Form 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-9294
Imo Industries Inc.
(Exact name of registrant as specified in its charter)
Delaware 21-0733751
(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1009 Lenox Drive, Building Four West
Lawrenceville, New Jersey 08648
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code 609-896-7600
Indicate by check mark whether the Registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
Indicate the number of shares outstanding of each of the
issuer's classes of common stock, as of the latest
practicable date: Common Stock, $1.00 Par Value--17,087,859
shares as of July 31, 1996.
INDEX
Page
Number
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited).
Consolidated Statements of Income--Three and six
months ended June 30, 1996 and 1995 2
Consolidated Balance Sheets--June 30, 1996 and
December 31, 1995 3
Consolidated Statements of Cash Flows--Six
months ended June 30, 1996 and 1995 4
Notes to Consolidated Financial Statements--
June 30, 1996 5 - 13
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. 13 - 22
PART II. OTHER INFORMATION
Item 1. Legal Proceedings. 22
Item 2. Changes in Securities. 23
Item 4. Submission of Matters to a Vote of Security Holders. 24
Item 6. Exhibits and Reports on Form 8-K. 24
SIGNATURES 26
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
<TABLE>
Imo Industries Inc. and Subsidiaries
Consolidated Statements of Income
(Dollars in thousands except per share amounts)
<CAPTION>
Three Months Six Months Ended
Ended June 30, June 30,
1996 1995* 1996 1995*
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Net Sales $ 97,659 $ 98,576 $ 197,071 $ 194,460
Cost of products sold 66,370 67,633 133,900 132,623
Gross Profit 31,289 30,943 63,171 61,837
Selling, general and
administrative expenses 20,765 20,815 41,251 41,325
Research and development
expenses 1,445 1,134 2,785 2,472
Income From Operations 9,079 8,994 19,135 18,040
Interest expense 6,551 6,415 13,521 12,986
Interest income (295) (475) (692) (1,280)
Other expense (income), net 85 (358) 262 (520)
Equity in income of
unconsolidated companies (25) (227) (50) (252)
Income From Continuing
Operations Before Income
Taxes and Extraordinary
Item 2,763 3,639 6,094 7,106
Income tax expense 681 677 1,308 1,558
Income From Continuing
Operations Before
Extraordinary Item 2,082 2,962 4,786 5,548
Discontinued Operations:
Income from Operations (net
of income taxes of $.2
million and $.4 million,
respectively, in 1995) --- 448 --- 1,412
Estimated Gain on Disposal
(net of income taxes of $5.2
million in 1995) --- --- --- 39,613
Total Income from
Discontinued Operations --- 448 --- 41,025
Extraordinary Item - Loss on
Extinguishment of Debt (8,455) --- (8,455) (4,140)
Net Income (Loss) $ (6,373) $ 3,410 $ (3,669) $ 42,433
Earnings per share:
Continuing operations
before extraordinary
item $ 0.12 $ 0.17 $ 0.28 $ 0.33
Discontinued operations $ --- $ 0.03 $ --- $ 2.40
Extraordinary item $ (0.49) $ --- $ (0.49) $ (0.24)
Net income (loss) $ (0.37) $ 0.20 $ (0.21) $ 2.49
Weighted average number of
shares outstanding 17,086,234 17,030,866 17,085,538 17,022,499
</TABLE>
See accompanying notes to consolidated financial statements.
*Reclassified to conform to 1996 presentation.
<TABLE>
Imo Industries Inc. and Subsudiaries
Consolidated Balance Sheets
(Dollars in thousands)
<CAPTION>
June 30, December 31,
1996 1995
(Unaudited)
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $ 2,843 $ 3,809
Trade accounts and notes
receivable, less
allowance of $1,952 in 1996
and $2,030 in 1995 64,768 53,965
Inventories-net 84,450 85,030
Deferred income taxes 11,082 11,371
Net assets of discontinued
operations-current 8,423 5,220
Prepaid expenses and other
current assets 6,338 4,617
Total Current Assets 177,904 164,012
Property, Plant and Equipment
on the basis of cost 166,399 164,349
Less allowance for depreciation
and amortization (87,684) (82,996)
Net Property, Plant and Equipment 78,715 81,353
Intangible assets, principally
goodwill 74,148 68,664
Investments in and advances to
unconsolidated companies 5,174 5,415
Deferred income taxes -
noncurrent 4,609 4,609
Net assets of discontinued
operations - noncurrent 28,718 29,190
Other assets 29,611 30,644
Total Assets $ 398,879 $ 383,887
LIABILITIES AND SHAREHOLDERS'
EQUITY
Current Liabilities
Notes payable $ 8,298 $ 9,019
Trade accounts payable 30,483 23,733
Accrued expenses and other
liabilities 34,364 38,069
Accrued costs related to
discontinued operations 1,553 3,055
Income taxes payable 7,322 8,354
Current portion of long-term debt 6,908 805
Total Current Liabilities 88,928 83,035
Long-Term Debt 261,767 245,802
Accrued Postretirement Benefits -
Long-Term 21,884 24,372
Accrued Pension Expense and Other
Liabilties 24,326 23,794
Total Liabilities 396,905 377,003
SHAREHOLDERS' EQUITY
Preferred stock: $1.00 par value;
authorized and unissued 5,000,000
shares --- ---
Common stock: $1.00 par value;
authorized 25,000,000 shares;
issued 18,759,397 and 18,756,397
in 1996 and 1995, respectively 18,759 18,756
Additional paid-in capital 80,292 80,275
Retained earnings (deficit) (80,261) (76,592)
Cumulative foreign currency
translation adjustments 3,005 4,266
Minimum pension liability
adjustment (1,801) (1,801)
Treasury stock at cost -
1,672,788 shares in 1996
and 1995 (18,020) (18,020)
Total Shareholders' Equity 1,974 6,884
Total Liabilities and
Shareholders' Equity $ 398,879 $ 383,887
</TABLE>
See accompanying notes to consolidated financial statements.
