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FILED PURSUANT TO RULE 424(b)(3)
REGISTRATION NO. 333-3477
PROSPECTUS
OFFER FOR ALL OUTSTANDING 11 3/4% SENIOR SUBORDINATED NOTES DUE 2006
IN EXCHANGE FOR 11 3/4% SENIOR SUBORDINATED NOTES DUE 2006,
WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED
OF
IMO INDUSTRIES INC.
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME,
ON SEPTEMBER 6, 1996, UNLESS EXTENDED.
------------------------
Imo Industries Inc. (the "Company" or "Imo"), a Delaware corporation, hereby
offers, upon the terms and subject to the conditions set forth in this
Prospectus and the accompanying Letter of Transmittal (which together constitute
the "Exchange Offer"), to exchange an aggregate principal amount of up to
$155,000,000 of 11 3/4% Senior Subordinated Notes due 2006 (the "New Notes") of
the Company, which have been registered under the Securities Act of 1933, as
amended (the "Securities Act"), for a like principal amount of the issued and
outstanding 11 3/4% Senior Subordinated Notes due 2006 (the "Old Notes") of the
Company from the registered holders thereof (the "Holders"). The terms of the
New Notes are identical in all material respects to the Old Notes, except for
certain transfer restrictions relating to the Old Notes. The New Notes will
evidence the same class of debt as the Old Notes and will be issued pursuant to,
and entitled to the benefits of, the Indenture governing the Old Notes (the
"Indenture"). As used herein, the term "Notes" means the Old Notes and the New
Notes, treated as a single class.
Imo will accept for exchange any and all Old Notes validly tendered and not
withdrawn prior to 5:00 P.M., New York City time, on September 6, 1996 unless
extended (as so extended, the "Expiration Date"). Tenders of Old Notes may be
withdrawn at any time prior to the Expiration Date. The Exchange Offer is not
conditioned upon any minimum principal amount of Old Notes being tendered for
exchange pursuant to the Exchange Offer. The Exchange Offer is subject to
certain other customary conditions. See "The Exchange Offer".
On April 29, 1996, the Company issued $155 million principal amount of Old
Notes (the "Offering") pursuant to exemptions from, or in transactions not
subject to, the registration requirements of the Securities Act and applicable
state securities laws.
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 the redemption prices set forth herein
plus accrued interest to the date of redemption with the net proceeds of one or
more Public Equity Offerings (as defined) if 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 the redemption prices set forth herein plus accrued
interest to the date of redemption. Upon a Change of Control (as defined), each
holder of Notes may require the Company to repurchase such Notes at 101% of the
principal amount thereof plus accrued interest to the date of repurchase. See
"Description of the Notes".
The New Notes will constitute, and the Old Notes currently constitute,
general unsecured obligations of the Company, but the payment of the principal
of, premium (if any) and interest on the Notes will be subordinate in right of
payment to the prior payment in full of all Specified Senior Indebtedness (as
defined). After giving pro forma effect to the Refinancing (as defined), as of
December 31, 1995, the Company would have had $112.4 million of Specified Senior
Indebtedness outstanding. The New Notes will rank pari passu in right of payment
with all existing and future senior indebtedness of the Company (other than
Specified Senior Indebtedness), including the Old Notes, and senior in right of
payment to all subordinated indebtedness of the Company issued after the date of
the Offering. Contemporaneously with the closing of the Offering, the Company
entered into a new credit agreement with a group of lenders providing for up to
$175 million of loans (the "New Credit Agreement"). The indebtedness incurred
under the New Credit Agreement, refinancings thereof and certain additional
borrowings tied to a borrowing base constitute all the Specified Senior
Indebtedness of the Company.
For each Old Note accepted for exchange, the Holder of such Old Note will
receive a New Note having a principal amount equal to that of the surrendered
Old Note. The New Notes will bear interest from the most recent date to which
interest has been paid on the Old Notes or, if no interest has been paid on the
Old Notes, from April 29, 1996. Old Notes accepted for exchange will cease to
accrue interest from and after the date of consummation of the Exchange Offer.
Holders of Old Notes whose Old Notes are accepted for exchange will not receive
any payment in respect of accrued interest on such Old Notes. Old Notes not
tendered or not accepted for exchange will continue to accrue interest from and
after the date of consummation of the Exchange Offer.
The New Notes are being offered hereunder in order to satisfy certain
obligations of the Company contained in the Registration Rights Agreement (as
defined). Based on interpretations by the staff of the Securities and Exchange
Commission (the "SEC") as set forth in no-action letters issued to third
parties, the Company believes that New Notes issued pursuant to the Exchange
Offer in exchange for Old Notes may be offered for resale, resold and otherwise
transferred by Holders thereof (other than any Holder which 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 New Notes are acquired in the ordinary course
of such Holders' business and such Holders have no arrangement with any person
to engage in a distribution of such New Notes. However, the SEC has not
considered the Exchange Offer in the context of a no-action letter and there can
be no assurance that the staff of the SEC would make a similar determination
with respect to the Exchange Offer as in such other circumstances. Each Holder,
other than a broker-dealer, must acknowledge that it is not engaged in, and does
not intend to engage in, a distribution of such New Notes and has no arrangement
or understanding to participate in a distribution of New Notes. Each
broker-dealer that receives New 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 New 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 New Notes received in
exchange for Old Notes where such Old Notes were acquired by such broker-dealer
as a result of market-making activities or other trading activities. The Company
has agreed that, for a period of 180 days after the Expiration Date, it will
make this Prospectus available to any broker-dealer for use in connection with
any such resale. See "Plan of Distribution".
The Company will not receive any proceeds from the Exchange Offer. The
Company will pay all the expenses incident to the Exchange Offer. In the event
the Company terminates the Exchange Offer and does not accept for exchange any
Old Notes, the Company will promptly return the Old Notes to the Holders
thereof. See "The Exchange Offer".
There is no existing trading market for the New Notes, and there can be no
assurance regarding the future development of a market for the New Notes. The
Initial Purchasers (as defined) have advised the Company that they currently
intend to make a market in the New Notes. The Initial Purchasers are not
obligated to do so, however, and any market-making with respect to the New Notes
may be discontinued at any time without notice. The Company does not intend to
apply for listing or quotation of the New Notes on any securities exchange or
stock market.
SEE "RISK FACTORS" ON PAGE 11 OF THIS PROSPECTUS FOR A DESCRIPTION OF
CERTAIN RISKS TO BE CONSIDERED BY HOLDERS WHO TENDER THEIR OLD NOTES IN THE
EXCHANGE OFFER.
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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 AUGUST 7, 1996.
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AVAILABLE INFORMATION
The Company has filed with the SEC a registration statement on Form S-4
(herein, together with all amendments and exhibits, referred to as the
"Registration Statement") under the Securities Act with respect to the New Notes
offered hereby. This Prospectus, which forms a part of the Registration
Statement, does not contain all of the information set forth in the Registration
Statement and the exhibits and schedules thereto, certain parts of which are
omitted in accordance with the rules and regulations of the SEC. For further
information with respect to the Company and the New Notes offered hereby,
reference is made to the Registration Statement. Any statements made in this
Prospectus concerning the provisions of certain documents are not necessarily
complete and, in each instance, reference is made to the copy of such document
filed as an exhibit to the Registration Statement otherwise filed with the SEC.
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy statements and other information with the SEC.
The Registration Statement, the exhibits forming a part thereof and the reports,
proxy statements and other information filed by the Company with the SEC in
accordance with the Exchange Act may be inspected, without charge, at the Public
Reference Section of the SEC located at 450 Fifth Street, N.W., Washington, D.C.
20549, and at the Regional Offices of the SEC located at Seven World Trade
Center, 13th Floor, New York, New York 10048 and Citicorp Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60601-2511. Copies of all or any
portion of the material may be obtained from the Public Reference Section of the
SEC upon payment of the prescribed fees. In addition, the Company's common stock
is listed on the New York Stock Exchange and material filed by the Company may
be inspected at the offices of the New York Stock Exchange, 20 Broad Street, New
York, New York 10005.
The Company will furnish holders of the New Notes offered hereby with
annual reports containing, among other information, audited financial statements
certified by an independent public accounting firm and quarterly reports
containing unaudited financial information for the first three quarters of each
fiscal year. The Company will also furnish such other reports as it may
determine or as may be required by law. In addition, in the event that the
Company is not required to be subject to the reporting requirements of the
Exchange Act in the future, the Company will be required under the Indenture,
pursuant to which the Old Notes were, and the New Notes will be, issued, to
continue to file with the SEC, and to furnish Holders of the New Notes with, the
information, documents and other reports specified in Sections 13 and 15(d) of
the Exchange Act.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents which have been filed by the Company (File No.
1-9294) with the SEC are incorporated by reference in this Prospectus:
(a) the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1995;
(b) the Company's Current Report on Form 8-K dated February 22, 1996;
(c) the Company's Current Report on Form 8-K dated April 22, 1996;
(d) the Company's Quarterly Report on Form 10-Q for the quarter ended
March 31, 1996; and
(e) the Company's Current Report on Form 8-K dated July 25, 1996.
All documents filed by the Company pursuant to Section 13(a), 13(c), 14 or
15(d) of the Exchange Act after the date of this Prospectus and prior to the
termination of the Exchange Offer contemplated hereby shall be deemed to be
incorporated by reference in this Prospectus and to be a part hereof from the
date of filing of such documents. Any statement contained in a document
incorporated by reference or deemed to be incorporated by reference herein shall
be deemed to be modified or superseded for all purposes of this Prospectus to
the extent that a statement contained herein or in any subsequently filed
document which also is incorporated or deemed to be incorporated by reference
herein modifies or supersedes such statement. Any such statement so modified or
superseded shall not be deemed, except as so modified or superseded, to
constitute a part of this Prospectus.
The Company will provide without charge to each person to whom a copy of
this Prospectus has been delivered, including any beneficial owner, on the
written or oral request of such person, a copy of any and all of the documents
referred to above which have been or may be incorporated in this Prospectus by
reference, other than exhibits to such documents, unless such exhibits are
specifically incorporated by reference therein. Requests for such copies should
be directed to: Imo Industries Inc., 1009 Lenox Drive, Building Four West,
Lawrenceville, New Jersey, 08648 (telephone number (609) 896-7600), Attention:
Corporate Secretary.
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information and financial statements of
the Company included elsewhere in this Prospectus. References to the business of
the Company refer to the business conducted by the Company (including its
operating divisions) and its wholly owned subsidiaries. Unless otherwise
indicated, industry data contained herein is derived from publicly available
industry trade journals and other publicly available industry sources, which the
Company has not independently verified but which the Company believes to be
reliable.
THE COMPANY
GENERAL
Imo is a diversified multinational corporation that designs, manufactures
and distributes a broad range of engineered industrial products to over 35,000
customers worldwide. With manufacturing plants on four continents, approximately
one-third of the Company's 1995 net sales were generated overseas. The Company
operates through four core business segments:
- POWER TRANSMISSION. The Company produces a wide range of power
transmission and motion control products, including enclosed gear drives,
speed reducers, open gearing components and AC and DC motor controllers.
Imo markets these products principally under the Boston Gear and Fincor
brand names. The Company believes that the segment's emphasis on product
quality, technical assistance and customer service differentiates Imo
from its competitors and allows it to compete effectively in its niche
markets. The Company's ability to make 10:00 a.m. next-day delivery of a
wide variety of Boston Gear products for orders received by 8:00 p.m.
exemplifies its superior customer service.
- PUMPS. The Company believes it is the largest manufacturer of rotary
screw pumps in the world and, according to published industry data, the
IMO brand name is the most recognized brand name for rotary screw pumps.
The Company markets its products, which are used to pump a broad range of
viscous fluids, under both the IMO and Warren brand names. The Company's
pumps (screw, gear and centrifugal) serve a variety of industries,
including naval, commercial marine, power generation, pulp and paper,
elevator, hydrocarbon processing, chemical processing and crude oil.
- INSTRUMENTATION. The Company believes it is a leading manufacturer of a
wide variety of products that perform critical sensing, measurement and
control functions, including level and flow switches, pressure
transducers and liquid level indicators. Imo markets these products
principally under the Gems brand name, which the Company believes is the
most recognized brand name among level and flow switches and liquid level
indicators in North America.
- MORSE CONTROLS. The Company believes it is a leading manufacturer of a
variety of products that position or regulate key control systems of
leisure marine craft and industrial vehicles, including push-pull cable
systems, mechanical, electronic and hydraulic steering systems, and
accelerator, clutch and gear shift controls. Imo markets these products
principally under the Morse, AquaPower and Hynautic brand names.
STRATEGIC REPOSITIONING
After acquiring several diverse businesses in the late 1980's through a
series of debt-financed acquisitions, management in 1992 determined to reduce
debt through the sale of certain businesses. Pursuant to this decision, the
Company divested its Heim Bearings, Aerospace, Barksdale Controls and CEC
Instruments businesses. In September 1993, Donald Farrar joined the Company as
its Chief Executive Officer. Under Mr. Farrar, the Company adopted a strategy to
reposition itself by focusing on its less capital intensive businesses with
market leadership, strong brand name recognition and a broad customer base that
was less dependent on U.S. Government sales. In connection with this strategy,
the Company divested its
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Turbomachinery business and most of its Electro-Optical Systems business. This
repositioning will be completed upon the sale of the Company's Roltra-Morse
business and the Electronic Systems division of the Company's Electro-Optical
Systems business, each of which is expected to occur in 1996. Since January 1,
1993, after giving effect to the Refinancing, Imo will have reduced its debt by
approximately $180 million. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations".
Concurrent with the repositioning, the Company initiated a program to
reduce its cost structure by consolidating operations, eliminating duplicative
functions and streamlining operating processes. These efforts, which the Company
intends to continue, have contributed significantly to a reduction in general
and administrative expenses and in the overall number of employees at Imo's core
businesses.
BUSINESS STRATEGY
The Company plans to continue to focus on its four core businesses, each of
which has the benefit of a strong leadership position in one or more niche
markets, high brand recognition, a track record of superior customer service and
responsive technical support, an extensive sales and distribution network and an
established customer base in a broad variety of industries. Having substantially
repositioned the Company and strengthened its balance sheet, management believes
that Imo is well positioned to exploit further its business strengths and to
achieve increased growth and improved profitability. Additionally, the Company
has initiated a new corporate identity program designed to strengthen name
recognition of its four core business segments. Set forth below are the key
elements of the Company's business strategy.
- Concentration on Niche Markets. Each of Imo's core businesses has strong
market positions in selected niche markets. This allows Imo to develop
expertise in its particular markets and in the distinctive needs of
customers in those markets. The Company believes that this expertise,
together with its demonstrated customer service and technical support
capabilities, differentiate Imo from its competitors.
- Consolidation into Focused Business Segments. To improve its current
business performance and position itself to take full advantage of
emerging global opportunities, the Company has consolidated thirteen
previously distinct and independent operating divisions into four focused
business segments. Each segment operates as a strategic global business
unit with a single senior manager accountable for the entire segment's
results, which better positions the Company to cross-sell products across
geographical lines and fully utilize its existing strong sales and
distribution channels.
- Continued Cost Controls. Management is committed to continued
improvement in the Company's cost structure, and Imo's realignment into
four business segments facilitates further cost-cutting measures designed
to improve operating margins.
- Customer Service and Responsiveness. The Company believes it is a market
leader in providing superior customer service and responsiveness. In the
power transmission industry, Imo has distinguished itself with its
ability to ship orders the day they are received. In 1995, approximately
62% of Boston Gear's sales were shipments of orders received that same
day. In addition, the Company's Gems Sensors division offers engineering
support to customize products for thousands of applications. In 1995,
Gems Sensors was able to ship 70% of its orders within 24 hours despite
this exacting process.
- Product Line Extensions and New Product Development. Imo historically
has increased its sales through the development of new products and the
extension of existing products to address new applications. In 1995, Imo
introduced 24 new products and 94 enhanced products for customers in a
broad range of industries. Many of these products were designed in
cooperation with a specific customer and for a new application. With over
150 employees dedicated to research and development and product
engineering, the Company intends to provide its customers with superior
technical support and to continue to develop new and enhanced products
that the Company believes offer attractive expected returns.
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- Penetration of Emerging Markets. The Company intends to aggressively
market its products in the emerging growth markets of the Pacific Rim and
Latin America. Accordingly, the Company recently opened sales offices in
Singapore and Venezuela and since 1994 has hired five new salespersons
and 13 new distributors to market the Company's products throughout the
Pacific Rim and Latin America.
- Strategic Acquisitions and Alliances. The Company intends to supplement
its internal growth with strategic alliances or acquisitions of products
or businesses that enhance its technological capabilities, expand its
geographical coverage, complement existing product portfolios or can be
leveraged through current sales channels.
The Company's principal executive offices are located at 1009 Lenox Drive,
Lawrenceville, New Jersey 08648. Imo's telephone number is (609) 896-7600.
THE EXCHANGE OFFER
On April 29, 1996, the Company issued $155 million principal amount of Old
Notes. The Old Notes were sold pursuant to exemptions from, or in transactions
not subject to, the registration requirements of the Securities Act and
applicable state securities laws. CS First Boston Corporation, Citicorp
Securities, Inc. and Lehman Brothers Inc. (the "Initial Purchasers"), as a
condition to their purchase of the Old Notes, required that the Company agree to
commence the Exchange Offer following the offering of the Old Notes. The New
Notes will evidence the same class of debt as the Old Notes and will be issued
pursuant to, and entitled to the benefits of, the Indenture. As used herein, the
term "Notes" means the Old Notes and the New Notes, treated as a single class.
Securities Offered............... Up to $155,000,000 aggregate principal
amount of the Company's 11 3/4% Senior
Subordinated Notes Due 2006, which have
been registered under the Securities Act
(the "New Notes"). The terms of the New
Notes and the Old Notes are identical in
all material respects, except for certain
transfer restrictions relating to the Old
Notes.
The Exchange Offer............... The New Notes are being offered in exchange
for a like principal amount of Old Notes.
The issuance of the New Notes is intended
to satisfy obligations of the Company
contained in the Registration Rights
Agreement, dated April 23, 1996, among the
Company and the Initial Purchasers (the
"Registration Rights Agreement"). For
procedures for tendering the Old Notes
pursuant to the Exchange Offer, see "The
Exchange Offer".
Tenders, Expiration Date;
Withdrawal....................... The Exchange Offer will expire at 5:00
P.M., New York City time, on September 6,
1996, or such later date and time to which
it is extended (as so extended, the
"Expiration Date"). A tender of Old Notes
pursuant to the Exchange Offer may be
withdrawn at any time prior to the
Expiration Date. Any Old Note not accepted
for exchange for any reason will be
returned without expense to the tendering
Holder thereof as promptly as practicable
after the expiration or termination of the
Exchange Offer.
Federal Income Tax
Consequences..................... The exchange pursuant to the Exchange Offer
should not result in any income, gain or
loss to the holders or the Company for
federal income tax purposes. See "Certain
U.S. Income Tax Consequences."
Use of Proceeds.................. There will be no proceeds to the Company
from the exchange pursuant to the Exchange
Offer.
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Exchange Agent................... IBJ Schroder Bank & Trust Company is
serving as the Exchange Agent in connection
with the Exchange Offer.
Shelf Registration Statement..... Under certain circumstances described in
the Registration Rights Agreement, certain
holders of Notes (including holders who are
not permitted to participate in the
Exchange Offer or who may not freely resell
New Notes received in the Exchange Offer)
may require the Company to file, and use
best efforts to cause to become effective,
a shelf registration statement under the
Securities Act, which would cover resales
of Notes by such holders. See "Description
of Notes -- Exchange Offer; Registration
Rights".
Conditions to the Exchange
Offer............................ The Exchange Offer is not conditioned on
any minimum principal amount of Old Notes
being tendered for exchange. The Exchange
Offer is subject to certain other customary
conditions, each of which may be waived by
the Company. See "The Exchange Offer --
Conditions".
CONSEQUENCES OF EXCHANGING OLD NOTES
Holders of Old Notes who do not exchange their Old Notes for New Notes
pursuant to the Exchange Offer will continue to be subject to the restrictions
on transfer of such Old Notes as set forth in the legend thereon as a
consequence of the issuance of the Old Notes pursuant to exemptions from, or in
transactions not subject to, the registration requirements of the Securities Act
and applicable state securities laws. In general, the Old Notes may not be
offered or sold, unless registered under the Securities Act, except pursuant to
an exemption from, or in a transaction not subject to, the Securities Act and
applicable state securities laws. The Company does not currently anticipate that
it will register Old Notes under the Securities Act. See "Description of the
Notes -- Exchange Offer; Registration Rights". Based on interpretations by the
staff of the SEC, as set forth in no-action letters issued to third parties, the
Company believes that New Notes issued pursuant to the Exchange Offer in
exchange for Old Notes may be offered for resale, resold or otherwise
transferred by holders thereof (other than any holder which 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 New Notes are acquired in the ordinary course
of such holders' business and such holders, other than broker-dealers, have no
arrangement with any person to participate in the distribution of such New
Notes. However, the SEC has not considered the Exchange Offer in the context of
a no-action letter and there can be no assurance that the staff of the SEC would
make a similar determination with respect to the Exchange Offer as in such other
circumstances. Each Holder, other than a broker-dealer, must acknowledge that it
is not engaged in, and does not intend to engage in, a distribution of such New
Notes and has no arrangement or understanding to participate in a distribution
of New Notes. Each broker-dealer that receives New Notes for its own account in
exchange for Old Notes must acknowledge that such Old Notes were acquired by
such broker-dealer as a result of market-making activities or other trading
activities and that it will deliver a prospectus in connection with any resale
of such New Notes. See "Plan of Distribution". In addition, to comply with the
securities laws of certain jurisdictions, it may be necessary to qualify for
sale or register thereunder the New Notes prior to offering or selling such New
Notes. The Company has agreed, pursuant to the Registration Rights Agreement,
subject to certain limitations specified therein, to register or qualify the New
Notes for offer or sale under the securities laws of such jurisdictions as any
holder reasonably requests in writing. Unless a holder so requests, the Company
does not intend to register or qualify the sale of the New Notes in any such
jurisdictions. See "Risk Factors -- Consequences of Failure to Exchange" and
"The Exchange Offer -- Consequences of Exchanging Old Notes".
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SUMMARY DESCRIPTION OF THE NEW NOTES
The terms of the New Notes and the Old Notes are identical in all material
respects, except for certain transfer restrictions relating to the Old Notes. If
the Exchange Offer is not consummated by September 26, 1996, the Notes will bear
additional interest of 0.50% per annum from and including September 26, 1996
until but excluding the date of consummation of the Exchange Offer. The New
Notes will bear interest from the most recent date to which interest has been
paid on the Old Notes or, if no interest has been paid on the Old Notes, from
April 29, 1996. Accordingly, registered holders of New Notes on the relevant
record date for the first interest payment date following the consummation of
the Exchange Offer will receive interest accruing from the most recent date to
which interest has been paid on the Old Notes or, if no interest has been paid,
from April 29, 1996. Old Notes accepted for exchange will cease to accrue
interest from and after the date of consummation of the Exchange Offer. Holders
whose Old Notes are accepted for exchange will not receive any payment in
respect of interest on such Old Notes otherwise payable on any interest payment
date the record date for which occurs on or after consummation of the Exchange
Offer.
Securities Offered............... Up to $155,000,000 aggregate principal
amount of the New Notes.
Maturity Date.................... May 1, 2006.
Interest Payment Dates........... November 1 and May 1 of each year,
commencing November 1, 1996.
Optional Redemption.............. 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 the
redemption price set forth herein plus
accrued interest to the date of redemption
with the net proceeds of one or more Public
Equity Offerings if 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 the
redemption prices set forth herein plus
accrued interest to the date of redemption.
See "Description of the Notes -- Optional
Redemption".
Change of Control................ Upon a Change of Control, each Holder of
Notes may require the Company to repurchase
the Notes held by such Holder at 101% of
the principal amount thereof plus accrued
interest to the date of repurchase. See
"Description of the Notes -- Change of
Control".
Ranking.......................... The Old Notes currently constitute, and the
New Notes will constitute, general
unsecured obligations of the Company, but
the payment of the principal of, and
premium (if any) and interest on the Notes
will be subordinate in right of payment to
the prior payment in full of all Specified
Senior Indebtedness. As of December 31,
1995, after giving effect to the
Refinancing, the Company would have had
$112.4 million of Specified Senior
Indebtedness outstanding. The Notes will
rank pari passu in right of payment with
all existing and future senior indebtedness
of the Company (other than Specified Senior
Indebtedness) and senior in right of
payment to all subordinated indebtedness of
the
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Company issued after the Offering. See
"Description of the Notes -- Ranking".
Restrictive Covenants............ The Indenture limits (a) the incurrence of
additional indebtedness by the Company, (b)
the incurrence of indebtedness and issuance
of preferred stock by the Company's
subsidiaries, (c) the payment of dividends
on capital stock of the Company and the
purchase, redemption or retirement of
capital stock or subordinated indebtedness,
(d) certain transactions with affiliates,
(e) the incurrence of liens, (f) sale and
lease-back transactions, (g) sales of
assets, including capital stock of
subsidiaries and (h) certain consolidations
and mergers. The Indenture also prohibits
certain restrictions on distributions from
subsidiaries. All of these limitations and
prohibitions, however, are subject to a
number of important qualifications. See
"Description of the Notes -- Certain
Covenants".
Use of Proceeds.................. The Company will not receive any proceeds
from the Exchange Offer. The net proceeds
of the Offering, together with certain
proceeds from the initial borrowings under
the New Credit Agreement, were used to
redeem all of the Company's $220 million in
aggregate principal amount of subordinated
debentures (the "Old Debentures") and to
pay related interest, fees and expenses.
The consummation of the Offering and the
application of the net proceeds therefrom
and the initial borrowings under the New
Credit Agreement and the application of the
proceeds therefrom are collectively
referred to herein as the "Refinancing".
Exchange Offer; Registration
Rights........................... Holders of New Notes (other than as set
forth below) are not entitled to any
registration rights with respect to the New
Notes. Pursuant to the Registration Rights
Agreement, the Company has agreed, for the
benefit of the Holders of Old Notes, to
file an exchange offer registration
statement. The Registration Statement of
which this Prospectus is a part constitutes
the exchange offer registration statement
referred to therein. Under certain
circumstances described in the Registration
Rights Agreement, certain Holders of Notes
(including Holders who may not participate
in the Exchange Offer or who may not freely
resell New Notes received in the Exchange
Offer) may require the Company to file, and
use best efforts to cause to become
effective, a shelf registration statement
under the Securities Act, which would cover
resales of Notes by such Holders. See
"Description of the Notes -- Exchange
Offer; Registration Rights".
RISK FACTORS
Holders of the Old Notes should consider carefully the information set
forth under the caption "Risk Factors" and all other information set forth in
this Prospectus.
6
<PAGE> 9
RECENT DEVELOPMENTS
In January 1996, the Company's Board of Directors determined to sell the
Company's Italian-based Roltra-Morse unit, a supplier of latches, door panels,
flexible cable, window controls and other components for automobiles, and the
Company currently is actively pursuing buyers for this business. Accordingly,
the operating results of Roltra-Morse have been segregated from the historical
results of the Company's operations and have been reported as a discontinued
operation in the audited Consolidated Financial Statements of the Company
included elsewhere in this Prospectus. In addition, the remaining operation of
the Company's Electro-Optical Systems business continues to be marketed to
interested parties. See Notes 2 and 15 to the Consolidated Financial Statements
of the Company for additional information regarding the proposed divestitures
and other recently completed divestitures accounted for as discontinued
operations.
On April 18, 1996, the Company reported results for the quarter ended March
31, 1996. The Company reported net income from continuing operations for the
first quarter of 1996 of $2.7 million, compared to $2.6 million in the first
quarter of 1995. The Company's net sales from continuing operations for the
first quarter of 1996 increased to $99.4 million, an increase of 4% from the
first quarter of 1995. Operating income from the Company's four core business
segments was $11.1 million for the first quarter of 1996, an increase of 8% from
the comparable quarter in 1995.
Sales in the Power Transmission segment were $23.7 million for the first
quarter of 1996, a decrease of 9% from the first quarter of 1995. Operating
income in this segment was $2.8 million, compared to $3.6 million in the first
quarter of 1995.
Sales in the Pumps segment were $26.3 million for the first quarter of
1996, an increase of 19% from the first quarter of 1995. Operating income in
this segment was $3.5 million, an increase of 43% from the first quarter of
1995.
Sales in the Instrumentation segment were $19.4 million for the first
quarter of 1996, an increase of 5% from the first quarter of 1995. Operating
income in this segment was $2.1 million, an increase of 25% from the first
quarter of 1995.
Sales in the Morse Controls segment were $30 million for the first quarter
of 1996, an increase of 3% from the first quarter of 1995. Operating income in
this segment was $2.7 million, an increase of 7% from the first quarter of 1995.
Additional financial data and discussion regarding the operating results
for the first quarter of 1996 are contained herein under "Summary Historical
Consolidated Financial Data," "Selected Historical Consolidated Financial Data,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Consolidated Financial Statements of the Company beginning
on page F-1. Certain financial data and a discussion regarding the operating
results for the second quarter of 1996 are contained in the Company's Current
Report on Form 8-K dated July 25, 1996 filed with the SEC, which is incorporated
herein by reference, and a copy of which can be obtained as set forth under
"Available Information."
7
<PAGE> 10
SUMMARY HISTORICAL CONSOLIDATED FINANCIAL DATA
The following table sets forth certain historical consolidated financial
data for the Company for each of the fiscal years indicated in the five year
period ended December 31, 1995, and the three month periods ended March 31, 1996
and 1995. The summary historical consolidated financial data for each of the
five years ended December 31, 1995 are derived from the audited Consolidated
Financial Statements of the Company and should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the audited Consolidated Financial Statements of the Company
included elsewhere in this Prospectus. The accompanying unaudited consolidated
financial statements have been prepared in accordance with generally accepted
accounting principles for interim financial information. In the opinion of
management, all adjustments (consisting only of normal recurring accruals)
considered necessary for a fair presentation have been included. The results of
any interim period are not necessarily indicative of the results to be expected
for the full year.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
---------------------------------------------------- -----------------
1991(A) 1992(A) 1993(A) 1994(A) 1995
1995(A) 1996
------- -------
(UNAUDITED)
-------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales:
Power Transmission............................. $ 88,255 $ 86,901 $ 85,906 $ 93,308 $ 95,075 $26,115 $23,697
Pumps.......................................... 101,929 98,325 91,556 90,428 94,375 22,062 26,346
Instrumentation................................ 80,125 80,110 72,434 72,226 76,113 18,479 19,350
Morse Controls................................. 78,816 85,724 90,876 100,075 107,664 29,228 30,019
-------- -------- -------- -------- -------- -------- --------
Core operations.......................... 349,125 351,060 340,772 356,037 373,227 95,884 99,412
Other (sold businesses)........................ 128,913 111,858 75,754 4,748 -- -- --
-------- -------- -------- -------- -------- -------- --------
Total net sales.......................... 478,038 462,918 416,526 360,785 373,227 95,884 99,412
Segment operating income(b)(c):
Power Transmission............................. 1,031 574 2,338 8,905 11,348 3,608 2,766
Pumps.......................................... 10,376 8,371 10,357 10,447 9,884 2,424 3,466
Instrumentation................................ 11,295 9,318 7,951 9,791 6,746 1,718 2,145
Morse Controls................................. 119 (2,077) 457 5,743 5,292 2,550 2,733
-------- -------- -------- -------- -------- -------- --------
Core operations.......................... 22,821 16,186 21,103 34,886 33,270 10,300 11,110
Other (sold businesses)........................ 12,007 (8,739) 886 (216) -- -- --
-------- -------- -------- -------- -------- -------- --------
Total segment operating income........... 34,828 7,447 21,989 34,670 33,270 10,300 11,110
Corporate expense and equity income(b)(c)........ (8,856) (9,005) (13,638) (5,120) (12,152) (1,067) (1,206)
Interest income(d)............................... 1,445 583 511 1,592 1,980 805 397
Interest expense................................. (38,390) (38,186) (33,341) (29,168) (25,860) (6,571) (6,970)
-------- -------- -------- -------- -------- -------- --------
Income (loss) from continuing operations before
taxes, extraordinary item and cumulative
accounting change.............................. (10,973) (39,161) (24,479) 1,974 (2,762) 3,467 3,331
Net income (loss)................................ 11,411 (82,590) (270,566) 3,931 29,710 39,023 2,704
OTHER DATA:
Net sales (core operations):
Sales to non-U.S. government customers......... $299,934 $309,749 $299,077 $322,241 $348,005
Percent growth (decline)..................... 3.3% (3.4)% 7.7% 8.0%
Sales to U.S. government customers............. 49,191 41,311 41,695 33,796 25,222
Percent growth (decline)..................... (16.0)% 0.9% (18.9)% (25.4)%
-------- -------- -------- -------- --------
Total net sales -- core operations....... 349,125 351,060 340,772 356,037 373,227
Depreciation and amortization(e)................. 18,469 18,573 17,536 15,190 14,144 3,731 3,517
Capital expenditures............................. 11,341 10,037 6,343 6,025 14,600 6,515 1,108
EBITDA(f)........................................ 45,886 17,598 26,398 46,332 37,242 13,769 13,818
Ratio of EBITDA to interest expense.............. 1.2x 0.5x 0.8x 1.6x 1.4x 2.1x 2.0x
Pro forma interest expense(g).................... 27,032 6,737 6,728
Ratio of EBITDA to pro forma interest
expense(h)..................................... 1.4x 2.0x 2.1x
Ratio of earnings to fixed charges............... (i) (i) (i) 1.1x (i) 1.5x 1.4x
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1996
DECEMBER 31, 1995 -------------------------
-------------------------
ACTUAL AS ADJUSTED ACTUAL AS ADJUSTED
--------- -----------
(UNAUDITED)
--------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
BALANCE SHEET DATA (AT PERIOD END):
Working capital...................................... $ 80,977 $ 93,727(j) $ 87,974 $ 99,624(j)
Total assets......................................... 383,887 397,910(k) 387,805 398,474(k)
Long-term debt (including current portion)........... 246,607 275,758(l) 250,604 278,655(l)
Shareholders' equity................................. 6,884 (1,904)(m) 9,182 712(m)
</TABLE>
8
<PAGE> 11
- ---------------
(a) Reclassified to conform to current year presentation.
(b) Segment operating income and Corporate expense include unusual charges in
1992, 1993 and 1995, as follows.
<TABLE>
<CAPTION>
1992 1993 1995
----- ----- ----
(IN MILLIONS)
<S> <C> <C> <C>
Power Transmission................................................. $ 0.2 $ 0.2 $--
Pumps.............................................................. 0.1 0.5 --
Instrumentation.................................................... 0.1 0.9 0.9
Morse Controls..................................................... 0.3 2.4 1.5
--- ---- ----
Core Operations............................................ 0.7 4.0 2.4
Other (sold businesses)............................................ 16.0 4.1 --
--- ---- ----
Total segment operating income..................................... 16.7 8.1 2.4
Corporate Expense.................................................. -- 6.2 6.6
--- ---- ----
$16.7 $14.3 $9.0
=== ==== ====
</TABLE>
(c) The unusual charges in 1992, 1993 and 1995 are comprised of the following
items:
<TABLE>
<CAPTION>
1992 1993 1995
----- ----- ----
(IN MILLIONS)
<S> <C> <C> <C>
Restructuring charges.............................................. $ -- $ 5.2 $4.0
Write-down of non-operating assets to net realizable value......... -- 10.1 5.0
Debt related financing fees........................................ -- 5.0 --
Litigation, warranty and claims settlements........................ 16.7 (6.0) --
--- ---- ----
Unusual items.............................................. $16.7 $14.3 $9.0
=== ==== ====
</TABLE>
(d) Interest income for 1995 and 1996 primarily represents interest earned on
the deferred purchase price of the sale of the Turbomachinery business
segment. Interest on the deferred purchase price will continue to be earned
through 2000 (See Note 2 to the audited Consolidated Financial Statements
included elsewhere in this Prospectus). Interest income in 1994 includes
interest earned on proceeds from asset divestitures.
(e) Excludes amortization of deferred financing costs reflected as a component
of interest expense.
(f) EBITDA consists of net income plus income taxes, interest expense,
depreciation and amortization. However, EBITDA excludes (i) income (or loss)
from discontinued operations, (ii) extraordinary item and (iii) cumulative
accounting change. EBITDA is presented because it is a widely accepted
financial indicator of a company's ability to incur and service debt and
relates to debt covenants under the New Credit Agreement. EBITDA should not
be considered by investors as an alternative to operating income, as an
indicator of the Company's operating performance or as an alternative to
cash flows as a measure of liquidity or any other measure of performance
under generally accepted accounting principles ("GAAP"). See page F-4 for
cash flow information related to operating, investing and financing
activities.
(g) Pro forma interest expense gives effect to the Refinancing as if it had
occurred on January 1, 1995 for the year ended December 31, 1995, and on
January 1, 1996, in the case of the three months ended March 31, 1996. The
components are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED MARCH 31,
DECEMBER 31, 1995 1995 1996
AS ADJUSTED
AS ADJUSTED (UNAUDITED)
----------------- ---------------------
(IN THOUSANDS)
<S> <C> <C> <C>
Pro forma interest expense:
New Credit Agreement
Revolving Credit Facility............................ $ 588 $ 147 $ 147
Term Loan A Facility................................. 2,000 500 500
Term Loan B Facility................................. 2,975 744 744
Term Loan C Facility................................. 3,825 956 956
11 3/4% Senior Subordinated Notes Due 2006............. 18,213 4,553 4,553
Amortization of original issue discount on 11 3/4%
Senior Subordinated Notes Due 2006................... 223 56 56
Bank fees.............................................. 300 75 75
Notes payable.......................................... 722 180 175
Other.................................................. 756 171 167
------- ------ ------
29,602 7,382 7,373
Amortization of deferred loan costs.................... 1,218 305 305
Roltra-Morse........................................... 3,103 550 819
------- ------ ------
Gross interest expense................................. 33,923 8,237 8,497
GAAP adjustments for discontinued operations:
Roltra-Morse......................................... (3,103) (550) (819)
Allocation to discontinued operations................ (3,788) (950) (950)
------- ------ ------
Pro forma interest expense....................... $27,032 $6,737 $6,728
================= ====== ======
</TABLE>
The above calculations assume interest rates of 8.0% for the revolving credit
facility and the Term Loan A Facility, 8.5% for the Term Loan B Facility and
the Term Loan C Facility, and 11.75% for the Notes. Pursuant to GAAP,
interest expense of approximately $3.8 million annually was allocated to
discontinued operations based on the ratio of the estimated net assets of
discontinued operations to the sum of the Company's shareholders' equity, if
positive, and outstanding debt as of year end.
9
<PAGE> 12
(h) The ratio of EBITDA to pro forma interest expense is computed differently
than the Consolidated Coverage Ratio (as defined) contained in the
Indenture. On a pro forma basis after giving effect to the Refinancing, the
Consolidated Coverage Ratio would have been 1.5x.
(i) Earnings were insufficient to cover fixed charges in the amounts of $11.6
million, $39.5 million, $24.2 million and $2.6 million in 1991, 1992, 1993
and 1995, respectively.
(j) Adjusted to reflect increase in cash of $6.4 million and a reduction in
accrued interest expense of $6.3 million as of December 31, 1995. Adjusted
to reflect increase in cash of $2.7 million and a reduction in accrued
interest expense of $8.9 million as of March 31, 1996.
(k) Adjusted to reflect increase in cash of $6.4 million and net increase in
deferred financing fees of $7.6 million as of December 31, 1995. Adjusted to
reflect increase in cash of $2.7 million and net increase in deferred
financing fees of $7.9 million as of March 31, 1996.
(l) Adjusted to reflect new borrowings of $267.4 million, net of repayment of
$18.2 million in outstanding borrowings under the Credit Agreement, dated as
of August 5, 1994, as amended (the "Old Credit Agreement"), and the
redemption of $220 million in aggregate principal amount of the Old
Debentures as of December 31, 1995. Adjusted to reflect new borrowings of
$267.4 million, net of repayment of $19.3 million in outstanding borrowings
under the Old Credit Agreement, and the redemption of $220 million in
aggregate principal amount of the Old Debentures as of March 31, 1996.
(m) Adjusted to reflect extraordinary charge of $8.8 million as a result of the
extinguishment of debt as of December 31, 1995. Adjusted to reflect
extraordinary charge of $8.5 million as a result of the extinguishment of
debt as of March 31, 1996.
10
<PAGE> 13
RISK FACTORS
Holders of the Old Notes should consider carefully all of the information
set forth in this Prospectus and, in particular, should evaluate the following
risks before tendering their Old Notes in the Exchange Offer, although the risk
factors set forth below (other than "-- Consequences of Failure to Exchange")
are generally applicable to the Old Notes as well as the New Notes.
CONSEQUENCES OF FAILURE TO EXCHANGE OLD NOTES
Holders of Old Notes who do not exchange their Old Notes for New Notes
pursuant to the Exchange Offer will continue to be subject to the provisions in
the Indenture regarding transfer and exchange of the Old Notes and the
restrictions on transfer of such Old Notes as set forth in the legend thereon as
a consequence of the issuance of the Old Notes pursuant to exemptions from, or
in transactions not subject to, the registration requirements of the Securities
Act and applicable state securities laws. In general, the Old Notes may not be
offered or sold, unless registered under the Securities Act and applicable state
securities laws. The Company does not currently anticipate that it will register
Old Notes under the Securities Act. See "Description of the Notes -- Exchange
Offer; Registration Rights". Based on interpretations by the staff of the SEC,
as set forth in no-action letters issued to third parties, the Company believes
that New Notes issued pursuant to the Exchange Offer in exchange for Old Notes
may be offered for resale, resold or otherwise transferred by holders thereof
(other than any such holder which 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 New Notes are acquired in the ordinary course or such holders'
business and such holders, other than broker-dealers, have no arrangement or
understanding with any person to participate in the distribution of such New
Notes. However, the SEC has not considered the Exchange Offer in the context of
a no-action letter and there can be no assurance that the staff of the SEC would
make a similar determination with respect to the Exchange Offer as in such other
circumstances. Each Holder, other than a broker-dealer, must acknowledge that it
is not engaged in, and does not intend to engage in, a distribution of such New
Notes and has no arrangement or understanding to participate in a distribution
of New Notes. If any Holder is an affiliate of the Company or is engaged in or
intends to engage in or has any arrangement or understanding with respect to the
distribution of the New Notes to be acquired pursuant to the Exchange Offer,
such Holder (i) may not rely on the applicable interpretations of the staff of
the SEC and (ii) must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with any resale transaction.
Each broker-dealer that receives New Notes for its own account in exchange for
Old Notes pursuant to the Exchange Offer must acknowledge that such Old Notes
were acquired by such broker-dealer as a result of market-making activities or
other trading activities and that it will deliver a prospectus in connection
with any resale of such New 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 New Notes received in
exchange for Old Notes where such Old Notes were acquired by such broker-dealer
as a result of market-making activities or other trading activities. The Company
has agreed that, for a period of 180 days after the Expiration Date, it will
make this Prospectus available to any broker-dealer for use in connection with
any such resale. See "Plan of Distribution". In addition, to comply with the
securities laws of certain jurisdictions, if applicable, the New Notes may not
be offered or sold unless they have been registered or qualified for sale in
such jurisdictions or an exemption from registration or qualification is
available and is complied with. The Company has agreed, pursuant to the
Registration Rights Agreement, subject to certain limitations specified therein,
to register or qualify the New Notes for offer or sale under the securities laws
of such jurisdictions as any holder reasonably requests in writing. Unless a
holder so requests, the Company does not currently intend to register or qualify
the sale of the New Notes in any such jurisdictions. See "The Exchange Offer".
