI (B) ADJUSTMENTS COMBINED SWI (C) ADJUSTMENTS COMBINED
--------- ----------- ------------- ----------- ----------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents.......... $ 15,105 $ -- $ 20,150(b) $ 35,255 $ 8 $ (6,621)(d) $ 28,642
Restricted cash.................... 3,973 -- 3,973 -- 3,973
Accounts receivable -- net......... 42,918 1,973 850(b) 41,795 3,171 44,966
Refundable income taxes............ 2,157 -- 2,157 -- 2,157
Inventories........................ 39,146 915 38,231 6,300 44,531
Prepaid expenses and other current
assets........................... 1,676 92 1,584 467 2,051
--------- ----------- ------------- ----------- ----------- ------------- -----------
Total current assets............. 104,975 2,980 21,000 122,995 9,946 (6,621) 126,320
PROPERTY, PLANT AND EQUIPMENT --
Net................................. 49,130 1,084 48,046 1,157 4,845(f) 54,048
INVESTMENT IN JOINT VENTURE.......... 1,843 -- 1,843 -- 1,843
ASSETS HELD FOR SALE................. 3,858 -- 3,858 -- 3,858
OTHER ASSETS -- Net.................. 16,598 207 16,391 433 1,750(d) 18,574
(2,300)(e)
2,300(f)
COST IN EXCESS OF NET ASSETS
ACQUIRED............................ 16,883 1,087 15,796 -- 12,449(f) 28,245
--------- ----------- ------------- ----------- ----------- ------------- -----------
$ 193,287 $ 5,358 $ 21,000 $ 208,929 $ 11,536 $ 12,423 $ 232,888
--------- ----------- ------------- ----------- ----------- ------------- -----------
--------- ----------- ------------- ----------- ----------- ------------- -----------
<CAPTION>
LIABILITIES AND STOCKHOLDERS' (DEFICIENCY) EQUITY
<S> <C> <C> <C> <C> <C> <C> <C>
CURRENT LIABILITIES
Current maturities of long-term
debt obligations................. $ 1,308 $ 112 85(b) $ 1,281 $ 3,934 $ (3,934)(d) $ 1,281
Foreign credit line................ 2,610 -- 2,610 -- 2,610
Accounts payable................... 17,290 1,008 16,282 2,137 18,419
Accrued interest................... 6,781 -- 6,781 19 (19)(d) 6,781
Accrued liabilities................ 21,955 535 $ 175(b) 21,889 1,364
294(b) 23,253
Advance payments by customers...... 6,605 19 6,586 -- 6,586
Federal, foreign and state income
taxes payable.................... 1,270 -- 6,947(b) 1,270 128 1,398
(6,947)(b)
Deferred income taxes.............. 2,322 -- 2,322 521 2,843
--------- ----------- ------------- ----------- ----------- ------------- -----------
Total current liabilities........ 60,141 1,674 554 59,021 8,103 (3,953) 63,171
REDEEMABLE PUT WARRANTS.............. 2,500 -- 2,500 -- 2,500
LONG-TERM OBLIGATIONS, LESS CURRENT
MATURITIES.......................... 152,997 13 152,984 -- 20,000(d) 173,084
100(d)
DEFERRED INCOME TAXES................ 4,423 -- 4,423 -- 1,986(f) 6,409
OTHER LIABILITIES.................... 3,252 -- 3,000(b) 6,252 23 6,275
COMMITMENT AND CONTINGENCIES.........
REDEEMABLE PREFERRED STOCK........... 29,567 -- 29,567 -- -- 29,567
STOCKHOLDERS' (DEFICIENCY) EQUITY.... (59,593) 3,671 10,584(b) (45,818) 3,410 (2,300)(e) (48,118)
6,947(b) (3,410)(f)
(85)(b)
--------- ----------- ------------- ----------- ----------- ------------- -----------
$ 193,287 $ 5,358 $ 21,000 $ 208,929 $ 11,536 $ 12,423 $ 232,888
--------- ----------- ------------- ----------- ----------- ------------- -----------
--------- ----------- ------------- ----------- ----------- ------------- -----------
</TABLE>
See accompanying Notes to Unaudited Pro Forma Condensed Consolidated Balance
Sheet.
31
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
AS OF JANUARY 24, 1998
(DOLLARS IN THOUSANDS)
(a) For purposes of the Unaudited Pro Forma Condensed Consolidated Balance
Sheet, the term "HVE" refers to High Voltage Engineering Corporation and
subsidiaries, including PHI Acquisition Holdings, Inc. and subsidiaries.
(b) For purposes of the Unaudited Pro Forma Condensed Consolidated Balance
Sheet, the term "GEI" refers to General Eastern a division of HVE.
Adjustments reflect pro forma for the General Eastern Disposition total
consideration of $21,000 for net assets of $3,671 less $85 related to a note
payable retained by HVE, and net of $175 of transaction related expenses,
$294 of expense related to the acceleration of the Value Creation Plan
liability, $6,947 of taxes in connection with the gain on the sale offset by
an adjustment to the valuation allowance, and $3,000 allocated to an
agreement on the part of HVE not to compete in the conduct of business of
GEI.
(c) For purposes of the Unaudited Pro Forma Condensed Consolidated Balance
Sheet, the term "SWI" refers to Stewart Warner Instrument Corporation and
subsidiaries. The financial position of Stewart Warner is as of January 31,
1998, the end of Stewart Warner's third fiscal quarter.
(d) Reflects the estimated sources and uses of funds for the Transactions,
assuming they had occurred as of January 24, 1998. Actual use of proceeds as
of the closing date of the Transactions will differ. See "Use of Proceeds."
<TABLE>
<S> <C> <C>
SOURCES OF FUNDS:
Notes offered hereby................................................ $ 20,000
Premium on New Notes................................................ 100
Existing cash....................................................... 6,621
---------
Total sources of funds........................................ $ 26,721
---------
---------
USES OF FUNDS:
Stewart Warner Aquisition:
Cash consideration paid to holders of Stewart Warner Stock........ $ 20,703
Repayment of existing Stewart Warner Loan Agreement
plus accrued interest........................................... 3,953 $ 24,656
---------
Estimated acquisition expenses...................................... 315
Estimated fees and expenses associated with the Notes Offering
and Consent Solicitation.......................................... 1,750
---------
Total uses of funds........................................... $ 26,721
---------
---------
</TABLE>
(e) Reflects the following adjustments to stockholders' (deficiency) equity:
<TABLE>
<S> <C> <C>
Charges to historical earnings:
Write-off of purchased in-process research and development.................... $ 2,300
</TABLE>
(f) Reflects the purchase price allocation to cost in excess of net assets
acquired using the purchase method of accounting. The preliminary allocation
of the purchase price and related transaction costs is as follows:
<TABLE>
<S> <C> <C>
Cash consideration paid to holders of Stewart Warner Stock......... $ 20,703
Estimated acquisition expenses..................................... 315
Less: Acquisition adjustments to SWI's historical financial
statements (i):
Elimination of SWI's stockholders' equity...................... $ 3,410
Increase in intangibles (ii)(iii).............................. 2,300
Write-up of SWI fixed assets (iii)............................. 4,845
Deferred tax liability arising from the Stewart Warner
Acquisition.................................................. (1,986) 8,569
--------- ---------
Cost in excess of net assets acquired...................... $ 12,449
---------
---------
</TABLE>
32
<PAGE>
-------------------
(i) The fair value of net assets acquired has been based on management's
preliminary estimate of the fair value of such assets and
liabilities. Adjustments to asset values, including inventories,
fixed assets, intangibles and liabilities in the final allocation
may differ from these estimates, which could impact future earnings.
Management believes that such adjustments will not have a material
impact on the pro forma financial statements.
(ii) Consists of In-process research and development (see note (d)
above) $2,300.
(iii) Based on a preliminary estimate by management as of January 31,
1998.
33
<PAGE>
HIGH VOLTAGE ENGINEERING CORPORATION AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE FISCAL YEAR ENDED APRIL 26, 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
HISTORICAL
---------------------- PRO FORMA
DISPOSITION PRO FORMA HISTORICAL -----------
----------- -------------------------- -----------
HVE (A) GEI (B) ADJUSTMENTS COMBINED PHI (C) ADJUSTMENTS
--------- ----------- ------------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Net sales......................................... $ 173,103 $ 12,256 $ 160,847 $ 67,819
Cost of sales..................................... 114,848 6,062 108,786 42,740 $ (100)(e)
1,000(f)
--------- ----------- ------------- ----------- ----------- -----------
Gross profit.................................... 58,255 6,194 52,061 25,079 (900)
Administrative and selling expenses............... 36,967 3,793 33,174 10,678 (55)(e)
429(g)
618(h)
Research and development expenses................. 9,361 739 8,622 7,902 (36)(e)
Reimbursed environmental and litigation
costs -- net..................................... 26 -- 26 --
Other............................................. 2,234 -- $ (1,000)(b) 1,234 11 --
--------- ----------- ------------- ----------- ----------- -----------
Income (loss) from operations................... 9,667 1,662 1,000 9,005 6,488 (1,856)
Interest expense.................................. 11,989 245 11,744 1,693 6,350(k)
Interest income................................... (351) -- (351) (48) --
--------- ----------- ------------- ----------- ----------- -----------
Income (loss) from operations before income
taxes and extraordinary item.................. (1,971) 1,417 1,000 (2,388) 4,843 (8,206)
Income taxes...................................... 526 -- 526 1,403 (l)
--------- ----------- ------------- ----------- ----------- -----------
Income (loss) from operations before
extraordinary item............................ (2,497) 1,417 1,000 (2,914) 3,440 (8,206)
Preferred dividends............................. (479) -- (479) -- (3,763)(m)
Accretion of redeemable preferred stock......... -- -- -- -- (310)(n)
--------- ----------- ------------- ----------- ----------- -----------
Income (loss) available to common stockholders
before extraordinary item........................ $ (2,976) $ 1,417 $ 1,000 $ (3,393) $ 3,440 $ (12,279)
--------- ----------- ------------- ----------- ----------- -----------
--------- ----------- ------------- ----------- ----------- -----------
Ratio of earnings to fixed charges (u)............ -- --
Adjusted EBITDA data (v):
Income from operations.......................... $ 9,667 $ 1,662 $ 1,000 9,005 $ 6,488 $ (1,856)
Reimbursed environmental and litigations costs
-- net........................................ 26 -- -- 26 --
Other........................................... 2,234 -- (1,000) 1,234 11
Depreciation and amortization................... 4,376 254 -- 4,122 2,769 856
Purchase accounting expenses/severance.......... -- -- -- -- 270 1,000
--------- ----------- ------------- ----------- ----------- -----------
Adjusted EBITDA............................... $ 16,303 $ 1,916 $ -- $ 14,387 $ 9,538 $ --
--------- ----------- ------------- ----------- ----------- -----------
--------- ----------- ------------- ----------- ----------- -----------
<CAPTION>
COMPANY
HISTORICAL PRO FORMA
HVE/PHI ------------- ------------------------
COMBINED SWI (D) ADJUSTMENTS TOTAL
----------- ------------- ------------- ---------
<S> <C> <C> <C> <C>
Net sales......................................... $ 228,666 $ 24,228 $ 252,894
Cost of sales..................................... 152,426 16,651 $ 501(o) 169,578
----------- ------------- ------------- ---------
Gross profit.................................... 76,240 7,577 (501) 83,316
Administrative and selling expenses............... 44,844 4,417 155(o) 49,783
622(p)
(255)(q)
Research and development expenses................. 16,488 942 34(o) 17,464
Reimbursed environmental and litigation
costs -- net..................................... 26 26
Other............................................. 1,245 (33) -- 1,212
----------- ------------- ------------- ---------
Income (loss) from operations................... 13,637 2,251 (1,057) 14,831
Interest expense.................................. 19,787 398 1,702(r) 22,162
292(s)
(17)(t)
Interest income................................... (399) (399)
----------- ------------- ------------- ---------
Income (loss) from operations before income
taxes and extraordinary item.................. (5,751) 1,853 (3,034) (6,932)
Income taxes...................................... 1,929 761 (l) 2,690
----------- ------------- ------------- ---------
Income (loss) from operations before
extraordinary item............................ (7,680) 1,092 (3,034) (9,622)
Preferred dividends............................. (4,242) -- (4,242)
Accretion of redeemable preferred stock......... (310) -- (310)
----------- ------------- ------------- ---------
Income (loss) available to common stockholders
before extraordinary item........................ $ (12,232) $ 1,092 $ (3,034) $ (14,174)
----------- ------------- ------------- ---------
----------- ------------- ------------- ---------
Ratio of earnings to fixed charges (u)............
Adjusted EBITDA data (v):
Income from operations.......................... $ 13,637 $ 2,251 $ (1,057) $ 14,831
Reimbursed environmental and litigations costs
-- net........................................ 26 -- 26
Other........................................... 1,245 (33) 1,212
Depreciation and amortization................... 7,747 162 1,312 9,221
Purchase accounting expenses/severance.......... 1,270 -- 1,270
----------- ------------- ------------- ---------
Adjusted EBITDA............................... $ 23,925 $ 2,380 $ 255 $ 26,560
----------- ------------- ------------- ---------
----------- ------------- ------------- ---------
</TABLE>
See accompanying Notes to Unaudited Pro Forma Condensed Consolidated Statement
of Operations.
34
<PAGE>
HIGH VOLTAGE ENGINEERING CORPORATION AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED JANUARY 24, 1998
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
HISTORICAL
------------------------ PRO FORMA
DISPOSITION PRO FORMA HISTORICAL -----------
------------- ---------------------------- -----------
HVE (A) GEI (B) ADJUSTMENTS COMBINED PHI (C) ADJUSTMENTS
--------- ------------- --------------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Net sales...................................... $ 138,368 $ 9,867 $ 128,501 $ 49,772
Cost of sales.................................. 88,853 5,015 83,838 32,650 $ (45)(e)
--------- ------ ----- ----------- ----------- -----------
Gross profit................................. 49,515 4,852 44,663 17,122 45
Administrative and selling expenses............ 33,109 3,083 30,026 8,895 (24)(e)
107(g)
155(h)
Research and development expenses.............. 7,852 682 7,170 12,164 (16)(e)
(5,800)(i)
Reimbursed environmental and litigation costs
-- net....................................... 458 -- 458 --
Other.......................................... 44 -- $ (750)(b) (706) 6,834 (6,660)(j)
--------- ------ ----- ----------- ----------- -----------
Income (loss) from operations................ 8,052 1,087 750 7,715 (10,771) 12,283
Interest expense............................... 12,779 220 12,559 1,923 467(k)
Interest income................................ (402) -- (402) (74)
--------- ------ ----- ----------- ----------- -----------
Income (loss) from operations before income
taxes and extraordinary item............... (4,325) 867 750 (4,442) (12,620) 11,816
Income taxes................................... 3,575 -- 3,575 (2,845) 4,840(l)
--------- ------ ----- ----------- ----------- -----------
Income (loss) from operations before
extraordinary item......................... (7,900) 867 750 (8,017) (9,775) 6,976
Preferred dividends.......................... (2,057) -- (2,057) -- (1,126)(m)
Accretion of redeemable preferred stock...... (175) -- (175) -- (58)(n)
--------- ------ ----- ----------- ----------- -----------
Income (loss) available to common stockholders
before extraordinary item.................... $ (10,132) $ 867 $ 750 $ (10,249) $ (9,775) $ 5,792
--------- ------ ----- ----------- ----------- -----------
--------- ------ ----- ----------- ----------- -----------
Ratio of earnings to fixed charges (u)......... --
Adjusted EBITDA data (v):
Income from operations....................... $ 8,052 $ 1,087 $ 750 $ 7,715 $ (10,771) $ 12,283
Reimbursed environmental and litigations
costs -- net............................... 458 -- 458 --
Other........................................ 44 -- (750) (706) 6,834 (6,660)
Depreciation and amortization................ 3,519 245 -- 3,274 3,077 177
Purchase accounting expenses/severance....... 636 -- 636 7,707 (5,800)
--------- ------ ----- ----------- ----------- -----------
Adjusted EBITDA............................ $ 12,709 $ 1,332 $ -- $ 11,377 $ 6,847 $ --
--------- ------ ----- ----------- ----------- -----------
--------- ------ ----- ----------- ----------- -----------
<CAPTION>
COMPANY
HISTORICAL PRO FORMA
HVE/PHI ------------- --------------------------
COMBINED SWI (D) ADJUSTMENTS TOTAL
----------- ------------- ------------- -----------
<S> <C> <C> <C> <C>
Net sales...................................... 178,273 $ 19,616 $ 197,889
Cost of sales.................................. 116,443 13,784 $ 304 130,531
----------- ------------- ------------- -----------
Gross profit................................. 61,830 5,832 (304) 67,358
Administrative and selling expenses............ 39,159 3,792 95(o) 43,231
467(p)
(282)(q)
Research and development expenses.............. 13,518 1,007 21(o) 14,546
Reimbursed environmental and litigation costs
-- net....................................... 458 -- 458
Other.......................................... (532) -- -- (532)
----------- ------------- ------------- -----------
Income (loss) from operations................ 9,227 1,033 (605) 9,655
Interest expense............................... 14,949 289 1,286(r) 16,731
219(s)
(12)(t)
Interest income................................ (476) -- (476)
----------- ------------- ------------- -----------
Income (loss) from operations before income
taxes and extraordinary item............... (5,246) 744 (2,098) (6,600)
Income taxes................................... 5,570 336 (l) 5,906
----------- ------------- ------------- -----------
Income (loss) from operations before
extraordinary item......................... (10,816) 408 (2,098) (12,506)
Preferred dividends.......................... (3,183) -- (3,183)
Accretion of redeemable preferred stock...... (233) -- (233)
----------- ------------- ------------- -----------
Income (loss) available to common stockholders
before extraordinary item.................... $ (14,232) $ 408 $ (2,098) $ (15,922)
----------- ------------- ------------- -----------
----------- ------------- ------------- -----------
Ratio of earnings to fixed charges (u).........
Adjusted EBITDA data (v):
Income from operations....................... $ 9,227 $ 1,033 $ (605) $ 9,655
Reimbursed environmental and litigations
costs -- net............................... 458 -- 458
Other........................................ (532) -- -- (532)
Depreciation and amortization................ 6,528 208 887 7,623
Purchase accounting expenses/severance....... 2,543 -- 2,543
----------- ------------- ------------- -----------
Adjusted EBITDA............................ $ 18,224 $ 1,241 $ 282 $ 19,747
----------- ------------- ------------- -----------
----------- ------------- ------------- -----------
</TABLE>
See accompanying Notes to Unaudited Pro Forma Condensed Consolidated Statement
of Operations.
35
<PAGE>
HIGH VOLTAGE ENGINEERING CORPORATION AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE LTM PERIOD ENDED JANUARY 24, 1998
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
HISTORICAL
---------------------- PRO FORMA
DISPOSITION PRO FORMA HISTORICAL -----------
----------- ----------- -----------
HVE (A) GEI (B) ADJUSTMENTS COMBINED PHI (C) ADJUSTMENTS
--------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Net sales......................................... $ 189,425 $ 13,187 $ 176,238 $ 64,686
Cost of sales..................................... 122,452 6,692 115,760 41,951 $ (45)(e)
--------- ----------- ----------- ----------- ----------- -----------
Gross profit.................................... 66,973 6,495 60,478 22,735 45
Administrative and selling expenses............... 43,179 4,009 39,170 11,896 (24)(e)
214(g)
309(h)
Research and development expenses................. 10,251 863 9,388 14,289 (16)(e)
(5,800)(i)
Reimbursed environmental and
litigation costs -- net.......................... 256 -- 256 --
Other............................................. 1,490 -- $ (1,000)(b) 490 6,586 (6,660)(j)
--------- ----------- ----------- ----------- ----------- -----------
Income (loss) from operations................... 11,797 1,623 1,000 11,174 (10,036) 12,022
Interest expense.................................. 16,518 291 16,227 2,295 851(k)
Interest income................................... (547) -- (547) (74)
--------- ----------- ----------- ----------- ----------- -----------
Income (loss) from operations before income
taxes and extraordinary item.................. (4,174) 1,332 1,000 (4,506) (12,257) 11,171
Income taxes...................................... 6,623 -- 6,623 (2,995) 4,649(l)
--------- ----------- ----------- ----------- ----------- -----------
Income (loss) from operations before
extraordinary item............................ (10,797) 1,332 1,000 (11,129) (9,262) 6,522
Preferred dividends............................. (2,180) -- (2,180) -- (2,062)(m)
Accretion of redeemable preferred stock......... (175) -- (175) -- (135)(n)
--------- ----------- ----------- ----------- ----------- -----------
Income (loss) available to common stockholders
before extraordinary item........................ $ (13,152) $ 1,332 $ 1,000 $ (13,484) $ (9,262) $ 4,325
--------- ----------- ----------- ----------- ----------- -----------
--------- ----------- ----------- ----------- ----------- -----------
Ratio of earnings to fixed charges (u)............ --
Adjusted EBITDA data (v):
Income from operations.......................... $ 11,797 $ 1,623 $ 1,000 11,174 $ (10,036) $ 12,022
Reimbursed environmental and litigation costs -- 256 -- 256 --
net...........................................
Other........................................... 1,490 -- (1,000) 490 6,586 (6,660)
Depreciation and amortization................... 4,719 258 -- 4,461 4,002 438
Purchase accounting adjustments/severance....... 636 -- -- 636 7,977 (5,800)
--------- ----------- ----------- ----------- ----------- -----------
Adjusted EBITDA............................... $ 18,898 $ 1,881 $ -- $ 17,017 $ 8,529 $ --
--------- ----------- ----------- ----------- ----------- -----------
--------- ----------- ----------- ----------- ----------- -----------
<CAPTION>
COMPANY
HISTORICAL PRO FORMA
HVE/PHI ------------- ------------------------
COMBINED SWI (D) ADJUSTMENTS TOTAL
----------- ------------- ------------- ---------
<S> <C> <C> <C> <C>
Net sales......................................... $ 240,924 $ 26,458 $ 267,382
Cost of sales..................................... 157,666 18,325 $ 434(o) 176,425
----------- ------------- ------------- ---------
Gross profit.................................... 83,258 8,133 (434) 90,957
Administrative and selling expenses............... 51,565 4,924 134(o) 56,901
622(p)
(344)(q)
Research and development expenses................. 17,861 1,294 29(o) 19,184
Reimbursed environmental and
litigation costs -- net.......................... 256 -- 256
Other............................................. 416 (5) 411
----------- ------------- ------------- ---------
Income (loss) from operations................... 13,160 1,920 (875) 14,205
Interest expense.................................. 19,373 384 1,716(r) 21,748
292(s)
(17)(t)
Interest income................................... (621) -- (621)
----------- ------------- ------------- ---------
Income (loss) from operations before income
taxes and extraordinary item.................. (5,592) 1,536 (2,866) (6,922)
Income taxes...................................... 8,277 717 (l) 8,994
----------- ------------- ------------- ---------
Income (loss) from operations before
extraordinary item............................ (13,869) 819 (2,866) (15,916)
Preferred dividends............................. (4,242) -- (4,242)
Accretion of redeemable preferred stock......... (310) -- (310)
----------- ------------- ------------- ---------
Income (loss) available to common stockholders
before extraordinary item........................ $ (18,421) $ 819 $ (2,866) $ (20,468)
----------- ------------- ------------- ---------
----------- ------------- ------------- ---------
Ratio of earnings to fixed charges (u)............ --
Adjusted EBITDA data (v):
Income from operations.......................... $ 13,160 $ 1,920 $ (875) $ 14,205
Reimbursed environmental and litigation costs -- 256 -- 256
net...........................................
Other........................................... 416 (5) 411
Depreciation and amortization................... 8,901 252 1,219 10,372
Purchase accounting adjustments/severance....... 2,813 -- 2,813
----------- ------------- ------------- ---------
Adjusted EBITDA............................... $ 25,546 $ 2,167 $ 344 $ 28,057
----------- ------------- ------------- ---------
----------- ------------- ------------- ---------
</TABLE>
See accompanying Notes to Unaudited Pro Forma Condensed Consolidated Statement
of Operations.
36
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
STATEMENT OF OPERATIONS
FOR THE FISCAL YEAR ENDED APRIL 26, 1997,
THE NINE MONTHS ENDED JANUARY 24, 1998
AND THE LTM PERIOD ENDED JANUARY 24, 1998
(DOLLARS IN THOUSANDS)
(a) For purposes of the Unaudited Pro Forma Condensed Consolidated Statement of
Operations, the term "HVE" refers to High Voltage Engineering Corporation
and subsidiaries, excluding PHI Acquisition Holdings, Inc. and subsidiaries.
(b) For purposes of the Unaudited Pro Forma Condensed Consolidated Statement of
Operations, the term "GEI" refers to General Eastern a division of HVE.
Adjustments reflect pro forma for the General Eastern Disposition an
increase of $1,000, $750 and $1,000 of amortization income resulting from
the $3,000 allocated to an agreement on the part of HVE not to compete in
the conduct of business of GEI for three years for the fiscal year ended
April 26, 1997, the nine months ended January 24, 1998 and the LTM period
ended January 24, 1998, respectively. See note (b) to "Notes to Unaudited
Pro Forma Condensed Consolidated Balance Sheet."
(c) For purposes of the Unaudited Pro Forma Condensed Consolidated Statement of
Operations, the term "PHI" refers to PHI Acquisition Holdings, Inc. and
subsidiaries. The results of operations of PHI are for its fiscal year ended
June 27, 1997, the nine months ended January 24, 1998 and the LTM period
ended January 24, 1998.
(d) For purposes of the Unaudited Pro Forma Condensed Consolidated Statement of
Operations, the term "SWI" refers to Stewart Warner Instrument Corporation
and subsidiaries. The results of operations of SWI are for its fiscal year
ended April 30, 1997, the nine months ended January 31, 1998, and the LTM
period ended January 31, 1998.
(e) Reflects a decrease in depreciation expense resulting from a valuation by
management, based in part on an appraisal, of both the estimated fair value
of the fixed assets acquired and their estimated remaining service lives as
of August 8, 1997. Such assets will be depreciated over their estimated
remaining service lives which range from 3 to 30 years. The decrease in
depreciation expense is allocated $100, $45 and $45 to cost of sales, $55,
$24 and $24 to administrative expense, and $36, $16 and $16 to research and
development expense, respectively, for the fiscal year ending April 26,
1997, the nine months ended January 24, 1998 and the LTM period ended
January 24, 1998. The allocation of the decrease in depreciation expense is
based upon the allocation of historical depreciation expense in the results
of operations of PHI for the fiscal year ended June 27, 1997.
(f) Reflects an increase of $1,000 to cost of sales resulting from an increase
in the value of the inventory based on an estimate by management for the
fiscal year ended April 26, 1997. This increase is reflected in historical
cost of sales for the nine months ended January 24, 1998, and the LTM period
ended January 24, 1998.
(g) Reflects an increase of $429, $107 and $214 of amortization of cost in
excess of net assets acquired, totaling approximately $8,600, over 20 years
resulting from the PHI Merger for the fiscal year ended April 26, 1997, the
nine months ended January 24, 1998 and the LTM period ended January 24,
1998.
(h) Reflects an increase of $618, $155 and $309 of amortization of intangible
assets, totaling $6,800, resulting from the PHI Merger for the fiscal year
ended April 26, 1997, the nine months ended January 24, 1998 and the LTM
period ended January 24, 1998, respectively.
(i) Reflects the reversal of $5,800 for the write-off of purchased research and
development that was charged to historical earnings resulting from the PHI
Merger on August 8, 1997.
(j) Reflects the reversal of non-recurring transactions related to compensation
expense recognized in connection with the exercising of employee stock
options and stock appreciation rights payments charged to historical
earnings by PHI prior to the PHI Merger on August 8, 1998.
37
<PAGE>
(k) Reflects the effect on interest expense resulting from the issuance of the
Original Notes and the PHI Merger:
<TABLE>
<CAPTION>
12 MOS. 9 MOS. LTM PERIOD
ENDED ENDED ENDED
INTEREST APRIL 26, JANUARY 24, JANUARY 24,
RATES AMOUNT 1997 1998 1998
-------------- ---------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C>
PRO FORMA INTEREST EXPENSE CALCULATION:
Revolving Credit Facility (i)............. -- $ -- $ -- $ -- $ --
Original Notes............................ 10.5% 135,000 14,175 10,631 14,175
Mortgage notes, capital leases, foreign
credit line and notes payable........... 2.0%-16.4% 21,790 2,101 1,457 1,698
Unused credit facility fee................ 125 62 125
--------- ----------- -----------
Pro forma cash interest expense......... 16,401 12,150 15,998
Accretion of redeemable put warrants...... 2,587 2,200 2,587
Amortization of deferred financing
costs................................... 799 599 799
--------- ----------- -----------
Total pro forma interest expense........ 19,787 14,949 19,384
Less:
Historical HVE interest expense......... 11,744 12,559 16,238
Historical PHI interest expense......... 1,693 1,923 2,295
--------- ----------- -----------
Total historical interest expense....... 13,437 14,482 18,533
--------- ----------- -----------
Total pro forma interest expense
adjustment................................ $ 6,350 $ 467 $ 851
--------- ----------- -----------
--------- ----------- -----------
- ------------
</TABLE>
(i) The Revolving Credit Facility is a $25,000 senior secured revolving
credit facility that bears interest at (i) the Lender's Base Rate plus
.25% or (ii) LIBOR plus 1.50%. See "Description of Other Indebtedness."
(l) For the fiscal year ended April 26, 1997, an income tax benefit has not been
recognized for the tax effect of pro forma adjustments due to the
non-deductibility of costs in excess of net assets acquired and a valuation
allowance which was established against the recoverability of the future
income tax benefits due to uncertainties as to their utilization in future
periods. For the nine months ended January 24, 1998 and for the LTM period
ended January 24, 1998, the adjustment reflects the tax effect of the pro
forma adjustments at a 40% effective tax rate.
(m) Represents adjustment to reflect dividends in the amount of $4,242, $3,183
and $4,242 on the Series A Preferred Stock at 12.50% per annum, payable
semiannually in cash or additional shares of Series A Preferred Stock, at
the option of the Company, and the elimination of dividends on the Series C
Preferred Stock of $479 for the fiscal year ended April 26, 1997, the nine
months ended January 24, 1998, and the LTM period ended January 24, 1998,
respectively.
(n) Represents adjustment to reflect the accretion of redeemable preferred stock
in the amount of $310, $233 and $310 on the Series A Preferred Stock as a
result of the allocation of $2,200 to the warrants to purchase HVE common
stock and $1,400 of fees and issuance costs for the fiscal year ended April
26, 1997, nine months ended January 24, 1998, and the LTM period ended
January 24, 1998, respectively.
(o) Reflects an increase in depreciation expense resulting from a preliminary
valuation by management, based in part on preliminary appraisal data, of
both the estimated fair value of the fixed assets acquired and their
estimated remaining service lives as of January 31, 1998. Such assets will
be depreciated over the estimated remaining service lives which range from 2
to 11 years. See note (f) to
38
<PAGE>
"Notes to Unaudited Pro Forma Condensed Consolidated Balance Sheet." The
increase in depreciation expense is allocated $501, $304 and $434 to cost of
sales, $155, $95 and $134 to administrative and selling expense, and $34,
$21 and $29 to research and development expense, respectively, for the
fiscal year ended April 26, 1997, the nine months ended January 24, 1998 and
the LTM period ended January 24, 1998. The allocation of the increase in
depreciation expense is based upon the allocation of historical depreciation
expense in the results of operations of SWI for the nine months ended
January 31, 1998.
(p) Reflects $622, $467 and $622 of estimated amortization of cost in excess of
net assets acquired, totaling $12,400, over 20 years resulting from the
Stewart Warner Acquisition for the fiscal year ended April 26, 1997, the
nine months ended January 24, 1998, and the LTM period ended January 24,
1998, respectively. See note (f) to "Notes to Unaudited Pro Forma Condensed
Consolidated Balance Sheet."
(q) Reflects adjustments to administrative and selling expenses to eliminate
certain operating expenses (including compensation) relating to a SWI
stockholder who will not be employed by the Company after the acquisition as
follows: $255, $282 and $344 for the fiscal year ended April 26, 1997, the
nine months ended January 24, 1998 and the LTM period ended January 24,
1998, respectively.
(r) Reflects $2,100, $1,575 and $2,100 of interest expense on the $20,000 of the
New Notes at 10.5% per annum and the elimination of $398, $289 and $384 of
SWI historical interest expense for the fiscal year ended April 26, 1997,
the nine months ended January 24, 1998, and the LTM period ended January 24,
1998, respectively. See note (d) to "Notes to Unaudited Pro Forma Condensed
Consolidated Balance Sheet."
(s) Reflects $292, $219 and $292 of amortization of deferred financing costs on
the $1.7 million of fees and expenses associated with the New Notes for the
fiscal year ended April 26, 1997, nine months ended January 24, 1998, and
the LTM period ended January 24, 1998, respectively. See note (d) to "Notes
to Unaudited Pro Forma Condensed Consolidated Balance Sheet."
(t) Represents an adjustment to reflect amortization of $17, $12 and $17 of a
premium of $100 on the issuance on the New Notes for the fiscal year ended
April 26, 1997, the nine months ended January 24, 1998, and the LTM period
ended January 24, 1998, respectively. See note (d) to "Notes to Unaudited
Pro Forma Condensed Consolidated Balance Sheet."
(u) For the purpose of this computation, earnings are defined as income or loss
from continuing operations before income taxes, extraordinary items and
fixed charges. Fixed charges are the sum of: (i) interest cost; (ii)
amortization of deferred financing costs; (iii) the portion of operating
lease rental expense that is representative of the interest factor (deemed
to be one-third); (iv) dividends on preferred stock; and (v) accretion of
redeemable put warrants issued in connection with the Subordinated Notes. On
a pro forma basis and HVE historical basis, earnings were inadequate to
cover fixed charges by $11,200 and $2,500, respectively, in Fiscal 1997,
$9,800 and $13,800, respectively, for the nine months ended January 24, 1998
and $11,200 and $13,800, respectively, for the LTM period ended January 24,
1998.
(v) Adjusted EBITDA is defined as earnings from continuing operations before
interest, income taxes, depreciation, amortization and non-recurring items.
Non-recurring items are comprised of: (i) reimbursed environmental and
litigation costs -- net and other and (ii) $210 of severance payments to a
former officer of PHI and $60 of relocation expense included in
administrative and selling expenses in connection with the replacement of
such officer of PHI in the fiscal year ended April 26, 1997 and the LTM
period ended January 24, 1998, (iii) $636 of severance to certain former
executives of the Company included in administrative and selling expense in
the nine months ended January 24, 1998 and the LTM period ended January 24,
1998, and (iv) purchase accounting expenses relating to the PHI Merger of
$1,000 in the fiscal year ended April 26, 1997 and $7,642 in the nine months
and LTM period January 24, 1998 (see notes (f) and (i) to "Notes to
Unaudited Pro Forma Condensed Consolidated Statements of Operations") and
$65 of severance payments to certain former employees
39
<PAGE>
of PHI for the nine months ended January 24, 1998 and the LTM period ended
January 24, 1998. See notes F, K and N to "Notes to Consolidated Financial
Statements" of High Voltage Engineering Corporation and subsidiaries.
Adjusted EBITDA is not be a measure of performance under GAAP. While
Adjusted EBITDA should not be considered as a substitute for net income,
cash flows from operating activities and other income or cash flow statement
data prepared in accordance with GAAP, or as a measure of profitability or
liquidity, management understands that EBITDA or a form thereof is often
used as a measurement in evaluating companies. In particular, since Adjusted
EBITDA excludes the non-recurring items described above, the Company
believes that trends in Adjusted EBITDA may provide meaningful information
as to the Company's ability to satisfy its cash requirements on an on-going
basis. Moreover, substantially all of the Company's financing agreements
contain covenants in which EBITDA, as defined therein, is used as a measure
of financial performance. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" for discussion of other
measures of performance determined in accordance with GAAP and an analysis
of changes in Adjusted EBITDA in recent periods. Investors should note,
however, that "Adjusted EBITDA" as used in this Memorandum may not be
comparable to similarly titled measures presented by other companies and
could be misleading, since not all companies and analysts calculate such
measures in the same fashion or on the same basis.
40
<PAGE>
UNAUDITED SUPPLEMENTAL ADJUSTED PRO FORMA FINANCIAL DATA
(DOLLARS IN THOUSANDS)
The following additional operational synergies do not reflect adjustments to
the Unaudited Pro Forma Condensed Consolidated Financial Information presented
for the Company. However, management believes these operational synergies may be
realizable and are relevant to evaluating the potential future operating results
of the Company. The following synergies are based on estimates and assumptions
made, and believed to be reasonable, by management, but are inherently uncertain
and subject to change. Due to the uncertainties of future economic conditions,
the amount of the expected synergies listed below may vary significantly.
Accordingly, the expected synergies described below are not necessarily
indicative of future financial results, including Adjusted EBITDA and net
income, which may be affected by a number of other factors. As a result,
prospective purchasers of New Notes are cautioned not to place undue reliance on
the amount of the synergies. See "Risk Factors -- Risks Associated with Stewart
Warner Acquisition," and "-- Variability of Customer Requirements; Fluctuations
in Operating Results." The following additional information reflects the
anticipated synergies resulting from management's business and operating
strategy, calculated prior to the Stewart Warner Acquisition based on due
diligence reviews by management, and expected to be substantially completed
within two years of the Stewart Warner Acquisition. However, unanticipated
factors may delay realization of such benefits or other unanticipated factors
could affect the achievement of such synergies and there can be no assurance
that such benefits will be fully realized, if at all.
<TABLE>
<CAPTION>
12 MONTHS 9 MONTHS LTM PERIOD
ENDED ENDED ENDED
APRIL 26, JANUARY 24, JANUARY 24,
1997 1998 1998
----------- ----------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Adjusted EBITDA........................................................... $26,560 $19,747 $28,057
Supplemental adjustments related to Stewart Warner:
Certain facility relocations (a)........................................ 42 39 39
Stockholder selling costs (b)........................................... 0 35 35
Operational synergies (c)............................................... 115 345 460
----------- ----------- -----------
Subtotal-supplemental adjustments..................................... 157 419 534
----------- ----------- -----------
Supplemental Adjusted EBITDA.............................................. $26,717 $20,166 $28,591
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
- ------------
(a) Reflects add-back of non-recurring costs previously incurred relating to
moving the Des Plaines, Illinois and El Paso, Texas facilities to new leased
space.
(b) Reflects add-back of non-recurring initial retainer fee previously incurred
and paid to investment banker in connection with the sale of Stewart Warner.
(c) Reflects estimated operational synergies including: (1) consolidation of
sourcing of printed circuit board assembly, plastic injection molding, and
other component parts; (2) elimination of duplication in distribution as
well as expanding cross selling of parts available for such distribution;
(3) marketing of Stewart Warner parts to Europe; (4) rationalization of
source assembly of labor intensive parts; and (5) elimination of duplicative
research and development, advertising and promotion expenses.
41
<PAGE>
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
(DOLLARS IN THOUSANDS)
HIGH VOLTAGE ENGINEERING CORPORATION AND SUBSIDIARIES
The Selected Historical Consolidated Financial Data presented below under
the captions "Statement of Operations Data" and "Balance Sheet Data" as of and
for each of the fiscal years in the five-year period ended April 26, 1997, are
derived from the audited consolidated financial statements of High Voltage
Engineering Corporation and its subsidiaries, as restated. The Selected
Historical Consolidated Financial Data presented below under the captions
"Statements of Operations Data" and "Balance Sheet Data" as of and for the nine
months ended January 25, 1997 and January 24, 1998 and the LTM period ended
January 24, 1998 are unaudited, but, in the opinion of management of the
Company, reflect all adjustments (consisting only of normal, recurring
adjustments) necessary for fair presentation of results for such periods. The
results for any interim period are not necessarily indicative of the results of
operations for a full year.
The Selected Historical Consolidated Financial Data of High Voltage
Engineering Corporation and its subsidiaries should be read in conjunction with
the audited historical consolidated financial statements of High Voltage
Engineering Corporation and subsidiaries for the fiscal years in the three-year
period ended April 26, 1997 and the notes thereto included elsewhere herein. For
additional information, see "Management's Discussion and Analysis of Financial
Condition and Results of Operations." In particular, see the discussion in the
second paragraph under that caption on page 48 of the lack of direct
comparability among data for the years presented below because of an acquisition
and certain divestitures at different points during those years.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED NINE MONTHS ENDED
------------------------------------------------------------- --------------------------
MAY 1, APRIL 30, APRIL 29, APRIL 27, APRIL 26, JANUARY 25, JANUARY 24,
1993 1994 1995 1996 1997 1997 1998
--------- ----------- ----------- ----------- ----------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales.............................. $ 101,282 $ 102,098 $ 116,551 $ 149,100 $ 173,103 $ 122,046 $ 164,796
Cost of sales.......................... 65,109 63,951 73,424 97,386 114,848 81,249 105,962
--------- ----------- ----------- ----------- ----------- ------------ ------------
Gross profit....................... 36,173 38,147 43,127 51,714 58,255 40,797 59,014
Administrative and selling expenses
(a).................................. 24,323 24,902 26,113 34,915 36,967 26,897 38,755
Research and development expenses...... 6,732 6,940 8,094 8,071 9,361 6,962 17,731
Restructuring charge (b)............... -- -- 1,294 150 -- -- --
Reimbursed environmental and litigation
costs -- net (c)..................... (2,467) (6,725) (2,130) (450) 26 228 458
Other (d).............................. (408) 703 892 1,163 2,234 788 44
--------- ----------- ----------- ----------- ----------- ------------ ------------
Income from operations............. 7,993 12,327 8,864 7,865 9,667 5,922 2,026
Interest expense....................... 8,753 7,870 8,573 11,225 11,989 8,250 14,291
Interest income........................ (628) (99) (74) (278) (351) (206) (476)
Income (loss) from continuing
operations before income taxes,
discontinued operations and
extraordinary item................. (132) 4,556 365 (3,082) (1,971) (2,122) (11,789)
Income taxes (credit).................. 1,677 4,209 196 (2,619) 526 (2,522) 2,769
--------- ----------- ----------- ----------- ----------- ------------ ------------
Income (loss) from continuing
operations before discontinued
operations and extraordinary item.... (1,809) 347 169 (463) (2,497) 400 (14,558)
Discontinued operations:
Income (loss) from discontinued
operations, net of income taxes.... (392) 106 607 (135) -- -- --
Gain (loss) on disposal of
discontinued operations, net of
income taxes....................... -- -- (331) 1,633 -- -- --
Extraordinary gain (loss), net of
income taxes......................... 356 -- -- (422) (259) (259) (7,861)
--------- ----------- ----------- ----------- ----------- ------------ ------------
Net income (loss)...................... $ (1,845) $ 453 $ 445 $ 613 $ (2,756) $ 141 $ (22,419)
--------- ----------- ----------- ----------- ----------- ------------ ------------
--------- ----------- ----------- ----------- ----------- ------------ ------------
<CAPTION>
(CONTINUED ON NEXT PAGE)
<CAPTION>
LTM PERIOD
ENDED
JANUARY 24,
1998
-------------
(UNAUDITED)
<S> <C>
STATEMENT OF OPERATIONS DATA:
Net sales.............................. $ 216,033
Cost of sales.......................... 139,561
-------------
Gross profit....................... 76,472
Administrative and selling expenses
(a).................................. 48,825
Research and development expenses...... 20,130
Restructuring charge (b)............... --
Reimbursed environmental and litigation
costs -- net (c)..................... 256
Other (d).............................. 1,490
-------------
Income from operations............. 5,771
Interest expense....................... 18,030
Interest income........................ (621)
Income (loss) from continuing
operations before income taxes,
discontinued operations and
extraordinary item................. (11,638)
Income taxes (credit).................. 5,817
-------------
Income (loss) from continuing
operations before discontinued
operations and extraordinary item.... (17,455)
Discontinued operations:
Income (loss) from discontinued
operations, net of income taxes.... --
Gain (loss) on disposal of
discontinued operations, net of
income taxes....................... --
Extraordinary gain (loss), net of
income taxes......................... (7,861)
-------------
Net income (loss)...................... $ (25,316)
-------------
-------------
</TABLE>
42
<PAGE>
<TABLE>
<CAPTION>
FISCAL YEAR ENDED NINE MONTHS ENDED
------------------------------------------------------------- --------------------------
MAY 1, APRIL 30, APRIL 29, APRIL 27, APRIL 26, JANUARY 25, JANUARY 24,
1993 1994 1995 1996 1997 1997 1998
--------- ----------- ----------- ----------- ----------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
(AT PERIOD END):
Working capital........................ $ 11,730 $ 19,157 $ 10,685 $ 11,894 $ 9,371 $ 18,016 $ 44,834
Total assets........................... 89,517 92,664 105,974 113,718 113,587 116,019 193,287
Total debt (including redeemable put
warrants)............................ 80,023 78,190 82,232 84,671 88,201 94,895 159,415
Redeemable preferred stock............. 9,750 10,134 10,549 10,995 11,474 11,351 29,567
Stockholders' deficiency............... (34,426) (34,728) (33,897) (33,482) (36,736) (33,704) (59,593)
OTHER DATA:
Adjusted EBITDA (e).................... $ 9,120 $ 9,593 $ 12,246 $ 12,768 $ 16,303 $ 10,114 $ 15,930
Depreciation and amortization (f)...... 4,002 3,288 3,080 3,584 4,376 3,176 5,966
Capital expenditures (g)............... 1,406 3,175 9,135 5,959 5,010 3,383 4,612
Backlog................................ 23,993 27,883 42,707 62,990 69,632 75,757 92,034
Ratio of earnings to fixed charges
(h).................................. -- 1.5x -- -- -- -- --
OPERATING UNIT DATA:
Net sales:
Robicon (i).......................... $ 34,099 $ 34,738 $ 40,061 $ 56,145 $ 83,096 $ 58,516 $ 67,422
PHI.................................. -- -- -- -- -- -- 26,608
Datcon Instrument Company............ 15,170 16,875 21,514 32,514 32,482 23,209 25,690
Anderson (i)......................... 15,017 15,471 18,136 21,509 21,554 15,441 18,219
Natvar............................... 13,979 13,948 16,828 17,101 15,227 11,080 12,510
General Eastern...................... 9,837 9,969 10,176 12,093 12,256 8,936 9,867
HVE Europa........................... 7,929 6,008 8,048 9,738 8,488 4,864 4,660
--------- ----------- ----------- ----------- ----------- ------------ ------------
Subtotal........................... 96,031 97,009 114,763 149,100 173,103 122,046 164,976
Divested product lines (i)........... 5,251 5,089 1,788 -- -- -- --
--------- ----------- ----------- ----------- ----------- ------------ ------------
Total net sales.................... $ 101,282 $ 102,098 $ 116,551 $ 149,100 $ 173,103 $ 122,046 $ 164,976
--------- ----------- ----------- ----------- ----------- ------------ ------------
--------- ----------- ----------- ----------- ----------- ------------ ------------
Adjusted EBITDA: (j)
Robicon.............................. $ 2,337 $ 3,057 $ 2,212 $ 1,425 $ 6,030 $ 4,063 $ 5,298
PHI.................................. -- -- -- -- -- -- 3,221
Datcon Instrument Company............ 2,005 2,233 3,444 4,230 4,338 2,935 3,347
Anderson............................. 2,632 3,271 3,922 5,240 4,885 3,406 4,393
Natvar............................... 2,268 2,357 2,881 1,784 1,328 986 1,418
General Eastern...................... 1,154 1,173 1,318 1,681 1,916 1,367 1,332
HVE Europa........................... 445 155 463 1,146 673 (382) (94)
--------- ----------- ----------- ----------- ----------- ------------ ------------
Total operating unit Adjusted
EBITDA........................... 10,841 12,246 14,240 15,506 19,170 12,375 18,915
Corporate overhead................... (1,721) (2,653) (1,994) (2,738) (2,867) (2,261) (2,985)
--------- ----------- ----------- ----------- ----------- ------------ ------------
Total Adjusted EBITDA.............. $ 9,120 $ 9,593 $ 12,246 $ 12,768 $ 16,303 $ 10,114 $ 15,930
--------- ----------- ----------- ----------- ----------- ------------ ------------
--------- ----------- ----------- ----------- ----------- ------------ ------------
CASH FLOW PROVIDED BY (USED FOR):
Operating activities................... $ (595) $ 7,806 $ 10,127 $ (6,360) $ 627 $ (4,228) $ (12,144)
Investing activities................... (114) (3,464) (12,278) 5,729 (3,066) (2,739) (55,422)
Financing activities................... (3,655) (4,823) 1,221 1,853 1,893 6,117 81,368
<CAPTION>
LTM PERIOD
ENDED
JANUARY 24,
1998
-------------
(UNAUDITED)
<S> <C>
BALANCE SHEET DATA
(AT PERIOD END):
Working capital........................ $ 44,834
Total assets........................... 193,287
Total debt (including redeemable put
warrants)............................ 159,415
Redeemable preferred stock............. 29,567
Stockholders' deficiency............... (59,593)
OTHER DATA:
Adjusted EBITDA (e).................... $ 22,119
Depreciation and amortization (f)...... 7,166
Capital expenditures (g)............... 6,239
Backlog................................ 92,034
Ratio of earnings to fixed charges
(h).................................. --
OPERATING UNIT DATA:
Net sales:
Robicon (i).......................... $ 92,002
PHI.................................. 26,608
Datcon Instrument Company............ 34,963
Anderson (i)......................... 24,332
Natvar............................... 16,657
General Eastern...................... 13,187
HVE Europa........................... 8,284
-------------
Subtotal........................... 216,033
Divested product lines (i)........... --
-------------
Total net sales.................... $ 216,033
-------------
-------------
Adjusted EBITDA: (j)
Robicon.............................. $ 7,265
PHI.................................. 3,221
Datcon Instrument Company............ 4,750
Anderson............................. 5,872
Natvar............................... 1,760
General Eastern...................... 1,881
HVE Europa........................... 961
-------------
Total operating unit Adjusted
EBITDA........................... 25,710
Corporate overhead................... (3,591)
-------------
Total Adjusted EBITDA.............. $ 22,119
-------------
-------------
CASH FLOW PROVIDED BY (USED FOR):
Operating activities................... $ (7,289)
Investing activities................... (55,749)
Financing activities................... 77,144
</TABLE>
See accompanying Notes to Selected Historical Consolidated Financial Data.
43
<PAGE>
NOTES TO SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
(DOLLARS IN THOUSANDS)
(a) Adjusted EBITDA excludes severance expenses of $246, $456 and $636 included
in administrative and selling expenses in Fiscal 1995, Fiscal 1996, and the
nine months ended January 24, 1998, respectively. See note (e) below.
(b) In Fiscal 1995, HVE incurred a total restructuring charge of $1,294
comprised primarily of $548 due to the closure of a duplicate manufacturing
facility, and costs related to the consolidation of the operations of this
manufacturing facility into another existing facility and $746 in connection
with the write-off of the cumulative foreign currency translation adjustment
resulting from the liquidation of a subsidiary of HVE Europa.
(c) Represents insurance recoveries related to environmental litigation,
remediation and consequential damages, net of actual legal costs, estimated
settlement costs and changes in cost remediation estimates in connection
with two properties formerly owned by HVE in Burlington, Massachusetts and
Woodbridge Township, New Jersey. See "Business -- Environmental and
Insurance Matters."
(d) Other is comprised of the following:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED NINE MONTHS ENDED
--------------------------------------------------------------- ----------------------------
MAY 1, APRIL 30, APRIL 29, APRIL 27, APRIL 26, JANUARY 25, JANUARY 24,
1993 1994 1995 1996 1997 1997 1998
----------- ----------- ----------- ----------- ----------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Writedown of assets held for
sale........................ $ -- $ -- $ 815 $ 1,200 $ -- $ -- $ --
Net gain on disposition of
miscellaneous assets........ (408) -- (47) (83) (230) (230) (710)
Division relocation and moving
costs....................... -- 488 124 103 -- -- --
Facilities (income) expense,
net......................... -- -- -- (57) 319 175 (274)
Aborted acquisition and
offering costs.............. -- -- -- -- 2,145 843 --
Unreimbursed litigation
costs....................... -- -- -- -- -- -- 1,028
Acquisition costs and loss on
write-off of purchased
assets...................... -- 215 -- -- -- -- --
----- ----------- ----- ----------- ----------- ----- ------
Total..................... $ (408) $ 703 $ 892 $ 1,163 $ 2,234 $ 788 $ 44
----- ----------- ----- ----------- ----------- ----- ------
----- ----------- ----- ----------- ----------- ----- ------
<CAPTION>
LTM PERIOD
ENDED
JANUARY 24,
1998
-------------
<S> <C>
Writedown of assets held for
sale........................ $ --
Net gain on disposition of
miscellaneous assets........ (710)
Division relocation and moving
costs....................... --
Facilities (income) expense,
net......................... (130)
Aborted acquisition and
offering costs.............. 1,302
Unreimbursed litigation
costs....................... 1,028
Acquisition costs and loss on
write-off of purchased
assets...................... --
------
Total..................... $ 1,490
------
------
</TABLE>
(e) Adjusted EBITDA is defined as earnings from continuing operations before
interest, income taxes, depreciation, amortization and non-recurring items.
Non-recurring items are comprised of: (i) restructuring charge, reimbursed
environmental and litigation costs -- net, and other, and (ii) non-recurring
severance payments of $246, $456 and $636 to certain former senior
executives included in administrative and selling expenses of HVE in Fiscal
1995, Fiscal 1996, the nine months ended January 25, 1997 and the LTM period
ended January 24, 1998, respectively, (iii) purchase accounting expenses
relating to the PHI Merger of $1,000 in the fiscal year ended April 26,
1997, and $7,642 the nine months ended and LTM period ended January 24, 1998
(see notes (f) and (i) to "Notes to Unaudited Pro Forma Condensed
Consolidated Statements of Operations"), and (iv) and $65 of severance
payments to certain former employees of PHI for the nine months ended
January 24, 1998 and the LTM period ended January 24, 1998. See notes (a)
through (d) above and notes F, K and N to "Notes to Consolidated Financial
Statements" of High Voltage Engineering Corporation and subsidiaries.
Adjusted EBITDA is not a measure of performance under GAAP. While Adjusted
EBITDA should not be considered as a substitute for net income, cash flows
from operating activities and other income or cash flow statement data
prepared in accordance with GAAP, or as a measure of profitability or
liquidity, management understands that some form of EBITDA is often used as
a measurement in evaluating companies. In particular, since Adjusted EBITDA
excludes the non-recurring items described above, the Company believes that
trends in Adjusted EBITDA may provide
44
<PAGE>
meaningful information as to the Company's ability to satisfy its cash
requirements on an on-going basis. Moreover, substantially all of the
Company's financing agreements contain covenants in which EBITDA, as defined
therein, is used as a measure of financial performance. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
for a discussion of other measures of performance determined in accordance
with GAAP and an analysis of changes in Adjusted EBITDA in recent periods.
Investors should note, however, that "Adjusted EBITDA" as used in this
Memorandum may not be comparable to similarly titled measures presented by
other companies and could be misleading, since not all companies and
analysts calculate such measures in the same fashion or on the same basis.
(f) Depreciation and amortization excludes $1,100 and $600 attributable to
discontinued operations in Fiscal 1995 and Fiscal 1996, respectively.
(g) Capital expenditures include assets acquired under capital leases and
exclude capital expenditures from discontinued operations in the amounts of
$800 and $4 in Fiscal 1995 and Fiscal 1996, respectively.
(h) For purposes of this computation, earnings are defined as income or loss
from continuing operations before income taxes, discontinued operations and
extraordinary item and fixed charges. Fixed charges are the sum of: (i)
interest cost; (ii) amortization of deferred financing costs; (iii) the
portion of operating lease rental expense that is representative of the
interest factor (deemed to be one third); (iv) dividends on preferred stock;
and (v) accretion of redeemable put warrants. Earnings were inadequate to
cover fixed charges by $496, $600, $3,500, $2,500, $2,500 and $13,800 in
Fiscal 1993, Fiscal 1995, Fiscal 1996, Fiscal 1997 and the nine months ended
January 25, 1997 and January 24, 1998, respectively.
(i) Anderson's net sales exclude net sales of $4,500, $4,100 and $1,400 from
divested product lines for Fiscal 1993, Fiscal 1994 and Fiscal 1995,
respectively. Robicon's net sales exclude net sales of $700, $1,000 and $345
from divested product lines for Fiscal 1993, Fiscal 1994 and Fiscal 1995,
respectively.
(j) Adjusted EBITDA has not been adjusted to exclude divested product lines.
45
<PAGE>
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
(DOLLARS IN THOUSANDS)
PHI ACQUISITION HOLDINGS, INC. AND SUBSIDIARIES
The following Selected Historical Consolidated Financial Data of PHI
Acquisition Holdings, Inc. and subsidiaries for its fiscal years ended June 30,
1995, June 28, 1996 and June 27, 1997, have been derived from the audited
consolidated financial statements of PHI Acquisition Holdings, Inc. and its
subsidiaries (referred to herein collectively as "PHI"). The Selected Historical
Consolidated Financial Data for the fiscal years ended June 25, 1993 and June
25, 1994 are primarily derived from unaudited divisional financial statements of
the Physical Electronics division of Perkin-Elmer. For this reason and the
additional reason described in Note (a) below, such data for those two fiscal
years may lack comparability with the data for the three subsequent fiscal
years. The information presented below should be read in conjunction with PHI's
consolidated financial statements and the notes thereto included elsewhere
herein.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-------------------------------------------------------------------------
JUNE 25, JUNE 25, JUNE 30, JUNE 28, JUNE 27,
1993(A) 1994(A) 1995 1996 1997
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
STATEMENT OF OPERATIONS DATA:
Net sales................................... $ 45,205 $ 48,315 $ 54,764 $ 58,074 $ 67,819
Cost of sales............................... 28,488 30,044 34,244 35,740 42,740
------------- ------------- ------------- ------------- -------------
Gross profit............................ 16,717 18,271 20,520 22,334 25,079
Administrative and selling expenses (b)..... 10,496 9,178 9,374 10,046 10,678
Research and development expenses........... 5,415 6,012 6,197 6,333 7,902
Equity in earnings of joint venture (c)..... (178) (725) (337) (206) 11
------------- ------------- ------------- ------------- -------------
Operating income........................ 984 3,806 5,286 6,161 6,488
Interest expense............................ -- -- 1,855 1,827 1,693
Interest income............................. -- -- (89) (137) (48)
------------- ------------- ------------- ------------- -------------
Income before income taxes.............. 984 3,806 3,520 4,471 4,843
Income tax expense.......................... -- -- 812 1,496 1,403
------------- ------------- ------------- ------------- -------------
Net income.................................. $ 984 $ 3,806 $ 2,708 $ 2,975 $ 3,440
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
BALANCE SHEET DATA (AT PERIOD END):
Working capital............................. $ 12,615 $ 12,052 $ 14,123 $ 16,037 $ 17,332
Total assets................................ 36,603 34,227 39,252 41,772 45,860
Total debt.................................. -- -- 19,668 18,315 17,505
Stockholders' equity........................ -- -- 8,836 11,412 14,195
OTHER DATA:
Adjusted EBITDA (d)......................... $ 2,559 $ 5,225 $ 7,064 $ 8,180 $ 9,538
Depreciation, amortization and other
non-cash transactions..................... 1,733 2,144 2,115 2,225 2,769
Capital expenditures........................ 1,832 1,796 2,596 2,814 3,309
Backlog..................................... 9,852 14,745 13,345 17,797 17,177
CASH FLOW PROVIDED BY (USED FOR):
Operating activities........................ $ -- $ -- $ 3,561 $ (2,881) $ 4,378
Investing activities........................ -- -- (2,844) 682 (2,113)
Financing activities........................ -- -- 449 (1,370) (1,774)
</TABLE>
- -------------
(a) Financial data available for PHI for the fiscal years ended June 25, 1993
and June 25, 1994 consist of 11 months and 12 months, respectively.
Financial data for the fiscal year ended June 25, 1994 exclude purchase
accounting adjustments of $1,300 related to the acquisition of the Physical
Electronics division of Perkin-Elmer.
(b) Includes $210 of severance payments to a former officer of PHI and $60 in
relocation expenses incurred in connection with the replacement of such
officer of PHI in 1997.
(c) PHI owns a 50% interest in a joint venture (ULVAC-PHI) which operates in
Japan. The joint venture is responsible for sales and service of PHI's
products in Japan.
(d) Adjusted EBITDA is defined as earnings before interest, income taxes,
depreciation, amortization, other non-cash transactions, equity in earnings
of joint venture and non-recurring items. See notes (a) and (b) above.
Non-recurring items are comprised of severance payments of $210 to a former
officer of PHI and relocation expenses of $60 in connection with the
replacement of such officer of PHI in 1997 and are included in
administrative and selling expenses. Adjusted EBITDA is not a measure of
performance under GAAP. While Adjusted EBITDA should not be considered as a
substitute for net income, cash flows from operating activities and other
income or cash flow statement data prepared in accordance with GAAP, or as a
measure of profitability or liquidity, management understands that EBITDA or
some form thereof is customarily used as a measurement in evaluating
companies. Investors should note, however, that "Adjusted EBITDA" as used in
this Memorandum may not be comparable to similarly titled measures presented
by other companies and could be misleading, since not all companies and
analysts calculate such measures in the same fashion or on the same basis.