<TABLE>
Imo Industries Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Dollars in thousands)
<CAPTION>
Six Months Ended
June 30,
1996 1995*
(Unaudited)
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ (3,669) $ 42,433
Adjustments to reconcile net income to
net cash provided by (used in)
continuing operations:
Discontinued operations --- (41,025)
Depreciation 5,848 6,301
Amortization 1,687 1,612
Extraordinary item 8,455 4,140
Other (2) 222
Other changes in operating
assets and liabilities:
Increase in accounts and
notes receivable (8,803) (6,034)
Decrease (increase) in
inventories 1,630 (5,262)
Increase (decrease) in
accounts payable and accrued
expenses 282 (8,192)
Other operating assets and
liabilities (4,268) (5,277)
Net cash provided by (used by)
continuing operations 1,160 (11,082)
Net cash used by discontinued
operations (10,391) (9,248)
Net Cash Used in Operating Activities (9,231) (20,330)
INVESTING ACTIVITIES
Purchases of property, plant and
equipment (3,618) (9,238)
Proceeds from sale of businesses and
sales of property, plant and equipment 3,523 174,784
Acquisitions, net of cash acquired (3,200) ---
Net cash used by discontinued
operations (2,381) (2,325)
Other --- (76)
Net Cash (Used in) Provided by
Investing Activities (5,676) 163,145
FINANCING ACTIVITIES
Increase (decrease) in notes payable 1,995 (547)
Proceeds from long-term borrowings 323,062 12,834
Principal payments on long-term debt (297,059) (133,702)
Payment of debt financing costs (13,916) ---
Other 20 290
Net Cash Provided by (Used in)
Financing Activities 14,102 (121,125)
Effect of exchange rate changes on
cash (161) 131
(Decrease) Increase in Cash and
Cash Equivalents (966) 21,821
Cash and cash equivalents at beginning
of period 3,809 26,942
Cash and Cash Equivalents at End of
Period $ 2,843 $ 48,763
Supplemental disclosures of cash flow
information:
Cash paid during the period for:
Interest expense $ 20,189 $ 22,396
Income taxes $ 1,030 $ 4,580
</TABLE>
See accompanying notes to consolidated financial statements.
* Reclassified to conform to 1996 presentation.
Imo Industries Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited with
respect to June 30, 1996 and 1995 and the periods then
ended.)
NOTE A--SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation: The accompanying unaudited
consolidated financial statements have been prepared in
accordance with generally accepted accounting principles for
interim financial information and with the instructions to
Form 10-Q and Article 10 of Regulation S-X. Accordingly,
they do not include all of the information and footnotes
required by generally accepted accounting principles for
complete financial statements. In the opinion of management,
all adjustments (consisting only of normal recurring
accruals) considered necessary for a fair presentation have
been included. Operating results for the six months ended
June 30, 1996 are not necessarily indicative of the results
that may be expected for the year ending December 31, 1996.
For further information, refer to the consolidated financial
statements and footnotes thereto included in the Company's
annual report on Form 10-K for the year ended December 31,
1995.
Restatements: The Consolidated Financial Statements, and the
notes thereto, have been restated to reflect the Company's
Roltra-Morse business segment as a discontinued operation, in
accordance with Accounting Principles Board Opinion No. 30.
Certain prior year amounts have been restated to conform to
the current year presentation.
NOTE B--DISCONTINUED OPERATIONS
The Company has accounted for its former Electro-Optical
Systems business and Turbomachinery business segments as
discontinued operations in accordance with Accounting
Principles Board Opinion No. 30. By the end of the second
quarter of 1995, the Company had completed the sales of its
Turbomachinery business and a substantial part of its Electro-
Optical Systems business. As reflected in the Company's first
quarter operating results of 1995, the sale of the
Turbomachinery business segment resulted in an estimated gain
of $39.6 million (net of applicable income tax expense of
$5.2 million). In the second half of 1995, the Company
recorded provisions totalling $17.9 million related to the
resolution of contingencies associated with the
Turbomachinery sale and the June 1995 Electro-Optical Systems
sale, which reduced the net gain on sale of discontinued
operations to $21.6 million by year-end 1995. Not included
in these sales were certain idle facilities which are being
held for sale, as well as the Electro-Optical System's Varo
Electronic Systems division, which continues to be marketed
to interested parties.
In February 1996 the Company announced a plan to sell its
Roltra-Morse operations. The Company has engaged an
investment banking firm to assist in the sale, which is
expected to be completed in 1996 with proceeds in excess of
net book value of the operations.
The Company is currently negotiating the final wording of the
contract for sale of Varo Electronic Systems division, a
division of its former Electro-Optical Systems business, with
a small defense contractor. The Company believes that there
do not appear to be any major outstanding issues unresolved
at this point. Both parties are in agreement as to the
contract price based on a range of net asset value on the
date of closing (which includes the buyer's assumption of
certain recorded liabilities). The steps left to complete
prior to the execution of a definitive contract are: 1)
finalization of the contract, and 2)completion of all financial
schedules and exhibits to the contract. The Company
estimates that agreement and signing of a definitive contract
could be reached within two to four weeks. Closing of the
sale would be contingent on the buyer's ability to obtain
financing and to finalize due diligence efforts. The Company
estimates that if an agreement is reached within this time
frame that the sale could close before the end of the fourth
quarter of 1996.
Net sales of the discontinued operations were $27.2 million
and $45.4 million for the three months ended June 30, 1996
and 1995, and $54.0 million and $105.5 million for the six
months ended June 30, 1996 and 1995, respectively. Operating
results of discontinued operations for the three and six
months ended June 30, 1996 resulted in a net loss of $1.2
million and $2.0 million, respectively, compared to net
income of $.4 million and $1.4 million for the three and six
months ended June 30, 1995, respectively. The 1996 net loss
has been deferred as the Company anticipates realizing a gain
on the sale of Roltra-Morse.
The income (loss) from operations of the discontinued
operations includes allocated interest expense of $1.9
million and $2.8 million for the three months ended June 30,
1996 and 1995, respectively, and $3.7 million and $6.5
million for the six months ended June 30, 1996 and 1995,
respectively. Allocated interest expense includes interest
on debt of the discontinued operations to be assumed by the
buyer, and an allocation of other consolidated interest
expense to the discontinued operations based on the ratio
of net assets to be sold to the sum of the Company's
consolidated net assets, if positive, plus other consolidated
debt.
NOTE C--INVENTORIES
Inventories (in thousands of dollars) are summarized as
follows:
June 30, December 31,
1996 1995
(Unaudited)
Finished products $ 37,156 $ 39,684
Work in process 30,676 31,235
Materials and supplies 31,316 26,372
99,148 97,291
Less customers' progress payments 3,303 689
Less valuation allowance 11,395 11,572
$ 84,450 $ 85,030
NOTE D--ACCRUED EXPENSES AND OTHER LIABILITIES
Accrued expenses and other liabilities (in thousands of
dollars) consist of the following:
June 30, December 31,
1996 1995
(Unaudited)
Accrued contract completion costs $ 13 $ 94
Accrued product warranty costs 2,020 2,737
Accrued litigation and claim costs 2,180 1,674
Payroll and related items 12,486 14,328
Accrued interest payable 4,618 6,511
Accrued restructuring costs 1,678 1,688
Accrued divestiture costs 2,206 2,861
Other 9,163 8,176
$ 34,364 $ 38,069
NOTE E--EARNINGS PER SHARE
Earnings per share for 1996 and 1995 are based upon the
weighted average number of shares of common stock
outstanding. Common stock equivalents related to stock
options and warrants are excluded because their effect is not
material.