SUBSTANTIAL LEVERAGE; ABILITY TO SERVICE DEBT
The Company has outstanding a significant amount of indebtedness relative
to its total capitalization. At March 31, 1996, after giving effect to the
Refinancing, the Company's total pro forma consolidated indebtedness would have
been approximately $286 million and the Company's ratio of total long-term
indebtedness to total capitalization would have been 0.97 to 1.0. See
"Capitalization". This substantial indebtedness will have important consequences
to Holders, including the following: (a) the Company will have significant cash
requirements to service debt (including substantial principal payments required
under
11
<PAGE> 14
the New Credit Agreement beginning in July 1996), reducing funds available for
operations and future business opportunities and increasing the Company's
vulnerability to adverse general economic and industry conditions; (b) the
Company may be restricted in the future from obtaining additional financing,
whether for capital expenditures, working capital or other general corporate
purposes; (c) the Company will be required to comply with certain financial
covenants and other restrictions contained in the New Credit Agreement and the
Indenture, certain of which become more restrictive with the passage of time;
and (d) to the extent that the Company incurs indebtedness under the New Credit
Agreement, which indebtedness will be at variable rates, the Company will be
vulnerable to increases in interest rates.
The ability of the Company to meet its debt service obligations will depend
on the future operating performance and financial results of the Company, which
will be subject in part to factors beyond the control of the Company. Although
management believes that the Company's cash flow will be adequate to meet its
interest and principal payment obligations, there can be no assurance that the
Company will generate earnings in the future sufficient to cover its fixed
charges. If the Company is unable to generate earnings in the future sufficient
to cover its fixed charges and is unable to borrow sufficient funds under either
the New Credit Agreement or from other sources, it may be required to refinance
all or a portion of its existing debt (including the Notes) or to sell all or a
portion of its assets. There can be no assurance that a refinancing would be
possible, nor can there be any assurance as to the timing of any asset sales or
the proceeds which the Company could realize therefrom. In addition, the terms
of the New Credit Agreement and the Indenture restrict the Company's ability to
sell assets and the Company's use of the proceeds therefrom. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources".
If for any reason, including a shortfall in anticipated operating results
or proceeds from asset sales, the Company were unable to meet its debt service
obligations, it would be in default under the terms of its indebtedness. In the
event of such a default, the holders of such indebtedness could elect to declare
all of such indebtedness immediately due and payable, including accrued and
unpaid interest, and to terminate their commitments (if any) with respect to
future funding obligations. In addition, such holders could proceed against
their collateral (if any) which, in the case of certain indebtedness, consists
of the common stock of certain subsidiaries of the Company. Any default with
respect to any of the Company's indebtedness could result in a default under
other indebtedness or result in a bankruptcy of the Company. Such defaults could
and any bankruptcy of the Company would result in a default under the Indenture
and could delay or preclude payment of principal of, or interest on, the Notes.
See "-- Ranking of the Notes".
OPERATING LOSSES
For the years ended December 31, 1992 and 1993, the Company suffered losses
from continuing operations of approximately $25 million and $38 million,
respectively. The Company had income from continuing operations of approximately
$.2 million and $12 million (which included a $17 million benefit from a tax
valuation allowance adjustment) for the years ended December 31, 1994 and 1995,
respectively. In addition, in 1995, the Company did not generate sufficient
earnings to meet its interest and principal payments. There can be no assurance
that the Company will not experience losses in the future or be able to generate
earnings in the future sufficient to meet its interest and principal payments.
See "-- Substantial Leverage; Ability to Service Debt" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations".
RANKING OF THE NOTES
The indebtedness evidenced by the Notes will constitute general unsecured
obligations of the Company, but the payment of the principal of and premium (if
any) and interest on the Notes will be subordinate in right of payment, as set
forth in the Indenture, to the prior payment in full of all Specified Senior
Indebtedness. Specified Senior Indebtedness is defined under "Description of the
Notes -- Certain Definitions", but generally includes only indebtedness under
the New Credit Agreement, refinancings thereof and certain additional borrowings
tied to the amount of the Company's then existing account receivables and
inventory. The principal amount of Specified Senior Indebtedness will be limited
initially to $175 million, will decrease if and when principal payments are made
under the term loan provisions of the New Credit Agreement and may increase to
the extent the borrowing base of the Company and its subsidiaries exceeds $70
million. The Notes will in all respects rank pari passu in right of payment with
all existing and future Senior Indebtedness (as defined) of the Company (other
than Specified Senior Indebtedness) and will be senior in right of payment to
all subordinated indebtedness of the Company issued after the Offering.
12
<PAGE> 15
As of March 31, 1996, after giving pro forma effect to the Refinancing, the
Company's Specified Senior Indebtedness would have been approximately $112.4
million, the Company would have been able to incur an additional $62.6 million
of Specified Senior Indebtedness and the Company's total Senior Indebtedness
(including the Notes) would have been approximately $267.4 million. Although the
Indenture contains limitations on the amount of additional indebtedness that the
Company may incur, the amount of such indebtedness could be substantial under
certain circumstances and, in certain cases, such indebtedness may be secured.
See "Description of the Notes -- Certain Covenants -- Limitation on
Indebtedness" and "-- Limitation on Indebtedness and Preferred Stock of
Restricted Subsidiaries".
A portion of the operations of the Company are conducted through its
subsidiaries. Claims of creditors of any subsidiaries, including trade
creditors, secured creditors and creditors holding indebtedness and guarantees
issued by such subsidiaries, and claims of preferred stockholders (if any) of
such subsidiaries generally will have priority with respect to the assets and
earnings of such subsidiaries over the claims of creditors of the Company,
including holders of the Notes, even if such obligations do not constitute
Specified Senior Indebtedness. In addition, the Specified Subsidiaries have
guaranteed all of the obligations of the Company under the New Credit Agreement,
which guarantees are secured by substantially all of the assets of the Specified
Subsidiaries. In certain limited circumstances, the Notes may be guaranteed by
certain future subsidiaries of the Company. Any such guarantees, however, will
be subordinate in right of payment to any Specified Senior Indebtedness of such
subsidiaries. See "Description of the Notes -- Certain Covenants -- Future
Guarantors". At December 31, 1995, and after giving effect to the Refinancing,
the total liabilities of the Company's subsidiaries (other than guarantees by
the Specified Subsidiaries of obligations under the New Credit Agreement) would
have been approximately $116 million, including trade payables. Although the
Indenture limits the incurrence of indebtedness and the issuance of preferred
stock of certain subsidiaries, such limitation is subject to a number of
significant qualifications. Moreover, the Indenture does not impose any
limitation on the incurrence by subsidiaries of liabilities that are not
considered indebtedness under the Indenture. See "Description of the
Notes -- Certain Covenants -- Limitation on Indebtedness and Preferred Stock of
Subsidiaries".
In the event of the bankruptcy, liquidation or reorganization of the
Company, the assets of the Company will be available to pay the Notes only after
all Specified Senior Indebtedness has been paid in full. Sufficient funds may
not exist to pay amounts due on the Notes in such event. In addition, the
subordination provisions of the Indenture provide that no payment may be made
with respect to the Notes during the continuance of a payment default under any
Specified Senior Indebtedness. Furthermore, if certain non-payment defaults
exist with respect to Specified Senior Indebtedness, the holders of such
Specified Senior Indebtedness will be able to prevent payments on the Notes for
certain periods of time. See "Description of the Notes -- Ranking".
RESTRICTIONS IMPOSED BY INDEBTEDNESS
The terms of the Indenture and the New Credit Agreement contain a number of
significant covenants that, among other things, restrict the ability of the
Company to dispose of assets or merge, incur debt, pay dividends, repurchase or
redeem capital stock and indebtedness, create liens, make capital expenditures
and make certain investments or acquisitions, and will otherwise restrict
corporate activities. In addition, the New Credit Agreement contains, among
other covenants, requirements that the Company comply with specified financial
ratios and tests, including a minimum net worth requirement and ratios regarding
the level of indebtedness to earnings, interest coverage and fixed charges. The
ability of the Company to comply with such provisions may be affected by events
beyond the Company's control. The breach of any of these covenants would result
in a default under the New Credit Agreement. In the event of any such default,
depending on the actions taken by the lenders party to the New Credit Agreement
(the "Lenders"), the Lenders could elect to declare all amounts borrowed under
the New Credit Agreement, together with accrued interest and other fees, to be
due and payable, require the Company to apply all the available cash of the
Company to repay such borrowings and collateralize letters of credit issued
under the New Credit Agreement (in which event cash would not be available to
the Company for other purposes) and prevent the Company from making debt service
payments on the Notes. If the Company were unable to repay any such borrowings
when due, the Lenders could proceed against their collateral, which consists of
substantially all of the assets of the Company. If the indebtedness under the
New Credit Agreement were to be accelerated, there can be no assurance that
13
<PAGE> 16
the assets of the Company would be sufficient to repay all indebtedness of the
Company in full. See "Description of the Notes" and "Description of New Credit
Agreement".
LIMITATION ON CHANGE OF CONTROL
The Indenture requires the Company, in the event of a Change of Control, to
make an offer to purchase all outstanding Notes at a price equal to 101% of the
principal amount thereof, plus accrued interest to the date of repurchase. The
New Credit Agreement generally prohibits the Company from repurchasing any Notes
other than pursuant to the Exchange Offer. The New Credit Agreement also
provides that certain change of control events with respect to the Company would
constitute a default thereunder. Any future credit agreements or other
agreements relating to indebtedness to which the Company becomes a party may
contain similar restrictions and provisions. In the event that a Change of
Control occurs at a time when the Company is prohibited from repurchasing Notes,
the Company could seek the consent of its lenders to the repurchase of Notes or
could attempt to refinance the borrowings that contain such prohibitions. If the
Company does not obtain such a consent or repay such borrowings, the Company
will remain prohibited from repurchasing Notes. The Company's failure to
repurchase tendered Notes at a time when such repurchase is required by the
Indenture would constitute an event of default thereunder which, in turn, would
constitute a default under the New Credit Agreement. In such circumstances, the
subordination provisions in the Indenture would likely restrict payments to the
holders of Notes. Finally, there can be no assurance that the Company will have
the financial resources necessary to repurchase the Notes upon a Change of
Control. See "Description of New Credit Agreement" and "Description of the
Notes -- Change of Control".
COMPETITION
Most of the markets in which the Company operates are highly competitive.
The Company believes that design features, product quality, customer service and
price are the principal factors considered by customers in each of the Company's
business segments. Some of the Company's competitors have greater financial
resources, lower costs, superior technology or more favorable operating
conditions than the Company. There can be no assurance that the Company will be
able to compete successfully with its existing or any new competitors or that
competitive pressures faced by the Company will not materially and adversely
affect its business, operating results or financial condition.
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 approximately $250 million in damages. In various decisions from 1986
through 1990, ten of the original 11 counts and various additional amended
counts were dismissed with only the original breach of warranty count remaining.
Thereafter, the trial court entered a judgment against the Company in the amount
of $18.3 million. In September 1993, the Second Circuit Court of Appeals
affirmed the judgment, 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"), two
of the Company's insurers.
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's
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 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.
14
<PAGE> 17
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 having
reimbursed the Company for $1.7 million in defense costs, Granite State refused
to reimburse the Company for approximately $8.5 million in additional defense
costs paid by the Company, alleging that, among other things, defense costs
above reasonable levels were expended in defending the LILCO litigation. Granite
State subsequently paid approximately $18 million of the judgment rendered
against the Company, thereby exhausting its $20 million policy. The Company
claims that Granite State'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 is seeking reimbursement of
all or part of the $1.7 million in defense costs previously paid by it and has
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 repaid on behalf of the Company). The Company and Granite
State have reached an agreement in principle which will result in the dismissal
of all claims and counter-claims 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.
Other 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 Company is also a party to several other legal proceedings, including
environmental remediation actions under the Comprehensive Environmental Response
Compensation and Liability Act ("CERCLA"). See "Business -- Legal Proceedings".
Although the Company believes that it will prevail, has adequate insurance
coverage or has established appropriate reserves to cover potential liabilities
in each of its legal proceedings identified above, the ultimate outcome of any
of these matters, including whether the International Judgment will be
reinstated, is indeterminable at this time. See Note 14 to the audited
Consolidated Financial Statements of the Company included elsewhere in this
Prospectus.
LACK OF PUBLIC MARKET FOR THE NOTES
The New Notes are being offered to the Holders of the Old Notes. The Old
Notes were issued on April 29, 1996 to institutional investors and are eligible
for trading in the Private Offerings, Resale and Trading through Automated
Linkages (PORTAL) Market, the National Association of Securities Dealers'
screenbased, automated market for trading of securities eligible for resale
under Rule 144A under the Securities Act. To the extent that Old Notes are
tendered and accepted in the Exchange Offer, the trading market for the
remaining untendered Old Notes could be adversely affected. There is no existing
trading market for the New Notes, and there can be no assurance regarding the
future development of a market for the New Notes, or the ability of Holders of
the New Notes to sell their New Notes or the price at which such
15
<PAGE> 18
Holders may be able to sell their New Notes. If such a market were to develop,
the New Notes could trade at prices that may be higher or lower than their
principal amount or purchase price, depending on many factors, including
prevailing interest rates, the Company's operating results and the market for
similar securities. Each Initial Purchaser has advised the Company that it
currently intends to make a market in the New Notes. The Initial Purchasers are
not obligated to do so, however, and any market-making with respect to the New
Notes may be discontinued at any time without notice. Therefore, there can be no
assurance as to the liquidity of any trading market for the New Notes or that an
active public market for the New Notes will develop. The Company does not intend
to apply for listing or quotation of the New Notes on any securities exchange or
stock market.
Historically, the market for noninvestment grade debt has been subject to
disruptions that have caused substantial volatility in the prices of such
securities. There can be no assurance that the market for the New Notes will not
be subject to similar disruptions. Any such disruptions may have an adverse
effect on Holders of the New Notes.
16
<PAGE> 19
CAPITALIZATION
The following table sets forth the capitalization of the Company at March
31, 1996, and as adjusted to give pro forma effect to the Refinancing. This
table should be read in conjunction with the audited Consolidated Financial
Statements of the Company included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AT MARCH 31, 1996
------------------------
ACTUAL AS ADJUSTED
-------- -----------
(UNAUDITED)
<S> <C> <C>
Short-term debt:
Notes payable....................................................... $ 7,171 $ 7,171
Current portion of long-term debt................................... 1,401 1,401
-------- --------
Total short-term debt....................................... $ 8,572 $ 8,572
======== ========
Long-term debt, excluding current maturities:
Old Credit Agreement................................................ $ 19,300 $ --
New Credit Agreement(a)............................................. -- 112,351
Debentures.......................................................... 220,000 --
11 3/4% Senior Subordinated Notes Due 2006.......................... -- 155,000
Other bank indebtedness............................................. 9,903 9,903
-------- --------
Total long-term debt, excluding current maturities.......... $249,203 $ 277,254
======== ========
Shareholders' Equity:
Common stock........................................................ $ 18,758 $ 18,758
Additional paid-in capital.......................................... 80,284 80,284
Retained earnings (deficit)......................................... (73,888) (82,358)
Cumulative foreign currency translation adjustments................. 3,849 3,849
Minimum pension liability adjustment................................ (1,801) (1,801)
Treasury stock at cost.............................................. (18,020) (18,020)
-------- --------
Total shareholders' equity (deficit)........................ 9,182 712
-------- --------
Total capitalization........................................ $266,957 $ 286,538
======== ========
</TABLE>
- ---------------
(a) As of March 31, 1996, on a pro forma basis after giving effect to the
Refinancing, the Company would have had the ability to borrow up to an
additional $62.6 million pursuant to the revolving credit facility contained
in the New Credit Agreement.
17
<PAGE> 20
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
The following table sets forth certain selected historical consolidated
financial data for the Company for each of the periods in the five year period
ended December 31, 1995 and the three month periods ended March 31, 1996 and
1995. The selected historical consolidated financial data for each of the five
years ended December 31, 1995 are derived from the audited Consolidated
Financial Statements of the Company. The accompanying unaudited consolidated
financial statements have been prepared in accordance with generally accepted
accounting principles for interim financial information. In the opinion of
management, all adjustments (consisting only of normal recurring accruals)
considered necessary for a fair presentation have been included. This table
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the audited Consolidated
Financial Statements of the Company included elsewhere in this Prospectus. The
results of any interim period are not necessarily indicative of the results to
be expected for the year.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
YEAR ENDED DECEMBER 31, -------------------
---------------------------------------------------------
1991(A) 1992(A) 1993(A) 1994(A) 1995 1995(A) 1996
-------- --------
(UNAUDITED)
--------- --------- --------- --------- --------- -------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales:
Power Transmission................. $ 88,255 $ 86,901 $ 85,906 $ 93,308 $ 95,075 $ 26,115 $ 23,697
Pumps.............................. 101,929 98,325 91,556 90,428 94,375 22,062 26,346
Instrumentation.................... 80,125 80,110 72,434 72,226 76,113 18,479 19,350
Morse Controls..................... 78,816 85,724 90,876 100,075 107,664 29,228 30,019
-------- -------- -------- -------- -------- -------- --------
Core operations.............. 349,125 351,060 340,772 356,037 373,227 95,884 99,412
Other (sold businesses)............ 128,913 111,858 75,754 4,748 -- -- --
-------- -------- -------- -------- -------- -------- --------
Total sales.................. 478,038 462,918 416,526 360,785 373,227 95,884 99,412
Segment operating income(b)(c):
Power Transmission................. 1,031 574 2,338 8,905 11,348 3,608 2,766
Pumps.............................. 10,376 8,371 10,357 10,447 9,884 2,424 3,466
Instrumentation.................... 11,295 9,318 7,951 9,791 6,746 1,718 2,145
Morse Controls..................... 119 (2,077) 457 5,743 5,292 2,550 2,733
-------- -------- -------- -------- -------- -------- --------
Core operations.............. 22,821 16,186 21,103 34,886 33,270 10,300 11,110
Other (sold businesses)............ 12,007 (8,739) 886 (216) -- -- --
-------- -------- -------- -------- -------- -------- --------
Total segment operating
income..................... 34,828 7,447 21,989 34,670 33,270 10,300 11,110
Corporate expense and equity
income(b)(c)....................... (8,856) (9,005) (13,638) (5,120) (12,152) (1,067) (1,206)
Interest income(d)................... 1,445 583 511 1,592 1,980 805 397
Interest expense..................... (38,390) (38,186) (33,341) (29,168) (25,860) (6,571) (6,970)
Tax (expense) benefit................ 4,103 14,315 (13,450) (1,790) 14,791 (881) (627)
-------- -------- -------- -------- -------- -------- --------
Income (loss) from continuing
operations before extraordinary
item and cumulative accounting
change............................. (6,870) (24,846) (37,929) 184 12,029 2,586 2,704
Extraordinary item................... -- -- (18,095) (5,299) (4,444) (4,140) --
Cumulative accounting change......... -- (27,590) -- -- -- -- --
Total income (loss) from discontinued
operations......................... 18,281 (30,154) (214,542) 9,046 22,125 40,577 --
-------- -------- -------- -------- -------- -------- --------
Net income (loss).................... $ 11,411 $ (82,590) $(270,566) $ 3,931 $ 29,710 $ 39,023 $ 2,704
======== ======== ======== ======== ======== ======== ========
STOCK DATA:
Weighted average common shares
outstanding...................... 16,811.3 16,869.4 16,890.5 16,926.1 17,048.6 17,014.8 17,084.7
Common shares outstanding at end of
period........................... 16,867.2 16,881.3 16,911.3 17,007.6 17,083.6 17,025.2 17,085.2
Income from continuing operations
before extraordinary item per
common share..................... (0.41) (1.47) (2.25) 0.01 0.71 0.15 0.16
Cash dividends per share........... 0.50 0.375 -- -- -- -- --
Book value per share............... 19.7 14.2 (2.0) (1.5) 0.4 0.8 0.5
</TABLE>
18
<PAGE> 21
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
1995(A) 1996
YEAR ENDED DECEMBER 31,
1991(A) 1992(A) 1993(A) 1994(A) 1995
(UNAUDITED)
-------- -------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
OTHER DATA:
Net sales (core operations):
Sales to non-U.S. government
customers........................ $ 299,934 $ 309,749 $ 299,077 $ 322,241 $ 348,005
Percent growth (decline)......... 3.3% (3.4)% 7.7% 8.0%
Sales to U.S. government
customers........................ 49,191 41,311 41,695 33,796 25,222
Percent growth (decline)......... (16.0)% 0.9% (18.9)% (25.4)%
-------- -------- -------- -------- --------
Total net sales -- core
operations................. 349,125 351,060 340,772 356,037 373,227
Depreciation and
Amortization(e).................... 18,469 18,573 17,536 15,190 14,144 3,731 3,517
Capital expenditures................. 11,341 10,037 6,343 6,025 14,600 6,515 1,108
EBITDA(f)............................ 45,886 17,598 26,398 46,332 37,242 13,769 13,818
Ratio of EBITDA to interest
expense............................ 1.2x .5x .8x 1.6x 1.4x 2.1x 2.0x
Pro forma interest expense(g)........ 27,032 6,737 6,728
Ratio of EBITDA to pro forma interest
expense(h)......................... 1.4x 2.0x 2.1x
Ratio of earnings to fixed charges... (i) (i) (i) 1.1x (i) 1.5x 1.4x
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1995
---------------------
AS MARCH 31, 1996
ACTUAL ADJUSTED ---------------------
AS
ACTUAL ADJUSTED
-------- --------
(UNAUDITED)
-------- -------- ---------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
BALANCE SHEET DATA (AT PERIOD END):
Working capital................................... $ 80,977 $ 93,727(j) $ 87,974 $ 99,624(j)
Total assets...................................... 383,887 397,910(k) 387,805 398,474(k)
Long-term debt (including current portion)........ 246,607 275,758(l) 250,604 278,655(l)
Shareholders' equity.............................. 6,884 (1,904)(m) 9,182 712(m)
</TABLE>
- ---------------
(a) Reclassified to conform to current year presentation.
(b) Segment operating income and Corporate expense include unusual charges in
1992, 1993 and 1995, as follows:
<TABLE>
<CAPTION>
1992 1993 1995
----- ----- ----
(IN MILLIONS)
<S> <C> <C> <C>
Power Transmission..................................................... $ 0.2 $ 0.2 --
Pumps.................................................................. 0.1 0.5 --
Instrumentation........................................................ 0.1 0.9 0.9
Morse Controls......................................................... 0.3 2.4 1.5
--- ---- ----
Core operations................................................ 0.7 4.0 2.4
Other (sold businesses)................................................ 16.0 4.1 --
--- ---- ----
Total segment operating income..................................... 16.7 8.1 2.4
Corporate Expense...................................................... -- 6.2 6.6
--- ---- ----
$16.7 $14.3 $9.0
=== ==== ====
</TABLE>
(c) The unusual charges in 1992, 1993 and 1995 are comprised of the following
items:
<TABLE>
<CAPTION>
1992 1993 1995
----- ----- ----
(IN MILLIONS)
<S> <C> <C> <C>
Restructuring charges.................................................. $ -- $ 5.2 $4.0
Write-down of non-operating assets to net realizable value............. -- 10.1 5.0
Debt related financing fees............................................ -- 5.0 --
Litigation, warranty and claims settlements............................ 16.7 (6.0) --
--- ---- ----
Unusual items.................................................. $16.7 $14.3 $9.0
=== ==== ====
</TABLE>
(d) Interest income for 1995 and 1996 primarily represents interest earned on
the deferred purchase price of the sale of the Turbomachinery business
segment. Interest on the deferred purchase price will continue to be earned
through 2000 (See Note 2 to the audited Consolidated Financial Statements
included elsewhere in this Prospectus). Interest income in 1994 represents
interest earned on proceeds from asset divestitures.
(e) Excludes amortization of deferred financing costs reflected as a component
of interest expense.
19
<PAGE> 22
(f) EBITDA consists of net income plus income taxes, interest expense,
depreciation and amortization. However, EBITDA excludes (i) income (or loss)
from discontinued operations, (ii) extraordinary item and (iii) cumulative
accounting change. EBITDA is presented because it is a widely accepted
financial indicator of a company's ability to incur and service debt and
relates to debt covenants under the New Credit Agreement. EBITDA should not
be considered by investors as an alternative to operating income, as an
indicator of the Company's operating performance or as an alternative to
cash flows as a measure of liquidity or any other measure of performance
under GAAP. See page F-4 for cash flow information related to operating,
investing and financing activities.
(g) Pro forma interest expense gives effect to the Refinancing as if it had
occurred on January 1, 1995 for the year ended December 31, 1995, and on
January 1, 1996, in the case of the three months ended March 31, 1996. The
components are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED MARCH 31,
DECEMBER 31, 1995 1995 1996
------ ------
AS ADJUSTED
AS ADJUSTED (UNAUDITED)
----------------- ---------------------
(IN THOUSANDS)
<S> <C> <C> <C>
Pro forma interest expense:
New Credit Agreement
Revolving Credit Facility............................ $ 588 $ 147 $ 147
Term Loan A Facility................................. 2,000 500 500
Term Loan B Facility................................. 2,975 744 744
Term Loan C Facility................................. 3,825 956 956
11 3/4% Senior Subordinated Notes Due 2006............. 18,213 4,553 4,553
Amortization of original issue discount on 11 3/4%
Senior Subordinated Notes Due 2006................... 223 56 56
Bank fees.............................................. 300 75 75
Notes payable.......................................... 722 180 175
Other.................................................. 756 171 167
------- ------ ------
29,602 7,382 7,373
Amortization of deferred financing costs............... 1,218 305 305
Roltra-Morse........................................... 3,103 550 819
------- ------ ------
Gross interest expense................................. 33,923 8,237 8,497
GAAP adjustments for discontinued operations:
Roltra-Morse........................................... (3,103) (550) (819)
Allocation to discontinued operations.................. (3,788) (950) (950)
------- ------ ------
Pro forma interest expense....................... $27,032 $6,737 $6,728
================= ====== ======
</TABLE>
The above calculations assume interest rates of 8.0% for the revolving
credit facility and the Term Loan A Facility, 8.5% for the Term Loan B
Facility and the Term Loan C Facility, and 11.75% for the Notes. Pursuant to
GAAP, interest expense of approximately $3.8 million annually was allocated
to discontinued operations based on the ratio of the estimated net assets of
discontinued operations to the sum of the Company's shareholders' equity, if
positive, and outstanding debt as of year end.
(h) The ratio of EBITDA to pro forma interest expense is computed differently
than the Consolidated Coverage Ratio contained in the Indenture. On a pro
forma basis after giving effect to the Refinancing, the Consolidated
Coverage Ratio would have been 1.5x.
(i) Earnings were insufficient to cover fixed charges in the amounts of $11.6
million, $39.5 million, $24.2 million and $2.6 million in 1991, 1992, 1993
and 1995, respectively.
(j) Adjusted to reflect increase in cash of $6.4 million and a reduction in
accrued interest expense of $6.3 million as of December 31, 1995. Adjusted
to reflect increase in cash of $2.7 million and a reduction in accrued
interest expense of $8.9 million as of March 31, 1996.
(k) Adjusted to reflect increase in cash of $6.4 million and net increase in
deferred financing fees of $7.6 million as of December 31, 1995. Adjusted to
reflect increase in cash of $2.7 million and net increase in deferred
financing fees of $7.9 million as of March 31, 1996.
(l) Adjusted to reflect new borrowings of $267.4 million, net of repayment of
$18.2 million in outstanding borrowings under the Old Credit Agreement and
the redemption of $220 million in aggregate principal amount of the Old
Debentures as of December 31, 1995. Adjusted to reflect new borrowings of
$267.4 million, net of repayment of $19.3 million in outstanding borrowings
under the Old Credit Agreement and the redemption of $220 million in
aggregate principal amount of the Old Debentures as of March 31, 1996.
(m) Adjusted to reflect extraordinary charge of $8.8 million as a result of the
extinguishment of debt as of December 31, 1995. Adjusted to reflect
extraordinary charge of $8.5 million as a result of the extinguishment of
debt as of March 31, 1996.
20
<PAGE> 23
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of the Company's consolidated results
of operations and financial condition should be read in conjunction with the
audited Consolidated Financial Statements included elsewhere in this Prospectus.
OVERVIEW
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. See "-- Liquidity and Capital Resources". 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. 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". 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. Previously, the Power Transmission, Pumps
and the Instrumentation business segments were all included in a single business
segment and the Morse Controls business segment included the Roltra-Morse
business.
1995 Asset Sales
Electro-Optical Systems. In January 1994, the Company announced a plan to
sell its Electro-Optical Systems business. On January 3, 1995, the Company
completed the sale of the Analytical Instruments division of its wholly owned
subsidiary, Baird Corporation ("Baird"), for $12.3 million in cash, the proceeds
of which were used to reduce outstanding amounts under the Old Credit Agreement.
On June 2, 1995, the Company completed the sale of the Optical Systems and
Ni-Tec divisions of its wholly owned subsidiary, Varo, Inc. ("Varo"), and the
Optical Systems division of Baird for $50 million in cash, the proceeds of which
were used to redeem $40 million in aggregate principal amount of the 12.25%
Debentures and to reduce outstanding amounts under the Old Credit Agreement. In
the second half of 1995, the Company recorded provisions totaling $13.3 million
related to the Electro-Optical Systems business, $6.8 million of which was
recorded in the third quarter related to the resolution of contingencies
associated with such divisions' sales, and $6.5 million of which was recorded in
the fourth quarter related primarily to write-downs of remaining non-operating
real estate to estimated fair market value.
Turbomachinery. On January 17, 1995, the Company completed the sale of its
Delaval Turbine and TurboCare divisions, which comprised substantially all of
the Company's former Turbomachinery business segment, and its 50% interest in
Delaval-Stork, a Dutch joint venture. The final adjusted purchase price was $119
million, of which the Company received $109 million in cash at closing, with the
balance earning interest until it is received at specified future contract
dates, subject to adjustment as provided in the agreement. It is management's
expectation that there will be no further adjustment to the purchase price. The
proceeds from this sale were used to repay in full term and bridge loans
outstanding under the Old Credit Agreement and to redeem $40 million in
aggregate principal amount of the 12.25% Debentures. In the fourth quarter of
1995, the Company recorded a provision of $4.6 million related primarily to the
resolution of contingencies associated with this sale. The fourth quarter
provision partially offset the after-tax gain of $39.6 million recorded in the
first quarter of 1995, bringing the net gain on these sales to $35.0 million.
21
<PAGE> 24
Remaining Asset Sales
The remaining operation of the Company's Electro-Optical Systems business,
which is Varo's Electronic Systems division, continues to be marketed to
interested parties. The Company expects to complete the sale of this business in
1996 and plans to use the proceeds to reduce debt.
In February 1996, the Company announced its intention to sell its
Roltra-Morse business. The Company expects to complete the sale of this business
in 1996 for proceeds in excess of net book value and plans to use the proceeds
to reduce debt.
Other non-operating real estate, representing less than 10% of the original
value of assets announced to be sold in October 1992, remain for sale. Results
for the fourth quarter of 1995 include an unusual charge of $5.0 million related
to the write-down of this non-operating real estate to its net realizable value.
Cost Reduction Programs
In the fourth quarter of 1995, the Company recorded a charge to continuing
operations of $4.0 million, including severance and other expenses related to a
Company-wide program to reduce general and administrative costs. This program
includes a reduction of 65 employees, or 2% of the total number of Company
employees, including a reduction of the corporate headquarters staff by 20%.
This program is expected to reduce general and administrative expenses by
approximately $2.9 million in 1996, $4.0 million in 1997 and $5.0 million
annually thereafter. The required cash outlay related to this program was $.4
million in 1995, and the expected cash requirements during 1996 are $3.2
million. The remainder of the charges represents non-cash charges.
In 1993, the Company recorded a charge to continuing operations of $5.2
million for a cost reduction program which benefited 1994 and 1995 operating
results. Following Mr. Farrar's joining as Chief Executive Officer, the Company
implemented cost-cutting measures at its core operations to reduce its expense
structure and to eliminate duplicative functions. In addition, in connection
with this 1993 cost reduction program, the Company consolidated certain
operations in its European Instrumentation and Morse Controls businesses and
revised operating processes and reduced employment levels at its Pumps segment
and other operations. The number of Company employees in core operations
declined by 205, or 7%, between mid-1993 and mid-1994. These organizational
restructuring measures have been providing net cash benefits, compared to 1993
levels, which approximated $4.5 million and $1.5 million for continuing
operations in 1995 and 1994, respectively, and are expected to approximate $5.5
million annually thereafter, based largely on reduced employment costs.
RESULTS OF OPERATIONS
The Electro-Optical, Turbomachinery and Roltra-Morse businesses are
accounted for as discontinued operations. Accordingly, their operating results
have been segregated and reported as Discontinued Operations in the audited
Consolidated Financial Statements included elsewhere in this Prospectus. Prior
year financial results have been reclassified to conform to current year
presentation.
Three Months Ended March 31, 1996 Compared to Three Months Ended March 31,
1995
Sales. Net sales from continuing operations for the three months ended
March 31, 1996 were $99.4 million, a 3.7% increase compared with $95.9 million
in the 1995 period. The Pumps segment experienced a significant increase in net
sales compared to the prior year, due principally to delays in deliveries to the
U.S. Navy in the 1995 period. The Instrumentation and Morse Controls segments
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 quarter of 1996 compared with an exceptionally strong 1995 first
quarter. See "Segment Operating Results" below.
Gross Profit. The gross profit in the first quarter of 1996 remained
relatively constant at 32.1% of sales compared with 32.2% in 1995. See "Segment
Operating Results" below.
22
<PAGE> 25
Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased as a percent of sales, to 20.6% in the first
quarter of 1996 compared with 21.4% 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. Research and development
expenditures were 1.3% and 1.4% of net sales for the three months ended March
31, 1996 and 1995, respectively.
Interest Expense. Average borrowings in the 1996 first quarter were
approximately $70 million lower than in the comparable 1995 period. As a result,
total interest expense (before allocation to discontinued operations) of $8.7
million for the three months ended March 31, 1996 was $1.5 million, or 15%, less
than same period in 1995. Interest expense for continuing operations excludes
interest expense incurred by the discontinued operations of $0.8 million and
$0.6 million for the three months ended March 31, 1996 and 1995, respectively,
as well as an interest allocation to the discontinued operations. Interest
allocated to discontinued operations was $1.0 million in the first quarter of
1996 and $3.1 million in the 1995 period.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------
1995 1996
----- -----
<S> <C> <C>
Interest Expense:
Total (Before Allocations to Discontinued Operations)...... $10.2 $ 8.7
Continuing Operations...................................... 6.6 7.0
</TABLE>
Provision for Income Taxes. Income tax expense for continuing operations
was $.6 million and $.9 million for the three months ended March 31, 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 $2.7 million, or $.16 per share, for the three months ended March
31, 1996, compared with $2.6 million, or $.15 per share, for the comparable 1995
period.
Income from Discontinued Operations. For the three months ended March 31,
1996, discontinued operations had a net loss of $.8 million. This loss has been
deferred as the Company anticipates realizing a gain on the sale of
Roltra-Morse. For the three months ended March 31, 1995 the Company had income
from discontinued operations of $40.6 million (net of income tax expense of $5.4
million), or $2.38 per share. The income recorded in the first quarter 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
$1.0 million and $3.1 million for the three months ended March 31, 1996 and
1995, respectively.
Extraordinary Item. The three months ended March 31, 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
Old Credit Agreement and 12.25% senior subordinated debentures.
Net Income. Net income in the first quarter of 1996 was $2.7 million, or
$.16 per share, compared with $39.0 million, or $2.29 per share, in the 1995
first quarter. Net income (loss) per share by component for each period is
summarized below:
23
<PAGE> 26
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------
1995 1996
----- -----
<S> <C> <C>
Earnings (loss) per share:
Continuing Operations Before Extraordinary Item............ $ .15 $ .16
Discontinued Operations.................................... 2.38 --
Extraordinary Item......................................... (.24) --
----- -----
Net Income............................................ $2.29 $ .16
----- -----
</TABLE>
1995 Compared to 1994
Sales. Net sales from continuing operations in 1995 were $373.2 million,
compared with $360.8 million in 1994. Sales from core operations (excluding
operations sold in 1994 that were not accounted for as discontinued operations)
increased 4.8% in 1995 compared with the 1994 level of $356.0 million. All sales
in 1995 were from core operations. Each of the Company's four core business
segments contributed to this increase. See "-- Segment Operating Results" below.
Gross Profit. The gross profit in 1995 remained relatively constant at
30.8% of sales compared with 31.0% in 1994. See "-- Segment Operating Results"
below.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $3.0 million, or 3.8%, in 1995 over the 1994
level. As a percent of sales, selling, general and administrative expenses
remained relatively constant at 21.7% in 1995 compared with 21.6% in 1994. While
the Company benefited in 1995 from a full year of savings from the 1993 cost
reduction program implemented during 1994, a portion of these savings were
offset by the Instrumentation segment's efforts to expand marketing of
transducer products in the United States and Gems products in Europe, as well as
to increase sales in the Far East markets. Research and development expenditures
were 1.3% of sales in both 1995 and 1994.
Interest Expense. Average borrowings in 1995 were approximately $120
million lower than in 1994. As a result, total interest expense (before
allocation to discontinued operations) of $36.4 million in 1995 was $15.3
million, or 30%, less than in 1994. Interest expense for continuing operations
excludes interest expense incurred by the discontinued operations of $3.0
million and $3.1 million in 1995 and 1994, respectively, as well as an interest
allocation to the discontinued operations. Interest allocated to discontinued
operations was $7.5 million in 1995 and $19.4 million in 1994.
<TABLE>
<CAPTION>
1994 1995
----- -----
(IN MILLIONS)
<S> <C> <C>
Total (before allocations to discontinued operations)........ $51.7 $36.4
Continuing operations........................................ 29.2 25.9
</TABLE>
Income from Continuing Operations. The Company had income from continuing
operations of $12.0 million, or $.71 per share, in 1995, which included unusual
charges of $9.0 million and a deferred tax benefit of $17.0 million. In 1994,
income from continuing operations was $.2 million, or $.01 per share. See
"-- Other Operating Results" for a discussion regarding Unusual Items and
Provision for Income Taxes.
Income (Loss) from Discontinued Operations. The Company had income from
discontinued operations of $22.1 million (net of income tax expense of $6.1
million), or $1.29 per share, in 1995 as compared to income of $9.0 million (net
of income tax expense of $1.4 million), or $.53 per share, in 1994. The income
recorded in 1995 includes an aggregate net gain of $21.6 million on the sale of
the Company's former Turbomachinery business and substantially all of its former
Electro-Optical Systems business. The Company retained certain liabilities upon
the sales of the Electro-Optical Systems and Turbomachinery businesses of
approximately $16.0 million and $25.0 million, respectively. In 1995, required
cash outlays of the Company were $5.7 million and $14.1 million, and expected
1996 cash requirements are approximately $7.0 million and $5.5 million, related
to the Electro-Optical Systems and Turbomachinery sales, respectively. Results
from operations for the discontinued operations include allocations for interest
of $7.5 million and $19.4 million for 1995 and 1994, respectively.
24
<PAGE> 27
Net Income. Net income in 1995 was $29.7 million compared with $3.9
million in 1994. Net income per share in 1995 was $1.74 compared with a net
income per share of $.23 in 1994. Net income (loss) per share by component for
each year is summarized below:
<TABLE>
<CAPTION>
1994 1995
----- -----
<S> <C> <C>
Continuing operations before extraordinary item.............. $ .01 $ .71
Discontinued operations...................................... .53 1.29
Extraordinary item........................................... (.31) (.26)
----- -----
Net income................................................... $ .23 $1.74
===== =====
</TABLE>
1994 Compared to 1993
Sales. Net sales from continuing operations in 1994 were $360.8 million,
compared with $416.5 million in 1993. Sales from core operations (excluding
operations sold in 1994 and 1993 that were not accounted for as discontinued
operations) were $356.0 million in 1994 compared with $340.8 million in 1993, an
increase of 4.5%. Sales in the Power Transmission and Morse Controls business
segments increased 8.6% and 10.1%, respectively, in 1994 compared with 1993.
Sales in the Pumps and the Instrumentation business segments in 1994 remained
near 1993 levels. See "-- Segment Operating Results" below.
Gross Profit. The gross profit margin in 1994 decreased slightly to 31.0%
of sales compared with 31.8% in 1993. See "-- Segment Operating Results" below.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses declined $24.9 million, or 24.2%, in 1994 from the 1993
level, with most of the decline attributable to businesses sold subsequent to
June 30, 1993, the phase-out of certain postretirement benefit subsidies in
1994, and lower levels of general and administrative staff in 1994 as a result
of the 1993 cost reduction plan. As a percent of sales, selling, general and
administrative expenses decreased to 21.6% in 1994 compared with 24.7% in 1993.
Research and development expenditures were 1.3% of sales in 1994 compared with
1.8% in 1993.
Interest Expense. Average borrowings in 1994 were approximately $50
million lower than in 1993. As a result, total interest expense (before
allocation to discontinued operations) of $51.7 million in 1994 was $5.5
million, or 10%, less than in 1993. Interest expense for continuing operations
excludes interest expense incurred by discontinued operations of $3.1 million
and $4.3 million in 1994 and 1993, respectively, as well as an interest
allocation to discontinued operations of $19.4 million in 1994 and $19.6 million
in 1993.
<TABLE>
<CAPTION>
1993 1994
----- -----
(IN MILLIONS)
<S> <C> <C>
Total (before allocations to discontinued operations)........ $57.2 $51.7
Continuing operations........................................ 33.3 29.2
</TABLE>
Income (Loss) from Continuing Operations. The Company had income from
continuing operations of $.2 million, or $.01 per share, in 1994. In 1993, loss
from continuing operations was $37.9 million, or $2.25 per share, primarily as a
result of the net unusual charges of $14.3 million and a $13.5 million tax
reserve provided against previously recorded future tax benefits. See "-- Other
Operating Results" for discussion regarding Unusual Items and Provision for
Income Taxes.
Income (Loss) from Discontinued Operations. The Company had income from
discontinued operations of $9.0 million (net of income tax expense of $1.4
million), or $.53 per share, in 1994 as compared to a net loss of $214.5 million
(including income tax expense of $1.5 million), or $12.70 per share, in 1993.
The loss recorded in 1993 includes an estimated loss on the disposal of the
Company's Electro-Optical Systems business of $168.0 million, most of which
represented a non-cash adjustment to reduce the carrying value of assets to
estimated realizable value. Of the total estimated loss on disposal recorded in
1993, required cash outlays were approximately $8.4 million and $4.6 million in
1995 and 1994, respectively, the remainder of which represented non-cash
charges. Results from operations for the discontinued operations include
allocations for interest of $19.4 million and $19.6 million for 1994 and 1993,
respectively.