46
<PAGE>
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
(DOLLARS IN THOUSANDS)
STEWART WARNER INSTRUMENT CORPORATION AND SUBSIDIARIES
The following Selected Historical Consolidated Financial Data of Stewart
Warner Instrument Corporation and subsidiary for its fiscal years ended April
30, 1995, 1996 and 1997 and for the nine-month period ended January 31, 1998
have been derived from the audited consolidated financial statements of Stewart
Warner Instrument Corporation and subsidiary (referred to herein collectively as
"SWI"). The following Selected Historical Consolidated Financial Data of Stewart
Warner Instrument Corporation and subsidiary for the nine-month period ended
January 31, 1997 and the LTM period ended January 31, 1998 are unaudited, but,
in the opinion of management of the Company, reflect all adjustments (consisting
only of normal, recurring adjustments) necessary for fair presentation of
results for such periods. The results for any interim period are not necessarily
indicative of the results of operations for a full year. The information
presented below should be read in conjunction with SWI's consolidated financial
statements and the notes thereto included elsewhere herein.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED NINE MONTHS ENDED
------------------------------------- ----------------------------
APRIL 30, APRIL 30, APRIL 30, JANUARY 31, JANUARY 31,
1995 1996 1997 1997 1998
----------- ----------- ----------- ------------- -------------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
STATEMENT OF OPERATIONS DATA:
Net sales....................................... $ 25,127 $ 22,521 $ 24,228 $ 17,386 $ 19,616
Cost of sales................................... 17,197 15,653 16,651 12,110 13,784
----------- ----------- ----------- ------------- -------------
Gross profit................................ 7,930 6,868 7,577 5,276 5,832
Administrative and selling expenses (a)......... 4,673 5,061 4,417 3,285 3,792
Research and development expense................ 961 966 942 655 1,007
Other........................................... (22) -- (33) (28) --
----------- ----------- ----------- ------------- -------------
Operating income............................ 2,318 841 2,251 1,364 1,033
Interest expense................................ 888 526 398 303 289
Interest income................................. -- -- -- -- --
----------- ----------- ----------- ------------- -------------
Income before income taxes.................. 1,430 315 1,853 1,061 744
Income tax expense.............................. 540 96 761 380 336
----------- ----------- ----------- ------------- -------------
Net income...................................... $ 890 $ 219 $ 1,092 $ 681 $ 408
----------- ----------- ----------- ------------- -------------
----------- ----------- ----------- ------------- -------------
BALANCE SHEET DATA (AT PERIOD END):
Working capital................................. $ 925 $ 853 $ 1,541 $ 1,252 $ 1,842
Total assets.................................... 11,312 10,794 11,931 10,131 11,536
Total debt...................................... 4,439 4,948 4,584 3,772 3,934
Stockholders' equity............................ 1,941 1,910 3,002 2,592 3,410
OTHER DATA:
Adjusted EBITDA (b)............................. $ 2,536 $ 1,123 $ 2,635 $ 1,647 $ 1,523
Depreciation, amortization and other non-cash
transactions.................................. 240 282 162 118 208
Capital expenditures............................ 280 367 514 402 516
Backlog 4,679 4,240 4,585 4,478 4,408
CASH FLOW PROVIDED BY (USED FOR):
Operating activities............................ $ 3,458 $ 167 $ 808 $ 1,504 $ 1,152
Investing activities............................ (8,672) (367) (482) (373) (516)
Financing activities............................ 5,245 230 (365) (1,176) (650)
<CAPTION>
LTM PERIOD
ENDED
JANUARY 31,
1998
-------------
<S> <C>
(UNAUDITED)
STATEMENT OF OPERATIONS DATA:
Net sales....................................... $ 26,458
Cost of sales................................... 18,325
-------------
Gross profit................................ 8,133
Administrative and selling expenses (a)......... 4,924
Research and development expense................ 1,294
Other........................................... (5)
-------------
Operating income............................ 1,920
Interest expense................................ 384
Interest income................................. --
-------------
Income before income taxes.................. 1,536
Income tax expense.............................. 717
-------------
Net income...................................... $ 819
-------------
-------------
BALANCE SHEET DATA (AT PERIOD END):
Working capital................................. $ 1,842
Total assets.................................... 11,536
Total debt...................................... 3,934
Stockholders' equity............................ 3,410
OTHER DATA:
Adjusted EBITDA (b)............................. $ 2,511
Depreciation, amortization and other non-cash
transactions.................................. 252
Capital expenditures............................ 628
Backlog 4,408
CASH FLOW PROVIDED BY (USED FOR):
Operating activities............................ $ 456
Investing activities............................ (625)
Financing activities............................ 161
</TABLE>
- ---------------
(a) Includes $255, $193, $282 and $344 of certain operating expenses (including
compensation) relating to a SWI stockholder who will not be employed by the
Company after the Stewart Warner Acquisition for the fiscal year ended April
30, 1997, the nine months ended January 31, 1997, the nine months ended
January 31, 1998 and the LTM period ended January 31, 1998, respectively.
(b) Adjusted EBITDA is defined as earnings before interest, income taxes,
depreciation, amortization, other non-cash transactions, and non-recurring
items. See note (a) above. Non-recurring items are comprised of $255, $193,
$282 and $344 of certain operating expenses (including compensation)
relating to an SWI stockholder who will not be employed by the Company after
the Merger for the fiscal year ended April 30, 1997, the nine months ended
January 31, 1997, the nine months ended January 31, 1998 and the LTM period
ended January 31, 1998, respectively. Adjusted EBITDA is not a measure of
performance under GAAP. While Adjusted EBITDA should not be considered as a
substitute for net income, cash flows from operating activities and other
income or cash flow statement data prepared in accordance with GAAP, or as a
measure of profitability or liquidity, management understands that EBITDA or
some form thereof is customarily used as a measurement in evaluating
companies. Investors should note, however, that "Adjusted EBITDA" as used in
this Memorandum may not be comparable to similarly titled measures presented
by other companies and could be misleading, since not all companies and
analysts calculate such measures in the same fashion or on the same basis.
47
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Except as otherwise indicated, the following discussion relates to the
Company on a historical basis without giving effect to the Stewart Warner
Acquisition or the General Eastern Disposition. Certain of the statements in
this section are forward-looking in nature and, accordingly, are subject to many
risks and uncertainties. The actual results that the Company achieves may differ
materially from any forward-looking statements herein. Factors that could cause
or contribute to such differences include, but are not limited to, those
discussed below and those contained in "Risk Factors" and "Business," as well as
those discussed elsewhere in this Prospectus. The following discussion should be
read in conjunction with the Selected Historical Consolidated Financial Data and
Unaudited Pro Forma Condensed Consolidated Financial Data and the consolidated
financial statements and notes thereto, and the other financial and operating
data included elsewhere in this Prospectus.
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. The audited historical
financial information of the Company's continuing operations is not directly
comparable on a year to year basis due to (i) the acquisition of Jorda on March
16, 1995, and (ii) the divestiture by the Company's Robicon and Anderson
operating units of certain non-strategic product lines. Anderson divested five
non-strategic product lines in a series of transactions from Fiscal 1993 to
Fiscal 1995 in accordance with its strategy of focusing on its core power
connector business. These divested product lines accounted for net sales of
approximately $1.4 million in Fiscal 1995. In addition, Robicon divested four
non-strategic product lines which accounted for net sales of approximately
$400,000 in Fiscal 1995. Net sales generated by such divested product lines are
presented elsewhere in this Prospectus under the caption "Divested product
lines" in the Selected Historical Consolidated Financial Data of High Voltage
Engineering Corporation and subsidiaries.
As a result of the sale by the Company of: (i) the assets of the Company's
Shore Instruments operating unit on January 5, 1995; (ii) substantially all of
the assets of the Company's Berger operating unit on January 27, 1995; and (iii)
substantially all of the assets of the Company's Specialty Connector operating
unit on November 9, 1995, the Company's consolidated results have been restated
to reclassify the results of such operations as discontinued operations.
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 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 funding of 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.
RESTRUCTURING CHARGES
Restructuring costs declined from $1.3 million in Fiscal 1995 to $150,000 in
Fiscal 1996. The Fiscal 1995 provision included costs related to the closing of
an excess manufacturing facility, costs related to the consolidation of the
operations of this manufacturing facility into another existing facility, and
the write-off
48
<PAGE>
of the cumulative foreign currency translation adjustment resulting from the
liquidation of a subsidiary of HVE Europa. The Fiscal 1996 provision reflected
the closure of a sales office in Europe. There were no restructuring charges in
Fiscal 1997.
REIMBURSED ENVIRONMENTAL AND LITIGATION COSTS -- NET
The Company has, from time to time, received cash settlements and insurance
recoveries relating to environmental litigation, remediation and consequential
damages incurred in connection with properties formerly owned or leased by the
Company. The Company recorded net gains (losses) of $2.1 million, $450,000,
($26,000) and ($458,000) for Fiscal 1995, Fiscal 1996, Fiscal 1997, and the nine
months ended January 24, 1998, respectively, net of actual legal costs,
estimated settlement costs and changes in cost remediation estimates, on cash
recoveries of $2.3 million, $1.5 million, $1.1 million and $0, respectively, for
such periods. These cash recoveries have generally been received from insurance
companies in reimbursement of costs previously incurred, or scheduled to be
incurred, by the Company in remediation efforts or the payment of damages to
third parties, from other responsible or potentially responsible parties in
settlement of potential claims relating to remediation responsibilities, and
from the recovery of expenses incurred both in the recovery of such amounts and
the remediation of affected properties. See "Business -- Environmental and
Insurance Matters."
OTHER
Other expenses in Fiscal 1995 were primarily related to a $0.8 million
provision to write down certain assets held for sale to estimated net realizable
value and costs incurred by Anderson to move into another existing facility.
Other expenses in Fiscal 1996 included a $1.2 million provision to write down
certain assets held for sale to estimated net realizable value and costs
incurred by Robicon to move to a newly constructed facility, which were
partially offset by a net gain on the sale of vacant land and income from
certain excess facilities. In Fiscal 1997, HVE recorded a $2.1 million provision
to write-off the costs associated with an aborted acquisition and related
offerings costs, and $319,000 in net expenses incurred in connection with assets
held for sale, offset by a $230,000 gain on the sale of a small product line at
Robicon. In the nine months ended January 24, 1998, other expenses were $44,000
which primarily reflected $1.0 million of litigation costs related to the
aborted acquisition and offerings costs offset by a gain of $0.6 million on the
sale of a vacant facility in Boston and income on the leases of other vacant
facilities. See note K to the consolidated financial statements of High Voltage
Engineering Corporation and subsidiaries.
ACQUISITION OF STEWART WARNER
On March 19, 1998, a wholly owned subsidiary of HVE acquired, directly or
indirectly, all of the capital stock of Stewart Warner, for an aggregate
consideration of $24.7 million in cash. After the repayment of all of Stewart
Warner's outstanding indebtedness, the remainder of the cash purchase price was
distributed to the holders of the Stewart Warner Stock.
THE PHI MERGER
On August 8, 1997, HVE acquired PHI Acquisition Holdings, Inc. ("PHI
Holdings") for $54.6 million, including transaction costs and net of cash
acquired. The acquisition was consummated through the merger of Lauren
Corporation, a wholly owned subsidiary of HVE, with and into PHI Holdings.
Immediately thereafter, PHI Holdings was merged with and into Physical
Electronics, Inc., its wholly owned subsidiary, and Physical Electronics, Inc.
became a direct, wholly owned subsidiary of HVE.
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RESULTS OF OPERATIONS
NINE MONTHS ENDED JANUARY 24, 1998 (THE "1998 PERIOD") COMPARED TO NINE
MONTHS ENDED
JANUARY 25, 1997 (THE "1997 PERIOD").
Net sales increased $42.9 million, or 35.2%, from $122.0 million for the
1997 Period to $165.0 million for the 1998 Period. This increase was primarily
attributable to: (i) $26.6 million in revenues due to the PHI Merger on August
8, 1997, (ii) an $8.9 million, or 15.2%, increase in sales at Robicon primarily
due to the continued growth in sales of medium voltage VFDs, (iii) a $2.8
million, or 18.0%, increase at Anderson due to continued growth in sales to the
uninterruptible power supply markets as well as telecommunications and
networking equipment markets primarily in North America, (iv) an increase of
$2.5 million, or 10.7%, at Datcon Instrument Company due to higher shipments in
both the United States and Europe, (v) an increase of $1.4 million, or 12.9%, at
Natvar, and (vi) an increase of $0.9 million, or 10.4%, at General Eastern, of
which approximately $300,000 is attributable to the acquisition of certain
assets of a small competitor during the first quarter of Fiscal 1998.
Gross profit increased $18.2 million, or 44.7%, from $40.8 million for the
1997 Period to $59.0 million for the 1998 Period. The increase included $9.5
million due to the PHI Merger, which included a $1.0 million charge to cost of
sales resulting from the shipments of finished goods inventory which had been
revalued in accordance with purchase accounting procedures. The remaining
increase in gross profit of $8.7 million was primarily attributable to higher
shipments at all operating units except for HVE Europa, as well as an improved
gross margin rates at all operating units except General Eastern. The gross
margin rate increased 2.4%, from 33.4% to 35.8%, as a result of the higher
shipments discussed above, as well as productivity improvements at Robicon,
Datcon Instrument Company, Anderson and Natvar compared to the 1997 Period.
Administrative and selling expenses of the Company increased by $11.9
million, or 44.1% for the 1998 Period, which included a $5.6 million increase
attributable to the PHI Merger, $3.0 million at Robicon primarily due to a step
level increase in information technology and other selling and administrative
costs to support higher sales, as well as $2.7 million due to higher selling and
administrative costs throughout the remainder of the Company to support higher
sales, and $0.6 million of severance accrued for certain former executives of
the Company. Administrative and selling expenses increased as a percent of sales
from 22.0% for the 1997 Period to 23.5% during the 1998 Period, as a result of
the factors discussed above.
Engineering, research and development expenses increased $10.8 million, from
approximately $7.0 million for the 1997 Period to approximately $17.7 million
for the 1998 Period, primarily as a result of the inclusion of $9.9 million of
such costs incurred at the newly acquired PHI, including $5.8 million of
purchased research and development as allocated from the purchase price for PHI
which was expensed during the second quarter of Fiscal 1998 in accordance with
purchase accounting procedures. The remaining increases included approximately
$0.6 million attributable to increased new product applications development at
Datcon Instrument Company.
Depreciation and amortization increased $2.9 million from $3.2 million for
the 1997 Period to $6.1 million for the 1998 Period, including $2.4 million
attributable to PHI and continued capital investment in information technology
and automation throughout the Company during the past twelve months.
Other expenses, including reimbursed environmental and litigation costs,
declined from $1.0 million to $0.5 million during the periods compared. The 1997
Period included a $0.8 million provision to write-off costs associated with an
aborted acquisition and related financing costs. The 1998 Period costs include
litigation costs of $1.0 million associated with the aborted acquisition, as
well as a gain of $0.6 million from the sale of a vacant building in Boston,
Massachusetts, as well as a change in the estimate on certain environmental
cleanup costs.
As a result of the above items, the Company's income from continuing
operations decreased by $3.9 million, from $5.9 million for the 1997 Period to
$2.0 million for the 1998 Period.
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Interest expense increased $6.0 million to $14.3 million for the 1998 Period
compared to $8.3 million in the 1997 Period due to higher average indebtedness
associated with the sale of the Original Notes, accretion of redeemable put
warrants in the amount of $2.2 million recorded in the first quarter of Fiscal
1998, as well as a $1.0 million provision for contingent interest payments
recorded in the first quarter of Fiscal 1998. Interest income increased $270,000
to $476,000 for the 1998 Period primarily due to the higher average cash
balances after the sale of the Original Notes.
Income tax provisions increased $5.3 million, from a benefit of $2.5 million
for the 1997 Period, to a provision of $2.8 million for the 1998 Period. The
increase primarily reflects a change in the valuation allowance due to a
revaluation of the realization of net operating loss carryforwards, net of
income tax benefits allocated to extraordinary items.
Income from operations before extraordinary items decreased $15.0 million to
a loss of $14.6 million for the 1998 Period. Extraordinary losses on debt
extinguishment, net of income taxes, in the amounts of $259,000 and $7.9 million
were recorded in the 1997 Period and the 1998 Period, respectively.
The foregoing factors contributed to an increase in net loss of $22.6
million from income of $141,000 for the 1997 Period, to a loss of $22.4 million
for the 1998 Period.
FISCAL 1997 COMPARED TO FISCAL 1996
The following discussion does not include the results of operations of PHI
Acquisition Holdings, Inc., but does include the results of operations of
General Eastern.
Net sales increased $24.0 million, or 16.1%, from $149.1 million in Fiscal
1996 to $173.1 million in Fiscal 1997. This increase was primarily attributable
to a $27.0 million, or 48.0%, increase at Robicon due to the continued growth in
sales of medium voltage VFDs. Robicon's net sales increase was slightly offset
by a $1.9 million, or 11.0%, decline in Natvar's net sales, due to weakness in
medical markets and related market price reductions, as well as a decrease of
$1.3 million, or 12.8%, at HVE Europa which was primarily attributable to weaker
foreign currencies. Net sales at General Eastern increased slightly despite
flatness in the market for humidity measurement instruments. Net sales at Datcon
Instrument Company remained flat as a sales increase in domestic markets was
offset by weakness in agricultural equipment markets in Europe. Net sales at
Anderson remained flat as higher domestic shipments of connectors for new
applications and new customers were offset by weaker markets in traction
batteries for materials handling equipment.
Gross profit increased $6.5 million, or 12.6%, from $51.7 million during
Fiscal 1996 to $58.3 million in Fiscal 1997. The increase was primarily
attributable to the growth in shipments at Robicon, but was somewhat offset by
lower sales at Natvar and HVE Europa. Gross margin declined from 34.7% to 33.7%
primarily due to the shipment by Robicon of certain higher cost prototype units
for new applications, the investment in a leased facility (a technical center
for new applications) at Anderson and the inclusion of the first full year of
costs of Natvar's Colorado facility.
Administrative and selling expenses increased $2.1 million, or 5.9%,
primarily due to a $1.6 million increase at Robicon due to increased commissions
and other selling and administrative costs attributable to higher sales levels.
Administrative and selling expenses declined as a percentage of net sales from
23.4% to 21.4% during the periods compared, including a decline from 21.9% to
16.7% at Robicon.
Research and development expenses increased $1.3 million, or 16.0%, from
$8.1 million to $9.4 million, which was primarily attributable to new product
investments at Robicon, as well as volume related applications engineering to
support the aforementioned sales increase at Robicon. Such expenses remained
unchanged as a percentage of net sales at 5.4%.
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Depreciation and amortization from continuing operations increased from $3.6
million to $4.4 million as a result of continued capital investment in
automation at Anderson and Datcon Instrument Company as well as a full year of
depreciation in connection with a new facility at Natvar.
The net total of restructuring charges, net reimbursed environmental and
litigation costs and other increased from a charge of $0.9 million in Fiscal
1996 to a charge of $2.3 million in Fiscal 1997. In Fiscal 1996, a restructuring
charge of $150,000 was recorded in connection with the closure of a sales office
in Europe. In Fiscal 1996, the Company recorded a gain of $450,000 resulting
from reimbursement from an insurance company of environmental and litigation
expenses. Other expenses in Fiscal 1996 included a $1.2 million provision to
write down certain assets held for sale to estimated net realizable value and
costs incurred by Robicon to move to a newly constructed facility, which were
partially offset by a net gain on the sale of vacant land and income from
certain excess facilities. In Fiscal 1997, other expenses reflected a $2.1
million provision to write-off costs associated with an aborted acquisition and
related offering costs, and $319,000 in net expenses incurred for assets held
for sale. In addition, Robicon recorded a gain on the sale of a small product
line of $230,000 in Fiscal 1997.
Adjusted EBITDA as defined in note (e) to "Notes to Selected Historical
Consolidated Financial Data," increased $3.5 million, or 27.7%, from $12.8
million in Fiscal 1996 to $16.3 million in Fiscal 1997. The excess of this
increase over the increase in income from operations for the same periods is
primarily attributable to the higher level of restructuring and other charges
excluded from Adjusted EBITDA in Fiscal 1997, as described in the immediately
preceding paragraph.
As a result of the factors described above, income from operations increased
$1.8 million, or 22.9%, from $7.9 million in Fiscal 1996 to $9.7 million in
Fiscal 1997.
Interest expense increased $764,000 from $11.2 million in Fiscal 1996 to
$12.0 million in Fiscal 1997 due to higher average interest rates in Fiscal 1997
and accretion of redeemable put warrants which were partially offset by a
reduction in CIP expense.
As a result of the above items, the Company recorded a loss from continuing
operations before income taxes, discontinued operations and extraordinary item
of $3.1 million in Fiscal 1996, as compared to a loss of $2.0 million in Fiscal
1997.
The Company recorded an income tax credit of $2.6 million in Fiscal 1996
compared to income taxes of $0.5 million in Fiscal 1997. The change in tax
provision was largely attributable to a Fiscal 1996 reversal of a tax reserve
previously accrued in connection with a federal tax audit of prior years.
Income from continuing operations before extraordinary items decreased $2.0
million to a loss of $2.5 million in Fiscal 1997. Income from discontinued
operations totaling $1.5 million was recorded in Fiscal 1996 primarily relating
to the sale of the Specialty Connector operating unit. The Company recorded an
extraordinary loss related to debt extinguishment, net of income taxes, of
$422,000 in Fiscal 1996 and $259,000 in Fiscal 1997.
The foregoing factors contributed to net income of $0.6 million in Fiscal
1996 compared to a net loss of $2.8 million in Fiscal 1997.
FISCAL 1996 COMPARED TO FISCAL 1995
The following discussion does not include the results of operations of PHI
Acquisition Holdings, Inc., but does include the results of operations of
General Eastern.
Net sales increased $32.5 million, or 27.9%, from $116.6 million in Fiscal
1995 to $149.1 million in Fiscal 1996. This increase included a $16.1 million,
or 40.1%, increase at Robicon, excluding sales from divested product lines of
$345,000, due to increased sales of medium voltage VFDs, as well as an increase
of $11.0 million at Datcon Instrument Company attributable to the inclusion of
sales generated by Jorda for an entire fiscal year. Excluding sales from
divested product lines totaling $1.4 million in Fiscal 1995, net
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sales increased at Anderson by $3.4 million, or 18.6%, primarily as a result of
increased power connector sales for new applications, market growth
(particularly in Europe), new market penetration and price increases. General
Eastern's net sales increased $1.9 million, or 18.8%, primarily due to higher
calibration and service revenues. HVE Europa's net sales increased $1.7 million,
or 21.0%, in Fiscal 1996 as compared to Fiscal 1995, primarily due to higher
average selling prices, as well as increased sales of component parts. Fiscal
1996 net sales at Natvar were generally flat compared to the prior year.
Gross profit increased $8.6 million, or 19.9%, from $43.1 million during
Fiscal 1995, to $51.7 million in Fiscal 1996. This increase was primarily
attributable to the higher sales volumes discussed above. Gross margin decreased
from 37.0% to 34.7%, primarily as a result of: (i) a reduction in gross margin
at Natvar from 30.9% to 23.4% in Fiscal 1996 resulting from pricing pressures
and new plant start-up costs; (ii) a reduction in gross margin at Datcon
Instrument Company from 36.3% to 28.9% in Fiscal 1996 resulting from plant
reconfiguration and new product introduction costs, as well as the impact of a
full year of Jorda's lower gross margin; and (iii) a reduction in gross margin
at Robicon from 36.6% to 33.0% in Fiscal 1996 resulting from inefficiencies
relating to Robicon's move to a new facility, its outsourcing of production of
its printed circuit boards and an upgrade of its MIS software system. These
gross margin reductions were partially offset by: (i) an increase in gross
margin at Anderson from 41.1% to 47.0% in Fiscal 1996 resulting from increased
automation, a more profitable mix of products resulting from the divestiture of
three lower margin product lines in Fiscal 1995, and cost savings resulting from
the consolidation of Anderson's manufacturing operations into a single facility
in Fiscal 1996; (ii) an increase in gross margin at HVE Europa from 29.1% to
36.8% in Fiscal 1996 resulting from improved pricing and certain product cost
reductions; and (iii) an increase in gross margin at General Eastern from 48.8%
to 50.8% in Fiscal 1996 resulting primarily from the growth of its calibration
and service businesses.
Administrative and selling expenses increased $8.8 million, or 33.7%,
including $1.1 million due to the incremental costs associated with the
inclusion of the operations of Jorda for a full year and increased commissions
and other selling and administrative costs at Robicon, Anderson, General Eastern
and HVE Europa attributable to higher sales levels. In addition, the Company
incurred severance costs of $246,000 during Fiscal 1995, as compared to $456,000
in Fiscal 1996, in connection with the replacement of operating unit presidents
as part of the Company's overall program to improve operating unit management.
Such costs have been excluded from EBITDA. Administrative and selling expenses
as a percentage of net sales increased from 22.4% to 23.4%, primarily as a
result of the increase at Robicon from 19.3% to 21.9% in Fiscal 1996 due to
higher sales levels.
Research and development expenses were $8.1 million in both Fiscal 1995 and
Fiscal 1996. As a percentage of net sales, such expenses declined from 6.9% in
Fiscal 1995 to 5.4% in Fiscal 1996.
Depreciation and amortization from continuing operations increased $500,000,
from $3.1 million to $3.6 million, primarily as a result of the Jorda
acquisition.
The net total of restructuring charges, net reimbursed environmental and
litigation costs and other increased from a charge of $56,000 in Fiscal 1995 to
a charge of $0.9 million in Fiscal 1996. Restructuring costs declined from $1.3
million in Fiscal 1995 to $150,000 in Fiscal 1996. The Fiscal 1995 provision
included costs related to the closure of a duplicate manufacturing facility,
costs related to the consolidation of the operations of this manufacturing
facility into another existing facility, and the write-off of the cumulative
foreign currency translation adjustment resulting from the liquidation of a
subsidiary of HVE Europa. The Fiscal 1996 provision reflected the closure of a
sales office in Europe. The favorable impact of net reimbursed environmental and
litigation costs declined approximately $1.7 million from $2.1 million in Fiscal
1995 to $450,000 in Fiscal 1996. See "Business -- Environmental and Insurance
Matters." Other expenses increased from $0.9 million in Fiscal 1995 to $1.2
million in Fiscal 1996. Other expenses in Fiscal 1995 were primarily related to
a $0.8 million provision to write down certain assets held for sale to estimated
net realizable value and costs incurred by Anderson to move into another
existing facility. Other expenses in Fiscal 1996 included a $1.2 million
provision to write down certain assets held for sale to
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estimated net realizable value and costs incurred by Robicon to move to a newly
constructed facility, which were partially offset by a net gain on the sale of
vacant land and income from certain excess facilities.
Adjusted EBITDA as defined in note (e) to "Notes to Selected Historical
Consolidated Financial Data," increased $0.5 million, or 4.3%, from $12.2
million in Fiscal 1995 to $12.8 million in Fiscal 1996. The excess of this
increase over the decrease in income from operations for the same periods is
primarily attributable to the higher level of restructuring and other charges
excluded from Adjusted EBITDA in Fiscal 1996, as described in the immediately
preceding paragraph.
As a result of the factors described above, income from operations decreased
$1.0 million, from $8.9 million in Fiscal 1995 to $7.9 million in Fiscal 1996.
Interest expense increased $2.7 million from $8.6 million in Fiscal 1995 to
$11.2 million in Fiscal 1996 due to an increase in CIP expense, the full year
impact of indebtedness incurred in connection with the Jorda acquisition and the
construction of a new manufacturing facility for Robicon, as well as slightly
higher interest rates.
As a result of the above items, the Company recorded income from continuing
operations before income taxes, discontinued operations and extraordinary item
of $365,000 in Fiscal 1995, as compared to a loss of $3.1 million in Fiscal
1996.
In Fiscal 1995, the Company had income tax expense of $196,000 compared to
an income tax credit of $2.6 million in Fiscal 1996, which was largely
attributable to a Fiscal 1996 reversal of a tax reserve previously accrued in
connection with a federal tax audit of prior years.
The Company recorded income from discontinued operations net of income taxes
of $276,000 in Fiscal 1995 including the net loss on disposal of the Berger and
Shore operating units as compared to income of $1.5 million in Fiscal 1996, net
of income taxes, including a gain on disposal of the Specialty Connector
operating unit.
In Fiscal 1996, the Company recorded an extraordinary loss of $422,000 on
debt extinguishment, net of income taxes.
The foregoing factors contributed to an increase in net income from $445,000
in Fiscal 1995 to $0.6 million in Fiscal 1996.
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
"Offering") of $20.0 million in 10 1/2% Senior Notes Due 2004. The net proceeds
of the Offering were used to finance part of the purchase price for the Stewart
Warner Stock.
On August 8, 1997, the Company entered into the $25.0 million Revolving
Credit Facility which is being used primarily to fund the Company's working
capital requirements and has a $6.0 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
January 24, 1998; however, there were $4.8 million in letters of credit
commitments outstanding. 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 to the Company. See "Description
of Other Indebtedness -- Revolving Credit Facility."
On August 8, 1997, the Company completed a private placement (the "Original
Offering") of $135.0 million in 10 1/2% Senior Notes due 2004 and $35.2 million
in Units consisting of Original Series A
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Preferred Stock, HVE Common Stock and Warrants to purchase HVE Common Stock. A
portion of the net proceeds of these private placements was used to repay
existing indebtedness described below, including accrued and unpaid interest
thereon and associated prepayment penalties. In connection with the issuance of
the Original Series A Preferred Stock, the Company issued to the holders thereof
warrants representing 6.6% of the fully-diluted HVE Common Stock. On January 16,
1998, the Company's outstanding 10 1/2% Senior Notes due 2004 and Original
Series A Preferred Stock were exchanged by the holders thereof for the Existing
Notes and a like number of shares of Series A Preferred Stock registered
pursuant to the Securities Act. See "Description of Outstanding Capital Stock."
On May 9, 1996, the Company entered into a $20.0 million revolving credit
facility as well as a $10.0 million senior term loan from Sanwa Business Credit
Corporation and Fleet National Bank. On the same date, the Company completed a
private placement of $20.0 million of senior secured notes due 2003, $7.0
million of senior unsecured notes due 2003 and $25.0 million principal amount of
subordinated notes due 2004 (issued at 82.086% of the principal amount thereof),
the net proceeds of which were used to refinance existing indebtedness. In
connection with the issuance of the subordinated notes due 2004, the Company
issued to the holders thereof warrants (the "Subordinated Notes Warrants")
representing 12.5% of the fully-diluted HVE 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 HVE 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 8.0x the
Company's EBITDA (as defined therein) less preferred stock and debt outstanding
plus excess cash. This senior revolving credit facility and term loan was repaid
and extinguished in connection with the Original Offering, and the $20.0 million
of senior secured notes due 2003, $7.0 million of senior unsecured notes due
2003 and $25.0 million of subordinated notes due 2004 were repurchased. The
Company also used $2.5 million of the net proceeds of the Original Offering to
repurchase Subordinated Notes Warrants representing 6.25% of the fully-diluted
HVE Common Stock.
For the third and fourth quarters of Fiscal 1997, the Company was not in
compliance with certain of its financial covenants contained in the Existing
Revolving Credit Facility, Senior Term Loan, Senior Secured Notes, Senior
Unsecured Notes and Subordinated Notes due primarily to costs incurred in
connection with an aborted acquisition and related offering costs. These
technical covenant breaches did not create an event of default whereby the
lenders could declare all outstanding balances due and payable, terminate all
available commitments or enforce their rights under all security arrangements.
The Company had received waivers with respect to such covenant defaults and all
such indebtedness was repaid in full, together with accrued and unpaid interest
and prepayment penalties, with the net proceeds of the Offerings.
During the same time period, the Company was also not in compliance with
certain of the financial covenants contained in the PEDFA IRB (as defined
herein) as a result of the factors described above; however the Company has
received a waiver with respect to such defaults. Additionally, if the waivers
discussed above had not been obtained, one of the Company's lessors could have
declared a default under leases of certain of its properties in Lancaster,
Pennsylvania and Sterling, Massachusetts.
On February 17, 1998, in connection with a misinterpretation of the
Indenture, the Company paid a dividend in cash in the aggregate amount of
approximately $2.1 million to the holders of the Series A Preferred Stock in
accordance with the terms thereof. Because the Company is currently unable to
incur additional indebtedness under the covenant described under the caption
"Description of the Notes -- Limitation on Additional Indebtedness," the payment
of this dividend, which constitutes a Restricted Payment under the Indenture, is
prohibited and constitutes a default under the Indenture. Under the terms of the
Company's Amended and Restated Articles of Organization (the "Restated Charter")
the Company is permitted to pay any dividends that become due and payable on the
Series A Preferred Stock pursuant to the Restated Charter on or prior to August
15, 2002 through the issuance of additional shares of Series A Preferred Stock.
The Company has reported the default to the Trustee under the Indenture
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and obtained the consent of the holders of a majority of the Existing Notes to
waive the default and any Event of Default (as defined herein) that may arise
therefrom, represented by this dividend payment.
Pro forma for the consummation of the Trasactions and the General Eastern
Disposition, as of March 28, 1998, the Company had total indebtedness (including
redeemable put warrants) of $184.2 million and mandatorily 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
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 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 $10.7 million, $11.9 million, $9.4 million
and $44.8 million at April 29, 1995, April 27, 1996, April 26, 1997 and January
24, 1998, respectively. The $35.5 million increase in working capital from April
26, 1997 to January 24, 1998 is partially attributable to a $13.6 million
increase in cash on hand as a result of the Original Offering, an increase in
accounts receivable of $9.6 million, of which $12.9 is due to the acquisition of
PHI, an increase of $2.2 million of refundable income taxes attributable to PHI,
and increases in inventories of $16.8 million in the aggregate, of which PHI
accounted for $17.4 million, which was offset by reductions in inventory of $0.6
million for the Company's other operations. Also contributing to the increase in
working capital was a decrease of $1.7 million in interest expense payable
related to a $6.8 million payment made upon the closing of the Original Offering
to extinguish obligations of the Company under certain Contingent Interest
Payment Agreements partially offset by additional accruals. Accounts payable and
accrued liabilities increased $10.1 million during this period, of which $8.9
million resulted from the acquisition of PHI. Short term debt also decreased
$1.3 million since April 26, 1997. The $1.2 million increase in working capital
from April 29, 1995 to April 27, 1996 resulted in part from increases in
accounts receivable, inventories and restricted cash and a decrease in federal,
foreign and state income taxes payable which were partially offset by an
increase in accounts payable, accrued interest and accrued liabilities, advance
payments by customers and deferred income taxes. The increases in accounts
receivable and inventories were related to growth of Robicon's medium voltage
VFD sales, the inclusion of sales generated by Jorda for the entire fiscal year
and growth in the sales of Anderson's power connectors, partially offset by the
sale of the Specialty Connector operating unit. The increase in working capital
was funded primarily by proceeds from the divestiture of discontinued operations
and the net proceeds from the issuance of long-term obligations and a cash
overdraft. The $2.5 million decrease in working capital from April 27, 1996 to
April 26, 1997 resulted from a decrease in restricted cash and an increase in
accrued interest and accrued liabilities, despite increases in inventories and
decreases in deferred income taxes and advance payments by customers. The
decrease in restricted cash was due to the shipment of certain systems by HVE
Europa and the increase in inventories was related to higher sales levels. Cash
and cash equivalents of $15.1 million on the Company's balance sheet as of
January 24, 1998, unadjusted for the Transactions, excludes $4.0 million of
restricted cash in uninsured foreign bank accounts which was used as collateral
for bank guarantee facilities for customer advances.
Net cash used in operating activities was $4.2 million and $12.1 million for
the 1997 Period and 1998 Period, respectively. The decrease in net cash for the
1998 Period was attributable primarily to an increase in inventories of $3.3
million. The decrease in net cash for the 1998 Period was primarily due to the
payment of prepayments fees and penalties of $6.3 million, net of taxes, and the
payment of $6.8 million to extinguish the Company's obligations under the
Contingent Interest Payment Agreements in connection with the Original Offering.
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Net cash used in investing activities was $2.7 million and $55.4 million for
the 1997 Period and 1998 Period, respectively. The decrease in net cash for the
1997 Period consisted primarily of capital expenditures of $2.9 million which
were partially offset by proceeds from minor asset sales. The decrease in net
cash for the 1998 Period resulted from the acquisition of PHI for $54.6 million,
including transaction costs and net of cash acquired, and capital expenditures
of $4.3 million, and offset by proceeds from asset sales of $3.4 million.
Net cash provided by financing activities was $6.1 million and $81.4 million
for the 1997 Period and 1998 Period, respectively. The increase in net cash for
the 1997 Period was the result of increased borrowings of $4.4 million under the
Company's previous senior credit agreement and the reduction of restricted cash
accounts of $1.4 million. The increase in cash for the 1998 Period was
substantially the result of the Original Offering, consummated on August 8,
1997, which provided $163.3 million (net of expenses) of cash, of which $78.5
million was used to retire existing preferred stock and indebtedness.
Net cash provided by operating activities in Fiscal 1995 was $10.1 million,
compared to net cash used in operating activities of $6.4 million in Fiscal
1996. The increase in net cash used in operating activities reflected
significant increases in accounts receivable and inventories related to higher
sales volumes in Fiscal 1996 and a decrease in federal, foreign and state income
taxes payable. Net cash used in operating activities in Fiscal 1996 was $6.4
million as compared to $0.6 million of net cash provided by operating activities
in Fiscal 1997. The net cash provided by operating activities in Fiscal 1997
resulted primarily from a decrease in working capital employed in the Company's
businesses, despite increased sales levels. This decrease was primarily in
working capital and attributable to the decrease in accounts payable and
federal, foreign, and state income taxes payable described above.
As of April 29, 1995, April 27, 1996, April 26, 1997 and January 24, 1998,
the Company had assets held for sale, consisting of several former manufacturing
facilities, of $6.4 million, $6.2 million, $5.2 million and $3.9 million,
respectively. These properties are recorded at the carrying amount or fair value
less selling costs. The Company believes it is possible that the proceeds from
the sale of these properties will differ significantly from the carrying amount
and additional losses may then be recorded. During Fiscal 1995 and Fiscal 1996,
the Company recorded provisions of $0.8 million and $1.2 million, respectively,
to write down the value of certain former manufacturing facilities. During
Fiscal 1996, the Company reclassified to assets held for sale a former
manufacturing facility valued at $1.2 million, which was retained in the sale of
the Specialty Connector operating unit.
Net cash used in investing activities in Fiscal 1995 was $12.3 million due
primarily to the $10.0 million of capital expenditures (including $0.8 million
related to discontinued operations and leased asset additions) and the $5.9
million investment to acquire Jorda in Fiscal 1995. In Fiscal 1996, net cash
provided by investing activities was $5.7 million, due primarily to
approximately $11.0 million of proceeds from the sale of the Specialty Connector
operating unit partially offset by $6.0 million in capital expenditures
(including leased asset additions) in Fiscal 1996. The Company incurred capital
expenditures of $10.0 million (including $0.8 million related to discontinued
operations and leased asset additions) in Fiscal 1995, including $6.6 million
for a new manufacturing facility for Robicon compared to $6.0 million of capital
expenditures (including leased asset additions) in Fiscal 1996. Net cash used in
investing activities increased in Fiscal 1997 to $3.1 million despite a decrease
in capital expenditures (including leased asset additions) from $6.0 million in
Fiscal 1996 to $5.0 million in Fiscal 1997. Capital expenditures in Fiscal 1996
included a $1.9 million expenditure for an additional facility for Natvar. This
decrease was primarily due to capital expenditures at Datcon Instrument Company,
Natvar, Anderson, and General Eastern for information technology upgrades, new
products and productivity programs. Although the Company believes that a
significant portion of future capital expenditures will be used to fund planned
maintenance of facilities and equipment, the Company may require additional
capital expenditures to support growth at certain of its operating units. The
Company expects to make capital expenditures (including leased asset additions)
of approximately $6.0 million in its fiscal year ending April 25, 1998.
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Net cash provided by financing activities increased from $1.2 million in
Fiscal 1995 to $1.9 million in Fiscal 1996, primarily due to the issuance of
long-term obligations and the cash overdraft which was partially offset by
payments on certain long-term obligations and decreases in restricted cash. Net
cash provided by financing activities was $1.9 million for Fiscal 1996 and
Fiscal 1997, which included a refinancing of a majority of the Company's
long-term obligations in Fiscal 1997.
The Indenture permits each Restricted Subsidiary that is an obligor under an
Intercompany Note to effect a Qualified Subsidiary IPO. Upon completion of a
Qualified Subsidiary IPO, such Restricted Subsidiary will become an Unrestricted
Subsidiary 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 General
Eastern to Bowthorpe, pursuant to the Asset Purchase Agreement. This sale
generated cash, net of expenses and cash acquired, of approximately $20.5
million. The cash received by HVE in connection with the General Eastern
Disposition is subject to the covenant of the Indenture described under the
caption "Limitation on Certain Asset Sales," which requires the Company to apply
such cash to either (i) repay debt ranking PARI PASSU to the Notes, (ii) make an
investment in assets for the Company's presently conducted business or (iii)
offer to repurchase the Notes pursuant to an Excess Proceeds Offer (as defined
herein). The Company has no current plans for the use of the cash proceeds of
the General Eastern Disposition 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 Notes on April 15, 1999. See "Description of the Notes -- Certain
Covenants -- Limitation on Certain Assets Sales."
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 Notes
and existing capital leases, IRBs, 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
EARNINGS PER SHARE. During 1997, the Financial Accounting Standards Board
("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 128,
"Earnings per Share," which changes the calculation of earnings per share to be
more consistent with countries outside the United States. In general, the
statement requires two calculations of earnings per share to be disclosed, basic
EPS and diluted EPS. Basic EPS is to be computed using only weighted average
shares outstanding, while diluted EPS is computed considering the dilution of
options and warrants. This statement has been adopted by the Company and all
prior, interim and annual periods have been restated.
OTHER PRONOUNCEMENTS. During 1997, the FASB issued SFAS No. 130, "Reporting
Comprehensive Income," which establishes standards for the reporting and display
of comprehensive income and SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information," which introduces a new model for segment
reporting. The Company does not believe adoption will have a material impact on
its financial statement disclosures.
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YEAR 2000
Many existing computer programs use only two digits to identify a year in
the date field. These programs were designed and developed without considering
the impact of the upcoming change in the century. If not corrected, many
computer applications could fail or create erroneous results by or at the Year
2000. The Company has reviewed the Year 2000 issue. Upon the implementation of a
new information technology system at PHI, expected to be completed by the end of
fiscal 1999, management believes that all of the Company's operating units will
be Year 2000 compliant. Additionally, each operating unit is assessing the
impact of the Year 2000 issue on its significant customers, suppliers and on
others. Management believes that the cost to complete its Year 2000 compliance
will not have a material adverse effect upon the Company.
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BUSINESS
COMPANY OVERVIEW
The Company owns and operates a diversified group of six middle market
industrial manufacturing businesses. These businesses focus on designing and
manufacturing high quality, applications-engineered products which are designed
to address specific customer needs. The Company's products are sold to a broad
range of domestic and foreign OEMs and end-users in a variety of industries
including process automation, freshwater and wastewater treatment,
petrochemicals, semiconductor fabrication, chemicals, construction, agriculture,
materials handling, computers, telecommunications, medical equipment and for
scientific and educational research. The diversified nature of the products sold
and end-markets served by the Company's businesses limits the effect on the
Company of operating performance fluctuations in any single operating unit and
cyclical downturns within individual industries and end-markets, while the
Company believes that its focus on middle market manufacturing enhances its
growth prospects. The Company believes that these factors have contributed to
steady growth in consolidated net sales and Adjusted EBITDA (as defined in note
(e) on page 44). Between Fiscal 1993 and Fiscal 1997, the Company's historical
net sales increased at a 14.3% CAGR, from $101.3 million to $173.1 million, and
its Adjusted EBITDA increased at a 15.6% CAGR from $9.1 million to $16.3
million. Pro forma for the PHI Merger, the Stewart Warner Acquisition and the
General Eastern Disposition, the Company had net sales and Adjusted EBITDA of
$267.4 million and $28.1 million, respectively, in the LTM period ended January
24, 1998. For information regarding the Company's consolidated net sales,
operating income, identifiable assets and other information by industry segment,
see Note R to the Company's consolidated financial statements, at page F-33. For
information regarding international and export sales, see Note Q to the
Company's consolidated financial statements, beginning at page F-31.
COMPETITIVE STRENGTHS
Management has focused its efforts on acquiring and developing a group of
middle market manufacturing businesses that generally share the following
competitive strengths:
- LEADING MARKET POSITIONS. Several of the Company's products hold leading
market share positions in their respective niche markets, including the
Company's medium voltage VFDs (Robicon), advanced surface analysis
instruments (PHI), high current, quick disconnect power connectors
(Anderson) and particle accelerator systems (HVE Europa). The Company
believes that applications- engineering expertise, proprietary technology
and customer relationships act as significant barriers to entry in several
of the Company's markets.
- REPUTATION FOR INNOVATIVE PRODUCT DEVELOPMENT. The Company believes that
its operating units have reputations for the development of innovative
products designed to address specific customer needs. For example, in
November 1994, Robicon introduced its Perfect Harmony series of medium
voltage VFDs which represented a significant technological breakthrough
relative to competitors' product offerings by increasing power factor and
reducing harmonic distortion typically resulting from the use of VFDs with
large electric motors. In addition, PHI has recently introduced several
new surface analysis instruments, including the SMART-200, TRIFT II and
6800 Dynamic SIMS, which each have the ability to analyze every point on
an 8-inch semiconductor wafer.
- LONG-TERM RELATIONSHIPS WITH MARKET-LEADING CUSTOMERS. The Company's
operating units serve some of the largest companies in their respective
industries, including: Advanced Micro Devices, Advanced Silicon Materials,
American Power Conversion, Amoco, Caterpillar, Cummins Engine, E-Z-GO
(Textron), Harley-Davidson, Hewlett-Packard, Hitachi, IBM, Lucent
Technologies, Massey Ferguson, 3M Healthcare and Yaskawa Electric. With
the exception of one customer which accounted for 5.9% of HVE's
consolidated net sales for Fiscal 1997, pro forma for the PHI Merger, the
Stewart Warner Acquisition and the General Eastern Disposition, no
customer of any of its operating units accounted for more than 6.2% of
such sales. The Company's operating units have
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long-term relationships with many of their customers; in many cases these
relationships have existed in excess of 10 years. No customer or group of
affiliated customers accounted for 10% or more of HVE's consolidated
revenues in Fiscal 1997.
- EXPERIENCED AND INCENTIVIZED SENIOR MANAGEMENT TEAM. The Company and each
of its operating units are run by senior managers who have an average of
over 20 years of relevant operating experience. The Company's senior
management team has financial incentives tied to long-term improvements in
the Company's financial performance.
BUSINESS STRATEGY
The Company's business strategy is to increase the sales and profitability
of its existing businesses and to build upon their inherent competitive
strengths. The Company applies a consistent operating strategy to its individual
operating units, key elements of which include:
- FOCUS ON APPLICATIONS-ENGINEERED PRODUCTS. The Company's products are
typically engineered based upon specific customer applications. The
Company seeks to involve its customers at an early stage of the product
development process in order to jointly design new products and to improve
existing ones. In certain instances, this process has resulted in the
Company becoming a sole source supplier. The Company believes that this
strategy has led to incremental long-term business with key customers and
the addition of new customers.
- INTEGRATED PRODUCT DEVELOPMENT. The Company seeks to develop new products
and find new applications for existing products through an integrated
product development process that involves cross-functional teams including
engineering, manufacturing and marketing personnel. As a result, the
Company believes that it is able to design and manufacture products that
address specific customer needs and can be manufactured efficiently,
cost-effectively and on a timely basis.
- FOCUS ON CORE COMPETENCIES. The Company believes that its core
competencies are the design, engineering and assembly of
applications-engineered products. As part of its focus on these core
competencies, the Company has eliminated certain ancillary functions
performed by certain of its operating units over the last several years
including printed circuit board assembly, machining and metal stamping and
plating.
- COMMITMENT TO PROCESS RE-ENGINEERING AND TOTAL QUALITY. The Company
maintains process re-engineering and Total Quality programs at each of its
operating units, which it began implementing in 1993. These programs have
enabled the Company to improve product quality, increase manufacturing
efficiency and productivity, reduce product lead and cycle times and
reduce the relative amount of working capital invested in its businesses.
- DECENTRALIZED MANAGEMENT OF OPERATING UNITS. The Company's operating units
are managed on a decentralized basis by senior managers who apply a
consistent operating strategy, while a small corporate staff provides
strategic direction and support. As a result of the discrete nature of the
Company's operating units, the Company has been able to sell businesses or
product lines on an opportunistic basis. For example, since 1988, the
Company has divested 13 businesses that generally lacked some or all of
the competitive strengths common to its current operating units.
Acquisitions are also an important part of the Company's growth strategy.
The Company seeks to supplement its internal growth with selected add-on
acquisitions of businesses that are complementary to its existing operating
units. In recent years, both Robicon and Datcon Instrument Company have
successfully completed and integrated such add-on acquisitions. The Stewart
Warner Acquisition, after which the operations of Stewart Warner were and will
continue to be operated with those of Datcon Instrument Company and Jorda, is
another example of the implementation of this strategy. In addition, the Company
seeks to acquire middle market manufacturing businesses to operate on a
stand-alone basis, such as PHI, that possess competitive strengths similar to
those of its existing businesses.
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THE OPERATING UNITS
The Company conducts its business through six independent operating units,
Robicon, PHI, Datcon, Anderson, Natvar and HVE Europa, each of which has its own
management team and manufacturing facilities and maintains its own independent
market identity. A discussion of the businesses conducted by each of the
operating units follows.
ROBICON
Robicon is a leading designer and manufacturer of high power conversion
products, which are used to regulate electric power, reduce energy costs and
improve process control in a wide variety of industrial applications. Products
include variable frequency drives ("VFDs") for large electric motors and power
control systems for other applications. These products are used in process
automation, freshwater and wastewater treatment, oil and gas extraction and
transmission, petrochemical processing, silicon processing, glass manufacturing,
cement production and other general industrial applications. In general,
Robicon's products are designed to provide highly engineered solutions to
specific customer requirements by utilizing a combination of standard product
platforms and options, with customized features. Robicon's growth strategy is to
increase sales of existing product lines through entrance into new end markets
and international expansion, and to add products and services complementary to
its existing product lines. The Company believes that Robicon is able to
differentiate itself from its competitors through the use of proprietary
technology, innovative product development, superior customer service, and the
ability to offer applications-engineered solutions based on standard products.
Robicon's headquarters are located in New Kensington, Pennsylvania, a facility
opened in Fiscal 1996. For the LTM period ended January 24, 1998, Robicon had
net sales of $92.0 million, which represented 34.4% of the Company's
consolidated net sales for such period, pro forma for the PHI Merger, the
Stewart Warner Acquisition and the General Eastern Disposition.
PRODUCTS
According to an article in SCIENTIFIC AMERICAN (September 1990), industry
sources estimate that motors consume 65% to 70% of all electricity used for
industrial applications, or more than half of the electric power generated in
the United States, at an annual cost of over $90 billion. In a single year, a
typical large industrial motor typically consumes electricity that costs 10 to
20 times its total capital cost. Many machines driven by electric motors,
particularly pumps and fans, need to vary their speed in response to changing
process needs. Particularly in large motor applications, this is often done by
operating the pump or fan at full power while "throttling" its output with a
partly closed valve or damper, which is comparable to driving a car with the
accelerator completely depressed and using the brake pedal to vary the car's
speed. Operating the pump or fan at full power wastes tremendous amounts of
electricity at significant cost and results in poor process control. A VFD is
analogous to an electric dimmer switch which regulates the brightness of light
in a lamp. VFDs regulate the amount of electricity supplied to electric motors
as an alternative means of varying output. For example, when only half the flow
from a pump is needed, the VFD supplies a reduced amount of electricity to the
electric motor driving the pump. As a result, according to industry sources,
electricity savings on motors using VFDs can range from 10% to 40%. Of
particular importance to Robicon, which participates in the VFD market for large
motors, is the estimate by industry sources that the largest 10% of the domestic
motor population accounts for at least 80% of all motor energy consumption. Use
of VFDs has been growing steadily, driven by the desire to achieve energy cost
savings, the need to control large industrial processes more accurately and
technological advances that have improved the cost and practicality of using
VFDs in large motor applications.
Historically, Robicon primarily manufactured low voltage (480 volts) VFDs
for small electric motors (20 to 1,500 horsepower) for use in industrial
applications such as commercial building climate control, incinerators and
freshwater and wastewater treatment plants, and in other general industrial
uses.
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Recently, the Company introduced the Perfect Harmony series of medium voltage
(2,300 to 7,200 volts) VFDs for large electric motors (400 to 12,000
horsepower). Heavy industrial processes such as freshwater and wastewater
treatment, oil and gas extraction and transmission, petrochemical processing,
and cement production, utilize large electric motors that require high levels of
power to drive pumps and fans. An undesirable byproduct of using medium voltage
VFDs on a large electric motor is the creation of harmonic distortion which
causes stress and fatigue to the electric motor and shortens its useful life, as
well as current and voltage fluctuations which may result in damage to other
equipment on the power grid. Most VFDs also place greater demands on a power
grid than the actual power consumed by the motor, an occurrence referred to as
reduced power factor, which can result in assessments of penalty charges against
the user by the local utility. Perfect Harmony, Robicon's patented technology
for medium voltage VFDs, virtually eliminates harmonic distortion and poor power
factor in large electric motors and as a result has significantly expanded the
market for medium voltage VFDs. The Company believes that Perfect Harmony is the
leading technology for reducing harmonic distortion and improving power factor
in medium voltage VFD applications and that this technology complements
Robicon's applications expertise and long-term customer relationships. Perfect
Harmony drives can be installed on virtually any large electric motor without
costly modifications and can be customized using a standard set of options.
Robicon has recently expanded its Perfect Harmony series to include synchronous
transfer, a feature that allows a single VFD to regulate multiple motors
sequentially. These VFDs are currently targeted at new end users in the oil and
gas pipeline markets. Introduced in November 1994, Perfect Harmony medium
voltage VFDs accounted for approximately $35.3 million of Robicon's net sales
for the LTM period ended January 24, 1998, or approximately 38.4% of Robicon's
total net sales for such period.
While VFDs regulate electricity for motors, power control systems regulate
electric power for other applications. Typical applications for Robicon's power
control systems include: (i) power supplies for high-power melting applications,
such as glass and fiberglass furnaces and plasma arc torches used in steel mills
and smelters; (ii) power supplies for polysilicon extraction and silicon crystal
growing for use in the semiconductor industry; and (iii) power supplies for
plasma generators used in sputtering equipment for coating the surface of glass
or plastics. Power control systems are critical to process control and reducing
overall energy costs in these applications. Robicon's power control systems
incorporate patented technology that virtually eliminates harmonic distortion
and "flicker."
MARKETS AND CUSTOMERS
Robicon markets and sells VFDs primarily in North America and Asia with an
expanding presence in Europe, Australia, South America and the Middle East. The
market for VFDs is comprised primarily of two customer segments: industrial and
municipal. The industrial market for VFDs is comprised of large power users such
as metals smelting plants, cement plants, pulp and paper mills, chemical
processing plants and power generation facilities. Robicon's industrial
customers include Amoco, Exxon, Interprovincial Pipeline, Lafarge, Mead Paper,
Medusa Cement, Petrobras and Yaskawa Electric. The municipal market for VFDs is
comprised primarily of municipalities which operate freshwater and wastewater
treatment facilities.
Customers for Robicon's power control systems include OEMs such as British
Oxygen (Airco), Kayex and Wheelabrator and end-users such as Advanced Silicon
Materials, Geneva Steel and Owens-Corning. Demand for power control systems is
driven by the construction of new, or the upgrading of existing, steel mills or
smelting facilities, semiconductor fabrication facilities, glass and fiberglass
furnaces and other large electrical process manufacturing facilities. Because of
the long lead time required to design, permit and build such facilities, demand
for power systems does not necessarily correlate to general economic cycles.
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SALES AND MARKETING
Robicon's VFDs and power control systems are sold through Robicon's direct
sales force and by independent manufacturers' representatives. Robicon targets
large industrial users in select markets and segments and specifying engineers
in both industrial and commercial projects. Bids for large municipal VFD
contracts are typically conducted through a "request for proposal" process and
handled by Robicon's independent manufacturers' representatives. In addition to
direct sales efforts in the United States, Robicon has sales offices in
Edmonton, Alberta; Shanghai, China; and Sao Paolo, Brazil.
COMPETITION
Robicon's principal competitor in the VFD market is Rockwell Automation
(Allen- Bradley/ Reliance). Other competitors include divisions of multinational
corporations such as Ansaldo Ross-Hill, Asea Brown Boveri ("ABB"), Eaton (Cutler
Hammer), Emerson Electric and Siemens. Robicon's major competitors in the power
control systems market include multinational corporations such as ABB and
Siemens, and several niche engineering firms such as InverPower, Rapid
Technology and Spang & Company. As with VFDs, power systems are often produced
by divisions of large multinational corporations that may offer a broader
product range than that of Robicon.
PHI
PHI is a leading designer and manufacturer of advanced surface analysis
instruments and components used to determine the elemental and/or chemical
composition of materials found on or near the surface of a sample. Advanced
surface analysis instruments are used in commercial applications in central
support laboratories and at or near the production line in the semiconductor
fabrication, computer peripherals, chemicals, aerospace, metals, polymer,
automotive and biomaterials industries, among others, for product and process
development, process control, defect review and failure analysis. Advanced
surface analysis instruments are also used for materials science research by
universities and government institutions. PHI is also a leading supplier of
ultrahigh vacuum ion pumps and controls required for highly accurate surface
analysis and for other applications. PHI's headquarters are located in Eden
Prairie, Minnesota. For the LTM period ended January 24, 1998, PHI had net sales
of $64.7 million, which represented 24.2% of the Company's consolidated net
sales for such period, pro forma for the PHI Merger, the Stewart Warner
Acquisition and the General Eastern Disposition.
PHI's growth strategy is to increase sales of its products through
identification of new applications for its existing products, increased
penetration of international markets, enhancements in the technological
capability of its instruments, development of application-specific hardware
configurations for its instruments and the continued improvement in the
operating ease and efficiency of its instruments through increased automation
and software development. The Company believes that PHI differentiates itself
from its competitors through its patented and proprietary technology, expertise
in the manufacture of instruments incorporating ultrahigh vacuum technology,
superior customer service, support and training and a reputation for product
quality, ease of operation and reliability.
PRODUCTS
PHI's products include Auger Electron Spectroscopy ("Auger"), Electron
Spectroscopy for Chemical Analysis ("ESCA"), Time-of-Flight Secondary Ion Mass
Spectrometry ("TOF-SIMS") and Dynamic Secondary Ion Mass Spectrometry ("Dynamic
SIMS") instruments. Under ultrahigh vacuum conditions, PHI's surface analysis
instruments direct a particle beam at the surface of a solid under
investigation, causing the emission of particles from the specimen that may be
analyzed to determine the elemental and/ or chemical composition of the sample
surface. Highly sophisticated software, customized for each of PHI's surface
analysis instruments, interprets data received from the instrument's analyzer
and creates images that show the distribution of elements or molecules on a
surface. Graphical and numerical data
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may also be obtained. In addition, by removing and analyzing successive layers
of material each surface analysis instrument is capable of generating a depth
profile, which indicates how elemental and/or chemical composition varies
throughout the thickness of a sample.
PHI's Auger surface analysis instruments direct a highly focused continuous
electron beam onto a sample, which causes high energy "Auger electrons" to be
emitted from the sample surface. Because the energy level of such Auger
electrons is unique to the element from which they were emitted, it may be
measured to identify the elements present on the surface. Auger offers the
highest spatial resolution of all of PHI's surface analysis instruments,
providing high definition images of the distribution of elements on a
microscopic region of a surface. In general, Auger may be used to examine
inorganic samples that are electrically conductive, such as semiconductors and
metals. While PHI's Auger instruments are well-suited to a variety of
applications, they are primarily used in the semiconductor industry for process
development, process control, defect review and failure analysis. For example,
PHI's Auger instruments are used to create high resolution images showing the
location of elements on a selected region of a semiconductor wafer. The Company
believes that, because of its high resolution capabilities, Auger will be of
increasing significance in semiconductor fabrication as the dimensions of
semiconductor devices are reduced. Auger also offers high elemental sensitivity,
enabling the identification of impurities in or on semiconductor devices which
may affect production yields in semiconductor fabrication. PHI's 680 Auger
instrument is primarily used in central support laboratories to analyze
materials in a variety of industries, including the semiconductor, aerospace,
computer peripherals, metals and automotive industries. PHI's introduction in
1994 of the SMART-200, a new Auger surface analysis instrument which has the
ability to analyze every point on an 8-inch semiconductor wafer, enabled PHI to
expand the market for its Auger instruments within the semiconductor industry.