NOTE F--NOTES PAYABLE AND LONG-TERM DEBT
On April 29, 1996, the Company completed the refinancing of
its domestic senior debt, its 12% senior subordinated
debentures and its remaining 12.25% senior subordinated
debentures. Under terms of the refinancing, the Company
issued $155 million of 11.75% senior subordinated notes due
2006 (the "Notes"), priced at a discount to yield 12%. The
Company also entered into an agreement for $175 million in
senior secured credit facilities with a group of lenders (the
"New Credit Agreement"). Initial borrowings under the New
Credit Agreement were approximately $112 million. Proceeds
of the Notes the New Credit Agreement were used to
redeem the remaining $70 million of the Company's 12.25%
senior subordinated debentures due 1997 and all $150
million of its 12% senior subordinated debentures due
2001, together with accrued interest and a prepayment premium
for the latter issue, and to refinance all obligations under the
Company's previous credit facility (the "Old Credit
Agreement"). The cost of issuance of the Notes and
implementation of the New Credit Agreement will be amortized
over their respective terms.
The Notes are not redeemable prior to May 1, 2001, except
that, until May 1, 1999, the Company may redeem, at its
option, up to an aggregate of $55 million of the principal
amount of the Notes at 110% of their principal amount plus
accrued interest with the net proceeds of one or more public
equity offerings; provided, however, that at least $100
million of the principal amount of the Notes remains
outstanding after each such redemption. On or after May 1,
2001, the Notes are redeemable at the option of the Company,
in whole or in part, at 106% of their principal amount, plus
accrued interest, declining to 100% of their principal amount
plus accrued interest on or after May 1, 2004. Interest is
payable semi-annually on May 1 and November 1. The fair
value of these instruments at June 30, 1996, based on market
bid prices, was $158.9 million.
The New Credit Agreement provides for a $70 million revolving
credit facility through April 30, 2001, a $25 million term
loan amortizing to April 30, 2001 ("Term Loan A"), a $35
million term loan amortizing to April 30, 2001 ("Term Loan
B"), and a $45 million term loan amortizing to April 30, 2003
("Term Loan C").
Pursuant to the New Credit Agreement, net cash proceeds from
the sales of Roltra-Morse and Electro-Optical System's Varo
Electronic Systems division must be applied to first repay
Term Loan B and then Term Loans A and C. In May 1996,
proceeds from the sale of certain non-operating real estate
were used to repay $1.9 million of Term Loan B.
As of June 30, 1996, under the New Credit Agreement the
Company had borrowings of $1.9 million outstanding under the
revolving credit facility in addition to $6.4 million of
outstanding standby letters of credit. The Company's
continuing operations currently have $14.4 million in foreign
short-term credit facilities with amounts outstanding at June
30, 1996 of $8.3 million. Due to he short-term nature of
these debt instruments it is the Company's opinion that the
carrying amounts approximate the fair value. The weighted
average interest rate on short-term notes payable was 7.1%
and 8.0% at June 30, 1996 and December 31, 1995,
respectively.
Long-term debt of continuing operations consists of the
following:
June 30, December 31,
(Dollars in thousands) 1996 1995
(Unaudited)
Borrowings on revolving credit
facility expiring July 31, 1997 $ --- $ 18,200
Borrowings on revolving credit
facility expiring April 30, 2001 (1) 1,900 ---
Term Loan A, $1.25 million due
quarterly July 31, 1996 to April
30, 2001 (1) 25,000 ---
Term Loan B, $2.2 million due
quarterly July 31, 1997 to
April 30, 2001 (2)(3) 33,122 ---
Term Loan C, $ .125 million due
quarterly July 31, 1996 to
April 30, 2001 and $5.3
million due quarterly July 31,
2001 to April 30, 2003 (2) 45,000 ---
Senior subordinated debentures
with interest at 12.25%, due
August 15, 1997 --- 70,000
Senior subordinated debentures
with interest at 12%, due
November 1, 1999 to 2001 --- 150,000
Senior subordinated notes with
interest at 11.75%, due May 1,
2006, net of unamortized
discount of $2.2 million 152,811 ---
Other 10,842 8,407
268,675 246,607
Less current portion 6,908 805
$ 261,767 $ 245,802
(1) These loans bear interest at prime plus 1.0% or 1, 2, 3,
or 6 months LIBOR plus 2.5%.
(2) These loans bear interest at prime plus 1.5% or 1, 2, 3,
or 6 months LIBOR plus 3.0%.
(3) Last payment differs due to principal prepayments.
_____________________________________________________________
The aggregate annual maturities of long-term debt from
continuing operations, in thousands, for the four years
subsequent to 1996 are: 1997 - $13,212; 1998 - $15,491; 1999
- - $14,731; 2000 - $14,732.
The New Credit Agreement requires the Company to meet certain
objectives with respect to financial ratios. The New
Credit Agreement and the Notes contain provisions which place
certain limitations on dividend payments and outside
borrowings. Under the most restrictive of such provisions,
the New Credit Agreement requires the Company to maintain
certain minimum consolidated net worth levels, interest
coverage and fixed charge coverage levels.
As a result of the refinancing, an extraordinary charge of
$8.5 million was recorded in the second quarter of 1996. This
charge represents the cash costs of $5.1 million incurred
in connection with the early extinguishment of the debt as
well as the write-off of previously deferred loan costs.
NOTE G--CONTINGENCIES
Legal Proceedings
LILCO Litigation. In August 1985, the Company was named as
defendant in a lawsuit filed in the U.S. District Court,
Southern District of New York, by Long Island Lighting
Company ("LILCO") following the severing of a crankshaft in a
diesel generator sold to LILCO by the Company. LILCO's
complaint contained 11 counts, including counts for breach of
warranty, negligence and fraud, and sought $250 million in
damages. In various decisions from 1986 through 1990, 10 of
the original 11 counts and various additional amended counts
were dismissed with only the original breach of warranty
count remaining. In September 1993, the Second Circuit Court
of Appeals affirmed a previous trial court decision entering
a judgment against the Company in the amount of $18.3
million, and in October 1993, the judgment was satisfied by
payment to LILCO of approximately $19.3 million (which amount
included approximately $1.0 million of post-judgment
interest) by International Insurance Company
("International") and Granite State Insurance Co. ("Granite
State").