25
<PAGE> 28
Net Income (Loss). Net income in 1994 was $3.9 million compared with a net
loss of $270.6 million in 1993. Net income per share in 1994 was $.23 compared
with a net loss per share of $16.02 in 1993. Net income (loss) per share by
component for each of the periods is summarized below:
<TABLE>
<CAPTION>
1993 1994
------- -----
<S> <C> <C>
Continuing operations before extraordinary item............ $ (2.25) $ .01
Discontinued operations.................................... (12.70) .53
Extraordinary item......................................... (1.07) (.31)
------- -------
Net income (loss).......................................... $(16.02) $ .23
======= =======
</TABLE>
Other Operating Results
Unusual Items. During the fourth quarter of 1995, the Company recognized
unusual charges of $9.0 million in income from continuing operations. These
charges include $4.0 million in severance benefits and other expenses related to
a Company-wide program to reduce general and administrative costs ($.9 million
included in the Instrumentation segment, $1.5 million included in the Morse
Controls segment and $1.6 million included in Corporate Expense), and $5.0
million related to the write-down of non-operating real estate to net realizable
value (included in Corporate Expense). Of the $9.0 million of unusual charges,
the required cash outlay in 1995 was $.4 million and the expected cash
requirements during 1996 are $3.2 million. The remainder represents non-cash
charges. There were no unusual items in 1994.
During the twelve months ended December 31, 1993, the Company recognized
unusual charges of $14.3 million in loss from continuing operations. During the
fourth quarter of 1993, the Company recognized charges of $20.3 million that
include provisions of $5.2 million related to the restructuring and
consolidation of certain of the Company's operating units ($.2 million, $.5
million, $.9 million, $2.4 million and $1.2 million, included in the Power
Transmission, Pumps, Instrumentation and Morse Controls segments and Corporate
Expense, respectively), $10.1 million expected net loss overall related to the
Company's asset divestiture program (included in a non-core segment entitled
"Other") and $5.0 million in debt-related financing fees (included in Corporate
Expense). These charges are net of unusual income of $6.0 million recorded in
the third quarter of 1993 as a result of a change in estimate related to legal
costs associated with pending litigation (included in the Other segment). Of the
$20.3 million of unusual charges, required cash outlays were approximately $1.3
million, $7.1 million, and $.2 million in 1995, 1994 and 1993, respectively,
with the remainder representing non-cash charges.
Extraordinary Items. The twelve months ended December 31, 1995 include an
extraordinary charge of $4.4 million after-tax, representing charges related to
the early extinguishment of portions of its debt under the Existing Credit
Agreement and the 12.25% Debentures.
The twelve months ended December 31, 1994 include an extraordinary charge
of $5.3 million after-tax, representing fees and charges related to
extinguishment of debt in connection with the restructuring of the Company's
credit facilities in August 1994.
The results of operations for the twelve months ended December 31, 1993
included an extraordinary item of $18.1 million, representing fees and expenses
related to extinguishment of senior debt of which approximately $4.0 million
required immediate cash outlays, approximately $2.0 million related to the
write-off of previously deferred debt expense and approximately $12.0 million
was provided as an estimate for the prepayment of its senior notes.
Additionally, approximately $4.0 million of fees related to the 1993
restructuring of the Company's credit facilities were paid in 1993. This amount
was being amortized until August 1994, at which time the balance was recognized
as an extraordinary charge in connection with the extinguishment of the
restructured credit facilities.
Provision for Income Taxes. Income tax expense (benefit) from continuing
operations was a benefit of $(14.8) million for 1995, and expense of $1.8
million and $13.5 million for 1994 and 1993, respectively. The 1995 amount is
comprised of current tax expense of $2.2 million representing foreign and state
income taxes, as the Company is utilizing existing U.S. net operating loss
carryforwards on its domestic earnings. This
26
<PAGE> 29
amount is offset by a deferred tax benefit in 1995 of $(17.0) million,
representing a reduction in the deferred tax valuation allowance against U.S.
net operating loss carryforwards.
The 1994 income tax expense represents foreign and state income taxes. The
1993 amount is principally comprised of the provision of a reserve against
previously recorded tax benefits. The Company did not record a benefit for the
1993 loss as a valuation allowance was established 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.
In 1995, the Company reduced the valuation allowance applied against the
net operating loss carryforward by $17 million to a level where management
believes it is more likely than not that the tax benefit will be realized. The
total amount of future taxable income in the U.S. necessary to realize the asset
is approximately $48 million. The Company would generate this income principally
from the sale of its Roltra Morse operations in 1996 and based upon future
income projections from its continuing operations. Although the Company has a
history of prior losses, these losses were primarily attributable to divested
businesses and unusual items. The remaining valuation allowance is necessary due
to the uncertainty of future income estimates.
The Company has a net operating loss carryforward of approximately $85.0
million expiring in years 2002 through 2010, foreign tax credit carryforwards of
approximately $8.3 million expiring through 2000, and minimum tax credits of
approximately $2.1 million which may be carried forward indefinitely. These
carryforwards are available to offset future taxable income. These existing tax
loss carryforwards will allow the Company's future earnings to be essentially
free from the payment of U.S. taxes for the foreseeable future.
Taxes have not been provided on the unremitted earnings of foreign
subsidiaries, since it is the Company's intention to indefinitely reinvest these
earnings overseas. The amount of foreign withholding taxes that would be payable
on remittance of these earnings is approximately $.9 million.
Retiree Medical and Life Insurance. In March 1994, the Company amended its
policy regarding retiree medical and life insurance plans. This amendment, which
affects some current retirees and all future retirees, phases out the Company
subsidy for retiree medical and life insurance over a three-year period ending
December 31, 1996. The Company expects to amortize associated reserves to income
from continuing operations over the phase-out period. The pre-tax amount
amortized to income from continuing operations was $4.6 million and $4.4 million
in 1995 and 1994, respectively. The Company does not anticipate a significant
increase or decrease in cash requirements related to this change in policy
during the phase-out period.
Segment Operating Results
Operating results by business segment for the three months ended March 31,
1996 and 1995 are summarized below:
Power Transmission. Segment net sales and operating income were $23.7
million and $2.8 million, respectively, in the first three months of 1996,
compared with $26.1 million and $3.6 million in the comparable 1995 period. The
decrease in the current period is due to the exceptionally strong demand
experienced in the industrial distribution marketing channel in the first
quarter of 1995. Both segment net sales and operating income increased compared
to the fourth quarter of 1995.
Pumps. Segment net sales increased 19.4% to $26.3 million in the first
quarter of 1996, as compared with $22.1 million for the 1995 first quarter. The
segment is experiencing continued growth in its U.S. industrial markets and
strong export demand, driven by products in crude oil transfer, chemical
processing and power generation. The global marine market has also gained
strength. Segment operating income for the first three months of 1996 was $3.5
million, a 43% increase compared with $2.4 million for the comparable 1995
period.
27
<PAGE> 30
On March 31, 1996, the Company acquired the assets of a long-time
three-screw pump licensee in France, which will allow the Company to gain
additional market penetration in Europe and North Africa. The acquisition will
increase pump sales in Europe by approximately $6 million annually.
Instrumentation. Segment net sales increased 4.7% to $19.4 million in the
first three months of 1996, as compared with the same period in 1995. First
quarter 1996 operating income of $2.1 million increased 24.9% compared with
1995, largely as a result of operational improvements made at a factory located
in England. The turnaround continues to progress at this factory, which has now
absorbed all the product lines previously manufactured at a German plant that
was closed in 1995.
Morse Controls. Segment net sales were $30.0 million in the first quarter
of 1996, a 2.7% increase compared with $29.2 million in the first three months
of 1995. Segment operating income increased 7.2% to $2.7 million for the same
periods. The increases 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.
Operating results by business segment for the years 1995, 1994 and 1993 are
summarized below:
Power Transmission. Segment sales remained strong across substantially all
markets in 1995, increasing 1.9% over 1994, despite a nearly $2.0 million
decline in sales to the printing market. Operating income rose more than 25% for
the year, largely as a result of cost containment efforts and a shift in product
mix which resulted in a higher level of manufacturing activity.
Power Transmission segment sales increased 8.6% while operating profit more
than tripled in 1994 as compared with 1993 levels, as results benefited from an
upturn in the general mechanical and printing markets in the United States, as
well as the favorable effect of phasing out the subsidy for certain benefit
plans. See "-- Other Operating Results -- Retiree Medical and Life Insurance".
<TABLE>
<CAPTION>
1993 1994 1995
----- ----- -----
(IN MILLIONS)
<S> <C> <C> <C>
Net sales................................................... $85.9 $93.3 $95.1
Segment operating income(1)................................. 2.3 8.9 11.3
</TABLE>
(1) The Power Transmission segment's operating income includes an unusual charge
of $.2 million in 1993.
Pumps. Segment net sales in 1995 were up 4.4% from 1994, 2.1% of which was
due to the effects of foreign exchange rates. However, segment operating income
decreased 5.4% due to a shift in product mix. Startup costs related to a new
line of corrosive-resistant composite pumps also adversely affected income, as
did expenses caused by now resolved technical difficulties related to a custom,
high performance product order.
Pumps segment net sales and operating profit in 1995 and 1994 were
adversely affected by a decline in U.S. Navy sales of over $6.0 million in 1994
and over $10.0 million in 1995, as compared with 1993 levels. These declines
were offset by increases in commercial sales of over $5.0 million in 1994 and
over $13.5 million in 1995, as compared with 1993 levels.
<TABLE>
<CAPTION>
1993 1994 1995
----- ----- -----
(IN MILLIONS)
<S> <C> <C> <C>
Net sales................................................... $91.6 $90.4 $94.4
Segment operating income(1)................................. 10.4 10.4 9.9
</TABLE>
(1) The Pumps segment's operating income includes an unusual charge of $.5
million in 1993.
Instrumentation. This segment experienced a double-digit growth rate in
its industrial business in 1995, offset by a 40% drop in sales to the U.S. Navy.
The result was an overall increase in net sales of 5.4% for the year. 1995
earnings were negatively impacted by the costs associated with a restructuring
of this segment's European operations coupled with a significant investment in
new marketing and sales initiatives.
28
<PAGE> 31
During 1995, the Instrumentation segment closed its plant in Frankfurt,
Germany and shifted production of certain products into a lower-cost
manufacturing facility in the United Kingdom. Total fourth quarter costs
relating to this relocation exceeded $1.2 million, including $.9 million of
unusual items. In response to the growing global markets for fluid sensor
products, the Company spent an additional $2.0 million in 1995 to upgrade its
sales and marketing organization and launched several new marketing initiatives.
The marketing efforts included an aggressive new trade advertising program
designed to produce a continuing source of new sales leads. These investments
should result in lower manufacturing costs and greater sales beginning in 1996.
Instrumentation segment net sales in 1994 were approximately $.2 million
less than 1993 net sales. Segment operating income in 1994, however, increased
23.1% from 1993. Excluding the unusual charge of $.9 million incurred in 1993,
segment income in 1994 increased 10.6% from 1993 levels resulting from improved
performance in the European operations.
<TABLE>
<CAPTION>
1993 1994 1995
----- ----- -----
(IN MILLIONS)
<S> <C> <C> <C>
Net sales................................................... $72.4 $72.2 $76.1
Segment operating income(1)................................. 8.0 9.8 6.7
</TABLE>
- ---------------
(1) The Instrumentation segment's operating income includes unusual charges of
$.9 million in both 1993 and 1995.
Morse Controls. Segment net sales of $107.7 million were up 7.6% for 1995,
as compared with $100.1 million in net sales in 1994, due to increases in the
mobile equipment, aviation and other general industrial markets. 1995 segment
operating income of $5.3 million decreased only $.4 million, as compared with
the 1994 level of $5.7 million. In the fourth quarter of 1995, the segment
recorded unusual charges of $1.5 million related to a major downsizing of its
European operations, and non-cash adjustments of $1.5 million, principally
related to inventory. Excluding unusual items and non-cash charges, segment
operating income increased to $8.3 million in 1995, as compared with $5.7
million in 1994.
In the third quarter of 1995, Morse entered into a joint venture in China
with an affiliate of Dong Feng Motor Corporation, one of China's largest truck
manufacturers. The joint venture will manufacture push-pull cables, pull-only
cables and other products used in trucks and other vehicles. In the last quarter
in 1995, Morse also completed the strategic acquisition of RMH Controls, a
small, specialized manufacturer of electronic controls with operations in Sweden
and the United Kingdom. RMH's technology will permit Morse to expand its product
offering in microprocessor-based electronic controls for marine and industrial
applications.
The Morse Controls segment had net sales of $100.1 million in 1994,
compared with net sales of $90.9 million for 1993, an increase of 10.1%, based
on increased pleasure marine sales. The increased sales level resulted in
operating income for the segment of $5.7 million in 1994, compared with $.5
million in 1993. Operating income in 1993 included unusual charges of $2.4
million related to restructuring and facilities consolidations.
<TABLE>
<CAPTION>
1993 1994 1995
----- ------ ------
(IN MILLIONS)
<S> <C> <C> <C>
Net sales................................................. $90.9 $100.1 $107.7
Segment operating income(1)............................... .5 5.7 5.3
</TABLE>
- ---------------
(1) The Morse Controls segment's operating income includes unusual charges of
$2.4 million and $1.5 million in 1993 and 1995, respectively.
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 due 2001 (the "12%
Debentures") and its remaining 12.25% senior subordinated debentures due 1997
(the "12.25% Debentures"). Under terms of the Refinancing, the Company issued
$155
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<PAGE> 32
million of 11.75% senior subordinated notes due in 2006 (the "Old Notes"),
priced at a discount to yield 12% per annum. The Company also entered into a new
agreement for $175 million in senior secured credit facilities (the "New Credit
Agreement") with a group of lenders. The New Credit Agreement provides for a $70
million revolving credit facility (including a letter of credit subfacility)
terminating on April 30, 2001, a $25 million amortizing term loan maturing in
April 2001, a $35 million amortizing term loan maturing in April 2001, and a $45
million amortizing term loan maturing in April 2003. Initial borrowings under
the New Credit Agreement were $105 million in aggregate term loans and $6.6
million of revolving credit borrowings. Outstanding standby letters of credit
were $6.4 million as of April 29, 1996.
Proceeds of the Old Notes and a portion of the initial borrowings under the
New Credit Agreement were used to redeem the remaining $70 million of the 12.25%
Debentures and all $150 million of the 12% Debentures, together with accrued
interest and a prepayment premium for the latter issue. Proceeds were also used
to refinance all obligations under the Old Credit Agreement. The cost of
issuance of the Old Notes and the New Credit Agreement will be amortized over
the terms of their respective agreements.
As a result of the Refinancing, an extraordinary charge of approximately
$8.5 million will be recorded in the second quarter of 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.
Prior to consummation of the Refinancing, the Company's domestic liquidity
requirements were served by the $60 million revolving credit facility (including
a letter of credit subfacility) under the Old Credit Agreement. The Company's
needs outside the United States are covered by short and intermediate term
credit facilities from foreign banks. As of March 31, 1996, there were $19.3
million of revolving credit borrowings and $6.4 million of standby letters of
credit outstanding under the Old Credit Agreement.
The Company also has, in the aggregate, foreign short-term credit
facilities of approximately $35 million. As of March 31, 1996, $14.1 million is
outstanding under these foreign facilities, of which $7.0 million relates to
indebtedness of discontinued operations.
In addition, at March 31, 1996, the Company had outstanding $70.0 million
in aggregate principal amount of the 12.25% Debentures and $150 million in
aggregate principal amount of the 12% Debentures, maturing in amounts of $37.5
million in 1999, $37.5 million in 2000 and $75.0 million in 2001.
The Company sold its CEC Instruments division, corporate headquarters
building and other previously identified assets for aggregate proceeds of $13.2
million in 1994, and its Heim Bearings, Aerospace and Barksdale Controls
operations for aggregate proceeds of approximately $91 million in 1993. The
Company used the net proceeds from these sales to reduce amounts outstanding
under its then existing senior notes and revolving credit facility. In the first
quarter of 1995, the Company repaid outstanding term and bridge loans under the
Old Credit Agreement in the aggregate principal amounts of $36.7 million and
$45.0 million, respectively. In 1995, the Company redeemed $80 million in
aggregate principal amount of the 12.25% Debentures at 100% of their principal
amount, $40 million of which were redeemed in March 1995 with proceeds from the
sale of the Company's former Turbomachinery business, and an additional $40
million of which were redeemed in July 1995 with proceeds from the sale of a
majority of the Company's Electro-Optical Systems business. As a result of these
actions, total interest expense has been significantly reduced as compared with
prior period levels. See "Summary Financial Data" for the effect, on a pro forma
basis, of the Refinancing on the Company's interest expense.
As a result of the early extinguishment of debt referred to above, a $4.1
million, or $.24 per share, charge was recorded as an extraordinary item in the
first quarter of 1995. The charge consisted of the write-off of deferred debt
expense associated with the portions of the debt repaid under the Old Credit
Agreement and the redemption of a portion of the 12.25% Debentures. The
redemption of $40 million in aggregate principal amount of the 12.25% Debentures
on July 6, 1995 resulted in an extraordinary charge of approximately $.3
million, or $0.02 per share, in the third quarter of 1995.
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's Electronic Systems businesses to reduce debt.
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<PAGE> 33
Cash Flow
During the first quarter of 1996, the Company generated cash from operating
activities $.3 million, and used cash of $4.3 million in investing activities.
Cash and cash equivalents decreased to $.7 million at March 31, 1996 from $3.8
million at December 31, 1995, principally due to cash used in investing
activities, which included the completion of the acquisition of a former
three-screw pump licensee in France.
Working capital at March 31, 1996 was $88.0 million, an increase of $7.0
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
2.1 at March 31, 1996, compared with 2.0 at December 31, 1995. The Company's
total debt as a percent of its total capitalization was 96.6% at March 31, 1996,
compared with 97.4% at December 31, 1995.
The Company's operating activities used cash of $31.7 million in 1995,
compared with providing cash of $16.8 million in 1994, due principally to cash
requirements of $22.0 million related to discontinued operations, cash
requirements related to previously sold operations (not classified as
discontinued operations) and a net increase in working capital items within the
Company's continuing operations. Net cash provided by investing activities was
$145.5 million in 1995, compared with cash used of $.3 million in 1994. The 1995
increase in net cash provided by investing activities is principally a result of
$174.9 million of net proceeds generated from the sale of businesses and assets
in 1995 versus $13.6 million in 1994. Cash and cash equivalents decreased to
$3.8 million at December 31, 1995 from $26.9 million at December 31, 1994, due
to cash used by operating activities and increased capital expenditures during
1995.
Working capital at December 31, 1995 was $81.0 million, a decrease of $51.2
million from the end of 1994, due principally to the sales of the Company's
former Turbomachinery business and substantially all of its Electro-Optical
Systems business. The reduction in assets was partially offset by a reduction in
current debt and accrual levels (related primarily to previously sold
businesses) in 1995.
Capital expenditures of continuing operations of $14.6 million in 1995
increased significantly over the 1994 level of $6.0 million. The 1995 level was
a planned increase over the 1994 level in order to make investments to maintain
and to improve competitive advantages at the Company's operations. The Company
anticipates that capital expenditures in 1996 will increase slightly over the
1995 level primarily to improve productivity. There were no material outstanding
commitments for the acquisition of property, plant and equipment at December 31,
1995.
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.
SEASONALITY; CUSTOMER CONCENTRATION; INFLATION
General economic conditions worldwide continue to create business
opportunities for the coming year in many of the markets in which the Company
operates. Management believes that because of the nature of its industrial
products and the fact that the Company sells diverse products to many markets,
the Company is not significantly affected by the cyclical behavior, or
seasonality, of any particular market that it serves.
Total sales to the U.S. Department of Defense in the form of prime and
subcontracts were approximately 7% of net sales from continuing operations in
1995, 9% of sales in 1994 and 14% of sales in 1993.
Approximately 31% of the property, plant and equipment of the Company's
continuing operations has been acquired over the past five years and has a
remaining useful life ranging from five years to fifteen years for equipment to
thirty years for buildings. In addition, property, plant and equipment of the
businesses acquired by the Company have been adjusted to their fair value at the
time of acquisition. Assets acquired in prior years are expected to be replaced
at higher costs but this will take place over many years. The newer assets will
result in higher depreciation charges but, in many cases, due to technological
improvements, there will be operating cost savings as well. The Company
considers these matters in establishing its pricing policies.
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<PAGE> 34
BUSINESS
GENERAL
Imo is a diversified multinational corporation that designs, manufactures
and distributes a broad range of engineered industrial products to over 35,000
customers worldwide. With manufacturing plants on four continents, approximately
one-third of the Company's 1995 net sales were generated overseas. The Company
operates through four core business segments:
- POWER TRANSMISSION. The Company produces a wide range of power
transmission and motion control products, including enclosed gear drives,
speed reducers, open gearing components and AC and DC motor controllers.
Imo markets these products principally under the Boston Gear and Fincor
brand names. The Company believes that the segment's emphasis on product
quality, technical assistance and customer service differentiates Imo
from its competitors and allows it to compete effectively in its niche
markets. The Company's ability to make 10:00 a.m. next-day delivery of a
wide variety of Boston Gear products for orders received by 8:00 p.m.
exemplifies its superior customer service.
- PUMPS. The Company believes it is the largest manufacturer of rotary
screw pumps in the world and, according to published industry data, the
IMO brand name is the most recognized brand name for rotary screw pumps.
The Company markets its products, which are used to pump a broad range of
viscous fluids, under both the IMO and Warren brand names. The Company's
pumps (screw, gear and centrifugal) serve a variety of industries,
including naval, commercial marine, power generation, pulp and paper,
elevator, hydrocarbon processing, chemical processing and crude oil.
- INSTRUMENTATION. The Company believes it is a leading manufacturer of a
wide variety of products that perform critical sensing, measurement and
control functions, including level and flow switches, pressure
transducers and liquid level indicators. Imo markets these products
principally under the Gems brand name, which the Company believes is the
most recognized brand name among level and flow switches and liquid level
indicators in North America.
- MORSE CONTROLS. The Company believes it is a leading manufacturer of a
variety of products that position or regulate key control systems of
leisure marine craft and industrial vehicles, including push-pull cable
systems, mechanical, electronic and hydraulic steering systems, and
accelerator, clutch and gear shift controls. Imo markets these products
principally under the Morse, AquaPower and Hynautic brand names.
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<PAGE> 35
Each of Imo's four core business segments focuses on niche markets,
produces products engineered to exacting specifications, emphasizes customer
service and strives for continuous improvement in manufacturing quality. The
following table identifies, by business segment, the Company's principal
products, the brand names under which they are marketed and examples of their
end uses:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
BUSINESS SEGMENT BRAND NAMES PRODUCTS* END USES
---------------- ----------------- ------------------------------- --------------------------
<S> <C> <C> <C>
POWER Boston Gear Enclosed Gear Drives General Industrial
TRANSMISSION Open Gearing Conveyors
(1995 net sales Speed Reducers Food Processing Machinery
of $95 million) Helical Gear Drives
Delroyd Worm Gears Heavy Industrial
Fincor Analog Adjustable-Speed Drives Printing Presses
Digital Adjustable-Speed Drives Textile Machinery
Refrigeration
- ---------------------------------------------------------------------------------------------------------
PUMPS IMO Three-Screw Pumps Ships
(1995 net sales Centrifugal Pumps Elevators
of Gear Pumps Power Generation
$94 million) Crude Oil
Warren Two-Screw Pumps Paper Processing
- ---------------------------------------------------------------------------------------------------------
INSTRUMENTATION Gems Level & Flow Switches Machine Tools
(1995 net sales Turbines
of $76 million) HVAC Systems
TransInstruments Pressure Transducers Aircraft
Water Processing
WEKA Liquid Level Indicators Fuel and Storage Tanks
Cryogenic & Industrial Valves
- ---------------------------------------------------------------------------------------------------------
MORSE CONTROLS Morse Push-Pull Control Systems Leisure Marine
(1995 net sales Industrial Vehicles
of $108 million) Trucks
Buses
Hynautic Hydraulic Control Systems Pleasure Boats
Aqua Power Replacement Parts Marine Aftermarket
- ---------------------------------------------------------------------------------------------------------
</TABLE>
* For a more detailed description of Imo's principal products, see the Glossary
of Product Descriptions attached as Annex A to this Prospectus.
The Company's predecessor was founded in 1901 by Dr. Carl Gustaf Patrik de
Laval, a Swedish scientist. The assets of the predecessor were sold in 1962 to
the Company, which was incorporated in Delaware in 1959. In 1963, Transamerica
Corporation ("Transamerica") acquired the Company. In 1986, Transamerica
distributed all of the issued and outstanding shares of the Company's common
stock to stockholders of Transamerica and since that time the Company has
operated on a stand-alone basis as a publicly traded company.
STRATEGIC REPOSITIONING
After acquiring several diverse businesses in the late 1980's through a
series of debt-financed acquisitions, management in 1992 determined to reduce
debt through the sale of certain businesses. Pursuant to this decision, the
Company divested its Heim Bearings, Aerospace, Barksdale Controls and CEC
Instruments businesses. In September 1993, Donald Farrar joined the Company as
its Chief Executive Officer. Under Mr. Farrar, the Company adopted a strategy to
reposition itself by focusing on its less capital intensive businesses with
market leadership, strong brand name recognition and a broad customer base that
was less dependent on U.S. Government sales. In connection with this strategy,
the Company divested its Turbomachinery business and most of its Electro-Optical
Systems business. This repositioning will be completed upon the sale of the
Roltra-Morse business and the Electronic Systems division of the Electro-
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<PAGE> 36
Optical Systems business, each of which is expected to occur in 1996. Since
January 1, 1993, after giving effect to the Refinancing, Imo will have reduced
its debt by approximately $180 million. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations".
Concurrent with its repositioning, the Company initiated a program to
reduce its cost structure by consolidating operations, eliminating duplicative
functions and streamlining operating processes. These efforts, which the Company
intends to continue, have contributed significantly to a reduction in general
and administrative expenses at Imo's core businesses of 6.8% since January 1,
1993 and to a reduction in the overall number of employees in its core
businesses of 270, or 9.4%, over the same period. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations".
BUSINESS STRATEGY
The Company plans to continue to focus on its four core businesses, each of
which has the benefit of a strong leadership position in one or more niche
markets, high brand recognition, a track record of superior customer service and
responsive technical support, an extensive sales and distribution network and an
established customer base in a broad variety of industries. Having substantially
repositioned the Company and strengthened its balance sheet, management believes
that Imo is well positioned to exploit further its business strengths and to
achieve increased growth and improved profitability. Additionally, the Company
has initiated a new corporate identity program designed to strengthen name
recognition of its four core businesses. Set forth below are the key elements of
the Company's business strategy.
- Concentration on Niche Markets. Each of Imo's four core businesses has
strong market positions in selected niche markets. This allows Imo to
develop expertise in its particular markets and in the distinctive needs
of customers in those markets. The Company believes that this expertise,
together with its demonstrated customer service and technical support
capabilities, differentiate Imo from its competitors.
- Consolidation into Focused Business Segments. To improve its current
business performance and position itself to take full advantage of
emerging global opportunities, the Company has consolidated thirteen
previously distinct and independent operating divisions into four focused
business segments. Each segment operates as a strategic global business
unit with a single senior manager accountable for the entire segment's
results, which better positions the Company to cross-sell products across
geographical lines and fully utilize its existing strong sales and
distributions channels. For example, the Company now sells its
UK-manufactured pressure transducers in the United States through its
U.S. field sales network that previously sold only U.S.-manufactured Gems
products.
- Continued Cost Controls. Management is committed to continued
improvement in the Company's cost structure, and Imo's realignment into
four business segments facilitates further cost-cutting measures designed
to improve operating margins. The Company recently consolidated its three
European Instrumentation facilities into two more focused, cost-efficient
plants. These two locations now produce, at lower cost, a more complete
line of level, flow and pressure sensing instruments for European markets
under the Gems brand name. In the Morse Controls segment, Imo recently
integrated and consolidated the administrative functions of three North
American facilities into one location, improving customer service and
reducing overhead expenses. The Company intends to continue the
integration of its business segments' manufacturing processes, functions,
facilities and products.
- Customer Service and Responsiveness. The Company believes it is a market
leader in providing superior customer service and responsiveness. In the
power transmission industry Imo has distinguished itself with its ability
to fill orders the day they are received. In 1995, approximately 62% of
Boston Gear's sales were shipments of orders received that same day. In
addition, the Company's Gems Sensors division offers engineering support
to customize products to thousands of applications. In 1995, Gems was
able to ship 70% of its orders within 24 hours despite this exacting
manufacturing process.
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<PAGE> 37
- Product Line Extensions and New Product Development. Imo historically
has increased its sales through the development of new products and the
extension of existing products to address new applications. In 1995, Imo
introduced 24 new products and 94 enhanced products for customers in a
broad range of industries. Many of these products were designed for a
specific customer, application or market. With over 150 employees
dedicated to research and development and product engineering, the
Company intends to continue to provide its customers with superior
technical support and to continue to develop new and enhanced products
that it believes will offer attractive expected returns.
- Penetration of Emerging Markets. The Company intends to aggressively
market its products in the emerging growth markets of the Pacific Rim and
Latin America. Accordingly, the Company recently opened sales offices in
Singapore and Venezuela and since 1994 has hired five new salespersons
and 13 new distributors to market the Company's products throughout the
Pacific Rim and Latin America.
- Strategic Acquisitions and Alliances. The Company intends to supplement
its internal growth with strategic alliances or acquisitions of products
or businesses that enhance its technological capabilities, expand its
geographical coverage, complement existing product portfolios or that can
be leveraged through current sales channels. Imo recently extended its
product line through the acquisition of RMH Controls, a specialized
manufacturer of electronic controls with operations in Sweden and the
United Kingdom. The technology developed by RMH complements and expands
the Morse Controls' products line to include microprocessor-based
electronic controls for marine and industrial applications. In addition,
the Company recently acquired substantially all of the assets of its
long-time three-screw pump licensee in France, which will facilitate
additional market penetration in Europe and North Africa. The Company
also recently formed a joint venture with an affiliate of Dong Feng Motor
Corporation, one of the largest truck producers in China, to produce
flexible push-pull and pull-only cables for a Japanese-built gear box to
be installed on new model three- and five-ton trucks in the Chinese
market, with exports to other markets.
BUSINESS SEGMENTS
Power Transmission
The Company is a leading producer of more than 20,000 types of power
transmission and motion control products, including enclosed gear drives, speed
reducers and open gearing components marketed under the Boston Gear and Delroyd
trade names and AC and DC adjustable motor controls marketed under the Fincor
trade name.
The Power Transmission segment's products have numerous industrial
applications, including use in automation and conveyor equipment, food
processing equipment, heating, ventilation and air conditioning units, metal
processing machinery, printing presses, paper making machinery and exercise
equipment. The Company believes that a majority of all presses that print daily
newspapers in the United States are equipped with Fincor drives.
Products are sold to original equipment manufacturers ("OEMs") and to end
users through a sales force of approximately 60 persons, an extensive
distribution network of approximately 270 distributors at over 2,000 locations
across the United States and through the segment's catalog. In addition, the
Company sells its products through third-party catalogs such as the catalog
produced by W.W. Grainger, Inc. ("Grainger"), one of the largest industrial
supply firms in the United States with 1995 net sales of approximately $3
billion.
The Company believes that Boston Gear is the market leader in terms of
customer service, responsiveness and technical support in the power transmission
industry. Boston Gear will ship any stock product the same day it is ordered at
no additional charge and, with respect to its customized models of speed
reducers encompassing over 9,000,000 possible product variations, Boston Gear
guarantees same-day shipment if the order is received by noon EST, and
next-business-day shipment if the order is received after noon and before 8:00
p.m. Boston Gear provides extensive technical support to its customers,
including 24-hour electronic access to detailed product information and the
Company's proprietary "expert" computer system which helps a customer select the
proper speed reducer configuration for its required application. In addition,
the
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<PAGE> 38
Company's distributors have access to Boston Gear's 43-person customer service
staff which responds to an average of 1,000 customer inquiries per day. The
Company believes that the Power Transmission segment's emphasis on product
quality, technical assistance and customer service differentiates Imo from its
competitors and allows it to compete effectively in its niche markets. Grainger
acknowledged the Company's superior product quality and customer responsiveness
by naming Boston Gear its top power transmission vendor for 1993.
Pumps
Imo believes it is the largest worldwide manufacturer of rotary screw pumps
(approximately 83% of Pumps segment net sales in 1995), with approximately 40%
of the global market share. The Company produces two and three screw pumps,
centrifugal pumps and gear pumps, which it markets under the IMO and Warren
brand names. The IMO brand name, according to published industry data, is the
most recognized brand name for rotary screw pumps. The Company also sells
replacement parts and performs repair services for its manufactured products,
many of which require rebuilding every three to five years due to the wear from
pumping abrasive fluids.
The Company's products, which are used to pump viscous fluids, principally
serve the following eight industries: naval, commercial marine, power
generation, pulp and paper, elevator, hydrocarbon processing, chemical
processing, and crude oil. The Company believes it is the leading worldwide
supplier of rotary screw pumps to five of these industries. The Company's pumps
have numerous applications, including use in machinery lubricating and cooling
systems, hydraulic elevators, environmental or HVAC equipment systems, pulp and
paper process streams, shipboard machinery lubrication systems, crude oil
gathering and pipeline services, and naval vessels throughout the world.
As depicted in the following table, since 1993, the Company has exhibited
annual growth in commercial sales and a decline in sales to the U.S. Navy.
<TABLE>
<CAPTION>
1993 1994 1995
------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Commercial net sales (non-naval)...................... $60,571 $65,540 $73,630
Percent growth...................................... -- 8.2% 12.3%
Naval net sales....................................... $30,985 $24,888 $20,745
Percent growth (decline)............................ -- (19.7)% (16.6)%
------- ------- -------
Total sales........................................... $91,556 $90,428 $94,375
======= ======= =======
Percent growth (decline)............................ -- (1.2)% 4.4%
</TABLE>
The Company does not anticipate a significant decline in net sales to the
U.S. Navy in 1996 compared to 1995 levels.
The Company's pumps are marketed to OEMs and to end users in North America
through a joint field sales force (with the Company's Instrumentation segment),
with 18 branch offices in the United States and Canada. The Pumps segment also
maintains affiliates or branch offices in Sweden, Germany, Italy, Switzerland
and Singapore and benefits from a global network of distributors and agents in
selected markets. The Company believes that significant growth opportunities
exist for this segment in Latin America and the Pacific Rim and intends to
aggressively pursue the marketing of its pumps in those areas through its global
sales and distribution network. The Company recently began marketing its pumps
through sales offices in Singapore and Venezuela. The Company's pending
acquisition of its long-time three-screw pump licensee in France will facilitate
additional market penetration in Europe and North Africa.
Instrumentation
The Company manufactures a wide variety of products that perform critical
sensing, measurement and control functions, including liquid level and flow
sensors, switches and controls, tank level indication systems and pressure
transducers marketed under the Gems brand name. The Company believes that it is
one of the
36
<PAGE> 39
largest worldwide manufacturers of non-automotive sensors in the fragmented
instrumentation market and, according to published industry reports, the Gems
brand name is the most recognized brand name among level and flow switches and
liquid level indicators in North America.
Instrumentation products serve the industrial machinery, aviation, marine,
defense, pulp and paper process, oil and gas, power generation and other
industries. Fixed and adjustable flow switches are used in a variety of
applications, such as monitoring hydraulic fluids, coolants and lubricating oils
in machine tools, turbines, centrifuges, HVAC systems, welding equipment,
industrial laser equipment, food and beverage cooling equipment, medical
equipment, commercial laundry and dishwashing machines. Visual level indicators
marketed under the Suresite(R) brand name use brightly colored flags that are
mechanically flipped by magnets to give an accurate and highly visible
indication of liquid level in fuel tanks, storage tanks and liquid dispensers.
The Company sells its products to more than 14,000 industrial and marine
customers worldwide through a joint field sales force (with the Pumps segment),
a network of distributors and representatives and specialty catalogs.
Imo emphasizes its custom engineering capabilities in marketing and
differentiating its instrumentation products. The Company aims to work with its
customers early in their own design processes to develop instrumentation
products that address the particular needs of each customer's applications. In
1995, Imo custom designed products representing over 60% of the Instrumentation
segment's net sales.
As Imo develops custom engineered products for customers in niche markets,
the Company develops an expertise with such markets and the particular
requirements of customers in those markets. Imo intends to leverage these
capabilities in its existing markets and in new markets by aggressively
marketing its instrumentation products to industry participants that are not
currently Imo customers but who have similar product requirements as the
Company's existing customers.
In 1991 Imo introduced a new, lower cost transducer product line based upon
a new process for manufacturing transducers called "chemical vapor deposition"
or "CVD". After a successful European launch, the Company initiated a U.S. sales
program in 1994. The Company intends to invest further in the CVD process in
order to capitalize on this significant growth opportunity.
Morse Controls
The Company manufactures a variety of products that position or regulate
key control systems of leisure marine craft and industrial vehicles, including
push-pull cable systems, mechanical, hydraulic and electronic steering systems,
and accelerator, clutch and gear shift controls. The products are marketed under
the Morse, Hynautic and Aqua Power brand names. The Company believes it is a
leading worldwide manufacturer of remote control operating systems for leisure
marine craft. The segment also sells replacement parts and performs repair
services for its manufactured products and for certain of its competitor's
products.
Morse Controls sells its products to the leisure marine, mobile vehicles
(i.e., trucks and buses), industrial and aviation markets. The products have
numerous applications, including for throttle, steering, valve control and
gear-shifting mechanisms installed in agricultural and construction equipment,
engine control mechanisms in trucks, buses and fire engines, aircraft crew seats
and cable tension regulators, and pleasure marine engine and gearbox control and
steering systems. Many premiere boat manufacturers, such as Hatteras, Bertram,
Sea Ray and Bayliner use Morse marine products. John Deere, Morse Controls'
largest industrial customer, recently awarded it "Partner" (i.e., preferred
supplier) status, based on product quality and on-time performance. The
Company's products are sold to OEMs through a factory-direct sales force of 61
persons and a nationwide network of more than 200 distributors. The Company also
has a small, but rapidly growing, percentage of sales through catalogs. The
Company maintains sales offices in the United States, the United Kingdom,
Germany, France, Sweden, Australia and Singapore.
The Company primarily serves the niche market of mechanical, cable-actuated
control systems. The Company, however, recently responded to enhanced market
demand for electronic control systems by developing electronic control systems
for on- and off-road vehicle transmissions and throttle systems and leisure
marine shift and throttle systems, and completed the acquisition of a small,
specialized manufacturer of
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<PAGE> 40
electronic controls for both marine and industrial vehicle manufacturers. See
"-- Business Strategy". In addition, the Morse Control segment intends to
enhance its sales and marketing efforts in developing markets. The Company
recently established a joint venture in China with an affiliate of Dong Feng
Motor Corporation, one of China's largest truck manufacturers, to manufacture
push-pull and pull-only cables for gear boxes. See "-- Business Strategy".
MARKETING AND PRODUCT DISTRIBUTION
The Company's products and services are marketed worldwide. The Company has
implemented initiatives to increase its global sales and distribution networks
in order to grow its businesses. See "-- Business Strategy". Approximately 90%
of the Company's products are marketed outside of the United States through
wholly owned subsidiaries, sales offices and several joint ventures. With the
exception of the products manufactured by the Company's Power Transmission
segment (70% of which are sold through independent distributors), the Company's
products are sold primarily through the Company's direct field sales force of
203 persons. During 1995, sales by the Company's direct sales forces accounted
for approximately 30%, 81%, 87% and 83% of the Power Transmission, Pumps,
Instrumentation and Morse Controls segment net sales, respectively. The
Company's remaining sales are made through distributors, dealers, agents and
catalogs.
CUSTOMERS
None of the Company's four business segments is dependent on any single
customer or a few customers, the loss of which would have a material adverse
effect on the respective segment, or on the Company as a whole. No customer
accounted for 10% or more of the Company's consolidated net sales in 1995. Total
sales to the U.S. Department of Defense (including both prime and subcontracts)
were approximately 7% of net sales in 1995, 9% of net sales in 1994 and 14% of
net sales in 1993. Government contracts, including those between the Company and
the Department of Defense, may be terminated, in whole or in part, without prior
notice at the Government's convenience upon payment of compensation only for
work performed and commitments made at the time of termination. In the event of
termination, the contractor may also receive some allowance for profit on work
performed. The right to terminate for convenience has not had any significant
effect on the Company's business.
BACKLOG
The Company's backlog of unfilled orders for its continuing operations at
March 31, 1996 and 1995 was $87.4 million and $86.0 million, respectively, and
at December 31, 1995 and 1994 was $82.4 million and $80.5 million, respectively.
Backlog is considered significant only with respect to the Warren Pumps
business of the Pumps segment, given that the products of that operation require
long lead times for manufacture. Of the total backlog from continuing operations
at December 31, 1995, the Company believes that all but approximately $2.5
million of its orders will be filled in 1996.
RAW MATERIALS
The Company's operations obtain raw materials, component parts and supplies
from a variety of sources and generally from more than one supplier. The
Company's principal raw materials are metals and plastics. The Company's
suppliers and sources of raw materials are based in both the United States and
foreign countries and the Company believes that its sources are adequate for its
needs for the foreseeable future. The loss of any one supplier would not have a
material adverse effect on the Company's financial condition or results of
operations. If, however, any significant supplier to Boston Gear were to cease
supplying Boston Gear with its product, Boston Gear would be temporarily unable
to guarantee next day delivery of certain products until alternative suppliers
were located.
38
<PAGE> 41
INTELLECTUAL PROPERTY
The Company owns numerous unexpired U.S. patents (currently having a term
of 17 years from the date of issuance and expiring at various times in the
future) and foreign patents (having an initial term that is governed by the law
of the country and expiring at various times in the future), including
counterparts of certain of its U.S. patents, in major industrial countries of
the world. The Company's products are marketed under various trade names and
registered U.S. and foreign trademarks (having an initial term that is governed
by the law of the country and expiring at various times in the future). Although
the Company believes that many of its trademarks are well known in its markets
and that the Company derives significant benefit from its trademarks and its
patents, the Company does not consider any one patent or trademark or any group
thereof essential to its business as a whole or to any of its business segments.
The Company relies, to an extent, on proprietary product knowledge and exacting
manufacturing processes in its operations.
RESEARCH AND DEVELOPMENT
The Company's ongoing research and development programs involve the
development of new technologies to enhance the performance of or lower the cost
of manufacturing the Company's products, and the redesign of existing product
lines either to increase their efficiency or to lower their manufacturing cost.