Another typical application of PHI's Auger instruments is the analysis of
corrosion of the read/write heads of computer hard drives.
PHI's ESCA surface analysis instruments direct a continuous x-ray beam onto
a sample, which causes "photoelectrons" to be emitted from the sample surface.
Because the energy level of such photoelectrons is unique to the element or
arrangement of atoms from which they were emitted, it may be measured to
identify the elements and/or determine the chemical composition of molecules on
the surface. ESCA may be used to analyze a wide variety of materials, including
both conductive and non-conductive solids, and provides both elemental and
chemical data, although with lower spatial resolution than Auger. While PHI's
ESCA instruments are well-suited to a variety of applications, they are
primarily used by PHI's customers for the analysis of polymers, semiconductors,
chemicals, computer peripherals, biomaterials and automotive components. Typical
applications include the development and optimization of chemical processing for
etching semiconductor wafers, the application of thin polymer films on bulk
materials, such as polymer coatings on aluminum cans, anti-corrosion coatings on
metal surfaces and non-stick coatings for kitchen utensils, as well as the
analysis of multi-layered paint. PHI's ESCA product line currently includes the
5800 as its standard model and the Quantum 2000 Scanning ESCA-TM-, which offers
enhanced resolution and operation on a fully-automated "turn-key" basis.
PHI's TOF-SIMS surface analysis instruments direct short, intermittent
bursts of charged atoms or molecules called "ions" onto a sample, which causes
other ions to be emitted from the sample surface. These emitted ions traverse a
long flight path, with the time required for an ion to reach the analyzer (the
"time of flight") being directly related to its mass. Because the mass of such
ions is unique to the material from which they were emitted, it may be measured
to identify the elements or molecules present. The "time of flight" method of
determining the mass of the emitted ions is highly precise and can be used to
accurately identify both the elemental and chemical composition of a surface. In
addition, TOF-SIMS is the best-suited of PHI's instruments to the detection of
very large molecules, such as those found in plastics and biomaterials, and
PHI's TOF-SIMS instruments can detect trace impurities in a sample at levels of
one part per million. PHI's TOF-SIMS products are used in a variety of
applications including the semiconductor industry for quality control and
process development, primarily in central support laboratories. For example,
PHI's TOF-SIMS instruments are capable of detecting contamination on
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semiconductor devices, including photoresist used in semiconductor device
manufacturing, which may affect production yields. PHI's TOF-SIMS products are
also sold for use in a variety other industries, including polymers, computer
peripherals and biomaterials. Applications include the process development of
the application of thin films on printer paper and lubricants on computer hard
disks. In 1994, PHI introduced the TRIFT II, a new TOF-SIMS instrument which may
be configured to analyze every point on an 8-inch semiconductor wafer.
PHI's Dynamic SIMS surface analysis instruments direct a highly focused
continuous beam of ions onto a sample, which causes other ions to be emitted
from the sample surface. Because the mass of such ions is unique to the material
from which they were emitted, it may be measured to identify the elements
present. In general, Dynamic SIMS is used to examine inorganic samples. PHI's
Dynamic SIMS instruments are capable of detecting trace impurities with a
sensitivity of greater than one part per billion, although without the chemical
sensitivity of PHI's TOF-SIMS instruments. While PHI's Dynamic SIMS instruments
are well-suited to a variety of applications, they are predominantly used in
central support laboratories in the semiconductor industry for process control
to monitor the precise elemental composition of semiconductor devices and in
quality control to identify contaminants that may affect yields in semiconductor
fabrication. Because the ion beam in PHI's Dynamic SIMS instruments removes the
surface layer of a material under investigation, depth profiles are generated as
a result of the operation of the instrument. This is in contrast to PHI's other
surface analysis instruments in which an additional ion beam is required to
remove successive layers of material. The 6650 Dynamic SIMS is PHI's standard
model. In 1997, PHI introduced the 6800 Dynamic SIMS instrument, which has the
ability to analyze every point on an 8-inch semiconductor wafer. All of PHI's
Dynamic SIMS surface analysis instruments are designed for ease of use and rapid
sample change for efficiency of sample analysis in industrial applications.
MARKETS AND CUSTOMERS
PHI markets and sells its surface analysis instruments worldwide, with Japan
representing its largest market and North America its second largest market. The
Company believes that demand for advanced surface analysis instruments will
increase most rapidly in Asia and the Pacific Rim region over the next several
years due primarily to an increased level of semiconductor fabrication facility
construction in those regions.
Historically, customers have operated PHI's surface analysis instruments
primarily in industrial central support laboratories to conduct research and
development, pre-production testing of pilot processes, materials
characterization and process control and verification, typically where
understanding the elemental and/or chemical composition of a material's surface
is critical to product or process development. In addition, the Company believes
that production support applications, such as failure analysis, defect review
and quality control, represent an important growth area, particularly in
semiconductor fabrication. PHI's surface analysis instruments are also used by
universities and government institutions for materials science research.
Due to the diversity of applications for PHI's surface analysis instruments,
PHI is not dependent on sales to customers in any single industry. PHI's
products are suitable for a wide variety of applications without the need for
customization or modification. This versatility of function permits PHI to
respond quickly to changes in the marketplace that favor new technologies or
demonstrate new applications. In addition, PHI has the ability to tailor each
surface analysis instrument to specific applications through changes in hardware
configuration, software customization and varying degrees of automation of
operation in response to industry-specific demands or customer requirements.
PHI's customer base is principally comprised of industrial laboratories,
OEMs and research facilities, including those associated with universities and
government institutions. Demand for PHI's products is driven by the need for
precise chemical and/or elemental analysis of materials. Some of PHI's customers
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include Advanced Micro Devices, Alcoa, DuPont, Hewlett-Packard, IBM, Matsushita,
Motorola, Nippon Steel, Samsung, Seagate, Siemens, Texas Instruments, Toshiba
and numerous universities and government institutions worldwide. PHI seeks to
cultivate long-term relationships with its various customers through the
continuous provision of post-sale technical support and on-site training of new
users of PHI's installed base of surface analysis instruments.
SALES AND MARKETING
PHI markets its products domestically and internationally on the basis of
product performance and quality, availability and quality of after-sales
support, and industry reputation in the manufacture of advanced surface analysis
instruments. The significant cost of surface analysis instruments (ranging from
approximately $250,000 to $1.5 million) leads to careful consideration among
potential purchasers not only of product reliability and performance, but also
availability and quality of technical support and training, factors which the
Company believes favor PHI and enable it to realize a pricing premium over
competitors' comparable products.
PHI's experienced and technically-oriented sales force is organized
geographically and consists of teams responsible for North America, Japan, the
Pacific Rim region and Europe. Technical service personnel (most of whom are
scientists and engineers) are decentralized within each region and strategically
situated in close proximity to major customers. PHI presently has a 50% interest
in a joint venture with ULVAC, a Japanese company, which resells and services
PHI's surface analysis instruments in the Japanese market. This joint venture
(ULVAC-PHI) has enabled PHI to successfully sell products into Japan, currently
the largest market for advanced surface analysis instruments. In addition, PHI
provides surface analysis services on a contract basis in its analytical
laboratories located in the United States and Japan. Such services often serve
as an effective means of demonstrating the capabilities of PHI's surface
analysis instruments to customers who may then consider purchasing an
instrument.
COMPETITION
Competition in the surface analysis market is highly concentrated. The only
broad line competitors in the markets served by PHI's products are Cameca and VG
Scientific (Thermo Electron). The Company believes that PHI has leading market
shares in the Auger, ESCA and TOF-SIMS and that PHI has the second largest
market share in Dynamic SIMS. In Auger, PHI's primary competitors are VG
Scientific and JEOL (Nihon Densi). In ESCA, PHI's primary competitors are Kratos
Analytical (Shimadzu) and VG Scientific. In TOF-SIMS, PHI's primary competitor
is ION-TOF, which is partially-owned by and markets its products through Cameca.
In Dynamic SIMS, PHI's primary competitor is Cameca. The Company believes that
the technical expertise required for the design, production and support of
instruments incorporating ultrahigh vacuum technology is a significant barrier
to entry to potential competitors.
THE DATCON / STEWART WARNER GROUP ("DATCON")
On March 19, 1998, a wholly owned subsidiary of HVE acquired, directly or
indirectly, all of the capital stock of Stewart Warner, for an aggregate
consideration of $24.7 million in cash. The operations of Stewart Warner will
continue to be operated together with those of the Company's existing Datcon
Instrument Company subsidiary and its wholly owned subsidiary Jorda. The Company
believes that the combined entity will be a leading designer, manufacturer and
distributor of customized monitoring instrumentation for heavy duty and
off-highway vehicles and equipment.
DATCON INSTRUMENT COMPANY. Datcon Instrument Company together with its
wholly owned subsidiary, Jorda, designs and manufactures customized monitoring
instrumentation for heavy duty and off-highway vehicles. Datcon Instrument
Company's products include instrument clusters, speedometers, tachometers and
fuel, temperature and pressure gauges which are used in construction equipment,
agricultural machinery, materials handling equipment, generator and compressor
engines, and marine
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products. Jorda, based in Barcelona, Spain, was acquired by the Company in March
1995, and is a leading manufacturer of instrument clusters for farm tractors in
Europe. Datcon Instrument Company's headquarters are located in Lancaster,
Pennsylvania. For the LTM period ended January 24, 1998, Datcon Instrument
Company had net sales of $35.0 million, which represented 13.1% of the Company's
consolidated net sales for such period, pro forma for the PHI Merger, the
Stewart Warner Acquisition and the General Eastern Disposition. After the
Stewart Warner Acquisition, the operations of Datcon Instrument Company and
Jorda will be combined with those of Stewart Warner to form Datcon.
A principal element of Datcon Instrument Company's strategy is to provide
its customers a broad line of "mass customized" products in the niche market for
monitoring instrumentation for heavy duty and off-highway vehicles. Mass
customization involves several steps, from manufacturing instrumentation to a
customer's specific tolerances to incorporating the customer's logo and design
profile in the product. In order to mass customize products profitably, a
manufacturer must be able to meet short lead times and operate short production
runs, both areas in which Datcon Instrument Company has significant expertise.
Datcon Instrument Company seeks to increase its market share by introducing
complementary new products that leverage its applications expertise. Datcon
Instrument Company has designed many innovative products capable of performing
accurately under the harsh conditions that are endemic to the construction,
agriculture and mining industries, including high vibration, extreme
temperature, exposure to ultra-violet light and humidity, which can cause
fogging.
PRODUCTS
The Company believes that Datcon Instrument Company has one of the broadest
lines of mass customized monitoring instrumentation for heavy duty and
off-highway vehicles. Datcon Instrument Company's line of gauges and meters
includes electrical instruments such as speedometers, tachometers, fuel,
temperature and pressure gauges and hour meters in a variety of styles. Datcon
Instrument Company offers its customers integrated monitoring instrumentation
packages comprised of gauges and/or senders or sensors. Sensors and senders are
devices that collect information at its source and relay it to gauges and
meters. Sensors are generally more technologically sophisticated than senders
and are used where the provision of precise measurement is cost-justified.
Datcon Instrument Company also manufactures and sells instrument clusters, which
are distinct from stand-alone vehicle monitoring instrumentation as they combine
multiple instruments in a single package with one set of electronics. Datcon
Instrument Company believes that its ability to offer its customers instrument
clusters, through the acquisition of Jorda, has enhanced its market position. In
furtherance of its strategy to increase market share through the introduction of
innovative products, Datcon Instrument Company has introduced several products
including: (i) the IllumaSeal-TM- line of heavy duty instruments that deliver
no-fog, waterproof performance and high levels of night visibility; (ii) the
Smart Instrument-TM- line of instruments that provide visual indication of
operational problems and can offer such feature enhancements on a simple plug-in
replacement basis to existing vehicle designs; (iii) the Illuma Deluxe-TM- line
of field-programmable speedometers and tachometers which enable customers to
custom-calibrate these new microprocessor controlled instruments to match
individual vehicle specifications; and (iv) the Intellisensor series of fuel
measurement systems which allow for electronic measurement of fluid levels
through the use of solid state technology, thereby eliminating moving parts and
increasing accuracy and durability.
MARKETS AND CUSTOMERS
Datcon Instrument Company sells its products in 40 countries worldwide.
Approximately 75% of Datcon Instrument Company's product sales are to OEM
markets (including OEM after market sales) to a diverse group of customers.
Datcon Instrument Company has multi-year relationships with some of the largest
OEMs in its markets including Caterpillar, Cummins Engine, Harley-Davidson,
Case, Landini, Massey Ferguson, SAME and Toro. The remaining 25% of Datcon
Instrument Company's products are sold through third-party distributors under
the Datcon-Registered Trademark- and AST-TM- brand names to other OEM customers
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and to the after market. Datcon Instrument Company believes that it has
developed significant customer loyalty by consistently providing high quality
products and exceptional service. The acquisition of Jorda has provided Datcon
Instrument Company with direct access to additional European customers and an
immediate presence in the European instrument cluster market.
SALES AND MARKETING
Datcon Instrument Company's products are sold through direct sales
representatives in the United States and Europe, as well as by manufacturers'
sales agents in regions where sales volume does not necessitate the assignment
of a direct representative. In addition, Datcon Instrument Company is
represented by a worldwide network of authorized distributors who carry Datcon
Instrument Company products in inventory.
COMPETITION
The market for monitoring instrumentation for heavy duty and off-highway
vehicles is highly fragmented. The U.S. Gauge/Dixson division of AMETEK, a
diversified manufacturer, is the largest competitor in the industry. Other
competitors are Beede, Frank W. Murphy Manufacturing, Hobbs, Joseph Pollack
(Stoneridge), Kysor/Medallion (Kuhlman) and Teleflex. The Company believes that
Datcon Instrument Company's largest competitor in Europe is VDO, a subsidiary of
Mannesman.
STEWART WARNER. Stewart Warner is a manufacturer and marketer of a broad
range of gauges, senders, sensors, switches, lamps and other accessories that
are sold to both the OEM and aftermarket segments in specialty applications,
including the heavy duty truck, agricultural, bus, emergency equipment, marine,
government and performance automotive hobby markets. Stewart Warner products are
characterized by strong brand name recognition and a reputation within the
industry for quality. For the LTM period ended January 31, 1998, Stewart Warner
had net sales of $26.5 million, which would be 9.9% of the Company's net sales
during the LTM period ended January 24, 1998, pro forma for the Stewart Warner
Acquisition and the General Eastern Disposition.
Stewart Warner is a direct wholly owned subsidiary of HVE and is operated in
conjunction with Datcon Instrument Company and Jorda. Datcon Instrument Company
and Jorda design and manufacture customized monitoring instrumentation for heavy
duty and off-highway vehicles.
Stewart Warner maintains three separate operating facilities: a Des Plaines,
Illinois headquarters which houses its new product design and engineering and
sales and marketing groups, and a twin-plant "Maquiladora Program" comprised of
a 20,000 square foot warehouse in El Paso, Texas and a 75,000 square foot
manufacturing facility in Juarez, Mexico which employs approximately 400 people.
PRODUCTS
Like Datcon Instrument Company, Stewart Warner currently markets its
instruments as individual units or as "engineered systems" incorporating groups
of instruments which are integrated into a vehicle's electrical system or onto a
stand-alone industrial engine. More sophisticated product offerings of Stewart
Warner include instrument "clusters" or "panels" which combine several
instruments into one mechanism designated to fit into a specified space in the
dashboard or control panel of an OEM's product. Clusters and panels are offered
in either a conventional or advanced technology configuration, the latter
incorporating solid state electronics with the option of microprocessor control.
Stewart Warner currently has several products in production which utilize
"SAE Data Bus" technology, a state-of-the-art microprocessor driven
communications network which carries information concerning the operating
parameters of engines, braking systems, etc. to the vehicle's driver through a
system of gauges and digital displays or warning lights.
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Like Datcon Instrument Company, Stewart Warner has employed a strategy of
"mass customization" which involves several steps, from manufacturing
instrumentation and instrument packages to specific customer requirements
(including customer-specified functions) to incorporating the customer's logo
and design profile into the product. This strategy is attractive to OEMs because
it offers a product designed to fit within a specific place in the OEM's product
and provides the look of a customized product without the significant investment
previously required for such customization. Like Datcon Instrument Company,
Stewart Warner has designed its production processes to be capable of meeting
the short lead times and operating the short production runs required to be
successful in its market place.
While many of Stewart Warner's products overlap with those sold by Datcon
Instrument Company or Jorda in certain markets, each company's products are be
differentiated on the basis of appearance, application, features offered and, in
some cases, price, with certain of the products of Stewart Warner having
generally higher prices than those of Datcon Instrument Company in the
aftermarket segment. Stewart Warner also distributes forward lamps and fuel
pumps, which Datcon Instrument Company does not currently manufacture or
distribute.
Since 1992, all of Stewart Warner's products have been manufactured at
Stewart Warner's "Maquiladora" facility located in Juarez, Mexico, and
distributed from Stewart Warner's warehouse located in El Paso, Texas (the
sister city to Juarez). This production plan permits Stewart Warner to cost-
effectively manufacture products requiring significant labor content due to the
advantageous labor costs. All of Stewart Warner's operations (including its
Mexican manufacturing operations) are ISO 9001 certified and recently received
QS-9000 certification.
In addition to its own products, Stewart Warner markets and distributes
products of other manufacturers, such as Hobbs hourmeters, that supplement its
own products. Sales of other manufacturers' products accounted for approximately
15% of Stewart Warner's net sales for the LTM period ended January 31, 1998.
MARKETS AND CUSTOMERS
Stewart Warner's products are sold to both the OEM and aftermarket segments
for many specialty applications, including heavy truck, bus, emergency
equipment, agricultural and construction equipment, marine, government and
performance automotive markets, with North America representing its largest
market.
Stewart Warner's major OEM customers include Case, Caterpillar,
Freightliner, Hyundai, John Deere, Komatsu, MCI Bus and New Holland. Stewart
Warner intends to continue to leverage the breadth of its product line, its
reputation for product quality, the competitive pricing it is able to provide as
a result of its Maquiladora Program and its strong relationships with many OEMs
to continue to increase its share of the OEM market. OEM products typically
require significant product engineering, design and customization which can
include lead times of six to 18 months to develop an appropriate gauge or
display and then a five to 15 year model production cycle. In general, these
relationships are characterized by exclusive contracts for specific parts,
closely tied to plant production schedules and requiring "just in time"
delivery.
Stewart Warner supplies its aftermarket customers, including wholesalers,
specialty distributors, repair shops and parts suppliers (such as CarQuest and
NAPA) with products that are used to replace defective instruments or to upgrade
the sophistication and appearance of an existing functional product. Product
life cycles in the aftermarket can be extremely long, with many current Stewart
Warner products replacing products installed thirty years earlier.
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Stewart Warner's customer base includes over 300 active accounts, ranging
from small shops to large chain stores and OEMs. Stewart Warner's top 100
customers accounted for 80% of net sales in the LTM period ended January 31,
1998, two of which, Freightliner 7.0% and New Holland 5.9%, accounted
individually for more than 5% of net sales in such period.
SALES AND MARKETING
To date, Stewart Warner's marketing efforts have been primarily focused on
North America, primarily the United States and, to a lesser extent, Canada and
Mexico. Stewart Warner uses a combination of direct sales personnel and
manufacturer representatives in both the OEM and aftermarket applications. Most
major OEM sales functions are performed by a technically skilled factory sales
force that coordinates with product managers in Stewart Warner's Des Plaines
facility to provide engineering support. Domestic aftermarket sales are handled
by more than 150 sales representatives nationwide. International sales functions
are performed by a combination of manufacturers' representatives and factory
direct sales staff.
COMPETITION
Stewart Warner faces competition from both OEM and, to a lesser extent,
aftermarket manufacturers. Stewart Warner's primary competitors in the high
volume OEM market are the U.S. Gauge/Dixson division of AMETEK and Joseph Pollak
(Stoneridge). Other current competitors include ISSPRO, Kysor/ Medallion
(Kuhlman) and Teleflex and VDO, a subsidiary of Mannesman.
ANDERSON
Anderson is a leading designer and manufacturer of high efficiency,
pluggable power connectors for use in high current, quick disconnect
applications including materials handling equipment and other electric-powered
vehicles, uninterruptible power supply products, telecommunications and
networking equipment and office furniture panel electrification. Anderson
specializes in high efficiency, pluggable connectors that are designed to
provide applications-specific solutions to power distribution and power
management challenges for end users. In addition to introducing new
applications-specific products, Anderson seeks to increase sales through finding
new applications for its standard power connectors. Anderson's headquarters are
located in Sterling, Massachusetts. For the LTM period ended January 24, 1998,
Anderson had net sales of $24.3 million, which represented 9.1% of the Company's
consolidated net sales for such period, pro forma for the PHI Merger, the
Stewart Warner Acquisition and the General Eastern Disposition.
PRODUCTS
Power connectors allow for the transmission of electric current to provide
distributed power within a device or system. Anderson focuses on the niche
market for wire-to-wire and wire-to-board, high current, quick disconnect
electric power connectors. Quick disconnect power connectors, in contrast to
permanent connectors, allow for easy and repeated disconnection and reconnection
to the power source. Anderson manufactures a broad range of both
applications-specific and standard power connectors. Anderson connectors utilize
a flat interlock contact design. These contacts are supplied in a variety of
housings and manufactured in a range of sizes in two product families. The
SB-Registered Trademark- series consists of two contacts, spring-mounted in a
genderless plastic housing design for easy connection and disconnection. The
Powerpole-Registered Trademark- series consists of a single contact, mounted in
a modular, genderless housing which can be assembled with other connectors in
any configuration or quantity, offering customers wide flexibility in customized
connector solutions at reasonable cost for low and high volume applications.
Anderson differentiates its power connectors from those of its competitors
by focusing on specialized applications that require unique power connectors to
be customized for specific applications on a rapid-turnaround basis. For
example, Anderson designed a special power connector for electric golf carts
made
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by E-Z-GO (Textron). Anderson designed and supplies a unique "smart" connector
that disables the electric drive control while the cart is being recharged,
thereby eliminating the possibility of inadvertent drive-aways while the cart
remains connected to the charging stand. Anderson also specializes in uncovering
new applications for its standard power connectors. For example, Anderson
successfully applied its existing power connector technology to the rapidly
growing market for uninterruptible power supply products.
MARKETS AND CUSTOMERS
Anderson's connectors are primarily used in OEM applications that typically
require high current capacity, high reliability and ease of installation, as
well as blind-mate, hot pluggable and quick disconnect capabilities. Typical
applications include: (i) materials handling equipment and other
electric-powered vehicles, including forklifts, golf carts, wheelchairs and
other vehicles; (ii) uninterruptible power supply (UPS) products and other
peripherals; (iii) telecommunications and networking equipment; and (iv) office
furniture panel electrification. Anderson's products are purchased both directly
by OEMs and indirectly through distributors.
A majority of Anderson's sales are derived from products which are
incorporated into the design of an OEM's product. Therefore, Anderson focuses
its sales and marketing efforts on OEMs and Anderson's engineers work directly
with an OEM's in-house product development team during the design phase of the
OEM's product life cycle to facilitate the engineering of effective power
interconnect solutions. Frequently, this collaborative effort results in a
design for which Anderson is designated by the OEM as a sole source supplier
through the life of the product program. Anderson believes that OEMs choose
Anderson's power connector products in large part due to its reputation for
innovative and customized solutions, its ability to quickly design products and
create prototypes and its long-term customer relationships. Anderson's product
design and prototyping capabilities were recently enhanced by the addition in
Fiscal 1997 of a technical center located in Leominster, Massachusetts which was
established specifically for such purposes. The technical center also houses
Anderson's tool company which designs and builds molds for customers and allows
Anderson to meet quick cycle times from concept to production.
Anderson's connectors are designed into products by OEMs including E-Z-GO
(Textron), Hyster-Yale and Yuasa-Exide in the materials handling equipment and
electric-powered vehicle industries, American Power Conversion and Yuasa-Exide
in UPS applications and Ericsson and Lucent Technologies in the
telecommunications and networking equipment industry.
SALES AND MARKETING
Anderson markets and sells the majority of its products under the Anderson
Power Products-Registered Trademark- name primarily in North America, Europe,
Japan and the Pacific Rim region both through an in-house direct sales force and
through a global third-party network of manufacturers' representatives, stocking
agents and authorized distributors. Anderson's products are generally purchased
directly by OEMs and by distributors for resale to OEMs and the after market.
COMPETITION
The connector market served by Anderson is highly fragmented, although the
Company believes that the segment in which Anderson participates is less
fragmented than the overall connector market. Anderson's principal competitors
in its niche markets include Hypertronics, Multi-Contact, ODU and Positronics
Industries. In addition, certain large manufacturers of connectors, such as AMP,
also produce power connectors for certain applications which compete directly
with Anderson products.
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NATVAR
Natvar is a manufacturer of disposable specialty bulk medical grade plastic
tubing used primarily in medical devices and for less-invasive surgical
procedures. Specialty bulk medical grade tubing is made from standard PVC,
polyethylene, polyurethane and radiopaque resin compounds extruded in conformity
with customer requirements and tolerances. The Company believes that Natvar
differentiates itself from other specialty bulk medical grade plastic tubing
manufacturers by selling products customized on a highly accurate basis to
medical device manufacturers' exacting standards. Natvar does not compete in the
non-specialty bulk medical tubing market, which is a commodity-type product used
in applications such as intravenous infusion therapy. Natvar also produces
electrical sleeving and tubing used to protect multiple insulated wires.
Natvar's headquarters are located in Clayton, North Carolina. For the LTM period
ended January 24, 1998, Natvar had net sales of $16.7 million, which represented
6.2% of the Company's consolidated net sales for such period, pro forma for the
PHI Merger, the Stewart Warner Acquisition and the General Eastern Disposition.
PRODUCTS
Natvar manufactures a variety of disposable specialty bulk medical grade
tubing products. These products are primarily incorporated in single use,
disposable products used in medical devices and for less-invasive surgical
procedures as opposed to products used in administering long-term patient care.
Specialty bulk medical grade tubing products include: (i) co-extruded
combinations of PVC and polyethylene used for administering unstable solutions
such as nitroglycerine, insulin and chemotherapy drugs; (ii) profile extrusion
tubing used as connectors to medical devices; (iii) transition tubing with
specially designed bubble spaces that reduce platelet damage during blood
hemolysis; (iv) heat exchanger coils used during cardioplegia procedures when
warming or cooling of blood is required; and (v) anesthesia monitoring lines.
Specialty bulk medical grade tubing can also be solvent bonded into paratubing
which allows for multiple fluids to be infused or removed without the need for
separate lines. Natvar has developed proprietary products such as Natvar 151
tubing, a bonded tri-layer tubing which does not react with drugs being
administered, and thereby combines the low cost of PVC with the inert properties
of more expensive materials such as silicone. Natvar also manufactures precision
medical and surgical tubing, which is designed for less-invasive surgical
procedures involving the use of products such as catheters, dilators and
arthroscopic applicators.
Natvar manufactures electrical sleeving and tubing for the secondary
electrical insulation market for use in a variety of applications, including low
voltage electric motors, instrument wiring, electric heater elements, wire
harnesses and cable assemblies. Electrical sleeving and tubing differs from
standard primary wire insulation in that it provides a secondary layer of
protection for an insulated wire. Electrical sleeving is made from fiberglass,
nylon and other fibers.
MARKETS AND CUSTOMERS
Substantially all of Natvar's customers for specialty bulk medical grade
tubing are medical equipment OEMs. Typically, manufacturing specifications for
such tubing are established by the customer in advance of placing the order.
Although many medical device companies utilize Natvar's products, each requires
slight variances in hardness, tint level, plasticity and thickness. All of these
customer specifications must be approved by the Food and Drug Administration
(the "FDA") prior to sale. OEMs closely monitor their suppliers to ensure that
tubing is being produced within FDA-approved specifications, and have lengthy
qualification procedures for new products to assure compliance. As a consequence
of this level of oversight, medical equipment manufacturers tend to maintain
only a limited number of specialty bulk medical grade tubing suppliers. Natvar's
major customers include COBE Laboratories, Haemonetics, Medtronics and 3M
Healthcare.
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Unlike specialty bulk medical grade tubing, the majority of electrical
sleeving and tubing sales are made through distributors, while the balance is
made to OEMs. Products are sold primarily on the basis of price and performance
considerations. Electrical sleeving is sold for use in motors and appliances as
well as applications in the automotive and aerospace industries.
SALES AND MARKETING
All of Natvar's products are sold primarily by a direct sales force to
customers located primarily in the United States. Natvar maintains a performance
guarantee and marketing campaign for its specialty bulk medical grade tubing
products that guarantees that its products will be shipped on the date quoted to
the customer or the product and shipping is provided free to the customer. Since
the introduction of this policy, known as "On Time or On Us" Natvar has
consistently met this performance guarantee.
COMPETITION
Competitors in the specialty bulk medical grade tubing market are typically
small, private companies, such as Kelcourt, Pexco and Sunlite, and divisions of
larger companies, including Norton and Plastron. Major competitors in the
electrical sleeving and tubing market include Bentley-Harris Manufacturing and
Varflex.
HVE EUROPA
HVE Europa is a leading designer and manufacturer of particle accelerator
systems used in scientific, educational and industrial research. HVE Europa's
products are used primarily for materials science, semiconductor research and
"carbon dating." HVE Europa's headquarters are located in Amersfoort, The
Netherlands. For the LTM period ended January 24, 1998, HVE Europa had net sales
of $8.3 million, which represented 3.1% of the Company's consolidated net sales
for such period, pro forma for the PHI Merger, the Stewart Warner Acquisition
and the General Eastern Disposition.
In addition to focusing on its core research markets, HVE Europa has begun
to pursue a strategy of identifying new markets for its existing products. In
furtherance of this strategy, HVE Europa has developed and begun to sell a new
ion accelerator subsystem to a launch customer in the industrial ion
implantation market who supplies complete systems to semiconductor
manufacturers. In addition, HVE Europa is currently assessing the feasibility of
adapting its carbon dating systems for biomedical and biochemical applications.
PRODUCTS
HVE Europa's products include ion accelerator systems, research ion
implanters, accelerator mass spectrometer systems and component parts such as
accelerator tubes. In a particle accelerator, ions are accelerated to a high
velocity under the influence of a strong electrical field and then fired into
the material to modify its properties and/or analyze its structure. Accelerator
mass spectrometer systems are specialized ion accelerator systems used for
carbon dating materials.
MARKETS AND CUSTOMERS
Historically, demand for HVE Europa's products was driven by nuclear physics
research. However, since the end of the Cold War, HVE Europa's products have
been sold for various applications in materials science, including semiconductor
research. Other applications include ratio spectrometry in archaeology,
oceanography, geosciences, materials science and biochemistry. Accelerator mass
spectrometer systems are used by universities and research institutes for carbon
dating in the fields of archaeology, oceanography and geosciences. The demand
for particle accelerator systems has historically been tied to the construction
of new or expanded research facilities, which for educational institutions is
mainly dependent upon grants and fund raising.
74
<PAGE>
SALES AND MARKETING
HVE Europa's products are sold worldwide by its direct sales force. Due to
the complex, custom-built nature of HVE Europa's particle accelerators, frequent
and extensive interaction is required between HVE Europa and the customer. HVE
Europa presents technical papers at, and participates in, scientific
conferences, advertises in scientific periodicals and distributes product
literature and information on new developments to its existing customers.
COMPETITION
Competition in HVE Europa's market is highly concentrated. HVE Europa's
sales in the particle accelerator market are often bid competitively against
National Electrostatics Corporation, a privately-held U.S. manufacturer. HVE
Europa's primary competitor in Japan is Nissin High Voltage.
BACKLOG
Pro forma for the General Eastern Disposition, the Company's backlog was as
follows as of the dates indicated (dollars in thousands):
<TABLE>
<CAPTION>
APRIL 29, 1995 APRIL 27, 1996 APRIL 26, 1997 JANUARY 24, 1998
---------------------- ---------------------- ---------------------- ----------------------
PERCENTAGE PERCENTAGE PERCENTAGE PERCENTAGE
AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL
--------- ----------- --------- ----------- --------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Robicon......................... $ 20,887 51.0% $ 38,158 62.0% $ 41,661 61.4% $ 41,395 45.8%
PHI............................. -- -- -- -- -- 19,684 21.8
Datcon Instrument Company(1).... 4,787 11.7 6,773 11.0 7,655 11.3 7,875 8.7
Anderson........................ 3,758 9.2 2,584 4.2 3,425 5.0 3,796 4.2
Natvar.......................... 3,432 8.3 3,579 5.8 3,239 4.8 3,617 4.0
HVE Europa...................... 8,108 19.8 10,466 17.0 11,848 17.5 13,967 15.5
--------- ----- --------- ----- --------- ----- --------- -----
Total....................... $ 40,972 100.0% $ 61,560 100.0% $ 67,828 100.0% $ 90,334 100.0%
--------- ----- --------- ----- --------- ----- --------- -----
--------- ----- --------- ----- --------- ----- --------- -----
</TABLE>
- ------------
(1) Does not include Stewart Warner. The backlog of Stewart Warner as of January
31, 1998 was $4.4 million.
The Company believes that its backlog as of any particular date may not be
indicative of sales for any future period. The Company expects that
approximately $737,000 of its backlog will not be shipped before April 24, 1999.
RESEARCH AND DEVELOPMENT
Research and development activities are conducted separately by each
operating unit. The Company's operating units focus on developing
applications-engineered products designed to meet their customers' needs. Teams
representing different functional areas within an operating unit work closely
with customers early in the product design process to ensure that the product
meets the customer's specifications and is designed for ease of manufacturing.
As a general matter, with the exception of Robicon and PHI, the Company's
operating units have not required substantial research and development
expenditures. Research and development expenditures that the Company has made
have resulted in innovative new products such as Robicon's Perfect Harmony
series of medium voltage VFDs, Datcon Instrument Company's Intellisensor fuel
measurement systems, Natvar's bonded tri-layer 151 tubing and numerous
applications-engineered products for Anderson's customers. PHI incurs
significant research and development expenses due to the high technology content
of PHI's surface analysis instruments and PHI's growth strategy of increasing
sales through the identification of new applications for its existing products,
enhancements in the technological capability of its instruments, the development
of application-specific
75
<PAGE>
hardware configurations for its instruments and the continued improvement in the
operating ease and efficiency of its instruments through increased automation
and software development. The Company's research and development expenses were
$8.1 million, $8.1 million, $9.4 million and $11.9 million for fiscal 1995,
fiscal 1996 and fiscal 1997, and nine months ended January 24, 1998,
respectively, excluding $5.8 million of purchased research and development
related to the PHI Merger. PHI's research and development expenses were $6.2
million, $6.3 million, $7.9 million and $12.2 million (including $5.8 million of
purchased research and development as allocated from the purchase price for PHI)
for its fiscal years ended June 30, 1995, June 28, 1996 and June 27, 1997, and
the nine months ended January 24, 1998, respectively. Stewart Warner's research
and development expenses were $1.0 million, $1.0 million, $0.9 million and $1.0
million for fiscal 1995, fiscal 1996 and fiscal 1997, and the nine months ended
January 31, 1998. Substantially all research and development expenses of the
Company, PHI and Stewart Warner related to company-sponsored research. Pro forma
for the PHI Merger, the Stewart Warner Acquisition and the General Eastern
Disposition, the Company incurred research and development expenses of $17.5
million for Fiscal 1997 (representing 6.9% of the consolidated net sales of the
Company for such period), the majority of which was incurred at Robicon and PHI.
PATENTS AND TRADEMARKS
The Company holds domestic and foreign patents covering certain products and
processes in all of its operating units, as well as trademarks covering certain
of its products. While these patents and trademarks are considered important to
the ability of the various operating units to compete, the Company believes that
these patents and trademarks are less important than the quality and
applications-engineered nature of its products and its unpatented manufacturing
expertise. Certain patents relating to Robicon's Perfect Harmony series of
medium voltage VFDs are of particular significance; these patents issued in
April and June of 1997 and expire in 2014. In addition, PHI holds key patents
relating to its Auger, ESCA and TOF-SIMS surface analysis instruments that
issued between 1991 and 1995 and expire between 2009 and 2014, and filed a
provisional patent application in December 1996 relating to its ESCA surface
analysis instruments. The Company also holds patents on certain products which,
although valuable to the Company, are not critical to its operations. Management
does not believe that the future profitability of the Company's operating units
is dependent upon any one patent or group of related patents.
EMPLOYEES
At January 24, 1998, pro forma for the Stewart Warner Acquisition and the
General Eastern Disposition, the Company had a total of 1,973 employees, of whom
1,959 were employed by the Company's operating units. The Company's domestic
employees are not covered by collective bargaining agreements, however,
substantially all of the personnel employed by its foreign subsidiaries belong
to national Workers' Councils. The Company considers it relations with its
employees to be good. The following table provides information relating to the
employees of the Company's operating units as of January 24, 1998, pro forma for
the Stewart Warner Acquisition and the General Eastern Disposition:
<TABLE>
<CAPTION>
TOTAL
OPERATING UNIT EMPLOYEES
- ------------------------------------------------------------------------------------------------------ -----------
<S> <C>
Robicon............................................................................................... 454
PHI................................................................................................... 394
Datcon(1)............................................................................................. 746
Anderson.............................................................................................. 140
Natvar................................................................................................ 149
HVE Europa............................................................................................ 76
-----
Total Operating Unit Employees.................................................................... 1,959
-----
-----
</TABLE>
- ------------
(1) Including 438 employees of Stewart Warner as of January 31, 1998.
76
<PAGE>
PROPERTIES
The following are the principal operating facilities of the Company, pro
forma for the Stewart Warner Acquisition and the General Eastern Disposition,
listed by operating unit, each of which also has limited general office and
administrative space:
<TABLE>
<CAPTION>
USABLE SPACE
(SQUARE
OPERATING UNIT FUNCTION FEET) OWNED/LEASED
- ----------------------------------- ------------------------------------------- ------------ -------------
<S> <C> <C> <C>
ROBICON:
New Kensington,
Pennsylvania Design and assembly 124,800 Leased(a)
Pittsburgh, Pennsylvania Assembly 79,000 Owned
PHI:
Eden Prairie, Minnesota Design and assembly 207,000 Owned(b)
Redwood City, California Design 11,800 Leased
DATCON INSTRUMENT COMPANY:
Lancaster, Pennsylvania Design and assembly 70,700 Leased(a)
Barcelona, Spain Design and assembly 35,500 Leased(a)
STEWART WARNER:
Des Plaines, Illinois Design and administration 15,000 Leased
El Paso, Texas Warehouse 20,000 Leased
Juarez, Mexico Assembly 75,000 Leased
ANDERSON:
Sterling, Massachusetts Plastic injection molding and assembly 42,400 Leased(a)
Sterling, Massachusetts Plastic injection molding and assembly 31,000 Leased(a)
Leominster, Massachusetts Technical center (design and tooling) 10,000 Leased(a)
Fermoy, Ireland Plastic injection molding and assembly 8,500 Leased
NATVAR:
Clayton, North Carolina Plastic extrusion 75,000 Owned
Lakewood, Colorado Plastic extrusion 17,300 Leased
HVE EUROPA:
Amersfoort, The Netherlands Design and assembly 60,000 Owned
</TABLE>
- ------------
(a) The Company holds a purchase option on these facilities.
(b) Approximately 14,000 square feet of space at the PHI facility in Eden
Prairie, Minnesota is currently leased by PHI to a third party.
In addition to the facilities described above, the Company leases various
warehouses and sales and administrative facilities. The Company believes that
its manufacturing facilities are properly maintained and that production
capacity is adequate to meet the requirements of its operating units.
ENVIRONMENTAL AND INSURANCE MATTERS
The Company's operations are subject to extensive and changing federal,
state, local and foreign environmental laws and regulations, including those
relating to the use, handling, storage, discharge and disposal of hazardous
substances and, as a result, the Company is from time to time involved in
administrative and judicial proceedings and inquiries relating to environmental
matters. Following is a description of the Company's significant pending
environmental matters.
77
<PAGE>
BURLINGTON, MASSACHUSETTS CLEANUP. In June 1989, the Company entered into a
Consent Order with the predecessor to the Massachusetts Department of
Environmental Protection (the "DEP") with respect to the remediation of alleged
contamination at property formerly owned and then leased by the Company in
Burlington, Massachusetts (the "Burlington Site"). Pursuant to the Consent Order
and a remediation plan approved by the DEP, the Company has posted financial
assurances currently consisting of a letter of credit of $1.2 million and is
proceeding with certain remediation measures at the Burlington Site. The owners
of several parcels of land adjoining or near the Burlington Site have also
asserted claims or sought damages from the Company claiming damages from waste
allegedly originating from activities on the Burlington Site. The Company paid
$200,000 in 1997 to settle claims with respect to one adjoining property, and in
1996 agreed to pay the first $500,000 of future costs incurred plus two-thirds
of any additional costs with respect to the cleanup of another. As of March 28,
1998, the Company's estimate of the costs that will be necessary to complete
these cleanups is $1.6 million. Expenditures for cleanup will be incurred by the
Company over a number of years.
WOODBRIDGE TOWNSHIP, NEW JERSEY CLEANUP. The Company is conducting an
environmental investigation and remediation of a former manufacturing site
located in Woodbridge Township, New Jersey (the "New Jersey Site") under New
Jersey law. The investigation and remediation are being undertaken in accordance
with an August 1989 agreement (the "Settlement Agreement") among the Company,
the current owner of the site and the former owner of the site who had purchased
the site from the Company which settled litigation brought against the Company
by the former owner of the New Jersey Site to recover damages allegedly caused
by environmental contamination of the site. As part of the Settlement Agreement,
the Company has agreed to assume full responsibility for the cleanup, and has
been conducting an investigation and remediation of the New Jersey Site in
accordance with the terms of the Settlement Agreement and New Jersey law. As of
January 24, 1998, the Company's estimate of the costs that will be necessary to
complete the cleanup is $1.5 million. Expenditures for cleanup will be incurred
by the Company over a number of years. In accordance with the terms of the
Settlement Agreement and New Jersey law, the Company has posted financial
assurances currently consisting of a $1.4 million letter of credit. The Company
is also involved in arbitration with the current owner of the New Jersey Site in
which the Company is seeking limited monetary damages consisting of legal and
consulting fees as well as other relief arising from alleged violations of the
Settlement Agreement by the current owner.
The Company has, from time to time, received cash settlements and insurance
recoveries relating to environmental litigation, remediation and consequential
damages incurred in connection with properties formerly owned or leased by the
Company. The Company recorded net gains (losses) of $2.1 million, $450,000,
($26,000) and ($458,000) for Fiscal 1995, Fiscal 1996 and Fiscal 1997, and the
nine months ended January 24, 1998, respectively, net of actual legal costs,
estimated settlement costs and changes in cost remediation estimates, on cash
recoveries of $2.3 million, $1.5 million, $1.1 million and $0, respectively, for
such periods. These cash recoveries have generally been received from insurance
companies in reimbursement of costs previously incurred by the Company in
remediation efforts or the payment of damages to third parties, from other
responsible or potentially responsible parties in settlement of potential claims
relating to remediation responsibilities, and from the recovery of expenses
incurred both in the recovery of such amounts and the remediation of affected
properties. Most of the amounts recovered by the Company in Fiscal 1995, Fiscal
1996 and Fiscal 1997 were recovered in connection with the litigation and
arbitration relating to the Burlington Site and the New Jersey Site. The Company
is not currently a party to any actions in which it has made a claim seeking
recovery for remediation and consequential damages incurred in connection with
environmental matters at properties formerly owned or leased by the Company.
Although the Company has realized significant recoveries on a historical basis,
the Company does not expect to receive any material recoveries relating to
environmental matters in any future periods.
In addition, although the Company believes it has made sufficient capital
expenditures to maintain compliance with existing laws and regulations, future
expenditures may be necessary as compliance
78
<PAGE>
standards and technology change. The Company has expended, and may be required
to expend in the future, significant amounts for investigation of environmental
conditions, remediation of environmental conditions and other similar matters.
See "Risk Factors -- Environmental Compliance."
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. Natvar received a notice of intent to
sue on December 11, 1996 from a California citizens group regarding alleged
violations of notice and labeling requirements under California Proposition 65,
a "right to know" provision intended to give consumers clear and reasonable
warnings of the presence of certain potentially hazardous substances in
products. Natvar participated in preliminary settlement negotiations, but on
March 18, 1998 the California citizens group -- The Working Group on Carcinogens
and Immune Suppressing Chemicals -- filed a complaint against Natvar in state
court in California alleging violations of Proposition 65. The relevant
regulations provide that violations of Proposition 65 are subject to civil
penalties of up to $2,500 per day retroactive to the beginning of an alleged
violation of Proposition 65. The substance contained in Natvar's products and
implicated in the Complaint has been listed under Proposition 65 since 1988, and
Natvar has sold products containing this substance in California since that
time. The Company is currently conducting fact finding to determine whether it
believes a violation of Proposition 65 has occurred. The Company intends to
defend the lawsuit vigorously; however, the Company believes, based on results
in similar cases and a preliminary review of the relevant facts, that this suit
can be settled for substantially less than the maximum penalty available under
the statute. The Company does not believe that it is likely that it will incur
material liability as a result of this lawsuit.
In April 1998, the Company was dismissed without prejudice as a defendant in
an action commenced in November 1996 against the Company and six others by
Chicago-Dubuque Foundry Corporation ("Chicago Dubuque"), and its property
insurer, Employers Mutual Casualty Co., in Iowa state court. The suit concerned
a May 1, 1996 fire that destroyed a Chicago-Dubuque facility located in East
Dubuque, Illinois. According to the complaint, defective products sold by one or
more of the defendants (including, it was alleged, the Company's Anderson
division) or incorporated by others in products sold by others to
Chicago-Dubuque, caused or contributed to the casualty. Although the dismissal
without prejudice does not foreclose the Company from being brought back into
the action at a later date, it did dismiss and close the claims of the main
plaintiffs in the action against the Company.
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 and seeking damages. 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 actual damages in an amount which has
varied, but in each instance the amount claimed (including punitive,
consequential and multiple damages) has been less than $1.0 million. A motion
for summary judgment dismissing TVM and Mr. Morris' counterclaim is pending
before the court. In light of the current stage of the proceedings, the Company
is unable to assess the likelihood of liability 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; however, the
Company believes the counterclaim to be without merit.
79
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers, directors and key employees of the Company as of
April 31, 1998 were as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------------------ --- ---------------------------------------------------------
<S> <C> <C>
Laurence S. Levy................................ 41 Chairman of the Board, Chief Executive Officer, and Vice
President
Clifford Press.................................. 44 Deputy Chairman of the Board and President
Russell L. Shade, Jr............................ 47 Chief Operating Officer
Joseph W. McHugh, Jr............................ 43 Vice President and Chief Financial Officer
Jody E. Kurtzhalts.............................. 51 President of Robicon
David J. Chalmers............................... 57 President of PHI
Oddie V. Leopando............................... 52 President of Datcon Instrument Company
Daniel N. Scenna (1)............................ 38 President of Anderson
Scott M. Kelley................................. 44 President of Natvar
Renee Koudijs................................... 52 Managing Director of HVE Europa
Edward Levy..................................... 34 Director
H. Cabot Lodge III.............................. 42 Director
</TABLE>
(1) Acting President.
LAURENCE S. LEVY is the Chairman of the Board and Chief Executive Officer of
the Company. Mr. Levy joined the Company in 1988 in connection with its
acquisition and reorganization and has been a member of the Board of Directors
since that time. Since 1988, he has served as Chairman and since 1991 he has
been the Company's Chief Executive Officer. From 1983 to 1986, Mr. Levy was a
consultant with Bain & Co., a leading strategic management company. Mr. Levy is
a graduate of the University of Witwatersrand in South Africa and the Harvard
Business School. Mr. Levy is also a director of Safety 1st, Inc.
CLIFFORD PRESS is the President and a Director of the Company. Mr. Press
joined the Company in 1988 in connection with its acquisition and reorganization
and has been a member of the Board of Directors since that time. Since 1991, he
has served as President. From 1983 to 1986, Mr. Press was employed by Morgan
Stanley & Co., Incorporated in its Mergers and Acquisitions Department. Mr.
Press is a graduate of Oxford University and the Harvard Business School. Mr.
Press is also a director of Buck Hill Falls Company.
RUSSELL L. SHADE, JR. is the Chief Operating Officer and a Director of the
Company. Prior to joining the Company, Mr. Shade was Vice President, Industrial
Systems, at General Electric Company. Mr. Shade was named a Corporate Officer of
GE and Vice President of GE Drive Systems in March 1995. During his 25-year
career with GE, Mr. Shade held numerous design, engineering, and manufacturing
positions in power generation, as well as general management positions in the
military and industrial product lines. Mr. Shade graduated from M.I.T with a
Master of Science degree in Mechanical Engineering and holds five U.S. patents.
JOSEPH W. MCHUGH, JR. is a Vice President and the Chief Financial Officer of
the Company. Mr. McHugh joined the Company in January 1992. From 1983 to 1992,
Mr. McHugh worked at GCA Corporation as a Division Controller and later as
Controller. In the former capacity, he participated in the workout and
recapitalization of GCA before its purchase in 1988 by General Signal. From 1977
to 1983, Mr. McHugh served in various financial management positions at
Honeywell Information Systems. Mr. McHugh is a Certified Management Accountant
and received both a Bachelor of Science degree in accounting and a Masters
degree in Business Administration from Bentley College.
80
<PAGE>
JODY E. KURTZHALTS has served as President of Robicon since April 1995.
Prior to joining the Company, Mr. Kurtzhalts was employed by Giddings & Lewis
Corp., from November 1992 to March 1995 as the Vice President/General Manager of
its Automation Control Division. Prior to November 1992, Mr. Kurtzhalts was the
Vice President, Electronics and Software Engineering of Giddings & Lewis. Mr.
Kurtzhalts has a Bachelor of Science in Electrical Engineering from Marquette
University.
DAVID J. CHALMERS has served as President and Chief Executive Officer of PHI
since February 1997. Prior to February 1997, Dr. Chalmers was the President and
Chief Executive Officer of TA Instruments Inc., which was formed through a
leveraged buyout of the Thermal Analysis Division of E.I DuPont de Nemours in
1990. From 1967 to 1990, Dr. Chalmers held several technical, marketing and
product management positions at E.I DuPont de Nemours, most recently serving as
General Manager of the Thermal Analysis Division. Dr. Chalmers received a
Bachelor of Science in Chemistry from the University of Aberdeen and a Ph.D. in
Chemistry from Oxford University.
ODDIE V. LEOPANDO has served as President of Datcon Instrument Company since
November 1995. Prior to joining the Company, Mr. Leopando was employed by
MascoTech, Inc. as President of the MascoTech Body Systems & Assembly Division
from 1994 to 1995. From 1991 to 1994, Mr. Leopando was the Senior Vice
President/General Manager of MascoTech Manufacturing & Assembly Division. Prior
to 1991, Mr. Leopando acted in managerial roles in several other companies,
including Massey Ferguson, Inc. and the Chrysler Corporation. Mr. Leopando
earned a Masters of Business Administration in Finance and Operations from the
University of Detroit and a Bachelor of Science in Mechanical Engineering from
the Mapua Institute of Technology in Manila, Philippines. Mr. Leopando is a
licensed professional engineer.
DANIEL N. SCENNA is currently serving as acting President and Vice President
of Finance of Anderson. Prior to joining the Company in 1989, Mr. Scenna served
as Corporate Cash Manager at Ausimont N.V., an international specialty chemical
company. Before that Mr. Scenna held various accounting positions at a major
supermarket chain. Mr. Scenna is a graduate of the University of Massachusetts.
SCOTT M. KELLEY, who has been employed by the Company since 1993, has served
as President of Natvar since January 1996. Prior to being appointed as President
of Natvar, Mr. Kelley was the President of the Company's General Eastern
division, from August 1994 to January 1996, and the Acting President of the
Company's Specialty Connector division from December 1993 to August 1994. Prior
to joining the Company, Mr. Kelley was the Vice President of Operations at Data
Translation Inc. from 1990 to 1993. Mr. Kelley also served as a management
consultant at Ernst & Young LLP and Coopers & Lybrand L.L.P. Mr. Kelley is a
graduate of Eastern Connecticut State University.
RENEE KOUDIJS has served as Managing Director of HVE Europa since May 1993,
and served as Engineering and Research and Development Manager at HVE Europa
from 1978 to 1993. From 1976 to 1978, Mr. Koudijs served as Engineering Manager
at Unicorp. Prior to that, Mr. Koudijs founded the Netherlands division of Sola
Basic Industries. Mr. Koudijs graduated from the Industrial and Commercial
Mechanical and Electrical College in The Netherlands and has a License for
Business Operation in The Netherlands through the General Commercial School.
EDWARD LEVY became a Director of the Company effective August 8, 1997. Mr.
Levy has been a Managing Director of CIBC Wood Gundy Securities Corp., a
predecessor of CIBC Oppenheimer Corp., since August 1995. Between 1991 and 1995,
Mr. Levy held various positions at The Argosy Group L.P. culminating in the
position of Managing Director. Mr. Levy has also held positions in the Mergers
and Acquisitions Group of Drexel Burnham Lambert Incorporated and the Corporate
Finance Department of Kidder, Peabody & Co. Incorporated. Mr. Levy is a graduate
of Connecticut College. Mr. Levy is also a director of Heating Oil Partners,
L.P., Norcross Safety Products L.L.C. and DSMax International Inc.
H. CABOT LODGE III became a Director of the Company effective August 8,
1997. Mr. Lodge is a principal of Carmel Lodge LLC, a New York based financial
advisory firm he founded in 1996. Mr. Lodge also served as Executive Vice
President, Managing Director and in other senior management positions at
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<PAGE>
W.P. Carey & Co., an investment banking firm, from 1983 to 1995. Mr. Lodge is a
graduate of Harvard University and the Harvard Business School. Mr. Lodge is
also a director of American General Hospitality Corp., TelAmerica Media, Inc.
and Chairman of Superconducting Core Technologies, Inc.
ELECTION; TERM OF OFFICE
All officers are elected at the annual meeting of the Board of Directors and
hold office until the next annual meeting of the Board of Directors or until
their respective successors are chosen and qualified. Directors are elected at
the annual meeting of the stockholders and hold office until the next annual
meeting of the stockholders or until their successors are elected. According to
the Company's By-Laws, the President of the Company must be a member of the
Board of Directors. In addition, holders of the Exchange Preferred Stock (acting
as a single class together with holders of any Series A Preferred Stock) have
the right to elect that number of directors constituting at least 25% of the
Board of Directors if cash dividends are in arrears and unpaid for two
semiannual periods after August 15, 2002.
BOARD COMMITTEES
In the third quarter of Fiscal 1998, the Board of Directors appointed an
Executive Committee, comprised of Clifford Press and Laurence S. Levy, which may
exercise any powers delegated to it by the full Board of Directors which the
corporation law of Massachusetts permits a corporation's board to delegate to a
committee. In addition, in the third quarter of Fiscal 1998 the Board of
Directors appointed an Audit Committee, comprised of H. Cabot Lodge III and
Laurence S. Levy, and a Compensation Committee, comprised of Clifford Press and
Edward Levy. The Audit Committee and the Compensation Committee were delegated
the customary functions of such committees, with the Compensation Committee
being specifically empowered to set the compensation of each of the Company's
executive officers, including the Company's Chairman of the Board and Chief
Executive Officer and President.
COMPENSATION OF DIRECTORS
Non-employee directors of the Company are paid an annual retainer of $10,000
plus expenses incurred by the directors in such capacity.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During Fiscal 1997, Fiscal 1996 and Fiscal 1995, Laurence S. Levy and
Clifford Press, the Company's Chairman of the Board and Chief Executive Officer,
and President and a Director, respectively (who together comprised the Board of
Directors during such period) established the compensation of the Company's
executive officers, including their own compensation. The Board of Directors
established the Compensation Committee and appointed Mr. Edward Levy and Mr.
Clifford Press as members during the third quarter of Fiscal 1998.
EXECUTIVE COMPENSATION
The following table sets forth the aggregate compensation paid by the
Company for services rendered during Fiscal 1997, Fiscal 1996 and Fiscal 1995 to
the Company's Chairman of the Board and Chief Executive Officer, President and
four other most highly-compensated executive officers.
82
<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
FISCAL --------------------- OTHER ANNUAL ALL OTHER
NAME AND PRINCIPAL POSITION PERIOD SALARY BONUS COMPENSATION(1) COMPENSATION(2)
- ------------------------------------- ----------- ---------- --------- ---------------- -----------------
<S> <C> <C> <C> <C> <C>
Laurence S. Levy..................... 1997 $ 100,000(3) $ -- $ 3,300
Chairman of the Board and 1996 100,000(3) 250,000(5) 4,000
Chief Executive Officer 1995 184,050(3) -- 4,050
Clifford Press....................... 1997 $ 100,000(3) $ -- $ 3,300
President and Director 1996 100,000(3) 250,000(5) 4,000
1995 184,050(3) -- 4,050
Paul H. Snyder(4).................... 1997 $ 210,000 $ 50,000 $ 4,050
1996 203,850 45,600 4,500
1995 189,050 65,000 4,050
Oddie V. Leopando.................... 1997 1996(6) $ 181,750 $ 74,000 $ 5,850
President of Datcon 87,500 35,000 --
Instrument Company
Renee Koudijs........................ 1997 $ 162,614 $ 53,164 --
Managing Director of 1996 141,327 125,597 --
HVE Europa 1995 116,003 41,039 --
Jody E. Kurtzhalts................... 1997 $ 168,750 $ 40,000 51,$480 31,492 $ 3,415
President of Robicon 1996 165,000 18,250 -- 3,335
1995(7) 13,750 -- --
</TABLE>
- ------------
(1) Represents relocation expenses.
(2) Represents matching employer contributions and profit-sharing under the
Company's Section 401(k) savings plan. See "Retirement Plans" below.
(3) Amounts shown as salary do not include management and transaction fees paid
to Hyde Park Holdings, Inc. ("Hyde Park"), and certain of its affiliates at
the request of the named executive officers, aggregating $780,901, $758,424
and $552,226 in Fiscal 1997, Fiscal 1996 and Fiscal 1995, respectively. See
"Certain Relationships and Related Transactions."
(4) Mr. Snyder ceased to be Chief Operating Officer and a Director of the
Company as of November 2, 1997.
(5) Represents amounts paid to affiliates of Hyde Park at the request of the
named executive officers.
(6) Mr. Leopando became an employee of the Company in November 1995.
(7) Mr. Kurtzhalts became an employee of the Company in April 1995.
EMPLOYMENT AGREEMENTS
Russell L. Shade, Jr., the Company's Chief Operating Officer and a Director,
entered into an employment agreement with the Company (the "Employment
Agreement"), dated February 24, 1998. Pursuant to the Employment Agreement, Mr.
Shade receives an annual base salary of $250,000, reviewed annually. In
addition, for each year of Mr. Shade's employment, the Compensation Committee of
the Company's Board of Directors will establish an incentive compensation
program with a target of 80% of Mr. Shade's base salary, with payment under the
plan generally based upon the Company's performance. The Employment Agreement
contains a customary confidentiality provision and an agreement that
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Mr. Shade will not, for three years after his employment ends, engage in
business competitive with the Company or solicit customers or employees of the
Company.
The Employment Agreement also provides shadow stock benefits, shadow stock
appreciation benefits and deferred compensation benefits. Upon the commencement
of his employment with the Company, Mr. Shade received twenty-two shadow stock
units. The stock units vest in yearly increments over a period of five years,
beginning on April 30, 1998, with each vested stock unit representing the right
to receive, following the fifth anniversary after the vesting thereof, an amount
of cash equal to the market value of a share of the Letitia Common Stock
determined as of the end of the most recent fiscal quarter. Upon termination of
employment for any reason other than death, all unvested stock units shall be
forfeited, and any vested units shall become redeemable by the Company, at the
market value of a share of Letitia Common Stock determined as of the end of the
most recent fiscal quarter preceding redemption, at any time, but in any event
the Company shall redeem the vested units on the scheduled payment date
therefor. Upon death, all stock units vest and each stock unit shall be promptly
redeemed at the market value of a share of Letitia Common Stock at the end of
the most recent fiscal quarter.
The Employment Agreement further provides for a stock appreciation
arrangement whereby Mr. Shade is entitled to receive additional shadow stock
units each year during the term of the Employment Agreement. For the Company's
1999 fiscal year, the shadow stock units granted pursuant to this arrangement
shall represent 0.4% of the Company's outstanding common stock. For the
Company's fiscal year 2000 and each subsequent year, the number of shadow stock
units granted shall be calculated based on a formula taking into account Mr.
Shade's base salary and the market value of Letitia Common Stock.
Under the deferred compensation arrangement, the Company shall contribute
$35,000 per year into a designated account and Mr. Shade may elect to make
additional contributions. Mr. Shade will receive distributions from the account
in ten installments, commencing in 2011, or earlier upon termination of
employment or death.