In January 1993, the Company was served with a complaint in a
case brought in the U.S. District Court for the Northern
District of California by International alleging that, among
other things, because International policies did not cover
the matters in question in the LILCO case, it was entitled to
recover $10 million in defense costs previously paid in
connection with such case and $1.2 million of the judgment
which was paid on behalf of the Company. In June 1995, the
Court entered a judgment in favor of International awarding
it $11.2 million, plus interest from March 1995 (the
"International Judgment"). The International Judgment,
however, was not supported by an order, and in July of 1995,
the court vacated the International Judgment as being
premature because certain outstanding issues of
recoverability of the $10 million in defense costs had not
been finally determined. The Company is awaiting a final
decision. If the International Judgment is reinstated, the
Company intends to appeal. If the ultimate outcome of this
matter is unfavorable, the Company will record a charge for
the judgment amount plus accrued interest.
In June 1992, the Company filed an action, subsequently
transferred to the U.S. District Court, Southern District of
New York, that is currently pending against Granite State in
an attempt to collect amounts for defense costs paid to
counsel retained by the Company in defense of the LILCO
litigation. After reimbursing the Company for $1.7 million
in defense costs, Granite State refused to reimburse the
Company for an additional $8.5 million in defense costs paid
by the Company, alleging, among other things, that defense
costs above reasonable levels were expended in defending the
LILCO litigation. The insurer subsequently paid $18 million
of the judgment rendered against the Company, thereby
exhausting its $20 million policy. The Company claimed that
the insurer's refusal to pay the $8.5 million in additional
defense costs was in bad faith and the Company is entitled to
its cost of money and other damages. In a counterclaim,
Granite State sought reimbursement of all or part
of the $1.7 million in defense costs previously paid by it,
and indicated that it may seek additional damages beyond
the reimbursement of defense costs, including recoupment of
approximately $4.0 million of the amount awarded by the jury
in the LILCO litigation (which $4.0 million represents
amounts previously paid by LILCO to the Company for generator
repairs and which Granite State had paid on behalf of the
Company). In May 1996, the Company and Granite State
reached an agreement in principle which will result in the
dismissal of all claims and counterclaims and the elimination
of all issues concerning the $20 million payment previously
made on behalf of the Company under the terms of the Granite
State policy. This agreement preserves the Company's ability
to seek reimbursement of the $8.5 million of defense costs
from persons other than Granite State.
Additional Litigation. The Company and one of its
subsidiaries are two of a large number of defendants in a
number of lawsuits brought in various jurisdictions by
approximately 19,000 claimants who allege injury caused by
exposure to asbestos. Although neither the Company nor any
of its subsidiaries has ever been a producer or direct
supplier of asbestos, it is alleged that the industrial and
marine products sold by the Company and the subsidiary named
in such complaints contained components which contained
asbestos. Suits against the Company and its subsidiary have
been tendered to their insurers who are defending under their
stated reservation of rights. On May 10, 1996, the Company
learned that the U.S. District Court for the Eastern
District of Pennsylvania entered an Order which
"administratively dismissed" without prejudice approximately
18,000 maritime asbestos injury cases, including
approximately 13,000 cases involving claims against the
Company and a number of other defendants. Cases that have
been "administratively dismissed" may be reinstated only upon
a showing to the Court that ( i) there is satisfactory
evidence of an asbestos-related injury; and (ii) there is
probative evidence that the plaintiff was exposed to products
or equipment supplied by each individual defendant in the
case. Should settlements for these claims be reached at
levels comparable to those reached by the Company in the
past, they would not be expected to have a material effect on
the Company.
The activities of certain employees of the Ni-Tec Division of
the Company's Varo Inc. subsidiary ("Ni-Tec"), headquartered
in Garland, Texas, were the focus of an investigation by the
Office of the Inspector General of the U.S. Department of
Defense and the Department of Justice (Criminal Division).
Ni-Tec received subpoenas for certain records as a part of
the investigation in 1992, 1993 and 1994, each of which was
responded to. The investigation was apparently directed at
alleged failures in quality control, testing and
documentation activities involving the manufacture of tubes
for night vision equipment which began at Ni-Tec while it was
a division of Optic-Electronic Corp. Optic-Electronic Corp.
was acquired by the Company in November 1990 and subsequently
merged with Varo Inc. in 1991. On July 15, 1996, the Company
reached an agreement with the U.S. government to settle
all claims related to this investigation and a related qui
tam civil action brought in the U.S. District Court for the
Northern District of Texas by a former Varo employee who
consented to the settlement. The U.S. government had recently
notified the Company that it intended to intervene in the
civil action which had been under seal. The settlement
involves the payment by Varo of approximately $2.0 million
and the dismissal of all civil and administrative claims
under the False Claims Act, 31 USC 3929 et seq., the Contract
Disputes Act, 41 USC 601 et seq., and all claims of common
law fraud and breach of contract. This settlement amount
was previously reserved in full by the Company. As a
result of the settlement, Varo will receive approximately
$400,000 in contract payments which were being held by a
prime contractor pending resolution of Varo's dispute with
the government.
The operations of the Company, like those of other companies
engaged in similar businesses, involve the use, disposal and
clean-up of substances regulated under environmental
protection laws. In a number of instances the Company has
been identified as a Potentially Responsible Party by the
U.S. Environmental Protection Agency, and in one instance by
the State of Washington, with respect to the disposal of
hazardous wastes at a number of facilities that have been
targeted for clean-up pursuant to CERCLA or similar State
law. Although CERCLA and corresponding State law liability
is joint and several, the Company believes that its liability
will not have a material adverse effect on the financial
condition of the Company since it believes that it either
qualifies as a de minimis or minor contributor at each site.
Accordingly, the Company believes that the portion of
remediation costs that it will be responsible for will not be
material.
There are lawsuits pending against the Company in the U.S.
District Court for the Western District of Pennsylvania
alleging component failures in equipment sold by its former
diesel engine division and claiming damages of approximately
$3.0 million, and in the Circuit Court of Cook County,
Illinois, alleging performance shortfalls in products
delivered by the Company's former Delaval Turbine Division
and claiming damages of approximately $8.0 million. Each
lawsuit is in the document discovery stage.
With respect to the litigation and claims described in the
preceding paragraphs, management of the Company believes that
it either expects to prevail, has adequate insurance coverage
or has established appropriate reserves to cover potential
liabilities. There can be no assurance, however, on the
ultimate outcome of any of these matters.
The Company is also involved in various other pending legal
proceedings arising out of the ordinary course of the
Company's business. None of these legal proceedings is
expected to have a material adverse effect on the financial
condition of the Company. A range of possible outcomes for
all of these legal proceedings currently cannot be estimated.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
The following paragraphs provide Management's discussion and
analysis of the significant factors which have affected the
Company's consolidated results of operations and financial
condition during the three and six months ended June 30,
1996.