Expenditures for research and development charged against continuing operations
for the year ended 1993, 1994, and 1995 and the first three months of 1995 and
1996 by business segment were as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, THREE MONTHS
------------------------------- ENDED MARCH
1993 1994 1995 31,
-------------
1995 1996
---- ----
(UNAUDITED)
---- ---- ------------- -------------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Power Transmission......................... $ .9 $ .7 $ .7 $ .2 $ .1
Pumps...................................... 1.8 1.8 1.5 .4 .5
Instrumentation............................ .9 .7 .9 .3 .3
Morse Controls............................. 1.6 1.3 1.7 .4 .4
Other...................................... 2.3 .1 -- -- --
---- ---- ---- ---- ----
Total............................ $7.5 $4.6 $ 4.8 $1.3 $1.3
==== ==== ==== ==== ====
</TABLE>
EMPLOYEES
At March 31, 1996, the Company employed approximately 4,000 persons
worldwide (2,000 persons in the United States and 2,000 outside of the United
States). Of such number, approximately 3,000 are associated with continuing
operations. There are approximately 900 persons worldwide covered by collective
bargaining agreements with various unions expiring at various dates in 1996 and
1998. The Company considers its relations with its employees to be satisfactory.
PROPERTIES
As of March 31, 1996, the Company's continuing operations have 23
manufacturing facilities, of which 12 are located in nine different states in
the United States and the remaining are located in the United Kingdom, Germany,
Singapore, Sweden, Switzerland, France and Australia. Of the 23 facilities, 17
are owned and six are leased. In addition, the Company owns 10 closed
manufacturing facilities (approximately 1.3 million square feet of building
space on 139.7 acres of land) that are being offered for sale. The properties
owned by the Company consist of approximately 2.8 million square feet of
building space, inclusive of the 1.5 million square feet of the closed
facilities, on approximately 390 acres (including 169.6 acres of undeveloped
land). The leases expire over a period of years from 1996 to 2054 with renewal
options for varying terms contained in four of the leases. The Company's
executive office, which is leased by the Company, is located in Lawrenceville,
New Jersey and occupies approximately 37,140 square feet.
The Company believes that its machinery, plants and offices are in
satisfactory operating condition and are adequate for their uses. The Company
believes that its properties have sufficient capacity to substantially increase
their current utilization without incurring significant additional capital
expenditures.
39
<PAGE> 42
The manufacturing facilities of the Company by business segment are
summarized below:
<TABLE>
<CAPTION>
NUMBER OF SQUARE FEET OF
PLANTS BUILDING
-------------- --------------
OWNED LEASED OWNED LEASED
----- ------ ----- ------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Power Transmission....................................... 4 -- 366 --
Pumps.................................................... 4 1 554 20
Instrumentation.......................................... 4 -- 154 --
Morse Controls........................................... 5 5 335 253
-- --
----- ---
Continuing Operations.................................. 17 6 1,409 273
Other (Including Discontinued Operations)................ 3 3 56 434
-- --
----- ---
Total.......................................... 20 9 1,465 707
== == ===== ===
</TABLE>
ENVIRONMENTAL MATTERS
In connection with the Company's separation from Transamerica in 1986,
three of the Company's properties required compliance with the New Jersey
Environmental Cleanup Responsibility Act, which was amended by the Industrial
Site Recovery Act ("ISRA"). ISRA required that the Company's three New Jersey
industrial establishments undergo an approved remediation by the New Jersey
Department of Environmental Protection and Energy (the "NJ DEP"). Remediation
has been completed at two sites and final closure approval has been obtained at
one site and is being sought at the second site. As a result of the sale of a
portion of the third establishment, this site has been divided into two separate
sites for ISRA compliance. Both sites have undergone cleanup but the NJ DEP has
requested and received from the Company additional sampling information. If
further cleanup is required, the Company does not expect it to have a material
adverse effect on its financial condition. Remediation of these sites has
included extensive testing and studies, removal of soil contaminated with
petroleum hydrocarbons, removal of underground storage tanks, removal of an oil
water separator, fencing and deed restrictions on a former solid waste disposal
area and the capping of an area containing asbestos brake linings disposed of by
a former owner of one of such sites. As of March 31, 1996, the Company has
incurred aggregate remediation costs at these three sites of approximately $4
million.
From June 1, 1995 through June 1, 1996, the Company had been identified in
eight instances as a "Potentially Responsible Party" by the U.S. Environmental
Protection Agency and in one instance by a state environmental agency with
respect to the disposal of hazardous wastes at facilities that have been
targeted for clean-up pursuant to CERCLA or similar State law. At June 30, 1996,
settlement agreements have been reached for five sites with aggregate payments
of $20,000 made to date. Additional payments for such five sites of less than
$43,000 are expected to be made in 1996. For the four matters where agreement
has not been reached, the Company anticipates that its share of settlement costs
should not exceed $300,000. 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 for which it will be responsible will therefore not be material. See
"-- Legal Proceedings".
The Company has operations in numerous locations, some of which require
environmental remediation. At June 1, 1996, remediation activity (other than
incidental matters that arise from time to time such as cleaning up minor
spills) is ongoing at four of the Company's facilities. The Company's former
Delaval Turbine facility requires further testing and the development of a New
Jersey Department of Environmental Protection Declaration of Environmental
Restrictions and Classification Exception Area for groundwater prior to
submission of final closure documents. No further remediation is expected. The
Company's Marquis Street facility in Garland, Texas requires removal of
petroleum hydrocarbons. The Company's Middlesex Turnpike facility in Bedford,
Massachusetts will undergo a process to remove volatile organic compounds from
the groundwater. With respect to its Enterprise Way facility in Oakland,
California, the Company has reduced the level of certain chlorinated solvents in
the groundwater to what the Company believes state regulators will determine are
acceptable levels. In addition, soils throughout the Enterprise Way site
containing low levels of polynuclear aromatic hydrocarbons will be remediated
through the normal development process. The Company anticipates that the
aggregate cost for the foregoing environmental remediation (not including the
40
<PAGE> 43
development costs referred to above) will be approximately $350,000. The Company
does not know of or believe that any such matters or the cost of any required
corrective measure, either individually or in the aggregate, will have a
material adverse effect on the financial condition of the Company. There can be
no assurance, however, that these matters, or other environmental matters not
currently known to the Company, will not have such a material adverse effect.
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
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 approximately $250 million
in damages. In various decisions from 1986 through 1990, ten of the original 11
counts and various additional amended counts were dismissed with only the
original breach of warranty count remaining. Thereafter, the trial court entered
a judgment against the Company in the amount of $18.3 million. In September
1993, the Second Circuit Court of Appeals affirmed the judgment 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 and 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's
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 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 having
reimbursed the Company for $1.7 million in defense costs, Granite State refused
to reimburse the Company for approximately $8.5 million in additional 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 approximately $18 million of the judgment rendered
against the Company, thereby exhausting its $20 million policy. The Company
claims 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 is seeking reimbursement of all
or part of the $1.7 million in defense costs previously paid by it and has
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 repaid on behalf of the Company). The Company and Granite
State have reached an agreement in principle which will result in the dismissal
of all claims and counter-claims 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.
Other 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 subsidiaries have been tendered to their insurers who are
defending under their
41
<PAGE> 44
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. The Company has 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 has 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. and the Contract Disputes
Act, 41 USC 601 et seq., and 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.
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.
The Company also has a lawsuit pending against it 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 a lawsuit in the Circuit Court of Cook County,
Illinois, alleging performance shortfalls in products delivered by the Company's
former Delaval Turbine Division and claiming damages of approximately $8.0
million. Each lawsuit is in the document discovery stage.
With respect to the litigation and claims described in the preceding
paragraphs under "Other Litigation", management of the Company believes it will
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. See Note 14 to the audited
Consolidated Financial Statements included elsewhere in this Prospectus.
The Company is also involved in various other pending legal proceedings
arising out of the ordinary course of the Company's business. The adverse
outcome of any of these legal proceedings is not expected to have a material
adverse effect on the financial condition of the Company. However, if all or
substantially all of these legal proceedings were to be determined adversely to
the Company, there could be a material adverse effect on the financial condition
of the Company.
42
<PAGE> 45
MANAGEMENT
DIRECTORS AND OFFICERS
The Company's Board of Directors is divided into three classes, with the
Company's stockholders electing one class of the directors at each annual
meeting of the stockholders. The following table sets forth certain information
regarding the directors (including the year his term is scheduled to expire) and
executive officers of Imo (ages at June 30, 1996).
<TABLE>
<CAPTION>
NAME AGE POSITION
-------------------------------------------- --- -----------------------------------
<S> <C> <C>
Donald K. Farrar............................ 57 Chairman of the Board of Directors,
President and Chief Executive
Officer (1998)
James B. Edwards............................ 68 Director (1997)
Richard J. Grosh............................ 68 Director (1996)
Carter P. Thacher........................... 69 Director (1997)
Donald C. Trauscht.......................... 62 Director (1998)
Arthur E. Van Leuven........................ 70 Director (1996)
William M. Brown............................ 53 Executive Vice President, Chief
Financial Officer and Corporate
Controller
John J. Carr................................ 53 Executive Vice President
Brian Lewis................................. 62 Executive Vice President
Thomas J. Bird, Jr.......................... 52 Executive Vice President, General
Counsel and Secretary
Donald N. Rosenberg......................... 55 Senior Vice President, Human
Resources
Robert A. Derr II........................... 50 Vice President and Treasurer
Frederick W. Wojtowicz...................... 44 Vice President and Director, Taxes
</TABLE>
Donald K. Farrar joined the Company as Chief Executive Officer and
President in September 1993 and was elected Chairman in June 1994. Prior to
joining the Company, Mr. Farrar held various positions with Textron, Inc. and
Avco Corporation for 24 years. He served as President, Chief Operating Officer
and director of Avco until its 1985 acquisition by Textron. Thereafter, he
served as Senior Executive Vice President, Operations and a director of Textron,
Inc. until December 1989. From January 1990 until joining the Company, Mr.
Farrar was a private investor.
James B. Edwards is the President of the Medical University of South
Carolina located in Charleston, South Carolina. Prior to assuming this position
in November 1982, Dr. Edwards served as Governor of the State of South Carolina
from January 1975 through January 1979. From February 1979 through December
1981, Dr. Edwards was in private practice as a maxiofacial surgeon. In January
1981, Dr. Edwards was named U.S. Secretary of Energy and held that position
until November 1982. Dr. Edwards serves as a director of Phillips Petroleum
Company, SCANA Corporation, WMX Technologies, Inc., National Data Corporation,
G.S. Industries, Inc. and General Engineering Laboratories, Inc.
Richard J. Grosh has been an independent consultant since 1987. From 1976
to 1987 he served as Chairman and Chief Executive Officer of Ranco, Inc., a
manufacturer of automated controls located in Columbus, Ohio.
Carter P. Thacher is the Chairman of Wilbur-Ellis Company, an export/import
company based in San Francisco, California, the principal business of which is
the domestic sale and distribution of agricultural chemical products. Mr.
Thacher has served in this position since January 1967, and from January 1967 to
December 1988 he also served as Chief Executive Officer.
Donald C. Trauscht is the Chairman of BW Capital Corporation, an investment
company. From 1967-1995, Mr. Trauscht held various positions with Borg-Warner
Corporation, including Director, and held
43
<PAGE> 46
the Chairman, Chief Executive Officer and other executive positions in finance
and strategy with Borg-Warner Security Corporation. Prior to joining Borg-Warner
Corporation, he served as President of Langevin Company, a California
electronics manufacturer. Mr. Trauscht is also a director of Borg-Warner
Security Corporation, Baker Hughes Incorporated, Esco Electronics Corporation,
Borg-Warner Automotive, Inc., Thiokol Corporation and Blue Bird Corporation.
Arthur E. Van Leuven is retired. From 1977 to 1990, Mr. Van Leuven served
as Chairman and Chief Executive Officer of Transamerica Finance Group, Inc., and
from 1984 to 1990 he was additionally an Executive Vice President and a director
of Transamerica Corporation, an insurance and financial services company based
in San Francisco, California. From 1992 to 1993, Mr. Van Leuven served as the
Chairman and President of IGYS Systems, Inc., located in Los Alamitos,
California.
William M. Brown joined the Company as Executive Vice President and Chief
Financial Officer in June 1992, and assumed the additional responsibility of
Corporate Controller in January 1996. Prior to joining the Company, Mr. Brown
held various positions with ITT Corporation for 25 years, most recently as
Assistant Controller and General Auditor from 1988 to 1990 and as Vice President
and Assistant Controller from 1991 until joining the Company.
John J. Carr was promoted to his current position in July 1989. From July
1985 to July 1989, Mr. Carr was a Group Vice President of the Company. Mr. Carr
is responsible for the Instrumentation, Morse Controls, Pumps and Power
Transmission segments of the Company.
Brian Lewis was promoted to his current position in 1994. Mr. Lewis was
President and Chief Operating Officer of the Controls Group of Incom
International Inc. (acquired by the Company in December 1987) from 1983 until
December 1987 and was a Group Managing Director of the Company from January 1988
to 1994. Mr. Lewis has responsibility for the Roltra-Morse business, a
discontinued operation.
Thomas J. Bird, Jr. was promoted to his current position in October 1994.
Mr. Bird served as Senior Vice President, General Counsel and Secretary from
June 1992 to October 1994, and as Vice President and Associate General Counsel
from July 1990 to June 1992. Prior to joining the Company in July 1990, Mr. Bird
held various positions with General Electric Company for 18 years, most recently
as Group Counsel RCA Aerospace and Defense division from August 1987 to February
1988 and as General Counsel to GE Aerospace of General Electric Company from
February 1988 until joining the Company.
Donald N. Rosenberg joined the Company in his current position in May 1996.
Prior to joining the Company, Mr. Rosenberg was the Director of Compensation,
Benefits and Human Resources Systems at Halliburton Energy Services Corporation.
From 1992 to 1994, he had been Director, Corporate Compensation and Benefits for
Jostens, in Minneapolis, Minnesota. Before the Jostens assignment, Mr. Rosenberg
had spent 26 years with Xerox Corporation, most recently as Corporate Manager,
U.S. and International Compensation.
Robert A. Derr II joined the Company as Vice President and Corporate
Controller in 1988. Mr. Derr was promoted to Vice President and Treasurer in
January of 1996. Prior to joining the Company, Mr. Derr held various positions
with The Stanley Works for nine years, most recently as Director of Corporate
Accounting from 1982 to 1986 and as the Controller of the Vidmar Division of The
Stanley Works from 1986 until joining the Company.
Frederick W. Wojtowicz was promoted to his current position in July 1995.
Mr. Wojtowicz served as the Company's Executive Director of Tax from July 1988
to July 1995. Prior to joining the Company in July 1988, Mr. Wojtowicz held
various positions with Ernst & Young LLP, most recently as Senior Tax Manager.
COMMITTEES OF THE BOARD
The Board of Directors of the Company has established an Audit Committee, a
Compensation Committee, an Executive Committee and a Nominating Committee. The
Audit Committee, comprised of Mr. Thacher as Chairman, Dr. Grosh and Mr.
Trauscht, reviews Imo's accounting practices and internal accounting controls,
oversees the engagement of Imo's independent auditors and performs such other
services
44
<PAGE> 47
as the Board or the Committee deems appropriate for the purpose of maintaining
sound and adequate reporting and auditing practices. The Compensation Committee,
comprised of Dr. Grosh as Chairman, Dr. Edwards and Mr. Van Leuven, approves
executive pay and benefit programs for executive officers and other employees.
The Executive Committee, comprised of Mr. Van Leuven as Chairman, Mr. Farrar and
Mr. Trauscht, acts on behalf of the full Board of Directors between Board
meetings with commensurate authority to so act by majority vote, except it does
not have the power to effect certain extraordinary corporate actions, such as
amending the Company's Certificate of Incorporation or By-Laws, declaring
dividends or approving the sale or lease of all or substantially all of the
property or assets of the Company. The Nominating Committee, comprised of Dr.
Edwards as Chairman, Mr. Thacher and Mr. Trauscht, recommends to the Board of
Directors individuals to fill Board vacancies.
45
<PAGE> 48
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
CERTAIN BENEFICIAL OWNERS
The following table sets forth information with respect to the ownership of
the Company's common stock, $1.00 par value (the "Common Stock"), as of June 30,
1996, by each person known to the Company to own beneficially more than 5% of
Common Stock outstanding on that date:
<TABLE>
<CAPTION>
SHARES PERCENT OF
BENEFICIALLY OUTSTANDING
NAME AND ADDRESS OF BENEFICIAL OWNER OWNED COMMON STOCK
----------------------------------------------------------- ------------ ------------
<S> <C> <C>
The Prudential Insurance Company of America................ 1,705,480(a) 9.9%
Prudential Plaza
Newark, NJ 07102-3777
State of Wisconsin Investment Board........................ 1,657,000(b) 9.7%
P.O. Box 7842
Madison, WI 53707
C.S. McKee & Co., Inc. .................................... 1,235,720(c) 7.2%
1 Gateway Center
Pittsburgh, PA 15222
The TCW Group, Inc.
865 South Figueroa Street
Los Angeles, CA 90017
.................... 965,400(d) 5.7%
Robert Day
200 Park Avenue, Suite 2200
New York, NY 10166
</TABLE>
- ---------------
(a) As reported by The Prudential Insurance Company of America ("Prudential") as
of December 31, 1995 in a filing made with the SEC. Of these shares, 200,000
shares are purchasable upon exercise of a currently exercisable warrant and
1,505,480 shares are shares over which Prudential may have direct or
indirect voting and/or investment discretion held for the benefit of its
clients by its separate account, externally managed accounts, registered
investment companies, subsidiaries and/or other affiliates.
(b) As reported as beneficially owned by State of Wisconsin Investment Board as
of December 31, 1995 in a filing made with the SEC.
(c) As reported as beneficially owned by C.S. McKee & Co., Inc. as of March 4,
1996 in a filing made with the SEC.
(d) As reported as beneficially owned by The TCW Group, Inc. and Robert Day as
of February 12, 1996 in a filing made with the SEC. According to such
filing, Mr. Day may be deemed a controlling person of the TCW Group, Inc.
46
<PAGE> 49
OWNERSHIP BY DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth the amount and percentage of the Company's
outstanding Common Stock beneficially owned on June 30, 1996 by each director,
the Chief Executive Officer and the top four other most highly compensated
officers of the Company and by all directors and executive officers as a group.
<TABLE>
<CAPTION>
SHARES PERCENT OF
BENEFICIALLY OUTSTANDING
NAME OF INDIVIDUAL OWNED(A) COMMON STOCK(B)
------------------------------------------------------- ------------ ---------------
<S> <C> <C>
Donald K. Farrar....................................... 298,708(c) 1.7%
James B. Edwards....................................... 83,000(d) --
Richard J. Grosh....................................... 82,856(e) --
Carter P. Thacher...................................... 112,000(d) --
Donald C. Trauscht..................................... 2,500 --
Arthur E. Van Leuven................................... 58,000(f) --
William M. Brown....................................... 54,752(g) --
John J. Carr........................................... 82,506(h) --
Brian Lewis............................................ 31,755(i) --
Thomas J. Bird......................................... 27,213(j) --
All directors and executive officers as a
group (13 persons)................................... 858,052(k) 4.8%
</TABLE>
- ---------------
(a) Information furnished by the directors and executive officers. Unless
otherwise indicated, such persons have sole voting and sole investment
power with respect to these shares. The number of shares reported as owned
through the Company's Employee Stock Savings Plan has been calculated based
upon such person's percentage interest in the total number of units
outstanding in Common Stock fund under such plan.
(b) Less than 1% unless otherwise indicated.
(c) This total includes 62,000 shares owned by Mr. Farrar pursuant to restricted
stock awards under the Company's Equity Incentive Plan for Key Employees
(the "Equity Incentive Plan"), 60,000 shares as to which Mr. Farrar holds
currently exercisable options to acquire under the Equity Incentive Plan
and 3,708 shares owned by Mr. Farrar through the Company's Employees Stock
Savings Plan.
(d) This total includes 81,000 shares as to which each such named individual
holds currently exercisable options to acquire under the Company's Equity
Incentive Plan for Outside Directors (the "1988 Director Plan") and 1,000
shares owned by such person pursuant to restricted stock awards under the
Company's 1995 Equity Incentive Plan for Outside Directors (the "1995
Director Plan").
(e) This total includes 81,000 shares as to which Dr. Grosh holds currently
exercisable options to acquire under the 1988 Director Plan and 1,000
shares owned by Dr. Grosh pursuant to restricted stock awards under the
1995 Director Plan. This total also includes 400 shares that are held by
Dr. Grosh's wife, and Dr. Grosh disclaims beneficial ownership of these
shares.
(f) This total includes 41,000 shares as to which Mr. Van Leuven holds currently
exercisable options to acquire under the 1988 Director Plan, 16,000 shares
held by a trust of which Mr. Van Leuven is trustee and settlor and 1,000
shares owned by Mr. Van Leuven pursuant to restricted stock awards under
the 1995 Director Plan.
(g) This total includes 36,820 shares as to which Mr. Brown holds currently
exercisable options to acquire under the Equity Incentive Plan and 5,432
shares owned by Mr. Brown through the Company's Employees Stock Savings
Plan.
(h) This total includes 65,000 shares as to which Mr. Carr holds currently
exercisable options to acquire under the Equity Incentive Plan and 5,406
shares owned by Mr. Carr through the Company's Employees Stock Savings
Plan.
(i) This total includes 30,755 shares as to which Mr. Lewis holds currently
exercisable options to acquire under the Equity Incentive Plan.
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<PAGE> 50
(j) This total includes 20,801 shares as to which Mr. Bird holds currently
exercisable options to acquire under the Equity Incentive Plan and 6,412
shares owned by Mr. Bird through the Company's Employees Stock Savings
Plan.
(k) This total includes the shares purchasable upon the exercise of the options
referred to in footnotes (c) through (j) above and an additional 17,706
shares purchasable upon the exercise of options by other executive officers
included in this group. This total also includes 2,000 shares that one of
the other executive officers included in this group holds jointly with his
wife.
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<PAGE> 51
THE EXCHANGE OFFER
TERMS OF THE EXCHANGE OFFER; PERIOD FOR TENDERING OLD NOTES
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), the Company will accept for exchange Old Notes which are
properly tendered on or prior to the Expiration Date and not withdrawn as
permitted below. As used herein, the term "Expiration Date" means 5:00 p.m., New
York City time, on September 6, 1996; provided, however, that if the Company, in
its sole discretion, has extended the period of time during which the Exchange
Offer is open, the term "Expiration Date" means the latest time and date to
which the Exchange Offer is extended.
As of the date of this Prospectus, $155,000,000 aggregate principal amount
of the Old Notes is outstanding. This Prospectus, together with the Letter of
Transmittal, is first being sent on or about August 7, 1996, to all Holders of
Old Notes known to the Company. The Company's obligation to accept Old Notes for
exchange pursuant to the Exchange Offer is subject to certain customary
conditions as set forth under " -- Certain Conditions to the Exchange Offer"
below.
The Company expressly reserves the right, at any time or from time to time,
to extend the period of time during which the Exchange Offer is open, and
thereby delay acceptance for exchange of any Old Notes, by giving oral or
written notice of such extension to the Holders thereof as described below.
During any such extension, all Old Notes previously tendered will remain subject
to the Exchange Offer and may be accepted for exchange by the Company. Any Old
Notes not accepted for exchange for any reason will be returned without expense
to the tendering Holder thereof as promptly as practicable after the expiration
or termination of the Exchange Offer.
Old Notes tendered in the Exchange Offer must be in denominations of
principal amount of $1,000 or any integral multiple thereof.
The Company expressly reserves the right to amend or terminate the Exchange
Offer, and not to accept for exchange any Old Notes not theretofore accepted for
exchange, upon the occurrence of any of the conditions of the Exchange Offer
specified below under " -- Certain Conditions to the Exchange Offer". The
Company will give oral or written notice of any extension, amendment,
non-acceptance or termination to the Holders of the Old Notes as promptly as
practicable, such notice in the case of any extension to be issued by means of a
press release or other public announcement no later than 9:00 a.m., New York
City time, on the next business day after the previously scheduled Expiration
Date.
PROCEDURES FOR TENDERING OLD NOTES
Only a registered holder of Old Notes may tender such Old Notes in the
Exchange Offer. The tender to the Company of Old 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. Except as set forth below, a Holder who
wishes to tender Old Notes for exchange pursuant to the Exchange Offer must
transmit a properly completed and duly executed Letter of Transmittal, including
all other documents required by such Letter of Transmittal, to IBJ Schroder Bank
& Trust Company (the "Exchange Agent") at one of the addresses set forth below
under "Exchange Agent" on or prior to the Expiration Date. In addition, either
(i) certificates for such Old Notes must be received by the Exchange Agent along
with the Letter of Transmittal, (ii) a timely confirmation of a book-entry
transfer ("a Book-Entry Confirmation") of such Old Notes, if such procedure is
available, into the Exchange Agent's account at The Depository Trust Company
(the "Book-Entry Transfer Facility") pursuant to the procedure for book-entry
transfer described below, must be received by the Exchange Agent prior to the
Expiration Date, or (iii) the Holder must comply with the guaranteed delivery
procedures described below. THE METHOD OF DELIVERY OF OLD 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
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<PAGE> 52
REQUESTED, BE USED. IN ALL CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO ASSURE
TIMELY DELIVERY. NO LETTERS OF TRANSMITTAL OR OLD NOTES SHOULD BE SENT TO THE
COMPANY.
Any beneficial owner whose Old Notes are registered in the name of a
broker, dealer, commercial bank, trust company, or other nominee and who wishes
to tender should contact the registered holder promptly and instruct such
registered holder to tender on such beneficial owner's behalf. If such
beneficial owner wishes to tender on such owner's behalf, such owner must, prior
to completing and executing the Letter of Transmittal and delivering such
owner's Old Notes, either make appropriate arrangements to register ownership of
the Old Notes in such beneficial owner's name or obtain a properly completed
bond power from the registered holder. The transfer of registered ownership may
take considerable time.
Signatures on a Letter of Transmittal or a notice of withdrawal described
below (see " -- Withdrawal Rights"), as the case may be, must be guaranteed (see
" -- Guaranteed Delivery Procedures") unless the Old Notes surrendered for
exchange pursuant thereto are tendered (i) by a registered Holder of the Old
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 below). 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 guaranties must be by a financial
institution (including most banks, savings and loan associations and brokerage
houses) that is a participant in the Securities Transfer Agents Medallion
Program, the New York Stock Exchange Medallion Program or the Stock Exchanges
Medallion Program (collectively, "Eligible Institutions"). If Old Notes are
registered in the name of a person other than a signer of the Letter of
Transmittal, the Old Notes surrendered for exchange must be endorsed by or be
accompanied by a written instrument or instruments of transfer or exchange, in
satisfactory form as determined by the Company in its sole discretion, duly
executed by the registered holder exactly as the name or names of the registered
holder or holders appear on the Old Notes with the signature thereon guarantied
by an Eligible Institution.
All questions as to the validity, form, eligibility (including time of
receipt) and acceptance of Old Notes tendered for exchange will be determined by
the Company in its sole discretion, which determination shall be final and
binding. The Company reserves the absolute right to reject any and all tenders
of any particular Old Notes not properly tendered or not to accept any
particular Old Note which acceptance 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 conditions of the Exchange Offer as to any
particular Old Notes either before or after the Expiration Date (including the
right to waive the ineligibility of any Holder who seeks to tender Old Notes in
the Exchange Offer). The interpretation of the terms and conditions of the
Exchange Offer as to any particular Old Notes either before or after the
Expiration Date (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 Old Notes
for exchange must be cured within such reasonable period of time as the Company
shall determine. None of the Company, the Exchange Agent or any other person
shall be under any duty to give notification of any defect or irregularity with
respect to any tender of Old Notes for exchange, nor shall any of them incur any
liability for failure to give such notification.
If the Letter of Transmittal or any Old 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 person 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 with the Letter of Transmittal.
By tendering, each Holder will represent to the Company that, among other
things, the New Notes acquired pursuant to the Exchange Offer are being obtained
in the ordinary course of business of the person receiving such New Notes,
whether or not such person is the Holder, and that neither the Holder nor such
other person has any arrangement or understanding with any person to participate
in the distribution of the New Notes. If any Holder or any such other person is
an "affiliate", as defined under Rule 405 of the Securities Act, of the Company
or is engaged in or intends to engage in, or has an arrangement or understanding
with any person to participate in, a distribution of such New Notes to be
acquired pursuant to
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<PAGE> 53
the Exchange Offer, such Holder or any such other person (i) may not rely on the
applicable interpretation of the staff of the SEC and (ii) must comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with any resale transaction. Each broker-dealer that receives New
Notes for its own account in exchange for Old Notes, where such Old Notes were
acquired by such broker-dealer as a result of market-making activities or other
trading activities, must acknowledge that it will deliver a prospectus in
connection with any resale of such New Notes. See "Plan of Distribution". 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.
ACCEPTANCE OF OLD NOTES FOR EXCHANGE; DELIVERY OF NEW NOTES
Upon satisfaction or waiver of all of the conditions to the Exchange Offer,
the Company will accept, promptly after the Expiration Date, all Old Notes
properly tendered and will issue the New Notes promptly after acceptance of the
Old Notes. See " -- Certain Conditions to the Exchange Offer" below. For
purposes of the Exchange Offer, the Company will be deemed to have accepted
properly tendered Old Notes for exchange when, as and if the Company has given
oral or written notice thereof to the Exchange Agent.
For each Old Note accepted for exchange, the Holder of such Old Note will
receive as set forth below under "Description of the Notes -- Book-Entry,
Delivery and Form" a New Note having a principal amount equal to that of the
surrendered Old Note. Accordingly, registered holders of New Notes on the
relevant record date for the first interest payment date following the
consummation of the Exchange Offer will receive interest accruing from the most
recent date to which interest has been paid on the Old Notes or, if no interest
has been paid, from April 29, 1996. Old Notes accepted for exchange will cease
to accrue interest from and after the date of consummation of the Exchange
Offer. Holders whose Old Notes are accepted for exchange will not receive any
payment in respect of accrued interest on such Old Notes otherwise payable on
any interest payment date the record date for which occurs on or after
consummation of the Exchange Offer. If the Exchange Offer is not consummated by
September 26, 1996, the Notes will bear additional interest of 0.50% per annum
from and including September 26, 1996 until but excluding the date of
consummation of the Exchange Offer. Old Notes not tendered or not accepted for
exchange will continue to accrue interest from and after the date of
consummation of the Exchange Offer.
In all cases, issuance of New Notes for Old Notes that are accepted for
exchange pursuant to the Exchange Offer will be made only after timely receipt
by the Exchange Agent of certificates for such Old Notes or a timely Book-Entry
Confirmation of such Old Notes into the Exchange Agent's account at the
Book-Entry Transfer Facility, a properly completed and duly executed Letter of
Transmittal and all other required documents. If any tendered Old Notes are not
accepted for any reason set forth in the terms and conditions of the Exchange
Offer or if Old Notes are submitted for a greater principal amount than the
Holder desires to exchange, such unaccepted or non-exchanged Old Notes will be
returned without expense to the tendering Holder thereof (or, in the case of Old
Notes tendered by book-entry transfer into the Exchange Agent's account at the
Book-Entry Transfer Facility pursuant to the book-entry procedures described
below, such non-exchanged Old Notes will be credited to an account maintained
with such Book-Entry Transfer Facility) as promptly as practicable after the
expiration or termination of the Exchange Offer.
BOOK-ENTRY TRANSFER
The Exchange Agent will make a request to establish an account with respect
to the Old Notes at the Book-Entry Transfer Facility for purposes of the
Exchange Offer within two business days after the date of this Prospectus, and
any financial institution that is a participant in the Book-Entry Transfer
Facility's systems may make book-entry delivery of Old Notes by causing the
Book-Entry Transfer Facility to transfer such Old Notes into the Exchange
Agent's account at the Book-Entry Transfer Facility in accordance with such
Book-Entry Transfer Facility's procedures for transfer. However, although
delivery of Old Notes may be effected through book-entry transfer at the
Book-Entry Transfer Facility, the Letter of Transmittal or a facsimile thereof,
with any required signature guarantees and any other required documents, must,
in any case, be transmitted to and received by the Exchange Agent at one of the
addresses set forth below under " -- Exchange Agent" on or prior to the
Expiration Date or the guaranteed delivery procedures described below must be
complied with.
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<PAGE> 54
GUARANTEED DELIVERY PROCEDURES
If a registered holder of the Old Notes desires to tender such Old Notes
and the Old Notes are not immediately available, or time will not permit such
Holder's Old Notes or other required documents 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 (i) the tender is made
through an Eligible Institution, (ii) on or prior to 5:00 P.M., New York City
time, on the Expiration Date, the Exchange Agent receives from such Eligible
Institution a properly completed and duly executed Letter of Transmittal (or a
facsimile thereof) and Notice of Guaranteed Delivery, substantially in the form
provided by the Company (by telegram, telex, facsimile transmission, mail or
hand delivery), setting forth the name and address of the Holder of Old Notes
and the amount of Old Notes tendered, stating that the tender is being made
thereby and guaranteeing that within three New York Stock Exchange ("NYSE")
trading days after the date of execution of the Notice of Guaranteed Delivery,
the certificates for all physically tendered Old Notes, in proper form for
transfer, or a Book-Entry Confirmation, as the case may be, and any other
documents required by the Letter of Transmittal will be deposited by the
Eligible Institution with the Exchange Agent, and (iii) the certificates for all
physically tendered Old Notes, in proper form for transfer, or a Book-Entry
Confirmation, as the case may be, and any other documents required by the Letter
of Transmittal will be deposited by the Eligible Institution within three NYSE
trading days after the date of execution of the Notice of Guaranteed Delivery.
WITHDRAWAL RIGHTS
Tenders of Old Notes may be withdrawn at any time prior to 5:00 P.M., New
York City time, on the Expiration Date. For a withdrawal to be effective, a
written notice of withdrawal must be received by the Exchange Agent at one of
the addresses set forth below under " -- Exchange Agent". Any such notice of
withdrawal must specify the name of the person having tendered the Old Notes to
be withdrawn, identify the Old Notes to be withdrawn (including the principal
amount of such Old Notes), and (where certificates for Old Notes have been
transmitted) specify the name in which such Old Notes are registered, if
different from that of the withdrawing Holder. If certificates for Old Notes
have been delivered or otherwise identified to the Exchange Agent, then, prior
to the release of such certificates the withdrawing Holder must also submit the
serial numbers of the particular certificates to be withdrawn and a signed
notice of withdrawal with signatures guaranteed by an Eligible Institution
unless such Holder is an Eligible Institution in which case such guarantee will
not be required. If Old Notes have been tendered pursuant to the procedure for
book-entry transfer described above, any notice of withdrawal must specify the
name and number of the account at the Book-Entry Transfer Facility to be
credited with the withdrawn Old Notes and otherwise comply with the procedures
of such facility. All questions as to the validity, form and eligibility
(including time of receipt) of such notices will be determined by the Company,
whose determination will be final and binding on all parties. Any Old Notes so
withdrawn will be deemed not to have been validly tendered for exchange for
purposes of the Exchange Offer. Any Old Notes which have been tendered for
exchange but which are not exchanged for any reason will be returned to the
Holder thereof without cost to such Holder (or, in the case of Old Notes
tendered by book-entry transfer into the Exchange Agent's account at the
Book-Entry Transfer Facility pursuant to the book-entry transfer procedures
described above, such Old Notes will be credited to an account maintained with
such Book-Entry Transfer Facility for the Old Notes) as soon as practicable
after withdrawal, rejection of tender or termination of the Exchange Offer.
Properly withdrawn Old Notes may be retendered by following one of the
procedures described under " -- Procedures for Tendering Old Notes" above at any
time on or prior to the Expiration Date.
CERTAIN CONDITIONS TO THE EXCHANGE OFFER
Notwithstanding any other provisions of the Exchange Offer, and subject to
its obligations pursuant to the Registration Rights Agreement, the Company shall
not be required to accept for exchange, or to issue New Notes in exchange for,
any Old 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:
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<PAGE> 55
(i) any injunction, order or decree shall have been issued by any
court or any governmental agency that would prohibit, prevent or otherwise
materially impair the ability of the Company to proceed with the Exchange
Offer; or
(ii) the Exchange Offer will violate any applicable law or any
applicable interpretation of the staff of the SEC.
The foregoing conditions are for the sole benefit of the Company and may be
asserted 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 such
right shall be deemed an ongoing right which may be asserted at any time and
from time to time.
In addition, the Company will not accept for exchange any Old Notes
tendered, and no New Notes will be issued in exchange for any such Old Notes, if
at such time any stop order is threatened by the SEC or in effect with respect
to the Registration Statement of which this Prospectus is a part or the
qualification of the Indenture under the Trust Indenture Act of 1939, as
amended.
The Exchange Offer is not conditioned on any minimum principal amount of
Old Notes being tendered for exchange.
EXCHANGE AGENT
IBJ Schroder Bank & Trust Company has been appointed as the Exchange Agent
for the Exchange Offer. All executed Letters of Transmittal should be directed
to the Exchange Agent at one of the addresses set forth below. Questions and
requests for assistance, requests for additional copies of this Prospectus or of
the Letter of Transmittal and requests or Notices of Guaranteed Delivery should
be directed to the Exchange Agent addressed as follows:
IBJ Schroder Bank & Trust Company, Exchange Agent
By Mail:
P.O. Box 84
Bowling Green Station
New York, New York 10274-0084
Attention: Reorganization Department
By Hand or Overnight Courier:
One State Street
New York, New York 10004
Attn: Securities Processing Window -- SC1
By Facsimile:
(212) 858-2611
Confirm by Telephone:
(212) 858-2103
DELIVERY OF THE LETTER OF TRANSMITTAL TO AN ADDRESS OTHER THAN AS SET FORTH
ABOVE OR TRANSMISSION OF INSTRUCTIONS VIA FACSIMILE OTHER THAN AS SET FORTH
ABOVE DOES NOT CONSTITUTE A VALID DELIVERY OF SUCH LETTER OF TRANSMITTAL.
FEES AND EXPENSES
The Company will not make any payment to brokers, dealers, or others
soliciting acceptances of the Exchange Offer.
The estimated cash expenses to be incurred in connection with the Exchange
Offer will be paid by the Company and are estimated in the aggregate to be
$200,000.
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<PAGE> 56
TRANSFER TAXES
Holders who tender their Old Notes for exchange will not be obligated to
pay any transfer taxes in connection therewith, except that Holders who instruct
the Company to register New Notes in the name of, or request that Old Notes not
tendered or not accepted in the Exchange Offer be returned to, a person other
than the registered tendering holder will be responsible for the payment of any
applicable transfer tax thereon.
CONSEQUENCES OF FAILURE TO EXCHANGE OLD NOTES
Holders of Old Notes who do not exchange their Old Notes for New Notes
pursuant to the Exchange Offer will continue to be subject to the provisions in
the Indenture regarding transfer and exchange of the Old Notes and the
restrictions on transfer of such Old Notes as set forth in the legend thereon as
a consequence of the issuance of the Old Notes pursuant to exemptions from, or
in transactions not subject to, the registration requirements of the Securities
Act and applicable state securities laws. In general, the Old Notes may not be
offered or sold, unless registered under the Securities Act and applicable state
securities laws. The Company does not currently anticipate that it will register
Old Notes under the Securities Act. See "Description of the Notes -- Exchange
Offer; Registration Rights". Based on interpretations by the staff of the SEC,
as set forth in no-action letters issued to third parties, the Company believes
that New Notes issued pursuant to the Exchange Offer in exchange for Old Notes
may be offered for resale, resold or otherwise transferred by holders thereof
(other than any such holder which 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 New Notes are acquired in the ordinary course or such holders'
business and such holders, other than broker-dealers, have no arrangement or
understanding with any person to participate in the distribution of such New
Notes. However, the SEC has not considered the Exchange Offer in the context of
a no-action letter and there can be no assurance that the staff of the SEC would
make a similar determination with respect to the Exchange Offer as in such other
circumstances. Each Holder, other than a broker-dealer, must acknowledge that it
is not engaged in, and does not intend to engage in, a distribution of such New
Notes and has no arrangement or understanding to participate in a distribution
of New Notes. If any Holder is an affiliate of the Company or is engaged in or
intends to engage in or has any arrangement or understanding with respect to the
distribution of the New Notes to be acquired pursuant to the Exchange Offer,
such Holder (i) may not rely on the applicable interpretations of the staff of
the SEC and (ii) must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with any resale transaction.
Each broker-dealer that receives New Notes for its own account in exchange for
Old Notes pursuant to the Exchange Offer must acknowledge that such Old Notes
were acquired by such broker-dealer as a result of market-making activities or
other trading activities and that it will deliver a prospectus in connection
with any resale of such New 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 New Notes received in
exchange for Old Notes where such Old Notes were acquired by such broker-dealer
as a result of market-making activities or other trading activities. The Company
has agreed that, for a period of 180 days after the Expiration Date, it will
make this Prospectus available to any broker-dealer for use in connection with
any such resale. See "Plan of Distribution". In addition, to comply with the
securities laws of certain jurisdictions, if applicable, the New Notes may not
be offered or sold unless they have been registered or qualified for sale in
such jurisdictions or an exemption from registration or qualification is
available and is complied with. The Company has agreed, pursuant to the
Registration Rights Agreement, subject to certain limitations specified therein,
to register or qualify the New Notes for offer or sale under the securities laws
of such jurisdictions as any holder reasonably requests in writing. Unless a
holder so requests, the Company does not currently intend to register or qualify
the sale of the New Notes in any such jurisdictions. See "The Exchange Offer".
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<PAGE> 57
DESCRIPTION OF THE NOTES
The Old Notes were issued under an Indenture, dated as of April 15, 1996
(the "Indenture"), between the Company and IBJ Schroder Bank & Trust Company, as
Trustee (the "Trustee"). The New Notes also will be issued under the Indenture.
The Old Notes and New Notes will be treated as a single class of securities
under the Indenture.
The following is a summary of certain provisions of the Indenture and the
Notes, a copy of which Indenture and the form of Notes are filed as exhibits to
the Registration Statement of which this Prospectus is a part. The following
summary does not purport to be complete and is subject to, and is qualified in
its entirety by reference to, all the provisions of the Indenture and the Notes,
including the definitions of certain terms therein and those terms made a part
thereof by the Trust Indenture Act of 1939, as amended. Certain terms used
herein are defined below under "-- Certain Definitions". The term "Notes" means
the New Notes and the Old Notes treated as a single class.
GENERAL
Principal of and premium, if any, and interest on the Notes will be
payable, and the Notes may be exchanged or transferred, at the office or agency
of the Company in the Borough of Manhattan, The City of New York (which
initially shall be the corporate trust office of the Trustee, at One State
Street, New York, New York 10004), except that, at the option of the Company,
payment of interest may be made by check mailed to the address of the Holders as
such address appears in the Note register.
The Notes will be issued in fully registered form, without coupons, in
denominations of $1,000 and any integral multiple of $1,000. No service charge
will be made for any registration of transfer or exchange of Notes, but the
Company may require payment of a sum sufficient to cover any transfer tax or
other similar governmental charge payable in connection therewith.
TERMS OF THE NOTES
The Old Notes are, and the New Notes will be, unsecured senior subordinated
obligations of the Company, limited to $155 million aggregate principal amount,
and will mature on May 1, 2006. The New Notes will bear interest at the rate of
11 3/4% per annum from the most recent date to which interest has been paid on
the Old Notes or if no interest has been paid on the Old Notes, from April 29,
1996, payable semiannually to holders of record at the close of business on the
October 15 or April 15 immediately preceding the interest payment date on
November 1 and May 1 of each year, commencing November 1, 1996. Accordingly,
registered holders of New Notes on the relevant record date for the first
interest payment date following the consummation of the Exchange Offer will
receive interest accruing from the most recent date to which interest has been
paid on the Old Notes or, if no interest has been paid, from April 29, 1996. Old
Notes accepted for exchange will cease to accrue interest from and after the
date of consummation of the Exchange Offer. Holders whose Old Notes are accepted
for exchange will not receive any payment in respect of interest on such Old
Notes otherwise payable on any interest payment date the record date for which
occurs on or after the consummation of the Exchange Offer. The Company will pay
interest on overdue principal at 1% per annum in excess of the interest rate
described above, and it will pay interest on overdue installments of interest at
such higher rate to the extent lawful. Interest on the Notes will be computed on
the basis of a 360-day year of twelve 30-day months.