The Employment Agreement terminates upon Mr. Shade's resignation or
discharge, with or without cause. Upon termination by reason of disability,
death, or resignation or discharge under certain circumstances, Mr. Shade shall
be entitled to receive compensation through the date of his termination,
including all benefits enjoyed under the Employment Agreement. Upon termination
by reason of resignation or discharge under certain other circumstances, Mr.
Shade shall be entitled to receive his base salary and all benefits until the
earlier of one year following the date of termination or receipt of income
earned from a source unaffiliated with the Company.
VALUE CREATION PLAN AND RELATED PLANS
The Company's Value Creation Plan (the "VCP") is a long-term cash incentive
compensation plan for certain key officers and employees of the Company which is
intended to provide participants in the VCP with an opportunity to share in an
increase in the value of the operating unit with which the participating
employee is associated. The VCP is designed to provide incentives for employees
in the Company's various operating units by tracking increases in the economic
value of an operating unit based generally upon a multiple of EBITDA, as defined
in the VCP, but also reflecting actual proceeds of dispositions of operating
units or public offerings by operating units. An aggregate amount equal to up to
5-7% of the incremental increases in value achieved in the unit is allocated to
the VCP. In the event that the value of any of the operating units increases
over time, the interests of its participating employees in the VCP will increase
proportionally.
Interests are granted in the VCP to certain key employees of a particular
operating unit as they are hired or promoted and vest over five years. The value
of an employee's interest is based on increases in the value of the employee's
operating unit (based generally on a multiple of EBITDA of the operating unit
but also reflecting actual proceeds of dispositions of operating units or public
offerings by operating units)
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from the date of grant to the end of the year prior to the determination date.
Vested interests are cashed out when an employee leaves the Company or retires,
when his operating unit is sold or he is transferred to another division;
provided that if he is dismissed for cause, his interests (vested and unvested)
are forfeited. Subject to the Company's discretion to defer cash payments, an
employee may cash out up to 50% of his vested interest while remaining employed.
The VCP is a non-qualified and non-funded plan. While Messrs. Leopando,
Kurtzhalts and Koudijs have each received interests in the VCP, Mr. Laurence S.
Levy, Mr. Press and Mr. Shade currently do not participate in the VCP. As of
March 28, 1998, the Company had an accrued liability of $1.8 million under the
VCP.
Paul H. Snyder, who was the Chief Operating Officer and a director of the
Company until November 2, 1997 was the beneficiary of an incentive compensation
plan of the Company pursuant to which Mr. Snyder received a one-time accrued
bonus payment of $120,000 upon his resignation in the third quarter of Fiscal
1998. This payment was calculated pursuant to a formula established by the
Company with respect to the value of the Letitia Common Stock (as defined
herein) at the time of such payment.
RETIREMENT PLANS
The Company maintains the High Voltage Engineering Corporation 401(k)
Retirement Plan, a Section 401(k) savings plan for qualified domestic employees,
pursuant to which the Company matches discretionary employee contributions up to
$1,800, and also contributes an annual profit-sharing amount equal to 2.5% of
the employee's annual salary and bonus. While each of Messrs. Laurence S. Levy,
Press, Leopando, [SHADE] and Kurtzhalts currently participates in this plan, Mr.
Koudijs does not participate in this plan.
The Company also maintains the High Voltage Engineering Corporation
Retirement Plan (the "Retirement Plan"), a defined benefit plan, which provides
for the payment of annual pension benefits, payable on retirement, based on the
participating employee's salary during the time of accrual. Participation in the
Retirement Plan, and the accrual of additional benefits thereunder, was frozen
by the Company in 1992. Messrs. Laurence S. Levy and Press will receive monthly
benefits under the Retirement Plan of $191.05 and $148.35, respectively,
beginning upon their retirement. Messrs. Leopando, Koudijs, Shade and Kurtzhalts
do not participate in the Retirement Plan.
BONUS PLAN
The Company has in effect various plans pursuant to which the Company's
executive officers and certain other employees may receive incentive cash
bonuses based upon the achievement of certain earnings goals in the preceding
fiscal year by an operating unit or by the Company as a whole, and upon
individual performance. The amounts of incentive and discretionary awards, and
the performance criteria for such awards, are currently fixed by the Board of
Directors. Such amounts, and the related performance criteria, will be set by
the Compensation Committee.
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Laurence S. Levy and Clifford Press, officers and directors of the Company,
are directors of Letitia Corporation, which owns 92.4% of the Company's
outstanding Common Stock. Hyde Park Holdings, Inc. ("Hyde Park"), a corporation
wholly owned by Laurence S. Levy and Clifford Press, is a minority stockholder
of Letitia Corporation. See "Principal Stockholders" and "Management --
Executive Compensation."
Historically, the Company has paid to Hyde Park and its affiliates: (i) an
annual fee for services performed in managing the Company; (ii) an acquisition
fee payable upon the closing of certain acquisitions by the Company of
additional businesses; and (iii) a disposition fee payable upon the closing of
the disposition of certain divisions or subsidiaries (or significant groups of
assets) of the Company.
The management fees paid to Hyde Park and its affiliates were $780,901,
$648,424 and $450,376 for Fiscal 1997, Fiscal 1996 and Fiscal 1995,
respectively. Under the terms of the Indenture, while there are any of the Notes
outstanding, management fees to Hyde Park in excess of $750,000 for any fiscal
year of the Company will be limited by the Indenture. Acquisition and
disposition fees have been calculated as an amount equal to 1% of the sum of the
total price paid or received for shares of stock (or in the case of an asset
acquisition or disposition, the total price paid for such assets) in such
acquisition or divestiture. In Fiscal 1996, the Company paid a fee of $110,000
in connection with the disposition of the Company's Specialty Connector
division. In Fiscal 1995, the Company paid fees aggregating $101,850 in
connection with the sale of the Company's Shore Instruments and Berger
divisions, and the acquisition of Jorda. No acquisition or divestiture fees were
paid in Fiscal 1997. The Company did not pay an acquisition fee in connection
with either the PHI Merger or the Stewart Warner Acquisition and did not pay a
disposition fee in connection with the General Eastern Disposition.
In connection with the consummation of the Original Offering, the Company
redeemed all of its outstanding Series B Preferred Stock for an aggregate
redemption price of $4.8 million. All of the outstanding 25,705 shares of Series
B Preferred Stock were held by Letitia Corporation. Messrs. Laurence S. Levy and
Clifford Press, the Company's Chairman of the Board and Chief Executive Officer,
and President and a Director, respectively, and certain of their affiliates and
family members beneficially own 100% of the outstanding common stock of Letitia
Corporation (the "Letitia Common Stock") and, accordingly, were the sole
beneficiaries of such redemption and could through dividends or other
distributions receive a majority of the proceeds of such redemption.
In connection with the consummation of the Original Offering, the Company
redeemed 6,871 shares of the Company's Series C Preferred Stock (the "Series C
Preferred Stock"), comprising all of the shares of Series C Preferred Stock then
issued or issuable, for its aggregate liquidation preference of $6.9 million.
All of the shares of Series C Preferred Stock were held by Letitia Corporation,
which had issued to Quest Equities Corp. ("Quest") a class of its own capital
stock (the "Letitia Preferred Stock") having identical rights and preferences to
the Series C Preferred Stock. Simultaneously with the closing of the Original
Offering, Letitia redeemed, from the proceeds of the redemption of the Series C
Preferred Stock, 6,871 shares of the Letitia Preferred Stock, comprising all of
the shares of Letitia Preferred Stock then issued or issuable, for its aggregate
liquidation preference of $6.9 million. In connection with the redemption of the
Letitia Preferred Stock, certain rights of Quest to demand "contingent interest
payments" equal to a minimum of 3.1% of HVE's common stock equity value at the
time payment is demanded, were extinguished.
Upon the consummation of the PHI Merger, CIBC Oppenheimer Corp. ("CIBC
Oppenheimer") received a transaction fee of $500,000 for advisory services
provided to the Company in connection with the transaction. A predecessor of
CIBC Oppenheimer also provided investment banking services in connection with
the May 1996 refinancing of certain of the Company's indebtedness, for which it
received customary compensation. On July 24, 1997, CIBC Oppenheimer purchased
existing Subordinated Notes Warrants to purchase 71.43 shares of HVE Common
Stock, representing 6.25% of the HVE Common
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Stock on a fully diluted basis, for an aggregate purchase price of $2.5 million.
Such Subordinated Notes Warrants were immediately thereafter repurchased from
CIBC Oppenheimer by the Company for the same purchase price from the proceeds of
the Original Offering. Mr. Edward Levy, who became a director of the Company
effective upon the consummation of the Original Offering, is a managing director
of CIBC Oppenheimer.
On October 3, 1997, Letitia Corporation repurchased 59.091 shares of Letitia
Common Stock from the High Voltage Engineering Retirement Plan for an aggregate
purchase price of $2.25 million. The purchase price for these shares of Letitia
Common Stock was determined based on an appraisal rendered by an independent
appraisal firm engaged by Letitia Corporation for this purpose. After the
completion of this purchase, all of the remaining outstanding shares of Letitia
Common Stock were held by Clifford Press, Laurence S. Levy or certain of their
affiliates or family members.
David J. Chalmers, the President of PHI, is party to an employment
agreement, dated as of February 14, 1997, with PHI pursuant to which, among
other things, PHI established an Executive Equity Compensation Plan (the "Equity
Plan") for Dr. Chalmers' benefit. The Equity Plan was intended to provide Dr.
Chalmers with stock appreciation rights payable in shares of PHI common stock or
cash, at the discretion of PHI, in the event of certain transactions
constituting the sale of PHI to a third party. Under the terms of the Equity
Plan, Dr. Chalmers was entitled to receive a benefit calculated as 20% of the
remainder of the aggregate cash proceeds received by the common equity
stockholders in a sale of PHI minus an accreting base value equal to $10.0
million plus $40,000 for each complete month after December 31, 1996 to the
relevant determination date. The Company, as the successor to PHI, deemed the
PHI Merger to constitute a sale of PHI for purposes of the Equity Plan and paid
an aggregate benefit of approximately $3.8 million to Dr. Chalmers under the
Equity Plan (comprising a portion of the aggregate consideration paid for PHI).
In addition to the payment to Dr. Chalmers, 93 officers, directors and
employees of, and consultants to, PHI received an aggregate of approximately
$12.9 million in cash (comprising a portion of the aggregate consideration paid)
in connection with the PHI Merger in exchange for their capital stock and
options to purchase capital stock of PHI.
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PRINCIPAL STOCKHOLDERS
The following table sets forth information concerning the beneficial
ownership of the HVE Common Stock, as of the date of this Prospectus by: (i)
each person known to the Company to own beneficially more than 5% of the
outstanding shares of HVE Common Stock; (ii) each director and each executive
officer named in the "Summary Compensation Table;" and (iii) all directors and
executive officers of the Company as a group. All shares are owned by such
person with sole voting and investment power. See "Description of Outstanding
Capital Stock."
<TABLE>
<CAPTION>
HVE COMMON STOCK
--------------------------------
<S> <C> <C>
NUMBER OF PERCENT OF
NAME OF STOCKHOLDERS, DIRECTORS AND EXECUTIVE OFFICERS SHARES COMMON SHARES
- ------------------------------------------------------------------------------------- ----------- -------------------
Letitia Corporation(1)............................................................... 1,000 92.4%
Laurence S. Levy(1)(2)............................................................... 1,000 92.4%
Clifford Press(1)(3)................................................................. 1,000 92.4%
Jody E. Kurtzhalts................................................................... -- --
Oddie V. Leopando.................................................................... -- --
Renee Koudijs........................................................................ -- --
Paul H. Snyder....................................................................... -- --
Edward Levy.......................................................................... -- --
H. Cabot Lodge III................................................................... -- --
Directors and executive officers as a group.......................................... 1,000 92.4%
</TABLE>
- ------------
(1) The address of each of these persons or organizations is c/o Hyde Park
Holdings, Inc., 595 Madison Avenue, 35th Floor, New York, New York 10022.
(2) All of such shares of HVE Common Stock (92.4% of the outstanding HVE Common
Stock) are held by Letitia Corporation. Mr. Laurence S. Levy is the Chairman
of the Board, Treasurer and Secretary of Letitia Corporation. Mr. Laurence
S. Levy is also a limited partner of, and an executive officer and 50%
shareholder of the corporate general partner of, a limited partnership that
owns all of the stock of Letitia Corporation. Mr. Laurence S. Levy disclaims
beneficial ownership of any shares of HVE Common Stock.
(3) All of such shares of HVE Common Stock (92.4% of the outstanding HVE Common
Stock) are held by Letitia Corporation. Mr. Press is the President of
Letitia Corporation. Mr. Press is also a limited partner of, and an
executive officer and 50% shareholder of the corporate general partner of, a
limited partnership that owns all of the stock of Letitia Corporation. Mr.
Press disclaims beneficial ownership of any shares of HVE Common Stock.
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EXCHANGE OFFER
GENERAL
The Company hereby offers, upon the terms and subject to the conditions set
forth in this Prospectus and in the accompanying Letter of Transmittal (which
together constitute the Exchange Offer), to exchange up to $20.0 million
aggregate principal amount of Exchange Notes for a like aggregate principal
amount of New Notes properly tendered on or prior to the Expiration Date and not
withdrawn as permitted pursuant to the procedures described below. The Exchange
Offer is being made with respect to all of the New Notes; the total aggregate
principal amount of New Notes and Exchange Notes will in no event exceed $20.0
million.
PURPOSE OF THE EXCHANGE OFFER
Pursuant to the Offering, which closed on March 19, 1998, the Company issued
$20.0 million aggregate principal amount of New Notes. The issuance of the New
Notes was not registered under the Securities Act in reliance upon the exemption
provided in Section 4(2) of the Securities Act.
In connection with the issuance and sale of the New Notes, the Company
entered into the Registration Rights Agreement, which requires it, at its cost,
(i) within 45 days after the date of original issue of the New Notes, to use its
best efforts to file a registration statement (the "Exchange Offer Registration
Statement") with the Commission with respect to a registered offer to exchange
the New Notes for the Exchange Notes, which will have terms substantially
identical in all material respects to the New Notes (except that the New Notes
do not contain terms with respect to transfer restrictions), and (ii) use its
best efforts to cause, within 135 days after the Issue Date, the Exchange Offer
Registration Statement to be declared effective under the Securities Act. Upon
the Exchange Offer Registration Statement being declared effective, the Company
will offer the Exchange Notes in exchange for surrender of the New Notes. The
Company will keep the Exchange Offer open for not less than 30 days (or longer
if required by applicable law) after the date notice of the Exchange Offer is
mailed to the holders of the Existing Notes. For each $1,000 principal amount of
outstanding New Notes surrendered to the Company pursuant to the Exchange Offer,
the holder who surrendered such New Notes will receive $1,000 principal amount
of Exchange Notes. Under existing Commission interpretations, the Exchange Notes
will in general be freely transferable after the Exchange Offer without further
registration under the Securities Act; provided that in the case of
broker-dealers, a prospectus meeting the requirements of the Act be delivered as
required. The Company has agreed to use its best efforts to make this Prospectus
available to participating broker-dealers for a period necessary to permit
compliance of such broker-dealers with applicable prospectus delivery
requirements under the Securities Act, such period not to exceed 180 days except
under specified circumstances. A broker-dealer which delivers such a prospectus
to purchasers in connection with such resales will be subject to certain of the
civil liability provisions under the Act, and will be bound by the provisions of
the Registration Rights Agreement (including certain indemnification rights and
obligations). See "Plan of Distribution."
In the event that applicable interpretations of the staff of the Commission
do not permit the Company to effect such an Exchange Offer, or if for any other
reason the Exchange Offer is not consummated within 195 days of the date of the
Offering, the Company will, at its own expense, (a) promptly file a Shelf
Registration Statement covering resales of the New Notes (the "Shelf
Registration Statement"), (b) use its best efforts to cause the Shelf
Registration Statement to be declared effective under the Act within 135 days
following the date of the Offering, and (c) use its best efforts to keep
effective the Shelf Registration Statement until two years after the date of the
Offering (or such shorter period as is specified for certain circumstances
described in the Registration Rights Agreement). The Company will, in the event
of the Shelf Registration Statement, provide to each holder of the New Notes
copies of the prospectus which is a part of the Shelf Registration Statement,
notify each such holder when the Shelf Registration Statement for the New Notes
has become effective and take certain other actions as are required to permit
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unrestricted resales of the New Notes. A holder of the New Notes that sells such
Notes pursuant to the Shelf Registration Statement generally would be required
to be named as a selling securityholder in the Shelf Registration Statment and
the related prospectus and to deliver a prospectus to purchasers, will be
subject to certain of the civil liability provisions under the Securities Act in
connection with such sales and will be bound by the provisions of the
Registration Rights Agreement which are applicable to such a holder (including
certain indemnification rights and obligations).
If the Company fails to comply with the above provisions or if such
registration statement fails to become effective, then, as liquidated damages,
additional interest shall become payable in respect of the New Notes as follows:
If (i) the Exchange Offer Registration Statement or Shelf Registration
Statement is not filed within 45 days of the Issue Date, or, if required to
be filed on behalf of the holders, the Shelf Registration Statement is not
filed within 30 days following delivery of notice of a Shelf Registration
Statement;
(ii) the Exchange Offer Registration Statement or Shelf Registration
Statement is not declared effective within 135 days after the Issue Date;
and
(iii) either (A) the Company has not exchanged the Exchange Notes for all
New Notes validly tendered in accordance with the terms of the Exchange
Offer on or prior to 60 days after the date on which the Exchange Offer
Registration Statement was declared effective or (B) the Exchange Offer
Registration Statement ceases to be effective at any time prior to the time
that the Exchange Offer is consummated or (C) if applicable, the Shelf
Registration Statement has been declared effective and such Shelf
Registration Statement ceases to be effective at any time prior to the
earlier of the date on which the notes coverd by the Shelf Registration
Statement have been sold or the second anniversary of its effective date;
(each of such events referred to in clauses (i) through (iii) above is a
"Registration Default"), the sole remedy available to holders of the New Notes
will be the immediate accrual of additional interest ("Additional Interest") as
follows: the per annum interest rate on the New Notes will increase by 50 basis
points; and the per annum interest rate will increase by an additional 25 basis
points for each subsequent 90-day period during which the Registration Default
remains uncured, up to a maximum additional interest rate of 200 basis points
per annum in excess of the interest rate on the cover of this Prospectus. All
Additional Interest will be payable to holders of the New Notes in cash on each
August 15 and February 15, commencing with the first such date occurring after
any such Additional Interest commences to accrue, until such Registration
Default is cured. After the date on which such Registration Default is cured,
the interest rate on the New Notes will revert to the interest rate originally
borne by the New Notes.
The Exchange Offer is being made by the Company to satisfy its obligations
under the Registration Rights Agreement. Pursuant to the Registration Rights
Agreement, the Company has agreed to use its best efforts to consummate the
Exchange Offer no less than 30 days after the date notice of the Exchange Offer
is mailed to the holders of the Existing Notes and no more than 60 days after
the date the Company's Registration Statement of which this Prospectus forms a
part is declared effective.
The summary herein of certain provisions of the Registration Rights
Agreement does not purport to be complete and is subject to, and is qualified in
its entirety by reference to, all the provisions of the Registration Rights
Agreement, a copy of which will be available upon request to the Company.
EXPIRATION DATE; EXTENSIONS; TERMINATION; AMENDMENTS
The Exchange Offer will expire at 5:00 P.M., Boston time, on June 11, 1998
unless the Company, in its sole discretion, has extended the period of time (as
described below) for which the Exchange Offer is open (such date, as it may be
extended, is referred to herein as the "Expiration Date"). The Company expressly
reserves the right, at any time or from time to time, to extend the period of
time during which the
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Exchange Offer is open, and thereby delay acceptance for exchange of any New
Notes by giving oral notice or written notice to the Exchange Agent (as defined
herein) and by giving written notice of such extension to the holders thereof no
later than 9:00 A.M. Boston time, on the next business day after the previously
scheduled Expiration Date. During any such extension, all New Notes previously
tendered will remain subject to the Exchange Offer.
In addition, the Company expressly reserves the right to terminate or amend
the Exchange Offer and not to accept for exchange any New Notes not theretofore
accepted for exchange upon the occurrence of any of the events specified below
under "-- Certain Conditions to the Exchange Offer." If any such termination or
amendment occurs, the Company will notify the Exchange Agent and will either
issue a press release or give oral or written notice to the holders of the New
Notes as promptly as practicable.
PROCEDURES FOR TENDERING NEW NOTES
The tender to the Company of New Notes by a holder thereof as set forth
below and the acceptance thereof by the Company will constitute a binding
agreement between the tendering holder and the Company upon the terms and
subject to the conditions set forth in this Prospectus and in the accompanying
Letter of Transmittal.
A holder of New Notes may tender the same by (i) properly completing and
signing the Letter of Transmittal or a facsimile thereof (all references in this
Prospectus to the Letter of Transmittal shall be deemed to include a facsimile
thereof) and delivering the same, together with the certificate or certificates
representing the New Notes being tendered and any required signature guarantees,
to the Exchange Agent at its address set forth below on or prior to 5:00 p.m.,
Boston time, on the Expiration Date (or complying with the procedure for
book-entry transfer described below) or (ii) complying with the guaranteed
delivery procedures described below.
THE METHOD OF DELIVERY OF NEW NOTES, LETTERS OF TRANSMITTAL AND ALL OTHER
REQUIRED DOCUMENTS IS AT THE ELECTION AND RISK OF THE HOLDERS. IF SUCH DELIVERY
IS BY MAIL, IT IS RECOMMENDED THAT REGISTERED MAIL PROPERLY INSURED, WITH RETURN
RECEIPT REQUESTED, OR AN OVERNIGHT OR HAND DELIVERY SERVICE, BE USED. IN ALL
CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO INSURE TIMELY DELIVERY. NO NEW NOTES
OR LETTERS OF TRANSMITTAL SHOULD BE SENT TO THE COMPANY.
Any financial institution that is a participant in Depositary Trust
Company's ("DTC") book-entry transfer facility system may make book-entry
delivery of the New Notes by causing DTC to transfer such New Notes into the
Exchange Agent's account in accordance with DTC's procedures for such transfer.
In connection with a book-entry transfer, a Letter of Transmittal need not be
transmitted to the Exchange Agent, provided that the book-entry transfer
procedure is made in accordance with DTC's ATOP (as defined below) procedures
for transfer and such procedures are complied with on or prior to 5:00 p.m.,
Boston time, on the Expiration Date.
DTC'S Automated Tender Offer Program ("ATOP") is the only method of
processing exchange offers through DTC. To consummate the Exchange Offer through
ATOP, participants in DTC must send electronic instructions to DTC through DTC's
communication system, prior to 5:00 p.m., Boston time, on the Expiration Date,
in place of sending a signed, hard copy Letter of Transmittal. DTC is obligated
to communicate those electronic instructions to the Exchange Agent by an
"Agent's Message." To tender New Notes through ATOP, the electronic instructions
sent to DTC and transmitted by DTC to the Exchange Agent must contain the
participant's acknowledgment of its receipt of and agreement to be bound by the
Letter of Transmittal for such New Notes.
Signatures on a Letter of Transmittal or a notice of withdrawal, as the case
may be, must be guaranteed unless the New Notes surrendered for exchange
pursuant thereto are tendered (i) by a
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registered holder of the New Notes who has not completed the box entitled
"Special Issuance Instructions" or "Special Delivery Instructions" on the Letter
of Transmittal or (ii) for the account of an Eligible Institution (as defined
herein). In the event that signatures on a Letter of Transmittal or a notice of
withdrawal, as the case may be, are required to be guaranteed, such guarantee
must be by a firm which is a member of a registered national securities exchange
or a member of the National Association of Securities Dealers, Inc. or by a
commercial bank or trust company having an office or correspondent in the United
States (each an "Eligible Institution"). If New Notes are registered in the name
of a person other than a signer of the Letter of Transmittal, the New Notes
surrendered for exchange must be endorsed by, or be accompanied by a written
instrument of transfer or exchange, in satisfactory form as determined by the
Company in its sole discretion, duly executed by the registered holder with the
signature thereon guaranteed by an Eligible Institution.
The Exchange Agent has or, promptly after the date of this Prospectus, will
have established accounts with respect to the New Notes at the book-entry
transfer facility, The Depository Trust Company, for the purpose of facilitating
the Exchange Offer, and subject to the establishment thereof, any financial
institution that is a participant in the book-entry transfer facility's system
may make book-entry delivery of New Notes by causing such book-entry transfer
facility to transfer such New Notes into the Exchange Agent's account with
respect to the New Notes in accordance with the book-entry transfer facility's
procedures for such transfer. Although delivery of New Notes may be effected
through book-entry transfer in the Exchange Agent's account at the book-entry
transfer facility, an appropriate Letter of Transmittal with any required
signature guarantee and other required documents must in each case be
transmitted to and received or confirmed by the Exchange Agent at its address
set forth below on or prior to the Expiration Date, or, if the guaranteed
delivery procedures described below are complied with, within the time period
provided under such procedures.
If a holder desires to accept the Exchange Offer and time will not permit a
Letter of Transmittal or Existing Notes to reach the Exchange Agent before the
Expiration Date or the procedure for book-entry transfer cannot be completed on
a timely basis, a tender may be effected if the Exchange Agent has received at
its address or facsimile number set forth below on or prior to the Expiration
Date a letter, telegram or facsimile from an Eligible Institution setting forth
the name and address of the tendering holder, the name in which the New Notes
are registered and, if possible, the certificate number or numbers of the
certificate or certificates representing the New Notes to be tendered, and
stating that the tender is being made thereby and guaranteeing that within three
business days after the Expiration Date the New Notes in proper form for
transfer (or a confirmation of book-entry transfer of such New Notes into the
Exchange Agent's account at the book-entry transfer facility), will be delivered
by such Eligible Institution together with a properly completed and duly
executed Letter of Transmittal (and any other required documents). Unless New
Notes being tendered by the above-described method are deposited with the
Exchange Agent within the time period set forth above (accompanied or preceded
by a properly completed Letter of Transmittal and any other required documents),
the Company may, at its option, reject the tender. Copies of a Notice of
Guaranteed Delivery which may be used by an Eligible Institution for the
purposes described in this paragraph are available from the Exchange Agent.
A tender will be deemed to have been received as of the date when (i) the
tendering holder's properly completed and duly signed Letter of Transmittal
accompanied by the New Notes (or a confirmation of book-entry transfer of such
New Notes into the Exchange Agent's account at the book-entry transfer facility)
is received by the Exchange Agent, or (ii) a Notice of Guaranteed Delivery or
letter, telegram or facsimile to similar effect (as provided above) from an
Eligible Institution is received by the Exchange Agent. Issuances of Exchange
Notes in exchange for New Notes tendered pursuant to a Notice of Guaranteed
Delivery or letter, telegram or facsimile to similar effect (as provided above)
by an Eligible Institution will be made only against deposit of the Letter of
Transmittal (and any other required documents) and the tendered New Notes.
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All questions as to the validity, form, eligibility (including time of
receipt) and acceptance of New Notes tendered for exchange will be determined by
the Company in its sole discretion, which determination will be final and
binding on all parties. The Company reserves the right to reject any and all
tenders of any particular New Notes not properly tendered or reject any
particular shares of New Notes the acceptance of which might, in the judgment of
the Company or its counsel, be unlawful. The Company also reserves the absolute
right to waive any defects or irregularities or condition of the Exchange Offer
as to any particular New Notes either before or after the Expiration Date
(including the right to waive the ineligibility of any holder who seeks to
tender New Notes in the Exchange Offer). The interpretation of the terms and
conditions of the Exchange Offer (including the Letter of Transmittal and the
instructions thereto) by the Company shall be final and binding on all parties.
Unless waived, any defects or irregularities in connection with tenders of New
Notes for exchange must be cured within such time as the Company shall
determine. Neither the Company nor any other person shall be under any duty to
give notification of defects or irregularities with respect to tenders of New
Notes for exchange, nor shall any of them incur any liability for failure to
give such notification.
If the Letter of Transmittal or any New Notes or powers of attorney are
signed by trustees, executors, administrators, guardians, attorneys-in-fact,
officers of corporations or others acting in a fiduciary or representative
capacity, such persons should so indicate when signing, and unless waived by the
Company, proper evidence satisfactory to the Company of their authority to so
act must be submitted.
Each holder who participates in the Exchange Offer will be required to
represent that any Exchange Notes received by it will be acquired in the
ordinary course of its business, that at the time of the consummation of the
Exchange Offer such holder will have no arrangement or understanding with any
person to participate in the distribution of the Exchange Notes, and that such
holder is not an affiliate of the Company within the meaning of Rule 405
promulgated under the Securities Act or if it is such an affiliate, that it will
comply with the registration and prospectus delivery requirements of the
Securities Act, to the extent applicable. Each broker-dealer that receives
Exchange Notes for its own account pursuant to the Exchange Offer must
acknowledge that, to the extent required by law, it will deliver a prospectus in
connection with any resale of such Exchange Notes.
In addition, the Company reserves the right in its sole discretion to (a)
purchase or make offers for any New Notes that remain outstanding subsequent to
the Expiration Date, or, as set forth under
"-- Certain Conditions to the Exchange Offer," to terminate the Exchange Offer
and (b) to the extent permitted by applicable law, purchase New Notes in the
open market, in privately negotiated transactions or otherwise. The terms of any
such purchases or offers may differ from the terms of the Exchange Offer.
WITHDRAWAL RIGHTS
Tenders of New Notes may be withdrawn at any time prior to at any time prior
to 5:00 p.m., Boston time, on the business day prior to the Expiration Date. For
a withdrawal to be effective, a written notice of withdrawal sent by letter or
facsimile must be received by the Exchange Agent at any time prior to 5:00 p.m.,
Boston time, on the business day prior to the Expiration Date at its address or
facsimile number set forth below. Any such notice of withdrawal must (i) specify
the name of the person having tendered the New Notes to be withdrawn (the
"Depositor"), (ii) identify the New Notes to be withdrawn (including the
certificate number of numbers of the certificate or certificates representing
such New Notes and the aggregate principal amount of such New Notes), (iii) be
signed by the holder in the same manner as the original signature on the Letter
of Transmittal by which such New Notes were tendered (including any required
signature guarantees) or be accompanied by documents of transfer sufficient to
permit the Transfer Agent with respect to the New Notes to register the transfer
of such New Notes into the name of the person withdrawing the tender, and (iv)
specify the name in which any such New Notes are to be registered, if different
from that of the Depositor. All questions as to the validity, form and
eligibility (including time of receipt) of such withdrawal notices will be
determined by the Company in its sole discretion, which determination will be
final and binding on all parties. Any New Notes so withdrawn will
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be deemed not to have been validly tendered for purposes of the Exchange Offer
and no Exchange Notes will be issued with respect thereto unless the New Notes
so withdrawn are validly retendered. Any New Notes which have been tendered but
which are withdrawn will be returned to the holder thereof without cost to such
holder as soon as practicable after such withdrawal. Properly withdrawn New
Notes may be retendered by following one of the procedures described above under
"-- Procedures for Tendering New Notes" at any time prior to the Expiration
Date.
ACCEPTANCE OF NEW NOTES FOR EXCHANGE; DELIVERY OF EXCHANGE NOTES
Upon satisfaction or waiver of all of the conditions to the Exchange Offer,
the Company will accept, promptly after the Expiration Date, all New Notes
properly tendered and will issue the Exchange Notes promptly after acceptance of
the Exchange Offer. See "-- Certain Conditions to the Exchange Offer" below. For
purposes of the Exchange Offer, the Company will be deemed to have accepted
properly tendered New Notes for exchange when the Company has given oral or
written notice thereof to the Exchange Agent.
In all cases, issuance of the Exchange Notes in exchange for New Notes
pursuant to the Exchange Offer will be made only after timely receipt by the
Company of such New Notes, a properly completed and duly executed Letter of
Transmittal and all other required documents. If any tendered New Notes are not
accepted for exchange for any reason set forth in the terms and conditions of
the Exchange Offer, such unaccepted New Notes will be returned without expense
to the tendering holder thereof as promptly as practicable after the rejection
of such tender or the expiration or termination of the Exchange Offer.
UNTENDERED EXISTING NOTES
Holders of New Notes whose New Notes are not tendered or are tendered but
not accepted in the Exchange Offer will continue to hold such New Notes and will
be entitled to all the rights and preferences and subject to the limitations
applicable thereto. Following consummation of the Exchange Offer, the holders of
New Notes will continue to be subject to the existing restrictions upon transfer
thereof and, except as provided herein, the Company will have no further
obligation to such holders to provide for the registration under the Securities
Act of the New Notes held by them. To the extent that New Notes are tendered and
accepted in the Exchange Offer, the trading market for untendered and tendered
but unaccepted New Notes could be adversely affected.
CERTAIN CONDITIONS TO THE EXCHANGE OFFER
Notwithstanding any other term of the Exchange Offer, the Company will not
be required to accept for exchange, or issue Exchange Notes in exchange for, any
New Notes, and may terminate or amend the Exchange Offer, if at any time before
the acceptance of such New Notes for exchange, any of the following events shall
occur:
(A) an injunction, order or decree shall have been issued by any court
or governmental agency that would prohibit, prevent or otherwise materially
impair the ability of the Company to proceed with the Exchange Offer; or
(B) there shall occur a change in the current interpretation of the
staff of the Commission which current interpretation permits the Exchange
Notes issued pursuant to the Exchange Offer in exchange for the New Notes to
be offered for resale, resold and otherwise transferred by holders thereof
(other than (i) a broker-dealer who purchases such Exchange Notes directly
from the Company to resell pursuant to Rule 144A or any other available
exemption under the Securities Act or (ii) a person that is an affiliate of
the Company within the meaning of Rule 405 under the Securities Act),
without compliance with the registration and prospectus delivery provisions
of the Securities Act provided that such Exchange Notes are acquired in the
ordinary course of such holders' business and such holders have no
arrangement with any person to participate in the distribution of Exchange
Notes.
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The foregoing conditions are for the sole benefit of the Company and may be
asserted by the Company regardless of the circumstances giving rise to any such
condition or may be waived by the Company in whole or in part at any time and
from time to time in its sole discretion. The failure by the Company at any time
to exercise any of the foregoing rights shall not be deemed a waiver of any such
right and each such right shall be deemed an ongoing right which may be asserted
at any time and from time to time.
If the Company determines that it may terminate the Exchange Offer, as set
forth above, the Company may (i) refuse to accept any New Notes and return any
New Notes that have been tendered to the holders thereof, (ii) extend the
Exchange Offer and retain all New Notes tendered prior to the Expiration Date,
subject to the rights of such holders of tendered shares of New Notes to
withdraw their tendered New Notes, or (iii) waive such termination event with
respect to the Exchange Offer and accept all properly tendered New Notes that
have not been withdrawn. If such waiver constitutes a material change in the
Exchange Offer, the Company will disclose such change by means of a supplement
to this Prospectus that will be distributed to each registered holder of New
Notes, and the Company will extend the Exchange Offer for a period of five to
ten business days, depending upon the significance of the waiver and the manner
of disclosure to the registered holders of the New Notes, if the Exchange Offer
would otherwise expire during such period.
In addition, the Company will not accept for exchange any New Notes
tendered, and no Exchange Notes will be issued in exchange for any such New
Notes, if at any time any stop order shall be threatened by the Commission or in
effect with respect to the Registration Statement.
The Exchange Offer is not conditioned on any minimum principal amount of
Existing Notes being tendered for exchange.
EXCHANGE AGENT
State Street Bank and Trust Company has been appointed as Exchange Agent for
the Exchange Offer. Questions regarding Exchange Offer procedures and requests
for additional copies of this Prospectus or the Letter of Transmittal should be
directed to the Exchange Agent addressed as follows:
State Street Bank and Trust Company
Corporate Trust Department, 4th Floor
Two International Place
Boston, Massachusetts 02110-2804
By Telephone:
(617) 664-5587
SOLICITATION OF TENDERS, FEES AND EXPENSES
The Company has not retained any dealer-manager in connection with the
Exchange Offer and will not make any payments to brokers, dealers or other
persons soliciting acceptance of the Exchange Offer. The Company, however, will
pay the Exchange Agent reasonable and customary fees for its services and will
reimburse the Exchange Agent for its reasonable out-of-pocket expenses in
connection therewith. The cash expenses to be incurred by the Company in
connection with the Exchange Offer will be paid by the Company.
No person has been authorized to give any information or to make any
representation in connection with the Exchange Offer other than those contained
in this Prospectus. If given or made, such information or representations should
not be relied upon as having been authorized by the Company. Neither the
delivery of this Prospectus nor any exchange made hereunder shall, under any
circumstances, create any implication that there has been no change in the
affairs of the Company since the respective dates as of
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which information is given herein. The Exchange Offer is not being made to (nor
will tenders be accepted from or on behalf of) holders of Existing Notes in any
jurisdiction in which the making of the Exchange Offer or the acceptance thereof
would not be in compliance with the laws of such jurisdiction.
TRANSFER TAXES
The Company will pay all transfer taxes, if any, applicable to the exchange
of New Notes pursuant to the Exchange Offer. If, however, certificates
representing Exchange Notes or New Notes not tendered or accepted for exchange
are to be delivered to, or are to be registered or issued in the name of, any
person other than the registered holder of the New Notes tendered, or if
tendered New Notes are registered in the name of any person other than the
person signing the Letter of Transmittal, or if a transfer tax is imposed for
any reason other than the exchange of Exchange Notes pursuant to the Exchange
Offer, then the amount of any such transfer taxes (whether imposed on the
registered holder or any other persons) will be payable by the tendering holder.
If satisfactory evidence of payment of such taxes or exemption therefrom is not
submitted with the Letter of Transmittal, the amount of such transfer taxes will
be billed directly to such tendering holders.
ACCOUNTING TREATMENT
No gain or loss for accounting purposes will be recognized by the Company
upon the consummation of the Exchange Offer. Expenses incurred in connection
with the issuance of the Exchange Notes will be amortized by the Company over
the term of the Exchange Notes under generally accepted accounting principles.
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PLAN OF DISTRIBUTION
Based on no action letters issued by the staff of the Commission to third
parties, the Company believes that the Exchange Notes issued pursuant to the
Exchange Offer in exchange for New Notes may be offered for resale, resold and
otherwise transferred by holders thereof (other than (i) a broker-dealer who
purchases such Exchange Notes directly from the Company to resell pursuant to
Rule 144A or any other available exemption under the Securities Act or (ii) a
person that is an affiliate of the Company within the meaning of Rule 405 under
the Securities Act), without compliance with the registration and prospectus
delivery requirements of the Securities Act provided that Exchange Notes are
acquired in the ordinary course of such holders' business and such holders have
no arrangement with any person to participate in the distribution of such
Exchange Notes. Any holder of New Notes who tenders in the Exchange Offer for
the purpose of participating in a distribution of the Exchange Notes could not
rely on such interpretation by the staff of the Commission and must comply with
the registration and prospectus delivery requirements of the Securities Act in
connection with any resale transaction. Thus, any Exchange Notes acquired by
such holders will not be freely transferable except in compliance with the
Securities Act.
Each broker-dealer that receives Exchange Notes for its own account in
exchange for New Notes acquired as a result of market-making or other trading
activities must acknowledge that, to the extent required by law, it will deliver
a prospectus in connection with any resale of such Exchange Notes. The Company
has agreed to use its best efforts to make this Prospectus available to
participating broker-dealers for a period necessary to permit compliance of such
broker-dealers with applicable prospectus delivery requirements under the
Securities Act, such period not to exceed 180 days except under specified
circumstances.
The Company will not receive any proceeds from any sale of Exchange Notes by
broker-dealers. Exchange Notes received by broker-dealers for their own account
pursuant to the Exchange Offer may be sold from time to time in one or more
transactions in the over-the-counter market, in negotiated transactions, through
the writing of options on the Exchange Notes or a combination of such methods of
resale, at market prices prevailing at the time of resale, at prices related to
such prevailing market prices or negotiated prices. Any such resale may be made
directly to purchasers or to or through broker-dealers who may receive
compensation in the form of commissions or concessions from any such
broker-dealer and/or the purchasers of any such Exchange Notes. Any
broker-dealer that resells Exchange Notes that were received by it for its own
account pursuant to the Exchange Offer and any person that participates in the
distribution of such Exchange Notes may be deemed to be an "underwriter" within
the meaning of the Securities Act and any profit on any such resale of Exchange
Notes and any commissions or concessions received by any such broker-dealers may
be deemed to be underwriting compensation under the Securities Act. The Letter
of Transmittal states that a broker-dealer, by acknowledging that it will
deliver and by delivering a prospectus, will not be deemed to admit that it is
an "underwriter" within the meaning of the Securities Act.
The Company will indemnify the holders of the Exchange Notes (including any
broker-dealers) against certain liabilities, including liabilities under the
Securities Act.
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DESCRIPTION OF THE NOTES
Except as otherwise indicated, the following description relates to the
Existing Notes, the New Notes issued in the Offering, and the Exchange Notes.
The form and terms of the Exchange Notes are the same as the form and terms of
the Existing Notes and the New Notes, except that the Existing Notes and
Exchange Notes have been registered under the Securities Act and therefore do
not bear legends restricting the transfer thereof. The New Notes are, and the
Exchange Notes will be, obligations of the Company evidencing the same
indebtedness as the Existing Notes and will be entitled to the benefits of the
Indenture, dated as of August 8, 1997, as amended by the Amendments (as so
amended, the "Indenture") by and between the Company and State Street Bank and
Trust Company, as trustee (the "Trustee"). The terms of the Notes include those
stated in the Indenture and those made part of the Indenture by reference to the
Trust Indenture Act of 1939, as amended (the "Trust Indenture Act") as in effect
on the date of the Indenture. The Notes are subject to all such terms, and
holders of the Notes are referred to the Indenture and the Trust Indenture Act
for a statement of them.
The following is a summary of the material terms and provisions of the Notes
after giving effect to the Amendments. This summary does not purport to be a
complete description of the Notes and is subject to the detailed provisions of,
and qualified in its entirety by reference to, the Notes and the Indenture
(including the definitions contained therein). A copy of the form of Indenture
may be obtained from the Company by any holder or prospective investor upon
request. In addition, the Company has filed the Indenture (prior to its
amendment) as an exhibit to a Registration Statement filed by the Company in
connection with the exchange of a majority of the Existing Notes for Original
Notes on January 16, 1998 and has filed a First Supplemental Indenture
containing the Amendments as an exhibit to the Registration Statement of which
this Prospectus is a part. Definitions relating to certain capitalized terms are
set forth under "-- Certain Definitions" and throughout this description.
Capitalized terms that are used but not otherwise defined herein have the
meanings assigned to them in the Indenture and such definitions are incorporated
herein by reference. As used in this description, the "Company" means HVE only.
As of March 28, 1998, $135.0 million aggregate principal amount of Existing
Notes were outstanding under the Indenture. The form and terms of the Exchange
Notes are the same as the form and terms of the New Notes and the Existing
Notes, except that (i) the Existing Notes and the Exchange Notes have been
registered under the Securities Act and, therefore, do not bear legends
restricting the transfer thereof and (ii) neither the holders of the New Notes
nor the holders of the Existing Notes are entitled to any rights under the
Exchange Offer Registration Rights Agreement, which will terminate (with respect
to the New Notes) when the Exchange Offer is consummated.
GENERAL
The Notes are limited in aggregate principal amount to $155.0 million. The
Notes are general unsecured obligations of the Company ranking PARI PASSU in
right of payment to all existing and future senior indebtedness of the Company
and senior in right of payment to any current or future subordinated
indebtedness of the Company.
The Indenture, the Notes, the Intercompany Notes and the agreement governing
the pledge of the Intercompany Notes to the Trustee, as collateral agent, are
governed by the laws of the Commonwealth of Massachusetts.
MATURITY, INTEREST AND PRINCIPAL
The Notes will mature on August 15, 2004. The Existing Notes bear interest
at a rate of 10 1/2% per annum from August 8, 1997 until maturity. The New Notes
bear, and the Exchange Notes will bear, interest at a rate of 10 1/2% per annum
from February 15, 1998 to maturity. Interest is payable semiannually in arrears
on August 15 and February 15, commencing February 15, 1998, with respect to the
Existing
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Notes, and August 15, 1998, with respect to the New Notes and the Exchange
Notes, to holders of record of the Notes at the close of business on the
immediately preceding August 1, and February 1, respectively.
OPTIONAL REDEMPTION
The Notes will be redeemable at the option of the Company, in whole or in
part, at any time on or after August 15, 2001 at the following redemption prices
(expressed as a percentage of principal amount), together, in each case, with
accrued and unpaid interest to the redemption date, if redeemed during the
twelve-month period beginning on August 15, of each year listed below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
- ------------------------------------------------------------------------------------- -----------
<S> <C>
2001................................................................................. 105.250%
2002................................................................................. 102.625%
2003 and thereafter.................................................................. 100.000%
</TABLE>
Notwithstanding the foregoing, the Company may redeem in the aggregate up to
35% of the original principal amount of Notes at any time and from time to time
prior to August 15, 2000, at a redemption price equal to 110.500% of the
aggregate principal amount so redeemed, plus accrued and unpaid interest to the
redemption date with the Net Proceeds of one or more Qualified Equity Offerings
of the Company, or Parent to the extent such proceeds were contributed to the
Company as common equity; provided that at least $100.8 million of the principal
amount of Notes originally issued remains outstanding immediately after the
occurrence of any such redemption and that any such redemption occurs within 60
days following the closing of any such Qualified Equity Offering.
In the event of redemption of fewer than all of the Notes, the Trustee shall
select by lot or in such other manner as it shall deem fair and equitable the
Notes to be redeemed. The Notes will be redeemable in whole or in part upon not
less than 30 nor more than 60 days' prior written notice, mailed by first class
mail to a holder's last address as it shall appear on the register maintained by
the Registrar of the Notes. On and after any redemption date, interest will
cease to accrue on the Notes or portions thereof called for redemption unless
the Company shall fail to redeem any such Note.
INTERCOMPANY NOTES
Upon the issuance of the Original Notes, the aggregate principal amount of
the Original Notes was allocated among the Company and each of its direct
Restricted Subsidiaries in consideration for the release of certain obligations
of such Restricted Subsidiaries relating to the indebtedness being repaid in
connection with such offering. Upon consummation of the Offering, Stewart Warner
issued the Stewart Warner Intercompany Note to the Company. HVE Acquisition
Corp. and TTS are co-obligors under the Stewart Warner Intercompany Note.
Amounts allocated to individual Restricted Subsidiaries are evidenced by the
Intercompany Notes. The Intercompany Notes: (i) are senior obligations of each
Restricted Subsidiary; (ii) bear interest at least at the rate borne by the
Notes; (iii) mature on the maturity date of the Notes or such earlier time when
no Notes remain outstanding; (iv) not be subject to redemption, repayment or
repurchase prior to the stated maturity thereof except as set forth under "--
Offer to Repurchase Upon a Qualified Subsidiary IPO" and "-- Limitation on
Transfer of Intercompany Notes; Repayment of Intercompany Notes;" and (v) are
pledged by the Company as collateral on the Notes. See "The Transactions --
Intercompany Notes."
OFFER TO REPURCHASE UPON A QUALIFIED SUBSIDIARY IPO
The Indenture allows each Restricted Subsidiary that is an obligor under an
Intercompany Note to effect a Qualified Subsidiary IPO; provided that (i) the
Restricted Subsidiary consummating such Qualified Subsidiary IPO will have
repaid in full its applicable Intercompany Note, together with all accrued and
unpaid interest, if any, thereon, (ii) immediately after giving pro forma effect
to such Qualified Subsidiary
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IPO, the Company (excluding the EBITDA and Consolidated Fixed Charges of the
Restricted Subsidiary effecting the Qualified Subsidiary IPO) could incur $1.00
of additional Indebtedness (other than Permitted Indebtedness) under the
covenant set forth under "-- Limitation on Additional Indebtedness," assuming
for the purposes of this calculation only, that the offer to repurchase referred
to in the following paragraph has been subscribed in full, and (iii) no Default
or Event of Default shall have occurred and be continuing. Upon completion of a
Qualified Subsidiary IPO and the repayment of its Intercompany Note, such
Restricted Subsidiary will become an Unrestricted Subsidiary.
Within 30 days of the consummation of a Qualified Subsidiary IPO, the
Company shall mail a notice to each holder of Notes stating, among other things:
(1) that the holders of the Notes have the right to require the Company to apply
the Net Proceeds received from the repayment of the applicable Intercompany Note
to repurchase Notes from the holders thereof at a purchase price in cash equal
to 101% of the aggregate principal amount thereof (plus accrued and unpaid
interest to the purchase date) in the principal amount of the Intercompany Note
being repaid by such Restricted Subsidiary; (2) the purchase date, which shall
be no earlier than 30 days and not later than 60 days from the date such notice
is mailed; (3) the instructions, determined by the Company, that each holder
must follow in order to have such Notes repurchased; and (4) if the aggregate
principal amount of Notes surrendered by Holders exceeds the principal amount of
such Intercompany Note, the Company shall select the Notes to be purchased on a
pro rata basis.
Following the consummation of any such offer to holders of the Notes
following a Qualified Subsidiary IPO, the remaining Net Proceeds from the
payment of the Intercompany Note repurchased by the Company in connection
therewith shall be proceeds of an Asset Sale and shall be applied in accordance
with the "Limitation on Certain Asset Sales" covenant.
CERTAIN COVENANTS
The Indenture contains, among others, the following covenants. Except as
otherwise specified, all of the covenants described below appear in the
Indenture.
LIMITATION ON ADDITIONAL INDEBTEDNESS
The Company will not, and will not permit any Restricted Subsidiary of the
Company to, directly or indirectly, incur (as defined) any Indebtedness
(including Acquired Indebtedness); provided that the Company may incur
Indebtedness if (i) after giving effect to the incurrence of such Indebtedness
and the receipt and application of the proceeds thereof, the Company's
consolidated Fixed Charge Coverage Ratio (determined on a pro forma basis for
the last four fiscal quarters of the Company for which financial statements are
available at the date of determination) is at least 2.00 to 1, and (ii) no
Default or Event of Default shall have occurred and be continuing at the time or
as a consequence of the incurrence of such Indebtedness; and, provided, further,
that any Restricted Subsidiary may incur Indebtedness if (i) after giving effect
to the incurrence of such Indebtedness and the receipt and application of the
proceeds thereof, such Restricted Subsidiary's Fixed Charge Coverage Ratio
(determined on a pro forma basis for the last four fiscal quarters of such
Restricted Subsidiary for which financial statements are available at the date
of determination) is at least 2.50 to 1, and (ii) no Default or Event of Default
shall have occurred and be continuing at the time or as a consequence of the
incurrence of such Indebtedness. For purposes of computing the Fixed Charge
Coverage Ratio, (A) if the Indebtedness which is the subject of a determination
under this provision is Acquired Indebtedness, or Indebtedness incurred in
connection with the simultaneous acquisition (by way of merger, consolidation or
otherwise) of any Person, business, property or assets (an "Acquisition"), then
such ratio shall be determined by giving effect (on a pro forma basis, as if the
transaction had occurred at the beginning of the four-quarter period) to both
the incurrence or assumption of such Acquired Indebtedness or such other
Indebtedness by the Company and the inclusion in the Company's or such
Restricted Subsidiary's EBITDA of the EBITDA of the acquired Person, business,
property or assets, (B) if any Indebtedness to be incurred (x) bears a floating
rate of
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interest, the interest expense on such Indebtedness shall be calculated as if
the rate in effect on the date of determination had been the applicable rate for
the entire period (taking into account on a pro forma basis any Interest Rate
Agreement applicable to such Indebtedness if such Interest Rate Agreement has a
remaining term as at the date of determination in excess of 12 months), (y)
bears, at the option of the Company or a Subsidiary, a fixed or floating rate of
interest, the interest expense on such Indebtedness shall be computed by
applying, at the option of the Company or such Subsidiary, either a fixed or
floating rate and (z) was incurred under a revolving credit facility, the
interest expense on such Indebtedness shall be computed based upon the average
daily balance of such Indebtedness during the applicable period, (C) for any
quarter prior to the date hereof included in the calculation of such ratio, such
calculation shall be made on a pro forma basis, giving effect to the PHI
Acquisition, the issuance of the Notes and the use of the net proceeds therefrom
as if the same had occurred at the beginning of the four-quarter period used to
make such calculation and (D) for any quarter included in the calculation of
such ratio prior to the date that any Asset Sale was consummated, or that any
Indebtedness was incurred, or that any Acquisition was effected, by the Company
or any of its Restricted Subsidiaries, such calculation shall be made on a pro
forma basis, giving effect to each Asset Sale, incurrence of Indebtedness or
Acquisition, as the case may be, and the use of any proceeds therefrom, as if
the same had occurred at the beginning of the four-quarter period used to make
such calculation.
Notwithstanding the foregoing, the Company and its Restricted Subsidiaries
may incur Permitted Indebtedness.
The Company will not, directly or indirectly, in any event incur any
Indebtedness which by its terms (or by the terms of any agreement governing such
Indebtedness) is subordinated to any other Indebtedness of the Company unless
such Indebtedness is also by its terms (or by the terms of any agreement
governing such Indebtedness) made expressly subordinate to the Notes to the same
extent and in the same manner as such Indebtedness is subordinated pursuant to
subordination provisions that are most favorable to the holders of any other
Indebtedness of the Company.
LIMITATION ON RESTRICTED PAYMENTS
The Company will not make, and will not permit any of its Restricted
Subsidiaries to, directly or indirectly, make, any Restricted Payment, unless:
(a) no Default or Event of Default shall have occurred and be continuing
at the time of or immediately after giving effect to such Restricted
Payment;
(b) immediately after giving pro forma effect to such Restricted
Payment, the Company could incur $1.00 of additional Indebtedness (other
than Permitted Indebtedness) under the covenant set forth under "--
Limitation on Additional Indebtedness"; and
(c) immediately after giving effect to such Restricted Payment, the
aggregate of all Restricted Payments declared or made after the Issue Date
does not exceed the sum of (1) 50% of the Company's cumulative Consolidated
Net Income after the Issue Date (or minus 100% of any cumulative deficit in
Consolidated Net Income during such period), (2) 100% of the aggregate Net
Proceeds and the fair market value of securities or other property received
by the Company as a capital contribution to the common equity of the Company
after the Issue Date and from the issue or sale, after the Issue Date, of
Capital Stock (other than Disqualified Capital Stock or Capital Stock of the
Company issued to any Subsidiary of the Company) of the Company or any
Indebtedness or other securities of the Company convertible into or
exercisable or exchangeable for Capital Stock (other than Disqualified
Capital Stock) of the Company which has been so converted or exercised or
exchanged, as the case may be and (3) $350,000. For purposes of determining
under this clause (c) the amount expended for Restricted Payments, cash
distributed shall be valued at the face amount thereof and property other
than cash shall be valued at its fair market value.
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The provisions of this covenant shall not prohibit (i) the payment of any
distribution within 60 days after the date of declaration thereof, if at such
date of declaration such payment would comply with the provisions of the
Indenture, (ii) the retirement of any shares of Capital Stock of the Company or
subordinated Indebtedness by conversion into, or by or in exchange for, shares
of Capital Stock (other than Disqualified Capital Stock), or out of, the Net
Proceeds of the substantially concurrent sale (other than to a Subsidiary of the
Company) of other shares of Capital Stock of the Company (other than
Disqualified Capital Stock), (iii) the redemption or retirement of Indebtedness
of the Company subordinated to the Notes in exchange for, by conversion into, or
out of the Net Proceeds of, a substantially concurrent sale or incurrence of
Indebtedness (other than any Indebtedness owed to a Subsidiary) of the Company
that is contractually subordinated in right of payment to the Notes to at least
the same extent as the Subordinated Indebtedness being redeemed or retired, (iv)
the retirement of any shares of Disqualified Capital Stock by conversion into,
or by exchange for, shares of Disqualified Capital Stock, or out of the Net
Proceeds of the substantially concurrent sale (other than to a Subsidiary of the
Company) of other shares of Disqualified Capital Stock, (v) so long as no
Default or Event of Default shall have occurred and be continuing, the payment
of cash dividends on the Series A Preferred Stock when such dividends are
required to be paid in cash in accordance with the Restated Articles, (vi)
payment from the net proceeds of the Original Offering, of up to $2.25 million
to Letitia Corporation to be used to repurchase from the High Voltage
Engineering Corporation Retirement Plan shares of Letitia Common Stock within 60
days of the Issue Date for not more than $2.25 million, and fund a proportional
accrual relating to the Subordinated Notes Warrants of up to $150,000, (vii) so
long as no Default or Event of Default shall have occurred and be continuing,
the exchange of Warrants for Subsidiary Warrants or Common Shares for Subsidiary
Shares in the event of a Qualified Subsidiary IPO, (viii) payments required to
effect the reclassification of an Unrestricted Subsidiary as a Restricted
Subsidiary in compliance with "-- Offer to Repurchase Upon a Qualified
Subsidiary IPO," and (ix) the payment of management fees for services provided
by Parent or its employees in an aggregate annual amount not to exceed $750,000;
provided, however, that any amounts paid by the Company pursuant to clauses (i),
(v) and (vii) shall reduce amounts otherwise available for Restricted Payments.
Not later than the date of making any Restricted Payment, the Company shall
deliver to the Trustee an Officers' Certificate stating that such Restricted
Payment is permitted and setting forth the basis upon which the calculations
required by the covenant "-- Limitation on Restricted Payments" were computed,
which calculations may be based upon the Company's latest available financial
statements, and that no Default or Event of Default exists and is continuing and
no Default or Event of Default will occur immediately after giving effect to any
Restricted Payments.
LIMITATIONS ON INVESTMENTS
The Company will not, and will not permit any of its Restricted Subsidiaries
to, make any Investment other than (i) a Permitted Investment or (ii) an
Investment that is made as a Restricted Payment in compliance with the "--
Limitation on Restricted Payments" covenant, after the Issue Date.
LIMITATIONS ON LIENS
The Company will not, and will not permit any of its Restricted Subsidiaries
to, create, incur or otherwise cause or suffer to exist or become effective any
Liens of any kind (other than Permitted Liens and other than a pledge of the
Intercompany Notes to the Trustee as security for the Notes) upon any property
or asset of the Company or any Restricted Subsidiary or any shares of stock or
debt of any Restricted Subsidiary which owns property or assets, now owned or
hereafter acquired, unless (i) if such Lien secures Indebtedness which is pari
passu with the Notes, then the Notes are secured on an equal and ratable basis
with the obligations so secured until such time as such obligation is no longer
secured by a Lien or (ii) if such Lien secures Indebtedness which is
subordinated to the Notes, any such Lien shall be subordinated to a Lien on such
property or asset or shares of stock or debt granted to the Holders of the
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Notes to the same extent as such subordinated Indebtedness is subordinated to
the Notes; provided, however, that in no event will the Company create, incur or
otherwise cause or suffer to exist or become effective any Liens of any kind on
any of the Intercompany Notes other than a pledge of the Intercompany Notes to
the Trustee as security for the Notes.
LIMITATION ON TRANSACTIONS WITH AFFILIATES
The Company will not, and will not permit any of its Restricted Subsidiaries
to, directly or indirectly, enter into or suffer to exist any transaction or
series of related transactions (including, without limitation, the sale,
purchase, exchange or lease of assets, property or services) with any Affiliate
(including entities in which the Company or any of its Restricted Subsidiaries
owns a minority interest) or holder of 10% or more of the Company's Common Stock
(an "Affiliate Transaction") or extend, renew, waive or otherwise modify the
terms of any Affiliate Transaction entered into prior to the Issue Date unless
(i) such Affiliate Transaction is between or among the Company and its Wholly
Owned Subsidiaries; or (ii) the terms of such Affiliate Transaction are fair and
reasonable to the Company or such Restricted Subsidiary, as the case may be, and
the terms of such Affiliate Transaction are at least as favorable as the terms
which could be obtained by the Company or such Restricted Subsidiary, as the
case may be, in a comparable transaction made on an arm's length basis between
unaffiliated parties. In any Affiliate Transaction involving an amount or having
a value in excess of $1.0 million which is not permitted under clause (i) above,
the Company must obtain a resolution of the Board of Directors certifying that
such Affiliate Transaction complies with clause (ii) above. In transactions with
a value in excess of $3.0 million which are not permitted under clause (i)
above, the Company must obtain a written opinion as to the fairness of such a
transaction from an independent investment banking firm selected by the Company.
The foregoing provisions will not apply to (i) any Restricted Payment that
is not prohibited by the provisions described under "-- Limitation on Restricted
Payments" contained herein or (ii) any transaction, approved by the Board of
Directors of the Company, with an officer or director of the Company or of any
Subsidiary in his or her capacity as officer or director entered into in the
ordinary course of business, including compensation and employee benefit
arrangements with any officer or director of the Company or of any Subsidiary
that are customary for public companies in the manufacturing industry.