Restructuring Plan
Background
In October 1992, the Company determined that it needed to
delever its balance sheet through the sale of certain
businesses and the application of the proceeds from the
divestitures to reduce debt. Pursuant to this decision, the
Company divested its Heim Bearings, Aerospace, Barksdale
Controls and CEC Instruments businesses during 1993 and 1994.
In 1993, management, under Donald K. Farrar, who became Chief
Executive Officer in September 1993, initiated a strategy to
reposition the Company to focus on its less capital intensive
businesses that exhibited strong brand name recognition, a
broad customer base and market leadership with less
dependence on U.S. Government sales. In connection with this
strategy, the Company divested its Turbomachinery and most of
its Electro-Optical Systems businesses during 1995. This
repositioning will be completed upon the sale of the Roltra-
Morse business, the remaining portion of the Electro-Optical
Systems business and certain non-operating real estate. See
"Remaining Asset Sales" below.
Recent Developments
On April 29, 1996, the Company completed the refinancing of
its domestic senior debt and all remaining subordinated
debentures. Under the terms of the refinancing, the Company
issued $155 million of Notes and entered into
the New Credit Agreement providing for $175 million in senior
secured credit facilities with a group of lenders. Proceeds of
the Notes and the New Credit Agreement were used to redeem
the remaining $70 million of the Company's 12.25% senior
subordinated debentures due 1997 and all $150 million of
its 12% senior subordinated debentures due 2001, together
with accrued interest and a prepayment premium for the latter
issue, and to refinance all obligations under the previous
credit facility. The refinancing has extended the maturities
of the Company's existing indebtedness, allows some of the
debt to be prepaid without undue premium, and lowers
the Company's overall interest rate. See "Liquidity and Capital
Resources" below.
During the first half of 1996, the Company completed the
sales of four of its non-operating real estate holdings for
net proceeds of $3.5 million.
Remaining Asset Sales
The Company is proceeding with its plan to sell its Roltra-
Morse business, as announced in February 1996, and expects
proceeds from the sale to exceed net book value. The
remaining portion of the Company's Electro-Optical Systems
business also continues to be marketed. The Company expects
to complete these sales of businesses in 1996 and plans to
use the proceeds to reduce debt. Reference is made Note B in
Part I of this Report for additional information regarding the
sale of the Electro-Optical Systems business.
In addition, other non-operating real estate, representing
less than 10% of the original value of assets announced to be
sold in October 1992, remains for sale.
Results of Operations
The Roltra-Morse and the remaining Electro-Optical Systems
businesses are accounted for as discontinued operations in
the accompanying consolidated financial statements. Certain
prior year amounts have been reclassified to conform to
current year presentation. Accordingly, the discussion that
follows concerns only the results of continuing operations.
The Company's continuing businesses are now grouped into four
core business segments for management and segment reporting
purposes: Power Transmission, Pumps, Instrumentation and
Morse Controls.
Three Months Ended June 30, 1996 Compared with 1995
Sales. Net sales from continuing operations for the three
months ended June 30, 1996 were $97.7 million, a slight
decrease compared with $98.6 million in the 1995 period. The
Pumps and Morse Controls segments experienced increased sales
levels in the 1996 second quarter as compared with the prior
year. These increases were offset by decreases in net sales
of the Power Transmission and Instrumentation segments
in the second quarter of 1996 compared with the 1995
period. See "Segment Operating Results" below.
Gross Profit. The gross profit in the second quarter of 1996
was 32.0%, a slight increase compared with 31.4% in 1995.
See "Segment Operating Results" below.
Selling, General and Administrative Expenses. Selling,
general and administrative expenses remained constant at
$20.8 million for the three months ended June 30, 1996
compared with 1995, which represented a slight increase as a
percent of sales, at 21.3% in the second quarter of 1996
compared with 21.1% in the prior year. Although the 1996
period benefited from cost savings attributable to the
Company-wide cost reduction program adopted in the fourth
quarter of 1995, and net adjustments of $.6 million to previously
estimated provisions, these benefits were offset by
increased selling expenses as compared with the prior year.
Research and development expenditures were 1.5% and 1.2% of
net sales for the three months ended June 30, 1996 and 1995,
respectively.
Interest Expense. Average borrowings in the second quarter
of 1996 were approximately $4 million lower than in the
comparable 1995 period. As a result, total interest expense
(before allocation to discontinued operations) of $8.5
million for the three months ended June 30, 1996 was $.8
million, or 8%, less than the same period in 1995. Interest
expense for continuing operations excludes interest expense
incurred by the discontinued operations of $.8 million and
$.7 million for the three months ended June 30, 1996 and
1995, respectively, as well as a general interest allocation
to the discontinued operations. General interest allocated
to discontinued operations was $1.1 million in the
second quarter of 1996 and $2.2 million in the 1995 period.
Three Months Ended
June 30,
(in millions)
Interest Expense: 1996 1995
Total (Before
Allocations to
Discontinued
Operations) $ 8.5 $ 9.3
Continuing Operations 6.6 6.4
Provision for Income Taxes. Income tax expense for
continuing operations was $.7 million for both the three
months ended June 30, 1996 and 1995. The amounts in both
periods are comprised of current tax expense representing
foreign and state income taxes, as the Company is utilizing
existing U.S. net operating loss carryforwards on its
domestic earnings. The Company has previously established
valuation allowances against unrecognized prior year tax
benefits in accordance with the provisions of FASB Statement
No. 109, "Accounting for Income Taxes." The Company is
recognizing these benefits only as reassessment demonstrates
that it is more likely than not that they will be realized.
Income from Continuing Operations. The Company had income
from continuing operations of $2.1 million, or $.12 per
share, for the three months ended June 30, 1996, compared
with $3.0 million, or $.17 per share, for the comparable 1995
period.
Income from Discontinued Operations. For the three months
ended June 30, 1996, discontinued operations had a net loss
of $1.2 million. This loss has been deferred as the Company
anticipates realizing a gain on the sale of Roltra-Morse. For
the three months ended June 30, 1995 the Company had income
from discontinued operations of $.4 million (net of income
tax expense of $.2 million), or $.03 per share. Results from
operations for the discontinued operations include
allocations for interest of $1.9 million and $2.8 million for
the three months ended June 30, 1996 and 1995, respectively.
Extraordinary Item. As a result of the April 29, 1996
refinancing of the Company's domestic debt, the second
quarter of 1996 includes an extraordinary charge of $8.5
million, or $.49 per share, representing charges related to
the early extinguishment of the Old Credit Agreement and
amounts outstanding under its 12.25% and 12% senior
subordinated debentures, as well as the write-off of previously
deferred loan costs. See "Liquidity and Capital Resources"
below.