For each Old Note accepted for exchange the Holder of such Old Note will
receive a New Note having a principal amount equal to that of the surrendered
Old Note.
The interest rate on the Notes is subject to increase in certain
circumstances if the Registration Statement ceases to be effective as further
described under "-- Exchange Offer; Registration Rights".
OPTIONAL REDEMPTION
Except as set forth in the following paragraph, the Notes will not be
redeemable at the option of the Company prior to May 1, 2001. Thereafter, the
Notes will be redeemable, at the Company's option, in whole or in part, at any
time or from time to time, upon not less than 30 nor more than 60 days' prior
notice mailed by first-class mail to each Holder's registered address, at the
following redemption prices (expressed in percentages of principal amount), plus
accrued interest to the redemption date (subject to the right of Holders
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<PAGE> 58
of record on the relevant record date to receive interest due on the relevant
interest payment date), if redeemed during the 12-month period commencing on May
1 of the years set forth below:
<TABLE>
<CAPTION>
REDEMPTION
PERIOD PRICE
----------------------------------------------- ----------
<S> <C>
2001........................................... 106.00%
2002........................................... 104.00
2003........................................... 102.00
2004 and thereafter............................ 100.00
</TABLE>
Notwithstanding the foregoing, at any time and from time to time prior to
May 1, 1999, the Company may redeem in the aggregate up to $55 million principal
amount of the Notes with the proceeds of one or more Public Equity Offerings, at
a redemption price (expressed as a percentage of principal amount) of 110% plus
accrued interest to the redemption date (subject to the right of Holders of
record on the relevant record date to receive interest due on the relevant
interest payment date); provided, however, that at least $100 million aggregate
principal amount of the Notes must remain outstanding after each such
redemption.
In the case of any partial redemption, selection of the Notes for
redemption will be made by the Trustee on a pro rata basis, by lot or by such
other method as the Trustee in its sole discretion shall deem to be fair and
appropriate, although no Note of $1,000 in original principal amount or less
shall be redeemed in part. If any Note is to be redeemed in part only, the
notice of redemption relating to such Note shall state the portion of the
principal amount thereof to be redeemed. A new Note in principal amount equal to
the unredeemed portion thereof will be issued in the name of the Holder thereof
upon cancellation of the original Note.
RANKING
The indebtedness evidenced by the Old Notes constitutes, and the
indebtedness evidenced by the New Notes will constitute, general unsecured
obligations of the Company, but the payment of the principal of and premium, if
any, and interest on the Notes will be subordinate in right of payment, as set
forth in the Indenture, to the prior payment in full in cash or cash equivalents
of all Specified Senior Indebtedness, whether outstanding on the Issue Date or
thereafter incurred. The maximum principal amount of Specified Senior
Indebtedness will initially be $175 million, will decrease if and when principal
payments are made under the term loan provisions of the Credit Agreement (as
defined herein) and may increase to the extent the borrowing base of the Company
and its subsidiaries exceeds $70 million, as described under "-- Certain
Covenants -- Limitation on Indebtedness". The Notes will in all respects rank
pari passu in right of payment with all existing and future Senior Indebtedness
of the Company (other than Specified Senior Indebtedness) and will be senior in
right of payment to all future subordinated indebtedness of the Company.
As of December 31, 1995, after giving pro forma effect to the Refinancing,
the Company's Specified Senior Indebtedness (all of which is secured) would have
been approximately $112.4 million, the Company would have been able to incur an
additional $62.6 million of Specified Senior Indebtedness, and the Company's
total Senior Indebtedness (including the Notes) would have been approximately
$267.4 million. Although the Indenture contains limitations on the amount of
additional Indebtedness that the Company may incur, under certain circumstances
the amount of such Indebtedness could be substantial and, in certain instances,
such Indebtedness may be secured. See "-- Certain Covenants -- Limitation on
Indebtedness" and "-- Limitations on Liens".
A portion of the operations of the Company are conducted through its
subsidiaries. Claims of creditors of any subsidiaries, including trade
creditors, secured creditors and creditors holding indebtedness and guarantees
issued by such subsidiaries, and claims of preferred stockholders (if any) of
such subsidiaries generally will have priority with respect to the assets and
earnings of such subsidiaries over the claims of creditors of the Company,
including holders of the Notes, even if such obligations do not constitute
Specified Senior Indebtedness. In addition, the Specified Subsidiaries have
guaranteed all of the obligations of the Company under the Credit Agreement,
which guarantees are secured by substantially all the assets of the Specified
Subsidiaries. In certain circumstances, the Notes may be guaranteed by certain
future subsidiaries of the Company. Any such guarantees, however, will be
subordinate in right of payment to any Specified Senior Indebtedness of such
subsidiaries. See "-- Certain Covenants -- Future Guarantors". At December 31,
1995,
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and after giving pro forma effect to the Refinancing, the total liabilities of
the Company's subsidiaries (other than guarantees by the Specified Subsidiaries
of obligations under the New Credit Agreement) would have been approximately
$116 million, including trade payables. Although the Indenture limits the
incurrence of Indebtedness and preferred stock of certain subsidiaries, such
limitation is subject to a number of significant qualifications. Moreover, the
Indenture does not impose any limitation on the incurrence by subsidiaries of
liabilities that are not considered Indebtedness under the Indenture. See
"-- Certain Covenants -- Limitation on Indebtedness and Preferred Stock of
Subsidiaries".
The Company may not pay principal of, premium (if any) or interest on, the
Notes or make any deposit pursuant to the provisions described under
"-- Defeasance" and may not repurchase, redeem or otherwise retire any Notes
(collectively, "pay the Notes") if (i) any Specified Senior Indebtedness is not
paid when due or (ii) any other default on Specified Senior Indebtedness occurs
and the maturity of such Specified Senior Indebtedness is accelerated in
accordance with its terms unless, in either case, the default has been cured or
waived and any such acceleration has been rescinded or such Specified Senior
Indebtedness has been paid in full in cash or cash equivalents. However, the
Company may pay the Notes without regard to the foregoing if the Company and the
Trustee receive written notice approving such payment from the Representative of
the Specified Senior Indebtedness with respect to which either of the events set
forth in clause (i) or (ii) of the immediately preceding sentence has occurred
and is continuing. During the continuance of any default (other than a default
described in clause (i) or (ii) of the second preceding sentence) with respect
to any Specified Senior Indebtedness pursuant to which the maturity thereof may
be accelerated immediately without further notice (except such notice as may be
required to effect such acceleration) or after the expiration of any applicable
grace periods, the Company may not pay the Notes for a period (a "Payment
Blockage Period") commencing upon the receipt by the Trustee (with a copy to the
Company) of written notice (a "Blockage Notice") of such default from the
Representative of the holders of such Specified Senior Indebtedness specifying
an election to effect a Payment Blockage Period and ending 179 days thereafter
(or earlier if such Payment Blockage Period is terminated (i) by written notice
to the Trustee and the Company from the Person or Persons who gave such Blockage
Notice, (ii) because the default giving rise to such Blockage Notice is no
longer continuing or (iii) because such Specified Senior Indebtedness has been
repaid in full in cash or cash equivalents). Notwithstanding the provisions
described in the immediately preceding sentence, unless the holders of such
Specified Senior Indebtedness or the Representative of such holders have
accelerated the maturity of such Specified Senior Indebtedness, the Company may
resume payments on the Notes after the end of such Payment Blockage Period. The
Notes shall not be subject to more than one Payment Blockage Period in any
consecutive 360-day period, irrespective of the number of defaults with respect
to Specified Senior Indebtedness during such period.
Upon any payment or distribution of the assets of the Company upon a total
or partial liquidation or dissolution or reorganization of or similar proceeding
relating to the Company or its property, the holders of Specified Senior
Indebtedness will be entitled to receive payment in full of such Specified
Senior Indebtedness before the Noteholders are entitled to receive any payment,
and until the Specified Senior Indebtedness is paid in full in cash or cash
equivalents, any payment or distribution to which Noteholders would be entitled
but for the subordination provisions of the Indenture will be made to holders of
such Specified Senior Indebtedness as their interests may appear. If a
distribution is made to Noteholders that, due to the subordination provisions,
should not have been made to them, such Noteholders are required to hold it in
trust for the holders of Specified Senior Indebtedness and pay it over to them
as their interests may appear.
If payment of the Notes is accelerated because of an Event of Default, the
Company or the Trustee shall promptly notify the holders of Specified Senior
Indebtedness or the Representative of such holders of the acceleration.
By reason of the subordination provisions contained in the Indenture, in
the event of insolvency, creditors of the Company who are holders of Specified
Senior Indebtedness may recover more, ratably, than the Noteholders, and
creditors of the Company who are not holders of Specified Senior Indebtedness
may recover less, ratably, than holders of Specified Senior Indebtedness and may
recover more, ratably, than the Noteholders.
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The terms of the subordination provisions described above will not apply to
payments from money or the proceeds of U.S. Government Obligations held in trust
by the Trustee for the payment of principal of and interest on the Notes
pursuant to the provisions described under "-- Defeasance".
BOOK-ENTRY, DELIVERY AND FORM
Except as set forth below, the New Notes to be issued upon consummation of
the Exchange Offer will be issued in the form of a Global Note. The Global Note
will be deposited with, or on behalf of, the Depository and registered in the
name of the Depository or its nominee. Except as set forth below, the Global
Note may be transferred, in whole and not in part, only to the Depository or
another nominee of the Depository. Investors may hold their beneficial interests
in the Global Note directly through the Depository if they have an account with
the Depository or indirectly through organizations which have accounts with the
Depository.
The Depository has advised the Company as follows: The Depository is a
limited-purpose trust company organized under the laws of the State of New York,
a member of the Federal Reserve System, a "clearing corporation" within the
meaning of the New York Uniform Commercial Code, and "a clearing agency"
registered pursuant to the provisions of Section 17A of the Securities Exchange
Act of 1934 (the "Exchange Act"). The Depository was created to hold securities
of institutions that have accounts with the Depository ("participants") and to
facilitate the clearance and settlement of securities transactions among its
participants in such securities through electronic book-entry changes in
accounts of the participants, thereby eliminating the need for physical movement
of securities certificates. The Depository's participants include securities
brokers and dealers (which may include the Initial Purchasers), banks, trust
companies, clearing corporations and certain other organizations. Access to the
Depository's book-entry system is also available to others such as banks,
brokers, dealers and trust companies that clear through or maintain a custodial
relationship with a participant, whether directly or indirectly.
Upon the issuance of the Global Note, the Depository will credit, on its
book-entry registration and transfer system, the principal amount of the New
Notes represented by such Global Note to the accounts of participants. Ownership
of beneficial interests in the Global Note will be limited to participants or
persons that may hold interests through participants. Ownership of beneficial
interests in the Global Note will be shown on, and the transfer of those
ownership interests will be effected only through, records maintained by the
Depository (with respect to participants' interests) and such participants (with
respect to the owners of beneficial interests in the Global Note other than
participants). The law of some jurisdictions may require that certain purchasers
of securities take physical delivery of such securities in definitive form. Such
limits and laws may impair the ability to transfer or pledge beneficial
interests in the Global Note.
So long as the Depository, or its nominee, is the registered holder and
owner of the Global Note, the Depository or such nominee, as the case may be,
will be considered the sole legal owner and holder of the related New Notes for
all purposes of such New Notes. Except as set forth below, owners of beneficial
interests in the Global Note will not be entitled to have the New Notes
represented by the Global Note registered in their names, will not receive or be
entitled to receive physical delivery of certificated New Notes in definitive
form and will not be considered to be the owners or holders of any New Notes
under the Global Note. The Company understands that under existing industry
practice, in the event owners of beneficial interests in the Global Note desire
to take any action that the Depository, as the holder of the Global Note, is
entitled to take, the Depository would authorize the participants to take such
action, and that the participants would authorize beneficial owners owning
through such participants to take such action or would otherwise act upon the
instructions of beneficial owners owning through them.
Payment of principal of and interest on New Notes represented by the Global
Note registered in the name of and held by the Depository or its nominee will be
made to the Depository or its nominee, as the case may be, as the registered
owner and holder of the Global Note.
The Company expects that the Depository or its nominee, upon receipt of any
payment of principal of or interest on the Global Note, will credit
participants' accounts with payments in amounts proportionate to their
respective beneficial interests in the principal amount of the Global Note as
shown on the records of the Depository or its nominee. The Company also expects
that payments by participants to owners of beneficial
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interests in the Global Note held through such participants will be governed by
standing instructions and customary practices and will be the responsibility of
such participants. The Company will not have any responsibility or liability for
any aspect of the records relating to, or payments made on account of,
beneficial ownership interests in the Global Note for any New Note or for
maintaining, supervising or reviewing any records relating to such beneficial
ownership interests or for any other aspect of the relationship between the
Depository and its participants or the relationship between such participants
and the owners of beneficial interests in the Global Note owning through such
participants.
Unless and until it is exchanged in whole or in part for certificated New
Notes in definitive form, the Global Note may not be transferred except as a
whole by the Depository to a nominee of such Depository or by a nominee of such
Depository to such Depository or another nominee of such Depository.
Beneficial owners of New Notes registered in the name of the Depository or
its nominee will be entitled to be issued, upon request, New Notes in definitive
certificated form.
Although the Depository has agreed to the foregoing procedures in order to
facilitate transfers of interests in the Global Note among participants of the
Depository, it is under no obligation to perform or continue to perform such
procedures, and such procedures may be discontinued at any time. Neither the
Trustee nor the Company will have any responsibility for the performance by the
Depository or its participants or indirect participants of their respective
obligations under the rules and procedures governing their operations.
CERTIFICATED NOTES
The New Notes represented by the Global Note are exchangeable for
certificated New Notes in definitive form of like tenor as such New Notes, in
denominations of $1,000 and integral multiples thereof if (i) the Depository
notifies the Company that it is unwilling or unable to continue as Depository
for the Global Note or if at any time the Depository ceases to be a clearing
agency registered under the Exchange Act, (ii) the Company in its discretion at
any time determines not to have all of the New Notes represented by the Global
Note or (iii) a Default entitling the Holders to accelerate the maturity thereof
has occurred and is continuing. Any New Note that is exchangeable pursuant to
the preceding sentence is exchangeable for certificated New Notes issuable in
authorized denominations and registered in such names as the Depository shall
direct. Subject to the foregoing, the Global Note is not exchangeable, except
for a Global Note of the same aggregate denomination to be registered in the
name of the Depository or its nominee.
EXCHANGE OFFER; REGISTRATION RIGHTS
The Company agreed pursuant to the Registration Rights Agreement (i) to
file the Registration Statement of which the Prospectus forms a part with the
SEC on or before May 29, 1996 and (ii) use its best efforts to cause the
Registration Statement to be declared effective under the Securities Act by
August 26, 1996. The Company agreed to keep the Exchange Offer open for not less
than 30 days after the date notice of the Exchange Offer is mailed to the
holders of the Old Notes.
In the event the Exchange Offer is not consummated by September 26, 1996,
or, in accordance with the Registration Rights Agreement, if the Initial
Purchasers so request with respect to Old Notes not eligible to be exchanged for
New Notes in the Exchange Offer, or if any holder of Old Notes is not eligible
to participate in the Exchange Offer or does not receive freely tradeable New
Notes in the Exchange Offer, the Company will, at its cost, (a) as promptly as
practicable, file a registration statement (the "Shelf Registration Statement")
covering resales of the Old Notes or the New Notes, as the case may be, (b) use
its best efforts to cause the Shelf Registration Statement to be declared
effective under the Securities Act and (c) keep the Shelf Registration Statement
effective until the earlier of (i) the time when the Old Notes covered by the
Shelf Registration Statement can be sold pursuant to Rule 144 under the
Securities Act without any limitations under clauses (c), (e), (f) and (h) of
Rule 144 and (ii) three years after its effective date. The Company will, in the
event a Shelf Registration Statement is filed, among other things, provide to
each holder for whom such Shelf Registration Statement was filed copies of the
prospectus which is a part of the Shelf Registration
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Statement, notify each such holder when the Shelf Registration Statement has
become effective and take certain other actions as are required to permit
unrestricted resales of the Old Notes or the New Notes, as the case may be. A
holder selling such Old Notes or New Notes pursuant to the Shelf Registration
Statement generally would be required to be named as a selling security holder
in the related prospectus and to deliver a prospectus to purchasers, would be
subject to certain of the civil liability provisions under the Securities Act in
connection with such sales and would be bound by the provisions of the
Registration Rights Agreement which are applicable to such holder (including
certain indemnification obligations).
The Registration Rights Agreement provides that if (i) by September 26,
1996, neither the Exchange Offer is consummated nor the Shelf Registration
Statement is declared effective; or (ii) after either the Registration Statement
or the Shelf Registration Statement is declared effective, such registration
statement thereafter ceases to be effective or usable (subject to certain
exceptions) in connection with resales of Old Notes or New Notes in accordance
with and during the periods specified in the Registration Rights Agreement (each
such event referred to in clauses (i) and (ii) a "Registration Default"),
additional interest will accrue on the Notes at the rate of 0.50% per annum from
and including the date on which any such Registration Default shall occur to but
excluding the date on which all Registration Defaults have been cured. Such
interest is payable in addition to any other interest payable from time to time
with respect to the Notes.
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 has been filed as an exhibit to the Registration
Statement of which this Prospectus forms a part.
CHANGE OF CONTROL
Upon the occurrence of any of the following events (each a "Change of
Control"), each Holder shall have the right to require that the Company
repurchase such Holder's Notes at a purchase price in cash equal to 101% of the
principal amount thereof plus accrued and unpaid interest, if any, to the date
of purchase (subject to the right of holders of record on the relevant record
date to receive interest due on the relevant interest payment date):
(i) Any "person" (as such term is used in Sections 13(d) and 14(d) of
the Exchange Act) is or becomes the "beneficial owner" (as defined in Rules
13d-3 and 13d-5 under the Exchange Act, except that such person shall be
deemed to have "beneficial ownership" of all shares that any such person
has the right to acquire, whether such right is exercisable immediately or
only after the passage of time), directly or indirectly, of more than 35%
of the total voting power of the Voting Stock of the Company;
(ii) during any period of two consecutive years, individuals who at
the beginning of such period constituted the Board of Directors (together
with any new directors whose election by such Board of Directors or whose
nomination for election by the shareholders of the Company was approved by
a vote of 66 2/3% of the directors of the Company then still in office who
were either directors at the beginning of such period or whose election or
nomination for election was previously so approved) cease for any reason to
constitute a majority of the Board of Directors then in office; or
(iii) the merger or consolidation of the Company with or into another
Person or the merger of another Person with or into the Company, or the
sale of all or substantially all the assets of the Company to another
Person, and, in the case of any such merger or consolidation, the
securities of the Company that are outstanding immediately prior to such
transaction and which represent 100% of the aggregate voting power of the
Voting Stock of the Company are changed into or exchanged for cash,
securities or property, unless pursuant to such transaction such securities
are changed into or exchanged for, in addition to any other consideration,
securities of the surviving corporation that represent immediately after
such transaction, at least a majority of the aggregate voting power of the
Voting Stock of the surviving corporation.
Within 30 days following any Change of Control, the Company shall mail a
notice to each Holder with a copy to the Trustee stating: (1) that a Change of
Control has occurred and that such Holder has the right to
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require the Company to purchase such Holder's Notes at a purchase price in cash
equal to 101% of the principal amount thereof plus accrued and unpaid interest,
if any, to the date of purchase (subject to the right of holders of record on
the relevant record date to receive interest on the relevant interest payment
date); (2) the circumstances and relevant facts regarding such Change of Control
(including information with respect to pro forma historical income, cash flow
and capitalization, each after giving effect to such Change of Control); (3) the
repurchase date (which shall be no earlier than 30 days nor later than 60 days
from the date such notice is mailed in the event of a Change of Control); and
(4) the instructions determined by the Company, consistent with the covenant
described hereunder, that a Holder must follow in order to have its Notes
purchased.
The Company shall comply, to the extent applicable, with the requirements
of Section 14(e) of the Exchange Act and any other securities laws or
regulations in connection with the repurchase of Notes pursuant to this
covenant. To the extent that the provisions of any securities laws or
regulations conflict with the provisions of the covenant described above, the
Company shall comply with the applicable securities laws and regulations and
shall not be deemed to have breached its obligations under such covenant by
virtue thereof.
The Change of Control purchase feature is a result of negotiations between
the Company and the Initial Purchasers. Management has no present intention to
engage in a transaction involving a Change of Control, although it is possible
that the Company would decide to do so in the future. Subject to the limitations
discussed below, the Company could, in the future, enter into certain
transactions, including acquisitions, refinancings or other recapitalizations,
that would not constitute a Change of Control under the Indenture, but that
could increase the amount of indebtedness outstanding at such time or otherwise
affect the Company's capital structure or credit ratings. Restrictions on the
ability of the Company to incur additional Indebtedness are contained in the
covenants described under "-- Certain Covenants -- Limitation on Indebtedness,"
"-- Limitation on Indebtedness and Preferred Stock of Restricted Subsidiaries,"
"-- Limitation on Liens" and "-- Limitation on Sale/Leaseback Transactions."
Such restrictions can only be waived with the consent of the holders of a
majority in principal amount of the Notes then outstanding. Except for the
limitations contained in such covenants, however, the Indenture will not contain
any covenants or provisions that may afford holders of the Notes protection in
the event of a highly leveraged transaction.
The Credit Agreement generally prohibits the Company from purchasing any
Notes, and will also provide that the occurrence of certain change of control
events with respect to the Company would constitute a default thereunder. In the
event a Change of Control occurs at a time when the Company is prohibited from
purchasing Notes, the Company could seek the consent of its lenders to the
purchase of Notes or could attempt to refinance the borrowings that contain such
prohibition. If the Company does not obtain such a consent or repay such
borrowings, the Company will remain prohibited from purchasing Notes. In such
case, the Company's failure to purchase tendered Notes would constitute an Event
of Default under the Indenture which would, in turn, constitute a default under
the Credit Agreement. In such circumstances, the subordination provisions in the
Indenture would likely restrict payment to the Holders of Notes.
Future indebtedness of the Company may contain prohibitions on the
occurrence of certain events that would constitute a Change of Control or
require such indebtedness to be repurchased upon a Change of Control. Moreover,
the exercise by the holders of their right to require the Company to repurchase
the Notes could cause a default under such indebtedness, even if the Change of
Control itself does not, due to the financial effect of such repurchase on the
Company. Finally, the Company's ability to pay cash to the holders of Notes
following the occurrence of a Change of Control may be limited by the Company's
then existing financial resources. There can be no assurance that sufficient
funds will be available when necessary to make any required repurchases.
The provisions under the Indenture relative to the Company's obligation to
make an offer to repurchase the Notes as a result of a Change of Control may be
waived or modified only with the written consent of the holders of a majority in
principal amount of the Notes then outstanding.
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CERTAIN COVENANTS
The Indenture contains covenants including, among others, the following:
Limitation on Indebtedness. (a) The Company shall not Incur, directly or
indirectly, any Indebtedness unless, on the date of such Incurrence, the
Consolidated Coverage Ratio exceeds 2.00 to 1 if such Indebtedness is Incurred
prior to May 1, 1998 or 2.25 to 1 if such Indebtedness is Incurred thereafter.
(b) Notwithstanding the foregoing paragraph (a), the Company may Incur any
or all of the following Indebtedness: (1) Indebtedness Incurred pursuant to the
Term Loan Provisions of the Credit Agreement or any other loan agreement or
other agreement in an aggregate principal amount that, when taken together with
the principal amount of all other Indebtedness Incurred pursuant to this clause
(1) and then outstanding, does not exceed (A) $105 million less (B) the
aggregate amount of all principal repayments of any such Indebtedness actually
made after the Issue Date (other than any such principal repayments made as a
result of the Refinancing of any such Indebtedness); (2) Indebtedness Incurred
pursuant to the Revolving Credit Provisions of the Credit Agreement or any other
loan agreement or other agreement; provided, however, that, after giving effect
to any such Incurrence, the aggregate principal amount of such Indebtedness then
outstanding does not exceed the greater of $70 million and the sum of (A) 50% of
the book value of the inventory of the Company and its Restricted Subsidiaries
(other than any Foreign Subsidiary that has Indebtedness then outstanding
Incurred pursuant to clause (d) of the covenant described under "-- Limitations
on Indebtedness and Preferred Stock of Restricted Subsidiaries") and (B) 85% of
the book value of the accounts receivables of the Company and its Restricted
Subsidiaries (other than any Foreign Subsidiary that has Indebtedness then
outstanding Incurred pursuant to clause (d) of the covenant described under
"-- Limitation on Indebtedness and Preferred Stock of Restricted Subsidiaries");
(3) Indebtedness owed to and held by a Wholly Owned Subsidiary; provided,
however, that any subsequent issuance or transfer of any Capital Stock which
results in any such Wholly Owned Subsidiary ceasing to be a Wholly Owned
Subsidiary or any subsequent transfer of such Indebtedness (other than to
another Wholly Owned Subsidiary) shall be deemed, in each case, to constitute
the Incurrence of such Indebtedness by the Company; (4) the Notes; (5)
Indebtedness outstanding on the Issue Date (other than Indebtedness described in
clause (1), (2), (3) or (4) of this covenant); (6) Refinancing Indebtedness in
respect of Indebtedness Incurred pursuant to paragraph (a) or pursuant to clause
(4) or (5) or this paragraph (6); (7) Hedging Obligations directly related to
Indebtedness permitted to be Incurred by the Company pursuant to the Indenture;
(8) Indebtedness consisting of Guarantees of Indebtedness of a Foreign
Subsidiary Incurred pursuant to clause (d) of the covenant described under
"-- Limitation on Indebtedness and Preferred Stock of Restricted Subsidiaries";
and (9) Indebtedness in an aggregate principal amount which, together with all
other Indebtedness of the Company outstanding on the date of such Incurrence
(other than Indebtedness permitted by clauses (1) through (8) above or paragraph
(a)) does not exceed $10 million.
(c) Notwithstanding the foregoing, the Company shall not Incur any
Indebtedness pursuant to the foregoing paragraph (b) if the proceeds thereof are
used, directly or indirectly, to Refinance any Subordinated Obligations unless
such Indebtedness shall be subordinated to the Notes to at least the same extent
as such Subordinated Obligations.
(d) For purposes of determining compliance with the foregoing covenant, (i)
in the event that an item of Indebtedness meets the criteria of more than one of
the types of Indebtedness described above, the Company, in its sole discretion,
will classify such item of Indebtedness and only be required to include the
amount and type of such Indebtedness in one of the above clauses and (ii) an
item of Indebtedness may be divided and classified in more than one of the types
of Indebtedness described above.
Limitation on Indebtedness and Preferred Stock of Restricted
Subsidiaries. The Company shall not permit any Restricted Subsidiary to Incur,
directly or indirectly, any Indebtedness or Preferred Stock except:
(a) Indebtedness of a Subsidiary of the Company Incurred solely to
Guarantee Indebtedness of the Company Incurred pursuant to clause (1) or
(2) of paragraph (b) of the covenant described under "-- Limitation on
Indebtedness";
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(b) Indebtedness or Preferred Stock issued to and held by the Company
or a Wholly Owned Subsidiary; provided, however, that any subsequent
issuance or transfer of any Capital Stock which results in any such Wholly
Owned Subsidiary ceasing to be a Wholly Owned Subsidiary or any subsequent
transfer of such Indebtedness or Preferred Stock (other than to the Company
or a Wholly Owned Subsidiary) shall be deemed, in each case, to constitute
the issuance of such Indebtedness or Preferred Stock by the issuer thereof;
(c) Indebtedness or Preferred Stock of a Subsidiary Incurred and
outstanding on or prior to the date on which such Subsidiary was acquired
by the Company (other than Indebtedness or Preferred Stock Incurred in
connection with, or to provide all or any portion of the funds or credit
support utilized to consummate, the transaction or series of related
transactions pursuant to which such Subsidiary became a Subsidiary or was
acquired by the Company); provided, however, that on the date of such
acquisition and after giving effect thereto, the Company would have been
able to Incur at least $1.00 of Indebtedness pursuant to clause (a) of the
covenant described under "-- Limitation on Indebtedness";
(d) Indebtedness of Foreign Subsidiaries in an aggregate principal
amount that, when taken together with the principal amount of all other
Indebtedness Incurred pursuant to this clause (d) (and any Indebtedness
Incurred by Foreign Subsidiaries prior to the Issue Date solely to finance
its working capital) and then outstanding does not exceed the sum of (i)
50% of the book value of the inventory of Foreign Subsidiaries that have
Indebtedness then outstanding and Incurred pursuant to this clause (d) and
(ii) 85% of the book value of the accounts receivable of Foreign
Subsidiaries that have Indebtedness then outstanding and Incurred pursuant
to this clause (d);
(e) Indebtedness or Preferred Stock outstanding on the Issue Date
(other than Indebtedness described in clause (a), (b), (c) or (d) of this
paragraph);
(f) Refinancing Indebtedness Incurred in respect of Indebtedness or
Preferred Stock referred to in clause (c) or (e) or this clause (f);
provided, however, that to the extent such Refinancing Indebtedness
directly or indirectly Refinances Indebtedness or Preferred Stock of a
Subsidiary described in clause (c), such Refinancing Indebtedness shall be
Incurred only by such Subsidiary; and
(g) a Subsidiary Guaranty.
Limitation on Restricted Payments. (a) The Company shall not, and shall
not permit any Restricted Subsidiary, directly or indirectly, to make a
Restricted Payment if at the time the Company or such Restricted Subsidiary
makes such Restricted Payment: (1) a Default shall have occurred and be
continuing (or would result therefrom); (2) the Company is not able to Incur an
additional $1.00 of Indebtedness pursuant to paragraph (a) of the covenant
described under "-- Limitation on Indebtedness"; or (3) the aggregate amount of
such Restricted Payment and all other Restricted Payments since the Issue Date
would exceed the sum of: (A) 50% of the Consolidated Net Income accrued during
the period (treated as one accounting period) from the beginning of the fiscal
quarter immediately following the fiscal quarter during which the Notes are
originally issued to the end of the most recent fiscal quarter ending at least
45 days prior to the date of such Restricted Payment (or, in case such
Consolidated Net Income shall be a deficit, minus 100% of such deficit); (B) the
aggregate Net Cash Proceeds received by the Company from the issuance or sale of
its Capital Stock (other than Disqualified Stock) subsequent to the Issue Date
(other than an issuance or sale to a Subsidiary of the Company and other than an
issuance or sale to an employee stock ownership plan or to a trust established
by the Company or any of its Subsidiaries for the benefit of their employees);
(C) the amount by which Indebtedness of the Company is reduced on the Company's
balance sheet upon the conversion or exchange (other than by a Subsidiary of the
Company) subsequent to the Issue Date of any Indebtedness of the Company
convertible or exchangeable for Capital Stock (other than Disqualified Stock) of
the Company (less the amount of any cash, or the fair value of any other
property, distributed by the Company upon such conversion or exchange); and (D)
an amount equal to the sum of (i) the net reduction in Investments in
Unrestricted Subsidiaries resulting from dividends, repayments of loans or
advances or other transfers of assets, in each case to the Company or any
Restricted Subsidiary from Unrestricted Subsidiaries, and (ii) the portion
(proportionate to the Company's equity interest in such Subsidiary) of the fair
market value of the net assets of an Unrestricted Subsidiary at the time such
Unrestricted Subsidiary is designated a Restricted
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Subsidiary; provided, however, that the foregoing sum in clause (D) shall not
exceed, in the case of any Unrestricted Subsidiary, the amount of Investments
previously made (and treated as a Restricted Payment) by the Company or any
Restricted Subsidiary in such Unrestricted Subsidiary.
(b) The provisions of the foregoing paragraph (a) shall not prohibit: (i)
any purchase or redemption of Capital Stock or Subordinated Obligations of the
Company made by exchange for, or out of the proceeds of the substantially
concurrent sale of, Capital Stock of the Company (other than Disqualified Stock
and other than Capital Stock issued or sold to a Subsidiary of the Company or an
employee stock ownership plan or to a trust established by the Company or any of
its Subsidiaries for the benefit of their employees); provided, however, that
(A) such purchase or redemption shall be excluded in the calculation of the
amount of Restricted Payments and (B) the Net Cash Proceeds from such sale shall
be excluded from the calculation of amounts under clause (3)(B) of paragraph (a)
above; (ii) any purchase, repurchase, redemption, defeasance or other
acquisition or retirement for value of Subordinated Obligations made by exchange
for, or out of the proceeds of the substantially concurrent sale of,
Indebtedness of the Company which is permitted to be Incurred pursuant to the
covenant described under "-- Limitation on Indebtedness"; provided, however,
that such purchase, repurchase, redemption, defeasance or other acquisition or
retirement for value shall be excluded in the calculation of the amount of
Restricted Payments; or (iii) dividends paid within 60 days after the date of
declaration thereof if at such date of declaration such dividend would have
complied with this covenant; provided, however, that at the time of payment of
such dividend, no other Default shall have occurred and be continuing (or result
therefrom); provided further, however, that such dividend shall be included in
the calculation of the amount of Restricted Payments.
Limitation on Restrictions on Distributions from Restricted
Subsidiaries. The Company shall not, and shall not permit any Restricted
Subsidiary to, create or otherwise cause or permit to exist or become effective
any consensual encumbrance or restriction on the ability of any Restricted
Subsidiary to (a) pay dividends or make any other distributions on its Capital
Stock to the Company or a Restricted Subsidiary or pay any Indebtedness owed to
the Company, (b) make any loans or advances to the Company or (c) transfer any
of its property or assets to the Company, except: (i) any encumbrance or
restriction pursuant to an agreement in effect at or entered into on the Issue
Date; (ii) any encumbrance or restriction with respect to a Restricted
Subsidiary pursuant to an agreement relating to any Indebtedness Incurred by
such Restricted Subsidiary on or prior to the date on which such Restricted
Subsidiary was acquired by the Company (other than Indebtedness Incurred as
consideration in, or to provide all or any portion of the funds or credit
support utilized to consummate, the transaction or series of related
transactions pursuant to which such Restricted Subsidiary became a Restricted
Subsidiary or was acquired by the Company) and outstanding on such date; (iii)
any encumbrance or restriction pursuant to an agreement effecting a Refinancing
of Indebtedness Incurred pursuant to an agreement referred to in clause (i) or
(ii) of this covenant or this clause (iii) or contained in any amendment to an
agreement referred to in clause (i) or (ii) of this covenant or this clause
(iii); provided, however, that the encumbrances and restrictions with respect to
such Restricted Subsidiary contained in any such refinancing agreement or
amendment are no less favorable to the Noteholders than encumbrances and
restrictions with respect to such Restricted Subsidiary contained in such
agreements; (iv) any such encumbrance or restriction consisting of customary non
assignment provisions in leases governing leasehold interests to the extent such
provisions restrict the transfer of the lease or the property leased thereunder;
(v) in the case of clause (c) above, restrictions contained in security
agreements or mortgages securing Indebtedness of a Restricted Subsidiary to the
extent such restrictions restrict the transfer of the property subject to such
security agreements or mortgages; (vi) any encumbrance or restriction imposed
solely upon a Foreign Subsidiary; and (vii) any restriction with respect to a
Restricted Subsidiary imposed pursuant to an agreement entered into for the sale
or disposition of all or substantially all the Capital Stock or assets of such
Restricted Subsidiary pending the closing of such sale or disposition.
Limitation on Sales of Assets and Subsidiary Stock. (a) The Company shall
not, and shall not permit any Restricted Subsidiary to, directly or indirectly,
consummate any Asset Disposition unless (i) the Company or such Restricted
Subsidiary receives consideration at the time of such Asset Disposition at least
equal to the fair market value (including as to the value of all non-cash
consideration), as determined in good faith by the Board of Directors, of the
shares and assets subject to such Asset Disposition and (except in the
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case of a Scheduled Asset Disposition) at least 85% of the consideration thereof
received by the Company or such Restricted Subsidiary is in the form of cash or
cash equivalents and (ii) an amount equal to 100% of the Net Available Cash from
such Asset Disposition is applied by the Company (or such Restricted Subsidiary,
as the case may be) (A) first, to the extent the Company elects (or is required
by the terms of any Senior Indebtedness), to prepay, repay, redeem or purchase
Senior Indebtedness or Indebtedness (other than any Disqualified Stock) of a
Wholly Owned Subsidiary (in each case other than Indebtedness owed to the
Company or an Affiliate of the Company) within one year from the later of the
date of such Asset Disposition or the receipt of such Net Available Cash; (B)
second, to the extent of the balance of such Net Available Cash after
application in accordance with clause (A), to the extent the Company elects, to
acquire Additional Assets within one year from the later of the date of such
Asset Disposition or the receipt of such Net Available Cash; (C) third, to the
extent of the balance of such Net Available Cash after application in accordance
with clauses (A) and (B), to make an offer to the holders of the Notes (and to
holders of other Senior Indebtedness designated by the Company) to purchase
Notes (and such other Senior Indebtedness) pursuant to and subject to the
conditions contained in the Indenture; and (D) fourth, to the extent of the
balance of such Net Available Cash after application in accordance with clauses
(A), (B) and (C), to (x) the acquisition by the Company or any Wholly Owned
Subsidiary of Additional Assets or (y) the prepayment, repayment or purchase of
Indebtedness (other than any Disqualified Stock) of the Company (other than
Indebtedness owed to an Affiliate of the Company) or Indebtedness of any
Subsidiary (other than Indebtedness owed to the Company or an Affiliate of the
Company), in each case within one year from the later of the receipt of such Net
Available Cash and the date the offer described in clause (b) below is
consummated; provided, however, that in connection with any prepayment,
repayment or purchase of Indebtedness pursuant to clause (A), (C) or (D) above
(other than such prepayment, repayment or purchase with the Net Available Cash
from a Scheduled Asset Disposition or such repayment or prepayment of
Indebtedness Incurred pursuant to clause (2) of paragraph (b) of the covenant
described under "-- Limitation on Indebtedness"), the Company or such Restricted
Subsidiary shall retire such Indebtedness and shall cause the related loan
commitment (if any) to be permanently reduced in an amount equal to the
principal amount so prepaid, repaid or purchased. Notwithstanding the foregoing
provisions of this paragraph, the Company and the Restricted Subsidiaries shall
not be required to apply any Net Available Cash in accordance with this
paragraph except to the extent that the aggregate Net Available Cash from all
Asset Dispositions which are not applied in accordance with this paragraph
exceed $10 million. Pending application of Net Available Cash pursuant to this
covenant, such Net Available Cash shall be invested in Permitted Investments or
applied to reduce outstanding Indebtedness described in paragraph (b)(2) of the
covenant described under "-- Limitation on Indebtedness".
For the purposes of this covenant, the following are deemed to be cash or
cash equivalents: (x) the assumption of Indebtedness of the Company or any
Restricted Subsidiary and the release of the Company or such Restricted
Subsidiary from all liability on such Indebtedness in connection with such Asset
Disposition and (y) securities received by the Company or any Restricted
Subsidiary from the transferee that are promptly converted by the Company or
such Restricted Subsidiary into cash.
(b) In the event of an Asset Disposition that requires the purchase of the
Notes (and other Senior Indebtedness) pursuant to clause (a)(ii)(C) above, the
Company will be required to purchase Notes tendered pursuant to an offer by the
Company for the Notes (and other Senior Indebtedness) at a purchase price of
100% of their principal amount (without premium) plus accrued but unpaid
interest (or, in respect of such other Senior Indebtedness, such lesser price,
if any, as may be provided for by the terms of such Senior Indebtedness) in
accordance with the procedures (including prorating in the event of
oversubscription) set forth in the Indenture. If the aggregate purchase price of
Notes (and any other Senior Indebtedness) tendered pursuant to such offer is
less than the Net Available Cash allotted to the purchase thereof, the Company
will be required to apply the remaining Net Available Cash in accordance with
clause (a)(ii)(D) above. The Company shall not be required to make such an offer
to purchase Notes (and other Senior Indebtedness) pursuant to this covenant if
the Net Available Cash available therefor is less than $10 million (which lesser
amount shall be carried forward for purposes of determining whether such an
offer is required with respect to any subsequent Asset Disposition).
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(c) The Company shall comply, to the extent applicable, with the
requirements of Section 14(e) of the Exchange Act and any other securities laws
or regulations in connection with the repurchase of Notes pursuant to this
covenant. To the extent that the provisions of any securities laws or
regulations conflict with provisions of this covenant, the Company shall comply
with the applicable securities laws and regulations and shall not be deemed to
have breached its obligations under this clause by virtue thereof.
Limitation on Affiliate Transactions. (a) The Company shall not, and shall
not permit any Restricted Subsidiary to, enter into or permit to exist any
transaction (including the purchase, sale, lease or exchange of any property,
employee compensation arrangements or the rendering of any service) with any
Affiliate of the Company (an "Affiliate Transaction") unless the terms thereof
(1) are no less favorable to the Company or such Restricted Subsidiary than
those that could be obtained at the time of such transaction in arm's-length
dealings with a Person who is not such an Affiliate, (2) if such Affiliate
Transaction involves an amount in excess of $2.5 million, (i) are set forth in
writing and (ii) have been approved by a majority of the members of the Board of
Directors having no personal stake in such Affiliate Transaction and (3) if such
Affiliate Transaction involves an amount in excess of $10 million, have been
determined by a nationally recognized investment banking firm to be fair, from a
financial standpoint to the Company and its Restricted Subsidiaries.
(b) The provisions of the foregoing paragraph (a) shall not prohibit (i)
any Restricted Payment permitted to be paid pursuant to the covenant described
under "-- Limitation on Restricted Payments", (ii) any issuance of securities,
or other payments, awards or grants in cash, securities or otherwise pursuant
to, or the funding of, employment arrangements, stock options and stock
ownership plans approved by the Board of Directors, (iii) the grant of stock
options or similar rights to employees and directors of the Company pursuant to
plans approved by the Board of Directors, (iv) loans or advances to employees in
the ordinary course of business in accordance with the past practices of the
Company or its Restricted Subsidiaries, but in any event not to exceed $1
million in the aggregate outstanding at any one time, (v) the payment of
reasonable fees to directors of the Company and its Restricted Subsidiaries who
are not employees of the Company or its Restricted Subsidiaries and (vi) any
Affiliate Transaction between the Company and a Restricted Subsidiary or between
Restricted Subsidiaries.
Limitation on the Sale or Issuance of Capital Stock of Restricted
Subsidiaries. The Company shall not sell or otherwise dispose of any shares of
Capital Stock of a Restricted Subsidiary, and shall not permit any Restricted
Subsidiary, directly or indirectly, to issue or sell or otherwise dispose of any
shares of its Capital Stock except (i) to the Company or a Wholly Owned
Subsidiary or (ii) if, immediately after giving effect to such issuance, sale or
other disposition, the Company and its Restricted Subsidiaries would own less
than 20% of the Voting Stock of such Restricted Subsidiary and have no greater
economic interest in such Restricted Subsidiary.
Limitation on Liens. The Company shall not, and shall not permit any
Restricted Subsidiary to, directly or indirectly, Incur or permit to exist any
Lien of any nature whatsoever on any of its properties (including Capital Stock
of a Restricted Subsidiary), whether owned at the Issue Date or thereafter
acquired, other than Permitted Liens, without effectively providing that the
Notes shall be secured equally and ratably with (or prior to) the obligations so
secured for so long as such obligations are so secured.