LIMITATION ON CERTAIN ASSET SALES
The Company will not, and will not permit any of its Restricted Subsidiaries
to, consummate an Asset Sale unless (i) the Company or its Restricted
Subsidiaries, as the case may be, receives consideration at the time of such
sale or other disposition at least equal to the fair market value thereof (as
determined in good faith by the Company's Board of Directors, and evidenced by a
board resolution); (ii) not less than 85% of the consideration received by the
Company or its Subsidiaries, as the case may be, is in the form of cash or cash
equivalents (those equivalents allowed under "Temporary Cash Investments"); and
(iii) subject to the Company's obligations with respect to the Intercompany
Notes in the event of a Qualified Subsidiary IPO, the Asset Sale Proceeds
received by the Company or such Restricted Subsidiary are applied (a) first, to
the extent the Company elects, or is required, to prepay, repay or purchase debt
under any then existing Indebtedness of the Company or any Restricted Subsidiary
ranking PARI PASSU to the Notes within 180 days following the receipt of the
Asset Sale Proceeds from any Asset Sale, provided that any such repayment shall
result in a permanent reduction of the commitments thereunder in an amount equal
to the principal amount so repaid; (b) second, to the extent of the balance of
Asset Sale Proceeds after application as described above, to the extent the
Company elects, to an investment in assets (including Capital Stock or other
securities purchased in connection with the acquisition of Capital Stock or
property of another person) used or useful in businesses similar or ancillary to
the business of the Company or any Restricted Subsidiary as conducted at the
time of such Asset Sale, provided that such investment occurs or the Company or
a Restricted Subsidiary enters into contractual commitments to make such
investment, subject
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only to customary conditions (other than the obtaining of financing), on or
prior to the 181st day following receipt of such Asset Sale Proceeds and Asset
Sale Proceeds contractually committed are so applied within 360 days following
the receipt of such Asset Sale Proceeds (the "Reinvestment Date"); and (c)
third, if on the Reinvestment Date with respect to any Asset Sale, the Available
Asset Sale Proceeds exceed $10 million, the Company shall apply an amount equal
to Available Asset Sale Proceeds to an offer to repurchase the Notes, at a
purchase price in cash equal to 100% of the principal amount thereof plus
accrued and unpaid interest, if any, to the date of repurchase (an "Excess
Proceeds Offer"). If an Excess Proceeds Offer is not fully subscribed, the
Company may retain the portion of the Available Asset Sale Proceeds not required
to repurchase Notes and the Available Asset Sale Proceeds shall be reset to
zero.
If the Company is required to make an Excess Proceeds Offer, the Company
shall mail, within 30 days following the Reinvestment Date, a notice to the
Holders stating, among other things: (1) that such Holders have the right to
require the Company to apply the Available Asset Sale Proceeds to repurchase
such Notes at a purchase price in cash equal to 100% of the principal amount
thereof plus accrued and unpaid interest, if any, to the date of purchase; (2)
the purchase date, which shall be no earlier than 30 days and not later than 60
days from the date such notice is mailed; (3) the instructions, determined by
the Company, that each Holder must follow in order to have such Notes
repurchased; and (4) the calculations used in determining the amount of
Available Asset Sale Proceeds to be applied to the repurchase of such Notes.
LIMITATION ON DISPOSITION OF ASSETS
The Company will not, and will not permit any Restricted Subsidiary of the
Company to, sell, convey, lease, transfer or otherwise contribute or dispose of
any of its assets or property or the proceeds from the sale or other disposition
of any such assets or property (including any shares of Capital Stock of any
Restricted Subsidiary of the Company) existing on the date the Original Notes
were issued (each referred to for the purpose of this covenant as a
"disposition") to any other Subsidiary of the Company, other than (a) DE MINIMIS
dispositions made in the ordinary course of business, (b) intercompany loans and
cash equity contributions (other than the Intercompany Notes), including,
without limitation, any such loans or contributions for the purpose of effecting
the payment of any tax owed by any such Subsidiary to any governmental entity),
(c) dispositions of trade or other receivables and assets relating to trade and
(d) dispositions permitted by the covenant "-- Limitation on Restricted
Payments."
LIMITATION ON PREFERRED STOCK OF RESTRICTED SUBSIDIARIES
The Company will not permit any Restricted Subsidiary to issue any Preferred
Stock (except Preferred Stock issued to the Company or a Restricted Subsidiary)
or permit any Person (other than the Company or a Restricted Subsidiary) to hold
any such Preferred Stock unless the Company or such Restricted Subsidiary would
be entitled to incur or assume Indebtedness under the covenant described under
"-- Limitation on Additional Indebtedness" in the aggregate principal amount
equal to the aggregate liquidation value of the Preferred Stock to be issued.
LIMITATION ON CAPITAL STOCK OF RESTRICTED SUBSIDIARIES
The Company will not (i) sell, pledge, hypothecate or otherwise convey or
dispose of any Capital Stock of a Restricted Subsidiary or (ii) permit any of
its Restricted Subsidiaries to issue any Capital Stock, other than to the
Company or a Wholly Owned Subsidiary of the Company. The foregoing restrictions
shall not apply to the issuance and sale of Capital Stock of a Restricted
Subsidiary that is an obligor under an Intercompany Note in compliance with
"Offer to Repurchase Upon a Qualified Subsidiary IPO," an Asset Sale made in
compliance with "-- Limitation on Certain Asset Sales" or the issuance of
Preferred Stock in compliance with the covenant described under "-- Limitation
on Preferred Stock of Restricted Subsidiaries."
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LIMITATION ON TRANSFER OF INTERCOMPANY NOTES; REPAYMENT OF INTERCOMPANY NOTES
With the exception of the pledge of the Intercompany Notes to the Trustee as
security for the Notes, the Company will not sell, pledge, hypothecate or
otherwise convey or dispose of any Intercompany Note except in accordance with
"-- Offer to Repurchase upon a Qualified Subsidiary IPO." The Company shall
agree not to reduce the principal amount of any Intercompany Note or otherwise
amend or modify the terms of any Intercompany Note as in effect on the Issue
Date.
Limitation on Business of HIVEC Holdings; Capital Stock of Foreign
Subsidiaries
HIVEC Holdings shall not engage in any trade or business, incur any
Indebtedness other than Permitted Indebtedness, incur any liabilities other than
nominal expenses necessary to maintain its corporate existence, hold any assets
other than the capital stock of HIVEC, B.V., or sell, pledge, encumber or
transfer or cause or permit the sale, pledge, encumbrance or transfer of Capital
Stock of any of its direct or indirect Subsidiaries. Datcon Instrument Company
shall not sell, pledge, encumber or transfer the Capital Stock of any of its
direct or indirect foreign subsidiaries including, but not limited to,
Instrumentos Stewart Warner de Mexico, S.A. de C.V. Notwithstanding the
foregoing, by May 31, 1998, the Company shall cause HIVEC Holdings and HIVEC,
B.V. to: (i) transfer (directly or indirectly) to Datcon Instrument Company all
of the capital stock of Industrias Jorda that is not held by Datcon Instrument
Company (or a direct or indirect subsidiary of Datcon Instrument Company); and
(ii) transfer (directly or indirectly) all of the asset of Anderson Ireland (as
defined herein) to Anderson (or a direct or indirect subsidiary of Anderson)
((i) and (ii) together, the "Foreign Realignment").
LIMITATION ON SALE AND LEASE-BACK TRANSACTIONS
The Company will not, and will not permit any Restricted Subsidiary to,
enter into any Sale and Lease-Back Transaction unless (i) the consideration
received in such Sale and Lease-Back Transaction is at least equal to the fair
market value of the property sold, as determined by a board resolution of the
Company and (ii) the Company could incur the Attributable Indebtedness in
respect of such Sale and Lease-Back Transaction in compliance with the covenant
described under "-- Limitation on Additional Indebtedness."
LIMITATION ON DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING SUBSIDIARIES
The Company will not, and will not permit any of its Restricted Subsidiaries
to, directly or indirectly, create or otherwise cause or suffer to exist or
become effective any encumbrance or restriction on the ability of any Restricted
Subsidiary to meet its principal and interest obligations on the Notes (a)(i)
through the payment of dividends or make any other distributions to the Company
or any of its Restricted Subsidiaries (A) on its Capital Stock or (B) with
respect to any other interest or participation in, or measured by, its profits,
or (ii) through the payment of any Indebtedness owed to the Company or any of
its Restricted Subsidiaries, (b) through the making of loans or advances or
capital contributions to the Company or any of its Restricted Subsidiaries or
(c) through the transfer of any of its properties or assets to the Company or
any of its Restricted Subsidiaries, except for such encumbrances or restrictions
existing under or by reason of (i) encumbrances or restrictions existing on the
Issue Date, (ii) the Indenture and the Notes, (iii) applicable law, (iv) any
instrument governing Indebtedness or Capital Stock of a Person acquired by the
Company or any of its Restricted Subsidiaries or of any Person that becomes a
Restricted Subsidiary as in effect at the time of such acquisition or such
Person becoming a Restricted Subsidiary (except to the extent such Indebtedness
was incurred in connection with or in contemplation of such acquisition of such
Person becoming a Restricted Subsidiary), which encumbrance or restriction is
not applicable to any Person, or the properties or assets of any Person, other
than the Person, or the property of assets of the Person (including any
Subsidiary of the Person), so acquired, (v) customary non-assignment provisions
in leases or other agreements entered into in the ordinary course of business
and consistent with past practices, (vi) Refinancing Indebtedness; provided that
such restrictions are in the aggregate no more
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restrictive than those contained in the agreements governing the Indebtedness
being extended, refinanced, renewed, replaced, defeased or refunded or (vii)
customary restrictions in security agreements or mortgages securing Indebtedness
of the Company or a Restricted Subsidiary to the extent such restrictions
restrict the transfer or encumbrance of the property subject to such security
agreements and mortgages.
GUARANTEES OF CERTAIN INDEBTEDNESS
The Company will not permit any of its Restricted Subsidiaries, directly or
indirectly, to Guarantee any Indebtedness of the Company or a Guarantor (except
as permitted under clause (i) of the definition of "Permitted Indebtedness"
below) unless, in the case of a domestic Restricted Subsidiary, such Restricted
Subsidiary simultaneously executes and delivers to the Trustee a supplemental
indenture, in form reasonably satisfactory to the Trustee, providing for the
Guarantee by such Restricted Subsidiary of the payment of the obligations of the
Company under the Notes in the manner set forth under "-- Guarantees." Neither
the Company nor any such Guarantor shall be required to make a notation on the
Notes to reflect any such Guarantee. Nothing in this covenant shall be construed
to permit any Restricted Subsidiary of the Company to incur Indebtedness
otherwise prohibited by the "-- Limitation on Additional Indebtedness" covenant.
PAYMENTS FOR CONSENT
Neither the Company nor any of its Subsidiaries shall, directly or
indirectly, pay or cause to be paid any consideration, whether by way of
interest, fee or otherwise, to any holder of any Notes for or as an inducement
to any consent, waiver or amendment of any of the terms or provisions of the
Indenture or the Notes unless such consideration is offered to be paid or agreed
to be paid to all holders of the Notes which so consent, waive or agree to amend
in the time frame set forth in solicitation documents relating to such consent,
waiver or agreement.
CHANGE OF CONTROL OFFER
Within 20 days of the occurrence of a Change of Control, the Company shall
notify the Trustee in writing of such occurrence and shall make an offer to
purchase (the "Change of Control Offer") the outstanding Notes at a purchase
price equal to 101% of the principal amount thereof plus any accrued and unpaid
interest thereon to the Change of Control Payment Date (as hereinafter defined)
(such applicable purchase price being hereinafter referred to as the "Change of
Control Purchase Price") in accordance with the procedures set forth in this
covenant.
Within 20 days of the occurrence of a Change of Control, the Company also
shall (i) cause a notice of the Change of Control Offer to be sent at least once
to the Dow Jones News Service or similar business news service in the United
States and (ii) send by first-class mail, postage prepaid, to the Trustee and to
each Holder of the Notes, at the address appearing in the register maintained by
the Registrar of the Notes, a notice stating:
(1) that the Change of Control Offer is being made pursuant to this
covenant and that all Notes tendered will be accepted for payment, and
otherwise subject to the terms and conditions set forth herein;
(2) the Change of Control Purchase Price and the purchase date (which
shall be a Business Day no earlier than 20 business days nor more than 60
days from the date such notice is mailed (the "Change of Control Payment
Date"));
(3) that any Note not tendered will continue to accrue interest;
(4) that, unless the Company defaults in the payment of the Change of
Control Purchase Price, any Notes accepted for payment pursuant to the
Change of Control Offer shall cease to accrue interest after the Change of
Control Payment Date;
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(5) that Holders accepting the offer to have their Notes purchased
pursuant to a Change of Control Offer will be required to surrender the
Notes to the Paying Agent at the address specified in the notice prior to
the close of business on the second Business Day preceding the Change of
Control Payment Date;
(6) that Holders will be entitled to withdraw their acceptance if the
Paying Agent receives, not later than the close of business on the third
Business Day preceding the Change of Control Payment Date, a telegram,
telex, facsimile transmission or letter setting forth the name of the
Holder, the principal amount of the Notes delivered for purchase, and a
statement that such Holder is withdrawing his election to have such Notes
purchased;
(7) that Holders whose Notes are being purchased only in part will be
issued new Notes equal in principal amount to the unpurchased portion of the
Notes surrendered, provided that each Note purchased and each such new Note
issued shall be in an original principal amount in denominations of $1,000
and integral multiples thereof;
(8) any other procedures that a Holder must follow to accept a Change of
Control Offer or effect withdrawal of such acceptance; and
(9) the name and address of the Paying Agent.
On the Change of Control Payment Date, the Company shall, to the extent
lawful, (i) accept for payment Notes or portions thereof tendered pursuant to
the Change of Control Offer, (ii) deposit with the Paying Agent money sufficient
to pay the purchase price of all Notes or portions thereof so tendered, and
(iii) deliver or cause to be delivered to the Trustee Notes so accepted together
with an Officers' Certificate stating the Notes or portions thereof tendered to
the Company. The Paying Agent shall promptly mail to each Holder of Notes so
accepted payment in an amount equal to the purchase price for such Notes, and
the Company shall execute and issue, and the Trustee shall promptly authenticate
and mail to such Holder, a new Note equal in principal amount to any unpurchased
portion of the Notes surrendered; provided that each such new Note shall be
issued in an original principal amount in denominations of $1,000 and integral
multiples thereof.
The Indenture will provide that, (A) if the Company or any Subsidiary
thereof has issued any outstanding (i) Indebtedness that is subordinated in
right of payment to the Notes or (ii) Preferred Stock, and the Company or such
Subsidiary is required to make a Change of Control Offer or to make a
distribution with respect to such subordinated Indebtedness or Preferred Stock
in the event of a Change of Control, the Company shall not consummate any such
offer or distribution with respect to such subordinated Indebtedness or
Preferred Stock until such time as the Company shall have paid the Change of
Control Purchase Price in full to the holders of Notes that have accepted the
Company's Change of Control Offer and shall otherwise have consummated the
Change of Control Offer made to holders of the Notes and (B) the Company will
not issue Indebtedness that is subordinated in right of payment to the Notes or
Preferred Stock with change of control provisions requiring the payment of such
Indebtedness or Preferred Stock prior to the payment of the Notes in the event
of a Change in Control under the Indenture.
In the event that a Change of Control occurs and the holders of Notes
exercise their right to require the Company to purchase Notes, if such purchase
constitutes a "tender offer" for purposes of Rule 14e-1 under the Exchange Act
at that time, the Company will comply with the requirements of Rule 14e-1 as
then in effect with respect to such repurchase.
MERGER, CONSOLIDATION OR SALE OF ASSETS
The Company will not and will not permit any Restricted Subsidiary to
consolidate with, merge with or into, or transfer all or substantially all of
its assets (as an entirety or substantially as an entirety in one transaction or
a series of related transactions), to any Person unless: (i) the Company or the
Restricted
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Subsidiary, as the case may be, shall be the continuing Person, or the Person
(if other than the Company or the Restricted Subsidiary) formed by such
consolidation or into which the Company or the Restricted Subsidiary, as the
case may be, is merged or to which the properties and assets of the Company or
the Restricted Subsidiary, as the case may be, are transferred shall be a
corporation organized and existing under the laws of the United States or any
state thereof or the District of Columbia and shall expressly assume, by a
supplemental indenture, executed and delivered to the Trustee, in form
satisfactory to the Trustee, all of the obligations of the Company or the
Restricted Subsidiary, as the case may be, under the Notes and the Indenture,
and the obligations under the Indenture shall remain in full force and effect;
(ii) immediately before and immediately after giving effect to such transaction,
no Default or Event of Default shall have occurred and be continuing; and (iii)
immediately after giving effect to such transaction on a pro forma basis the
Company or such Person could incur at least $1.00 of additional Indebtedness
(other than Permitted Indebtedness) under the covenant set forth under "--
Limitation on Additional Indebtedness;" provided that a Person that is a
Restricted Subsidiary may merge into the Company or another Person that is a
Restricted Subsidiary without complying with this clause (iii).
In connection with any consolidation, merger or transfer of assets
contemplated by this provision, the Company shall deliver, or cause to be
delivered, to the Trustee, in form and substance reasonably satisfactory to the
Trustee, an Officers' Certificate and an opinion of counsel, each stating that
such consolidation, merger or transfer and the supplemental indenture in respect
thereto comply with this provision and that all conditions precedent herein
provided for relating to such transaction or transactions have been complied
with.
GUARANTEES
Under the circumstances described above in "Guarantees of Certain
Indebtedness," the Company's payment obligations under the Notes may in the
future be jointly and severally guaranteed (a "Guarantee") on a senior unsecured
basis by existing or future domestic Restricted Subsidiaries of the Company as
guarantors (each, a "Guarantor"). It is not expected that any Restricted
Subsidiary of the Company will initially execute and deliver the Indenture as a
Guarantor. Each Guarantor will guarantee to each holder of the Notes and the
Trustee, the full and prompt performance of the obligations of the Company under
the Notes, including the payment of principal of premium, if any, on and
interest on the Notes pursuant to its Guarantee. Any of the Company's Restricted
Subsidiaries which become Unrestricted Subsidiaries pursuant to the terms and
provisions of the Indenture shall be released from their obligations under the
Guarantees.
The obligations of each Guarantor will be limited to the maximum amount as
will, after giving effect to all other contingent and fixed liabilities of such
Guarantor (including, without limitation, any guarantees of other Indebtedness)
and after giving effect to any collections from or payments made by or on behalf
of any other Guarantor in respect of the obligations of such other Guarantor
under its Guarantee or pursuant to its contribution obligations under the
Indenture, result in the obligations of such Guarantor under the Guarantee not
constituting a fraudulent conveyance or fraudulent transfer under federal or
state law. Each Guarantor that makes a payment or distribution under a Guarantee
shall be entitled to a contribution from each other Guarantor in a pro rata
amount based on the Adjusted Net Assets of each Guarantor.
A Guarantor shall be released from all of its obligations under its
Guarantee if all or substantially all of its assets are sold or all of its
Capital Stock is sold, in each case in a transaction in compliance with the
covenant described under "-- Limitation on Certain Asset Sales," the Guarantor
merges with or into or consolidates with, or transfers all or substantially all
of its assets to, the Company, another Guarantor or a Restricted Subsidiary that
is an obligor under an Intercompany Note in a transaction in compliance with "--
Merger, Consolidation or Sale of Assets," or, in the case of a Restricted
Subsidiary that is an obligor under an Intercompany Note, upon the consummation
of a Qualified Subsidiary IPO, complying with "Offer to Repurchase Upon a
Qualified Subsidiary IPO" and, in each case, such Guarantor has delivered
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to the Trustee an Officers' Certificate and an opinion of counsel, each stating
that all conditions precedent herein provided for relating to such transaction
have been complied with.
EVENTS OF DEFAULT
The following events are defined in the Indenture as "Events of Default":
(i) default in payment of any principal of, or premium, if any, on the
Notes;
(ii) default for 30 days in payment of any interest on the Notes;
(iii) default by the Company or any Guarantor in the observance or
performance of any other covenant in the Notes or the Indenture for 60 days
after written notice from the Trustee or the holders of not less than 25% in
aggregate principal amount of the Notes then outstanding;
(iv) failure to pay when due principal, interest or premium in an
aggregate amount of $3,000,000 or more with respect to any Indebtedness of
the Company or any Restricted Subsidiary thereof, or the acceleration of any
such Indebtedness aggregating $3,000,000 or more which default shall not be
cured, waived or postponed pursuant to an agreement with the holders of such
Indebtedness within 60 days after written notice as provided in the
Indenture, or such acceleration shall not be rescinded or annulled within 20
days after written notice as provided in the Indenture;
(v) any final judgment or judgments which can no longer be appealed for
the payment of money in excess of $3,000,000 shall be rendered against the
Company or any Restricted Subsidiary thereof, and shall not be discharged
for any period of 60 consecutive days during which a stay of enforcement
shall not be in effect;
(vi) certain events involving bankruptcy, insolvency or reorganization
of the Company or any Restricted Subsidiary thereof;
(vii) the failure of the Company to cause up to $2.25 million of the
proceeds of the Original Offerings to be applied, as completely as possible,
to the repurchase of Letitia Common Stock held by the High Voltage
Engineering Corporation Retirement Plan within 60 days of the Issue Date; or
(viii) the failure of the Company to cause the Foreign Realignment to
occur.
The Indenture provides that the Trustee may withhold notice to the Holders
of the Notes of any default (except in payment of principal or premium, if any,
or interest on the Notes) if the Trustee considers it to be in the best interest
of the Holders of the Notes to do so.
The Indenture provides that if an Event of Default (other than an Event of
Default resulting from certain events of bankruptcy, insolvency or
reorganization) shall have occurred and be continuing, then the Trustee or the
holders of not less than 25% in aggregate principal amount of the Notes then
outstanding may declare to be immediately due and payable the entire principal
amount of all the Notes then outstanding plus accrued interest to the date of
acceleration; provided, however, that after such acceleration but before a
judgment or decree based on acceleration is obtained by the Trustee, the holders
of a majority in aggregate principal amount of outstanding Notes may, under
certain circumstances, rescind and annul such acceleration if all Events of
Default, other than nonpayment of accelerated principal, premium or interest,
have been cured or waived as provided in the Indenture. In case an Event of
Default resulting from certain events of bankruptcy, insolvency or
reorganization shall occur, the principal, premium and interest amount with
respect to all of the Notes shall be due and payable immediately without any
declaration or other act on the part of the Trustee or the Holders of the Notes.
The holders of a majority in principal amount of the Notes then outstanding
shall have the right to waive any existing default or compliance with any
provision of the Indenture or the Notes and to direct the time, method and place
of conducting any proceeding for any remedy available to the Trustee, subject to
certain limitations specified in the Indenture.
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No Holders of any Note will have any right to institute any proceeding with
respect to the Indenture or for any remedy thereunder, unless such Holders shall
have previously given to the Trustee written notice of a continuing Event of
Default and unless also the holders of at least 25% in aggregate principal
amount of the outstanding Notes shall have made written request and offered
reasonable indemnity to the Trustee to institute such proceeding as a trustee,
and unless the Trustee shall not have received from the holders of a majority in
aggregate principal amount of the outstanding Notes a direction inconsistent
with such request and shall have failed to institute such proceeding within 60
days. However, such limitations do not apply to a suit instituted on such Note
on or after the respective due dates expressed in such Note.
DEFEASANCE AND COVENANT DEFEASANCE
The Indenture provides the Company may elect either (a) to defease and be
discharged from any and all obligations with respect to the Notes (except for
the obligations to register the transfer or exchange of such Notes, to replace
temporary or mutilated, destroyed, lost or stolen Notes, to maintain an office
or agency in respect of the Notes and to hold monies for payment in trust)
("defeasance") or (b) to be released from its obligations with respect to the
Notes under certain covenants contained in the Indenture and described above
under "-- Certain Covenants" ("covenant defeasance"), upon the deposit with the
Trustee (or other qualifying trustee), in trust for such purpose, of money
and/or U.S. Government Obligations which through the payment of principal and
interest in accordance with their terms will provide money, in an amount
sufficient to pay the principal of, premium, if any, and interest on the Notes,
on the scheduled due dates therefor or on a selected date of redemption in
accordance with the terms of the Indenture. Such a trust may only be established
if, among other things, the Company has delivered to the Trustee an opinion of
counsel (as specified in the Indenture) (i) to the effect that neither the trust
nor the Trustee will be required to register as an investment company under the
Investment Company Act of 1940, as amended, and (ii) describing either a private
ruling concerning the Notes or a published ruling of the Internal Revenue
Service, to the effect that holders of the Notes or persons in their positions
will not recognize income, gain or loss for federal income tax purposes as a
result of such deposit, defeasance and discharge and will be subject to federal
income tax on the same amount and in the same manner and at the same times, as
would have been the case if such deposit, defeasance and discharge had not
occurred.
MODIFICATION OF INDENTURE
From time to time, the Company and the Trustee may, without the consent of
holders of the Notes, amend the Indenture or the Notes or supplement the
Indenture for certain specified purposes, including providing for uncertificated
Notes in addition to certificated Notes, and curing any ambiguity, defect or
inconsistency, or making any other change that does not materially and adversely
affect the rights of any holder. The Indenture contains provisions permitting
the Company and the Trustee, with the consent of holders of at least a majority
in principal amount of the outstanding Notes, to modify or supplement the
Indenture or the Notes, except that no such modification shall, without the
consent of each holder affected thereby, (i) reduce the amount of Notes whose
holders must consent to an amendment, supplement, or waiver to the Indenture or
the Notes, (ii) reduce the rate of or change the time for payment of interest on
any Note, (iii) reduce the principal of or premium on or change the stated
maturity of any Note, (iv) make any Note payable in money other than that stated
in the Note or change the place of payment from New York, New York, (v) change
the amount or time of any payment required by the Notes or reduce the premium
payable upon any redemption of Notes, or change the time before which no such
redemption may be made, (vi) waive a default on the payment of the principal of,
interest on, or redemption payment with respect to any Note, or (vii) take any
other action otherwise prohibited by the Indenture to be taken without the
consent of each holder affected thereby.
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REPORTS TO HOLDERS
So long as the Company is subject to the periodic reporting requirements of
the Exchange Act, it will continue to furnish the information required thereby
to the Commission and to the holders of the Notes, the Indenture provides that
even if the Company is not subject to the reporting requirements of Section 13
or Section 15(d) of the Exchange Act, the Company will be obligated to provide
to the holders of Notes all annual and quarterly reports and other documents
which the Company would have been required to file with the Commission pursuant
to such Sections 13 and 15(d) had it been so subject and provide to all holders
of Notes, without costs to such holders, copies of such reports and documents.
COMPLIANCE CERTIFICATE
The Company will deliver to the Trustee on or before 100 days after the end
of the Company's fiscal year and on or before 50 days after the end of each of
the first, second and third fiscal quarters in each year an Officers'
Certificate stating whether or not the signers know of any Default or Event of
Default that has occurred. If they do, the certificate will describe the Default
or Event of Default and its status.
THE TRUSTEE
The Trustee under the Indenture will be the Registrar and Paying Agent with
regard to the Notes. The Indenture provides that, except during the continuance
of an Event of Default, the Trustee will perform only such duties as are
specifically set forth in the Indenture. During the existence of an Event of
Default, the Trustee will exercise such rights and powers vested in it under the
Indenture and use the same degree of care and skill in its exercise as a prudent
person would exercise under the circumstances in the conduct of such person's
own affairs.
TRANSFER AND EXCHANGE
Holders of the Notes may transfer or exchange Notes in accordance with the
Indenture. The Registrar under such Indenture may require a Holder, among other
things, to furnish appropriate endorsements and transfer documents, and to pay
any taxes and fees required by law or permitted by the Indenture. The Registrar
is not required to transfer or exchange any Note selected for redemption. Also,
the Registrar is not required to transfer or exchange any Note for a period of
15 days before selection of the Notes to be redeemed.
The registered Holder of a Note may be treated as the owner of it for all
purposes.
CERTAIN DEFINITIONS
Set forth below is a summary of certain of the defined terms used in the
covenants contained in the Indenture. Reference is made to the Indenture for the
full definition of all such terms as well as any other capitalized terms used
herein for which no definition is provided.
"ACQUIRED INDEBTEDNESS" means Indebtedness of a Person (including an
Unrestricted Subsidiary) existing at the time such Person becomes a Restricted
Subsidiary or assumed in connection with the acquisition of assets from such
Person.
"ADJUSTED NET ASSETS" of a Guarantor at any date shall mean the lesser of
(x) the amount by which the fair value of the property of such Guarantor exceeds
the total amount of liabilities, including, without limitation, contingent
liabilities (after giving effect to all other fixed and contingent liabilities),
but excluding liabilities under the Guarantee, of such Guarantor at such date
and (y) the amount by which the present fair salable value of the assets of such
Guarantor at such date exceeds the amount that will be required to pay the
probable liability of such Guarantor on its debts (after giving effect to all
other fixed and contingent liabilities and after giving effect to any collection
from any subsidiary of such Guarantor in
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respect of the obligations of such Subsidiary under the Guarantee), excluding
Indebtedness in respect of the Guarantee, as they become absolute and matured.
"AFFILIATE" of any specified Person means any other Person which directly or
indirectly through one or more intermediaries controls, or is controlled by, or
is under common control with, such specified Person. For the purposes of this
definition, "control" (including, with correlative meanings, the terms
"controlling," "controlled by," and "under common control with"), as used with
respect to any Person, means the possession, directly or indirectly, of the
power to direct or cause the direction of the management or policies of such
Person, whether through the ownership of voting securities, by agreement or
otherwise.
"ASSET SALE" means the sale, transfer, repayment or other disposition (other
than to the Company or any of its Restricted Subsidiaries) in any single
transaction or series of related transactions with a fair market value in excess
of $1.0 million of (a) any Capital Stock of or other equity interest in any
Restricted Subsidiary of the Company, (b) all or substantially all of the assets
of the Company or of any Restricted Subsidiary thereof, (c) real property, (d)
all or substantially all of the assets of any business owned by the Company or
any Restricted Subsidiary thereof, or a division, line of business or comparable
business segment of the Company or any Restricted Subsidiary thereof; or (e) any
of the Intercompany Notes; provided that Asset Sales shall not include sales,
leases, conveyances, transfers or other dispositions to the Company or to a
Restricted Subsidiary or to any other Person if after giving effect to such
sale, lease, conveyance, transfer or other disposition such other Person becomes
a Restricted Subsidiary; and provided, further that any sale of capital stock of
any Restricted Subsidiary pursuant to a Qualified Subsidiary IPO shall be an
Asset Sale only to the extent provided under "-- Offer to Repurchase Upon a
Qualified Subsidiary IPO."
"ASSET SALE PROCEEDS" means, with respect to any Asset Sale, (i) cash
received by the Company or any Restricted Subsidiary from such Asset Sale
(including cash received as consideration for the assumption of liabilities
incurred in connection with or in anticipation of such Asset Sale), after (a)
provision for all income or other taxes measured by or resulting from such Asset
Sale, (b) payment of all brokerage commissions, underwriting and other fees and
expenses related to such Asset Sale, (c) provision for minority interest holders
in any Restricted Subsidiary as a result of such Asset Sale and (d) deduction of
appropriate amounts to be provided by the Company or a Restricted Subsidiary as
a reserve, in accordance with GAAP, against any liabilities associated with the
assets sold or disposed of in such Asset Sale and retained by the Company or a
Restricted Subsidiary after such Asset Sale, including, without limitation,
pension and other post employment benefit liabilities and liabilities related to
environmental matters or against any indemnification obligations associated with
the assets sold or disposed of in such Asset Sale, and (ii) promissory notes and
other noncash consideration received by the Company or any Restricted Subsidiary
from such Asset Sale or other disposition, but only upon the liquidation or
conversion of such notes or noncash consideration into cash.
"ATTRIBUTABLE INDEBTEDNESS" under the Indenture in respect of a Sale and
Lease- Back Transaction means, as at the time of determination, the greater of
(i) the fair value of the property subject to such arrangement (as determined by
the Board of Directors) and (ii) the present value of the obligation (discounted
at a rate of 10%, compounded annually) of the lessee for rental payments during
the remaining term of the lease included in such Sale and Lease-Back Transaction
(including any period for which such lease has been extended).
"AVAILABLE ASSET SALE PROCEEDS" means, with respect to any Asset Sale, the
aggregate Asset Sale Proceeds from such Asset Sales that have not been applied
in accordance with clauses (iii)(a) or (iii)(b), and which has not yet been the
basis for an Excess Proceeds Offer in accordance with clause (iii)(c) of the
first paragraph of "-- Limitation on Certain Asset Sales."
"BENNER BERG" means Benner Berg, Inc., an Illinois corporation.
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"CAPITAL STOCK" means, with respect to any Person, any and all shares or
other equivalents (however designated) of capital stock, partnership interests
or any other participation, right or other interest in the nature of an equity
interest in such Person or any option, warrant or other security convertible
into any of the foregoing.
"CAPITALIZED LEASE OBLIGATIONS" means Indebtedness represented by
obligations under a lease that is required to be capitalized for financial
reporting purposes in accordance with GAAP, and the amount of such Indebtedness
shall be the capitalized amount of such obligations determined in accordance
with GAAP.
A "CHANGE OF CONTROL" of the Company will be deemed to have occurred at such
time as (i) any Person (including a Person's Affiliates and associates), other
than a Permitted Holder, becomes the beneficial owner (as defined under Rule
13d-3 or any successor rule or regulation promulgated under the Exchange Act) of
50% or more of the total voting or economic power of the Company's or Parent's
Common Stock, as the case may be, (ii) any Person (including a Person's
Affiliates and associates), other than a Permitted Holder, becomes the
beneficial owner of more than 33 1/3% of the total voting power of the Common
Stock, and the Permitted Holders beneficially own, in the aggregate, a lesser
percentage of the total voting power of the Company or Parent, as the case may
be, than such other Person and do not have the right or ability by voting power,
contract or otherwise to elect or designate for election a majority of the Board
of Directors of the Company or Parent, as the case may be, (iii) there shall be
consummated any consolidation or merger of the Company or Parent in which the
Company or Parent, as the case may be, is not the continuing or surviving
corporation or pursuant to which the Common Stock of the Company or Parent, as
the case may be, would be converted into cash, securities or other property,
other than a merger or consolidation of the Company or Parent, as the case may
be, in which the holders of the Common Stock of the Company or Parent, as the
case may be, outstanding immediately prior to the consolidation or merger hold,
directly or indirectly, at least a majority of the Common Stock of the surviving
corporation immediately after such consolidation or merger, or (iv) during any
period of two consecutive years, individuals who at the beginning of such period
constituted the Board of Directors of the Company (together with any new
directors whose election by such Board of Directors or whose nomination for
election by the shareholders of the Company or Parent, as the case may be, has
been approved by 66 2/3% of the directors then still in office who either were
directors at the beginning of such period or whose election or recommendation
for election was previously so approved) cease to constitute a majority of the
Board of Directors of the Company or Parent, as the case may be.
"COMMON STOCK" of any Person means all Capital Stock of such Person that is
generally entitled to (i) vote in the election of directors of such Person or
(ii) if such Person is not a corporation, vote or otherwise participate in the
selection of the governing body, partners, managers or others that will control
the management and policies of such Person.
"CONSOLIDATED FIXED CHARGES" means, with respect to any Person and with
respect to any determination date, the sum of a Person's (i) Consolidated
Interest Expense, plus (ii) the product of (x) the aggregate amount of all
dividends paid on Disqualified Capital Stock of the Company or on each series of
preferred stock of each Subsidiary of such Person (other than dividends paid or
payable in additional shares of preferred stock or to the Company or any of its
Wholly Owned Subsidiaries) times (y) a fraction, the numerator of which is one
and the denominator of which is one minus the then current effective combined
federal, state and local tax rate of such Person (expressed as a decimal), in
each case, for the prior four full fiscal quarter periods for which financial
results are available.
"CONSOLIDATED INTEREST EXPENSE" means, with respect to any Person, for any
period, the aggregate amount of interest which, in conformity with GAAP, would
be set forth opposite the caption "interest expense" or any like caption on an
income statement for such Person and its Restricted Subsidiaries on a
consolidated basis (including, but not limited to, Redeemable Dividends, whether
paid or accrued, on Subsidiary Preferred Stock (as defined below in these
"Certain Definitions"), imputed interest included in
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Capitalized Lease Obligations, all commissions, discounts and other fees and
charges owed with respect to letters of credit and bankers' acceptance
financing, the net costs associated with hedging obligations, amortization of
other financing fees and expenses, the interest portion of any deferred payment
obligation, amortization of discount or premium, if any, and all other non-cash
interest expense) plus, without duplication, all net capitalized interest for
such period and all interest paid under any guarantee of Indebtedness (including
a guarantee of principal, interest or any combination thereof) of any Person,
plus, without duplication, the amount of all dividends or distributions paid on
Disqualified Capital Stock (other than dividends paid or payable in shares of
Capital Stock of the Company) and, minus: (i) amortization of deferred financing
costs and expenses; (ii) prepayment penalties on outstanding indebtedness of the
Company retired on the Issue Date; (iii) accrual, redemption or payment of
Contingent Interest Payments, and (iv) any accretions with respect to any of the
Warrants.
"CONSOLIDATED NET INCOME" means, with respect to any Person, for any period,
the aggregate of the Net Income of such Person and its Restricted Subsidiaries
for such period, on a consolidated basis, determined in accordance with GAAP;
provided, however, that (a) the Net Income of any Person, including any
Unrestricted Subsidiary of the Company or a Restricted Subsidiary (the "other
Person") in which the Person in question or any of its Restricted Subsidiaries
has less than a 100% interest (which interest does not cause the net income of
such other Person to be consolidated into the net income of the Person in
question in accordance with GAAP) shall be included only to the extent of the
amount of dividends or distributions actually paid to the Person in question or
the Restricted Subsidiary, (b) the Net Income of any Restricted Subsidiary of
the Person in question that is subject to any restriction or limitation on the
payment of dividends or the making of other distributions to the Company (other
than pursuant to the Notes or the Indenture) shall be excluded to the extent of
such restriction or limitation, (c)(i) the Net Income of any Person acquired in
a pooling of interests transaction for any period prior to the date of such
acquisition and (ii) any net gain (but not loss) resulting from an Asset Sale by
the Person in question or any of its Restricted Subsidiaries other than in the
ordinary course of business shall be excluded, (d) extraordinary, unusual and
non-recurring gains and losses shall be excluded and (e) without duplication,
the tax effected non-cash accrual or accretion of, and payment of, Contingent
Interest Payments or Warrants during such period shall be excluded.
"CONTINGENT INTEREST PAYMENTS" means the contingent interest payments
payable by the Company to BancBoston Capital, Inc. pursuant to the Contingent
Interest Payment Agreement, dated as of April 27, 1991, between the Company,
Robicon and Datcon Instrument Company and BancBoston Capital, Inc.
("BancBoston"), as amended, and that Agreement for Additional Contingent
Interest Payments (Quest), dated as of June 29, 1995, between the Company,
Robicon and Datcon Instrument Company and BancBoston.
"DISQUALIFIED CAPITAL STOCK" means any Capital Stock of the Company or a
Restricted Subsidiary thereof which, by its terms (or by the terms of any
security into which it is convertible or for which it is exchangeable at the
option of the holder), or upon the happening of any event, matures or is
mandatorily redeemable, pursuant to a sinking fund obligation or otherwise, or
is redeemable at the option of the holder thereof, in whole or in part, on or
prior to the maturity date of the Notes, for cash or securities constituting
Indebtedness. Without limitation of the foregoing, Disqualified Capital Stock
shall be deemed to include (i) any Preferred Stock of a Restricted Subsidiary of
the Company and (ii) any Preferred Stock of the Company, with respect to either
of which, under the terms of such Preferred Stock, by agreement or otherwise,
such Restricted Subsidiary or the Company is obligated to pay current dividends
or distributions in cash during the period prior to the maturity date of the
Notes; provided, however, that Preferred Stock of the Company or any Restricted
Subsidiary thereof that is issued with the benefit of provisions requiring a
change of control offer to be made for such Preferred Stock in the event of a
change of control of the Company or Restricted Subsidiary, which provisions have
substantially the same effect as the provisions of the Indenture described under
"Change of Control," shall not be deemed to be Disqualified Capital Stock
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solely by virtue of such provisions; and, provided, further, that the Series A
Preferred Stock shall be deemed not to be Disqualified Capital Stock.
"EBITDA" means, for any Person, for any period, an amount equal to (a) the
sum of (i) Consolidated Net Income for such period, plus (ii) the provision for
taxes for such period based on income or profits to the extent such income or
profits were included in computing Consolidated Net Income and any provision for
taxes utilized in computing net loss under clause (i) hereof, plus (iii)
Consolidated Interest Expense for such period (but only including Redeemable
Dividends in the calculation of such Consolidated Interest Expense to the extent
that such Redeemable Dividends have been included in the calculation of
Consolidated Net Income), plus (iv) depreciation for such period on a
consolidated basis, plus (v) amortization of intangibles for such period on a
consolidated basis, plus (vi) any other non-cash items reducing Consolidated Net
Income for such period, minus (b) all non-cash items increasing Consolidated Net
Income for such period, all for such Person and its Subsidiaries determined in
accordance with GAAP, except that with respect to the Company each of the
foregoing items shall be determined on a consolidated basis with respect to the
Company and its Restricted Subsidiaries only; and provided, however, that, for
purposes of calculating EBITDA during any fiscal quarter, cash income from a
particular Investment of such Person shall be included only (x) if cash income
has actually been received by such Person with respect to such Investment, or
(y) if the cash income derived from such Investment is attributable to Temporary
Cash Investments.
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended.
"FIXED CHARGE COVERAGE RATIO" of any Person means, with respect to any
determination date, the ratio of (i) EBITDA for such Person's prior four
full-fiscal quarters for which financial results have been reported prior to the
determination date to (ii) Consolidated Fixed Charges of such Person for such
period.
"GAAP" means generally accepted accounting principles consistently applied
as in effect in the United States from time to time.
"HVE ACQUISITION CORP." means HVE Acquisition Corp., an Illinois
corporation.
"INCUR" means, with respect to any Indebtedness or other obligation of any
Person, to create, issue, incur (by conversion, exchange or otherwise), assume,
guarantee or otherwise become liable in respect of such Indebtedness or other
obligation or the recording, as required pursuant to GAAP or otherwise, of any
such Indebtedness or other obligation on the balance sheet of such person (and
"incurrence," "incurred," "incurable," and "incurring" shall have meanings
correlative to the foregoing); provided that a change in GAAP that results in an
obligation of such Person that exists at such time becoming Indebtedness shall
not be deemed an incurrence of such Indebtedness.
"INDEBTEDNESS" means (without duplication), with respect to any Person, any
indebtedness at any time outstanding, secured or unsecured, contingent or
otherwise, which is for borrowed money (whether or not the recourse of the
lender is to the whole of the assets of such Person or only to a portion
thereof), or evidenced by bonds, notes, debentures or similar instruments or
representing the balance deferred and unpaid of the purchase price of any
property (excluding, without limitation, any balances that constitute accounts
payable or trade payables, and other accrued liabilities arising in the ordinary
course of business) if and to the extent any of the foregoing indebtedness would
appear as a liability upon a balance sheet of such Person prepared in accordance
with GAAP, and shall also include, to the extent not otherwise included (i) any
Capitalized Lease Obligations, (ii) obligations secured by a lien to which the
property or assets owned or held by such Person is subject, whether or not the
obligation or obligations secured thereby shall have been assumed, (iii)
guarantees of items of other Persons which would be included within this
definition for such other Persons (whether or not such items would appear upon
the balance sheet of the guarantor), (iv) all obligations for the reimbursement
of any obligor on any letter of credit, banker's acceptance or similar credit
transaction, (v) in the case of the Company, Disqualified Capital Stock of the
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Company or any Restricted Subsidiary thereof, and (vi) obligations of any such
Person under any Interest Rate Agreement applicable to any of the foregoing (if
and to the extent such Interest Rate Agreement obligations would appear as a
liability upon a balance sheet of such Person prepared in accordance with GAAP).
The amount of Indebtedness of any Person at any date shall be the outstanding
balance at such date of all unconditional obligations as described above and,
with respect to contingent obligations, the maximum liability upon the
occurrence of the contingency giving rise to the obligation; provided (i) that
the amount outstanding at any time of any Indebtedness issued with original
issue discount, including the Notes, is the principal amount of such
Indebtedness less the remaining unamortized portion of the original issue
discount of such Indebtedness at such time as determined in conformity with GAAP
and (ii) that Indebtedness shall not include any liability for federal, state,
local or other taxes. Notwithstanding any other provision of the foregoing
definition, any trade payable arising from the purchase of goods or materials or
for services obtained in the ordinary course of business shall not be deemed to
be "Indebtedness" of the Company or any Restricted Subsidiaries for purposes of
this definition. Furthermore, guarantees of (or obligations with respect to
letters of credit supporting) Indebtedness otherwise included in the
determination of such amount shall not also be included.
"INTEREST RATE AGREEMENT" means, for any Person, any interest rate swap
agreement, interest rate cap agreement, interest rate collar agreement or other
similar agreement designed to protect the party indicated therein against
fluctuations in interest rates.
"INVESTMENTS" means, directly or indirectly, any advance (other than
advances to employees and directors of the Company and its Restricted
Subsidiaries in the ordinary course of business of the Company and its
Restricted Subsidiaries), account receivable (other than an account receivable
arising in the ordinary course of business), loan or capital contribution to (by
means of transfers of property to others, payments for property or services for
the account or use of others or otherwise), the purchase of any stock, bonds,
notes, debentures, partnership or joint venture interests or other securities
of, the acquisition, by purchase or otherwise, of all or substantially all of
the business or assets or stock or other evidence of beneficial ownership of,
any Person or the making of any investment in any Person. Investments shall
exclude extensions of trade credit on commercially reasonable terms in
accordance with normal trade practices.
"ISSUE DATE" means the date the Notes are first issued by the Company and
authenticated by the Trustee under the Indenture.
"LIEN" means with respect to any property or assets of any Person, any
mortgage or deed of trust, pledge, hypothecation, assignment, deposit
arrangement, security interest, lien, charge, easement, encumbrance, preference,
priority, or other security agreement or preferential arrangement of any kind or
nature whatsoever on or with respect to such property or assets (including
without limitation, any Capitalized Lease Obligation, conditional sales, or
other title retention agreement having substantially the same economic effect as
any of the foregoing).
"NET INCOME" means, with respect to any Person for any period, the net
income (loss) of such Person determined in accordance with GAAP.
"NET INVESTMENT" means the excess of (i) the aggregate amount of all
Investments in Unrestricted Subsidiaries made by the Company on or after the
Issue Date (in the case of an Investment made other than in cash, the amount
shall be the fair market value of such Investment as determined in good faith by
the board of directors of the Company) over (ii) the sum of (A) the aggregate
amount returned in cash on such Investments whether through interest payments,
principal payments, dividends or other distributions and (B) the net cash
proceeds received by the Company from the disposition of all or any portion of
such Investments (other than to a Subsidiary of the Company); provided, however,
that with respect to all Investments made in an Unrestricted Subsidiary the sum
of clauses (A) and (B) above with respect to such Investments shall not exceed
the aggregate amount of all such Investments made in such Unrestricted
Subsidiary.
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"NET PROCEEDS" means (a) in the case of any sale of Capital Stock by any
Person, the aggregate net proceeds received by such Person, after payment of
expenses, commissions and the like incurred in connection therewith, whether
such proceeds are in cash or in property (valued at the fair market value
thereof, as determined in good faith by the board of directors, at the time of
receipt), (b) in the case of any exchange, exercise, conversion or surrender of
outstanding securities of any kind for or into shares of Capital Stock of the
Company which is not Disqualified Capital Stock, the net book value of such
outstanding securities on the date of such exchange, exercise, conversion or
surrender (plus any additional amount required to be paid by the holder to the
Company upon such exchange, exercise, conversion or surrender, less any and all
payments made to the holders, e.g., on account of fractional shares and less all
expenses incurred by the Company in connection therewith) and (c) in the case of
any issuance of any Indebtedness by the Company or any Restricted Subsidiary,
the aggregate net cash proceeds received by such Person after the payment of
expenses, commissions, underwriting discounts and the like incurred in
connection therewith.
"NEW REVOLVING CREDIT FACILITY" means the credit agreement or credit
agreements to be entered into by and among the Company, the Restricted
Subsidiaries and any one or more lenders from time to time parties thereto, as
the same may be amended, extended, increased, renewed, restated, supplemented or
otherwise modified (in whole or in part, and without limitation as to amount,
terms, conditions, covenants and other provisions) from time to time and any
agreement or agreements governing Indebtedness incurred to refinance, replace,
restructure or refund in whole or in part the borrowings and then maximum
commitments under the New Revolving Credit Facility or such agreement (whether
with the original administrative agent and lenders or other lenders or other
agents and lenders or otherwise and whether provided under the original credit
facility or other credit agreements or otherwise). The Company shall promptly
notify the Trustee of any such refunding, replacement, restructuring or
refinancing of the New Revolving Credit Facility.
"OFFICERS' CERTIFICATE" means, with respect to any Person, a certificate
signed by the Chairman of the Board, the Chief Executive Officer, the Deputy
Chairman of the Board, the President, the Chief Operating Officer or any Vice
President and the Chief Financial Officer or any Treasurer of such Person that
shall comply with applicable provisions of the Indenture.
"PARENT" means Letitia Corporation, a Delaware corporation and the Company's
sole stockholder.
"PERMITTED HOLDERS" means (a) Parent, (b) Laurence S. Levy, (c) Clifford
Press and (d) any spouse and any trust, holding company, or similar entity
established by and or controlled by either or both of Laurence S. Levy and
Clifford Press for the principal benefit of any of them or their spouses, lineal
descendants or other family members.
"PERMITTED INDEBTEDNESS" means:
(i) Indebtedness of the Company or any Restricted Subsidiary arising
under or in connection with the New Revolving Credit Facility in an amount
not to exceed $25,000,000 less any mandatory prepayments actually made
thereunder (to the extent, in the case of payments of revolving credit
indebtedness, that the corresponding commitments have been permanently
reduced);
(ii) Indebtedness under the Notes and the Guarantees, if applicable;
(iii) (A) Indebtedness of foreign Restricted Subsidiaries outstanding
under one or more working capital facilities not to exceed the aggregate of
85% of eligible accounts receivable and 60% of eligible inventory of each
such Restricted Subsidiary and (B) additional Indebtedness of such
Restricted Subsidiaries not to exceed $2,000,000 in aggregate principal
amount outstanding at any one time;
(iv) Indebtedness not covered by any other clause of this definition
which is outstanding on the date of the Indenture;
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(v) Indebtedness of the Company to any Restricted Subsidiary and
Indebtedness of any Restricted Subsidiary to the Company or another
Restricted Subsidiary;
(vi) Purchase Money Indebtedness and Capitalized Lease Obligations
incurred to acquire property in the ordinary course of business which
Indebtedness and Capitalized Lease Obligations do not in the aggregate
exceed $5,000,000;
(vii) Interest Rate Agreements;
(viii) additional Indebtedness of the Company not to exceed $2,000,000 in
principal amount outstanding at any time; and
(ix) Refinancing Indebtedness.
"PERMITTED INVESTMENTS" means, for any Person, Investments made on or after
the date of the Indenture consisting of:
(i) Investments by the Company, or by a Restricted Subsidiary thereof,
in the Company or a Restricted Subsidiary, provided that any such Investment
is permitted under clauses (a), (b) or (c) of the "-- Limitation on
Disposition of Assets" covenant;
(ii) Temporary Cash Investments;
(iii) Investments by the Company, or by a Restricted Subsidiary thereof,
in a Person, if as a result of such Investment (a) such Person becomes a
Restricted Subsidiary of the Company or (b) such Person is merged,
consolidated or amalgamated with or into, or transfers or conveys
substantially all of its assets to, or is liquidated into, the Company or a
Restricted Subsidiary thereof;
(iv) Existing Investments in a Restricted Subsidiary which becomes an
Unrestricted Subsidiary after a Qualified Subsidiary IPO; provided, however,
that investments by the Company in a Restricted Subsidiary in anticipation
of a Qualified Subsidiary IPO shall not be considered Permitted Investments;
(v) reasonable and customary loans made to employees in connection with
their relocation not to exceed $1,000,000 in the aggregate at any one time
outstanding;
(vi) an Investment that is made by the Company or a Restricted
Subsidiary thereof in the form of any stock, bonds, notes, debentures,
partnership or joint venture interests or other securities that are issued
by a third party to the Company or Restricted Subsidiary solely as partial
consideration for the consummation of an Asset Sale that is otherwise
permitted under the covenant described under "-- Limitation on Certain Asset
Sales," and
(vii) other Investments that do not exceed $1,000,000 at any time
outstanding plus, the aggregate amount returned in cash on or with respect
to Investments made pursuant to this clause (vii) not to exceed the
aggregate amount invested by the Company therein.
"PERMITTED LIENS" means (i) Liens on property or assets of, or any shares of
stock of or secured debt of, any corporation existing at the time such
corporation becomes a Restricted Subsidiary of the Company or at the time such
corporation is merged into the Company or any of its Restricted Subsidiaries;
provided that such Liens are not incurred in connection with, or in
contemplation of, such corporation becoming a Restricted Subsidiary of the
Company or merging into the Company or any of its Restricted Subsidiaries, (ii)
Liens securing Refinancing Indebtedness; provided that any such Lien does not
extend to or cover any Property, shares or debt other than the Property, shares
or debt securing the Indebtedness so refunded, refinanced or extended, (iii)
Liens in favor of the Company or any of its Restricted Subsidiaries, (iv) Liens
securing industrial revenue bonds, (v) Liens to secure Purchase Money
Indebtedness that is otherwise permitted under the Indenture; provided that (a)
any such Lien is created solely for the purpose of securing Indebtedness
representing, or incurred to finance, refinance or refund, the cost (including
sales
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and excise taxes, installation and delivery charges and other direct costs of,
and other direct expenses paid or charged in connection with, such purchase or
construction) of such Property, (b) the principal amount of the Indebtedness
secured by such Lien does not exceed 100% of such costs, and (c) such Lien does
not extend to or cover any Property other than such item of Property and any
improvements on such item, (vi) statutory liens or landlords', carriers',
warehouseman's, mechanics', suppliers', materialmen's, repairmen's or other like
Liens arising in the ordinary course of business which do not secure any
Indebtedness and with respect to amounts not yet delinquent or being contested
in good faith by appropriate proceedings, if a reserve or other appropriate
provision, if any, as shall be required in conformity with GAAP shall have been
made therefor, (vii) other Liens securing obligations incurred in the ordinary
course of business which obligations do not exceed $1,000,000 in the aggregate
at any one time outstanding, (viii) any extensions, substitutions, replacements
or renewals of the foregoing, (ix) Liens for taxes, assessments or governmental
charges that are being contested in good faith by appropriate proceedings, (x)
Liens securing Capitalized Lease Obligations permitted to be incurred under
clause (vi) of the definition of "Permitted Indebtedness" provided that such
Lien does not extend to any property other than that subject to the underlying
lease; (xi) Liens to secure Indebtedness consisting of Interest Rate Agreements;
and (xii) Liens securing the New Revolving Credit Facility.
"PERSON" means any individual, corporation, partnership, joint venture,
association, joint-stock company, trust, unincorporated organization or
government (including any agency or political subdivision thereof).
"PHI ACQUISITION" means the acquisition of PHI Acquisition Holdings, Inc. by
the Company and Lauren Corporation pursuant to an Agreement and Plan of Merger
dated as of May 7, 1997.
"PREFERRED STOCK" means any Capital Stock of a Person, however designated,
which entitles the holder thereof to a preference with respect to dividends,
distributions or liquidation proceeds of such Person over the holders of other
Capital Stock issued by such Person.
"PROPERTY" of any Person means all types of real, personal, tangible,
intangible or mixed property owned by such Person whether or not included in the
most recent consolidated balance sheet of such Person and its Subsidiaries under
GAAP.
"PURCHASE MONEY INDEBTEDNESS" means any Indebtedness incurred in the
ordinary course of business by a Person to finance the cost (including the cost
of construction) of an item of property, the principal amount of which
Indebtedness does not exceed the sum of (i) 100% of such cost and (ii)
reasonable fees and expenses of such Person incurred in connection therewith.
"QUALIFIED EQUITY OFFERING" means a public offering by the Company or Parent
of shares of its common stock (however designated and whether voting or
non-voting) and any and all rights, warrants or options to acquire such common
stock.
"QUALIFIED SUBSIDIARY IPO" means a public offering by a Restricted
Subsidiary that is an obligor under an Intercompany Note of shares of its
Capital Stock (however designated and whether voting or non-voting) and any and
all rights, warrants or options to acquire such Capital Stock.
"REDEEMABLE DIVIDEND" means, for any dividend or distribution with regard to
Disqualified Capital Stock, the quotient of the dividend or distribution divided
by the difference between one and the maximum statutory federal income tax rate
(expressed as a decimal number between 1 and 0) then applicable to the issuer of
such Disqualified Capital Stock.
"REFINANCING INDEBTEDNESS" means Indebtedness that refunds, refinances or
extends any Indebtedness of the Company or any Restricted Subsidiary outstanding
on the Issue Date or other Indebtedness permitted to be incurred by the Company
or its Restricted Subsidiaries pursuant to the terms of the Indenture, but only
to the extent that (i) the Refinancing Indebtedness is subordinated to the Notes
to at least the same extent as the Indebtedness being refunded, refinanced or
extended, if at all, (ii) the
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Refinancing Indebtedness is scheduled to mature either (a) no earlier than the
Indebtedness being refunded, refinanced or extended, or (b) after the maturity
date of the Notes, (iii) the portion, if any, of the Refinancing Indebtedness
that is scheduled to mature on or prior to the maturity date of the Notes has a
weighted average life to maturity at the time such Refinancing Indebtedness is
incurred that is equal to or greater than the weighted average life to maturity
of the portion of the Indebtedness being refunded, refinanced or extended that
is scheduled to mature on or prior to the maturity date of the Notes, (iv) such
Refinancing Indebtedness is in an aggregate principal amount that is equal to or
less than the sum of (a) the aggregate principal amount then outstanding under
the Indebtedness being refunded, refinanced or extended, (b) the amount of
accrued and unpaid interest, if any, and premiums owed, if any, not in excess of
preexisting prepayment provisions on such Indebtedness being refunded,
refinanced or extended and (c) the amount of customary fees, expenses and costs
related to the incurrence of such Refinancing Indebtedness, and (v) such
Refinancing Indebtedness is incurred by the same Person that initially incurred
the Indebtedness being refunded, refinanced or extended, except that the Company
may incur Refinancing Indebtedness to refund, refinance or extend Indebtedness
of any Wholly Owned Subsidiary of the Company and any Wholly Owned Subsidiary of
the Company which becomes a Guarantor may incur Refinancing Indebtedness to
refund, refinance or extend Indebtedness of the Company.
"RESTRICTED PAYMENT" means any of the following: (i) the declaration or
payment of any dividend or any other distribution or payment on Capital Stock of
the Company or any Restricted Subsidiary of the Company or any payment made to
the direct or indirect holders (in their capacities as such) of Capital Stock of
the Company or any Restricted Subsidiary of the Company (other than (x)
dividends or distributions payable solely in Capital Stock (other than
Disqualified Capital Stock) or in options, warrants or other rights to purchase
Capital Stock (other than Disqualified Capital Stock), and (y) in the case of
Subsidiaries of the Company, dividends or distributions payable to the Company
or to a Wholly Owned Subsidiary of the Company), (ii) the purchase, redemption
or other acquisition or retirement for value of any Capital Stock of the Company
or any of its Restricted Subsidiaries (other than Capital Stock owned by the
Company or a Wholly Owned Subsidiary of the Company, excluding Disqualified
Capital Stock), (iii) the making of any principal payment on, or the purchase,
defeasance, repurchase, redemption or other acquisition or retirement for value,
prior to any scheduled maturity, scheduled repayment or scheduled sinking fund
payment, of any Indebtedness which is subordinated in right of payment to the
Notes (other than subordinated Indebtedness acquired in anticipation of
satisfying a scheduled sinking fund obligation, principal installment or final
maturity, in each case due within one year of the date of acquisition), (iv) the
making of any Investment or guarantee of any Investment in any Person other than
a Permitted Investment, (v) any designation of a Restricted Subsidiary as an
Unrestricted Subsidiary on the basis of the amount of the Net Investment by the
Company therein (other than in connection with a Qualified Subsidiary IPO), (vi)
the redemption of or the making of any Contingent Interest Payments, (vii)
forgiveness of any Indebtedness of an Affiliate of the Company to the Company or
a Restricted Subsidiary and (viii) the exchange of Warrants for Subsidiary
Warrants or Common Shares for Subsidiary Shares. For purposes of determining the
amount expended for Restricted Payments, cash distributed or invested shall be
valued at the face amount thereof and property other than cash shall be valued
at its fair market value.