Net Income (Loss). The net loss in the second quarter of 1996
was $6.4 million, or $.37 per share, compared with net income
of $3.4 million,or $.20 per share,in the 1995 second quarter.
Net income (loss) per share by component for each period is
summarized below:
Three Months Ended
June 30,
Earnings (loss) per
share: 1996 1995
Continuing Operations
Before Extraordinary Item $ .12 $ .17
Discontinued Operations --- .03
Extraordinary Item (.49) ---
Net income (loss) $ (.37) $ .20
Segment Operating Results
Operating results by business segment for the three months
ended June 30, 1996 and 1995 are summarized below.
Power Transmission segment net sales and operating income
were $21.2 million and $1.7 million, respectively, in the
second quarter of 1996, compared with $24.2 million and $2.8
million in the comparable 1995 period. The 12 % decrease in
net sales was due to a sharp downturn in the U.S. gear market
in 1996, resulting in major customers adjusting their
inventory levels, after a relatively strong 1995. The 39%
decrease in segment operating income resulted from the sales
decrease and the higher unabsorbed costs experienced at the
decreased volume.
Pumps segment net sales increased 10.5% to $27.4 million and
segment operating income increased 30% in the second quarter
of 1996, as compared with the second quarter of 1995. In
the second quarter of 1996, the segment experienced
continued growth in its U.S. industrial markets and strong
export demand, driven by products in crude oil transfer,
power generation and general industrial markets, as well as
increased demand in the U.S. marine market. Second quarter
1996 sales and operations were favorably affected by the
recent acquisition of the segment's former French
distributor, Imo Pompes S.A., which has expanded the product
portfolio and sales coverage throughout France. The segment's
operating income also benefited from the North American
consolidation of its Imo Pump and Warren Pumps operations into
a single business unit.
The Instrumentation segment's net sales decreased 7.4% to
$19.4 million during the three months ended June 30, 1996, as
compared with the same period in 1995, due primarily to lower
sales volume in Europe, which more than offset a 10% increase
in the U.S. Second quarter 1996 operating income of $2.5
million decreased $.2 million, or 8.3%, compared with 1995.
Although the segment's operating income continues to benefit
from the operational improvements made at a factory located
in England, which has absorbed all product lines previously
manufactured at a German plant that was closed in 1995, the
European market in general is experiencing a slowdown.
Morse Controls segment net sales were $29.6 million in the
second quarter of 1996, a 3.4% increase compared with $28.7
million in the three months ended June 30, 1995. Segment
operating income decreased $.3 million, or 11.5%, to $2.5
million when comparing the same periods. The increase in net
sales resulted from the acquisition of RMH Controls, a
Swedish manufacturer of specialized electronic controls,
which was completed in late December 1995, and were partially
offset by slowed marine sales in the U.S. due to the late
arrival of the spring pleasure boating season. Despite the
slight volume increase the segment's operating income was
adversely affected by delays related to the restructuring
of the German operation.
Six Months Ended June 30, 1996 Compared with 1995
Sales. Net sales from continuing operations for the six
months ended June 30, 1996 were $197.1 million, a 1.3%
increase compared with $194.5 million in the 1995 period.
The Pumps segment experienced a 14.7% increase in net sales
compared to the prior year, due principally to increased
demand in most markets it serves. The Morse Controls
segment also experienced increased sales levels as compared
with the prior year. These increases were partially offset
by a decrease in Power Transmission net sales in the
first half of 1996 compared with an exceptionally strong
1995 first half. See "Segment Operating Results" below.
Gross Profit. The gross profit in the first six months of
1996 increased slightly to 32.1% of sales compared with 31.8%
in 1995. See "Segment Operating Results" below.
Selling, General and Administrative Expenses. Selling,
general and administrative expenses decreased as a percent of
sales, to 20.9% for the six months ended June 30, 1996
compared with 21.3% in the prior year, as the 1996 period
benefited from cost savings attributable to the Company-wide
cost reduction program adopted in the fourth quarter of 1995,
and net adjustments of $.8 million to previously
estimated provisions, only partially offset by increased
selling expenses as compared with the prior year. Research
and development expenditures were 1.4% and 1.3% of net sales
for the six months ended June 30, 1996 and 1995, respectively.
Interest Expense. Average borrowings during the first six
months of 1996 were approximately $40.5 million lower than in
the comparable 1995 period. As a result, total interest
expense (before allocation to discontinued operations) of
$17.2 million for the six months ended June 30, 1996 was $2.3
million, or 12%, less than same period in 1995. Interest
expense for continuing operations excludes interest expense
incurred by the discontinued operations of $1.6 million and
$1.2 million for the six months ended June 30, 1996 and 1995,
respectively, as well as a general interest allocation to the
discontinued operations. General interest allocated to
discontinued operations was $2.1 million in the first six
months of 1996 and $5.3 million in the 1995 period.
Six Months Ended
June 30,
(in millions)
Interest Expense: 1996 1995
Total (Before
Allocations to
Discontinued
Operations) $ 17.2 $ 19.5
Continuing Operations 13.5 13.0
Provision for Income Taxes. Income tax expense for
continuing operations was $1.3 million and $1.6 million for
the six months ended June 30, 1996 and 1995, respectively.
The amounts in both periods are comprised of current tax
expense representing foreign and state income taxes, as the
Company is utilizing existing U.S. net operating loss
carryforwards on its domestic earnings. The Company has
previously established valuation allowances against
unrecognized prior year tax benefits in accordance with the
provisions of FASB Statement No. 109, "Accounting for Income
Taxes." The Company is recognizing these benefits only as
reassessment demonstrates that it is more likely than not
that they will be realized.
Income from Continuing Operations. The Company had income
from continuing operations of $4.8 million, or $.28 per
share, for the six months ended June 30, 1996, compared with
$5.5 million, or $.33 per share, for the comparable 1995
period.
Income from Discontinued Operations. For the six months ended
June 30, 1996, discontinued operations had a net loss of $1.9
million. This loss has been deferred as the Company
anticipates realizing a gain on the sale of Roltra-Morse. For
the six months ended June 30, 1995 the Company had income
from discontinued operations of $41.0 million (net of income
tax expense of $5.6 million), or $2.40 per share. The income
recorded in the first half of 1995 includes the estimated net
gain of $39.6 million on the sale of the Company's former
Turbomachinery business, which was sold in January of 1995.
In the second half of 1995, the Company recorded provisions
of $17.9 million related to the resolution of contingencies
associated with the Turbomachinery sale and the June 1995
Electro-Optical Systems sale, which reduced the net gain on
sale of discontinued operations to $21.6 million by year-end
1995. Results from operations for the discontinued
operations include allocations for interest of $3.7 million
and $6.5 million for the six months ended June 30, 1996 and
1995, respectively.