Limitation on Sale/Leaseback Transactions. The Company shall not, and
shall not permit any Restricted Subsidiary to, enter into any Sale/Leaseback
Transaction with respect to any property unless (i) the Company or such
Subsidiary would be entitled to (A) Incur Indebtedness in an amount equal to the
Attributable Debt with respect to such Sale/Leaseback Transaction pursuant to
the covenant described under "-- Limitation on Indebtedness" and (B) create a
Lien on such property securing such Attributable Debt without equally and
ratably securing the Notes pursuant to the covenant described under
"-- Limitation on Liens", (ii) the net cash proceeds received by the Company or
any Restricted Subsidiary in connection with such Sale/Leaseback Transaction are
at least equal to the fair value (as determined by the Board of Directors) of
such property and (iii) the Company applies the proceeds of such transaction in
compliance with the covenant described under "-- Limitation on Sale of Assets
and Subsidiary Stock".
Merger and Consolidation. The Company shall not consolidate with or merge
with or into, or convey, transfer or lease, in one transaction or a series of
transactions, all or substantially all its assets to, any Person, unless: (i)
the resulting, surviving or transferee Person (the "Successor Company") shall be
a Person
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organized and existing under the laws of the United States of America, any State
thereof or the District of Columbia and the Successor Company (if not the
Company) shall expressly assume, by an indenture supplemental thereto, executed
and delivered to the Trustee, in form acceptable to the Trustee, all the
obligations of the Company under the Notes and the Indenture; (ii) immediately
after giving effect to such transaction (and treating any Indebtedness which
becomes an obligation of the Successor Company or any Subsidiary as a result of
such transaction as having been Incurred by such Successor Company or such
Subsidiary at the time of such transaction), no Default shall have occurred and
be continuing, (iii) immediately after giving effect to such transaction, the
Successor Company would be able to Incur an additional $1.00 of Indebtedness
pursuant to paragraph (a) of the covenant described under "-- Limitation on
Indebtedness"; (iv) immediately after giving effect to such transaction, the
Successor Company shall have Consolidated Net Worth in an amount that is not
less than the Consolidated Net Worth of the Company immediately prior to such
transaction; and (v) the Company shall have delivered to the Trustee an
Officers' Certificate and an Opinion of Counsel, each stating that such
consolidation, merger or transfer and such supplemental indenture (if any)
comply with the Indenture.
The Successor Company shall be the successor to the Company and shall
succeed to, and be substituted for, and may exercise every right and power of,
the Company under the Indenture, and the predecessor Company in the case of a
conveyance, transfer or lease shall be released from its obligations under the
Indenture and with respect to the Notes.
The Company will not permit any Subsidiary Guarantor to consolidate with or
merge with or into, or convey, transfer or lease, in one transaction or series
of transactions, all or substantially all of its assets to any Person unless:
(i) the resulting, surviving or transferee Person (if not such Subsidiary) shall
be a Person organized and existing under the laws of the jurisdiction under
which such Subsidiary was organized or under the laws of the United States of
America, or any State hereof or the District of Columbia, and such Person shall
expressly assume, by a guaranty agreement, in a form acceptable to the Trustee,
all the obligations of such Subsidiary, if any, under its Subsidiary Guaranty;
(ii) immediately after giving effect to such transaction or transactions on a
pro forma basis (and treating any Indebtedness which becomes an obligation of
the resulting, surviving or transferee Person as a result of such transaction as
having been issued by such Person at the time of such transaction), no Default
shall have occurred and be continuing; and (iii) the Company delivers to the
Trustee an Officers' Certificate and an Opinion of Counsel, each stating that
such consolidation, merger or transfer and such guaranty agreement, if any,
complies with the Indenture.
Future Guarantors. In the event that, after the Issue Date, a Subsidiary
(other than any Specified Subsidiary) Guarantees any Indebtedness of the Company
incurred pursuant to clause (1) or (2) of paragraph (b) of the covenant
described under "-- Limitation on Indebtedness", the Company shall cause such
Subsidiary to Guarantee the Notes pursuant to a Subsidiary Guaranty on the terms
and conditions set forth in the Indenture.
Specified Subsidiaries. The Company shall not, and shall not permit any
Restricted Subsidiary to, make any Investment in a Specified Subsidiary or
transfer any assets or other property to a Specified Subsidiary; provided,
however, the foregoing shall not prohibit the Company from providing treasury
functions to a Specified Subsidiary or the transfer of inventory and equipment,
furniture, computers and related equipment among the Company and such Specified
Subsidiaries, in each case in the ordinary course of business consistent with
past practices.
SEC Reports. Notwithstanding that the Company may not be required to
remain subject to the reporting requirements of Section 13 or 15(d) of the
Exchange Act, the Company shall file with the SEC and provide the Trustee and
Noteholders with such annual reports and such information, documents and other
reports as are specified in Sections 13 and 15(d) of the Exchange Act and
applicable to a U.S. corporation subject to such Sections, such information,
documents and other reports to be so filed and provided at the times specified
for the filing of such information, documents and reports under such Sections.
DEFAULTS
An Event of Default is defined in the Indenture as (i) a default in the
payment of interest on the Notes when due, continued for 30 days, (ii) a default
in the payment of principal of any Note when due at its Stated
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Maturity, upon optional redemption, upon required repurchase, upon declaration
or otherwise, (iii) the failure by the Company to comply with its obligations
under "-- Certain Covenants -- Merger and Consolidation" above, (iv) the failure
by the Company to comply for 30 days after notice with any of its obligations in
the covenants described above under "-- Change of Control" (other than a failure
to purchase Notes) or under "-- Certain Covenants", under "-- Limitation on
Indebtedness", "-- Limitation on Indebtedness and Preferred Stock of Restricted
Subsidiaries", "-- Limitation on Restricted Payments", "-- Limitation on
Restrictions on Distributions from Restricted Subsidiaries", "-- Limitation on
Sales of Assets and Subsidiary Stock" (other than a failure to purchase Notes),
"-- Limitation on Affiliate Transactions", "-- Limitation on the Sale or
Issuance of Capital Stock of Restricted Subsidiaries", "-- Limitation on Liens",
"-- Limitation on Sale/Leaseback Transactions", "-- Future Guarantors",
"-- Specified Subsidiaries" or "-- SEC Reports", (v) the failure by the Company
to comply for 60 days after notice with its other agreements contained in the
Indenture, (vi) Indebtedness of the Company or any Significant Subsidiary is not
paid within any applicable grace period after final maturity or is accelerated
by the holders thereof because of a default and the total amount of such
Indebtedness unpaid or accelerated exceeds $5 million (the "cross acceleration
provision"), (vii) certain events of bankruptcy, insolvency or reorganization of
the Company or a Significant Subsidiary (the "bankruptcy provisions"), (viii)
any judgment or decree for the payment of money in excess of $5 million is
rendered against the Company or a Significant Subsidiary, remains outstanding
for a period of 60 days following such judgment and is not discharged, waived or
stayed within 10 days after notice (the "judgment default provision") or (ix) a
Subsidiary Guaranty ceases to be in full force and effect (other than in
accordance with the terms of such Subsidiary Guaranty) or a Subsidiary Guarantor
denies or disaffirms its obligations under its Subsidiary Guaranty. However, a
default under clauses (iv), (v) and (viii) will not constitute an Event of
Default until the Trustee or the holders of 25% in principal amount of the
outstanding Notes notify the Company of the default and the Company does not
cure such default within the time specified after receipt of such notice.
If an Event of Default occurs and is continuing, the Trustee or the holders
of at least 25% in principal amount of the outstanding Notes may declare the
principal of and accrued but unpaid interest on all the Notes to be due and
payable. Upon such a declaration, such principal and interest shall be due and
payable immediately. If an Event of Default relating to certain events of
bankruptcy, insolvency or reorganization of the Company occurs and is
continuing, the principal of and interest on all the Notes will ipso facto
become and be immediately due and payable without any declaration or other act
on the part of the Trustee or any holders of the Notes. Under certain
circumstances, the holders of a majority in principal amount of the outstanding
Notes may rescind any such acceleration with respect to the Notes and its
consequences.
Subject to the provisions of the Indenture relating to the duties of the
Trustee, in case an Event of Default occurs and is continuing, the Trustee will
be under no obligation to exercise any of the rights or powers under the
Indenture at the request or direction of any of the holders of the Notes unless
such holders have offered to the Trustee reasonable indemnity or security
against any loss, liability or expense. Except to enforce the right to receive
payment of principal, premium (if any) or interest when due, no holder of a Note
may pursue any remedy with respect to the Indenture or the Notes unless (i) such
holder has previously given the Trustee notice that an Event of Default is
continuing, (ii) holders of at least 25% in principal amount of the outstanding
Notes have requested the Trustee to pursue the remedy, (iii) such holders have
offered the Trustee reasonable security or indemnity against any loss, liability
or expense, (iv) the Trustee has not complied with such request within 60 days
after the receipt thereof and the offer of security or indemnity and (v) the
holders of a majority in principal amount of the outstanding Notes have not
given the Trustee a direction inconsistent with such request within such 60-day
period. Subject to certain restrictions, the holders of a majority in principal
amount of the outstanding Notes are given the right to direct the time, method
and place of conducting any proceeding for any remedy available to the Trustee
or of exercising any trust or power conferred on the Trustee. The Trustee,
however, may refuse to follow any direction that conflicts with law or the
Indenture or that the Trustee determines is unduly prejudicial to the rights of
any other holder of a Note or that would involve the Trustee in personal
liability.
The Indenture provides that if a Default occurs and is continuing and is
known to the Trustee, the Trustee must mail to each holder of the Notes notice
of the Default within 90 days after it occurs. Except in the case of a Default
in the payment of principal of or interest on any Note, the Trustee may withhold
notice if
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it determines that withholding notice is not opposed to the interest of the
holders of the Notes. In addition, the Company is required to deliver to the
Trustee, within 120 days after the end of each fiscal year, a certificate
indicating whether the signers thereof know of any Default that occurred during
the previous year. The Company also is required to deliver to the Trustee,
within 30 days after the occurrence thereof, written notice of any event which
would constitute certain Defaults, their status and what action the Company is
taking or proposes to take in respect thereof.
AMENDMENTS AND WAIVERS
Subject to certain exceptions, the Indenture may be amended with the
consent of the holders of a majority in principal amount of the Notes then
outstanding (including consents obtained in connection with a tender offer or
exchange for the Notes) and any past default or compliance with any provisions
may also be waived with the consent of the holders of a majority in principal
amount of the Notes then outstanding. However, without the consent of each
holder of an outstanding Note affected thereby, no amendment may, among other
things, (i) reduce the amount of Notes whose holders must consent to an
amendment, (ii) reduce the rate of or extend the time for payment of interest on
any Note, (iii) reduce the principal of or extend the Stated Maturity of any
Note, (iv) reduce the premium payable upon the redemption of any Note or change
the time at which any Note may be redeemed as described under "-- Optional
Redemption" above, (v) make any Note payable in money other than that stated in
the Note, (vi) impair the right of such holder of the Notes to receive payment
of principal of and interest on such holder's Notes on or after the due dates
therefor or to institute suit for the enforcement of any payment on or with
respect to such holder's Notes, (vii) make any change in the amendment
provisions which require such holder's consent or in the waiver provisions,
(viii) make any change to the subordination provisions of the Indenture that
would adversely affect such holder or (ix) make any change in any Subsidiary
Guaranty that could adversely affect such holder.
Without the consent of any Holder, the Company and Trustee may amend the
Indenture to cure any ambiguity, omission, defect or inconsistency, to provide
for the assumption by a successor corporation of the obligations of the Company
under the Indenture, to provide for uncertificated Notes in addition to or in
place of certificated Notes (provided that the uncertificated Notes are issued
in registered form for purposes of Section 163(f) of the Code, or in a manner
such that the uncertificated Notes are described in Section 163(f)(2)(B) of the
Code), to add guarantees with respect to the Notes, to secure the Notes, to add
to the covenants of the Company for the benefit of the holders of the Notes or
to surrender any right or power conferred upon the Company, to make any change
that does not adversely affect the rights of any holder of the Notes or to
comply with any requirement of the SEC in connection with the qualification of
the Indenture under the Trust Indenture Act. However, no amendment may be made
to the subordination provisions of the Indenture that adversely affects the
rights of any holder of Specified Senior Indebtedness then outstanding unless
the holders of such Specified Senior Indebtedness (or their Representative)
consent to such change in accordance with the terms governing such Specified
Senior Indebtedness.
The consent of the holders of the Notes is not necessary under the
Indenture to approve the particular form of any proposed amendment. It is
sufficient if such consent approves the substance of the proposed amendment.
After an amendment under the Indenture becomes effective, the Company is
required to mail to holders of the Notes a notice briefly describing such
amendment. However, the failure to give such notice to all holders of the Notes,
or any defect therein, will not impair or affect the validity of the amendment.
DEFEASANCE
The Company at any time may terminate all its obligations under the Notes
and the Indenture ("legal defeasance"), except for certain obligations,
including those respecting the defeasance trust and obligations to register the
transfer or exchange of the Notes, to replace mutilated, destroyed, lost or
stolen Notes and to maintain a registrar and paying agent in respect of the
Notes. The Company at any time may terminate its obligations under "Change of
Control" and under the covenants described under "-- Certain Covenants" (other
than the covenant described under "-- Merger and Consolidation"), the operation
of the cross acceleration provision, the bankruptcy provisions with respect to
Significant Subsidiaries and the judgment
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default provision described under "-- Defaults" above and the limitations
contained in clauses (iii) and (iv) under "-- Certain Covenants -- Merger and
Consolidation" above ("covenant defeasance").
The Company may exercise its legal defeasance option notwithstanding its
prior exercise of its covenant defeasance option. If the Company exercises its
legal defeasance option, payment of the Notes may not be accelerated because of
an Event of Default with respect thereto. If the Company exercises its covenant
defeasance option, payment of the Notes may not be accelerated because of an
Event of Default specified in clause (iv), (vi), (vii) (with respect only to
Significant Subsidiaries) or (viii) under "-- Defaults" above or because of the
failure of the Company to comply with clause (iii) or (iv) under "-- Certain
Covenants -- Merger and Consolidation" above. If the Company exercises its legal
defeasance option or its covenant defeasance option, each Subsidiary Guarantor,
if any, will be released from all of its obligations with respect to its
Subsidiary Guaranty.
In order to exercise either defeasance option, the Company must irrevocably
deposit in trust (the "defeasance trust") with the Trustee money or U.S.
Government Obligations for the payment of principal and interest on the Notes to
redemption or maturity, as the case may be, and must comply with certain other
conditions, including delivery to the Trustee of an Opinion of Counsel to the
effect that holders of the Notes will not recognize income, gain or loss for
Federal income tax purposes as a result of such deposit and defeasance 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 and defeasance had
not occurred (and, in the case of legal defeasance only, such Opinion of Counsel
must be based on a ruling of the Internal Revenue Service or other change in
applicable Federal income tax law).
CONCERNING THE TRUSTEE
IBJ Schroder Bank & Trust Company is the Trustee under the Indenture and
has been appointed by the Company as Registrar and Paying Agent with regard to
the Notes.
The Holders of a majority in principal amount of the outstanding Notes will
have the right to direct the time, method and place of conducting any proceeding
for exercising any remedy available to the Trustee, subject to certain
exceptions. The Indenture provides that if an Event of Default occurs (and is
not cured), the Trustee will be required, in the exercise of its power, to use
the degree of care of a prudent man in the conduct of his own affairs. Subject
to such provisions, the Trustee will be under no obligation to exercise any of
its rights or powers under the Indenture at the request of any Holder of Notes,
unless such Holder shall have offered to the Trustee security and indemnity
satisfactory to it against any loss, liability or expense and then only to the
extent required by the terms of the Indenture.
GOVERNING LAW
The Indenture provides that it and the Notes will be governed by, and
construed in accordance with, the law of the State of New York without giving
effect to applicable principles of conflicts of law to the extent that the
application of the law of another jurisdiction would be required thereby.
CERTAIN DEFINITIONS
"Additional Assets" means (i) any property or assets (other than
Indebtedness and Capital Stock) in a Related Business; (ii) the Capital Stock of
a Person that becomes a Restricted Subsidiary as a result of the acquisition of
such Capital Stock by the Company or another Restricted Subsidiary or (iii)
Capital Stock constituting a minority interest in any Person that at such time
is a Restricted Subsidiary; provided, however, that any such Restricted
Subsidiary described in clauses (ii) or (iii) above is primarily engaged in a
Related Business.
"Affiliate" of any specified Person means any other Person, directly or
indirectly, controlling or controlled by or under direct or indirect common
control with such specified Person. For the purposes of this definition,
"control" when used with respect to any Person means the power to direct the
management and policies of such Person, directly or indirectly, whether through
the ownership of voting securities, by contract or otherwise; and the terms
"controlling" and "controlled" have meanings correlative to the foregoing. For
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purposes of the provisions described under "-- Certain Covenants -- Limitation
on Restricted Payments", "-- Certain Covenants -- Limitation on Affiliate
Transactions" and "-- Certain Covenants -- Limitations on Sales of Assets and
Subsidiary Stock" only, "Affiliate" shall also mean any beneficial owner of
Capital Stock representing 5% or more of the total voting power of the Voting
Stock (on a fully diluted basis) of the Company or of rights or warrants to
purchase such Capital Stock (whether or not currently exercisable) and any
Person who would be an Affiliate of any such beneficial owner pursuant to the
first sentence hereof.
"Asset Disposition" means any sale, lease, transfer or other disposition
(or series of related sales, leases, transfers or dispositions) by the Company
or any Restricted Subsidiary, including any disposition by means of a merger,
consolidation or similar transaction (each referred to for the purposes of this
definition as a "disposition"), of (i) any shares of Capital Stock of a
Restricted Subsidiary (other than directors' qualifying shares or shares
required by applicable law to be held by a Person other than the Company or a
Restricted Subsidiary), (ii) all or substantially all the assets of any division
or line of business of the Company or any Restricted Subsidiary or (iii) any
other assets of the Company or any Restricted Subsidiary outside of the ordinary
course of business of the Company or such Restricted Subsidiary (other than, in
the case of (i), (ii) and (iii) above, (y) a disposition by a Restricted
Subsidiary to the Company or by the Company or a Restricted Subsidiary to a
Wholly Owned Subsidiary and (z) for purposes of the covenant described under
"-- Certain Covenants -- Limitation on Sales of Assets and Subsidiary Stock"
only, a disposition that constitutes a Restricted Payment permitted by the
covenant described under "-- Certain Covenants -- Limitation on Restricted
Payments").
"Attributable Debt" in respect of a Sale/Leaseback Transaction means, as at
the time of determination, the present value (discounted at the interest rate
borne by the Notes, compounded annually) of the total obligations of the lessee
for rental payments during the remaining term of the lease included in such
Sale/Leaseback Transaction (including any period for which such lease has been
extended).
"Average Life" means, as of the date of determination, with respect to any
Indebtedness or Preferred Stock, the quotient obtained by dividing (i) the sum
of the products of numbers of years from the date of determination to the dates
of each successive scheduled principal payment of such Indebtedness or
redemption or similar payment with respect to such Preferred Stock multiplied by
the amount of such payment by (ii) the sum of all such payments.
"Banks" means the "Lenders" as defined in the Credit Agreement.
"Board of Directors" means the Board of Directors of the Company or any
committee thereof duly authorized to act on behalf of such Board.
"Business Day" means each day which is not a Legal Holiday.
"Capital Lease Obligations" means an obligation that is required to be
classified and accounted for as a capital lease for financial reporting purposes
in accordance with GAAP, and the amount of Indebtedness represented by such
obligation shall be the capitalized amount of such obligation determined in
accordance with GAAP; and the Stated Maturity thereof shall be the date of the
last payment of rent or any other amount due under such lease prior to the first
date upon which such lease may be terminated by the lessee without payment of a
penalty.
"Capital Stock" of any Person means any and all shares, interests, rights
to purchase, warrants, options, participations or other equivalents of or
interests in (however designated) equity of such Person, including any Preferred
Stock, but excluding any debt securities convertible into such equity.
"Code" means the Internal Revenue Code of 1986, as amended.
"Consolidated Coverage Ratio" as of any date of determination means the
ratio of (i) the aggregate amount of EBITDA for the period of the most recent
four consecutive fiscal quarters ending at least 45 days prior to the date of
such determination to (ii) Consolidated Interest Expense for such four fiscal
quarters; provided, however, that (1) if the Company or any Restricted
Subsidiary has Incurred any Indebtedness since the beginning of such period that
remains outstanding or if the transaction giving rise to the need to calculate
the Consolidated Coverage Ratio is an Incurrence of Indebtedness, or both,
EBITDA and Consolidated
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Interest Expense for such period shall be calculated after giving effect on a
pro forma basis to such Indebtedness as if such Indebtedness had been Incurred
on the first day of such period and the discharge of any other Indebtedness
repaid, repurchased, defeased or otherwise discharged with the proceeds of such
new Indebtedness as if such discharge had occurred on the first day of such
period, (2) if since the beginning of such period the Company or any Restricted
Subsidiary shall have made any Asset Disposition, the EBITDA for such period
shall be reduced by an amount equal to the EBITDA (if positive) directly
attributable to the assets which are the subject of such Asset Disposition for
such period, or increased by an amount equal to the EBITDA (if negative),
directly attributable thereto for such period and Consolidated Interest Expense
for such period shall be reduced by an amount equal to the Consolidated Interest
Expense directly attributable to any Indebtedness of the Company or any
Restricted Subsidiary repaid, repurchased, defeased or otherwise discharged with
respect to the Company and its continuing Restricted Subsidiaries in connection
with such Asset Disposition for such period (or, if the Capital Stock of any
Restricted Subsidiary is sold, the Consolidated Interest Expense for such period
directly attributable to the Indebtedness of such Restricted Subsidiary to the
extent the Company and its continuing Restricted Subsidiaries are no longer
liable for such Indebtedness after such sale), (3) if since the beginning of
such period the Company or any Restricted Subsidiary (by merger or otherwise)
shall have made an Investment in any Restricted Subsidiary (or any person which
becomes a Restricted Subsidiary) or an acquisition of assets, including any
acquisition of assets occurring in connection with a transaction requiring a
calculation to be made hereunder, which constitutes all or substantially all of
an operating unit of a business, EBITDA and Consolidated Interest Expense for
such period shall be calculated after giving pro forma effect thereto (including
the Incurrence of any Indebtedness) as if such Investment or acquisition
occurred on the first day of such period and (4) if since the beginning of such
period any Person (that subsequently became a Restricted Subsidiary or was
merged with or into the Company or any Restricted Subsidiary since the beginning
of such period) shall have made any Asset Disposition, any Investment or
acquisition of assets that would have required an adjustment pursuant to clause
(2) or (3) above if made by the Company or a Restricted Subsidiary during such
period, EBITDA and Consolidated Interest Expense for such period shall be
calculated after giving pro forma effect thereto as if such Asset Disposition,
Investment or acquisition occurred on the first day of such period. For purposes
of this definition, whenever pro forma effect is to be given to an acquisition
of assets, the amount of income or earnings relating thereto and the amount of
Consolidated Interest Expense associated with any Indebtedness Incurred in
connection therewith, the pro forma calculations shall be determined in good
faith by a responsible financial or accounting Officer of the Company. If any
Indebtedness bears a floating rate of interest and is being given pro forma
effect, the interest of 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 any Interest Rate Agreement applicable to such
Indebtedness if such Interest Rate Agreement has a remaining term in excess of
12 months).
"Consolidated Interest Expense" means, for any period, the total interest
expense of the Company and its consolidated Restricted Subsidiaries, plus, to
the extent not included in such total interest expense, and to the extent
incurred by the Company or its Restricted Subsidiaries, (i) interest expense
attributable to capital leases and one-third of the rental expense attributable
to operating leases, (ii) amortization of debt discount (including any original
issue discount) and debt issuance cost, (iii) capitalized interest, (iv)
non-cash interest expenses, (v) commissions, discounts and other fees and
charges owed with respect to letters of credit and bankers' acceptance
financing, (vi) net costs associated with Hedging Obligations (including
amortization of fees), (vii) Preferred Stock dividends in respect of all
Preferred Stock held by Persons other than the Company or a Wholly Owned
Subsidiary, (viii) interest incurred in connection with Investments in
discontinued operations, (ix) interest accruing on any Indebtedness of any other
Person to the extent such Indebtedness is Guaranteed by the Company or any
Restricted Subsidiary and (x) the cash contributions to any employee stock
ownership plan or similar trust to the extent such contributions are used by
such plan or trust to pay interest or fees to any Person (other than the
Company) in connection with Indebtedness Incurred by such plan or trust.
"Consolidated Net Income" means, for any period, the net income of the
Company and its consolidated Subsidiaries; provided, however, that there shall
not be included in such Consolidated Net Income: (i) any net income of any
Person if such Person is not a Restricted Subsidiary, except that (A) subject to
the exclusion
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contained in clause (iv) below, the Company's equity in the net income of any
such Person for such period shall be included in such Consolidated Net Income up
to the aggregate amount of cash actually distributed by such Person during such
period to the Company or a Restricted Subsidiary as a dividend or other
distribution (subject, in the case of a dividend or other distribution paid to a
Restricted Subsidiary, to the limitations contained in clause (iii) below) and
(B) the Company's equity in a net loss of any such Person for such period shall
be included in determining such Consolidated Net Income; (ii) any net income (or
loss) of any Person acquired by the Company or a Subsidiary in a pooling of
interests transaction for any period prior to the date of such acquisition;
(iii) any net income of any Restricted Subsidiary if such Restricted Subsidiary
is subject to restrictions, directly or indirectly, on the payment of dividends
or the making of distributions by such Restricted Subsidiary, directly or
indirectly, to the Company, except that (A) subject to the exclusion contained
in clause (iv) below, the Company's equity in the net income of any such
Restricted Subsidiary for such period shall be included in such Consolidated Net
Income up to the aggregate amount of cash actually distributed by such
Restricted Subsidiary during such period to the Company or another Restricted
Subsidiary as a dividend or other distribution (subject, in the case of a
dividend or other distribution paid to another Restricted Subsidiary, to the
limitation contained in this clause) and (B) the Company's equity in a net loss
of any such Restricted Subsidiary for such period shall be included in
determining such Consolidated Net Income; (iv) any gain (but not loss) realized
upon the sale or other disposition of any assets of the Company or its
consolidated Subsidiaries (including pursuant to any sale-and-leaseback
arrangement) which is not sold or otherwise disposed of in the ordinary course
of business and any gain (but not loss) realized upon the sale or other
disposition of any Capital Stock of any Person; (v) extraordinary gains or
losses; and (vi) the cumulative effect of a change in accounting principles.
Notwithstanding the foregoing, for the purposes of the covenant described under
"Certain Covenants -- Limitation on Restricted Payments" only, there shall be
excluded from Consolidated Net Income any dividends, repayments of loans or
advances or other transfers of assets from Unrestricted Subsidiaries to the
Company or a Restricted Subsidiary to the extent such dividends, repayments or
transfers increase the amount of Restricted Payments permitted under such
covenant pursuant to clause (a)(3)(D) thereof.
"Consolidated Net Worth" means the total of the amounts shown on the
balance sheet of the Company and its consolidated Subsidiaries, determined on a
consolidated basis in accordance with GAAP, as of the end of the most recent
fiscal quarter of the Company ending at least 45 days prior to the taking of any
action for the purpose of which the determination is being made, as (i) the par
or stated value of all outstanding Capital Stock of the Company plus (ii)
paid-in capital or capital surplus relating to such Capital Stock plus (iii) any
retained earnings or earned surplus less (A) any accumulated deficit and (B) any
amounts attributable to Disqualified Stock.
"Credit Agreement" means, collectively, the Credit Agreement dated as of
April 29, 1996, among the Company, the Specified Subsidiaries, the financial
institutions from time to time party thereto as Lenders and Issuing Banks,
Citicorp USA, Inc., in its separate capacity as agent for the Lenders and
Issuing Banks, as the same may from time to time be amended, renewed,
supplemented or otherwise modified at the option of the parties thereto and any
other agreement pursuant to which any of the Indebtedness, commitments,
obligations, costs, expenses, fees, reimbursements and other indemnities payable
or owing thereunder may be refinanced, restructured, renewed, extended, refunded
or increased, as any such other agreement may from time to time at the option of
the parties thereto be amended, supplemented, renewed or otherwise modified.
"Currency Agreement" means in respect of a Person any foreign exchange
contract, currency swap agreement or other similar agreement to which such
Person is a party or a beneficiary.
"Default" means any event which is, or after notice or passage of time or
both would be, an Event of Default.
"Disqualified Stock" means, with respect to any Person, any Capital Stock
which by its terms (or by the terms of any security into which it is convertible
or for which it is exchangeable) or upon the happening of any event (i) matures
or is mandatorily redeemable pursuant to a sinking fund obligation or otherwise,
(ii) is convertible or exchangeable for Indebtedness or Disqualified Stock or
(iii) is redeemable at the option of the holder thereof, in whole or in part, in
each case on or prior to the first anniversary of the Stated Maturity of the
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Notes; provided, however, that any Capital Stock that would not constitute
Disqualified Stock but for provisions thereof giving holders thereof the right
to require such Person to repurchase or redeem such Capital Stock upon the
occurrence of an "asset sale" or "change of control" occurring prior to the
first anniversary of the Stated Maturity of the Notes shall not constitute
Disqualified Stock if the "asset sale" or "change of control" provisions
applicable to such Capital Stock are not more favorable to the holders of such
Capital Stock than the provisions described under "Change of Control" and under
"-- Certain Covenants -- Limitation on Sales of Assets and Subsidiary Stock".
"EBITDA" for any period means the sum of Consolidated Net Income, plus
Consolidated Interest Expense plus the following to the extent deducted in
calculating such Consolidated Net Income: (a) all income tax expense of the
Company, (b) depreciation expense and (c) amortization expense, in each case for
such period. Notwithstanding the foregoing, the provision for taxes based on the
income or profits of, and the depreciation and amortization of, a Subsidiary of
the Company shall be added to Consolidated Net Income to compute EBITDA only to
the extent (and in the same proportion) that the net income of such Subsidiary
was included in calculating Consolidated Net Income and only if a corresponding
amount would be permitted at the date of determination to be dividended to the
Company by such Subsidiary without prior approval (that has not been obtained),
pursuant to the terms of its charter and all agreements, instruments, judgments,
decrees, orders, statutes, rules and governmental regulations applicable to such
Subsidiary or its stockholders.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Foreign Subsidiary" means a Restricted Subsidiary that is incorporated in
a jurisdiction other than the United States or a State thereof or the District
of Columbia and with respect to which more than 80% of any of its sales,
earnings or assets (determined on a consolidated basis in accordance with GAAP)
are located in, generated from or derived from operations located in territories
outside of the United States of America and jurisdictions outside the United
States of America.
"GAAP" means generally accepted accounting principles in the United States
of America as in effect as of the Issue Date, including those set forth (i) in
the opinions and pronouncements of the Accounting Principles Board of the
American Institute of Certified Public Accountants, (ii) statements and
pronouncements of the Financial Accounting Standards Board, (iii) in such other
statements by such other entity as approved by a significant segment of the
accounting profession, and (iv) the rules and regulations of the SEC governing
the inclusion of financial statements (including pro forma financial statements)
in periodic reports required to be filed pursuant to Section 13 of the Exchange
Act, including opinions and pronouncements in staff accounting bulletins and
similar written statements from the accounting staff of the SEC.
"Guarantee" means any obligation, contingent or otherwise, of any Person
directly or indirectly guaranteeing any Indebtedness or other obligation of any
Person and any obligation, direct or indirect, contingent or otherwise, of such
Person (i) to purchase or pay (or advance or supply funds for the purchase or
payment of) such Indebtedness or other obligation of such Person (whether
arising by virtue of partnership arrangements, or by agreements to keep-well, to
purchase assets, goods, securities or services, to take-or-pay or to maintain
financial statement conditions or otherwise) or (ii) entered into for the
purpose of assuring in any other manner the obligee of such Indebtedness or
other obligation of the payment thereof or to protect such obligee against loss
in respect thereof (in whole or in part); provided, however, that the term
"Guarantee" shall not include endorsements for collection or deposit in the
ordinary course of business. The term "Guarantee" used as a verb has a
corresponding meaning. The term "Guarantor" shall mean any Person Guaranteeing
any obligation.
"Hedging Obligations" of any Person means the obligations of such Person
pursuant to any Interest Rate Agreement or Currency Agreement.
"Holder" or "Noteholder" means the Person in whose name a Note is
registered on the Registrar's books.
"Incur" means issue, assume, Guarantee, incur or otherwise become liable
for; provided, however, that any Indebtedness or Capital Stock of a Person
existing at the time such Person becomes a Subsidiary (whether by merger,
consolidation, acquisition or otherwise) shall be deemed to be Incurred by such
Subsidiary at the time it becomes a Subsidiary. The term "Incurrence" when used
as a noun shall have a
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correlative meaning. The accretion of principal of a non-interest bearing or
other discount security shall not be deemed the Incurrence of Indebtedness.
"Indebtedness" means, with respect to any Person on any date of
determination (without duplication), (i) the principal of and premium (if any)
in respect of (A) indebtedness of such Person for money borrowed and (B)
indebtedness evidenced by notes, debentures, bonds or other similar instruments
for the payment of which such Person is responsible or liable; (ii) all Capital
Lease Obligations of such Person and all Attributable Debt in respect of
Sale/Leaseback Transactions entered into by such Person; (iii) all obligations
of such Person issued or assumed as the deferred purchase price of property, all
conditional sale obligations of such Person and all obligations of such Person
under any title retention agreement (but excluding trade accounts payable
arising in the ordinary course of business); (iv) all obligations of such Person
for the reimbursement of any obligor on any letter of credit, banker's
acceptance or similar credit transaction (other than obligations with respect to
letters of credit securing obligations (other than obligations described in (i)
through (iii) above) entered into in the ordinary course of business of such
Person to the extent such letters of credit are not drawn upon or, if and to the
extent drawn upon, such drawing is reimbursed no later than the tenth Business
Day following receipt by such Person of a demand for reimbursement following
payment on the letter of credit); (v) the amount of all obligations of such
Person with respect to the redemption, repayment or other repurchase of any
Disqualified Stock or, with respect to any Subsidiary of such Person, any
Preferred Stock (but excluding, in each case, any accrued dividends); (vi) all
obligations of the type referred to in clauses (i) through (v) of other Persons
and all dividends of other Persons for the payment of which, in either case,
such Person is responsible or liable, directly or indirectly, as obligor,
guarantor or otherwise, including by means of any Guarantee; (vii) all
obligations of the type referred to in clauses (i) through (vi) of other Persons
secured by any Lien on any property or asset of such Person (whether or not such
obligation is assumed by such Person), the amount of such obligation being
deemed to be the lesser of the value of such property or assets or the amount of
the obligation so secured and (viii) to the extent not otherwise included in
this definition, Hedging Obligations of such Person. 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 the maximum liability, upon the
occurrence of the contingency giving rise to the obligation, of any contingent
obligations at such date; provided, however, that the amount outstanding at any
time of any Indebtedness Incurred with original issue discount is the face
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.
"Insolvency or Liquidation Proceeding" means (i) any insolvency or
bankruptcy case or proceeding, or any receivership, liquidation, reorganization
or other similar case or proceeding in connection therewith, relating to the
Company or its assets, or (ii) any liquidation, dissolution or other winding up
of the Company, whether voluntary or involuntary or whether or not involving
insolvency or bankruptcy, or (iii) any assignment for the benefit of creditors
or any other marshalling of assets or liabilities of the Company.
"Interest Rate Agreement" means any interest rate swap agreement, interest
rate cap agreement or other financial agreement or arrangement designed to
protect the Company or any Restricted Subsidiary against fluctuations in
interest rates.
"Investment" in any Person means any direct or indirect advance, loan
(other than advances to customers in the ordinary course of business that are
recorded as accounts receivable on the balance sheet of such Person) or other
extensions of credit (including by way of Guarantee or similar arrangement) or
capital contribution to (by means of any transfer of cash or other property to
others or any payment for property or services for the account or use of
others), or any purchase or acquisition of Capital Stock, Indebtedness or other
similar instruments issued by such Person. For purposes of the definition of
"Unrestricted Subsidiary", the definition of "Restricted Payment" and the
covenant described under "-- Certain Covenants -- Limitation on Restricted
Payments", (i) "Investment" shall include the portion (proportionate to the
Company's equity interest in such Subsidiary) of the fair market value of the
net assets of any Subsidiary of the Company at the time that such Subsidiary is
designated an Unrestricted Subsidiary; provided, however, that upon a
redesignation of such Subsidiary as a Restricted Subsidiary, the Company shall
be deemed to continue to have a permanent "Investment" in an Unrestricted
Subsidiary equal to an amount (if positive) equal to (x) the
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Company's "Investment" in such Subsidiary at the time of such redesignation less
(y) the portion (proportionate to the Company's equity interest in such
Subsidiary) of the fair market value of the net assets of such Subsidiary at the
time of such redesignation; and (ii) any property transferred to or from an
Unrestricted Subsidiary shall be valued at its fair market value at the time of
such transfer, in each case as determined in good faith by the Board of
Directors.
"Issue Date" means the date on which the Old Notes were originally issued.
"Lien" means any mortgage, pledge, security interest, encumbrance, lien or
charge of any kind (including any conditional sale or other title retention
agreement or lease in the nature thereof).
"Net Available Cash" from an Asset Disposition means cash payments received
therefrom (including any cash payments received by way of deferred payment of
principal pursuant to a note or installment receivable or otherwise, but only as
and when received, but excluding any other consideration received in the form of
assumption by the acquiring Person of Indebtedness or other obligations relating
to such properties or assets that are the subject of such Asset Disposition or
received in any other noncash form) in each case net of (i) all legal, title and
recording tax expenses, commissions and other fees and expenses incurred, and
all Federal, state, provincial, foreign and local taxes required to be accrued
as a liability under GAAP, as a consequence of such Asset Disposition, (ii) all
payments made on any Indebtedness which is secured by any assets subject to such
Asset Disposition, in accordance with the terms of any Lien upon or other
security agreement of any kind with respect to such assets, or which must by its
terms, or in order to obtain a necessary consent to such Asset Disposition, or
by applicable law be, repaid out of the proceeds from such Asset Disposition,
(iii) all distributions and other payments required to be made to minority
interest holders in Subsidiaries or joint ventures as a result of such Asset
Disposition and (iv) the deduction of appropriate amounts provided by the seller
as a reserve, in accordance with GAAP, against any liabilities associated with
the property or other assets disposed in such Asset Disposition and retained by
the Company or any Restricted Subsidiary after such Asset Disposition.
"Net Cash Proceeds," with respect to any issuance or sale of Capital Stock,
means the cash proceeds of such issuance or sale net of attorneys' fees,
accountants' fees, underwriters' or placement agents' fees, discounts or
commissions and brokerage, consultant and other fees actually incurred in
connection with such issuance or sale and net of taxes paid or payable as a
result thereof.
"Permitted Investment" means an Investment by the Company or any Restricted
Subsidiary in (i) a Restricted Subsidiary or a Person that will, upon the making
of such Investment, become a Restricted Subsidiary; provided, however, that the
primary business of such Restricted Subsidiary is a Related Business; (ii)
another Person if as a result of such Investment such other Person is merged or
consolidated with or into, or transfers or conveys all or substantially all its
assets to, the Company or a Restricted Subsidiary; provided, however, that such
Person's primary business is a Related Business; (iii) Temporary Cash
Investments; (iv) receivables owing to the Company or any Restricted Subsidiary
if created or acquired in the ordinary course of business and payable or
dischargeable in accordance with customary trade terms; provided, however, that
such trade terms may include such concessionary trade terms as the Company or
any such Restricted Subsidiary deems reasonable under the circumstances; (v)
payroll, travel and similar advances to cover matters that are expected at the
time of such advances ultimately to be treated as expenses for accounting
purposes and that are made in the ordinary course of business; (vi) loans or
advances to employees made in the ordinary course of business consistent with
past practices of the Company or such Restricted Subsidiary; (vii) stock,
obligations or securities received in settlement of debts created in the
ordinary course of business and owing to the Company or any Restricted
Subsidiary or in satisfaction of judgments; (viii) any Person to the extent such
Investment represents the non-cash portion of the consideration received for an
Asset Disposition as permitted pursuant to the covenant described under
"-- Certain Covenants -- Limitation on Sales of Assets and Subsidiary Stock";
(ix) Investments in joint ventures conducting a Related Business primarily
outside of the United States; provided, however, that (A) so long as the Company
holds its investment as of the Issue Date in Roltra-Morse SpA and, through such
investment, the business conducted as of the Issue Date by Roltra-Morse SpA and
its subsidiaries, such Investments shall not exceed $15 million at any time
outstanding and (B) in the event that the Company no longer holds such
investment in Roltra-
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Morse SpA and such business conducted by Roltra-Morse and its subsidiaries, such
Investments shall not exceed $5 million at any time outstanding unless, at the
time such Investment is made, the Company would be able to Incur an additional
$1.00 of Indebtedness pursuant to paragraph (a) of the covenant described under
"-- Limitation on Indebtedness", in which case such Investments shall not exceed
$10 million at any time outstanding; and (x) other Investments that do not
exceed $1 million at any time outstanding.