"RESTRICTED SUBSIDIARY" means a Subsidiary of the Company other than an
Unrestricted Subsidiary and includes (i) all of the direct or indirect
Subsidiaries of the Company existing as of the Issue Date and (ii) Stewart
Warner, Benner Berg, HVE Acquisition Corp. and each of Stewart Warner's wholly
owned subsidiaries. The Board of Directors of the Company may designate any
Unrestricted Subsidiary or any Person to be acquired that is to become a
Subsidiary as a Restricted Subsidiary if immediately after giving effect to such
action (and treating any Acquired Indebtedness as having been incurred at the
time of such action), (i) the Company could have incurred at least $1.00 of
additional Indebtedness (other than Permitted Indebtedness) pursuant to the
"Limitation on Additional Indebtedness" covenant or (ii) the Company's Fixed
Charge Coverage Ratio (determined on a pro forma basis for the last four fiscal
quarters of the Company for which financial statements are available at the date
of determination in accordance with the "Limitation of Additional Indebtedness"
covenant) does not decrease, the Company does not
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incur any Indebtedness (other than Indebtedness under the Notes permitted under
clause (ii) of the definition of "Permitted Indebtedness") and such Subsidiary
shall execute and deliver to the Trustee a supplemental indenture, in form
reasonably satisfactory to the Trustee, providing for the Guarantee by such
Subsidiary of the payment of the obligations of the Company under the Notes in
the manner set forth under "-- Guarantees"; provided, however, that the
foregoing Indebtedness incurrence condition set forth under clause (i) above
shall not apply to the designation as a Restricted Subsidiary of the Subsidiary
("Anderson Ireland") to which is to be transferred the assets and liabilities of
the Fermoy, Ireland division of HIVEC, B.V. that is associated with the business
of Anderson.
"SALE AND LEASE-BACK TRANSACTION" means any arrangement with any Person
providing for the leasing by the Company or any Restricted Subsidiary of the
Company of any real or tangible personal property, which property has been or is
to be sold or transferred by the Company or such Restricted Subsidiary to such
Person in contemplation of such leasing.
"SERIES A PREFERRED STOCK" means the 12 1/2% Series A Exchange Senior
Redeemable Preferred Stock of the Company.
"STEWART WARNER" means Stewart Warner Instrument Corporation, an Illinois
corporation.
"STEWART WARNER ACQUISITION" means the acquisition directly or indirectly of
all of the issued and outstanding shares of capital stock of Stewart Warner and
of each of Benner Berg, Stewart Warner Instruments (Barbados) Inc., a Barbados
corporation, TTS Mexican Holding Company, Inc., an Illinois corporation, and
Instrumentos Stewart Warner de Mexico, S.A. de C.V., a Mexican corporation,
pursuant to the certain Stock Purchase Agreement, dated as of February 4, 1998,
by and among Carolyn Corporation, a wholly owned subsidiary of the Company, and
the direct and indirect selling shareholders of Stewart Warner listed on the
signature pages attached thereto.
"SUBSIDIARY" of any specified Person means any corporation, partnership,
joint venture, association or other business entity, whether now existing or
hereafter organized or acquired, (i) in the case of a corporation, of which more
than 50% of the total voting power of the Capital Stock entitled (without regard
to the occurrence of any contingency) to vote in the election of directors,
officers or trustees thereof is held by such first named Person or any of its
Subsidiaries; or (ii) in the case of a partnership, joint venture, association
or other business entity, with respect to which such first-named Person or any
of its Subsidiaries has the power to direct or cause the direction of the
management and policies of such entity by contract or otherwise or if in
accordance with generally accepted accounting principles such entity is
consolidated with the first named Person for financial statement purposes.
"SUBSIDIARY WARRANTS" means warrants of a Subsidiary that may be issued in
exchange for the Warrants in connection with a Qualified Subsidiary IPO.
"TEMPORARY CASH INVESTMENTS" means (i) Investments in marketable, direct
obligations issued or guaranteed by the United States of America, or of any
governmental agency or political subdivision thereof, maturing within 365 days
of the date of purchase; (ii) Investments in certificates of deposit issued by a
bank organized under the laws of the United States of America or any state
thereof or the District of Columbia, in each case having capital, surplus and
undivided profits totaling more than $500,000,000 and rated at least A by
Standard & Poor's Corporation and A-2 by Moody's Investors Service, Inc.,
maturing within 365 days of purchase; or (iii) Investments not exceeding 365
days in duration in money market funds that invest substantially all of such
funds' assets in the Investments described in the preceding clauses (i) and
(ii).
"UNRESTRICTED SUBSIDIARY" means (a) any Subsidiary of an Unrestricted
Subsidiary and (b) any Subsidiary of the Company which is classified after the
Issue Date as an Unrestricted Subsidiary by a resolution adopted by the Board of
Directors of the Company; provided that, other than a Restricted Subsidiary
which may be classified as an Unrestricted Subsidiary upon consummation of a
Qualified Subsidiary IPO in compliance with "-- Offer to Repurchase upon a
Qualified Subsidiary IPO," a
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Subsidiary may be so classified as an Unrestricted Subsidiary only if (x) the
Restricted Subsidiary to be so designated has total assets of $1,000 or less or
(y) immediately after giving effect to such designation, the Company could incur
at least $1.00 of additional Indebtedness pursuant to the first paragraph under
"-- Limitation on Additional Indebtedness," and provided, further, that the
Company could make a Restricted Payment in an amount equal to the greater of the
fair market value (as determined by the Board of Directors in good faith) and
book value of such Restricted Subsidiary pursuant to the "-- Limitation on
Restricted Payments" covenant and such amount is thereafter treated as a
Restricted Payment for the purpose of calculating the aggregate amount available
for Restricted Payments thereunder. The Trustee shall be given prompt notice by
the Company of each resolution adopted by the Board of Directors of the Company
under this provision, together with a copy of each such resolution adopted.
"WARRANTS" means the warrants issued in connection with the issuance of the
Original Series A Preferred Stock.
"WHOLLY OWNED SUBSIDIARY" means any Restricted Subsidiary, all of the
outstanding voting securities (other than directors' qualifying shares) of which
are owned, directly or indirectly, by the Company.
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DESCRIPTION OF OTHER INDEBTEDNESS
The Company has certain other outstanding indebtedness and other payment
obligations (including guarantees of a subsidiary's indebtedness) which contain
a number of covenants that, among other things, restrict the ability of the
Company and its subsidiaries to incur additional indebtedness, pay certain
dividends, prepay indebtedness, dispose of certain assets, create liens, make
capital expenditures, make certain investments or acquisitions and otherwise
restrict corporate activities. Certain of these agreements also contain
provisions relating to a change of control of the Company and requirements that
the Company comply with certain financial ratios and tests. Following is a
description of such other indebtedness and other obligations. The following
summary does not purport to be complete and is qualified in its entirety by
reference to the provisions of these agreements, copies of certain of which have
been filed as exhibits to the Registration Statement of which this Prospectus is
a part.
REVOLVING CREDIT FACILITY
Concurrently with the closing of the sale of the Original Notes, the Company
entered into a $25.0 million senior secured revolving credit facility, including
a $5.1 million sublimit for the issuance of standby letters of credit (the
"Revolving Credit Facility"), with Fleet National Bank (the "Lender").
INTEREST RATE AND SECURITY. Availability under the Revolving Credit
Facility is limited to the sum of 85% of eligible accounts receivable and 60% of
eligible inventory. The term of the Revolving Credit Facility is five years.
Amounts borrowed under the Revolving Credit Facility will bear interest, at the
option of the Company, at either (i) the Lender's Base Rate plus 0.25% or (ii)
LIBOR plus 1.50%. Obligations under the Revolving Credit Facility are guaranteed
by the Company and all of its domestic subsidiaries and secured by accounts
receivable and inventories of HVE and its domestic subsidiaries.
CERTAIN COVENANTS. The Revolving Credit Facility contains a number of
covenants that restrict the operations of the Company, including restrictions
on, among other things: (i) certain mergers, acquisitions or sales of the
Company's assets or stock (other than the stock of HVE); (ii) cash dividends and
other distributions to equity holders; (iii) payments in respect of subordinated
debt; (iv) transactions resulting in a change of control of HVE; (v)
transactions with affiliates; and (vi) indebtedness and liens. The Revolving
Credit Facility also includes certain financial covenants, including without
limitation, a maximum total leverage ratio and a minimum fixed charge coverage
ratio. The Revolving Credit Facility also contains customary representations,
warranties, affirmative and negative covenants and events of default for a
facility of this type.
As of March 28, 1998, borrowings outstanding under the Revolving Credit
Facility were $5.1 million and there were $5.1 million in letter of credit
commitments outstanding.
GUARANTEES OF ROBICON INDUSTRIAL REVENUE BONDS
PENNSYLVANIA ECONOMIC DEVELOPMENT FINANCING AUTHORITY. HVE is the guarantor
of Robicon's obligations to the Pennsylvania Economic Development Financing
Authority ("PEDFA") under a certain loan agreement among Robicon, PEDFA and
Dollar Bank, Federal Savings Bank ("Dollar Bank"), pursuant to which Robicon
borrowed $4.2 million from PEDFA to finance the construction of Robicon's
manufacturing facility in New Kensington, Pennsylvania. In connection with the
loan, PEDFA issued a Pennsylvania Economic Development Revenue Bond (1995 Series
C) (the "PEDFA IRB") to Dollar Bank for $4.2 million. PEDFA simultaneously
assigned most of its rights to reimbursement under the loan agreement to Dollar
Bank pursuant to an indenture between PEDFA and Dollar Bank. The PEDFA IRB is a
special limited obligation of PEDFA, payable solely from funds received from
Robicon and under the guarantee (the "PEDFA Guarantee") from HVE and an Open-End
Mortgage and Security Agreement granting a first priority security interest in
the land and improvements at the New Kensington facility.
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The PEDFA IRB bears interest at a rate of 8.29% and matures on April 21,
2011. Robicon is permitted to prepay the PEDFA IRB at any time before maturity,
subject to prepayment premiums ranging from 101% to 105% of the principal amount
thereof.
The PEDFA Guarantee imposes certain financial and non-financial covenants
upon the Company which, once modified, are expected to correspond to covenants
contained in the Revolving Credit Facility. The PEDFA Guarantee provides a cure
period of 30 days with respect to certain non-financial covenants contained
therein and, in most cases, an additional notice period of five days following
the acceleration of the PEDFA IRB before payment must be made by the Company
under the PEDFA Guarantee. The outstanding principal balance under the PEDFA IRB
as of March 28, 1998 was $3.7 million.
In the third and fourth quarters of Fiscal 1997, HVE was in technical
default of certain covenants under the PEDFA Guarantee, which defaults were
waived by Dollar Bank. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources."
PENNSYLVANIA INDUSTRIAL DEVELOPMENT AUTHORITY. HVE has also guaranteed
Robicon's obligations to the Pennsylvania Industrial Development Authority
("PIDA") under a Consent, Subordination and Assumption Agreement (the
"Assumption Agreement") between Robicon and the Monroeville Area Industrial
Development Corporation ("MAID"), pursuant to which MAID assigned to Robicon all
of MAID's obligations to PIDA under a Loan Agreement between PIDA and MAID (the
"PIDA Loan Agreement"). Under the PIDA Loan Agreement, MAID borrowed $2.0
million from PIDA to defray the costs of Robicon's construction of its New
Kensington facility. Simultaneously with the execution of the Assumption
Agreement, Robicon entered into an installment sale agreement (the "Installment
Sale Agreement") with MAID pursuant to which Robicon agreed to purchase the New
Kensington property from MAID. The PIDA Loan Agreement is secured by the
guaranty from HVE and a mortgage granting a security interest in the land and
improvements at the New Kensington facility. The security interest represented
by this mortgage has been subordinated to the lien of Dollar Bank under the
PEDFA IRB pursuant to a subordination agreement between PIDA and Dollar Bank.
The balance outstanding under the PIDA Loan Agreement as of March 28, 1998 was
approximately $1.6 million.
The PIDA loan is evidenced by a note which bears interest at a rate of 2%
per annum of the outstanding principal balance of the note, unless the loan is
in default, in which case the note shall bear interest at a rate of the greater
of 12.5% or the Prime Interest Rate (as defined therein) plus 2% per annum,
applied from the date of such event of default (or if the event of default
relates to violation of a certain covenant relating to employment, applied
retroactively to the date of disbursement of the funds under the note)
prospectively until the note is paid in full. Robicon's obligations under the
Installment Sale Agreement also include payment of a fee to MAID of
seven-eighths of 1% charged on the outstanding principal balance of the note for
each year that the Installment Sale Agreement remains unsatisfied together with
any and all charges assessed annually or otherwise by PIDA relative to the note.
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DESCRIPTION OF OUTSTANDING CAPITAL STOCK
Under HVE's Restated Articles of Organization (the "Restated Articles"), HVE
is authorized to issue up to 4,000 shares of HVE Common Stock, and 400,000
shares of preferred stock, par value $1.00 per share ("Preferred Stock").
110,000 shares of Preferred Stock have been designated as 12 1/2% Series A
Senior Redeemable Preferred Stock, no shares of which were issued and
outstanding as of March 28, 1998. 110,000 shares of Preferred Stock have been
designated as 12 1/2% Series A Exchange Senior Redeemable Preferred Stock,
33,000 shares of which were issued and outstanding as of March 28, 1998.
HVE COMMON STOCK
At March 28, 1998, there were 1,082.7429 shares of HVE Common Stock
outstanding and held of record by two stockholders. HVE has reserved up to
154.1729 shares of HVE Common Stock for issuance upon exercise of certain
warrants described below.
Holders of HVE Common Stock are entitled to one vote for each share held on
all matters submitted to a vote of stockholders and do not have cumulative
voting rights. Accordingly, holders of a majority of the shares of HVE Common
Stock entitled to vote in any election of directors may elect a majority of the
directors standing for election. Holders of HVE Common Stock are entitled to
receive ratably such dividends, if any, as may be declared by the Board of
Directors out of funds legally available therefor, subject to any preferential
dividend rights of outstanding Preferred Stock. Upon the liquidation,
dissolution or winding-up of HVE, the holders of HVE Common Stock are entitled
to receive ratably the net assets of HVE available after the payment of all
debts and other liabilities, subject to the prior rights of any outstanding
Preferred Stock. Holders of HVE Common Stock have no preemptive, subscription,
redemption or conversion rights. The outstanding shares of HVE Common Stock are
fully paid and nonassessable. The rights, preferences and privileges of holders
of HVE Common Stock are subject to, and may be adversely affected by, the rights
of the holders of shares of any additional series of Preferred Stock that HVE
may designate and issue in the future.
Holders of the Common Shares included in the Units sold in the Original
Offering will have the right, immediately prior to the occurrence of a Qualified
Subsidiary IPO and at certain times thereafter, to require the Company to
exchange a portion of their Common Shares into shares of common stock of the
Restricted Subsidiary effecting such Qualified Subsidiary IPO ("Subsidiary
Shares"). In addition, holders of the Common Shares have certain registration
rights and take-along rights. Moreover, additional Common Shares may be issuable
to the holders of the Common Shares in the future, under certain circumstances.
COMMON STOCK WARRANTS
In connection with the sale of HVE's Subordinated Notes, HVE issued to such
noteholders warrants (the "Subordinated Notes Warrants") to purchase an
aggregate of 142.86 shares of HVE Common Stock (the "Subordinated Notes Warrant
Shares"), representing 12.5% of the fully-diluted HVE Common Stock, at an
exercise price of $.01 per share. The exercise price and number of Subordinated
Notes Warrant Shares issuable upon exercise of the Subordinated Notes Warrants
are subject to adjustment to prevent dilution in the event of issuance of shares
of HVE Common Stock below the then-current market value or under certain other
circumstances. The Subordinated Notes Warrant holders will have the right to
require the Company to purchase the Subordinated Notes Warrants or Subordinated
Notes Warrant Shares at a price calculated as the proportionate percentage of
the value of the Company's capital stock (determined by an appraiser or pursuant
to a formula of a multiple of eight times the Company's EBITDA (as defined
therein) less outstanding preferred stock and debt plus cash), if the Company
does not consummate an initial public offering of its capital stock before May
1, 2000. Any repurchase of Subordinated Notes Warrants by the Company would
constitute a Restricted Payment under the Indenture. The Subordinated Notes
Warrants expire on May 9, 2004. On July 24, 1997, CIBC Oppenheimer Corp.
purchased
125
<PAGE>
Subordinated Notes Warrants to purchase 71.43 shares of HVE Common Stock,
representing 6.25% of the then outstanding HVE Common Stock on a fully-diluted
basis, for an aggregate purchase price of $2.5 million. Such Subordinated Notes
Warrants were repurchased by the Company with a portion of the net proceeds of
the Original Offering at the same purchase price.
Contemporaneous with the sale of the Original Notes, HVE issued, as part of
33,000 Units also comprising in the aggregate 33,000 shares of Series A
Preferred Stock and 82.7429 Common Shares, Warrants to purchase an aggregate of
82.7429 shares of HVE Common Stock.
Each of these Warrants, when exercised, will entitle the holder thereof to
purchase .00250736 shares of HVE Common Stock (each such share a "Warrant
Share") at an exercise price equal to $0.01 per .00250736 shares (the "Exercise
Price"). The number of Warrant Shares may be adjusted from time to time upon the
occurrence of certain events as provided in the Warrant Agreement and Warrant
and Common Stock Exchange Agreement, dated as of August 8, 1997, as amended, by
and among HVE, the subsidiaries of HVE named therein, and State Street Bank and
Trust Company, as successor by assignment to Boston EquiServe, L.P., as Warrant
Agent (the "Warrant Agreement"). The Warrants are presently exercisable and,
unless exercised, will automatically expire on August 15, 2005 (the "Expiration
Date"). The Warrants entitle the holders thereof to purchase in the aggregate
approximately 6.6% of the outstanding HVE Common Stock on a fully diluted basis
as of the date of issuance of the Warrants.
The Warrants are detachable from the Series A Preferred Stock and the Common
Shares and separately transferable, subject to compliance with applicable
federal and state securities laws. The Warrants and the Warrant Shares have not
been registered under the Securities Act and are subject to certain transfer
restrictions further described in the Warrant Agreement.
Immediately prior to the occurrence of a Qualified Subsidiary IPO and at
certain times thereafter, Warrant holders will have a right to require the
Company to exchange a portion of their Warrants into new warrants to purchase
Subsidiary Shares. In addition, holders of the Warrants have certain
registration rights and take-along rights. Moreover, additional Warrants may be
issuable to the holders of the Warrants in the future, under certain
circumstances.
PREFERRED STOCK
The Board of Directors is authorized, subject to certain limitations
prescribed by law and the terms of the Indenture and the Restated Articles,
without further stockholder approval, from time to time to issue up to an
aggregate of 400,000 shares of Preferred Stock in one or more series and to fix
or alter the designations, preferences and rights, and any qualifications,
limitations or restrictions thereof, of the shares of each such series,
including the number of shares constituting any such series and the dividend
rights, dividend rates, conversion rights, voting rights, terms of redemption
(including sinking fund provisions), redemption price or prices and liquidation
preferences thereof. 110,000 of these shares of Preferred Stock have been
designated as 12 1/2% Series A Senior Redeemable Preferred Stock and an
additional 110,000 of these shares have been designated as 12 1/2% Series A
Exchange Senior Redeemable Preferred Stock. The creation and issuance of any
additional series of Preferred Stock may have the effect of delaying, deferring
or preventing a change of control of the Company.
The Company issued an aggregate of 33,000 shares of Original Series A
Preferred Stock with a liquidation preference of $1,000 per share on August 8,
1997 in the sale of the Units. Pursuant to a registration statement filed by the
Company, the Company exchanged shares of Series A Preferred Stock for all of the
outstanding shares of Original Series A Preferred Stock. The terms of the
Original Series A Preferred Stock are substantially identical to the terms of
the Series A Preferred Stock, except that the shares of Series A Preferred Stock
have been registered under the Securities Act and do not bear legends
restricting the transfer of such shares.
126
<PAGE>
The Original Series A Preferred Stock and Series A Preferred Stock will,
with respect to dividend distributions and distributions upon the liquidation,
dissolution or winding-up of the Company, rank senior to all classes of common
stock of the Company and to each other class of capital stock or series of
preferred stock established after the date of issuance of the original Series A
Preferred Stock (collectively, "Junior Securities"). The Company may not issue
any class or series of capital stock ranking senior to or on a parity with the
Original Series A Preferred Stock and Series A Preferred Stock (or amend the
provisions of any existing class of capital stock or series of preferred stock
to make such class or series rank senior to or on a parity with the Series A
Preferred Stock) with respect to dividend distributions or distributions upon
liquidation, dissolution or winding-up of the Company without the approval of
the holders of at least a majority of the shares of Series A Preferred Stock and
Original Series A Preferred Stock then outstanding, voting or consenting, as the
case may be, together as one class; provided, however, that the Company can
issue, from time to time, (i) additional shares of Series A Preferred Stock to
satisfy dividend payments on outstanding shares of Series A Preferred Stock, and
(ii) up to 5,000 shares of Series A Preferred Stock, along with sufficient
additional shares of Series A Preferred Stock to satisfy the payment of
dividends thereon.
Holders of Series A Preferred Stock are entitled to receive, when, as and if
declared by the Board of Directors of the Company, out of funds legally
available therefor, dividends on the Series A Preferred Stock at a rate per
annum equal to 12 1/2% of the liquidation preference per share of Series A
Preferred Stock, payable semiannually. All dividends will be cumulative whether
or not earned or declared on a daily basis from the date on which such stock is
issued and will be payable semiannually in arrears on August 15 and February 15
of each year, commencing on February 15, 1998, to holders of record on the
August 1 and February 1 immediately preceding the relevant dividend payment
date. Dividends may be paid, at the Company's option, on any dividend payment
date occurring on or prior to August 15, 2002 either in cash or by the issuance
of additional shares of Series A Preferred Stock (including fractional shares)
having an aggregate liquidation preference equal to the amount of such
dividends. In the event that on or prior to August 15, 2002 dividends are
declared and paid through the issuance of additional shares of Series A
Preferred Stock, as provided in the previous sentence, such dividends shall be
deemed paid in full and will not accumulate. If any dividend payable on any
dividend payment date subsequent to August 15, 2000 is not paid in full in cash,
the per annum dividend rate will be increased by 0.50% from such dividend
payment date, and following two such non-cash payments, the per annum dividend
rate will be increased by 1.00% for each additional semiannual period in which
such non-cash payment occurs, up to a maximum rate of 200 basis points in excess
of the dividend rate originally borne by the Series A Preferred Stock. After the
date on which such dividend default is cured, the dividend rate on the Series A
Preferred Stock will revert to the dividend rate originally borne by the Series
A Preferred Stock. After August 15, 2002, dividends on such classes of Preferred
Stock must be paid in cash.
The Series A Preferred Stock may be redeemed (subject to contractual and
other restrictions with respect thereto and to the legal availability of funds
therefor) at any time on or after August 15, 2002, in whole or in part, at the
option of the Company, at the redemption prices (expressed in percentages of the
then effective liquidation preference thereof) set forth below, plus, without
duplication, an amount in cash equal to all accumulated and unpaid dividends
(including an amount in cash equal to a prorated dividend for the period from
the dividend payment date immediately prior to the redemption date to the
redemption date), if redeemed during the 12-month period beginning August 15 of
each of the years set forth below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
- --------------------------------------------------------------------------------- -----------
<S> <C>
2002............................................................................. 106.250%
2003............................................................................. 103.125%
2004............................................................................. 101.563%
2005 and thereafter.............................................................. 100.000%
</TABLE>
127
<PAGE>
The Series A Preferred Stock will also be subject to mandatory redemption
(subject to contractual and other restrictions with respect thereto and to the
legal availability of funds therefor) in whole on August 15, 2005 at a price
equal to 100% of the liquidation preference thereof, payable in cash, plus,
without duplication, all accumulated and unpaid dividends, which will also be
paid in cash (whether or not otherwise payable in cash) to the date of
redemption.
Upon any voluntary or involuntary liquidation, dissolution or winding-up of
the Company, holders of the Series A Preferred Stock will initially be entitled
to be paid, out of the assets of the Company available for distribution, $1,000
per share, plus an amount in cash equal to accumulated and unpaid dividends
thereon to the date fixed for liquidation, dissolution or winding-up (including
an amount equal to a prorated dividend for the period from the immediately
preceding dividend payment date to the date fixed for liquidation, dissolution
or winding-up), before any distribution is made on any Junior Securities. If
upon any voluntary or involuntary liquidation, dissolution or winding-up of the
Company, the amounts payable with respect to the Series A Preferred Stock are
not paid in full, the holders of the Series A Preferred Stock will share equally
and ratably in any distribution of assets of the Company first in proportion to
the full liquidation preference to which each is entitled until such preferences
are paid in full, and then in proportion to their respective amounts of
accumulated but unpaid dividends.
Holders of the Series A Preferred Stock will have no voting rights with
respect to general corporate matters except as provided by law or upon the
occurrence of certain events as set forth in the Restated Articles.
Within 20 days of the occurrence of a Change of Control, the Company shall
make an offer to purchase (the "Change of Control Offer") the outstanding Series
A Preferred Stock at a purchase price equal to 101% of the liquidation
preference thereof plus, without duplication, an amount in cash equal to all
accumulated and unpaid dividends thereon (including an amount in cash equal to a
prorated dividend for the period from the immediately preceding dividend payment
date to the Change of Control Payment Date) in accordance with the procedures
set forth in this covenant.
The Restated Articles impose certain restrictions on the ability of Company
to declare or pay dividends or make distributions with respect to, or purchase,
or redeem or exchange, any capital stock of the Company other than the Series A
Preferred Stock.
LIMITATION OF LIABILITY AND INDEMNIFICATION
The Restated Articles contain certain provisions permitted under
Massachusetts law relating to the liability of directors. These provisions
eliminate a director's personal liability for monetary damages resulting from a
breach of fiduciary duty, except in certain circumstances involving certain
wrongful acts, such as the breach of a director's duty of loyalty or acts or
omissions that involve intentional misconduct or a knowing violation of law.
These provisions do not limit or eliminate the rights of the Company or any
stockholder to seek non-monetary relief, such as an injunction or rescission, in
the event of a breach of a director's fiduciary duty. These provisions will not
alter a director's liability under federal securities laws. The Company's
Restated Articles and By-laws also contain provisions indemnifying the directors
and officers of the Company to the fullest extent permitted by Massachusetts
law. The Company believes that these provisions will assist the Company in
attracting and retaining qualified individuals to serve as directors.
128
<PAGE>
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following discussion of certain of the anticipated federal income tax
consequences of an exchange of the New Notes for Exchange Notes and of the
purchase, ownership, and disposition of the Exchange Notes is based upon the
provisions of the Internal Revenue Code of 1986, as amended (the "Code"), the
final, temporary, and proposed regulations promulgated thereunder, and
administrative rulings and judicial decisions now in effect, all of which are
subject to change (possibly with retroactive effect) or different
interpretations. This summary does not purport to deal with all aspects of
federal income taxation that may be relevant to a particular investor, nor any
tax consequences arising under the laws of any state, locality, or foreign
jurisdiction, and it is not intended to be applicable to all categories of
investors, some of which, such as dealers in securities, banks, insurance
companies, tax-exempt organizations, foreign persons, persons that hold Exchange
Notes as part of a straddle or conversion transactions or holders subject to the
alternative minimum tax, may be subject to special rules. In addition, the
summary is limited to persons that will hold the Exchange Notes as "capital
assets" (generally, property held for investment) within the meaning of Section
1221 of the Code. ALL INVESTORS ARE ADVISED TO CONSULT THEIR OWN TAX ADVISERS
REGARDING THE FEDERAL, STATE, LOCAL, AND FOREIGN TAX CONSEQUENCES OF THE
EXCHANGE AND THE OWNERSHIP AND DISPOSITION OF EXCHANGE NOTES.
TAXATION OF HOLDERS ON EXCHANGE
Although the matter is not free from doubt, an exchange of New Notes for
Exchange Notes should not be a taxable event to holders of New Notes, and
holders should not recognize any taxable gain or loss as a result of such an
exchange. Accordingly, a holder would have the same adjusted basis and holding
period in the Exchange Notes as it had in the New Notes immediately before the
exchange. Further, the tax consequences of ownership and disposition of any
Exchange Notes should be the same as the tax consequences of ownership and
disposition of New Notes.
MARKET DISCOUNT
If a holder purchases a Note for an amount that is less than its principal
amount, the amount of the difference will be treated as "market discount" for
federal income tax purposes, unless such difference is less than a specified de
minimis amount. Under the market discount rules, a holder will be required to
treat any principal payment on, or any gain on the sale, exchange, retirement or
other disposition of, a Note as ordinary income to the exchange of the market
discount which has not previously been included in income and is treated as
having accrued on such a Note at the time of such payment or disposition. In
addition, the holder may be required to defer, until the maturity of the Note or
its earlier disposition in a taxable transaction, the deduction of all or a
portion of the interest expense on any indebtedness incurred or continued to
purchase or carry such Note.
Any market discount will be considered to accrue ratably during the period
from the date of acquisition to the maturity date of the Note, unless the holder
elects to accrue on a constant interest method. A holder of a Note may elect to
include market discount in income currently as it accrues (on either a ratable
or constant interest method), in which case the rule described above regarding
deferral of interest deductions will not apply. This election to include market
discount in income currently, once made, applies to all market discount
obligations acquired on or after the first taxable year to which the election
applies and may not be revoked without the consent of the Internal Revenue
Service (the "IRS").
AMORTIZABLE BOND PREMIUM
A holder that purchases a Note for an amount in excess of the sum of its
principal amount will be considered to have purchased the Note at a "premium." A
holder generally may elect to amortize the premium over the remaining term of
the Note on a constant yield method. The amount amortized in any
129
<PAGE>
year will be treated as a reduction of the holder's interest income from the
Note. Bond premium on a Note held by a holder that does not make such an
election will decrease the gain or increase the loss otherwise recognized on
disposition of the Note. The election to amortize premium on a constant yield
method once made applies to all debt obligations held or subsequently acquired
by the electing holder on or after the first day of the first taxable year to
which the election applies and may not be revoked without the consent of the
IRS.
SALE, EXCHANGE AND RETIREMENT OF NOTES
A holder's tax basis in a Note will, in general, be the holder's cost
therefor, increased by market discount previously included in income by the
holder and reduced by any amortized premium. Upon the sale, exchange or
retirement of a Note, a holder will recognize gain or loss equal to the
difference between the amount realized upon the sale, exchange or retirement
(less any accrued interest, which will be taxable as such) and the adjusted tax
basis of the Note. Except as described above with respect to market discount,
such gain or loss will be capital gain or loss and will, as a general rule, be
long-term capital gain or loss if at the time of sale, exchange or retirement
the Note has been held for more than eighteen months. Under current law,
long-term capital gains of individuals are, under certain circumstances, taxed
at lower rates than items of ordinary income. The deductibility of capital
losses is subject to limitations.
BACKUP WITHHOLDING
In general, information reporting requirements will apply to certain
payments of principal, interest and premium paid on Notes and to the proceeds of
sale of a Note made to holders other than certain exempt recipients (such as
corporations). A 31% backup withholding tax will apply to such payments if the
holder fails to provide a taxpayer identification number or certification of
foreign or other exempt status or fails to report in full dividend and interest
income.
Any amounts withheld under the backup withholding rules will be allowed as a
refund or a credit against such holder's U.S. federal income tax liability
provided the required information is furnished to the IRS.
THE UNITED STATES FEDERAL TAX DISCUSSION SET FORTH ABOVE IS INCLUDED FOR
GENERAL INFORMATION ONLY AND MAY OR MAY NOT BE APPLICABLE DEPENDING UPON A
HOLDER'S PARTICULAR SITUATION. HOLDERS SHOULD CONSULT THEIR TAX ADVISERS WITH
RESPECT TO THE TAX CONSEQUENCES TO THEM OF THE EXCHANGE OF NEW NOTES FOR
EXCHANGE NOTES AND OF THE OWNERSHIP AND DISPOSITION OF THE EXCHANGE NOTES,
INCLUDING THE TAX CONSEQUENCES UNDER STATE, LOCAL, FOREIGN AND OTHER TAX LAWS
AND THE POSSIBLE EFFECTS OF CHANGES IN FEDERAL OR OTHER TAX LAWS.
130
<PAGE>
EXPERTS
The consolidated historical financial statements of High Voltage Engineering
Corporation and Subsidiaries as of April 27, 1996 and April 26, 1997, and for
each of the fiscal years in the three-year period ended April 26, 1997, included
in this Prospectus and elsewhere in this Registration Statement have been
audited by Grant Thornton LLP, independent certified public accountants, as
indicated in their report with respect thereto, and are included herein in
reliance upon the authority of said expert firm as in auditing and accounting.
The consolidated historical financial statements of PHI Acquisition
Holdings, Inc. and Subsidiaries as of June 28, 1996 and June 27, 1997, and for
each of the years in the three-year period ended June 27, 1997, included in this
Prospectus and elsewhere in this Registration Statement have been audited by
KPMG Peat Marwick LLP, independent certified public accountants, as indicated in
their report with respect thereto, and are included herein in reliance upon the
authority of said firm as in auditing and accounting.
The consolidated historical financial statements of Stewart Warner and
Subsidiaries as of and for the years ended April 30, 1996 and 1997 and as of and
for the nine-month period ended January 31, 1998, included in this Prospectus
and elsewhere in this Registration Statement have been audited by Deloitte &
Touche LLP, independent certified public accountants, as indicated in their
report with respect thereto, and are included herein in reliance upon the
authority of said expert firm as experts in auditing and accounting.
LEGAL MATTERS
The validity of the Exchange Notes has been passed upon for the Company by
Bingham Dana LLP, Boston, Massachusetts.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Prospectus contains certain statements that may be considered
"forward-looking." Those forward-looking statements include, among other things,
discussions of the Company's business strategy and expectations concerning the
Company's position in the various industries in which it participates, future
operations, growth, product development and marketing efforts, the issuance of
patents, margins, profitability, liquidity and capital resources, as well as
statements concerning certain products under development, the PHI Merger and
Stewart Warner Acquisition and PHI's and Stewart Warner's contributions to the
realization of the Company's overall strategies. Such forward-looking statements
involve known and unknown risks, uncertainties and other factors that may cause
the actual results, performance or achievements of the Company to be materially
different from any future results, performance or achievements of the Company
expressed or implied by such forward-looking statements. Prospective investors
in the Exchange Notes offered hereby are cautioned that although the Company
believes that the assumptions on which the forward-looking statements contained
herein are based are reasonable, any of those assumptions could prove to be
inaccurate and, as a result, the forward-looking statements based on those
assumptions also could be materially incorrect. The uncertainties in this regard
include, but are not limited to, those identified in the section of this
Prospectus entitled "Risk Factors." In light of these and other uncertainties,
the inclusion of a forward-looking statement herein should not be regarded as a
representation by the Company that the Company's plans and objectives will be
achieved and prospective investors in the New Notes should not place undue
reliance on such forward-looking statements.
131
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
HIGH VOLTAGE ENGINEERING CORPORATION AND SUBSIDIARIES
Consolidated Financial Statements -- April 29, 1995, April 27, 1996, April 26, 1997,
January 25, 1997 (unaudited) and January 24, 1998 (unaudited)
Report of Grant Thornton LLP, Independent Certified Public Accountants..................................... F-2
Consolidated Balance Sheets................................................................................ F-3
Consolidated Statements of Operations...................................................................... F-4
Consolidated Statements of Stockholders' Deficiency........................................................ F-5
Consolidated Statements of Cash Flows...................................................................... F-6
Notes to Consolidated Financial Statements................................................................. F-7
PHI ACQUISITION HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Financial Statements -- June 28, 1996 and June 27, 1997
Report of KPMG Peat Marwick LLP, Independent Auditors...................................................... F-34
Consolidated Balance Sheets................................................................................ F-35
Consolidated Statements of Operations...................................................................... F-36
Consolidated Statements of Stockholders' Equity............................................................ F-37
Consolidated Statements of Cash Flows...................................................................... F-38
Notes to Consolidated Financial Statements................................................................. F-39
STEWART WARNER INSTRUMENT CORPORATION AND SUBSIDIARIES
Consolidated Financial Statements -- April 30, 1996 and 1997, January 31, 1997 (unaudited) and January 31,
1998
Report of Deloitte & Touche LLP, Independent Auditors...................................................... F-51
Consolidated Balance Sheets................................................................................ F-52
Consolidated Statements of Income.......................................................................... F-53
Statements of Stockholders' Equity......................................................................... F-54
Consolidated Statements of Cash Flows...................................................................... F-55
Notes to Consolidated Financial Statements................................................................. F-56
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Stockholder
High Voltage Engineering Corporation
We have audited the accompanying consolidated balance sheets of High Voltage
Engineering Corporation and Subsidiaries (the Company) as of April 27, 1996 and
April 26, 1997 and the related consolidated statements of operations,
stockholders' deficiency, and cash flows for each of the three years in the
period ended April 26, 1997. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these consolidated 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 the Company as
of April 27, 1996 and April 26, 1997 and the consolidated results of its
operations and its consolidated cash flows for each of the three years in the
period ended April 26, 1997, in conformity with generally accepted accounting
principles.
/S/ GRANT THORNTON LLP
Boston, Massachusetts GRANT THORNTON LLP
June 18, 1997 (except for notes N and P
as to which the dates are March 19, 1998
and April 15, 1998, respectively)
F-2
<PAGE>
HIGH VOLTAGE ENGINEERING CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
APRIL 27, APRIL 26, JANUARY 24,
1996 1997 1998
---------- ---------- ------------
<S> <C> <C> <C>
(UNAUDITED)
ASSETS
CURRENT ASSETS
Cash and cash equivalents............................................... $ 2,107 $ 1,542 $ 15,105
Restricted cash......................................................... 4,595 2,210 3,973
Accounts receivable -- net of allowance for doubtful accounts........... 33,340 33,333 42,918
Refundable income taxes................................................. -- -- 2,157
Inventories............................................................. 20,972 22,334 39,146
Prepaid expenses and other current assets............................... 1,971 1,164 1,676
---------- ---------- ------------
Total current assets................................................ 62,985 60,583 104,975
PROPERTY, PLANT AND EQUIPMENT -- Net........................................ 29,222 30,966 49,130
INVESTMENT IN JOINT VENTURE................................................. -- -- 1,843
ASSETS HELD FOR SALE........................................................ 6,173 5,248 3,858
OTHER ASSETS -- Net......................................................... 5,627 7,432 16,598
COST IN EXCESS OF NET ASSETS ACQUIRED....................................... 9,711 9,358 16,883
---------- ---------- ------------
$ 113,718 $ 113,587 $ 193,287
---------- ---------- ------------
---------- ---------- ------------
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
CURRENT LIABILITIES
Current maturities of long-term debt obligations........................ $ 1,909 $ 2,609 $ 1,308
Foreign credit line..................................................... 2,753 2,284 2,610
Accounts payable........................................................ 18,119 17,199 17,290
Accrued interest........................................................ 6,211 8,394 6,781
Accrued liabilities..................................................... 11,530 12,000 21,955
Advance payments by customers........................................... 6,324 5,294 6,605
Federal, foreign and state income taxes payable......................... 997 1,261 1,270
Deferred income taxes................................................... 3,248 2,171 2,322
---------- ---------- ------------
Total current liabilities........................................... 51,091 51,212 60,141
REDEEMABLE PUT WARRANTS..................................................... -- 2,800 2,500
LONG-TERM OBLIGATIONS, LESS CURRENT MATURITIES.............................. 80,009 80,508 152,997
DEFERRED INCOME TAXES....................................................... 1,900 1,834 4,423
OTHER LIABILITIES........................................................... 3,205 2,495 3,252
COMMITMENTS AND CONTINGENCIES
REDEEMABLE PREFERRED STOCK (aggregate liquidation preference of $33,000 as
of January 24, 1998)...................................................... 10,995 11,474 29,567
STOCKHOLDERS' DEFICIENCY
Common stock............................................................ 1 1 1
Paid-in-capital......................................................... 17,326 17,326 19,527
Accumulated deficit..................................................... (50,869) (54,104) (81,155)
Common stock warrants................................................... -- -- 2,200
Cumulative foreign currency translation adjustment...................... 60 41 (166)
---------- ---------- ------------
Total stockholders' deficiency...................................... (33,482) (36,736) (59,593)
---------- ---------- ------------
$ 113,718 $ 113,587 $ 193,287
---------- ---------- ------------
---------- ---------- ------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-3
<PAGE>
HIGH VOLTAGE ENGINEERING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEARS ENDED NINE MONTHS ENDED
------------------------------------- ------------------------
<S> <C> <C> <C> <C> <C>
APRIL 29, APRIL 27, APRIL 26, JANUARY 25 JANUARY 24,
1995 1996 1997 1997 1998
----------- ----------- ----------- ----------- -----------
<CAPTION>
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net sales.......................................... $ 116,551 $ 149,100 $ 173,103 $ 122,046 $ 164,976
Cost of sales...................................... 73,424 97,386 114,848 81,249 105,962
----------- ----------- ----------- ----------- -----------
Gross profit................................... 43,127 51,714 58,255 40,797 59,014
Administrative and selling expenses................ 26,113 34,915 36,967 26,897 38,755
Research and development expenses.................. 8,094 8,071 9,361 6,962 17,731
Restructuring charge............................... 1,294 150 -- -- --
Reimbursed environmental and litigation costs --
net.............................................. (2,130) (450) 26 228 458
Other.............................................. 892 1,163 2,234 788 44
----------- ----------- ----------- ----------- -----------
Income from operations......................... 8,864 7,865 9,667 5,922 2,026
Interest expense................................... 8,573 11,225 11,989 8,250 14,291
Interest income.................................... (74) (278) (351) (206) (476)
----------- ----------- ----------- ----------- -----------
Income (loss) from continuing operations before
income taxes, discontinued operations and
extraordinary item........................... 365 (3,082) (1,971) (2,122) (11,789)
Income taxes (credit).............................. 196 (2,619) 526 (2,522) 2,769
----------- ----------- ----------- ----------- -----------
Income (loss) from continuing operations before
discontinued operations and extraordinary
item......................................... 169 (463) (2,497) 400 (14,558)
Discontinued operations:
Income (loss) from discontinued operations, net
of income taxes.............................. 607 (135) -- -- --
Gain (loss) on disposal of discontinued
operations, net of income taxes.............. (331) 1,633 -- -- --
----------- ----------- ----------- ----------- -----------
276 1,498 -- -- --
Extraordinary loss, net of income taxes............ -- (422) (259) (259) (7,861)
----------- ----------- ----------- ----------- -----------
Net income (loss).................................. 445 613 (2,756) 141 (22,419)
Preferred dividends................................ (415) (446) (479) (356) (2,057)
Accretion of redeemable preferred stock............ -- -- -- -- (175)
----------- ----------- ----------- ----------- -----------
Net income (loss) applicable to common
stockholders..................................... $ 30 $ 167 $ (3,235) $ (215) $ (24,651)
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
Net income (loss) per common share:
Continuing operations.......................... $ (246.00) $ (909.00) $(2,976.00) $ 44.00 ($15,975.26)
Discontinued operations........................ 276.00 1,498.00 -- -- --
Extraordinary item............................. -- (422.00) (259.00) (259.00) (7,479.54)
----------- ----------- ----------- ----------- -----------
Net income (loss) applicable to common
stockholders................................. $ 30.00 $ 167.00 $(3,235.00) $ (215.00) ($23,454.80)
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
Net income (loss) per common share (assuming
dilution):
Continuing operations.......................... $ (246.00) $ (909.00) $(2,299.21) $ 38.50 ($12,331.39)
Discontinued operations........................ 276.00 1,498.00 -- -- --
Extraordinary item............................. -- (422.00) (226.60) (226.60) (6,545.38)
----------- ----------- ----------- ----------- -----------
Net income (loss) applicable to common
stockholders................................. $ 30.00 $ 167.00 $(2,525.81) $ (188.10) ($18,876.77)
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
Weighted average common stock outstanding.......... 1,000 1,000 1,000 1,000 1,051
Weighted average common stock and dilutive
equivalents outstanding.......................... 1,000 1,000 1,143 1,143 1,201
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE>
HIGH VOLTAGE ENGINEERING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIENCY
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
CUMULATIVE
FOREIGN
COMMON CURRENCY PENSION
COMMON PAID-IN ACCUMULATED STOCK TRANSLATION LIABILITY
STOCK CAPITAL DEFICIT WARRANTS ADJUSTMENT ADJUSTMENT
--------------- ----------- ---------------- ----------- ----------------- -----------------
<S> <C> <C> <C> <C> <C> <C>
Balance, April 30, 1994 as
restated (note A)......... $ 1 $ 17,326 $ (51,066) $ -- $ (915) $ (74)
Net income, as restated..... 445
Preferred stock dividends... (415)
Change in foreign currency
translation............... 201
Liquidation of foreign
subsidiary................ 526
Pension liability
adjustment................ 74
--
----------- -------- ----------- ------ ---
Balance, April 29, 1995..... 1 17,326 (51,036) -- (188) --
Net income, as restated..... 613
Preferred stock dividends... (446)
Change in foreign currency
translation............... 248
--
----------- -------- ----------- ------ ---
Balance, April 27, 1996..... 1 17,326 (50,869) -- 60 --
Net loss.................... (2,756)
Preferred stock dividends... (479)
Change in foreign currency
translation............... (19)
--
----------- -------- ----------- ------ ---
Balance, April 26, 1997..... 1 17,326 (54,104) -- 41 --
Nine Months Ended January
24, 1998 (unaudited):
Net loss.................... (22,419)
Preferred stock
dividends................. (2,057)
Accretion of redeemable
preferred stock........... (175)
Distribution to fund Letitia
common stock repurchase... (2,400)
Change in foreign currency
translation............... (207)
Common stock warrants....... 2,200
Proceeds from issuance of
common stock.............. 2,201
--
----------- -------- ----------- ------ ---
Balance, January 24, 1998
(unaudited)............... $ 1 $ 19,527 $ (81,155) $ 2,200 $ (166) $ --
--
--
----------- -------- ----------- ------ ---
----------- -------- ----------- ------ ---
<CAPTION>
TOTAL
---------
<S> <C>
Balance, April 30, 1994 as
restated (note A)......... $ (34,728)
Net income, as restated..... 445
Preferred stock dividends... (415)
Change in foreign currency
translation............... 201
Liquidation of foreign
subsidiary................ 526
Pension liability
adjustment................ 74
---------
Balance, April 29, 1995..... (33,897)
Net income, as restated..... 613
Preferred stock dividends... (446)
Change in foreign currency
translation............... 248
---------
Balance, April 27, 1996..... (33,482)
Net loss.................... (2,756)
Preferred stock dividends... (479)
Change in foreign currency
translation............... (19)
---------
Balance, April 26, 1997..... (36,736)
Nine Months Ended January
24, 1998 (unaudited):
Net loss.................... (22,419)
Preferred stock
dividends................. (2,057)
Accretion of redeemable
preferred stock........... (175)
Distribution to fund Letitia
common stock repurchase... (2,400)
Change in foreign currency
translation............... (207)
Common stock warrants....... 2,200
Proceeds from issuance of
common stock.............. 2,201
---------
Balance, January 24, 1998
(unaudited)............... $ (59,593)
---------
---------
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE>
HIGH VOLTAGE ENGINEERING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED
-------------------------------------
<S> <C> <C> <C>
APRIL 29, APRIL 27, APRIL 26,
1995 1996 1997
----------- ----------- -----------
<CAPTION>
<S> <C> <C> <C>
Increase (Decrease) in Cash and Cash Equivalents
Cash flows from operating activities:
Net income (loss)......................................................................... $ 445 613 $ (2,756)
Adjustments to reconcile net income to net cash provided by operating activities:
Extraordinary item, net of income taxes................................................. -- 422 --
Depreciation and amortization........................................................... 4,234 4,134 4,376
Write-off of other assets............................................................... 650 1,200 --
Non-cash interest....................................................................... 2,104 2,533 2,897
Deferred income taxes................................................................... (410) (2,714) (1,143)
Undistributed earnings ofaffiliate...................................................... (250) (88) (201)
(Gain) loss on sale of discontinued operations.......................................... 331 (1,633) --
Other................................................................................... 456 (37) (186)
Change in assets and liabilities, net of effects of business acquisitions and
divestitures:
Accounts receivable................................................................... (1,137) (7,547) 257
Refundable income taxes............................................................... (997) 997 --
Inventories........................................................................... 644 (5,754) (1,482)
Prepaid expenses and other current assets............................................. 147 67 857
Other assets.......................................................................... (304) (576) (3,094)
Accounts payable, accrued interest and accrued liabilities............................ 1,670 893 1,868
Advance payments by customers......................................................... 1,965 2,511 (1,030)
Federal, foreign and state income taxes payable....................................... 579 (1,381) 264
----------- ----------- -----------
Net cash provided by (used in) operating activities................................. 10,127 (6,360) 627
----------- ----------- -----------
Cash flows from investing activities:
Additions to property, plant and equipment................................................ (9,873) (5,791) (3,516)
Proceeds from sales of discontinued operation............................................. 2,194 11,000 --
Proceeds from sales of assets net of expenses............................................. 950 402 260
Acquisition of Industrias Jorda S.L. ..................................................... (5,946) -- --
Acquisition of Physical Electronics net of cash acquired.................................. -- -- --
Other..................................................................................... 397 118 190
----------- ----------- -----------
Net cash provided by (used in) investing activities................................. (12,278) 5,729 (3,066)
----------- ----------- -----------
Cash flows from financing activities:
Cash overdraft............................................................................ 797 2,416 (1,306)
Proceeds from the issuance of long-term obligations net of issuance costs................. 3,628 4,813 66,267
Proceeds from the issuance of preferred stock, net of issuance costs...................... -- -- --
Proceeds from the issuance of common stock................................................ -- -- --
Net proceeds from the issuance of redeemable put warrants and common stock warrants....... -- -- 2,413
Net proceeds/(payments) from foreign credit line.......................................... 2,090 663 (469)
Net (increase) decrease in restricted cash................................................ (2,123) (1,696) 2,385
Net proceeds/(payments) under senior credit agreement..................................... (2,300) (515) (2,957)
Distribution to fund Letitia common stock repurchase...................................... -- -- --
Redemption of redeemable put warrants..................................................... -- -- --
Redemption of redeemable preferred stock.................................................. -- -- --
Principal payments on long-term obligations............................................... (871) (3,828) (64,440)
----------- ----------- -----------
Net cash provided by financing activities........................................... 1,221 1,853 1,893
----------- ----------- -----------
Effect of foreign exchange rate changes on cash............................................. 391 380 (19)
----------- ----------- -----------
Net (decrease) increase in cash and cash equivalents................................ (539) 1,602 (565)
Cash and cash equivalents, beginning of year................................................ 1,044 505 2,107
----------- ----------- -----------
Cash and cash equivalents, end of year...................................................... $ 505 $ 2,107 $ 1,542
----------- ----------- -----------
----------- ----------- -----------
Supplemental Disclosure of Cash Flow Information:
Cash paid for:
Interest................................................................................ $ 6,542 $ 8,272 $ 7,568
Income taxes............................................................................ 905 408 1,246
Supplemental Schedule of Non-cash Investing and Financing Activities:
Preferred stock dividends-in-kind and issuable preferred stock
dividends-in-kind....................................................................... $ 415 $ 446 $ 479
Leased asset additions.................................................................... 96 172 1,494
Transfer from property, plant and equipment to assets held for sale, net.................. 6,195 1,178 (1,378)
<CAPTION>
NINE MONTHS ENDED
------------------------
<S> <C> <C>
JANUARY 25, JANUARY 24,
1997 1998
----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Increase (Decrease) in Cash and Cash Equivalents
Cash flows from operating activities:
Net income (loss)......................................................................... $ 141 $ (22,419)
Adjustments to reconcile net income to net cash provided by operating activities:
Extraordinary item, net of income taxes................................................. -- 1,574
Depreciation and amortization........................................................... 3,211 6,076
Write-off of other assets............................................................... -- 5,800
Non-cash interest....................................................................... 1,370 3,231
Deferred income taxes................................................................... (803) (3,496)
Undistributed earnings ofaffiliate...................................................... (99) (131)
(Gain) loss on sale of discontinued operations.......................................... (246) (1,417)
Other................................................................................... -- --
Change in assets and liabilities, net of effects of business acquisitions and
divestitures:
Accounts receivable................................................................... 1,325 6,079
Refundable income taxes............................................................... -- --
Inventories........................................................................... (3,345) (1,569)
Prepaid expenses and other current assets............................................. 372 372
Other assets.......................................................................... (230) 28
Accounts payable, accrued interest and accrued liabilities............................ (3,716) (4,459)
Advance payments by customers......................................................... 1,099 (2,787)
Federal, foreign and state income taxes payable....................................... (3,307) 974
----------- -----------
Net cash provided by (used in) operating activities................................. (4,228) (12,144)
----------- -----------
Cash flows from investing activities:
Additions to property, plant and equipment................................................ (2,945) (4,336)
Proceeds from sales of discontinued operation............................................. -- --
Proceeds from sales of assets net of expenses............................................. 157 3,352
Acquisition of Industrias Jorda S.L. ..................................................... -- --
Acquisition of Physical Electronics net of cash acquired.................................. -- (54,272)
Other..................................................................................... 49 (166)
----------- -----------
Net cash provided by (used in) investing activities................................. (2,739) (55,422)
----------- -----------
Cash flows from financing activities:
Cash overdraft............................................................................ (1,196) 269
Proceeds from the issuance of long-term obligations net of issuance costs................. 63,079 129,466
Proceeds from the issuance of preferred stock, net of issuance costs...................... -- 29,392
Proceeds from the issuance of common stock................................................ -- 2,200
Net proceeds from the issuance of redeemable put warrants and common stock warrants....... 2,413 2,200
Net proceeds/(payments) from foreign credit line.......................................... (217) 326
Net (increase) decrease in restricted cash................................................ 1,406 (1,763)
Net proceeds/(payments) under senior credit agreement..................................... 4,444 (7,702)
Distribution to fund Letitia common stock repurchase...................................... -- (2,250)
Redemption of redeemable put warrants..................................................... -- (2,500)
Redemption of redeemable preferred stock.................................................. -- (11,621)
Principal payments on long-term obligations............................................... (63,812) (56,649)
----------- -----------
Net cash provided by financing activities........................................... 6,117 81,368
----------- -----------
Effect of foreign exchange rate changes on cash............................................. (55) (239)
----------- -----------
Net (decrease) increase in cash and cash equivalents................................ (905) 13,563
Cash and cash equivalents, beginning of year................................................ 2,107 1,542
----------- -----------
Cash and cash equivalents, end of year...................................................... $ 1,202 $ 15,105
----------- -----------
----------- -----------
Supplemental Disclosure of Cash Flow Information:
Cash paid for:
Interest................................................................................ $ 5,116 $ 12,756
Income taxes............................................................................ 604 1,635
Supplemental Schedule of Non-cash Investing and Financing Activities:
Preferred stock dividends-in-kind and issuable preferred stock
dividends-in-kind....................................................................... $ 356 $ 322
Leased asset additions.................................................................... 438 276
Transfer from property, plant and equipment to assets held for sale, net.................. -- --
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
<PAGE>
HIGH VOLTAGE ENGINEERING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(Information as of January 24, 1998 and for the nine months ended
January 25, 1997 and January 24, 1998 is unaudited)
NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of significant accounting policies consistently applied in the
preparation of the accompanying financial statements follows:
FINANCIAL STATEMENT PRESENTATION
High Voltage Engineering Corporation (the "Company") is a wholly owned
subsidiary of Letitia Corporation ("Letitia"). The Company's wholly owned
subsidiaries include Datcon Instrument Company, HIVEC B.V., and Halmar Robicon
Group, Inc.
The consolidated financial statements include the accounts of the Company
and its domestic and foreign subsidiaries after elimination of material
intercompany transactions and balances.
The Company owns 49% of an affiliated company which is accounted for using
the equity method. Separate disclosure is not presented as the amounts are not
significant.
The accompanying consolidated financial statements for fiscal years 1995 and
1996 have been restated to correct the method of valuing contingent interest
payments (see note E). The effect of the restatement was to decrease net income
for 1995 by $604 ($604.00 per share), decrease net income for fiscal year 1996
by $1,582 ($1,582.00 per share) and also to increase the accumulated deficit at
the beginning of fiscal year 1995 by $2,763.
INTERIM CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
The consolidated balance sheet as of January 24, 1998, the consolidated
statements of operations, consolidated statement of stockholder's deficiency and
the consolidated statement of cash flows for the three months ended January 25,
1997 and January 24, 1998 are unaudited and, in the opinion of management of the
Company, include all adjustments (consisting only of normal recurring
adjustments) necessary for a fair presentation of the results for those interim
periods. The results of operations for the nine months ended January 25, 1997
and January 24, 1998 are not necessarily indicative of the results to be
expected for the full year.
NATURE OF OPERATIONS
The Company operates a diversified portfolio of specialty industrial
manufacturing businesses with multiple product lines that serve a broad spectrum
of original equipment manufacturers and end-users. Business and customer
concentration is minimal due to the diversified nature of its portfolio of
businesses, with respect to products sold and end-markets served on a world-wide
basis. Examples of end-markets served include process automation, wastewater
treatment, petrochemicals, construction, agriculture, materials handling,
computers, telecommunications, medical equipment, climate control and
scientific, and educational research.
ACCOUNTING PERIOD
The Company operates on a 52 or 53 week fiscal period. Each of the fiscal
periods presented are 52 week periods.
F-7
<PAGE>
HIGH VOLTAGE ENGINEERING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(Information as of January 24, 1998 and for the nine months ended
January 25, 1997 and January 24, 1998 is unaudited)
NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REVENUE RECOGNITION
Revenue is recognized when goods are shipped and the risk of loss passes to
the customer or in the case of significant long-term contracts on the
percentage-of-completion method. Provisions for estimated losses on long-term
contracts are charged to operations when identified.
When customers, under the terms of specific orders, request that the Company
manufacture, invoice and ship goods on a bill and hold basis, the Company
recognizes revenue based on the completion date required in the order and actual
completion of the manufacturing process. At the time such goods are ready for
delivery, title and risk of ownership pass to the customer.
Accounts receivable include retainages of approximately $504 and $1,279 as
of April 27, 1996 and April 26, 1997, respectively. Bill and hold receivables
were not significant as of April 27, 1996 and April 26, 1997.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
A summary of activity in the allowance for doubtful accounts is as follows:
<TABLE>
<CAPTION>
YEARS ENDED
-------------------------------------
<S> <C> <C> <C>
APRIL 29, APRIL 27, APRIL 26,
1995 1996 1997
----------- ----------- -----------
Balance at beginning of year................................... $ 906 $ 973 $ 1,973
Provision...................................................... 166 1,412 813
Charge-offs, net of recoveries................................. (99) (412) (929)
----- ----------- -----------
Balance at end of year......................................... $ 973 $ 1,973 $ 1,857
----- ----------- -----------
----- ----------- -----------
</TABLE>
CASH EQUIVALENTS
For purposes of the statements of cash flows, all highly liquid debt
instruments purchased with a maturity of three months or less are considered to
be cash equivalents.
Cash overdrafts included in trade accounts payable were $3,587 and $2,281 at
April 27, 1996 and April 26, 1997, respectively.
At April 27, 1996 and April 26, 1997, cash in the amounts of $6,191 and
$2,712, respectively, was in uninsured foreign bank accounts, including $4,595
and $2,210, respectively which was used for collateral for a bank guarantee
facility for customer advances.
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out or average
cost method) or market.
F-8
<PAGE>
HIGH VOLTAGE ENGINEERING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(Information as of January 24, 1998 and for the nine months ended
January 25, 1997 and January 24, 1998 is unaudited)
NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are recorded at cost. Depreciation and
amortization are provided for in amounts sufficient to relate the cost of
depreciable assets to operations over their estimated service lives. Leasehold
improvements are amortized over the lives of the respective leases or the
service lives of the improvements, whichever is shorter. Leased property under
capital leases is amortized over the lives of the respective leases or over the
service lives of the assets for those leases which substantially transfer
ownership. The straight-line method of depreciation is followed for
substantially all assets for financial reporting purposes, while accelerated
methods are used for tax purposes. Future income taxes resulting from
depreciation temporary differences have been provided for as deferred income
taxes.
Depreciation is based upon the following estimated useful lives:
<TABLE>
<S> <C>
Building and building improvements........................... 30 to 40
years
Leasehold improvements....................................... 5 to 20 years
Machinery and equipment...................................... 2 to 10 years
</TABLE>
COST IN EXCESS OF NET ASSETS ACQUIRED
The cost in excess of net assets acquired (goodwill) is amortized on a
straight-line basis over the expected period of benefit of forty years. The
Company continually evaluates the carrying value of goodwill. Any impairments
would be recognized when the expected undiscounted future operating cash flows
derived from such goodwill is less than the carrying value.
INTANGIBLE ASSETS
Costs incurred to obtain debt financing are amortized over the expected term
of the related debt. Amortization of deferred financing costs is recorded as
interest expense. The costs associated with non-compete and consulting
agreements are amortized over the period to which the agreements relate.
LONG-TERM COMPENSATION PLAN
Costs associated with a Valuation Creation Plan (VCP) which provides
long-term compensation for key individuals are recorded, on a quarterly basis,
based on the formula as defined in the VCP (see note I).
FOREIGN CURRENCY TRANSLATION
Foreign subsidiaries use the local currency as their functional currency.