Extraordinary Item. The six months ended June 30, 1996
include an extraordinary charge of $8.5 million, or $.49 per
share, representing charges related to the early
extinguishment of the Old Credit Agreement and amounts
outstanding under its 12.25% and 12% senior subordinated
debentures, as well as the write-off of previously deferred
loan costs as a result of its debt refinancing on April 29,
1996.
The six months ended June 30, 1995 include an extraordinary
charge of $4.1 million after-tax, or $.24 per share,
representing charges related to the early extinguishment of
portions of its debt under the Company's Old Credit Agreement
and 12.25% senior subordinated debentures.
Net Income (Loss). The net loss in the first six months
of 1996 was $3.7 million, or $.21 per share, compared with
net income of $42.4 million, or $2.49 per hare, in the 1995
first half. Net income(loss) per share by component for each
year is summarized below:
Six Months Ended
June 30,
Earnings (loss) per 1996 1995
share:
Continuing Operations
Before Extraordinary Item $ .28 $ .33
Discontinued Operations --- 2.40
Extraordinary Item (.49) (.24)
Net income(loss) $ (.21) $ 2.49
Segment Operating Results
Operating results by business segment for the six months
ended June 30, 1996 and 1995 are summarized below.
Power Transmission segment net sales and operating income
were $44.9 million and $4.5 million, respectively, in the six
months of 1996, compared with $50.3 million and $6.4 million
in the comparable 1995 period. The 11% decrease in net sales
was due to a sharp downturn in the U.S. gear market in 1996,
resulting in major customers adjusting their
inventory levels, after a relatively strong 1995. The 30%
decrease in segment operating income resulted from the sales
decrease and the higher unabsorbed costs experienced at the
decreased volume.
Pumps segment net sales increased 14.7% to $53.8 million in
the first half of 1996, as compared with $48.9 million for
the 1995 period. Segment operating income for the first six
months of 1996 was $7.0 million, a 36% increase compared with
$5.1 million for the comparable 1995 period. The segment is
experiencing continued growth in its U.S. industrial markets
and strong export demand, driven by products in crude oil
transfer, power generation and general industrial markets, as
well as increased demand in the U.S. marine market. 1996
sales and operations were favorably affected for the past
three months by the recent acquisition of the segment's
former French distributor. The segment's operating income is
beginning to experience the benefits from the North American
consolidation of its Imo Pump and Warren Pumps operations
into a single business unit.
The Instrumentation segment's net sales decreased slightly to
$38.7 million in the first six months of 1996, as compared
with $39.4 million for the same period in 1995. Segment
operating income of $4.7 million for the six months ended
June 30, 1996 was up slightly compared with $4.5 million for
the 1995 period. The segment's operating income continues to
benefit from the operational improvements made at a factory
located in England, and the increased demand in the U.S.,
partially offset by the slowdown experienced in the European
market in general.
Morse Controls segment net sales were $59.7 million in the
first six months of 1996, a 3.1% increase compared with $57.9
million in the first six months of 1995. Segment operating
income remained relatively constant at $5.3 million, compared
with $5.4 million for the same periods. The segment has been
favorably affected in 1996 by the acquisition of a Swedish
manufacturer of specialized electronic controls, which was
completed in late December 1995, which was partially offset
by slowed marine sales in the U.S. due to the late arrival of
the spring pleasure boating season, and delays related to the
restructuring of the German operation.
Liquidity and Capital Resources
Short-term and Long-term Debt
On April 29, 1996, the Company completed the refinancing of
the Old Credit Agreement, its 12% senior subordinated
debentures and its remaining 12.25% senior subordinated
debentures. Under terms of the refinancing,the Company issued
$155 million of Notes at 11.75% due in 2006, priced at
a discount to yield 12%. The Company also entered into the
New Credit Agreement, which provides for a $70 million
revolving credit facility (including a letter of credit
subfacility) through April 30, 2001, a $25 million term loan
amortizing to April 2001, a $35 million term loan amortizing
to April 2001, and a $45 million term loan amortizing to April
2003. Proceeds of the Notes and the New Credit Agreement
were used to redeem the remaining $70 million of
the Company's 12.25% senior subordinated debentures due 1997
and all $150 million of its 12% senior subordinated
debentures due 2001, together with accrued interest and
a prepayment premium for the latter issue, and to refinance
all obligations under the Old Credit Agreement. The cost of
issuance of the Notes and the implementation of the New Credit
Agreement will be amortized over their respective terms.
As a result of the refinancing, an extraordinary charge of
approximately $8.5 million was be recorded in the second
quarter ended June 30, 1996. This charge represents the
costs incurred in connection with the early extinguishment of
the debt as well as the write-off of previously deferred loan
costs.
The Company's domestic liquidity requirements are served by
the $70 million revolving credit facility (including a letter
of credit subfacility) under the New Credit Agreement, while
its needs outside the United States continue to be covered by
short and intermediate term credit facilities from foreign
banks. As of June 30, 1996, there were $1.9 million of
revolving credit borrowings and $6.4 million of standby
letters of credit outstanding under the New Credit Agreement.
The Company also has, in the aggregate, foreign short-term
credit facilities of approximately $35 million. As of June
30, 1996, $18.5 million was outstanding under those foreign
facilities, of which $10.2 million related to indebtedness of
discontinued operations.
At June 30, 1996, the Company also had outstanding under the
New Credit Agreement $25 million in a term loan amortizing
to April 2001, $33.1 million in a second term loan amortizing
to April 2001, and $45 million in a third term loan
amortizing to April 2003. In addition, the Company had
outstanding $155 million the Notes.
Management continues to actively pursue opportunities to
further reduce its high interest debt. The Company plans to
use the proceeds from the sales of its Roltra-Morse and
Varo Electronic Systems businesses to reduce debt.
Cash Flow
The Company's operating activities used cash of $9.2 million
in the first half of 1996, compared with cash used of $20.3
million in the comparable 1995 period. The use of cash in
operating activities in 1996 was due entirely to the use of
$10.4 million by discontinued operations. The 1995 use of
cash was due principally to cash requirements related to
previously divested companies and discontinued operations.
Net cash used in investing activities was $5.7 million in the
first six months of 1996, compared with cash provided of
$163.1 million in the six months ended June 30, 1995. The
decrease in the current year investing activities is due
principally to the 1995 net proceeds generated from the sale
of businesses and assets in the first quarter of 1995 of
$121.9 million. Cash and cash equivalents decreased
to $2.8 million at June 30, 1996 from $3.8 million at
December 31, 1995.