"Permitted Liens" means, with respect to any Person, (a) pledges or
deposits by such Person under workers' compensation laws, unemployment insurance
laws or similar legislation, or good faith deposits in connection with bids,
tenders, contracts (other than for the payment of Indebtedness) or leases to
which such Person is a party, or deposits to secure public or statutory
obligations of such Person or deposits of cash or United States government bonds
to secure surety or appeal bonds to which such Person is a party, or deposits as
security for contested taxes or import duties or for the payment of rent, in
each case Incurred in the ordinary course of business; (b) Liens imposed by law,
such as carriers', warehousemen's and mechanics' Liens, in each case for sums
not yet due or being contested in good faith by appropriate proceedings or other
Liens arising out of judgments or awards against such Person with respect to
which such Person shall then be proceeding with an appeal or other proceedings
for review; (c) Liens for property taxes not yet subject to penalties for
non-payment or which are being contested in good faith and by appropriate
proceedings; (d) Liens in favor of issuers of surety bonds or letters of credit
issued pursuant to the request of and for the account of such Person in the
ordinary course of its business; provided, however, that such letters of credit
do not constitute Indebtedness; (e) minor survey exceptions, minor encumbrances,
easements or reservations of, or rights of others for, licenses, rights of way,
sewers, electric lines, telegraph and telephone lines and other similar
purposes, or zoning or other restrictions as to the use of real property or
Liens incidental to the conduct of the business of such Person or to the
ownership of its properties which were not Incurred in connection with
Indebtedness and which do not in the aggregate materially adversely affect the
value of said properties or materially impair their use in the operation of the
business of such Person; (f) Liens securing Indebtedness Incurred to finance the
construction, purchase or lease of, or repairs, improvements or additions to,
property of such Person; provided, however, that the Lien may not extend to any
other property owned by such Person or any of its Subsidiaries at the time the
Lien is Incurred, and the Indebtedness secured by the Lien may not be Incurred
more than 180 days after the later of the acquisition, completion of
construction, repair, improvement, addition or commencement of full operation of
the property subject to the Lien; (g) Liens to secure Indebtedness permitted
under the provisions described in clauses (b)(1) and (b)(2) under "-- Certain
Covenants -- Limitation on Indebtedness" and Indebtedness permitted under the
provisions described in clause (a) under "-- Certain Covenants -- Limitations on
Indebtedness and Preferred Stock of Restricted Subsidiaries"; (h) Liens existing
on the Issue Date; (i) Liens on property or shares of Capital Stock of another
Person at the time such other Person becomes a Subsidiary of such Person;
provided, however, that such Liens are not created, incurred or assumed in
connection with, or in contemplation of, such other Person becoming such a
Subsidiary; provided further, however, that such Lien may not extend to any
other property owned by such Person or any of its Subsidiaries; (j) Liens on
property at the time such Person or any of its Subsidiaries acquires the
property, including any acquisition by means of a merger or consolidation with
or into such Person or a Subsidiary of such Person; provided, however, that such
Liens are not created, incurred or assumed in connection with, or in
contemplation of, such acquisition; provided further, however, that the Liens
may not extend to any other property owned by such Person or any of its
Subsidiaries; (k) Liens securing Indebtedness or other obligations of a
Subsidiary of such Person owing to such Person or a wholly owned Subsidiary of
such Person; (l) Liens securing Hedging Obligations so long as such Hedging
Obligations relate to Indebtedness that is, and is permitted to be under the
Indenture, secured by a Lien on the same property securing such Hedging
Obligations; (m) Liens on inventory and accounts receivable (and the proceeds
thereof) of a Person and Capital Stock of or held, directly or indirectly, by
such Person, in each case securing Indebtedness Incurred by such Person pursuant
to clause (d) of the covenant described under "-- Certain
Covenants -- Limitation on Indebtedness and Preferred Stock of Restricted
Subsidiaries"; (n) purchase money Liens up to an aggregate at any time
outstanding of $5 million upon or in any property acquired or held by such
Person in the ordinary course of business to secure the purchase price of such
property; and (o) Liens to secure any Refinancing (or successive Refinancings)
as a whole, or in part, of any Indebtedness secured by any Lien referred to in
the foregoing clauses (f), (h), (i) and (j); provided, however,
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that (x) such new Lien shall be limited to all or part of the same property that
secured the original Lien (plus improvements to or on such property) and (y) the
Indebtedness secured by such Lien at such time is not increased to any amount
greater than the sum of (A) the outstanding principal amount or, if greater,
committed amount of the Indebtedness described under clauses (f), (h), (i) or
(j) at the time the original Lien became a Permitted Lien and (B) an amount
necessary to pay any fees and expenses, including premiums, related to such
refinancing, refunding, extension, renewal or replacement. Notwithstanding the
foregoing, "Permitted Liens" will not include any Lien described in clauses (f),
(i) or (j) above to the extent such Lien applies to any Additional Assets
acquired directly or indirectly from Net Available Cash pursuant to the covenant
described under "-- Certain Covenants -- Limitation on Sale of Assets and
Subsidiary Stock".
"Person" means any individual, corporation, partnership, joint venture,
association, joint-stock company, trust, unincorporated organization, government
or any agency or political subdivision thereof or any other entity.
"Post-Petition Interest" means all interest accrued or accruing after the
commencement of any Insolvency or Liquidation Proceeding (and interest that
would accrue but for the commencement of any Insolvency or Liquidation
Proceeding) in accordance with and at the contract rate (including, without
limitation, any rate applicable upon default) specified in the agreement or
instrument creating, evidencing or governing any Indebtedness, whether or not,
pursuant to applicable law or otherwise, the claim for such interest is allowed
as a claim in such Insolvency or Liquidation Proceeding.
"Preferred Stock", as applied to the Capital Stock of any corporation,
means Capital Stock of any class or classes (however designated) which is
preferred as to the payment of dividends, or as to the distribution of assets
upon any voluntary or involuntary liquidation or dissolution of such
corporation, over shares of Capital Stock of any other class of such
corporation.
"principal" of a Note means the principal of the Note plus the premium, if
any, payable on the Note which is due or is to become due at the relevant time.
"Public Equity Offering" means an underwritten primary public offering of
common stock of the Company pursuant to an effective registration statement
under the Securities Act.
"Refinance" means, in respect of any Indebtedness, to refinance, extend,
renew, refund, repay, prepay, redeem, defease or retire, or to issue other
Indebtedness in exchange or replacement for, such indebtedness. "Refinanced" and
"Refinancing" shall have correlative meanings.
"Refinancing Indebtedness" means Indebtedness that Refinances any
Indebtedness of the Company or any Restricted Subsidiary existing on the Issue
Date or Incurred in compliance with the Indenture including Indebtedness that
Refinances Refinancing Indebtedness; provided, however, that (i) such
Refinancing Indebtedness has a Stated Maturity no earlier than the Stated
Maturity of the Indebtedness being Refinanced, (ii) such Refinancing
Indebtedness has an Average Life at the time such Refinancing Indebtedness is
Incurred that is equal to or greater than the Average Life of the Indebtedness
being Refinanced and (iii) such Refinancing Indebtedness has an aggregate
principal amount (or if Incurred with original issue discount, an aggregate
issue price) that is equal to or less than the aggregate principal amount (or if
Incurred with original issue discount, the aggregate accreted value) then
outstanding or committed (plus fees and expenses, including any premium and
defeasance costs) under the Indebtedness being Refinanced; provided further,
however, that Refinancing Indebtedness shall not include (x) Indebtedness of a
Subsidiary that Refinances Indebtedness of the Company or (y) Indebtedness of
the Company or a Restricted Subsidiary that Refinances Indebtedness of an
Unrestricted Subsidiary.
"Related Business" means any business related, ancillary or complementary
to the businesses of the Company and the Restricted Subsidiaries on the Issue
Date.
"Representative" means any trustee, agent or representative (if any) for an
issue of Specified Senior Indebtedness of the Company.
"Restricted Payment" with respect to any Person means (i) the declaration
or payment of any dividends or any other distributions of any sort in respect of
its Capital Stock (including any payment in connection with
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any merger or consolidation involving such Person) or similar payment to the
direct or indirect holders of its Capital Stock (other than dividends or
distributions payable solely in its Capital Stock (other than Disqualified
Stock)) and dividends or distributions payable solely to the Company or a
Restricted Subsidiary, and other than pro rata dividends or other distributions
made by a Subsidiary that is not a Wholly Owned Subsidiary to minority
stockholders (or owners of an equivalent interest in the case of a Subsidiary
that is an entity other than a corporation)), (ii) the purchase, redemption or
other acquisition or retirement for value of any Capital Stock of the Company
held by any Person or of any Capital Stock of a Restricted Subsidiary held by
any Affiliate of the Company (other than a Restricted Subsidiary), including the
exercise of any option to exchange any Capital Stock (other than into Capital
Stock of the Company that is not Disqualified Stock), (iii) the purchase,
repurchase, redemption, defeasance or other acquisition or retirement for value,
prior to scheduled maturity, scheduled repayment or scheduled sinking fund
payment of any Subordinated Obligations (other than the purchase, repurchase or
other acquisition of Subordinated Obligations purchased in anticipation of
satisfying a sinking fund obligation, principal installment or final maturity,
in each case due within one year of the date of acquisition) or (iv) the making
of any Investment in any Person (other than a Permitted Investment).
"Restricted Subsidiary" means any Subsidiary of the Company that is not an
Unrestricted Subsidiary.
"Revolving Credit Provisions" means the provisions of the Credit Agreement
pursuant to which lenders thereunder have committed to make available to the
Company a revolving credit facility.
"Sale/Leaseback Transaction" means an arrangement relating to property now
owned or hereafter acquired whereby the Company or a Restricted Subsidiary
transfers such property to a Person and the Company or a Restricted Subsidiary
leases it from such Person; provided, however, that such a transfer and lease
will not constitute a Sale/Leaseback Transaction if such transfer occurs and
such lease is entered into within 60 days of the acquisition of the subject
property by the Company.
"Scheduled Asset Dispositions" means an Asset Disposition of certain real
property or other assets of the Company held for sale and set forth on a
schedule to the Indenture.
"Senior Indebtedness" with respect to any Person means (i) the Notes, (ii)
Indebtedness of such Person, whether outstanding on the Issue Date or thereafter
Incurred and (iii) accrued and unpaid interest (including Post-Petition
Interest) in respect of (A) indebtedness of such Person for money borrowed and
(B) indebtedness evidenced by notes, debentures, bonds or other similar
instruments for the payment of which such Person is responsible or liable
unless, in the instrument creating or evidencing the same or pursuant to which
the same is outstanding, it is provided that such obligations are subordinate in
right of payment to the Notes or the applicable Subsidiary Guaranty, as the case
may be; provided, however, that Senior Indebtedness shall not include (1) any
obligation of such Person to any Subsidiary, (2) any liability for Federal,
state, local or other taxes owed or owing by such Person, (3) any accounts
payable or other liability to trade creditors arising in the ordinary course of
business (including guarantees thereof or instruments evidencing such
liabilities), (4) any Indebtedness of such Person (and any accrued and unpaid
interest in respect thereof) which is subordinate or junior in any respect to
any other Indebtedness or other obligation of such Person (other than
Indebtedness that is subordinate or junior only to Specified Senior
Indebtedness) or (5) that portion of any Indebtedness which at the time of
Incurrence is Incurred in violation of the Indenture; provided, however, that in
the case of this clause (5), any Indebtedness issued to a Person who had no
actual knowledge that the issuance of such Indebtedness was not permitted under
the Indenture and who received on the date of issuance thereof a certificate
from an officer of the Company to the effect that the issuance of such
Indebtedness would not violate the Indenture will constitute Senior
Indebtedness.
"Significant Subsidiary" means any Restricted Subsidiary that would be a
"Significant Subsidiary" of the Company within the meaning of Rule 1-02 under
Regulation S-X promulgated by the SEC.
"Specified Senior Indebtedness" means, (i) with respect to the Company,
Indebtedness of the Company Incurred pursuant to clause (1) or (2) of paragraph
(b) of the covenant described under "-- Certain Covenants -- Limitation on
Indebtedness", and, (ii) with respect to any Subsidiary Guarantor, Indebtedness
of such Subsidiary Guarantor Incurred pursuant to paragraph (a) of the covenant
described under "-- Certain
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Covenants -- Limitation on Indebtedness and Preferred Stock of Restricted
Subsidiaries", in the case of each of clause (i) and (ii), together with accrued
and unpaid interest (including Post-Petition Interest) in respect of such
Indebtedness and any costs, expenses, fees, reimbursements, indemnities and
other obligations of the Company or any Restricted Subsidiary under the Credit
Agreement.
"Specified Subsidiaries" means Warren Pumps, Inc. and Varo, Inc., each a
wholly owned subsidiary of the Company.
"Stated Maturity" means, with respect to any security or obligation, the
date specified in such security or obligation as the fixed date on which the
final payment of principal of such security or obligation is due and payable,
including, in the case of Preferred Stock, pursuant to any mandatory redemption
provision (but excluding any provision providing for the repurchase of such
security at the option of the holder thereof upon the happening of any
contingency beyond the control of the issuer unless such contingency has
occurred).
"Subordinated Obligation" means any Indebtedness of the Company (whether
outstanding on the Issue Date or thereafter Incurred) which by its terms
provides that it is subordinate or junior in right of payment to the Notes.
"Subsidiary" means, in respect of any Person, any corporation, association,
partnership or other business entity of which more than 50% of the total voting
power of shares of Capital Stock or other interests (including partnership
interests) entitled (without regard to the occurrence of any contingency) to
vote in the election of directors, managers or trustees thereof is at the time
owned or controlled, directly or indirectly, by (i) such Person, (ii) such
Person and one or more Subsidiaries of such Person or (iii) one or more
Subsidiaries of such Person.
"Subsidiary Guarantor" means each Person that delivers a Subsidiary
Guaranty.
"Subsidiary Guaranty" means a Guarantee by a Subsidiary Guarantor of the
Company's obligations with respect to the Notes, which Guarantee will be
subordinated to Specified Senior Indebtedness of such Subsidiary Guarantor on
substantially the same terms as the Notes are subordinated to Specified Senior
Indebtedness of the Company and which Guarantee shall remain in effect only so
long as such Subsidiary Guarantor is Guaranteeing Indebtedness pursuant to
clause (a) of the covenant described under "-- Limitation on Indebtedness and
Preferred Stock of Restricted Subsidiaries."
"Temporary Cash Investments" means any of the following: (i) any investment
in direct obligations of the United States of America or any agency thereof or
obligations guaranteed by the United States of America or any agency thereof,
(ii) investments in time deposit accounts, certificates of deposit and money
market deposits maturing within 180 days of the date of acquisition thereof
issued by a bank or trust company which is organized under the laws of the
United States of America, any state thereof or any foreign country recognized by
the United States, and which bank or trust company has capital, surplus and
undivided profits aggregating in excess of $50,000,000 (or the foreign currency
equivalent thereof) and has outstanding debt which is rated "A" (or such similar
equivalent rating) or higher by at least one nationally recognized statistical
rating organization (as defined in Rule 436 under the Securities Act) or any
money-market fund sponsored by a registered broker dealer or mutual fund
distributor, (iii) repurchase obligations with a term of not more than 30 days
for underlying securities of the types described in clause (i) above entered
into with a bank meeting the qualifications described in clause (ii) above, (iv)
investments in commercial paper, maturing not more than 90 days after the date
of acquisition, issued by a corporation (other than an Affiliate of the Company)
organized and in existence under the laws of the United States of America or any
foreign country recognized by the United States of America with a rating at the
time as of which any investment therein is made of "P-1" (or higher) according
to Moody's Investors Service, Inc. or "A-1" (or higher) according to Standard
and Poor's Ratings Group, and (v) investments in securities with maturities of
six months or less from the date of acquisition issued or fully guaranteed by
any state, commonwealth or territory of the United States of America, or by any
political subdivision or taxing authority thereof, and rated at least "A" by
Standard & Poor's Ratings Group or "A" by Moody's Investors Service, Inc.
"Term Loan Provisions" means the provisions of the Credit Agreement
pursuant to which lenders thereunder have committed to make term loans available
to the Company.
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"Unrestricted Subsidiary" means (i) any Subsidiary of the Company that at
the time of determination shall be designated an Unrestricted Subsidiary by the
Board of Directors in the manner provided below and (ii) any Subsidiary of an
Unrestricted Subsidiary. The Board of Directors may designate any Subsidiary of
the Company (including any newly acquired or newly formed Subsidiary) to be an
Unrestricted Subsidiary unless such Subsidiary or any of its Subsidiaries owns
any Capital Stock or Indebtedness of, or holds any Lien on any property of, the
Company or any other Subsidiary of the Company that is not a Subsidiary of the
Subsidiary to be so designated; provided, however, that either (A) the
Subsidiary to be so designated has total assets of $1,000 or less or (B) if such
Subsidiary has assets greater than $1,000, such designation would be permitted
under the covenant described under "-- Certain Covenants -- Limitation on
Restricted Payments". The Board of Directors may designate any Unrestricted
Subsidiary to be a Restricted Subsidiary; provided, however, that immediately
after giving effect to such designation (x) the Company could Incur $1.00 of
additional Indebtedness under paragraph (a) of the covenant described under
"-- Certain Covenants -- Limitation on Indebtedness" and (y) no Default shall
have occurred and be continuing. Any such designation by the Board of Directors
shall be evidenced by promptly filing with the Trustee a copy of the board
resolution giving effect to such designation and an officers' certificate
certifying that such designation complied with the foregoing provisions.
"U.S. Government Obligations" means direct obligations (or certificates
representing an ownership interest in such obligations) of the United States of
America (including any agency or instrumentality thereof) for the payment of
which the full faith and credit of the United States of America is pledged and
which are not callable or redeemable at the issuer's option.
"Voting Stock" of a Person means all classes of Capital Stock or other
interests (including partnership interests) of such Person then outstanding and
normally entitled (without regard to the occurrence of any contingency) to vote
in the election of directors, managers or trustees thereof.
"Wholly Owned Subsidiary" means a Restricted Subsidiary all the Capital
Stock of which (other than directors' qualifying shares and shares held by other
Persons to the extent such shares are required by applicable law to be held by a
Person other than the Company or a Restricted Subsidiary) is owned by the
Company or one or more Wholly Owned Subsidiaries.
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DESCRIPTION OF NEW CREDIT AGREEMENT
The Company entered into the New Credit Agreement contemporaneously with
the issuance of the Old Notes. The following summary describes certain
provisions of the New Credit Agreement, a copy of which is filed as an exhibit
to the Registration Statement of which this Prospectus forms a part. The
following summary does not purport to be complete and is subject to and is
qualified in its entirety by reference to the New Credit Agreement.
Borrower. The Company is the only borrower under the New Credit Agreement.
Use Of Proceeds. The initial advances under the New Credit Agreement were
used (i) to retire the outstanding obligations under the Old Credit Agreement,
(ii) to retire a portion of the principal amount of the Old Debentures and (iii)
for refinancing costs.
Commitment. The senior secured credit facilities under the New Credit
Agreement consist of (i) a $70.0 million five-year revolving credit facility,
including a letter of credit subfacility in an amount not to exceed $40.0
million; (ii) a $25.0 million five-year amortizing term loan ("Term Loan A");
(iii) a $35.0 million five-year amortizing term loan ("Term Loan B"); and (iv) a
$45.0 million seven-year amortizing term loan ("Term Loan C").
Amortization. Term Loan A is payable in equal quarterly installments
aggregating $5,000,000 per annum, beginning on July 31, 1996 and maturing on
April 30, 2001. Term Loan B is payable in equal quarterly installments
aggregating $8,750,000 per year beginning on July 31, 1997 and maturing on April
30, 2001. Term Loan C is payable in equal quarterly installments aggregating (i)
$500,000 per year beginning on July 31, 1996 through April 30, 2001 and (ii)
$21,250,000 per year beginning on July 31, 2001 and maturing on April 30, 2003.
Interest. At the Company's option, advances will be available at varying
London Interbank Offered Rates ("LIBOR") and Citibank, N.A. base rate interest
rates with LIBOR advances ranging from LIBOR plus 2.50%-3.00% and base rate
loans ranging from Citibank's base rate plus 1.00%-1.50%. The LIBOR Rate will be
fixed for interest periods of 1, 2, 3 or 6 months. After the later of one year
from the Issue Date and repayment in full of Term Loan B, the margin on the
revolving credit facility and the $25 million five-year term loan may change
based on the Company's financial performance.
Security. The obligations of the Company are secured by a first priority
security interest on substantially all present and future assets of the Company,
including the stock of the Company's significant domestic subsidiaries and 65%
of the stock of the Company's significant foreign subsidiaries.
Guarantees. The obligations of the Company are guaranteed by Warren Pumps,
Inc. and Varo, Inc., each a wholly owned subsidiary of the Company, and, to the
extent permitted, any future newly created significant domestic subsidiaries of
the Company (the "Guarantors"). The guaranties are secured by a first priority
security interest on substantially all of the assets of each Guarantor.
Restrictive and Financial Covenants. The New Credit Agreement contains
customary financial covenants including a ratio of maximum permitted senior
indebtedness to EBITDA; a ratio of maximum permitted total indebtedness to
EBITDA; minimum interest coverage ratio; minimum fixed charge coverage ratio; a
limitation on capital expenditures and a minimum net worth. The New Credit
Agreement also contains limitations on, among other things, liens, mergers,
changes in conduct of business, creation of subsidiaries, dividends, capital
leases, indebtedness or guarantees, restricted payments, sale or transfer of
assets, transactions with affiliates and prepayments or repurchase of
indebtedness.
Mandatory Prepayments. The Company is required to make mandatory
prepayments of loans in amounts, at times and subject to exceptions to be agreed
upon, (i) in respect of 75% of consolidated excess cash flow of the Company and
its subsidiaries, (ii) in respect of 100% of the net proceeds of certain
dispositions of assets or the incurrence of certain indebtedness by the Company
and the Guarantors and (iii) in respect of 50% of the net proceeds of certain
dispositions of stock of the Company and the Guarantors.
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Events of Default. The New Credit Agreement contains customary events of
default including failure to pay principal or interest or fees when due, any
representation or warranty being materially incorrect when made, the failure to
perform or timely observe covenants set forth therein, cross-defaults to other
indebtedness (including the Notes) and the occurrence of certain events having a
material adverse effect on the Company's financial condition, operations or
performance. Upon the occurrence and during the continuance of an Event of
Default under the New Credit Agreement, the Lenders may terminate their
commitments to make new loans, declare the then outstanding loans due and
payable and demand cash collateral for outstanding letters of credit.
CERTAIN U.S. FEDERAL INCOME TAX CONSEQUENCES
The following general discussion summarizes certain of the material U.S.
federal income tax aspects of the acquisition, ownership and disposition of the
New Notes. This discussion is generally limited to the tax consequences to
initial holders and does not consider all aspects of U.S. federal income tax
that may be relevant to the purchase, ownership and disposition of the New Notes
by a prospective investor in light of such investor's personal circumstances.
This discussion also does not address the U.S. federal income tax consequences
either of ownership of New Notes not held as capital assets within the meaning
of Section 1221 of the U.S. Internal Revenue Code of 1986, as amended (the
"Code"), or to investors subject to special treatment under the U.S. federal
income tax laws, such as dealers in securities or foreign currency, tax-exempt
entities, banks, thrifts, insurance companies, persons that either hold the New
Notes as part of a "straddle", a "hedge" against currency risk or a "conversion
transaction" or have a "functional currency" other than the U.S. dollar, and
investors in pass-through entities. In addition, this discussion does not
describe any tax consequences arising under the tax laws of any state, local or
foreign jurisdiction.
This discussion is based upon the Code, existing and proposed regulations
thereunder, and current administrative rulings and court decisions. All of the
foregoing is subject to change, possibly on a retroactive basis, and any such
change could affect the continuing validity of this discussion.
PROSPECTIVE HOLDERS OF THE NEW NOTES SHOULD CONSULT THEIR OWN TAX ADVISORS
CONCERNING THE APPLICATION OF FEDERAL INCOME TAX LAWS, AS WELL AS THE LAWS OF
ANY STATE, LOCAL OR FOREIGN TAXING JURISDICTION, TO THEIR PARTICULAR SITUATIONS.
U.S. HOLDERS
The following discussion is limited to the U.S. federal income tax
consequences relevant to a holder of a New Note that is (i) a citizen or
resident (as defined in Section 7701(b)(1) of the Code) of the United States,
(ii) a corporation organized under the laws of the United States or any
political subdivision thereof or therein or (iii) an estate or trust, the income
of which is subject to U.S. federal income tax regardless of the source (a "U.S.
Holder"). Certain U.S. federal income tax consequences relevant to a holder
other than a U.S. Holder are discussed separately below.
EXCHANGE OFFER
The exchange of Old Notes for New Notes pursuant to the Exchange Offer
should not be a taxable exchange for federal income tax purposes. As a result,
there should be no federal income tax consequences to U.S. Holders exchanging
Old Notes for New Notes pursuant to the Exchange Offer.
STATED INTEREST
Interest on a New Note will be taxable to a U.S. Holder as ordinary
interest income at the time it accrues or is received in accordance with such
holder's method of accounting for tax purposes.
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MARKET DISCOUNT
If a New Note is acquired at a "market discount", some or all of any gain
realized upon a sale or other disposition or payment at maturity, or some or all
of a partial principal payment, of such Note may be treated as ordinary income,
as described below. For this purpose, "market discount" is the excess (if any)
of the stated redemption price at maturity over the purchase price, subject to a
statutory de minimis exception. Unless a U.S. Holder has elected to include the
market discount in income as it accrues, any gain realized on any subsequent
disposition of such New Note (other than in connection with certain
nonrecognition transactions), on payment at maturity, or on any partial
principal payment with respect to such Note, will be treated as ordinary income
to the extent of the market discount that is treated as having accrued during
the period such New Note was held.
The amount of market discount treated as having accrued will be determined
either (i) on a ratable basis by multiplying the market discount times a
fraction, the numerator of which is the number of days the New Note was held by
the U.S. Holder and the denominator of which is the total number of days after
the date such U.S. Holder acquired the New Note up to and including the date of
its maturity or (ii) if the U.S. Holder so elects, on a constant interest rate
method.
In lieu of recharacterizing gain upon disposition as ordinary income to the
extent of accrued market discount at the time of disposition, a U.S. Holder of a
New Note acquired at a market discount may elect to include market discount in
income currently, through the use of either the ratable inclusion method or the
elective constant interest method. Once made, the election to include market
discount in income currently applies to all Notes and other obligations held by
the U.S. Holder that are purchased at a market discount during the taxable year
for which the election is made, and all subsequent taxable years of the U.S.
Holder, unless the Internal Revenue Service (the "Service") consents to a
revocation of the election. If an election is made to include market discount in
income currently, the basis of the New Note in the hands of the U.S. Holder will
be increased by the market discount thereon as it is included in income.
Unless a U.S. Holder who acquires a New Note at a market discount elects to
include market discount in income currently, such U.S. Holder may be required to
defer deductions for any interest paid on indebtedness allocable to such Notes
in an amount not exceeding the deferred income until such income is realized.
BOND PREMIUM
If a U.S. Holder purchases a New Note and immediately after the purchase
the adjusted basis of the New Note to such holder exceeds the sum of all amounts
of principal payable on the instrument after the purchase date, the New Note
will have "bond premium." A U.S. Holder may elect to amortize such bond premium
over the remaining term of such Note (or, in certain circumstances, until an
earlier call date).
If bond premium is amortized, the amount of interest that must be included
in the U.S. Holder's income for each period ending on an interest payment date
or at the stated maturity, as the case may be, will be reduced by the portion of
premium allocable to such period based on the New Note's yield to maturity. If
such an election to amortize bond premium is not made, a U.S. Holder must
include the full amount of each interest payment in income in accordance with
its regular method of accounting and will receive a tax benefit from the premium
only in computing such holder's gain or loss upon the sale or other disposition
or payment of the principal amount of the New Note.
An election to amortize premium will apply to amortizable bond premium on
all Notes and other bonds, the interest on which is includible in the U.S.
Holder's gross income, held at the beginning of the U.S. Holder's first taxable
year to which the election applies or are thereafter acquired, and may be
revoked only with the consent of the Service.
SALE, EXCHANGE OR REDEMPTION OF THE NOTES
Upon the disposition of a New Note by sale, exchange or redemption, a U.S.
Holder will generally recognize gain or loss equal to the difference between (i)
the amount realized on the disposition (other than amounts attributable to
accrued interest) and (ii) the U.S. Holder's tax basis in the New Note. A U.S.
84
<PAGE> 87
Holder's tax basis in a New Note generally will equal its cost (net of accrued
interest) to the U.S. Holder increased by amounts includible in income as market
discount (if the holder elects to include market discount on a current basis)
and reduced by any amortized bond premium and any payments (other than interest)
made on such Note.
Assuming the New Note is held as a capital asset, such gain or loss (except
to the extent that the market discount rules otherwise provide) will generally
constitute capital gain or loss and will be long-term capital gain or loss if
the U.S. Holder has held such New Note for longer than one year.
BACKUP WITHHOLDING AND INFORMATION REPORTING
Under the Code, a U.S. Holder of a New Note may be subject, under certain
circumstances, to information reporting and/or backup withholding at a 31% rate
with respect to cash payments in respect of interest or the gross proceeds from
dispositions thereof. This withholding applies only if the holder (i) fails to
furnish its social security or other taxpayer identification number ("TIN")
within a reasonable time after a request therefor, (ii) furnishes an incorrect
TIN, (iii) fails to report interest properly, or (iv) fails, under certain
circumstances, to provide a certified statement, signed under penalty of
perjury, that the TIN provided is its correct number and that it is not subject
to backup withholding. Any amount withheld from a payment to a U.S. Holder under
the backup withholding rules is allowable as a credit and (and may entitle such
holder to a refund) against such holder's U.S. federal income tax liability,
provided that the required information is furnished to the Service. Certain
persons are exempt from backup withholding, including corporations and financial
institutions. Holders of New Notes should consult their tax advisors as to their
qualification for exemption from withholding and the procedure for obtaining
such exemption.
NON-U.S. HOLDERS
The following discussion is limited to the U.S. federal income tax
consequences relevant to a holder of a New Note that is not (i) a citizen or
resident of the United States, (ii) a corporation organized under the laws of
the United States or any political subdivision thereof or therein or (iii) an
estate or trust, the income of which is subject to U.S. federal income tax
regardless of the source (a "Non-U.S. Holder").
This discussion does not deal with all aspects of U.S. federal income and
estate taxation that may be relevant to the purchase, ownership or disposition
of the New Notes by any particular Non-U.S. Holder in light of such holder's
personal circumstances, including holding the New Notes through a partnership.
For example, persons who are partners in foreign partnerships and beneficiaries
of foreign trusts or estates who are subject to U.S. federal income tax because
of their own status, such as United States residents or foreign persons engaged
in a trade or business in the United States, may be subject to U.S. federal
income tax even though the entity is not subject to income tax on the
disposition of its New Note.
For purposes of the following discussion, interest and gain on the sale,
exchange or other disposition of a New Note will be considered "U.S. trade or
business income" if such income or gain is (i) effectively connected with the
conduct of a U.S. trade or business or (ii) in the case of a treaty resident,
attributable to a U.S. permanent establishment (or to a fixed base) in the
United States.
STATED INTEREST
Generally, any interest paid to a Non-U.S. Holder of a New Note that is not
U.S. trade or business income will not be subject to United States tax if the
interest qualifies as "portfolio interest." Generally, interest on the New Notes
will qualify as portfolio interest if (i) the Non-U.S. Holder does not actually
or constructively own 10% or more of the total voting power of all voting stock
of the Company and is not a "controlled foreign corporation" with respect to
which the Company is a "related person" within the meaning of the Code, and (ii)
the beneficial owner, under penalty of perjury, certifies that the beneficial
owner is not a United States person and such certificate provides the beneficial
owner's name and address.
The gross amount of payments to a Non-U.S. Holder of interest that do not
qualify for the portfolio interest exception and that are not U.S. trade or
business income will be subject to U.S. federal income tax at
85
<PAGE> 88
the rate of 30%, unless a U.S. income tax treaty applies to reduce or eliminate
withholding. U.S. trade or business income will be taxed at regular U.S. federal
income tax rates rather than the 30% gross rate. To claim the benefit of a tax
treaty or to claim exemption from withholding because the income is U.S. trade
or business income, the Non-U.S. Holder must provide a properly executed Form
1001 or 4224 (or such successor forms as the Service designates), as applicable,
prior to the payment of interest. These forms must be periodically updated.
Under proposed regulations, the Forms 1001 and 4224 will be replaced by Form
W-8. Also under proposed regulations, a Non-U.S. Holder who is claiming the
benefits of a treaty may be required to obtain a U.S. taxpayer identification
number and to provide certain documentary evidence issued by foreign
governmental authorities to prove residence in the foreign country. Certain
special procedures are provided in the proposed regulations for payments through
qualified intermediaries.
SALE, EXCHANGE OR REDEMPTION OF NOTES
Except as described below and subject to the discussion concerning backup
withholding, any gain realized by a Non-U.S. Holder on the sale, exchange or
redemption of a New Note generally will not be subject to U.S. federal income
tax, unless (i) such gain is U.S. trade or business income, (ii) subject to
certain exceptions, the Non-U.S. Holder is an individual who holds the New Note
as a capital asset and is present in the United States for 183 days or more in
the taxable year of the disposition, or (iii) the Non-U.S. Holder is subject to
tax pursuant to the provisions of U.S. tax law applicable to certain U.S.
expatriates.
FEDERAL ESTATE TAX
New Notes held (or treated as held) by an individual who is a Non-U.S.
Holder at the time of his or her death will not be subject to U.S. federal
estate tax, provided that the deceased individual did not actually or
constructively own 10% or more of the total voting power of all voting stock of
the Company and income on the New Notes was not U.S. trade or business income.
INFORMATION REPORTING AND BACKUP WITHHOLDING
The Company must report annually to the Service and to each Non-U.S. Holder
any interest that is subject to withholding or that is exempt from withholding
pursuant to a tax treaty or the portfolio interest exception. Copies of these
information returns may also be made available under the provisions of a
specific treaty or other agreement to the tax authorities of the country in
which the Non-U.S. Holder resides.
The regulations provide that backup withholding and information reporting
will not apply to payments of principal on the New Notes by the Company to a
Non-U.S. Holder, if the holder certifies as to its non-U.S. status under
penalties of perjury or otherwise establishes an exemption (provided that
neither the Company nor its paying agent has actual knowledge that the holder is
a United States person or that the conditions of any other exemption are not, in
fact, satisfied).
The payment of the proceeds from the disposition of New Notes to or through
the United States office of any broker, U.S. or foreign, will be subject to
information reporting and possible backup withholding unless the owner certifies
as its non-U.S. status under penalty of perjury or otherwise establishes an
exemption, provided that the broker does not have actual knowledge that the
holder is a U.S. person or that the conditions of any other exemption are not,
in fact, satisfied. The payment of the proceeds from the disposition of a New
Note to or through a non-U.S. office of a non-U.S. broker that is not a U.S.
related person will not be subject to information reporting or backup
withholding. For this purpose, a "U.S. related person" is (i) a "controlled
foreign corporation" for U.S. federal income tax purposes or (ii) a foreign
person 50% or more of whose gross income from all sources for the three-year
period ending with the close of its taxable year preceding the payment (or for
such part of the period that the broker has been in existence) is derived from
activities that are effectively connected with the conduct of a United States
trade or business.
In the case of the payment of proceeds from the disposition of New Notes to
or through a non-U.S. office of a broker that is either a U.S. person or a U.S.
related person, the regulations require information reporting on the payment
unless the broker has documentary evidence in its files that the owner is a
Non-U.S. Holder and the broker has no knowledge to the contrary. Backup
withholding will not apply to payments made
86
<PAGE> 89
through foreign offices of a broker that is a U.S. person or a U.S. related
person (absent actual knowledge that the payee is a U.S. person).
Any amounts withheld under the backup withholding rules from a payment to a
Non-U.S. Holder will be allowed as a refund or a credit against such Non-U.S.
Holder's U.S. federal income tax liability, provided that the requisite
procedures are followed.
87
<PAGE> 90
PLAN OF DISTRIBUTION
Each broker-dealer that receives New 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 New Notes. 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 New Notes received in exchange for Old Notes where
such Old Notes were acquired as a result of market-making activities or other
trading activities. The Company has agreed that, for a period of 180 days after
the Expiration Date, it will make this prospectus, as amended or supplemented,
available to any broker-dealer for use in connection with any such resale.
The Company will not receive any proceeds from any sale of New Notes by
broker-dealers. New 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 New 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 brokers or dealers who may receive
compensation in the form of commissions or concessions from any such
broker-dealer or the purchasers of any such New Notes. Any broker-dealer that
resells New Notes that were received by it for its own account pursuant to the
Exchange Offer and any broker or dealer that participates in a distribution of
such New Notes may be deemed to be an "underwriter" within the meaning of the
Securities Act and any profit on any such resale of New Notes and any commission
or concessions received by any such persons may be deemed to be underwriting
compensation under the Securities Act. The Letter of Transmittal states that, by
acknowledging that it will deliver 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.
The Company has agreed, pursuant to the Registration Rights Agreement, to
pay all expenses incident to the Exchange Offer (including the expenses of one
counsel for all the holders of the Notes as a single class) other than
commissions or concessions of any brokers or dealers and will indemnify the
holders of the Notes (including any broker-dealers) against certain liabilities,
including liabilities under the Securities Act.
NOTICE TO CANADIAN RESIDENTS
RESALE RESTRICTIONS
The distribution of the New Notes in Canada is being made only on a private
equity placement basis exempt from the requirement that the Company prepare and
file a prospectus with the securities regulatory authorities in each province
where trades of New Notes are effected. Accordingly, any resale of the New Notes
in Canada must be made in accordance with applicable securities laws which will
vary depending on the relevant jurisdiction, and which may require resales to be
made in accordance with available statutory exemptions or pursuant to a
discretionary exemption granted by the applicable Canadian securities regulatory
authority. Purchasers are advised to seek legal advice prior to any resale of
the New Notes.
REPRESENTATIONS OF PURCHASERS
Each purchaser of New Notes in Canada who receives a purchase confirmation
will be deemed to represent to the Company and the dealer from whom such
purchase confirmation is received that (i) such purchaser is entitled under
applicable provincial securities laws to purchase such New Notes without the
benefit of a prospectus qualified under such securities laws, (ii) where
required by law, that such purchaser is purchasing as principal and not as
agent, and (iii) such purchaser has reviewed the text above under "Resale
Restrictions".
88
<PAGE> 91
RIGHTS OF ACTION AND ENFORCEMENT
The securities being offered are those of a foreign issuer and Ontario
purchasers will not receive the contractual right of action prescribed by
section 32 of the Regulation under the Securities Act (Ontario). As a result,
Ontario purchasers must rely on other remedies that may be available, including
common law rights of action for damages or rescission or rights of action under
the civil liability provisions of the U.S. federal securities laws. Following a
recent decision of the U.S. Supreme Court, it is possible that Ontario
purchasers will not be able to rely upon the remedies set out in Section 12(2)
of the United States Securities Act of 1933 if the securities are being offered
under a U.S. private equity placement memorandum.
All of the issuer's directors and officers as well as the experts named
herein may be located outside of Canada and, as a result, it may not be possible
for Ontario purchasers to effect service of process within Canada upon the
issuer or such persons. All or a substantial portion of the assets of the issuer
and such persons may be located outside of Canada and, as a result, it may not
be possible to satisfy a judgment against the issuer or such persons in Canada
or to enforce a judgment obtained in Canadian courts against such issuer or
persons outside of Canada.
NOTICE TO BRITISH COLUMBIA RESIDENTS
A purchaser of New Notes to whom the Securities Act (British Columbia)
applies is advised that such purchaser is required to file with the British
Columbia Securities Commission a report within ten days of the sale of any Notes
acquired by such purchaser pursuant to this Offering. Such report must be in the
form attached to British Columbia Securities Commission Blanket Order BOR
#95/17, a copy of which may be obtained from the Company. Only one such report
must be filed in respect of Notes acquired on the same date and under the same
prospectus exemption.
LEGAL MATTERS
Certain legal matters relating to the New Notes offered hereby, including
with respect to the legal conclusions disclosed above under "Certain U.S.
Federal Income Tax Consequences," will be passed upon for the Company by Weil,
Gotshal & Manges LLP (a limited liability partnership including professional
corporations), New York, New York.
EXPERTS
The consolidated financial statements and schedule of the Company at
December 31, 1995 and 1994, and for each of the three years in the period ended
December 31, 1995, appearing in this Prospectus and Registration Statement have
been audited by Ernst & Young LLP, independent auditors, as set forth in their
reports thereon appearing elsewhere herein, and are included in reliance upon
such reports given upon the authority of such firm as experts in accounting and
auditing.
89
<PAGE> 92
IMO INDUSTRIES INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C>
Consolidated Statements of Income -- For the years ended
December 31, 1995, 1994 and 1993 and the quarters ended March 31, 1996 and 1995
(unaudited)................................................................... F-2
Consolidated Balance Sheets -- December 31, 1995 and 1994 and as of March 31, 1996
(unaudited).................................................................... F-3
Consolidated Statements of Cash Flows -- For the years ended
December 31, 1995, 1994 and 1993 and the quarters ended March 31, 1996 and 1995
(unaudited)................................................................... F-4
Consolidated Statements of Shareholders' Equity -- For the years ended
December 31, 1995, 1994 and 1993 and the quarters ended March 31, 1996 and 1995
(unaudited)................................................................... F-5
Notes to Consolidated Financial Statements......................................... F-6
Report of Independent Auditors..................................................... F-29
Quarterly Financial Information.................................................... F-30
</TABLE>
F-1
<PAGE> 93
IMO INDUSTRIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-----------------------
1996 1995* YEAR ENDED DECEMBER 31,
---------- ---------- ---------------------------------------
(UNAUDITED) 1995 1994* 1993*
----------------------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
Net Sales.............................. $ 99,412 $ 95,884 $ 373,227 $ 360,785 $ 416,526
Cost of products sold.................. 67,530 64,990 258,335 248,835 284,227
--------- --------- --------- --------- ---------
GROSS PROFIT........................... 31,882 30,894 114,892 111,950 132,299
Selling, general and administrative
expenses............................. 20,486 20,510 80,964 77,973 102,916
Research and development expenses...... 1,340 1,338 4,831 4,646 7,537
Unusual items.......................... -- -- 9,020 -- 14,338
--------- --------- --------- --------- ---------
INCOME FROM OPERATIONS................. 10,056 9,046 20,077 29,331 7,508
Interest expense....................... 6,970 6,571 25,860 29,168 33,341
Interest income........................ (397) (805) (1,980) (1,592) (511)
Other income........................... 177 (162) (739) (219) (1,074)
Equity in (income) loss of
unconsolidated companies............. (25) (25) (302) -- 231
--------- --------- --------- --------- ---------
INCOME (LOSS) FROM CONTINUING
OPERATIONS BEFORE TAXES AND
EXTRAORDINARY ITEM................... 3,331 3,467 (2,762) 1,974 (24,479)
Income taxes (benefit):
Current.............................. 627 881 2,209 1,790 --
Deferred............................. -- -- (17,000) -- 13,450
--------- --------- --------- --------- ---------
Total Income Taxes (Benefit)......... 627 881 (14,791) 1,790 13,450
--------- --------- --------- --------- ---------
INCOME (LOSS) FROM CONTINUING
OPERATIONS BEFORE EXTRAORDINARY
ITEM................................. 2,704 2,586 12,029 184 (37,929)
Discontinued Operations:
Income (Loss) from Operations (net of
annual income tax expense of $.9
million in 1995, $1.4 million in
1994, $1.5 million in 1993 and $.2
million for the three months ended
March 31, 1995)................... -- 964 500 9,046 (46,528)
Estimated Gain (Loss) on Disposal (net
of income taxes of $5.2 million in
1995)................................ -- 39,613 21,625 -- (168,014)
--------- --------- --------- --------- ---------
Total Income (Loss) from
Discontinued Operations.... -- 40,577 22,125 9,046 (214,542)
--------- --------- --------- --------- ---------
Extraordinary Item -- Loss on
Extinguishment of Debt............... -- (4,140) (4,444) (5,299) (18,095)
--------- --------- --------- --------- ---------
NET INCOME (LOSS)...................... $ 2,704 $ 39,023 $ 29,710 $ 3,931 $ (270,566)
========= ========= ========= ========= =========
EARNINGS (LOSS) PER SHARE:
Continuing operations before
extraordinary item................ $ 0.16 $ 0.15 $ .71 $ .01 $ (2.25)
Discontinued operations.............. $ -- $ 2.38 $ 1.29 $ .53 $ (12.70)
Extraordinary item................... $ -- $ (0.24) $ (.26) $ (.31) $ (1.07)
--------- --------- --------- --------- ---------
Net income (loss).................... $ 0.16 $ 2.29 $ 1.74 $ .23 $ (16.02)
--------- --------- --------- --------- ---------
Weighted average number of shares
outstanding.......................... 17,084,734 17,014,805 17,048,622 16,926,071 16,890,501
========= ========= ========= ========= =========
</TABLE>
- ---------------
* Reclassified to conform to current year presentation.
See accompanying notes to consolidated financial statements.