Assets and liabilities of these entities are translated into U.S. dollars at
rates of exchange in effect at the balance sheet date. The resulting translation
adjustments are accumulated in a separate component of stockholder's deficiency
and are included in operations only upon the sale or liquidation of the
underlying foreign investment. Revenue and expense transactions are translated
at the weighted average exchange rates for the fiscal month in which the
transaction occurred.
F-9
<PAGE>
HIGH VOLTAGE ENGINEERING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(Information as of January 24, 1998 and for the nine months ended
January 25, 1997 and January 24, 1998 is unaudited)
NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
DERIVATIVES
The Company enters into forward exchange contracts to manage exposure
related to certain foreign currency commitments, certain foreign currency
denominated balance sheet positions and anticipated foreign currency denominated
expenditures. All forward exchange contracts are designated as and effective as
a hedge and are highly inversely correlated to the hedged item as required by
generally accepted accounting principles. If a derivative contract terminates
prior to maturity, the investment is shown at its fair value with the resulting
gain or loss reflected in operating results. Gains and losses on contracts to
hedge identifiable foreign currency commitments are deferred and accounted for
as part of the related foreign currency transaction. Gains and losses on all
other forward exchange contracts are included in income currently.
At April 26, 1997, the notional amounts of forward exchange contracts (all
denominated in Netherlands guilders) totaled $1,272. All of these contracts
mature in fiscal year 1998. Deferred unrealized losses from hedging firm
commitments are immaterial.
The Company's forward exchange contracts contain credit risk in that its
banking counterparties may be unable to meet the terms of the agreements. The
Company minimizes such risk by limiting its counterparties to major financial
institutions. In addition, the potential risk of loss with any one party
resulting from this type of credit risk is monitored. Management does not expect
any material losses as a result of default by other parties.
The Company does not use derivative financial instruments for speculative
trading purposes, nor does it hold or issue leveraged derivative financial
instruments.
ENVIRONMENTAL EXPENDITURES
Costs associated with remediation activities are expensed. Liabilities
relating to probable remedial activities are recorded when the cost of such
activities can be reasonably estimated. The liability is discounted when the
amount and timing of the cash payments for that remediation site are fixed or
reliably determinable. The liabilities are adjusted as further information
develops or circumstances change.
CERTAIN RISKS AND CONCENTRATION
The Company operates in highly competitive and rapidly changing markets and
some competitors have substantially greater sales and financial resources. Entry
into the market by new competition or the development of new technologies could
adversely affect operating results. Significant concentration of credit risk is
with trade receivables, which is somewhat mitigated due to the Company's
diversity of regions and customers.
The Company has manufacturing operations in three foreign countries (Spain,
Ireland and the Netherlands). Risks inherent in foreign operations include
changes in social, political and economic conditions, changes in currency
exchange rates, changes in the laws and policies that govern foreign investments
in countries and to a lesser extent, changes in United States laws and
regulations relating to foreign trade and investment.
F-10
<PAGE>
HIGH VOLTAGE ENGINEERING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(Information as of January 24, 1998 and for the nine months ended
January 25, 1997 and January 24, 1998 is unaudited)
NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES
Deferred tax assets and liabilities are determined based on the differences
between the financial statement and tax basis of assets and liabilities as
measured by the enacted tax rates which will be in effect when these differences
reverse, subject to a valuation allowance.
Deferred income taxes result from changes in deferred tax assets, deferred
tax liabilities and changes in the valuation allowance. Income tax expense
consists of the taxes payable for the year and deferred income taxes as
discussed above (see note J).
NET INCOME (LOSS) PER SHARE
During 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per
Share," which changes the calculation of earnings per share to be more
consistent with countries outside the United States. In general, the statement
requires two calculations of earnings per share to be disclosed, basic EPS and
diluted EPS. Basic EPS is to be computed using only weighted average shares
outstanding, while diluted EPS is computed considering the dilution of options
and warrants. This statement has been adopted by the Company and all prior,
interim and annual periods have been restated.
LIQUIDITY
The Company believes that its current financing together with internally
generated funds will be sufficient to fund its operations over the next twelve
months.
USE OF ESTIMATES
In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements and
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
ADVERTISING
Advertising costs are expensed as incurred. Advertising expense was $1,458,
$1,429 and $1,754 for the fiscal years 1995, 1996 and 1997, respectively.
RESEARCH AND DEVELOPMENT
Research and development costs are charged to operations as incurred.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of cash and cash equivalents approximates its fair
value. The fair value of notes receivable is estimated by discounting the
expected future cash flows at interest rates commensurate with the
creditworthiness of the parties to the notes receivable, which approximates its
carrying values.
F-11
<PAGE>
HIGH VOLTAGE ENGINEERING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(Information as of January 24, 1998 and for the nine months ended
January 25, 1997 and January 24, 1998 is unaudited)
NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The carrying amounts of borrowings under short-term revolving credit
agreements, and variable rate long-term debt instruments approximate their fair
value as the floating rates applicable to the financial instruments reflect
changes in overall market interest rates. The fair value of other long-term debt
is estimated using discounted cash flow analysis, based on the Company's current
incremental borrowing rates for similar types of borrowing arrangements. The
fair value of long-term debt refinanced, as discussed in note E, was estimated
at its carrying value. At April 27, 1996, the carrying amount and estimated fair
value of long-term debt was $81,918 and $81,001, respectively. At April 26,
1997, the carrying amount and estimated fair value of long-term debt was $83,117
and $82,196, respectively.
The carrying value of the redeemable warrants is equal to the estimated fair
value.
The estimate fair value of forward currency exchange contracts is calculated
using the exchange rate at the Company's year end as quoted by the respective
brokers and at April 26, 1997 was approximately $1,162.
Fair value estimates are subjective in nature and involve uncertainties and
matters of significant judgement and therefore cannot be determined with
precision. Changes in assumptions could significantly affect these estimates.
The Company believes that it is not practical to estimate a fair value
different from these securities' carrying value of its redeemable preferred
stock as these securities are issued to Letitia, a related party, and have
numerous unique features (see note G).
NEW ACCOUNTING PRONOUNCEMENTS
During 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive
Income," which establishes standards for the reporting and display of
comprehensive income and SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information," which introduces a new model for segment
reporting. The Company does not believe adoption will have a material impact on
its financial statement disclosures.
RECLASSIFICATIONS
Certain reclassifications have been made to the fiscal year 1995 and 1996
consolidated financial statements in order to conform with the current year's
presentation.
F-12
<PAGE>
HIGH VOLTAGE ENGINEERING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(Information as of January 24, 1998 and for the nine months ended
January 25, 1997 and January 24, 1998 is unaudited)
NOTE B -- INVENTORIES
Inventories consisted of the following as of:
<TABLE>
<CAPTION>
APRIL 27, APRIL 26, JANUARY 24,
1997 1997 1998
--------- --------- -----------
<S> <C> <C> <C>
(UNAUDITED)
Raw materials.............................................. $ 13,461 $ 14,912 $ 17,832
Work in process............................................ 4,462 3,977 11,825
Finished goods............................................. 3,049 3,445 9,489
--------- --------- -----------
Total...................................................... $ 20,972 $ 22,334 $ 39,146
--------- --------- -----------
--------- --------- -----------
</TABLE>
NOTE C -- PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following as of:
<TABLE>
<CAPTION>
APRIL 27, APRIL 26,
1996 1997
---------- ----------
<S> <C> <C>
Land and land improvements............................................ $ 3,763 $ 5,788
Buildings and building improvements................................... 15,722 16,494
Machinery and equipment............................................... 29,713 30,681
Construction in progress.............................................. 789 644
---------- ----------
Total............................................................. 49,987 53,607
Less accumulated depreciation and amortization........................ (20,765) (22,641)
---------- ----------
Total......................................................... $ 29,222 $ 30,966
---------- ----------
---------- ----------
</TABLE>
Property under capital leases is included in these amounts (see note M)
NOTE D -- ASSETS HELD FOR SALE AND OTHER ASSETS
At April 27, 1996 and April 26, 1997, assets held for sale of $6,173 and
$5,248 consisted of several former manufacturing facilities. These properties
are recorded at the lower of the carrying amount or fair value less costs to
sell. It is reasonably possible that the proceeds from the sales of these
properties will differ significantly from the carrying amount and additional
losses may be recorded.
Two of the properties are leased to third parties, one lease is for a term
of five years which commenced in March, 1997 with annual payments of $336 in
year one, $360 in year two, $468 in year three, $528 in year four and $567 in
year five. This lease contains a buyout provision. The other lease is also a
five year term which commenced in November, 1995 with annual payments of $120.
During fiscal year 1997, a facility was transferred to fixed assets at its
carrying value of $1,378. The transfer was made because the facility is now
being utilized in the Company's operations.
F-13
<PAGE>
HIGH VOLTAGE ENGINEERING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(Information as of January 24, 1998 and for the nine months ended
January 25, 1997 and January 24, 1998 is unaudited)
Other assets and costs in excess of net assets acquired consisted of the
following as of:
<TABLE>
<CAPTION>
APRIL 27,
1996 APRIL 26, 1997
--------- ----------------------------------
NET NET
CARRYING GROSS ACCUMULATED CARRYING
AMOUNT AMOUNT AMORTIZATION AMOUNT
--------- --------- ------------ ---------
<S> <C> <C> <C> <C>
Cost in excess of net assets acquired.............................. $ 9,711 $ 11,842 $ (2,484) $ 9,358
--------- --------- ------------ ---------
--------- --------- ------------ ---------
Deferred financing costs (note E).................................. $ 1,100 $ 4,771 $ (1,183) $ 3,588
Covenant not-to-compete (note O)................................... 853 1,280 (854) 426
Prepaid consulting agreement (note O).............................. 533 800 (533) 267
Prepaid pension cost (note I)...................................... 2,018 2,119 -- 2,119
Notes receivable................................................... 947 696 -- 696
Other.............................................................. 176 699 (363) 336
--------- --------- ------------ ---------
Total.......................................................... $ 5,627 $ 10,365 $ (2,933) $ 7,432
--------- --------- ------------ ---------
--------- --------- ------------ ---------
</TABLE>
The fiscal year 1996 net carrying amount is net of accumulated amortization
of $3,753. Amortization expense was $931, $1,729 and $1,664 for fiscal years
1995, 1996 and 1997, respectively.
NOTE E -- LONG-TERM OBLIGATIONS AND FOREIGN CREDIT LINE
Long-term obligations consisted of the following as of:
<TABLE>
<CAPTION>
APRIL 27, APRIL 26, JANUARY 24,
1996 1997 1998
--------- --------- -----------
<S> <C> <C> <C>
(UNAUDITED)
1997 Senior Notes.......................................... -- -- $ 135,000
1996 Senior Credit Agreement............................... $ -- $ 16,630 --
1996 Senior Secured Notes.................................. -- 20,000 --
1996 Senior Unsecured Notes................................ -- 7,000 --
1996 Senior Subordinated Notes
(face value $25,000)..................................... -- 19,374 --
1995 Senior Credit Agreement............................... 30,485 -- --
1995 Senior Subordinated Note.............................. 13,808 -- --
1995 Junior Subordinated Note.............................. 18,230 -- --
Capital lease obligations (note M)......................... 9,143 10,382 10,090
Mortgage notes payable..................................... 8,271 8,035 7,581
Notes payable.............................................. 1,981 1,696 1,634
--------- --------- -----------
Total (see note P)..................................... 81,918 83,117 154,305
Less current maturities................................ (1,909) (2,609) (1,308)
--------- --------- -----------
Long-term obligations, net of current maturities....... $ 80,009 $ 80,508 $ 152,997
--------- --------- -----------
--------- --------- -----------
</TABLE>
On May 9, 1996, the Company entered into new revolving and long-term credit
agreements. The 1996 Agreements refinanced the 1995 Senior Credit Agreement, the
1995 Senior Subordinated Note, and the
F-14
<PAGE>
HIGH VOLTAGE ENGINEERING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(Information as of January 24, 1998 and for the nine months ended
January 25, 1997 and January 24, 1998 is unaudited)
NOTE E -- LONG-TERM OBLIGATIONS AND FOREIGN CREDIT LINE (CONTINUED)
1995 Junior Subordinated Note. In connection with this refinancing the Company
incurred financing costs of approximately $3,192 (see note D).
The Company also recorded an extraordinary loss on this refinancing of $422
and $259, net of income taxes in fiscal years 1996 and 1997, respectively.
1996 SENIOR CREDIT AGREEMENT
The 1996 Senior Credit Agreement provides a $20,000 revolving credit
facility ($7,702 outstanding as of April 26, 1997) with principal due at
maturity on April 30, 2001, as well as a $10,000 term loan ($8,928 outstanding
as of April 26, 1997) with principal due in twenty seven (27) equal installments
due quarterly, with the balance due on April 30, 2003. Interest under the
revolving credit facility is computed at the Prime Rate of the bank (8.5% as of
April 26, 1997) which is payable monthly. The interest rate of the term loans
was computed at the Prime Rate of the bank plus 0.75% (9.25% as of April 26,
1997) and is payable quarterly. As of April 26, 1997, letters of credit
outstanding were $2,932.
1996 SENIOR SECURED NOTES
The 1996 Senior Secured Notes provides $20,000 in notes with repayments on
May 1, 2001, and 2002 of the lesser of $6,667 or the outstanding balance, and
the remaining amounts due on May 1, 2003. Interest expense is payable
semi-annually at a rate of 10.84% per annum.
1996 SENIOR UNSECURED NOTES
The 1996 Senior Unsecured Notes provides $7,000 in notes with repayments in
equal installments of $2,333 on May 1, 2001, 2002, and 2003. Interest expense is
payable semi-annually at a rate of 12.09% per annum.
1996 SENIOR SUBORDINATED NOTES
The 1996 Senior Subordinated Notes ($25,000) provided net proceeds of
$20,520 with repayment of $25,000 (principal including "payment-in-kind"
interest) due at maturity on May 1, 2004. The Senior Subordinated Notes include
warrants to purchase 142.86 shares at $.01 per share of the Company's Common
Stock subject to a dilution adjustment, as defined, which represents 12.5% of
the Company's fully diluted common stock. The warrants expire on May 9, 2004
(see note P). For financial reporting purposes, the Company assigned an initial
estimated fair value of these warrants at $2,413 of the net proceeds. In the
event the Company does not consummate an initial public offering of its common
stock prior to May 1, 2000, the holders of the warrants may "put" the warrants
to the Company at amounts which are the greater of the then appraised value or
by formula as defined in the agreement. Changes in the value of the warrants in
the amount of $387 and $2,200 for fiscal year 1997 and for the three months
ended July 26, 1997, respectively, were charged to interest expense. It is
reasonably possible that the value of the warrants will differ significantly
from the carrying amount and additional adjustments may be recorded. The
effective interest rate of the debt after giving effect to the discount and
warrant valuation is
F-15
<PAGE>
HIGH VOLTAGE ENGINEERING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(Information as of January 24, 1998 and for the nine months ended
January 25, 1997 and January 24, 1998 is unaudited)
NOTE E -- LONG-TERM OBLIGATIONS AND FOREIGN CREDIT LINE (CONTINUED)
approximately 17.1%. Interest payments are made quarterly at a rate of 8% of the
face value of the note ($25,000) per annum until May 1, 2000, and at a rate of
14% thereafter.
COLLATERAL AND CONTINGENT INTEREST
Obligations were collateralized under an Intercreditor Agreement which
provided for liens on substantially all of the Company's assets. Under certain
circumstances, the Company may be required to make contingent interest payments
("CIP") to the former 1995 Senior and Junior Subordinated Noteholders based upon
the greater of the fair value of the Company, or formula, both as defined. The
Company has accrued its estimate of amounts due based on an independent
appraisal. It is reasonably possible that the settlement of CIP will differ from
the amounts accrued (see note P).
MORTGAGE NOTES PAYABLE
The mortgage notes generally are due June 2004, November 2009, April 2011
and January 2016, and bear interest between 2% and 9.75% (weighted average
interest rate of 6.4% at April 26, 1997). The notes are collateralized by land
and buildings with a net book value of approximately $10,438 as of April 26,
1997. Certain of these mortgages were issued through the Pennsylvania Economic
Development Financing Authority and the Pennsylvania Industrial Development
Authority in conjunction with the construction of a new facility for a
subsidiary of the Company. The subsidiary may prepay the mortgage before
maturity, subject to a prepayment premium ranging from 101% to 105% of the
principal amount thereof.
FOREIGN CREDIT LINE
At April 26, 1997, the foreign credit line outstanding balance is $2,284.
The borrowing bears interest at 10% per annum, and matures at the earlier of the
collection of the receivables securing the credit line or 120 days.
RESTRICTIVE COVENANTS
The 1996 Credit Agreements, subordinated notes and mortgage notes payable
contain restrictive provisions relating to the maintenance of certain financial
ratios, as defined in the respective agreements, restrictions on the payment of
common stock dividends, leases, capital expenditures, borrowings, the
acquisition or disposition of material subsidiaries and other matters. The
borrowings under certain capital leases contain cross default provisions. The
Company was in violation of certain covenants, which were waived by the
respective lenders.
F-16
<PAGE>
HIGH VOLTAGE ENGINEERING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(Information as of January 24, 1998 and for the nine months ended
January 25, 1997 and January 24, 1998 is unaudited)
NOTE E -- LONG-TERM OBLIGATIONS AND FOREIGN CREDIT LINE (CONTINUED)
Aggregate maturities of long-term obligations including discount are as
follows:
<TABLE>
<CAPTION>
FISCAL
- ---------------------------------------------------------------
<S> <C>
1998........................................................... $ 2,609
1999........................................................... 2,688
2000........................................................... 4,324
2001........................................................... 12,502
2002........................................................... 4,753
Thereafter..................................................... 61,867
---------
$ 88,743
---------
---------
</TABLE>
NOTE F -- OTHER LIABILITIES
Other liabilities consisted of the following:
<TABLE>
<CAPTION>
APRIL 27, APRIL 26,
1996 1997
----------- -----------
<S> <C> <C>
Environmental cleanup and related litigation costs (note N).............. $ 4,472 $ 3,267
Other.................................................................... 876 1,739
----------- -----------
Total................................................................ 5,348 5,006
Less current portion included in accrued liabilities................. (2,143) (2,511)
----------- -----------
$ 3,205 $ 2,495
----------- -----------
----------- -----------
</TABLE>
NOTE G -- REDEEMABLE PREFERRED STOCK
Redeemable preferred stock was issued to Letitia. The Series B and Series C
Preferred Stock is indirectly owned by a former Junior Subordinated noteholder
(see note P).
Redeemable Preferred Stock consisted of the following:
<TABLE>
<CAPTION>
SHARES ISSUED
AND ISSUABLE
------------------------
<S> <C> <C> <C> <C>
PAR SHARES APRIL 27, APRIL 26,
VALUE AUTHORIZED 1996 1997
----- ----------- ----------- -----------
Series A................................................................. $ 1 25,000 -- --
Series B................................................................. $ 1 30,000 25,705 25,705
Series C................................................................. $ 1 10,000 6,245 6,724
</TABLE>
F-17
<PAGE>
HIGH VOLTAGE ENGINEERING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(Information as of January 24, 1998 and for the nine months ended
January 25, 1997 and January 24, 1998 is unaudited)
NOTE G -- REDEEMABLE PREFERRED STOCK (CONTINUED)
Changes in Redeemable Preferred Stock (issued and issuable) were as follows:
<TABLE>
<CAPTION>
SERIES B SERIES C TOTAL
----------- ----------- ---------
<S> <C> <C> <C>
Balance at April 29, 1995...................................... $ 4,750 $ 5,799 $ 10,549
Dividends declared............................................. -- 446 446
----------- ----------- ---------
Balance at April 27, 1996...................................... 4,750 6,245 10,995
Dividends declared............................................. -- 479 479
----------- ----------- ---------
Balance at April 26, 1997...................................... $ 4,750 $ 6,724 $ 11,474
----------- ----------- ---------
----------- ----------- ---------
</TABLE>
DIVIDENDS AND REDEMPTIONS
Series A Preferred Stock is authorized but no shares are issued or
outstanding.
Dividends on Series B Preferred Stock are noncumulative and payable when and
as declared by the Board of Directors out of funds legally available for such
purpose. The rate at which dividends may be declared and paid shall not exceed
17 1/2% per annum of the Liquidation Value (defined below). Dividends of 1,745
shares and 1,903 shares of Series B Preferred Stock were declared during the
fiscal years 1995 and 1996, respectively. This dividend has no effect on the
Liquidation Value of the Series B Preferred Stock and the Company has ceased
declaring dividends in fiscal year 1997.
Dividends on Series C Preferred Stock are cumulative and accrue at a rate of
7.6% per annum. Dividends through June 1, 2000, are payable in the form of
additional shares of Series C Preferred Stock, and, thereafter, dividends are
payable annually in cash, except to the extent restricted by other agreements of
the Company. Holders of Series C Preferred Stock have preference as to payments
of dividends over holders of Series A and Series B Preferred Stock and Common
Stock.
REDEMPTION PROVISIONS
The Series B Preferred Stock has a mandatory redemption date of March 17,
2008, except to the extent restricted by other agreements, at a redemption price
equal to the Liquidation Value (discussed below) together with all declared, but
unpaid dividends thereon.
The Series C Preferred Stock has a mandatory redemption date of June 2000,
except to the extent restricted by other agreements, at a redemption price of
one thousand dollars per share together with accrued dividends thereon. The
Company may, at its sole option, redeem shares of Series C Preferred Stock using
the same terms as noted on the mandatory redemption date except to the extent
restricted by other agreements.
VOTING RIGHTS
Holders of Series B and Series C Preferred Stock have no voting rights
except, as to holders of Series C, if the Company is in arrears in the payment
of dividends in an amount equal to or exceeding two quarterly dividend payments
and until all such arrearages are repaid in full, the holders of the Series C,
voting as a class, are entitled to elect one director to the Board of Directors
of the Company.
F-18
<PAGE>
HIGH VOLTAGE ENGINEERING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(Information as of January 24, 1998 and for the nine months ended
January 25, 1997 and January 24, 1998 is unaudited)
NOTE G -- REDEEMABLE PREFERRED STOCK (CONTINUED)
The consent of the holders of a majority of shares of any outstanding Series
B and Series C Preferred Stock is necessary for effecting certain significant
transactions.
RESTRICTIVE COVENANTS
As long as any shares of Series B or Series C Preferred Stock are
outstanding, no common stock dividend may be paid or declared, nor may any
distribution be made on any other class of preferred or common stock.
Additionally, no shares of any other class of preferred or common stock may be
purchased, redeemed or otherwise acquired unless (a) all dividends on the Series
B and Series C Preferred Stock for all past dividend periods, and for the then
current period, have been paid, or, if declared and unpaid, a sum sufficient for
the payment thereof set apart and all mandatory redemption payments then due
with respect to Series B and Series C Preferred Stock have been made or funds
therefore set apart for payment or (b) the holders of a majority of the shares
of Series B and Series C Preferred Stock, each voting as a class, approve such
dividend, distribution, purchase, redemption or acquisition.
LIQUIDATION VALUE
The holder of shares of Series B Preferred Stock shall be entitled to
receive the lesser of (a) one thousand dollars per share or (b) $4,750
representing the fair value, as determined by the Board of Directors. The fair
value was determined based on the proceeds received by the Company as a result
of the liquidation of a 1988 investment made with the proceeds of the issuance
of the Series B Preferred Stock, net of all liabilities and expenses, including
taxes, divided by the number of shares of Series B Preferred Stock outstanding,
plus all dividends declared and unpaid. Holders of Series B Preferred Stock have
preferences as to liquidation over holders of Series C Preferred Stock.
In the event of a voluntary or involuntary liquidation, dissolution or
winding up of the affairs of the Company, the holders of Series C Preferred
Stock are entitled to receive all dividends accrued and unpaid to the date of
payment and a liquidation value per share of one thousand dollars prior to any
payment to holders of any junior stock.
NOTE H -- COMMON STOCK
At April 27, 1996 and April 26, 1997, the Company had two thousand shares of
common stock authorized, and one thousand issued and outstanding. Such common
stock has a par value of $.01 per share. The declaration or payment of dividends
is restricted as discussed in notes E and G.
NOTE I -- BENEFIT PLANS
DEFINED BENEFIT PLAN
The Company and its subsidiaries have a frozen pension plan. The benefit
accruals for certain remaining former employees became frozen in February 1995.
Pension costs are determined in accordance with Statement of Financial
Accounting Standards (SFAS) No. 87, "Employers' Accounting for Pensions."
F-19
<PAGE>
HIGH VOLTAGE ENGINEERING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(Information as of January 24, 1998 and for the nine months ended
January 25, 1997 and January 24, 1998 is unaudited)
NOTE I -- BENEFIT PLANS (CONTINUED)
Service cost is determined using the projected unit credit actuarial cost
method. In fiscal year 1995, a curtailment of the plan occurred and the
remaining prior service costs of $419 was written off. It is the Company's
policy to make annual contributions to the plan in amounts at least equal to the
amounts required by law.
Domestic net pension costs are summarized as follows:
<TABLE>
<CAPTION>
YEARS ENDED
-------------------------------
<S> <C> <C> <C>
APRIL 29, APRIL 27, APRIL 26,
1995 1996 1997
--------- --------- ---------
Service cost.................................................. $ 50 $ -- $ --
Interest cost................................................. 1,227 1,227 1,351
Curtailment loss.............................................. 419 -- --
--------- --------- ---------
1,696 1,227 1,351
--------- --------- ---------
--------- --------- ---------
Return on plan assets:
Actual $ (685) $ (3,834) $ (2,215)
Deferred.................................................. (484) 2,592 763
Unrecognized loss......................................... 9 -- --
--------- --------- ---------
Net recognized............................................ (1,160) (1,242) (1,452)
--------- --------- ---------
Total pension expense (income)........................ $ 536 $ (15) $ (101)
--------- --------- ---------
--------- --------- ---------
</TABLE>
The funded status and prepaid net pension cost are as follows:
<TABLE>
<CAPTION>
APRIL 27, APRIL 26,
1996 1997
--------- ---------
<S> <C> <C>
Vested and accumulated benefit obligation............................... $ 14,805 $ 16,378
--------- ---------
--------- ---------
Fair value of plan assets............................................... $ 17,179 $ 17,505
Projected benefit obligation............................................ 14,805 16,378
--------- ---------
Excess of plan assets over projected benefit obligation................. 2,374 1,127
Unrecognized net (gain) loss............................................ (356) 992
--------- ---------
Prepaid pension cost -- (note D)........................................ $ 2,018 $ 2,119
--------- ---------
--------- ---------
Assumed discount rate................................................... 8.5% 8.5%
Expected rate of return on plan assets.................................. 9.0% 9.0%
</TABLE>
No compensation increases have been assumed due to the plan being frozen.
The plan assets as of April 27, 1996 and April 26, 1997 consisted primarily
of equity securities, pooled real estate funds, guaranteed interest contracts,
fixed income securities and cash equivalents. The plan holds stock in Letitia
who is the sole shareholder of the Company. The plan has valued this stock at
$1,300 (unaudited) as of April 27, 1996 and $2,088 (unaudited) as of April 26,
1997, respectively (see note P).
F-20
<PAGE>
HIGH VOLTAGE ENGINEERING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(Information as of January 24, 1998 and for the nine months ended
January 25, 1997 and January 24, 1998 is unaudited)
NOTE I -- BENEFIT PLANS (CONTINUED)
The Company elected to adopt a revised mortality rate in the current year to
more accurately reflect employees life expectancies.
MULTI-EMPLOYER PLAN
Foreign employees generally participate in a multiemployer pension plan.
Foreign pension expense totaled $138, $163 and $199 in fiscal years 1995, 1996
and 1997, respectively.
DEFINED CONTRIBUTION PLANS
The Company has a 401(k) savings plan (the "Plan") covering substantially
all U.S. employees. The Plan provides for a Company matching contribution of up
to one thousand eight hundred dollars per year based on the amount of elective
deferral selected by the employee, plus a profit sharing contribution, equal to
two percent (2%) of the employees annual salary and bonus, when applicable.
Contributions to the Plan were $1,449, $1,289 and $1,581 in fiscal years
1995, 1996 and 1997, respectively. The Company provides certain other retirement
benefits, which are not material, to some former officers and former key
management employees which have been provided for in the consolidated financial
statements.
LONG-TERM COMPENSATION PLAN
The Company maintains a Valuation Creation Plan (VCP) which provides
long-term compensation for key individuals. Upon joining the VCP, benefits vest
at twenty percent a year and participants can "cash out", as defined, up to
fifty percent of their vested value anytime with the remainder paid at
retirement or termination. All payments under the VCP are subject to the
availability of general funds of the Company. The VCP is a nonqualified and
non-funded plan. The Company has accrued $720 and $1,266 as of fiscal years 1996
and 1997, respectively and administrative and selling expenses includes $149,
$436 and $698 for fiscal years 1995, 1996 and 1997, respectively related to VCP.
In the event of the sale or certain other changes in ownership of a
subsidiary or division, impacted key individuals would become 100% vested.
Benefits, if any, would be calculated up to that date based upon fair values as
established by the transaction. Such benefits would be charged to operations
immediately and may be greater than that which would have been calculated under
the original terms of the VCP.
An officer of the Company is the beneficiary of an incentive compensation
plan pursuant to which such officer shall be entitled to receive upon
termination of employment or his death certain payments in accordance with a
formula, as defined. The vesting is in equal installments from May 1, 1994
through May 1, 1998. The Company has accrued the estimated vested balance.
F-21
<PAGE>
HIGH VOLTAGE ENGINEERING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(Information as of January 24, 1998 and for the nine months ended
January 25, 1997 and January 24, 1998 is unaudited)
NOTE J -- INCOME TAXES
The foreign and domestic components of income (loss) from continuing
operations before income taxes and extraordinary item were as follows:
<TABLE>
<CAPTION>
APRIL 29, APRIL 27, APRIL 26,
1995 1996 1997
----------- --------- ---------
<S> <C> <C> <C>
Domestic.................................. $ 1,171 $ (6,795) $ (4,407)
Foreign................................... (806) 3,713 2,436
----------- --------- ---------
Total..................................... $ 365 $ (3,082) $ (1,971)
----------- --------- ---------
----------- --------- ---------
</TABLE>
The components of income taxes expense (credit) are:
<TABLE>
<CAPTION>
YEARS ENDED
---------------------------------
<S> <C> <C> <C>
APRIL 29, APRIL 27, APRIL 26,
1995 1996 1997
----------- --------- ---------
Continuing operations:
Current:
Federal $ (28) $ (742) $ --
State..................................................................... 288 120 400
Foreign................................................................... 346 717 1,269
----- --------- ---------
606 95 1,669
----- --------- ---------
Deferred (net of impact of valuation allowance):
Federal................................................................... (560) (3,228) (592)
Foreign................................................................... 150 514 (551)
----- --------- ---------
(410) (2,714) (1,143)
----- --------- ---------
Total continuing operations................................................... $ 196 $ (2,619) $ 526
----- --------- ---------
Discontinued operations and extraordinary item:
Current:
Federal................................................................... 140 531 (159)
State..................................................................... 65 95 --
----- --------- ---------
Total discontinued operations and extraordinary item.......................... 205 626 (159)
----- --------- ---------
Net income taxes (benefit)........................................................ $ 401 $ (1,993) $ 367
----- --------- ---------
----- --------- ---------
</TABLE>
F-22
<PAGE>
HIGH VOLTAGE ENGINEERING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(Information as of January 24, 1998 and for the nine months ended
January 25, 1997 and January 24, 1998 is unaudited)
DEFINED BENEFIT PLAN (CONTINUED)
Total income taxes (benefit) from continuing operations differed from
"expected" income tax expense, computed by applying the U.S. Federal statutory
tax rate of 35 percent to income before income tax, as follows:
<TABLE>
<CAPTION>
APRIL 29, APRIL 27, APRIL 26,
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
Federal statutory rate applied to income before income taxes, discontinued
operations and extraordinary item............................................... $ 127 $ (1,078) $ (689)
State and local taxes, net of Federal tax benefit................................. 199 80 264
Effect of foreign operations...................................................... 770 (66) (1,684)
Costs in excess of net assets acquired............................................ 423 246 234
Change in valuation reserve....................................................... (1,459) 1,669 3,093
Provision (benefit) for Internal Revenue Service ("IRS") examination.............. -- (3,429) (696)
Other items....................................................................... 136 (41) 4
--------- --------- ---------
Income tax expense (benefit) -- continuing operations............................. $ 196 $ (2,619) $ 526
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-23
<PAGE>
HIGH VOLTAGE ENGINEERING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(Information as of January 24, 1998 and for the nine months ended
January 25, 1997 and January 24, 1998 is unaudited)
DEFINED BENEFIT PLAN (CONTINUED)
A deferred income tax (expense) benefit results from temporary differences
in the recognition of income and expense for income tax and financial reporting
purposes. The temporary differences which gave rise to the following deferred
income tax assets and liabilities are:
<TABLE>
<CAPTION>
APRIL 27, APRIL 26,
1996 1997
--------- ---------
<S> <C> <C>
Deferred income tax assets:
Accounts receivable........................................ $ 720 $ 1,027
Inventory.................................................. 883 915
Accrued liabilities........................................ 2,518 2,858
Net operating losses....................................... 2,386 2,677
Tax credits................................................ 193 2,873
Assets held for sale....................................... 580 580
Accrued interest........................................... 815 1,074
Other...................................................... 186 94
--------- ---------
Total gross deferred income tax assets................. 8,281 12,098
Valuation allowance........................................ (6,493) (9,586)
--------- ---------
Total net deferred income tax assets................... 1,788 2,512
Deferred income tax liabilities:
Depreciation............................................... $ (1,700) $ (2,291)
Reserve for IRS examination................................ (3,078) (2,382)
Foreign items.............................................. (1,641) (1,090)
Other...................................................... (517) (754)
--------- ---------
Total gross deferred income tax liabilities............ (6,936) (6,517)
--------- ---------
Net deferred income tax liability $ (5,148) $ (4,005)
--------- ---------
--------- ---------
</TABLE>
These deferred income tax assets and liabilities are presented as follows in
the consolidated balance sheets:
<TABLE>
<CAPTION>
APRIL 27, APRIL 26,
1996 1997
----------- -----------
<S> <C> <C>
Current deferred tax liability................................. $ 3,248 $ 2,171
Noncurrent deferred tax liability.............................. 1,900 1,834
----------- -----------
$ 5,148 $ 4,005
----------- -----------
----------- -----------
</TABLE>
A valuation allowance against the recoverability of deferred tax assets has
been established because more likely than not the Company will not be able to
utilize certain credits and net operating loss carryforwards in future years.
The Company has offset certain deferred tax liabilities, with deferred tax
assets which are expected to generate offsetting deductions within the same
periods.
F-24
<PAGE>
HIGH VOLTAGE ENGINEERING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(Information as of January 24, 1998 and for the nine months ended
January 25, 1997 and January 24, 1998 is unaudited)
DEFINED BENEFIT PLAN (CONTINUED)
A summary of the activity in the allowance for deferred tax assets is as
follows:
<TABLE>
<CAPTION>
YEARS ENDED
-------------------------------------
<S> <C> <C> <C>
APRIL 29, APRIL 27, APRIL 26,
1995 1996 1997
----------- ----------- -----------
Balance at beginning of period....................... $ 6,283 $ 4,824 $ 6,493
Net change........................................... (1,459) 1,669 3,093
----------- ----------- -----------
Balance at end of period............................. $ 4,824 $ 6,493 $ 9,586
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
During fiscal 1995, the IRS completed an examination of the Company's income
tax returns for the years ended December 1986 through April 1991. During fiscal
year 1996, the Company and the IRS reached a proposed settlement of this
liability which was subsequently approved by the Joint Committee on Taxation.
Subsequent to April 26, 1997, the Company and the IRS settled on the interest to
be paid related to the assessment. The amount of the settlement including
interest, as well as the state taxes which are expected to be levied due to this
settlement have been accrued.
At April 26, 1997, the Company has available net operating loss
carryforwards of approximately $6,742 which generally expire in the fiscal year
ending in 2006. Such carryforwards are substantially limited upon an "ownership
change" as defined in the Internal Revenue Code. No such ownership change is
currently anticipated. The Company also has foreign tax credits of $2,584 the
majority of which expire in the fiscal year 2002.
NOTE K -- OTHER STATEMENT OF OPERATIONS ITEMS
RESTRUCTURING CHARGE
For the fiscal years 1995 and 1996, restructuring charges in the amount of
$1,294 and $150, respectively, which have been paid, represents a restructuring
program designed to reduce cost and improve operating processes. The program
included relocation to a new facility in Massachusetts by one of the Company's
operating divisions, (including a facility write-down and related severance
costs of the respective terminated employees), the write-off of the cumulative
foreign currency translation adjustment resulting from the liquidation of a
foreign subsidiary and the closure of a European office.
F-25
<PAGE>
HIGH VOLTAGE ENGINEERING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(Information as of January 24, 1998 and for the nine months ended
January 25, 1997 and January 24, 1998 is unaudited)
NOTE K -- OTHER STATEMENT OF OPERATIONS ITEMS (CONTINUED)
OTHER EXPENSE -- NET
Other expense -- net includes the following:
<TABLE>
<CAPTION>
YEARS ENDED
-------------------------------------
<S> <C> <C> <C>
APRIL 29, APRIL 27, APRIL 26,
1995 1996 1997
----------- ----------- -----------
Writedown of assets held for sale (note D)..................... $ 815 $ 1,200 $ --
Net gain on disposition of miscellaneous assets................ (47) (83) (230)
Division relocation and moving costs........................... 124 103 --
Facilities (income) expense (note D)........................... -- (57) 319
Aborted acquisition and offering costs......................... -- -- 2,145
----- ----------- -----------
Total...................................................... $ 892 $ 1,163 $ 2,234
----- ----------- -----------
----- ----------- -----------
</TABLE>
NOTE L -- RELATED-PARTY TRANSACTIONS
MANAGEMENT FEES
Management fees were incurred with respect to services rendered in
connection with financing, merger and acquisitions and various operational and
strategic matters. Management fees were $450, $648 and $781 for fiscal years
1995, 1996 and 1997, respectively.
TRANSACTION FEES
The Company has agreed to pay a related party a transaction fee of 1% of the
gross proceeds of all asset acquisitions and divestitures. Transaction fees of
$102 and $110 (reflected in gain/(loss) on disposal of discontinued operations)
were paid in fiscal years 1995 and 1996. There were no transaction fees for
fiscal year 1997.
NOTE M -- LEASES
CAPITAL AND OPERATING LEASES
The Company conducts a portion of its operations in facilities under capital
and operating leases and also has capital and operating leases covering certain
machinery and equipment. Certain of the leases contain renewal and purchase
options. Rental expense charged to operations in fiscal years 1995, 1996 and
1997, was approximately $1,256, $1,079, and $1,626, respectively.
F-26
<PAGE>
HIGH VOLTAGE ENGINEERING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(Information as of January 24, 1998 and for the nine months ended
January 25, 1997 and January 24, 1998 is unaudited)
NOTE M -- LEASES (CONTINUED)
Property under capital leases consisted of the following:
<TABLE>
<CAPTION>
APRIL 27, APRIL 26,
1996 1997
----------- -----------
<S> <C> <C>
Land, buildings and improvements............................... $ 9,650 $ 9,650
Machinery and equipment........................................ 563 2,160
Less accumulated amortization.................................. (2,288) (2,647)
----------- -----------
Total...................................................... $ 7,925 $ 9,163
----------- -----------
----------- -----------
</TABLE>
At April 26, 1997, the minimum rental commitments for noncancelable leases
that have initial or remaining terms of more than one year are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
--------- -----------
<S> <C> <C>
1998.......................................................... $ 1,757 $ 1,581
1999.......................................................... 1,777 1,306
2000.......................................................... 1,665 837
2001.......................................................... 1,451 269
2002.......................................................... 1,357 62
Thereafter through 2014....................................... 13,805 --
--------- -----------
Minimum commitments........................................... 21,812 $ 4,055
--------- -----------
Less amount representing interest............................. (11,430)
---------
Capital lease obligations (included in longterm obligations)
(note E).................................................... $ 10,382
---------
---------
</TABLE>
NOTE N -- LITIGATION, CLAIMS AND ENVIRONMENTAL MATTERS
The Company is obligated to clean-up three sites relating to former
manufacturing facilities and has accrued the estimated costs of remediation (see
note F). Estimated costs are determined by external and internal environmental
remediation experts. The estimated costs of remediation of one site is based on
its estimated present value. The discount rate used was 6%. The gross
undiscounted amount differs from the estimated present value by approximately
$667 as of April 26, 1997. There are no assurances that additional costs will
not be incurred or that significant changes in estimates or changes in
environmental laws will not require additional amounts to be accrued. The
Company believes that it can continue to meet these environmental standards
without material adverse effect on its financial condition. The completion of
the clean-up relating to these sites is estimated at 10 years. The expected
future payments for the environmental liabilities is $985 in fiscal year 1997,
$303 in fiscal year 1998, $259 in fiscal year 1999 through fiscal year 2001 and
$1,469 thereafter.
During fiscal years 1995, 1996 and 1997, the Company recorded operating cash
proceeds of $2,280, $1,500 and $1,100, respectively, from insurance recoveries
related to environmental litigation, remediation and consequential damages. Such
amounts were recorded as Reimbursed Environmental and Litigation
F-27
<PAGE>
HIGH VOLTAGE ENGINEERING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(Information as of January 24, 1998 and for the nine months ended
January 25, 1997 and January 24, 1998 is unaudited)
NOTE N -- LITIGATION, CLAIMS AND ENVIRONMENTAL MATTERS (CONTINUED)
Costs, net of actual legal costs, estimated settlement costs, and changes in
cost remediation estimates. These settlements relate to recoveries of
environmental and legal costs incurred primarily in fiscal years 1995 and prior.
During fiscal year 1996, the Company reached an agreement with the owners of
two separate properties adjacent to the remediation sites on the principal terms
of a settlement and are currently preparing the documentation of such
settlements. The settlement terms principally include a mutual release of claims
for past costs and an undertaking by the Company to perform certain future
remediation work on the site, for which the Company will pay up to the first
$500 in costs and two thirds of any cost over this threshold for the first
property and $200 for the second property. At April 26, 1997, the Company has
accrued the estimated remediation cost with respect to this matter (see note F).
There are no assurances that additional costs will not be incurred or that
significant changes in estimates or changes in environmental laws will not
require additional amounts to be accrued.
In connection with matters referred to above, the Company has posted
financial assurances that the remediation will be completed in the form of
$2,250 letters of credit and a lien of $1,250 on certain real property held for
sale.
In February 1997, the Company commenced litigation seeking damages for
breaches in connection with a aborted acquisition. The other party has filed
counterclaims. The Company believes the case has merit and there are substantial
defenses to these counterclaims. In light of the preliminary stage of the
proceedings, the Company is unable to assess the likelihood of liability arising
from this action, if any, 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; however, the Company believes the counterclaims to be
without merit.
The Company, along with six others, was named as a defendant in an action
commenced in November 1996 by Chicago-Dubuque Foundry Corporation and its
property insurer, Employers Mutual Casualty Co. in Iowa state court. The suit
concerns a May 1, 1996 fire that destroyed a Chicago-Dubuque facility located in
East Dubuque, Illinois. According to the complaint, defective products sold by
one or more of the defendants (including, it is alleged, the Company's Anderson
division) to Chicago-Dubuque, or incorporated in products sold by others to
Chicago-Dubuque, caused or contributed to the casualty. The property insurer has
stated that damages for property damage will be in excess of $11 million. No
estimate of economic losses caused by business interruption has been made by any
plaintiff. The Company has placed its insurers on notice of the claim and at
least one insurer has retained legal counsel to defend the Company. In March,
1998, the plaintiffs voluntarily dismissed the Company as a defendant in the
litigation. This dismissal is without prejudice to the refiling of the
plaintiffs' claims at some future date, but the plaintiffs have indicated no
intention to refile. There remain claims by two plaintiff-intervenors which must
be resolved if the Company is to be entirely dismissed from the action. The
intervenors have, to date, made no effort to prosecute their claims against the
Company. The Company's counsel has requested that the intervenor-plaintiffs
submit a voluntary dismissal of the claims against the Company and that request
remains outstanding. In light of the preliminary stage of the proceedings, the
Company is unable to assess the likelihood of liability 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.
F-28
<PAGE>
HIGH VOLTAGE ENGINEERING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(Information as of January 24, 1998 and for the nine months ended
January 25, 1997 and January 24, 1998 is unaudited)
NOTE N -- LITIGATION, CLAIMS AND ENVIRONMENTAL MATTERS (CONTINUED)
The Company received a notice of intent to sue on December 11, 1996 from a
California citizens group regarding alleged violations of notice and labeling
requirements under California Proposition 65, a "right to know" provision
intended to give consumers clear and reasonable warnings of the presence of
certain potentially hazardous substances in products. After brief settlement
discussions, on March 19, 1998, the citizens group filed a complaint against the
Company in California State Court alleging violations of Proposition 65. The
relevant regulations provide that violations of Proposition 65 are subject to
civil penalties of up to $2,500 per day retroactive to the beginning of an
alleged violation of Proposition 65. The substance contained in the Company's
products and implicated in the complaint has been listed under Proposition 65
since 1988, and the Company has sold products containing this substance in
California since that time. The Company is currently conducting fact-finding to
determine whether it believes a violation of Proposition 65 has occurred, but is
also currently in settlement negotiations. The Company believes it will settle
the case for an amount substantially less than the maximum penalty available
under the statute, but if it does not, it intends to defend it vigorously. The
Company does not believe that it is likely that it will incur material liability
as a result of any lawsuit arising in connection with this matter.
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.
NOTE O -- ACQUISITIONS AND DIVESTITURES
ACQUISITION -- INDUSTRIAS JORDA, S.L. ("JORDA")
During fiscal year 1995, the Company acquired all the outstanding stock of
Jorda, a Spanish corporation, for approximately $1,843 in cash and $2,023 in
seller notes which bear interest at 7.50% and mature in March 2000.
Jorda primarily manufactures and markets electrical and mechanical gauges
and integrated instrument clusters which are sold throughout Europe. The
acquisition has been accounted for under the purchase method of accounting. The
impact on fiscal year 1995 earnings was not significant.
In connection with the acquisition, the Company entered into a non-compete
and consulting agreements in the amount of approximately $1,280 and $800
respectively (see note D). The acquisition of Jorda was financed in part through
the financing of specific accounts receivables of Jorda amounting to
approximately $2,100 at the acquisition date.
DIVESTITURES OF BERGER INSTRUMENTS DIVISION AND THE SHORE INSTRUMENTS & MFG.
CO., INC. SUBSIDIARY
During fiscal year 1995, the Company sold the assets of The Shore
Instruments & Mfg. Co., Inc. subsidiary in exchange for cash proceeds totaling
$2,460. The Company recorded a gain on disposal of $572, net of taxes, including
the write-off of $772 in goodwill.
F-29
<PAGE>
HIGH VOLTAGE ENGINEERING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(Information as of January 24, 1998 and for the nine months ended
January 25, 1997 and January 24, 1998 is unaudited)
NOTE O -- ACQUISITIONS AND DIVESTITURES (CONTINUED)
During fiscal year 1995, the Company sold substantially all of the assets of
the Berger Instruments division in exchange for total consideration of $1,046,
consisting of $125 in cash, an interest bearing promissory note for $846, and a
non-interest bearing promissory note for $75. The Company recorded a loss on
disposal of $903, net of taxes. At April 26, 1997, the outstanding balance of
the promissory note, included in other assets, is $532.
DIVESTITURE OF SPECIALTY CONNECTOR COMPANY DIVISION
During fiscal year 1996, the Company sold substantially all of the assets of
the Specialty Connector Company division in exchange for cash proceeds totaling
$11,000. The Company recorded a gain on disposal of $1,633, net of taxes.
Revenues applicable to discontinued operations were approximately $18,791
and $6,900 for the years ended April 29, 1995 and April 27, 1996, respectively.
NOTE P -- SUBSEQUENT EVENTS
FINANCING AND PHI MERGER
On August 8, 1997, the Company closed a Purchase and Sale Agreement
("Agreement") among the Company, PHI Acquisition Holdings, Inc. ("PHI") and
Chase Venture Capital Associates, L.P., the principal shareholder of PHI
Acquisition Holdings, Inc., whereby, the Company acquired PHI through a merger
of a wholly owned subsidiary of the Company with and into PHI Acquisition
Holdings, Inc. Under the Agreement, the Company paid aggregate consideration of
$54.6 million, including transaction costs and net of cash acquired. In
addition, the former shareholders of PHI will receive an amount equal to any
income tax refunds the Company receives after the closing of the Merger of taxes
paid by PHI for periods prior to the closing of the Merger.
In connection with the acquisition described above, the Company completed a
Rule 144A offering in the amount of $170.2 million consisting of $135.0 million
of Senior Notes, due in 2004 and $35.2 million representing 33,000 units
consisting 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
million revolving credit facility. Both of these financings closed
simultaneously with the 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,
extinguish BBC CIP Agreement, pay fees and for general corporate purposes. These
financings contain certain restrictive covenants, including restrictions on
certain payments, sales of certain assets and other matters, as defined. Upon
consummation of the Rule 144A offering, the Company charged historical earnings
for premiums, penalties and deferred financing costs related to the retired
indebtedness and purchased research and development acquired in the acquisition
of PHI.
Under the terms of the CIP Agreements, the consent of the CIP holder was
required for consummation of certain transactions. By agreement, dated July 26,
1997, the Company, Letitia and
F-30
<PAGE>
HIGH VOLTAGE ENGINEERING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(Information as of January 24, 1998 and for the nine months ended
January 25, 1997 and January 24, 1998 is unaudited)
NOTE P -- SUBSEQUENT EVENTS (CONTINUED)
BancBoston Capital, Inc. ("BBC"), a CIP holder, agreed to the termination of CIP
obligations and other rights in return, effective on the closing of the Rule
144A offering, August 8, 1997, for a cash payment of $6,750. As a result of the
Agreement, the Company recorded interest expense of approximately $951 during
the nine months ended January 24, 1998.
THE STEWART WARNER ACQUISITION
On March 19, 1998, a wholly owned subsidiary of the Company acquired all of
the capital stock of Stewart Warner Instrument Corporation ("Stewart Warner"),
for an aggregate consideration of $24.7 million subject to possible reduction
based on the net amount of certain of Stewart Warner's assets and liabilities as
of the closing. The acquisition was accounted for using the purchase method of
accounting and accordingly, the purchase price was allocated to the assets
acquired and the liabilities assumed based on their fair values at the date of
acquisition.
FINANCING
In connection with the Stewart Warner acquisition, the Company completed an
add-on Rule 144A offering (the "Offering") in the amount of $20 million of
10 1/2% Senior Notes due 2004. Simultaneously with the Rule 144A offering, the
Company obtained the consent of the holders of a majority of the Company's
existing 10 1/2% Senior notes due 2004 to make certain amendments to, and to
waive the restricted payments covenants of, the indenture of such Notes. The
Company paid a consent fee in the aggregate amount of $675,000 to the holders of
the Existing Notes prior to the closing of the Offering.
SALE OF ASSETS OF GENERAL EASTERN INSTRUMENTS
On April 15, 1998, the Company sold all of the assets, and certain trade
payables and lease obligations of its division, General Eastern Instruments,
pursuant to an Asset Purchase Agreement, dated as of March 25, 1998, as amended
(the "Asset Purchase Agreement"). The total purchase price for the General
Eastern Instruments division's net assets was $21.0 million, subject to increase
or decrease depending on the Net Worth (as defined therein) of General Eastern
at the closing of the sale. A portion of the purchase price paid at closing was
allocated to an agreement on the part of the Company not to compete in the
conduct of the business of General Eastern for a period of three years from the
closing. The cash proceeds from the sale of General Eastern are subject to a
covenant of the Indenture, as amended, with respect to the Senior Notes,
requiring that the Company elect within 180 days of the sale to either repay
indebtedness, as defined, or invest in assets, as defined.
INDENTURE AGREEMENT
On February 17, 1998, in connection with a misinterpretation of certain
provisions of the Indenture, as amended, with respect to the Senior Notes, the
Company paid a cash dividend in the amount of $2.1 million to the holders of the
Series A Preferred Stock pursuant to the terms thereof. This payment constituted
a Restricted Payment that was at the time prohibited under the terms of the
Indenture and thus constituted a default thereunder. On March 13, 1998, the
Company obtained a waiver of this default.
F-31
<PAGE>
HIGH VOLTAGE ENGINEERING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(Information as of January 24, 1998 and for the nine months ended
January 25, 1997 and January 24, 1998 is unaudited)
NOTE Q -- FOREIGN SALES
International sales represented 20%, 26% and 27% of the Company's net sales
in fiscal years 1995, 1996 and 1997, respectively. These sales represented the
combined total of export sales made by United States operations and all sales
made by foreign operations.
Export sales made by United States operations were less than 10% of the
Company's net sales for fiscal years 1995 and 1996, and 13% for fiscal year
1997.
The following table summarizes the Company's sales and selected operating
data in different geographic areas:
<TABLE>
<CAPTION>
ADJUSTMENTS
UNITED AND
STATES EUROPE ELIMINATIONS CONSOLIDATED
---------- --------- ------------ ------------
<S> <C> <C> <C> <C>
FISCAL 1995
Sales to unaffiliated customers............................... $ 104,397 $ 12,154 $ 116,551
Transfers between geographic locations........................ 1,547 84 $ (1,631) --
---------- --------- ------------ ------------
Net sales..................................................... 105,944 12,238 (1,631) 116,551
Income from operations........................................ 9,598 (734) 8,864
Identifiable assets........................................... 88,295 17,679 105,974
FISCAL 1996
Sales to unaffiliated customers............................... $ 122,952 $ 26,148 $ 149,100
Transfers between geographic locations........................ 1,939 103 $ (2,042) --
---------- --------- ------------ ------------
Net sales..................................................... 124,891 26,251 (2,042) 149,100
Income from operations........................................ 4,362 3,503 7,865
Identifiable assets........................................... 90,771 22,947 113,718
FISCAL 1997
Sales to unaffiliated customers............................... $ 149,065 $ 24,038 $ 173,103
Transfers between geographic locations........................ 1,660 76 $ (1,736) --
---------- --------- ------------ ------------
Net sales..................................................... 150,725 24,114 (1,736) 173,103
Income from operations........................................ 7,999 1,668 9,667
Identifiable assets........................................... 94,293 19,294 113,587
</TABLE>
Identifiable assets by geographic area are those assets used in the
Company's operations in each area.
Net assets for European operations amounted to approximately $15,874 as of
April 26, 1997. Included in net assets of European operations were intercompany
payables to affiliated companies amounting to approximately $9,721 as of April
26, 1997.
Insofar as can be reasonably determined, there are no foreign-exchange
restrictions that materially affect the financial position or the operating
results of the Company and its subsidiaries.
F-32
<PAGE>
HIGH VOLTAGE ENGINEERING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(Information as of January 24, 1998 and for the nine months ended
January 25, 1997 and January 24, 1998 is unaudited)
NOTE R -- 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):
<TABLE>
<CAPTION>
OPERATING DEPRECIATION
NET INCOME IDENTIFIABLE AND CAPITAL
SALES (LOSS) ASSETS AMORTIZATION EXPENDITURES
--------- ----------- ----------- ------------- ---------------
<S> <C> <C> <C> <C> <C>
YEAR END APRIL 29, 1995
High power electric conversion products................... $ 40,406 $ 1,060 $ 30,132 $ 588 $ 6,978
Electrical power connectors............................... 19,579 2,041 13,679 891 496
Engine monitoring instruments............................. 21,514 2,839 21,295 605 492
Disposable medical and surgical tubing.................... 16,828 2,512 7,657 369 906
Humidity measurement instruments.......................... 10,176 965 4,360 221 195
Corporate and other....................................... 8,048 (553) 28,851 406 68
--------- ----------- ----------- ------ ------
Consolidated.......................................... $ 116,551 $ 8,864 $ 105,974 $ 3,080 $ 9,135
--------- ----------- ----------- ------ ------
--------- ----------- ----------- ------ ------
YEAR END APRIL 27, 1996
High power electric conversion products................... $ 56,145 $ (265) $ 40,580 $ 569 $ 1,142
Electrical power connectors............................... 21,509 4,628 13,659 612 1,090
Engine monitoring instruments............................. 32,514 2,378 21,338 1,474 492
Disposable medical and surgical tubing.................... 17,101 1,024 9,885 532 2,666
Humidity measurement instruments.......................... 12,093 1,456 5,133 225 379
Corporate and other....................................... 9,738 (1,356) 23,123 172 190
--------- ----------- ----------- ------ ------
Consolidated.......................................... $ 149,100 $ 7,865 $ 113,718 $ 3,584 $ 5,959
--------- ----------- ----------- ------ ------
--------- ----------- ----------- ------ ------
YEAR END APRIL 26, 1997
High power electric conversion products................... $ 83,096 $ 5,292 $ 41,849 $ 591 $ --
Electrical power connectors............................... 21,554 1,907 15,049 833 1,794
Engine monitoring instruments............................. 32,482 2,676 20,457 1,662 1,261
Disposable medical and surgical tubing.................... 15,227 531 8,938 797 360
Humidity measurement instruments.......................... 12,256 1,662 4,827 254 287
Corporate and other....................................... 8,488 (2,401) 22,467 239 1,308
--------- ----------- ----------- ------ ------
Consolidated.......................................... $ 173,103 $ 9,667 $ 113,587 $ 4,376 $ 5,010
--------- ----------- ----------- ------ ------
--------- ----------- ----------- ------ ------
</TABLE>
F-33
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
PHI Acquisition Holdings, Inc.:
We have audited the accompanying consolidated balance sheets of PHI
Acquisition Holdings, Inc. and subsidiaries as of June 28, 1996 and June 27,
1997, and the related consolidated statements of operations, stockholders'
equity, and cash flows for each of the years in the three-year period ended June
27, 1997. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated 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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of PHI
Acquisition Holdings, Inc. and subsidiaries as of June 28, 1996 and June 27,
1997, and the results of their operations and their cash flows for each of the
years in the three-year period ended June 27, 1997, in conformity with generally
accepted accounting principles.
/s/ KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
Minneapolis, Minnesota
August 20, 1997
F-34
<PAGE>
PHI ACQUISITION HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 28, 1996 AND JUNE 27, 1997
<TABLE>
<CAPTION>
1996 1997
------------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash........................................................................... $ 437,900 $ 815,000
Trade accounts receivable, net of allowance for doubtful accounts of $246,800
in 1996 and $44,000 in 1997.................................................. 14,663,000 19,188,000
Inventories, net (note 2)...................................................... 13,539,500 12,735,000
Prepaid expenses and other current assets...................................... 714,300 387,000
Deferred income tax asset...................................................... 54,500 --
------------- -------------
Total current assets....................................................... 29,409,200 33,125,000
------------- -------------
Property, plant, and equipment, net (note 3)....................................... 9,753,000 10,236,000
Investment in joint venture........................................................ 2,044,000 1,873,000
Other non-current assets........................................................... 566,000 582,000
Deferred income tax asset.......................................................... -- 44,000
------------- -------------
Total assets............................................................... $ 41,772,200 $ 45,860,000
------------- -------------
------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current installments of long-term debt (note 8)................................ $ 2,250,000 $ 2,375,000
Accounts payable............................................................... 2,390,900 2,274,000
Income tax payable............................................................. 770,200 276,000
Accrued expenses (note 4)...................................................... 1,531,800 2,378,000
Accrued wages and benefits..................................................... 2,606,000 4,027,000
Warranty accrual............................................................... 1,128,000 1,120,000
Installation reserve........................................................... 297,000 292,000
Deferred revenues (note 5)..................................................... 2,298,000 2,658,000
Other current liabilities...................................................... 100,000 100,000
Deferred income tax liability.................................................. -- 293,000
------------- -------------
Total current liabilities.................................................. 13,371,900 15,793,000
Pension liability.................................................................. 705,000 742,000
Long-term debt, less current installments (note 8)................................. 7,269,000 5,457,000
Note payable to seller (note 9).................................................... 8,796,000 9,673,000
Other long-term liabilities........................................................ 101,000 --
Deferred income tax liability...................................................... 117,000 --
------------- -------------
Total liabilities.......................................................... 30,359,900 31,665,000
------------- -------------
Stockholders' equity:
Capital stock (note 11)........................................................ 16,504 15,704
Additional paid-in capital (note 11)........................................... 7,096,906 6,555,296
Retained earnings.............................................................. 4,638,500 8,078,000
Foreign currency translation adjustment........................................ (339,610) (454,000)
------------- -------------
Total stockholders' equity................................................. 11,412,300 14,195,000
------------- -------------
Commitments and contingencies (notes 7, 8, 9, 10, 12, and 13)
Total liabilities and stockholders' equity................................. $ 41,772,200 $ 45,860,000
------------- -------------
------------- -------------
</TABLE>
See accompanying notes to the consolidated financial statements.