Working capital at June 30, 1996 was $89.0 million, an
increase of $8.0 million from the end of 1995, due
principally to the increase in receivable levels since year
end. The ratio of current assets to current liabilities was
2.0 at June 30, 1996 and at December 31, 1995. The Company's
total debt as a percent of its total capitalization increased
to 99.3% at June 30, 1996, compared with 97.4% at December
31, 1995, due to the extraordinary item recorded in the
second quarter of 1996 as a result of the refinancing.
Management of the Company believes that cash flow from
operations, cash available from unused credit facilities and
cash generated by additional asset sales will be sufficient
to meet its foreseeable liquidity needs.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
In June 1992, the Company filed an action, subsequently
transferred to the U.S. District Court, Southern District of
New York, against Granite State in an attempt to collect
amounts for defense costs paid to counsel retained by
the Company in defense of a lawsuit brought against the
Company by LILCO. For additional information with
respect to the LILCO litigation, reference is made to the
Company's Form 10-K for the year ended December 31, 1995
and to Note G in Part I of this report. On May 3, 1996, the
Company and Granite State reached an agreement in principle
which will result in the dismissal of all claims and
counterclaims and the elimination of all issues concerning
the $20 million payment previously made on behalf of the
Company under the terms of the Granite State policy. This
agreement preserves the Company's ability to seek
reimbursement of $8.5 million of defense costs previously
paid by the Company in connection with the LILCO litigation
from persons other than Granite State.
The Company and one of its subsidiaries are two of a large
number of defendants in a number of lawsuits brought in
various jurisdictions by approximately 19,000 claimants who
allege injury caused by exposure to asbestos. Although
neither the Company nor any of its subsidiaries has ever been
a producer or direct supplier of asbestos, it is alleged that
the industrial and marine products sold by the Company and
the subsidiary named in such complaints contained components
which contained asbestos. Suits against the Company and its
subsidiary have been tendered to their insurers who are
defending under their stated reservation of rights. On May
10, 1996, the Company learned that the U.S. District Court
for the Eastern District of Pennsylvania entered an Order
which "administratively dismissed" without prejudice
approximately 18,000 maritime asbestos injury cases,
including approximately 13,000 cases involving claims against
the Company and a number of other defendants. Cases that
have been "administratively dismissed" may be reinstated only
upon a showing to the Court that (i) there is satisfactory
evidence of an asbestos-related injury; and (ii) there is
probative evidence that the plaintiff was exposed to products
or equipment supplied by each individual defendant in the
case. Should settlements for these claims be reached at
levels comparable to those reached by the Company in the
past, they would not be expected to have a material effect on
the Company.
The activities of certain employees of the Ni-Tec Division of
the Company's Varo Inc. subsidiary ("Ni-Tec"), headquartered
in Garland, Texas, were the focus of an investigation by the
Office of the Inspector General of the U.S. Department of
Defense and the Department of Justice (Criminal Division).
For additional information with respect to the Ni-Tec
investigation, reference is made to the Company's Form 10-K
for the year ended December 31, 1995 and to Note G in Part
I of this report. On July 15, 1996, the Company reached an
agreement with the U.S. government to settle all claims
related to this investigation and a related qui tam civil
action brought in the U.S. District Court for the Northern
District of Texas by a former Varo employee who
consented to the settlement. The U.S. government had recently
notified the Company that it intended to intervene in this
civil action which had been under seal. The settlement
involves the payment by Varo of approximately $2.0 million
in consideration of, among other things, dismissal of all
civil and administrative claims under the False Claims Act,
31 USC 3929 et seq., the Contract Disputes Act, 41 USC 601 et
seq., and all claims of common law fraud and breach of
contract. As a result of the settlement, Varo will
receive approximately $400,000 in contract payments which
were being held by a prime contractor pending resolution of
Varo's dispute with the government.
Item 2. Changes in Securities
On April 29, 1996, the Company issued the Notes
under an indenture dated as of April 15, 1996 between
the Company and IBJ Schroder Bank & Trust Company, as
trustee (the "Indenture"). The Indenture contains covenants
that, among other things, restrict the ability of the
Company to dispose of assets, merge, incur debt, pay
dividends, repurchase or redeem capital stock or
indebtedness, create liens, make capital expenditures and
make certain investments or acquisitions, and otherwise
restrict corporate activities. Reference is made to a copy
of the Indenture for a complete description of restrictions
upon the Company which is filed as part of this Report.
See also Note F in Part I of this Report for information
related to additional restrictions on the Company under the
New Credit Agreement.
Item 4. Submission of Matters to a Vote of Security Holders.
The Annual Meeting of the Company's Stockholders was held on May
21, 1996.
The following Directors were elected:
Name Votes For Votes Withheld
Richard J .Grosh 15,250,387 202,428
Arthur E. Van Leuven 15,243,985 208,830
There were no broker non-votes regarding the election of
Directors.
The following Directors terms of office continued after the
meeting:
Name
Dr. James B. Edwards
Donald K. Farrar
Carter P. Thacher
Donald C. Trauscht
Ernst & Young LLP was elected as independent auditors of the
Company with 15,336,463 votes in favor of such election, 73,258
votes against and 43,094 abstentions. There were no broker non-
votes regarding the election of such auditors.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
The following exhibits are being filed as
part of this Report:
Exhibit No. Description
4.1 Indenture, dated as of April 15, 1996,
between the Company and IBJ Schroder Bank &
Trust Company, as trustee (Incorporated by
reference to the Company's Form S-4
(Registration No. 333-3477) filed with the
Commission on May 10, 1996)
4.3 Registration Rights Agreement, dated as of
April 23, 1996, between the Company and the
Initial Purchasers (Incorporated by reference
to the Company's Form S-4 (Registration No.
333-3477) filed with the Commission on May
10, 1996)
10.23 Credit Agreement dated as of April 29, 1996
among the Company, as Borrower, Varo Inc., as
Guarantor, Warren Pumps, Inc., as Guarantor,
the institutions from time to time party
thereto as Lenders and Issuing Banks, and
Citicorp USA, Inc., as Agent (Incorporated by
reference to the Company's Form S-4
(Registration No. 333-3477) filed with the
Commission on May 10, 1996)
27 Financial Data Schedule as of June 30, 1996
(b) Reports on Form 8-K:
On April 22, 1996, the Company filed a report on Form 8-
K, reporting under Item 5, disclosing the announcement
of the Registrant's reported results of operations for
the first quarter ended March 31, 1996.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Imo Industries Inc.
(Registrant)
Date August 14, 1996 Donald K. Farrar
Chairman, Chief Executive Officer,
President and Director
(principal executive officer)
Date August 14, 1996 William M. Brown
Executive Vice President,
Chief Financial Officer and
Corporate Controller
(principal financial and accounting
officer)
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