F-35
<PAGE>
PHI ACQUISITION HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
THE YEARS ENDED JUNE 30, 1995, JUNE 28, 1996 AND JUNE 27, 1997
<TABLE>
<CAPTION>
FISCAL FISCAL FISCAL
1995 1996 1997
------------- ------------- -------------
<S> <C> <C> <C>
Net sales........................................................... $ 54,764,000 $ 58,074,000 $ 67,819,000
Cost of sales....................................................... 34,244,000 35,740,500 42,740,000
------------- ------------- -------------
Gross profit................................................ 20,520,000 22,333,500 25,079,000
------------- ------------- -------------
Selling, general, and administrative expenses:
Selling and marketing........................................... 7,071,000 7,349,500 7,823,000
General and administrative...................................... 2,303,000 2,696,400 2,855,000
Research and development........................................ 6,197,000 6,332,600 7,902,000
------------- ------------- -------------
Total operating expenses.................................... 15,571,000 16,378,500 18,580,000
------------- ------------- -------------
Equity in earnings (loss) of joint venture.......................... 337,000 206,000 (11,000)
------------- ------------- -------------
Operating income............................................ 5,286,000 6,161,000 6,488,000
------------- ------------- -------------
Interest expense................................................ (1,855,000) (1,827,000) (1,693,000)
Interest income................................................. 89,000 137,000 48,000
------------- ------------- -------------
Income before income taxes.................................. 3,520,000 4,471,000 4,843,000
Income tax expense (note 6)......................................... 812,300 1,495,700 1,403,500
------------- ------------- -------------
Net income.................................................. $ 2,707,700 $ 2,975,300 $ 3,439,500
------------- ------------- -------------
Net income per share........................................ $ 2.14 $ 2.22 $ 2.59
------------- ------------- -------------
Weighted average shares outstanding................................. 1,266,965 1,337,511 1,327,668
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
See accompanying notes to the consolidated financial statements.
F-36
<PAGE>
PHI ACQUISITION HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
THE YEARS ENDED JUNE 30, 1995, JUNE 28, 1996, AND JUNE 27, 1997
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
---------------------- ---------------------- ----------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
--------- ----------- --------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance, July 1, 1994...................................... 398,070 $ 3,981 398,070 $ 3,981 203,860 $ 2,038
Net income for the fiscal year ended June 30, 1995.......
Gain (loss) on currency translation......................
Sales of common and preferred stock...................... 206,410 2,064
Repurchase of common and preferred stock................. (206,410) (2,064)
Shares issued upon conversion of convertible note........ 52,632 526
--------- ----------- --------- ----------- --------- -----------
Balance, June 30, 1995..................................... 191,660 1,917 398,070 3,981 462,902 4,628
Net income for the fiscal year ended June 28, 1996.......
Gain (loss) on currency translation......................
Repurchase of common and preferred stock................. (1,430) (13)
Compensation expense associated with granting of
options................................................
--------- ----------- --------- ----------- --------- -----------
Balance, June 28, 1996..................................... 191,660 1,917 398,070 3,981 461,472 4,615
Net income for the fiscal year ended June 27, 1997.......
Gain (loss) on currency translation (unaudited)..........
Compensation expense associated with granting of options
(unaudited)............................................
Repurchase of common and preferred stock................. (50,000) (500)
Preferred dividend paid..................................
--------- ----------- --------- ----------- --------- -----------
Balance, June 27, 1997..................................... 191,660 $ 1,917 398,070 $ 3,981 411,472 $ 4,115
--------- ----------- --------- ----------- --------- -----------
--------- ----------- --------- ----------- --------- -----------
<CAPTION>
PREFERRED STOCK
----------------------
SHARES AMOUNT
--------- -----------
<S> <C> <C>
Balance, July 1, 1994...................................... 600,000 $ 6,000
Net income for the fiscal year ended June 30, 1995.......
Gain (loss) on currency translation......................
Sales of common and preferred stock......................
Repurchase of common and preferred stock.................
Shares issued upon conversion of convertible note........
--------- -----------
Balance, June 30, 1995..................................... 600,000 6,000
Net income for the fiscal year ended June 28, 1996.......
Gain (loss) on currency translation......................
Repurchase of common and preferred stock................. (857) (9)
Compensation expense associated with granting of
options................................................
--------- -----------
Balance, June 28, 1996..................................... 599,143 5,991
Net income for the fiscal year ended June 27, 1997.......
Gain (loss) on currency translation (unaudited)..........
Compensation expense associated with granting of options
(unaudited)............................................
Repurchase of common and preferred stock................. (30,000) (300)
Preferred dividend paid..................................
--------- -----------
Balance, June 27, 1997..................................... 569,143 $ 5,691
--------- -----------
--------- -----------
</TABLE>
<TABLE>
<CAPTION>
ADDITIONAL ADDITIONAL RETAINED FOREIGN
PAID-IN PAID-IN EARNINGS CURRENCY
CAPITAL CAPITAL (ACCUMULATED TRANSLATION
COMMON PREFERRED DEFICIT) ADJUSTMENT
---------- ----------- ------------ -----------
<S> <C> <C> <C> <C>
Balance, July 1, 1994................................................ $ 990,000 $ 5,994,000 $(1,044,500) $ 62,000
Net income for the fiscal year ended June 30, 1995................. 2,707,700
Gain (loss) on currency translation................................ 61,000
Sales of common and preferred stock................................
Repurchase of common and preferred stock...........................
Shares issued upon conversion of convertible note.................. 49,474
---------- ----------- ------------ -----------
Balance, June 30, 1995............................................... 1,039,474 5,994,000 1,663,200 123,000
Net income for the fiscal year ended June 28, 1996................. 2,975,300
Gain (loss) on currency translation................................ (462,610)
Repurchase of common and preferred stock........................... (6,953) (9,615)
Compensation expense associated with granting of options........... 80,000
---------- ----------- ------------ -----------
Balance, June 28, 1996............................................... 1,112,521 5,984,385 4,638,500 (339,610)
Net income for the fiscal year ended June 27, 1997................. 3,439,500
Gain (loss) on currency translation................................ (114,390)
Compensation expense associated with granting of options........... 421,390
Repurchase of common and preferred stock........................... (573,000) (299,700)
Preferred dividend paid............................................ (90,300)
---------- ----------- ------------ -----------
Balance, June 27, 1997............................................... $ 960,911 $ 5,594,385 $8,078,000 $(454,000)
---------- ----------- ------------ -----------
---------- ----------- ------------ -----------
<CAPTION>
TOTAL
STOCKHOLDERS'
EQUITY
------------
<S> <C>
Balance, July 1, 1994................................................ $6,017,500
Net income for the fiscal year ended June 30, 1995................. 2,707,700
Gain (loss) on currency translation................................ 61,000
Sales of common and preferred stock................................ 2,064
Repurchase of common and preferred stock........................... (2,064)
Shares issued upon conversion of convertible note.................. 50,000
------------
Balance, June 30, 1995............................................... 8,836,200
Net income for the fiscal year ended June 28, 1996................. 2,975,300
Gain (loss) on currency translation................................ (462,610)
Repurchase of common and preferred stock........................... (16,590)
Compensation expense associated with granting of options........... 80,000
------------
Balance, June 28, 1996............................................... 11,412,300
Net income for the fiscal year ended June 27, 1997................. 3,439,500
Gain (loss) on currency translation................................ (114,390)
Compensation expense associated with granting of options........... 421,390
Repurchase of common and preferred stock........................... (873,500)
Preferred dividend paid............................................ (90,300)
------------
Balance, June 27, 1997............................................... $14,195,000
------------
------------
</TABLE>
See accompanying notes to the consolidated financial statements.
F-37
<PAGE>
PHI ACQUISITION HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
THE YEARS ENDED JUNE 30, 1995, JUNE 28, 1996 AND JUNE 27, 1997
<TABLE>
<CAPTION>
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income............................................................... $ 2,707,700 $ 2,975,300 $ 3,439,500
Adjustments to reconcile net income to net cash (used) provided by
operating activities:
Depreciation, amortization, and other noncash transactions............. 2,115,000 2,225,000 2,769,390
Net gain on disposal of fixed assets................................... (238,000) (1,167,000) (510,000)
Deferred income taxes.................................................. 603,200 (320,200) 186,500
Changes in operating assets and liabilities:
Trade accounts receivable............................................ (1,294,000) (6,426,000) (4,525,000)
Inventories.......................................................... (1,100,000) (1,794,500) 804,500
Other receivable..................................................... (21,000) 188,000 --
Prepaid expenses and other current assets............................ (694,400) 217,100 327,300
Other noncurrent assets.............................................. -- (341,000) (53,000)
Accounts payable..................................................... 46,500 514,400 (116,900)
Income tax payable................................................... (5,000) 770,200 (494,200)
Accrued expenses..................................................... (218,000) 57,800 846,200
Accrued wages and benefits........................................... 1,105,000 (651,000) 1,421,000
Warranty reserve..................................................... 322,000 (235,000) (8,000)
Installation reserve................................................. 2,000 268,000 (5,000)
Deferred revenues.................................................... (30,000) 389,000 360,000
Other current liabilities............................................ -- 100,000 --
Other long-term liabilities.......................................... -- 101,000 (101,000)
Pension liability.................................................... 260,000 248,000 37,000
----------- ----------- -----------
Net cash (used) provided by operating activities................... 3,561,000 (2,880,900) 4,378,290
----------- ----------- -----------
Cash flows from investing activities:
Proceeds from sale of land............................................... -- 1,440,000 --
Net proceeds from sale of Demo Systems................................... 366,000 1,637,000 1,025,000
Purchase of property, plant, and equipment............................... (2,596,000) (2,813,600) (3,309,000)
Investment in joint venture.............................................. (614,000) 419,000 171,000
----------- ----------- -----------
Net cash (used) provided by investing activities................... (2,844,000) 682,400 (2,113,000)
----------- ----------- -----------
Cash flows from financing activities:
Purchase of common and preferred stock................................... -- (16,600) (963,800)
Proceeds from issuance of note payable................................... 50,000 -- --
Increase in note payable to seller (note 9).............................. 732,000 795,000 877,000
Repayments of note payable............................................... (333,000) (2,148,000) (1,687,000)
----------- ----------- -----------
Net cash (used) provided in financing activities................... 449,000 (1,369,600) (1,773,800)
----------- ----------- -----------
Effect of foreign exchange rate changes on cash............................ 61,000 (463,000) (114,390)
----------- ----------- -----------
Net (decrease) increase in cash and cash equivalents....................... 1,227,000 (4,031,100) 377,100
Cash and cash equivalents at beginning of year............................. 3,242,000 4,469,000 437,900
----------- ----------- -----------
Cash and cash equivalents at end of year................................... $ 4,469,000 $ 437,900 $ 815,000
----------- ----------- -----------
----------- ----------- -----------
Supplemental disclosure of cash information:
Cash paid during the period for interest................................. $ 1,043,000 $ 809,000 $ 839,000
Cash paid during the period for income taxes............................. 922,000 375,000 1,676,000
Supplemental schedule of noncash investing and financing activities:
Conversion of note payable to Class C common stock....................... 52,632 -- --
</TABLE>
See accompanying notes to the consolidated financial statements.
F-38
<PAGE>
PHI ACQUISITION HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1995, JUNE 28, 1996
AND JUNE 27, 1997
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
PHI Acquisition Holdings, Inc. (PHI or the Company) was formed on March 10,
1994 to acquire certain assets and assume certain liabilities of the Physical
Electronics Division of the Perkin Elmer Corporation (Perkin Elmer). Physical
Electronics, Inc. (Physical Electronics), a wholly owned subsidiary of PHI, was
also formed on March 10, 1994 to serve as the operating company under PHI.
Physical Electronics designs, manufactures, installs, and services surface
analysis instrument systems and ultrahigh vacuum equipment in North America,
Japan, and Europe.
The consolidated financial statements include the accounts of PHI, Physical
Electronics, and Physical Electronics' wholly owned subsidiaries, Physical
Electronics GmbH, Physical Electronics S.A.R.L., and Physical Electronics FSC,
Inc. All significant intercompany accounts have been eliminated in
consolidation.
INVESTMENT IN JOINT VENTURE
The Company owns a 50% interest in a joint venture which operates in Japan.
The joint venture is responsible for sales and service of the Company's products
in Japan.
FISCAL YEAR END
The Company's fiscal year end is the Friday closest to June 30. The fiscal
year end for 1995 was June 30, for fiscal 1996 was June 28, and for 1997 was
June 27.
INVENTORIES
As of June 28, 1996 and June 27, 1997, inventory is stated at lower of cost
(first in, first out method) or market.
CREDIT CONCENTRATIONS
The Company extends unsecured credit to customers in North America, Europe,
and to its joint venture in Japan. Other international customers normally
provide irrevocable letters of credit.
PROPERTY AND EQUIPMENT
Property and equipment are stated at fair market value at the date of
acquisition. Depreciation and amortization are computed on a straight-line basis
over the estimated useful lives of the assets. Maintenance, repairs, and minor
renewals are expensed as incurred.
The Company maintains a laboratory used primarily for demonstrations of the
Company's products to potential customers. Investment in the Company's products
used in this laboratory is capitalized and depreciated over its useful life. In
the normal course of business, the Company replaces older technology as new
technology is introduced at which time product is sold and revenue and cost of
sales are recognized.
F-39
<PAGE>
PHI ACQUISITION HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1995, JUNE 28, 1996
AND JUNE 27, 1997
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Depreciation and amortization is computed using the following estimated
useful lives:
<TABLE>
<CAPTION>
USEFUL
LIVES
-----------
<S> <C>
Buildings and leasehold improvements............................................. 5-40 years
Machinery and equipment.......................................................... 3-15 years
</TABLE>
INCOME TAXES
The Company accounts for income taxes under provisions of Financial Account
Standard No. 109, Accounting for Income Taxes (Statement No. 109). Under
Statement No. 109, deferred income taxes are recognized for the temporary
differences between the financial statement carrying amounts and the tax basis
of existing assets and liabilities. Deferred taxes are measured using enacted
tax rates expected to be in effect when those temporary differences are expected
to be included in future taxable income.
REVENUE RECOGNITION
Revenue is recognized upon shipment or upon delivery, depending upon
negotiated terms of sale.
Revenue from service contracts and customer training is recognized over the
terms of the contracts and as the training services are performed.
RESEARCH AND DEVELOPMENT
Research and development costs are expensed as incurred.
FOREIGN CURRENCY TRANSLATION
Exchange adjustments resulting from foreign currency transactions are
generally recognized in net earnings, whereas adjustments resulting from the
translation of financial statements, if material, are reflected as a separate
component of stockholders' equity. Net foreign currency transaction gains or
losses are not significant.
STATEMENTS OF CASH FLOWS
For purposes of the statements of cash flows, the Company considers all
highly liquid debt instruments purchased with an original maturity of three
months or less to be cash equivalents.
ACCOUNTING ESTIMATES
The presentation 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
disclosures 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-40
<PAGE>
PHI ACQUISITION HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1995, JUNE 28, 1996
AND JUNE 27, 1997
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments are recorded on its consolidated balance
sheet. The carrying amount for cash, accounts receivable, accounts payable, and
accrued expenses approximates fair value due to the immediate or short-term
maturity of these financial instruments. The fair value of notes receivable and
notes payable approximate their carrying value.
IMPAIRMENT OF LONG-LIVED ASSETS
In fiscal year 1997, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 121, Accounting for the Impairment of Long-lived Assets and
for Long-lived Assets to be Disposed Of, which prescribes accounting and
reporting standards when circumstances indicate that the carrying amount of an
asset may not be recoverable. No cumulative effect adjustment occurred as a
result of this change in accounting principle.
STOCK BASED COMPENSATION
The Company accounts for its employee stock options under the
intrinsic-value method of APB Opinion No. 25 and, accordingly, compensation
costs are recognized in the financial statements when options are granted to
employees below the fair market value of the underlying stock. In fiscal year
1997, the Company adopted the provisions of SFAS No. 123, Accounting for Stock
Based Compensation. Pro forma information is presented reflecting compensation
costs under SFAS No. 123 in note 14.
NET INCOME PER SHARE
Net income per share has been calculated using the weighted average of
common stock outstanding and dilutive common stock equivalents determined by the
treasury stock method.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the 1997
presentation. Such reclassifications had no impact on net income and
stockholders' equity.
(2) INVENTORIES
Inventories are summarized as follows:
<TABLE>
<CAPTION>
JUNE 28, JUNE 27,
1996 1997
------------- -------------
<S> <C> <C>
Raw materials and subassemblies................................ $ 9,806,500 $ 9,133,000
Work-in-process................................................ 3,733,000 3,602,000
------------- -------------
$ 13,539,500 $ 12,735,000
------------- -------------
------------- -------------
</TABLE>
F-41
<PAGE>
PHI ACQUISITION HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1995, JUNE 28, 1996
AND JUNE 27, 1997
(3) PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment is summarized as follows:
<TABLE>
<CAPTION>
JUNE 28, JUNE 27,
1996 1997
------------- -------------
<S> <C> <C>
Land........................................................... $ 556,000 $ 556,000
Buildings and leasehold improvements........................... 4,012,000 4,137,000
Machinery and equipment........................................ 9,095,000 11,238,000
Less accumulated depreciation.................................. (3,910,000) (5,695,000)
------------- -------------
$ 9,753,000 $ 10,236,000
------------- -------------
------------- -------------
</TABLE>
(4) ACCRUED EXPENSES
Accrued expenses are summarized as follows:
<TABLE>
<CAPTION>
JUNE 28, JUNE 27,
1996 1997
------------- -------------
<S> <C> <C>
Commissions.................................................... $ 233,000 $ 264,000
Audit and tax fees............................................. 126,000 171,000
Interest payable............................................... 148,000 125,000
Sales and real estate taxes.................................... 252,000 78,000
Customer deposits.............................................. 342,000 1,226,000
Other.......................................................... 430,800 514,000
------------- -------------
$ 1,531,800 $ 2,378,000
------------- -------------
------------- -------------
</TABLE>
(5) DEFERRED REVENUES
<TABLE>
<CAPTION>
JUNE 28, JUNE 27,
1996 1997
------------- -------------
<S> <C> <C>
Service contracts.............................................. $ 1,862,000 $ 2,151,000
Customer training.............................................. 436,000 507,000
------------- -------------
Total deferred revenue..................................... $ 2,298,000 $ 2,658,000
------------- -------------
------------- -------------
</TABLE>
F-42
<PAGE>
PHI ACQUISITION HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1995, JUNE 28, 1996
AND JUNE 27, 1997
(6) INCOME TAXES
Income tax expense for the years ended June 30, 1995, June 28, 1996 and June
27, 1997 consists of the following:
<TABLE>
<CAPTION>
FEDERAL STATE TOTAL
------------ ---------- ------------
<S> <C> <C> <C>
1995:
Current........................................... 807,000 142,400 949,400
Deferred.......................................... (116,500) (20,600) (137,100)
------------ ---------- ------------
$ 690,500 $ 121,800 $ 812,300
------------ ---------- ------------
------------ ---------- ------------
1996:
Current........................................... 1,625,000 191,200 1,816,200
Deferred.......................................... (272,400) (48,100) (320,500)
------------ ---------- ------------
$ 1,352,600 143,100 1,495,700
------------ ---------- ------------
------------ ---------- ------------
1997:
Current........................................... $ 1,085,200 $ 127,700 $ 1,212,900
Deferred.......................................... 162,000 28,600 190,600
------------ ---------- ------------
$ 1,247,200 156,300 1,403,500
------------ ---------- ------------
------------ ---------- ------------
</TABLE>
The provision for income taxes differs from the amount computed by applying
the statutory U.S. federal income tax rate to the income or loss before income
taxes due to the impact of state income taxes, the change in the valuation
reserve, and the impact of the purchase price allocation which occurred on May
20, 1994.
A reconciliation of the expected federal income taxes at the statutory rate
of 34% with the provision for income taxes is as follows:
<TABLE>
<CAPTION>
1995 1996 1997
------------ ------------ ------------
<S> <C> <C> <C>
Expected federal tax expense........................ $ 1,196,800 $ 1,518,400 $ 1,668,700
State income tax expense, net of federal effect..... 140,800 171,400 179,900
Permanent differences............................... (314,682) (64,600) (72,400)
Differences due to general business credits......... -- (131,900) (376,000)
Purchase accounting adjustment...................... (281,000) -- --
Other............................................... 70,382 2,400 3,300
------------ ------------ ------------
$ 812,300 $ 1,495,700 $ 1,403,500
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
F-43
<PAGE>
PHI ACQUISITION HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1995, JUNE 28, 1996
AND JUNE 27, 1997
(6) INCOME TAXES (CONTINUED)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets (liabilities) are as follows:
<TABLE>
<CAPTION>
JUNE 28, JUNE 27,
1996 1997
----------- -------------
<S> <C> <C>
Current deferred asset (liability):
Inventories................................................... $ 150,100 $ 258,800
Warranty accrual.............................................. 325,500 343,600
Accrued expenses.............................................. 272,000 317,300
Deferred revenue.............................................. (977,700) (1,385,000)
Other assets.................................................. 408,100 130,600
Other liabilities............................................. (123,500) 41,700
----------- -------------
Total current gross deferred tax asset (liabilities)...... 54,500 (293,000)
Less valuation allowance -- --
----------- -------------
Net current deferred tax asset (liability)................ $ 54,500 $ (293,000)
----------- -------------
----------- -------------
</TABLE>
<TABLE>
<CAPTION>
JUNE 28, JUNE 27,
1996 1997
----------- -----------
<S> <C> <C>
Noncurrent deferred tax asset (liability):
Differences in tax and adjusted book basis in plant and
equipment..................................................... $ (117,000) $ (116,700)
Employee stock options.......................................... -- 160,700
----------- -----------
Net noncurrent deferred tax asset (liability)............... $ (117,000) $ 44,000
----------- -----------
----------- -----------
</TABLE>
Certain of the temporary differences noted above arose due to differences in
the tax and book purchase price allocation which occurred on May 20, 1994.
The activity related to the valuation allowance is as follows:
<TABLE>
<CAPTION>
<S> <C>
Valuation allowance at June 30, 1995............................................... $ 41,700
Decrease in valuation allowance.................................................... (41,700)
---------
Valuation allowance at June 28, 1996............................................... $ --
---------
---------
</TABLE>
The Company had a net operating loss carryover for tax purposes of
approximately $104,000, at June 30, 1995 which was utilized in fiscal 1996. A
valuation allowance for the tax asset related to any benefit for the
carryforward was established at July 1, 1994.
(7) CREDIT AGREEMENT
The Company has a $17,000,000 credit agreement with First Bank National
Association with a $12,000,000 note payable and a $5,000,000 line of credit. The
line of credit and the note payable to bank (note 8) are secured by
substantially all of the Company's assets and have the same restrictive
covenants
F-44
<PAGE>
PHI ACQUISITION HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1995, JUNE 28, 1996
AND JUNE 27, 1997
(7) CREDIT AGREEMENT (CONTINUED)
and termination date. Such covenants restrict debt and lease financing, annual
capital expenditures, dividends, management's compensation, and the sale of
assets, and requires the Company to meet certain financial results and financial
ratios as defined in the agreement. Borrowings under the line of credit are
subject to borrowing base restrictions and bear interest, payable monthly, at
either 2.0% over the bank's reference rate or 3.0% over LIBOR. The Company has
the potential to have decreases in the interest rate based on future operations.
On June 28, 1996 and June 27, 1997, the effective rate was 7.98% and 9.36%,
respectively. At June 28, 1996 and June 27, 1997, the balance outstanding on the
line of credit was $261,000 and $0, respectively.
(8) LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
JUNE 28, JUNE 27,
1996 1997
------------- -------------
<S> <C> <C>
Note payable to bank with interest payable monthly.
Principal due in three installments during fiscal 1995 and in quarterly
installments thereafter through June 30, 2000. The installments range from
approximately $333,000 to $875,000. The agreement has the same interest rate and
covenants as the line of credit (note 7)........................................ $ 9,519,000 $ 7,832,000
Less current installments........................................................... (2,250,000) (2,375,000)
------------- -------------
Long-term debt, less current installments..................................... $ 7,269,000 $ 5,457,000
------------- -------------
------------- -------------
</TABLE>
The minimum annual maturities of long-term debt as of June 27, 1997 are as
follows:
<TABLE>
<CAPTION>
<S> <C>
1998............................................................................ $ 2,375,000
1999............................................................................ 2,937,000
2000............................................................................ 2,520,000
------------
$ 7,832,000
------------
------------
</TABLE>
(9) NOTE PAYABLE TO SELLER
In connection with the business acquisition described in note 1, the Company
entered into a convertible subordinated promissory note with Perkin Elmer. The
outstanding balance at June 27, 1997 of $9,673,000 is due on May 20, 2001. The
accrued interest compounds annually at a rate of 10%. Interest payments begin
100 days following the end of the fiscal year ending June 30, 1998, and are made
annually thereafter. The note is convertible into 253,843 shares of Class B
common stock of the Company upon consummation of a sale of the business or after
May 21, 1997.
F-45
<PAGE>
PHI ACQUISITION HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1995, JUNE 28, 1996
AND JUNE 27, 1997
(10) LEASES
As of June 27, 1997, minimum annual lease payments, under noncancelable
operating leases with initial and remaining lease payments in excess of one year
are as follows:
<TABLE>
<CAPTION>
<S> <C>
1998............................................................................ $ 588,000
1999............................................................................ 351,000
2000............................................................................ 257,000
------------
Total minimum lease payments................................................ $ 1,196,000
------------
------------
</TABLE>
Rental expense for all operating leases for the years ended June 30, 1995,
June 28, 1996, and June 27, 1997 were $583,000, $829,000, and $801,000,
respectively.
(11) CAPITAL STOCK AND ADDITIONAL PAID-IN CAPITAL
Capital stock consists of the following:
<TABLE>
<CAPTION>
JUNE 28, JUNE 27,
1996 1997
------------ ------------
<S> <C> <C>
Class A common stock; $.01 par value. Authorized 1,000,000 shares; issued and
outstanding 191,660 shares.......................................................... $ 1,917 $ 1,917
------------ ------------
Class B common stock; $.01 par value. Authorized 1,000,000 shares; issued and
outstanding 398,070 shares.......................................................... $ 3,981 $ 3,981
------------ ------------
Class C common stock; $.01 par value. Authorized 1,000,000 shares; issued and
outstanding 461,472 shares in 1996 and 411,472 shares in 1997....................... $ 4,615 $ 4,115
------------ ------------
Additional paid-in capital on common stock............................................ $ 1,112,521 $ 960,911
------------ ------------
Series A 10% redeemable cumulative preferred stock; $.01 par value. Authorized 700,000
shares; issued and outstanding 599,143 shares in 1996 and 569,143 shares in 1997.... $ 5,991 $ 5,691
------------ ------------
Additional paid-in capital on preferred stock......................................... $ 5,984,385 $ 5,594,385
------------ ------------
------------ ------------
</TABLE>
The Class A, B, and C common stock have the same powers, preferences, and
rights except for the following: Voting, Class A and B common stock each have
one vote per share. Class C common stock has no voting rights. As to the board
of directors, Class A common stockholders have the right to elect 3 directors
and Class B common stockholders have the right to elect 4 directors. Class C
common stockholders do not have the right to participate in any director
elections. The designations, voting powers, and preferences of the preferred
stock shall be established by resolution of the board of directors.
On April 17, 1997, the Company reacquired 50,000 shares of Class C common
stock at $11.47 per share and 30,000 shares of preferred stock at $10.00 per
share plus $3.01 of accrued dividends per share from a former executive of the
Company.
F-46
<PAGE>
PHI ACQUISITION HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1995, JUNE 28, 1996
AND JUNE 27, 1997
(12) EMPLOYEE BENEFITS
Prior to May 20, 1994, employees participated in the Perkin Elmer pension
plan. Active participation in this plan ended on May 20, 1994 with the
participants' accrued benefits remaining in the Perkin Elmer plan. On July 1,
1994 PHI implemented a 401(k) plan. In lieu of a pension plan, the Company
contributes an amount equal to 2% of the employee's compensation to their
respective 401(k) accounts. In addition, employees can contribute up to 15% of
their eligible compensation to the plan. The Company will match 100% of each
employee's contribution up to 3% of the employee's eligible compensation. Total
expense under this plan was $643,000, $835,000 and $843,000 in 1995, 1996 and
1997, respectively.
(13) PENSION PLAN
The Company's wholly owned subsidiary, Physical Electronics, GmbH, has a
defined benefit pension plan which is covered by a group insurance policy. The
plan covers 20 employees. The benefits are based upon the number of years of
service and the employee's past compensation.
The following table sets forth the plan's funded status as of June 27, 1997,
and the net periodic pension expense for the year then ended. The Company
adopted FASB #87 treatment in the year ended June 27, 1997.
<TABLE>
<CAPTION>
<S> <C>
Actuarial present value of benefit obligations:
Vested........................................................................ $ 394,115
Nonvested..................................................................... 123,975
----------
Accumulated benefit obligation............................................ 518,090
Effect of projected future salary increases....................................... 202,334
----------
Projected benefit obligation.............................................. 720,424
Plan assets at market value....................................................... 188,188
----------
Unfunded status............................................................. 532,236
Unamortized transition amount..................................................... 165,425
Unrecognized net gain............................................................. 44,339
Unrecognized prior service cost --
----------
Pension liability......................................................... $ 742,000
----------
----------
</TABLE>
F-47
<PAGE>
PHI ACQUISITION HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1995, JUNE 28, 1996
AND JUNE 27, 1997
(13) PENSION PLAN (CONTINUED)
Net pension expense includes the following components:
<TABLE>
<CAPTION>
YEAR- ENDED
JUNE 27,
1997
----------
<S> <C>
Service cost -- benefits earned during the period................................. $ 72,630
Interest cost on projected benefit obligation..................................... 47,383
Actual gain on plan assets........................................................ --
Amortization of transition amount................................................. 11,380
Amortization of unrecognized service cost......................................... --
Amortization of unrecognized net gain............................................. --
----------
Net pension expense........................................................... $ 131,393
----------
----------
</TABLE>
Measurement of the 1997 projected benefit obligation was based on a 7.0%
discount rate and a 4% long-term rate of compensation increase.
(14) EMPLOYEE STOCK PURCHASE AND STOCK OPTION PLAN
On May 16, 1994, the Company established an Employee Stock Purchase and
Stock Option Plan. The plan gives key employees rights to acquire specific
numbers of Class C common stock at $1 per share and Series A preferred stock at
$10 per share. The plan also includes a feature to provide employees with
options to purchase additional Class C common stock. The Plan was modified on
October 28, 1994 to increase the number of shares.
The rights to acquire Class C common stock and Series A preferred stock
exist for the various participants in two distinct offering periods. The first
offering period began May 16, 1994 and ended on November 15, 1994. The second
offering period began on June 2, 1995 and ended June 16, 1995. A total of
371,700 shares of Class C common stock and 223,017 shares of Series A preferred
stock were purchased during the two offering periods. As of June 27, 1997, no
shares of Class C common stock or Series A preferred stock are available for
purchase under the Plan.
To fund this plan, the Company acquired Class A common shares from its
majority shareholder, retired those shares, and issued Class C common shares to
plan participants. All preferred shares purchased under this plan were acquired
by the Company from its majority stockholder.
The stock options awarded under this plan will be based upon the operating
results for each of the five fiscal years 1995 through 1999 and vest over five
years starting on May 20, 1994. During the year ended June 28, 1996, the Company
granted 22,223 options and recognized $52,000 of compensation expense, which
represents the difference between fair market value and exercise prices at the
date of grant. During the year ended June 27, 1997, the Company granted 22,623
options and recognized $279,000 of compensation expense.
In connection with the Charles Evans & Associates acquisition, a stock
option plan was established, which gives certain key employees the right to
purchase up to 58,480 shares of Class C common stock at $1 per share. 11,696
options were granted during the year ended June 28, 1996 and the Company
recognized
F-48
<PAGE>
PHI ACQUISITION HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1995, JUNE 28, 1996
AND JUNE 27, 1997
(14) EMPLOYEE STOCK PURCHASE AND STOCK OPTION PLAN (CONTINUED)
$28,000 of compensation expense. During the year ended June 27, 1997, the
Company granted 11,696 options of Class C common stock and recognized
approximately $144,000 of compensation expense.
Class C common stock option activity under the Employee Stock Purchase Plan,
Stock Option Plan, and the Charles Evans & Associates Acquisition Plan and
summarized as follows:
<TABLE>
<CAPTION>
OPTION PRICE NUMBER OF
PER SHARE SHARES
------------- -----------
<S> <C> <C>
Outstanding at June 30, 1995........................................ $ -- 0
Granted......................................................... 1.00 33,919
Exercised....................................................... -- --
Terminated...................................................... 1.00 (400)
----- -----------
Outstanding at June 28, 1996........................................ 33,519
Granted......................................................... 1.00 34,319
Exercised....................................................... -- --
----- -----------
Outstanding at June 27, 1997........................................ $ 1.00 67,838
</TABLE>
At June 27, 1997, the remaining contractual life of all options was 7 years.
The per share fair value of stock options granted during 1996 and 1997 was
$3.40 and $16.98 on the date of grant using the Minimal Value Method with the
following assumptions: 1997 -- risk free interest rate of 6.5% and an expected
life of 5 years; 1996 -- risk free interest rate of 6.0%, and an expected life
of 5 years.
Had the company determined compensation cost based on the fair value at the
grant date for its stock options under SFAS No. 123, the Company's net income
would have been reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1995 1996 1997
------------ ------------ --------------
<S> <C> <C> <C> <C>
Net income............................................ As reported $ 2,707,700 $ 2,975,300 $ 3,439,500
Pro forma 2,707,700 2,929,200 3,107,300
Net income per share.................................. As reported $ 2.14 $ 2.22 $ 2.59
Pro forma 2.14 2.19 2.34
</TABLE>
(15) FOREIGN SALES
International sales represented 48%, 54%, and 52% of the Company's net sales
for the years ended June 30, 1995, June 28, 1996 and June 27, 1997,
respectively. These sales represented the combined total of export sales made by
United States operations and all sales made by foreign operations.
Export sales made by United States operations were 37%, 43% and 44% of the
Company's net sales for the years ended June 30, 1995, June 28, 1996 and June
27, 1997, respectively.
F-49
<PAGE>
PHI ACQUISITION HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1995, JUNE 28, 1996
AND JUNE 27, 1997
(15) FOREIGN SALES (CONTINUED)
The following table summarizes the Company's sales and selected operating
data in different geographic areas (amounts in thousands):
<TABLE>
<CAPTION>
EUROPE,
UNITED AFRICA,
STATES INDIA ELIMINATIONS CONSOLIDATED
--------- --------- ------------- -------------
<S> <C> <C> <C> <C>
Fiscal 1995:
Sales to unaffiliated customers.............................. $ 46,472 8,292 -- 54,764
Transfers between geographic locations....................... 2,283 -- (2,283) --
Net sales.................................................... 48,755 8,292 (2,283) 54,764
Income from operations....................................... 4,751 535 -- 5,286
Identifiable assets.......................................... 38,699 2,788 (2,235) 39,252
Fiscal 1996:
Sales to unaffiliated customers.............................. 46,381 11,693 -- 58,074
Transfers between geographic locations....................... 5,348 -- (5,348) --
Net sales.................................................... 51,729 11,693 (5,348) 58,074
Income (loss) from operations................................ 6,265 (104) -- 6,161
Identifiable assets.......................................... 40,054 4,643 (2,925) 41,772
Fiscal 1997:
Sales to unaffiliated customers.............................. 56,434 11,385 -- 67,819
Transfers between geographic locations....................... 6,243 -- (6,243) --
Net sales.................................................... 62,677 11,385 (6,243) 67,819
Income (loss) from operations................................ 6,964 (476) -- 6,488
Identifiable assets.......................................... 44,408 4,738 (3,286) 45,860
</TABLE>
(16) SUBSEQUENT EVENTS
On August 8, 1997, PHI Acquisition Holdings, Inc. was merged with Lauren
Corporation, a wholly owned subsidiary of High Voltage Engineering Corporation
(HVE) through the acquisition agreement between HVE and PHI. Immediately after
the acquisition, PHI Acquisition Holdings, Inc. was merged with and into
Physical Electronics, Inc. and is a direct, wholly owned subsidiary of HVE.
Immediately prior to and in conjunction with the acquisition, the Company
granted a total of 101,757 options under the Employee Stock Purchase Plan and
Stock Option Plan and the Charles Evans & Associates Acquisition Plan. All
outstanding options of the Company became fully vested and option holders were
required to surrender all rights of such options in exchange for a cash payment
made by HVE based upon the difference between the fair market price and exercise
price. As a result of this transaction, the Company recognized $2,371,000 of
compensation expense.
On August 8, 1997, the unpaid principal and accrued interest of the First
Bank National Association note payable and unpaid principal and accrued interest
of the Perkin Elmer promissory note were paid in full by HVE.
F-50
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
Stewart Warner Instrument Corporation
El Paso, Texas
We have audited the accompanying consolidated balance sheets of Stewart Warner
Instrument Corporation and subsidiary (the Company) as of April 30, 1996, April
30, 1997 and January 31, 1998, and the related consolidated statements of
income, stockholders' equity, and cash flows for the years ended April 30, 1996
and 1997 and the nine-month period ended January 31, 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated 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, such consolidated financial statements present fairly, in all
material respects, the financial position of Stewart Warner Instrument
Corporation and subsidiary at April 30, 1996, April 30, 1997, and January 31,
1998 and the results of their operations and their cash flows for the years
ended April 30, 1996 and 1997 and the nine-month period ended January 31, 1998
in conformity with generally accepted accounting principles.
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
San Antonio, TX
March 13, 1998
F-51
<PAGE>
STEWART WARNER INSTRUMENT CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
APRIL 30, 1996, APRIL 30, 1997 AND JANUARY 31, 1998
<TABLE>
<CAPTION>
APRIL 30, APRIL 30, JANUARY 31,
1996 1997 1998
------------- ------------- ---------------
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents..................................... $ 60,568 $ 22,020 $ 8,187
Trade accounts receivable, net of allowance for doubtful
accounts of $75,407, $41,191 and $40,000, respectively...... 3,123,924 3,913,527 3,170,881
Inventories:
Raw materials............................................... 3,555,508 3,354,617 3,462,431
Work in process............................................. 106,811 218,989 230,855
Finished goods.............................................. 2,580,864 2,723,605 2,606,220
Refundable income taxes....................................... 124,650 42,200 191,097
Prepayments and other......................................... 175,665 177,840 275,856
------------- ------------- ---------------
Total current assets...................................... 9,727,990 10,452,798 9,945,527
PROPERTY, PLANT AND EQUIPMENT:
Machinery and equipment....................................... 181,117 243,346 289,305
Molds, tools and dies......................................... 167,170 249,566 497,244
Offce equipment............................................... 182,108 274,150 341,650
Leasehold improvements........................................ 76,238 204,866 420,930
Construction in process....................................... 9,200 158,369 97,060
Accumulated depreciation...................................... (118,433) (280,783) (489,077)
------------- ------------- ---------------
Property, plant and equipment, net............................ 497,400 849,514 1,157,112
DEFERRED TAXES.................................................... 528,018 552,800 372,338
OTHER............................................................. 40,535 76,122 61,317
------------- ------------- ---------------
TOTAL............................................................. $ 10,793,943 $ 11,931,234 $ 11,536,294
------------- ------------- ---------------
------------- ------------- ---------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Line of credit................................................ $ 4,948,165 $ 4,583,550 $ 3,933,514
Bank checks outstanding....................................... 574,690 756,183 560,141
Trade accounts payable........................................ 1,454,268 1,631,972 1,577,482
Accrued warranty liabilities.................................. 1,065,000 935,962 923,286
Other accrued liabilities..................................... 426,502 419,677 441,430
Federal and state income taxes payable........................ -- 62,638 128,379
Accrued interest payable...................................... -- 33,954 19,000
Deferred taxes................................................ 406,229 487,500 520,592
------------- ------------- ---------------
Total current liabilities................................. 8,874,854 8,911,436 8,103,824
SENIORITY PREMIUMS PAYABLE........................................ 9,062 17,900 22,801
COMMITMENTS AND CONTINGENCIES (Note 7)
STOCKHOLDERS' EQUITY:
Common Stock -- authorized, 1,000,000 shares of no par value;
issued and outstanding, 100,000 shares...................... 1,001,500 1,001,500 1,001,500
Retained earnings............................................. 908,527 2,000,398 2,408,169
------------- ------------- ---------------
Total stockholders' equity................................ 1,910,027 3,001,898 3,409,669
------------- ------------- ---------------
TOTAL............................................................. $ 10,793,943 $ 11,931,234 $ 11,536,294
------------- ------------- ---------------
------------- ------------- ---------------
</TABLE>
See notes to consolidated financial statements.
F-52
<PAGE>
STEWART WARNER INSTRUMENT CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED APRIL 30, 1996 AND 1997,
NINE-MONTH PERIODS ENDED JANUARY 31, 1997 AND 1998
<TABLE>
<CAPTION>
NINE-MONTH
PERIOD ENDED NINE-MONTH
YEAR ENDED YEAR ENDED JANUARY 31, PERIOD ENDED
APRIL 30, APRIL 30, 1997 JANUARY 31,
1996 1997 ------------- 1998
------------- ------------- (UNAUDITED) -------------
<S> <C> <C> <C> <C>
NET SALES........................................... $ 22,521,096 $ 24,228,419 $ 17,386,021 $ 19,616,285
COST OF SALES....................................... 15,653,193 16,651,122 12,109,852 13,784,328
------------- ------------- ------------- -------------
GROSS PROFIT........................................ 6,867,903 7,577,297 5,276,169 5,831,957
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE......... 5,061,281 4,417,326 3,285,118 3,792,310
RESEARCH AND DEVELOPMENT EXPENSE.................... 966,134 942,336 655,066 1,006,824
------------- ------------- ------------- -------------
OPERATING INCOME.................................... 840,488 2,217,635 1,335,985 1,032,823
INTEREST EXPENSE.................................... (526,141) (397,759) (303,027) (289,217)
GAIN FROM INSURANCE CLAIM........................... -- 32,750 28,250 --
------------- ------------- ------------- -------------
INCOME BEFORE PROVISION FOR INCOME TAXES............ 314,347 1,852,626 1,061,208 743,606
INCOME TAXES........................................ (95,672) (760,755) (379,645) (335,835)
------------- ------------- ------------- -------------
NET INCOME.......................................... $ 218,675 $ 1,091,871 $ 681,563 $ 407,771
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
</TABLE>
See notes to consolidated financial statements.
F-53
<PAGE>
STEWART WARNER INSTRUMENT CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED APRIL 30, 1996 AND 1997,
NINE-MONTH PERIOD ENDED JANUARY 31, 1998
<TABLE>
<CAPTION>
ADDITIONAL
COMMON PAID-IN RETAINED
STOCK CAPITAL EARNINGS TOTAL
------------ ----------- ------------ ------------
<S> <C> <C> <C> <C>
BALANCE, May 1, 1995........................................ $ 1,001,500 $ 50,075 $ 889,777 $ 1,941,352
REPURCHASE OF COMMON STOCK WARRANTS......................... -- (50,075) (199,925) (250,000)
NET INCOME.................................................. -- -- 218,675 218,675
------------ ----------- ------------ ------------
BALANCE, April 30, 1996..................................... 1,001,500 -- 908,527 1,910,027
NET INCOME.................................................. -- -- 1,091,871 1,091,871
------------ ----------- ------------ ------------
BALANCE, April 30, 1997..................................... 1,001,500 -- 2,000,398 3,001,898
NET INCOME.................................................. -- -- 407,771 407,771
------------ ----------- ------------ ------------
BALANCE, January 31, 1998................................... $ 1,001,500 $ -- $ 2,408,169 $ 3,409,669
------------ ----------- ------------ ------------
------------ ----------- ------------ ------------
</TABLE>
See notes to consolidated financial statements.
F-54
<PAGE>
STEWART WARNER INSTRUMENT CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED APRIL 30, 1996 AND 1997,
NINE-MONTH PERIODS ENDED JANUARY 31, 1997 AND 1998
<TABLE>
<CAPTION>
NINE-MONTH
PERIOD ENDED NINE-MONTH
YEAR ENDED YEAR ENDED JANUARY 31, PERIOD ENDED
APRIL 30, APRIL 30, 1997 JANUARY 31,
1996 1997 ------------ 1998
----------- ----------- (UNAUDITED) ------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income............................................... $ 218,675 $ 1,091,871 681,563 $ 407,771
Adjustments to reconcile net income to net cash provided
by
operating activities:
Depreciation and amortization.......................... 281,604 162,350 117,949 208,294
Gain from insurance claim.............................. -- (32,750) (28,250) --
Changes in operating assets and liabilities:
Trade accounts receivable.............................. 453,560 (789,603) 359,064 742,646
Inventories............................................ 359,027 (54,028) 466,336 (2,295)
Refundable income taxes................................ (124,650) 82,450 124,650 (148,897)
Prepayments and other.................................. (91,340) (37,762) (48,908) (83,211)
Bank checks outstanding................................ (386,036) 181,493 (25,025) (196,042)
Trade accounts payable................................. 59,862 177,704 138,906 (54,490)
Accrued liabilities.................................... (307,220) (101,909) (246,377) (5,877)
Federal and state income taxes payable................. (344,555) 62,638 (71,698) 65,741
Seniority premiums payable............................. 6,343 8,838 7,921 4,901
Deferred taxes......................................... 41,925 56,489 28,089 213,554
----------- ----------- ------------ ------------
Net cash provided by operating activities................ 167,195 807,781 1,504,220 1,152,095
----------- ----------- ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment...................... (367,083) (514,464) (401,736) (515,892)
Proceeds from insurance claim............................ -- 32,750 28,250 --
----------- ----------- ------------ ------------
Net cash used in investing activities.................. (367,083) (481,714) (373,486) (515,892)
----------- ----------- ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowing on line of credit................ 22,853,535 22,174,880 15,900,905 18,653,228
Payments on line of credit............................... (22,343,944) (22,539,495) (17,077,071) (19,303,264)
Payment of debt issue costs.............................. (30,000) -- -- --
Payment for repurchase of common stock warrants.......... (250,000) -- -- --
----------- ----------- ------------ ------------
Net cash (used in) provided by financing activities...... 229,591 (364,615) (1,176,166) (650,036)
----------- ----------- ------------ ------------
Net (decrease) increase in cash and cash equivalents..... 29,703 (38,548) (45,432) (13,833)
CASH AND CASH EQUIVALENTS, beginning of period........... 30,865 60,568 60,568 22,020
----------- ----------- ------------ ------------
CASH AND CASH EQUIVALENTS, end of period................. $ 60,568 $ 22,020 $ 15,136 $ 8,187
----------- ----------- ------------ ------------
----------- ----------- ------------ ------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest................................... $ 386,968 $ 367,270 $ 275,716 $ 304,171
Cash paid for income taxes............................... 549,418 578,409 293,557 128,220
Cash refunds received for income taxes................... 26,508 -- -- --
</TABLE>
See notes to consolidated financial statements.
F-55
<PAGE>
STEWART WARNER INSTRUMENT CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED APRIL 30, 1996 AND 1997,
NINE-MONTH PERIODS ENDED JANUARY 31, 1997 AND 1998
1. ORGANIZATION AND OPERATIONS
TTS, Inc. (TTS), an Illinois corporation, was formed in February 1994 and
purchased the assets and assumed certain liabilities of Stewart Warner
Instrument Corporation on April 22, 1994. Subsequently, TTS changed its name to
Stewart Warner Instrument Corporation (the "Company") and relocated its
headquarters from Chicago, Illinois to El Paso, Texas.
The Company manufactures, markets, sells and distributes gauges, switches,
senders and related instruments to the automotive, marine, and heavy-duty
equipment markets worldwide.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION -- The accompanying consolidated financial
statements include the accounts of the Company and its wholly-owned subsidiary,
Instrumentos Stewart Warner de Mexico (ISW). All material intercompany accounts
and transactions have been eliminated in consolidation.
UNAUDITED INTERIM FINANCIAL STATEMENTS -- The unaudited consolidated
financial statements for the nine-month period ended January 31, 1997 include
all adjustments, consisting of normal, recurring adjustments and accruals, which
the Company considers necessary for fair presentation of financial position and
the results of operations for the periods presented. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted. The interim financial statements should be read in conjunction with the
audited financial statements for the periods ended April 30, 1996, April 30,
1997 and January 31, 1998.
REVENUE RECOGNITION POLICY -- Revenue, including revenue from sales to
distributors and resellers, is recognized when products are shipped or services
are provided.
FOREIGN CURRENCY REMEASUREMENT -- The financial statements of the foreign
subsidiary are remeasured into the functional currency, the United States
dollar, as follows: property and accumulated depreciation at historical rates;
other assets and liabilities principally at rates in effect on the balance sheet
date; and income and expense accounts, other than depreciation and amortization,
at average rates of exchange in effect during the period. Gains and losses
resulting from the remeasurement are included in the statement of income.
INVENTORIES -- Inventories are stated at the lower of cost or market
determined by the last-in, first-out (LIFO) method. Inventory replacement cost
exceeds the LIFO value by approximately $380,000, $39,000 and $39,000 at April
30, 1996, April 30, 1997 and January 31, 1998, respectively.
PROPERTY, PLANT AND EQUIPMENT -- Property, plant and equipment are stated at
cost and are depreciated using the straight-line method over the estimated
useful lives of the assets.
PRODUCT WARRANTIES -- Some of the Company's products are under warranty
against defects in material and workmanship for a period of two years from the
date of installation. Warranty costs are estimated, and a provision is recorded
based on returns and sales volumes.
SENIORITY PREMIUMS -- Provisions for seniority premiums payable to employees
of the foreign subsidiary upon voluntary or involuntary separation are
calculated in accordance with the Mexican Federal Labor Law. All other payments
to which the workers are entitled, upon involuntary retirement, are charged to
F-56
<PAGE>
STEWART WARNER INSTRUMENT CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED APRIL 30, 1996 AND 1997,
NINE-MONTH PERIODS ENDED JANUARY 31, 1997 AND 1998 (CONTINUED)
operations when they become payable. Management believes that the amount of such
other payments in any single year will not be significant.
INCOME TAXES -- Income taxes are recognized for (a) the amount of taxes
payable or refundable for the current year, and (b) deferred tax assets and
liabilities for the future tax consequences of events that have been recognized
in the Company's financial statements or tax returns. Deferred tax assets and
liabilities are measured based upon enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
USE OF ESTIMATES -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, the 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.
RECLASSIFICATIONS -- Certain prior year balances have been reclassified for
comparative purposes.
3. FOREIGN SUBSIDIARY
In order to benefit from certain economic advantages, the Company maintains
a maquiladora plant in Juarez, Mexico, under Mexico's Border Industrialization
Program. The Company's wholly owned Mexican subsidiary, ISW, holds and operates
the maquiladora plant. ISW provides plant facilities and labor for the assembly
of the Company's products. Key financial information for ISW as of and for the
years ended April 30, 1996 and 1997 and for the nine-month periods ended January
31, 1997 and 1998 is as follows:
<TABLE>
<CAPTION>
APRIL 30, APRIL 30, JANUARY 31,
1996 1997 1998
------------ ------------ JANUARY 31, ------------
1997
------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Total Assets............................................ $ 258,285 $ 330,369 $ 401,660
Total Liabilities....................................... 131,923 152,308 157,806
Sales to Stewart Warner Instrument Corporation.......... 2,859,697 3,310,500 $ 2,374,787 2,851,199
Net Income.............................................. 83,539 51,699 67,345 65,929
</TABLE>
4. CREDIT ARRANGEMENTS
The Company has a financing and credit arrangement with a bank under a Loan
and Security Agreement (Agreement) which expires September 1, 1999. The
Agreement, which is subject to a borrowing base, provides for (a) the issuance
of letters of credit up to the lesser of: (1) $500,000, (2) the borrowing base
less the outstanding principal balance of the line of credit, or (3) $6,500,000
less the outstanding principle balance of the line of credit, and (b) cash
borrowings up to the lesser of: (1) $6,500,000 less availability for letters of
credit, or (2) the borrowing base less availability for letters of credit.
Interest accrues on outstanding borrowings at: (a) the London Interbank
Offered Rate (LIBOR) plus 2.6% (8.2% at January 31, 1998) or (b) the bank's
prime rate (8.5% at January 31, 1998), at the Company's option.
F-57
<PAGE>
STEWART WARNER INSTRUMENT CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED APRIL 30, 1996 AND 1997,
NINE-MONTH PERIODS ENDED JANUARY 31, 1997 AND 1998 (CONTINUED)
Outstanding obligations under the Agreement are secured by liens on
substantially all of the Company's assets. Under the terms of the Agreement, the
Company is required to maintain specific ratios of debt, interest coverage,
fixed charge coverage, and working capital. Among other matters, the Agreement
contains certain restrictions with respect to incurrence of additional
indebtedness and capital expenditures and prohibits the payment of dividends on
capital stock. The Agreement contains other covenants customary in credit
arrangements of this kind. For the year ended April 30, 1997, the Company
received a specific waiver for exceeding its capital expenditure limit under the
Agreement. At January 31, 1998, the Company had no outstanding letters of credit
under the Agreement, cash borrowings outstanding of $3,933,514 and remaining
unused available commitments of $362,723.
5. WARRANT AGREEMENT
The Company granted warrants to purchase 11,111 shares of common stock to a
bank in connection with the Company's term loan. In accordance with the
provisions of the warrant agreement, the Company's repayment of the term loan
prior to April 21, 1995 reduced the number of shares of common stock issuable
upon exercise of the warrants to 5,556 shares. The warrants were exercisable at
a price of $.01 per share of common stock and had no set expiration date. During
fiscal 1996, the Company repurchased these warrants for $250,000. The purchase
price of the warrants was charged to additional paid-in capital and retained
earnings.
6. INCOME TAXES
The income tax provision consists of the following for the years ended April
30, 1996 and 1997 and for the nine-month periods ended January 31, 1997 and
1998.
<TABLE>
<CAPTION>
APRIL 30, APRIL 30, JANUARY 31,
1996 1997 1998
----------- ----------- JANUARY 31, ------------
1997
------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Federal:
Current.................................................. $ (26,075) $ 547,100 $ 272,039 $ 13,000
Deferred................................................. 39,539 33,175 16,496 201,394
State:
Current.................................................. 27,993 83,695 41,616 53,649
Deferred................................................. 2,386 23,314 11,593 12,160
Foreign.................................................... 51,829 73,471 37,901 55,632
----------- ----------- ------------ ------------
Total income taxes......................................... $ 95,672 $ 760,755 $ 379,645 $ 335,835
----------- ----------- ------------ ------------
----------- ----------- ------------ ------------
</TABLE>
F-58
<PAGE>
STEWART WARNER INSTRUMENT CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED APRIL 30, 1996 AND 1997,
NINE-MONTH PERIODS ENDED JANUARY 31, 1997 AND 1998 (CONTINUED)
A reconciliation between the Company's effective tax rate and the U.S.
federal income tax rate is as follows:
<TABLE>
<CAPTION>
NINE-MONTH
YEAR ENDED YEAR ENDED PERIOD ENDED
APRIL 30, APRIL 30, JANUARY 31,
1996 1997 1998
----------- ----------- NINE-MONTH ------------
PERIOD ENDED
JANUARY 31,
1997
------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Federal income tax at statutory rate....................... $ 106,878 $ 629,893 $ 360,811 $ 252,826
Non U.S. taxable foreign income............................ (46,025) (46,929) (35,784) (41,330)
State income taxes, net of federal benefit................. 20,050 70,626 35,118 43,434
Mexican income taxes....................................... 51,829 73,471 37,901 55,632
Other...................................................... (37,060) 33,694 (18,401) 25,273
----------- ----------- ------------ ------------
Total.................................................. $ 95,672 $ 760,755 $ 379,645 $ 335,835
----------- ----------- ------------ ------------
----------- ----------- ------------ ------------
</TABLE>
Deferred income taxes and benefits are provided for differences between
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Temporary differences and the resulting deferred tax
assets and liabilities at April 30, 1996, April 30, 1997, and January 31, 1998
follow:
<TABLE>
<CAPTION>
APRIL 30, APRIL 30, JANUARY 31,
1996 1997 1998
----------- ----------- -------------
<S> <C> <C> <C>
NONCURRENT DEFERRED TAXES:
Fixed assets............................................................. $ 511,043 $ 410,210 $ 372,338
Alternative minimum tax credits.......................................... -- 125,000 --
Other.................................................................... 16,975 17,590 --
----------- ----------- -------------
Noncurrent deferred tax asset............................................ $ 528,018 $ 552,800 $ 372,338
----------- ----------- -------------
----------- ----------- -------------
CURRENT DEFERRED TAXES:
Accounts receivable...................................................... $ 29,409 $ 16,064 $ 15,600
Inventories.............................................................. (960,690) (980,505) (1,054,378)
Accrued liabilities...................................................... 525,052 476,941 511,429
Other.................................................................... -- -- 6,757
----------- ----------- -------------
Current deferred tax liability........................................... $ (406,229) $ (487,500) $ (520,592)
----------- ----------- -------------
----------- ----------- -------------
</TABLE>
7. COMMITMENTS AND CONTINGENCIES
The Company conducts all of its operations in leased facilities. The future
minimum lease payments (excluding renewal options) under leases having a
remaining non-cancelable lease term in excess of twelve months as of January 31,
1998 are as follows:
<TABLE>
<CAPTION>
PERIOD ENDING
JANUARY 31,
- ------------------------------------------------------------------------------------------------------
<S> <C>
1999................................................................................................ $ 501,953
2000................................................................................................ 505,389
2001................................................................................................ 520,132
2002................................................................................................ 495,248
2003................................................................................................ 426,000
</TABLE>
F-59
<PAGE>
STEWART WARNER INSTRUMENT CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED APRIL 30, 1996 AND 1997,
NINE-MONTH PERIODS ENDED JANUARY 31, 1997 AND 1998 (CONTINUED)
Rent expense was approximately $590,000, $588,000, $439,000 (unaudited) and
$471,000 for the years ended April 30, 1996 and 1997 and the nine-month periods
ended January 31, 1997 and 1998, respectively.
The Company, in the ordinary course of business, has been named as a
defendant in litigation and other proceedings. Management believes that the
aggregate amount of such liabilities will not have a material adverse impact on
the Company's financial position or results of operations.
8. EMPLOYEE BENEFITS
The Company maintains a 401(k) plan (the Plan) covering all eligible
employees. All full-time employees are eligible to participate on the first day
of each semi-annual period following the completion of one year of service. A
participant may elect to contribute from 1% to 15% of his or her earnings
subject to limits set forth in the Plan. The Company did not make any
discretionary contributions during the years ended April 30, 1996 and 1997 or
the nine-month period ended January 31, 1998.
9. RELATED PARTY
During the nine-month period ended January 31, 1998, the Company incurred
expenses to an affiliated company of $100,000 for consulting services.
10. CONCENTRATIONS OF CREDIT RISK
Concentrations of credit risk with respect to accounts receivable are
limited by virtue of the large number of customers comprising the Company's
customer base and their geographic dispersion. However, the Company's customers
are concentrated in agriculture, construction, heavy truck and related
industries and the ability of the customers to pay the Company's accounts
receivables depends, in part, upon the general condition of these industries.
Generally, the Company does not require collateral or other security for
customer receivables.
11. SUBSEQUENT EVENT (UNAUDITED)
Effective March 19, 1998, the outstanding shares of the Company were sold to
High Voltage Engineering Corporation.
* * * * * * *
F-60
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THE OFFERS
CONTAINED HEREIN OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR THE INITIAL PURCHASER. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY TO ANY PERSON
IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN
WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO 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 BEEN NO CHANGE IN THE
AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED
HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
--------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE NO.
-----------
<S> <C>
Available Information............................... iv
Prospectus Summary.................................. 1
Risk Factors........................................ 16
The Company......................................... 25
The Transactions.................................... 26
Use of Proceeds..................................... 28
Capitalization...................................... 29
Unaudited Pro Forma Condensed Consolidated Financial
Data.............................................. 30
Selected Historical Consolidated Financial Data..... 42
Management's Discussion and Analysis of Financial
Condition and Results of Operations............... 48
Business............................................ 60
Management.......................................... 80
Certain Relationships and Related Transactions...... 86
Principal Stockholders.............................. 88
Exchange Offer...................................... 89
Plan of Distribution................................ 97
Description of the Notes............................ 98
Description of Other Indebtedness................... 123
Description of Outstanding Capital Stock............ 125
Certain Federal Income Tax Considerations........... 129
Experts............................................. 131
Legal Matters....................................... 131
Special Note Regarding Forward-Looking Statements... 131
Index to Financial Statements....................... F-1
</TABLE>
[LOGO]
HIGH VOLTAGE
ENGINEERING
CORPORATION
OFFER TO EXCHANGE 10 1/2% SENIOR NOTES
DUE 2004 WHICH HAVE BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED,
FOR ANY AND ALL OF ITS OUTSTANDING
10 1/2% SENIOR NOTES DUE 2004
ORIGINALLY ISSUED ON MARCH 19, 1998,
OF WHICH $20,000,000 IN PRINCIPAL AMOUNT
IS OUTSTANDING ON THE DATE HEREOF.
-----------------------------
PROSPECTUS
--------------------------
MAY 12, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