F-2
<PAGE> 94
IMO INDUSTRIES INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31,
1996 DECEMBER 31,
----------- ---------------------------
(UNAUDITED) 1995 1994*
----------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents.......................................... $ 674 $ 3,809 $ 26,942
Trade accounts and notes receivable, less allowance of $1,990 in
1996, $2,030 in 1995 and $2,192 in 1994.......................... 63,263 53,965 53,909
Inventories -- net................................................. 84,169 85,030 76,902
Deferred income taxes.............................................. 11,375 11,371 4,328
Net assets of discontinued operations -- current................... 5,765 5,220 75,165
Prepaid expenses and other current assets.......................... 4,606 4,617 5.089
-------- -------- --------
TOTAL CURRENT ASSETS........................................ 169,852 164,012 242,335
Property, Plant and Equipment -- on the basis of cost................
Land................................................................. 10,194 10,407 5,930
Buildings and improvements........................................... 44,673 44,786 40,449
Machinery and equipment.............................................. 109,889 109,156 102,730
-------- -------- --------
164,756 164,349 149,109
Less allowances for depreciation and amortization.................... (85,252) (82,996) (71,867)
-------- -------- --------
Net Property, Plant and Equipment.................................... 79,504 81,353 77,242
Intangible Assets, Principally Goodwill.............................. 69,006 68,664 73,834
Investments in and Advances to Unconsolidated Companies.............. 5,497 5,415 3,653
Deferred income taxes -- Long-Term................................... 4,609 4,609 --
Net Assets of Discontinued Operations -- Noncurrent.................. 28,457 29,190 89,313
Other Assets......................................................... 30,880 30,644 26,242
-------- -------- --------
TOTAL ASSETS................................................ $ 387,805 $ 383,887 $ 512,619
======== ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable........................................................ $ 7,171 $ 9,019 $ 9,699
Trade accounts payable............................................... 25,259 23,733 22,012
Accrued expenses and other liabilities............................... 37,857 38,069 51,620
Accrued costs related to discontinued operations..................... 2,018 3,055 6,444
Income taxes payable................................................. 8,172 8,354 6,671
Current portion of long-term debt.................................... 1,401 805 13,675
-------- -------- --------
TOTAL CURRENT LIABILITIES................................... 81,878 83,035 110,121
Long-Term Debt....................................................... 249,203 245,802 372,365
Deferred Income Taxes................................................ -- 7,364
Accrued Postretirement Benefits -- Long-Term......................... 23,129 24,372 30,918
Accrued Pension Expense and Other Liabilities........................ 24,413 23,794 17,696
-------- -------- --------
TOTAL LIABILITIES........................................... 378,623 377,003 538,464
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
18,757,897, 18,756,397 and 18,680,428 in 1996, 1995 and 1994,
respectively....................................................... 18,758 18,756 18,680
Additional paid-in capital........................................... 80,284 80,275 79,789
Retained earnings (deficit).......................................... (73,888) (76,592) (106,302)
Cumulative foreign currency translation adjustments.................. 3,849 4,266 861
Minimum pension liability adjustment................................. (1,801) (1,801) (853)
Treasury stock at cost -- 1,672,788 shares in 1996, 1995 and 1994.... (18,020) (18,020) (18,020)
-------- -------- --------
TOTAL SHAREHOLDERS' EQUITY.................................. 9,182 6,884 (25,845)
-------- -------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.................. $ 387,805 $ 383,887 $ 512,619
======== ======== ========
</TABLE>
- ---------------
* Restated to conform to current year presentation.
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 95
IMO INDUSTRIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------
1996 1995* YEAR ENDED DECEMBER 31,
-------- --------- --------------------------------
(UNAUDITED) 1995 1994* 1993*
-------------------- --------- -------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss).................................. $ 2,704 $ 39,023 $ 29,710 $ 3,931 $(270,566)
Adjustments to reconcile net income (loss) to net
cash (used by) provided by continuing operations:
Discontinued operations.......................... -- (40,577) (22,125) (9,046) 214,542
Depreciation..................................... 3,003 3,217 12,100 12,771 15,325
Amortization..................................... 830 819 3,122 5,832 4,471
Provision (credit) for deferred income taxes..... (17,000) -- 13,450
Extraordinary item............................... -- 4,140 4,444 5,299 18,095
Unusual items.................................... 9,020 -- 14,338
Other............................................ 24 22 172 666 1,243
Other changes in operating assets and
liabilities:
(Increase) decrease in accounts and notes
receivable................................... (8,247) (4,864) 236 (1,557) 9,491
Decrease (increase) in inventories............. 1,911 (2,454) (7,157) (368) 7,198
Decrease in recoverable income taxes........... -- -- -- 3,826 7,270
(Increase) (decrease) in accounts payable and
accrued expenses............................. 144 3,236 (13,273) (9,160) 7
Other operating assets and liabilities......... (708) (7,077) (9,014) (5,387) (8,846)
--------- -------- -------- -------- ---------
Net cash (used by) provided by continuing
operations..................................... (339) (4,515) (9,765) 6,807 26,018
Net cash provided by (used by) discontinued
operations..................................... 674 (506) (21,978) 9,971 986
--------- -------- -------- -------- ---------
Net Cash Provided by (Used in) Operating
Activities....................................... 335 (5,021) (31,743) 16,778 27,004
INVESTING ACTIVITIES
Net proceeds from sale of businesses and sales of
property, plant and equipment.................... -- 121,870 174,922 13,568 86,619
Purchases of property, plant and equipment......... (1,108) (6,515) (14,600) (6,025) (6,343)
Acquisitions, net of cash acquired................. (2,700) -- (5,247) -- --
Net investing activities of discontinued
operations....................................... (499) (1,776) (9,426) (6,994) (9,724)
Other.............................................. -- (73) (122) (857) 252
--------- -------- -------- -------- ---------
Net Cash (Used in) Provided by Investing
Activities....................................... (4,307) 113,506 145,527 (308) 70,804
--------- -------- -------- -------- ---------
FINANCING ACTIVITIES
(Decrease) increase in notes payable............... (4,727) (1,705) 5,407 (31,346) (29,915)
Proceeds from long-term borrowings................. 29,848 2,815 45,461 86,951 4,377
Principal payments on long-term debt............... (24,232) (122,682) (188,200) (56,759) (55,575)
Payment of debt financing costs.................... (401) (11,277) (8,326)
Proceeds from stock options exercised.............. 535 415 --
Other.............................................. 11 149 59 15 (318)
--------- -------- -------- -------- ---------
Net Cash Used in Financing Activities.............. 903 (121,423) (137,139) (12,001) (89,757)
--------- -------- -------- -------- ---------
Effect of exchange rate changes on cash............ (66) 147 222 117 (462)
--------- -------- -------- -------- ---------
(Decrease) increase in Cash and Cash Equivalents... (3,135) (12,791) (23,133) 4,586 7,589
Cash and cash equivalents at beginning of year..... 3,809 26,942 26,942 22,356 14,767
--------- -------- -------- -------- ---------
Cash and Cash Equivalents at End of Year........... $ 674 $ 14,151 $ 3,809 $ 26,942 $ 22,356
========= ======== ======== ======== =========
</TABLE>
- ---------------
* Reclassified to conform to current year presentation.
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 96
IMO INDUSTRIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
CUMULATIVE
FOREIGN MINIMUM
ADDITIONAL RETAINED CURRENCY PENSION
COMMON PAID-IN EARNINGS TRANSLATION LIABILITY TREASURY
STOCK CAPITAL (DEFICIT) ADJUSTMENT ADJUSTMENT STOCK TOTAL
------- ---------- --------- ---------- ---------- -------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1,
1993*...................... $18,554 $ 78,557 $ 160,333 $ 491 $ -- $(18,020) $ 239,915
Net loss..................... -- -- (270,566) -- -- -- (270,566)
Foreign currency translation
adjustments................ -- -- -- (1,638) -- -- (1,638)
Minimum pension liability
adjustment................. -- -- -- -- (1,768) -- (1,768)
Issuance of common stock
warrants................... -- 336 -- -- -- -- 336
Restricted shares issued
under the equity incentive
plan....................... 30 187 -- -- -- -- 217
------- ------- ---------- -------- -------- --------- ---------
Balance at December 31,
1993*...................... 18,584 79,080 (110,233) (1,147) (1,768) (18,020) (33,504)
Net income................... -- -- 3,931 -- -- -- 3,931
Foreign currency translation
adjustments................ -- -- -- 2,008 -- -- 2,008
Minimum pension liability
adjustment................. -- -- -- -- 915 -- 915
Shares issued under stock
option plan................ 56 359 -- -- -- -- 415
Restricted shares issued
under the equity incentive
plan....................... 40 350 -- -- -- -- 390
------- ------- ---------- -------- -------- --------- ---------
Balance at December 31,
1994*...................... 18,680 79,789 (106,302) 861 (853) (18,020) (25,845)
Net income................... -- -- 29,710 -- -- -- 29,710
Foreign currency translation
adjustments................ -- -- -- 3,405 -- -- 3,405
Minimum pension liability
adjustment................. -- -- -- -- (948) -- (948)
Shares issued under stock
option plan................ 73 462 -- -- -- -- 535
Restricted shares issued
under the equity incentive
plan....................... 3 24 -- -- -- -- 27
------- ------- ---------- -------- -------- --------- ---------
Balance at December 31,
1995....................... 18,756 80,275 (76,592) 4,266 (1,801) (18,020) 6,884
Net income................... 2,704 2,704
Foreign currency translation
adjustments................ (417) (417)
Restricted shares issued
under the equity incentive
plan....................... 2 9 11
------- ------- ---------- -------- -------- --------- ---------
BALANCE AT MARCH 31, 1996
(UNAUDITED)................ $18,758 $ 80,284 $ (73,888) $ 3,849 $ (1,801) $(18,020) $ 9,182
======= ======= ========== ======== ======== ========= =========
</TABLE>
- ---------------
* Reclassified to conform to current year presentation.
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 97
IMO INDUSTRIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 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 three
months ended March 31, 1996 are not necessarily indicative of the results that
may be expected for the year ending December 31, 1996.
Consolidation: The consolidated financial statements include the accounts
of the Company and its majority-owned subsidiaries. Significant intercompany
transactions have been eliminated in consolidation. The Company uses the equity
method to account for investments in corporations in which it does not own a
majority voting interest but has the ability to exercise significant influence
over operating and financial policies.
Translation of Foreign Currencies: Assets and liabilities of international
operations are translated into U.S. dollars at current exchange rates. Income
and expense accounts are translated into U.S. dollars at average rates of
exchange prevailing during the year. Translation adjustments are reflected as a
separate component of shareholders' equity.
Cash Equivalents: Cash equivalents include investments in government
securities funds and certificates of deposit. Investment periods are generally
less than one month.
Financial Instruments: The Company uses forward exchange contracts to
hedge certain firm foreign commitments denominated in foreign currencies. Gains
or losses on forward contracts are deferred and offset against the foreign
exchange gains and losses on the underlying hedged item. The forward exchange
contracts are for periods of less than one year, and the amounts outstanding as
well as gains or losses on such contracts are not material.
Inventories: Inventories are carried at the lower of cost or market, cost
being determined principally on the basis of standards which approximate actual
costs on the first-in, first-out method, and market being determined by net
realizable value. Appropriate consideration is given to deterioration,
obsolescence and other factors in evaluating net realizable value.
Revenue Recognition: Revenues are recorded generally when the Company's
products are shipped.
Depreciation and Amortization: Depreciation and amortization of plant and
equipment are computed principally by the straight-line method based upon the
estimated useful lives of the assets as follows: buildings, 10 to 35 years and
machinery and equipment, 3 to 15 years.
Interest Expense: Interest expense incurred during the construction of
facilities and equipment is capitalized as part of the cost of those assets.
Total interest paid by the Company amounted to $39.5 million in 1995, $49.5
million in 1994 and $56.7 million in 1993. There was no interest capitalized in
1995. Interest capitalized in 1994 and 1993 was $.2 million and $.1 million,
respectively.
Earnings Per Share: Earnings per share are based upon the weighted average
number of shares of common stock outstanding. Common stock equivalents related
to stock options are excluded because their effect is not material.
Impact of Recently Issued Accounting Standards: In March 1995, the FASB
issued Statement No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of", which requires impairment losses
to be recorded on long-lived assets used in operations when indicators of
impairment are present and the undiscounted cash flows estimated to be generated
by those assets are less than the assets' carrying amount. Statement 121 also
addresses the accounting for long-lived assets that are
F-6
<PAGE> 98
IMO INDUSTRIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
expected to be disposed of. The Company will adopt Statement 121 in the first
quarter of 1996 and, based on current circumstances, does not believe the effect
of adoption will be material.
Stock Compensation: The Company grants stock options and shares of
restricted stock to certain employees under its Equity Incentive Plan. The stock
options are for a fixed number of shares and have an exercise price equal to the
fair value of the shares at the date of grant. Restricted shares are valued at
fair value of the shares at the date of grant and compensation expense is
recognized over the vesting period.
In October 1995, the FASB issued Statement No. 123, "Accounting for
Stock-Based Compensation", which encourages companies to recognize expense for
stock-based awards based on their estimated fair value on the date of grant. The
Company accounts for its stock compensation arrangements under the provisions of
APB 25, "Accounting for Stock Issued to Employees," and intends to continue to
do so. For the fiscal year ended December 31, 1996, the Company will be required
to provide pro forma disclosures of what net income and earnings per share would
have been for 1996 and 1995 had the new fair value method been used, and provide
additional general disclosures regarding employee stock options, as required by
Statement No. 123.
Intangible Assets: Goodwill of companies acquired is being amortized on
the straight-line basis over 40 years. The carrying value of goodwill is
reviewed when indicators of impairment are present, by evaluating future cash
flows of the associated operations to determine if impairment exists. Goodwill
related to continuing operations at December 31, 1995 and 1994 was $63.1 million
and $61.2 million, respectively, net of respective accumulated amortization of
$14.6 million and $12.9 million. Patents are amortized over the shorter of their
legal or estimated useful lives.
Management Estimates: The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
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 reclassified to
conform to the current year presentation.
NOTE 2 DISCONTINUED OPERATIONS
Electro-Optical Systems
In January 1994, pursuant to a plan approved by the Board of Directors, the
Company announced its intention to dispose of its Electro-Optical Systems
operations. On January 3, 1995, the Company completed the sale of its Baird
Analytical Instruments Division to Thermo Instruments Systems Inc. for
approximately $12.3 million, which was used to repay a portion of the Company's
domestic senior debt. On June 2, 1995, the Company completed the sale of the
Optical Systems and Ni-Tec divisions of Varo Inc. and the Optical Systems
division of Baird Corporation, which represented the major part of its
Electro-Optical Systems business, to Litton Industries for approximately book
value. The proceeds were used to pay off $8 million outstanding under the
revolving credit facility on June 2, 1995 and to redeem $40 million of its
12.25% senior subordinated debentures on July 6, 1995. Remaining assets to be
sold include the Electro-Optical System's Varo Electronic Systems division and
non-operating real estate, which continue to be marketed to interested parties.
Turbomachinery
In August 1994 the Board of Directors approved a plan to sell the Company's
Turbomachinery operations. On January 17, 1995, the Company completed the sale
of its Delaval Turbine and TurboCare
F-7
<PAGE> 99
IMO INDUSTRIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
divisions and its 50% interest in Delaval-Stork, to Mannesmann Demag. The final
adjusted purchase price was $119 million of which, $109 million was received at
closing, with the remainder earning interest to the Company and to be received
at specified future contract dates subject to adjustment as provided in the
agreement. It is management's expectation that there will be no further
adjustment to the purchase price. A portion of the proceeds were used by the
Company to pay off its domestic senior debt in January 1995 and in March 1995
the Company redeemed $40 million of its 12.25% senior subordinated debentures
with the remainder of the proceeds.
Roltra-Morse
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.
In accordance with APB Opinion No. 30, the disposals of these business
segments have been accounted for as discontinued operations and, accordingly,
their operating results have been segregated and reported as Discontinued
Operations in the accompanying Consolidated Statements of Income. Prior year
financial statements have been reclassified to conform to the current year
presentation.
Discontinued operations include management's best estimates of amounts
expected to be realized at the time of disposal. The amounts the Company will
ultimately realize could differ materially in the near term from the amounts
used to determine the gain or loss on disposal of the discontinued operations.
Net assets and liabilities of the Discontinued Operations consist of the
following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1995 1994
------- --------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Current Assets:
Receivables.................................................. $25,956 $ 88,793
Inventories.................................................. 21,484 70,194
Other current assets......................................... 6,351 4,986
------- --------
53,791 163,973
------- --------
Current Liabilities:
Notes Payable................................................ 9,849 3,072
Trade accounts payable....................................... 27,687 46,733
Other current liabilities.................................... 11,035 39,003
------- --------
48,571 88,808
------- --------
Net Current Assets............................................. $ 5,220 $ 75,165
------- --------
Long-term Assets:
Property..................................................... $22,112 $ 82,684
Intangible assets............................................ 12,645 12,589
Other long-term assets....................................... 11,666 9,308
------- --------
46,423 104,581
------- --------
Long-term Liabilities.......................................... 17,233 15,268
------- --------
Net Long-term Assets........................................... $29,190 $ 89,313
------- --------
Net Assets..................................................... $34,410 $164,478
======= ========
</TABLE>
F-8
<PAGE> 100
IMO INDUSTRIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Net assets related to the Electro-Optical Systems business are $11.9
million and $85 million as of December 31, 1995 and 1994, respectively; net
assets related to the Turbomachinery business are $1.0 million and $60 million
as of December 31, 1995 and 1994, respectively; and net assets related to the
Roltra-Morse business are $21.5 million and $19.5 million as of December 31,
1995 and 1994, respectively.
The Discontinued Operations have $19.4 million in foreign short-term credit
facilities with amounts outstanding at December 31, 1995 of $9.8 million. Total
long-term debt of discontinued operations amounted to $7.1 million and $9.6
million as of December 31, 1995 and 1994, respectively. Of these amounts, $1.6
million and $3.4 million represent the current portion.
A condensed summary of operations for the Discontinued Operations is as
follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1995 1994 1993
-------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Net Sales.......................................... $159,339 $444,656 $396,731
Income (loss) from operations before income taxes
and minority interest............................ 653 10,882 (44,431)
-------- -------- ---------
Income taxes....................................... 878 1,443 1,550
Minority interest.................................. (725) 393 547
-------- -------- ---------
Income (loss) from operations...................... $ 500 $ 9,046 $(46,528)
======== ======== =========
</TABLE>
The income (loss) from operations of the Discontinued Operations for 1995,
1994 and 1993 includes allocated interest expense of $7.5 million, $19.4 million
and $19.6 million, 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.
Electro-Optical Business
The Electro-Optical loss from operations was $45.3 million for 1993. Losses
from the Electro-Optical Systems operations for 1995 and 1994 resulted in a net
charge of $1.0 million and $6.2 million, respectively, to reserves established
as of December 31, 1993.
The Company recorded charges of $155.3 million at December 31, 1993, which
included a $104.6 million goodwill write-off to reduce the carrying amount of
the Electro-Optical discontinued operation to estimated realizable value. During
1995 the Company recognized an additional $13.3 million loss on disposal.
Included in the additional loss was $6.8 million related to the resolution of
contingencies associated with the sale of the business and fourth quarter
charges of $6.5 million primarily to write-down remaining non-operating real
estate to net realizable value. As of December 31, 1995, the Company has an
accrual for anticipated operating losses of $.6 million (including $.9 million
of allocated interest) through the date of sale, which is expected to occur
during the second half of 1996.
Turbomachinery Business
The Turbomachinery business income from operations was $5.6 million and
$1.0 million for 1994 and 1993, respectively.
As a result of the sale of the Turbomachinery business in 1995, the Company
recognized an estimated gain on disposal of $35.0 million, net of income taxes
of $5.2 million. The gain is net of fourth quarter charges of $4.6 million,
related to the resolution of contingencies associated with the sale to
Mannesmann Demag and to a write-down of remaining assets to net realizable
value.
F-9
<PAGE> 101
IMO INDUSTRIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Roltra-Morse
The Roltra-Morse business had income from operations of $.5 million and
$3.5 million for 1995 and 1994, respectively, and a loss from operations of $2.1
million in 1993.
NOTE 3 RESTRUCTURING
Asset Sales
In October 1992, the Company announced a plan to strengthen its balance
sheet through the sale of certain businesses and the application of the proceeds
to reduce debt. Pursuant to this plan, the Company divested its Heim Bearings,
Aerospace, Barksdale Controls and CEC Instruments businesses. In 1993, the
Company sold its Heim Bearings, Aerospace and Barksdale Controls operations for
proceeds of approximately $91 million, and in 1994, sold its CEC Instruments and
Turboflex Ltd. operations, its Corporate headquarters building and other
previously identified assets for aggregate proceeds of $13.2 million. These
proceeds, net of related expenses, were used to repay senior debt in the amount
of $81.9 million in 1993 and $13.2 million in 1994, in accordance with the terms
of the 1993 restructured credit facilities.
Other non-operating real estate, representing less than 10% of the original
value of assets announced to be sold in October 1992, remain for sale. Results
for the fourth quarter of 1995 include an unusual charge of $5.0 million related
to the write-down of this non-operating real estate to its net realizable value
(See Note 6). The Company targets completion of the divestitures over the next 9
to 12 months.
In the fourth quarter of 1993, management initiated a strategy to
reposition the Company 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 in 1995. This repositioning will be completed upon the sales of the
Roltra-Morse business, and the remaining portion of the Electro-Optical Systems
business, which are expected to be completed in 1996 (See Note 2).
Cost Reduction Programs
In the fourth quarter of 1995, the Company recorded a charge to continuing
operations of $4.0 million, including severance and other expenses related to a
Company-wide program to reduce general and administrative costs (See Note 6).
This program includes a reduction of 65 employees, or 2% of the total number of
Company employees, including a reduction of the corporate headquarters staff by
20%. This program is expected to reduce general and administrative expenses by
approximately $2.9 million in 1996, $4.0 million in 1997 and $5.0 million
annually thereafter. The required cash outlay related to this program was $.4
million in 1995, and the expected cash requirements during 1996 are $3.2
million. The remainder represents non-cash charges.
In 1993, the Company recorded a charge to continuing operations of $5.2
million for a cost reduction program which benefited 1994 and 1995 operating
results (See Note 6). The Company implemented cost-cutting measures at its core
operations to reduce its expense structure and to eliminate duplicative
functions. In addition, in connection with this 1993 cost reduction program, the
Company consolidated certain operations in its European Instruments and Morse
Controls businesses and revised operating processes and reduced employment
levels at its Pumps segment and other operations. The number of Company
employees in core operations declined by 205, or 7%, between mid-1993 and
mid-1994. These organizational restructuring measures have been providing net
cash benefits, compared to 1993 levels, which approximated $4.5 million and $1.5
million for continuing operations, in 1995 and 1994, respectively, and are
expected to approximate $5.5 million annually thereafter, based largely on
reduced employment costs.
F-10
<PAGE> 102
IMO INDUSTRIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 4 INVENTORIES
Inventories are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1995 1994
------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Finished products................................................ $39,684 $33,350
Work in process.................................................. 31,235 30,049
Materials and supplies........................................... 26,372 27,022
------- -------
97,291 90,421
Less customers' progress payments................................ 689 1,635
Less valuation allowance......................................... 11,572 11,884
------- -------
$85,030 $76,902
======= =======
</TABLE>
NOTE 5 ACCRUED EXPENSES AND OTHER LIABILITIES
Accrued expenses and other liabilities consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1995 1994
------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Accrued contract completion costs................................ $ 94 $ 556
Accrued product warranty costs................................... 2,737 4,310
Accrued litigation and claims costs.............................. 1,674 4,493
Payroll and related items........................................ 14,328 12,547
Accrued interest payable......................................... 6,511 10,167
Accrued restructuring costs...................................... 1,688 960
Accrued divestiture costs........................................ 2,861 8,582
Other............................................................ 8,176 10,005
------- -------
$38,069 $51,620
======= =======
</TABLE>
NOTE 6 UNUSUAL ITEMS
During the fourth quarter of 1995, the Company recognized unusual charges
of $9.0 million ($.53 per share) in income from continuing operations. These
charges include $4.0 million in severance benefits and other expenses related to
a Company-wide program to reduce general and administrative costs (See Note 3)
and $5.0 million related to the write-down of certain non-operating real estate
to net realizable value (See Note 3).
During the twelve months ended December 31, 1993, the Company recognized
unusual charges of $14.3 million ($.85 per share) in loss from continuing
operations. During the fourth quarter of 1993, the Company recognized charges of
$20.3 million that include provisions of $5.2 million related to the
restructuring and consolidation of certain of the Company's operating units (See
Note 3), $10.1 million expected net loss overall related to the Company's asset
divestiture program (See Note 3) and $5.0 million in debt related financing fees
associated with obtaining consents from holders of its 12.25% senior
subordinated debentures to amend the indenture governing these debentures and
obtain waivers from its senior lenders for non-compliance with certain financial
covenants as of December 31, 1993, as a result of the fourth quarter net loss.
These charges are net of unusual income of $6.0 million recorded in the third
quarter of 1993 as a result of a change in estimate related to legal costs
associated with pending litigation.
F-11
<PAGE> 103
IMO INDUSTRIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 7 INCOME TAXES
The components of income tax expense (benefit) from continuing operations
are:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1995 1994 1993
-------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Current:
Federal............................................ $ -- $ -- $ --
Foreign............................................ 1,906 1,330 --
State.............................................. 303 460 --
------ ----- ------
2,209 1,790 --
------ ----- ------
Deferred:
Federal............................................ (17,000) -- 13,000
Foreign and State.................................. -- -- 450
------ ----- ------
(17,000) -- 13,450
------ ----- ------
$(14,791) $ 1,790 $13,450
====== ===== ======
</TABLE>
Income tax expense from discontinued operations, in thousands, is as
follows: 1995 -- $878; 1994 -- $1,443; and 1993 -- $1,550.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets and liabilities as of December 31, 1995 and
1994 are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------
1995 1994
------------------- ---------------------
CURRENT LONG-TERM CURRENT LONG-TERM
------- --------- -------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Deferred tax assets:
Postretirement benefit obligation............ $ 765 $ 8,940 $ 765 $ 11,593
Expenses not currently deductible............ 19,101 9,895 19,174 25,879
Net operating loss carryover................. -- 30,041 -- 24,673
Tax credit carryover......................... -- 5,033 -- 8,653
----- ------ ------ ------
Total deferred tax assets...................... 19,866 53,909 19,939 70,798
Valuation allowance for deferred tax assets.... (8,495) (23,180) (15,140) (53,770)
----- ------ ------ ------
Net deferred tax assets........................ 11,371 30,729 4,799 17,028
----- ------ ------ ------
Deferred tax liabilities:
Tax over book depreciation................... -- 18,593 -- 18,838
Difference between book and tax basis of
income recognition........................ -- -- 471 1,230
Other........................................ -- 7,527 -- 4,324
----- ------ ------ ------
Total deferred tax liabilities................. -- 26,120 471 24,392
----- ------ ------ ------
Net deferred tax assets (liabilities).......... $11,371 $ 4,609 $ 4,328 $ (7,364)
===== ====== ====== ======
</TABLE>
At December 31, 1995, unremitted earnings of foreign subsidiaries were
approximately $23.4 million. Since it is the Company's intention to indefinitely
reinvest these earnings, no U.S. taxes have been provided.
F-12
<PAGE> 104
IMO INDUSTRIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Determination of the amount of unrecognized deferred tax liability on these
unremitted earnings is not practicable. The amount of foreign withholding taxes
that would be payable upon remittance of those earnings is approximately $.9
million.
The components of income (loss) from continuing operations before income
taxes and extraordinary item:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1995 1994 1993
------- ------ --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
United States......................................... $(5,584) $ (322) $(21,086)
Foreign............................................... 2,822 2,296 (3,393)
-------- ------ ---------
$(2,762) $1,974 $(24,479)
======== ====== =========
</TABLE>
U.S. income tax expense (benefit) at the statutory tax rate is reconciled
below to the overall U.S. and foreign income tax expense (benefit).
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1995 1994 1993
-------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Tax at U.S. federal income tax rate.................. $ (967) $ 691 $(8,567)
State taxes, net of federal income tax effect........ 197 299 396
Impact of foreign tax rates and credits.............. 918 526 --
Net U.S. tax on distributions of current foreign
earnings........................................... 586 935 --
Goodwill amortization................................ 643 656 694
Other/valuation reserve.............................. (16,168) (1,317) 20,927
--------- -------- -------
Income tax expense (benefit)......................... $(14,791) $(1,790) $13,450
========= ======== =======
</TABLE>
Net income taxes paid during 1995 and 1994 were $6.3 million and $.2
million, respectively, and net income tax refunds received during 1993 were $7
million.
The Company has net operating loss carryforwards of approximately $85
million expiring in years 2002 through 2010, foreign tax credit carryforwards of
approximately $8.3 million expiring through 2000, which, for financial reporting
purposes, are reflected as deductible foreign taxes, and minimum tax credits of
approximately $2.1 million which may be carried forward indefinitely. These
carryforwards are available to offset future federal taxable income.
In 1995, the Company reduced the valuation allowance applied against the
net operating loss carryforward by $17 million to a level where management
believes it is more likely than not that the tax benefit will be realized. The
total amount of future taxable income in the U.S. necessary to realize the asset
is approximately $48 million. The Company would generate this income from the
execution of reasonable and prudent tax planning strategies and based upon
future income projections, including the Company's announced plan to sell
Roltra-Morse SpA in 1996. The amount of the deferred tax asset considered
realizable, however, could be reduced in the near term if estimates of future
taxable income during the carryforward period are reduced.
NOTE 8 NOTES PAYABLE AND LONG-TERM DEBT
In August 1994, the Company obtained credit facilities for borrowings up to
$150 million from a group of lenders (the "Existing Credit Agreement"), secured
by the assets of the Company's domestic operations and all or a portion of the
stock of certain of the Company's subsidiaries. The Existing Credit Agreement
provided for a $65 million revolving credit facility through July 31, 1997, a
$40 million term loan amortizing to July 1997, and a $45 million bridge loan
maturing January 1996. The revolving credit facility is extendible to July
F-13
<PAGE> 105
IMO INDUSTRIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1999 under certain conditions. Proceeds from the Existing Credit Agreement were
used to repay the Company's working capital loans under the former domestic
senior credit facilities, as well as other outstanding senior debt obligations.
(See Note 15).
In January 1995, proceeds from the sales of the Baird Analytical
Instruments division and the Turbomachinery business were used to repay amounts
outstanding on the term and bridge loans of $36.7 million and $45 million,
respectively (See Note 2). At the same time, and in keeping with the terms of
the Existing Credit Agreement, the $65 million revolving credit facility was
reduced to $50.0 million. In December 1995, the Existing Credit Agreement was
amended to increase the revolving credit facility to $60 million. At December
31, 1995 the Company had borrowings of $18.2 million outstanding under the
revolving credit facility in addition to $7.8 million of outstanding standby
letters of credit. The Company's continuing operations currently have $16.1
million in foreign short-term credit facilities with amounts outstanding at
December 31, 1995 of $9.0 million. Due to the short-term nature of these debt
instruments it is the Company's opinion that the carrying amounts approximate
the fair value. The weighted average interest rate on short-term notes payable
was 8.0% and 8.5% at December 31, 1995 and 1994, respectively.
Long-term debt of continuing operations consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1995 1994
-------- --------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Borrowings on revolving credit facility expiring July 31,
1997(1)...................................................... $ 18,200 $ --
Bridge loan due January 31, 1996............................... -- 45,000
Term loan, $3.3 million due quarterly October 31, 1994 to
July 31, 1997................................................ -- 36,667
Senior subordinated debentures with interest at 12.25%,
due August 15, 1997.......................................... 70,000 150,000
Senior subordinated debentures with interest at 12%,
due November 1, 1999 to 2001................................. 150,000 150,000
Other.......................................................... 8,407 4,373
-------- --------
246,607 386,040
Less current portion........................................... 805 13,675
-------- --------
$245,802 $372,365
======== ========
</TABLE>
- ---------------
(1) These loans bear interest at a rate equal to LIBOR plus 2.25%.
The aggregate annual maturities of long-term debt from continuing
operations, in thousands, for the four years subsequent to 1996 are:
1997 -- $90,460; 1998 -- $935; 1999 -- $37,672; and 2000 -- $37,662.
Total debt of the discontinued operations, in thousands, amounted to
$16,983 and $12,723 as of December 31, 1995 and 1994, respectively. Of these
amounts, $5,514 and $6,238 represent the long-term portion.
The 12.25% senior subordinated debentures are redeemable in whole or in
part, at the option of the Company at any time, at 100% of their principal
amount, plus accrued interest. Interest is payable semi-annually on February 15
and August 15. The fair value of these instruments at December 31, 1995, based
on market bid prices, was $70.4 million. In March 1995, $40 million of the
12.25% senior subordinated debentures were redeemed from the proceeds received
from the sale of the Turbomachinery business in January 1995 and on July 6, 1995
an additional $40 million were redeemed with proceeds from the sale of the
Company's Electro-Optical Systems businesses (See Note 2).
F-14
<PAGE> 106
IMO INDUSTRIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The 12% senior subordinated debentures are currently redeemable in whole or
in part, at the option of the Company, at 102.5% of their principal amount, plus
accrued interest. The redemption price declines to 100% on or after November 1,
1996. Interest is payable semi-annually on May 1 and November 1. The fair value
of these instruments at December 31, 1995, based on market bid prices, was
$153.0 million.
The Existing Credit Agreement requires the Company to meet certain
objectives with respect to financial ratios and it and the 12.25% and 12% senior
subordinated debentures contain provisions which place certain limitations on
dividend payments and outside borrowings. Under the most restrictive of such
provisions, the Company must maintain certain minimum consolidated net worth
levels, interest coverage and fixed charge coverage levels and the Company is
prohibited from declaring or paying cash dividends through at least July 31,
1997. The senior subordinated debentures contain covenants that, among other
things, restrict indebtedness to specified levels. Under certain circumstances,
such covenants could result in the Company's inability to fully utilize the
revolving credit facility under the Existing Credit Agreement and the foreign
short-term credit facilities. At December 31, 1995, the Company was in technical
violation of one of the covenants under the Existing Credit Agreement which was
subsequently amended. The Company received a waiver of this technical violation.
In connection with the early repayment and redemption of domestic senior
debt and $80 million of the 12.25% senior subordinated debentures, as discussed
in the preceding paragraphs, a $4.4 million ($.26 per share) charge was recorded
as an extraordinary item in 1995. The charge consisted of the write-off of
deferred debt expense associated with portions of the domestic senior debt
repaid and the 12.25% senior subordinated debentures redeemed.
Bank, advisory and legal fees associated with the 1994 refinancing of the
Existing Credit Agreement amounted to approximately $5.6 million in 1994. In
addition, a $5.3 million ($.31 per share) charge related to the extinguishment
of senior debt under the former domestic senior credit facilities was recorded
as an extraordinary charge in 1994. The $5.3 million charge is comprised of a
$3.7 million premium paid in 1994 on the prepayment of its $30 million 12.75%
senior promissory note and the write-off of approximately $1.6 million of
previously deferred loan costs.
Bank, advisory and legal fees associated with the 1993 restructuring of the
Company's domestic senior credit facilities amounted to approximately $8.0
million payable in 1993. In addition, 200,000 warrants for the Company's common
stock, valued at approximately $.4 million, were issued to one senior lender
and, as part of the $125 million repayment plan, the Company has recognized a
charge in 1993 of approximately $12 million on the prepayment of its senior
notes which was partially financed with Make-Whole Notes issued to one of its
senior lenders and the write-off of approximately $2 million of previously
deferred loan costs. Approximately $18.1 million ($1.07 per share) of the above
amounts relate to the extinguishment of senior debt and were recorded as an
extraordinary item in 1993.
NOTE 9 SHAREHOLDERS' EQUITY
Equity Incentive Plan
Under the Company's Equity Incentive plan, up to 3,050,000 shares of the
Company's $1.00 par value common stock can be issued pursuant to the granting of
stock options, stock appreciation rights, restricted stock awards and restricted
unit awards to key employees. Options can be granted at no less than 100 percent
of the fair market value of the stock on the date of grant or on the prospective
date fixed by the Board of Directors. None of these options can be exercised for
at least a one-year period from the date of grant. After this waiting period, 25
percent of each option, on a cumulative basis, can be exercised in each of the
following four years. Additionally, each option shall terminate no later than 10
years from the date of grant.
On August 17, 1993, the Board of Directors approved the repricing of
certain outstanding non-qualified stock options granted on previous dates under
the Plan. This resulted in the replacement of 468,000 non-qualified stock
options at various exercise prices ranging from $10.375 to $20.375, by 272,865
non-qualified
F-15
<PAGE> 107
IMO INDUSTRIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
stock options at an exercise price of $7.375, the fair market value at the date
of the replacement grant, subject to the market price of the Company's stock
exceeding $10 per share for a period of 30 days. During 1994, the aforementioned
criteria was met. Vested dates are based on the original grant dates of the
replaced options.
On June 20, 1994, certain additional outstanding non-qualified stock
options, granted on previous dates under the Plan, were repriced pursuant to the
August 17, 1993 Board of Directors approval. This resulted in the replacement of
15,000 non-qualified stock options at various exercise prices ranging from
$11.625 to $20.375, by 9,970 non-qualified stock options at an exercise price of
$10.25, the fair market value at the date of the replacement grant. Vested dates
are based on the original grant dates of the replaced options.
On June 23, 1995, the Company's Equity Incentive Plan was amended to
increase the total issuable shares by 850,000 to 3,050,000 and to prohibit
repricing without prior shareholder approval.
The Plan permits awards of restricted stock to key employees subject to a
restricted period and a purchase price, if any, to be paid by the employee as
determined by the Committee of the Equity Incentive Plan. Grants of 40,000
shares and 30,000 shares of restricted stock were made in 1994 and 1993,
respectively, all of which were outstanding as of December 31, 1995. Vesting of
such awards is subject to a defined vesting period and to the Company's stock
achieving certain performance levels during such period.
Stock option activity under the plan was as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1995 1994 1993
------ ------ ------
(SHARES IN THOUSANDS)
<S> <C> <C> <C>
Options:
Granted................................................ 250 410 498
Exercised.............................................. (73) (56) --
Canceled............................................... (210) (159) (150)
Repricing..............................................
Canceled............................................ -- (15) (468)
Issued.............................................. -- 10 273
Outstanding at end of year............................... 1,464 1,497 1,307
Exercisable at end of year............................... 691 654 652
Available for grant at end of year....................... 865 55 341
Option price range per share:
Granted................................................ $ 6.00 $ 9.75- $7.375
$10.25
Exercised.............................................. $ 7.00- $ 7.00- --
$7.375 $7.375
</TABLE>
During 1988, the Company adopted the Equity Incentive Plan for Outside
Directors. The plan provides for the granting of non-qualified stock options of
up to 360,000 shares of the Company's common stock to directors of the Company
who are not employees of the Company or any of its affiliates. Pursuant to this
plan, options can be granted at no less than 100 percent of the fair market
value of the stock on a date five business days after the option is granted and
no option granted may be exercised during the first year after its grant. After
this waiting period, 25 percent of each option, on a cumulative basis, can be
exercised in each of the following four years. In February 1988, 320,000 stock
options were granted at $16.19 per share, all of which were exercisable as of
December 31, 1995. In December 1990, 40,000 stock options were granted at
$10.375 per share, all of which were exercisable as of December 31, 1995. In
June 1995, the Plan was amended to reduce the number of shares issuable to an
aggregate of 360,000.
F-16
<PAGE> 108
IMO INDUSTRIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In June 1995, the Company adopted the 1995 Equity Incentive Plan for
Outside Directors. The Plan provides for the granting of restricted stock awards
and non-qualified stock options of up to 240,000 shares of the Company's common
stock to outside directors of the Company who are not employees of the Company
or any of its affiliates. Pursuant to this Plan, each outside director will be
granted, on an annual basis, options to purchase 4,000 shares of the Company's
common stock. The exercise price of the options will be 100 percent of the fair
market value of the common stock at the date of grant and no option granted may
be exercised during the first year after its grant subject to certain plan
provisions. After this waiting period, the options become exercisable in four
equal annual installments of 1,000 shares. Additionally, each option terminates
no later than 10 years from the date of grant. The plan also provides for the
granting of an annual restricted stock award of 1,000 shares of the Company's
common stock. Each award is made in four quarterly installments of 250 shares
beginning July 1, 1995. The shares comprising the restricted stock awards may
not be sold or otherwise transferred by the outside director until termination
from service. During 1995, 24,000 stock options were granted at $8.00 per share,
none of which were excercisable as of December 31, 1995, and 3,000 shares of
restricted stock awards were issued.
Preferred Stock Purchase Rights
On April 22, 1987, the Board of Directors declared a distribution of one
Preferred Stock Purchase Right for each share of common stock outstanding. Each
right will entitle the holder to buy from the Company a unit consisting of 1/100
of a share of Junior Participating Preferred Stock, Series A, at an exercise
price of $70 per unit. The rights become exercisable ten days after public
announcement that a person or group has acquired 20 percent or more of the
Company's common stock or has commenced a tender offer for 30 percent or more of
common stock. The rights may be redeemed prior to becoming exercisable by action
of the Board of Directors at a redemption price of $0.025 per right. If more
than 35 percent of the Company's common stock becomes held by a beneficial
owner, other than pursuant to an offer deemed in the best interest of the
shareholders by the Company's independent directors, each right may be exercised
for common stock, or other property, of the Company having a value of twice the
exercise price of each right. If the Company is acquired by any person after the
rights become exercisable, each right will entitle its holder to receive common
stock of the acquiring company having a market value of twice the exercise price
of each right. The rights expire on May 4, 1997.
Employee Stock Savings Plan
Up to 600,000 shares of the Company's common stock are reserved for
issuance under the Company's Employee Stock Savings Plan. (See Note 11)
Common Stock Warrants
In July 1993, the Company issued warrants to purchase 200,000 shares of its
common stock at $9.02 per share (subject to adjustment in certain events), to
one of its senior lenders in connection with the restructuring of its senior
credit facilities. The warrants are exercisable on or before December 31, 1998.
NOTE 10 OPERATIONS BY INDUSTRY SEGMENT AND GEOGRAPHIC AREA
The Company classifies its continuing operations into four core business
segments: Power Transmission, Pumps, Instrumentation and Morse Controls.
Detailed information regarding products by segment is contained in the
Prospectus under the section entitled "Business." A fifth business segment
entitled Other is included in continuing operations for financial reporting
purposes, and includes operations previously sold as part of the Company's asset
divestiture program, such as units of the Company's aerospace business and
certain other non-strategic businesses, which no longer fit into its core
business segments as redefined in 1993 and 1995. The 1994 and 1993 amounts have
been restated to reflect Roltra-Morse as a discontinued operation
F-17
<PAGE> 109
IMO INDUSTRIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
and the redefinition of the Company's business segments. Information about the
business of the Company by business segment, foreign operations and geographic
area is presented below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1995 1994 1993
-------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Net Sales
Power Transmission................................... $ 95,075 $ 93,308 $ 85,906
Pumps................................................ 94,375 90,428 91,556
Instrumentation...................................... 76,113 72,226 72,434
Morse Controls....................................... 107,664 100,075 90,876
Other................................................ -- 4,748 75,754
-------- -------- --------
Total net sales.............................. $373,227 $360,785 $416,526
-------- -------- --------
Segment operating income
Power Transmission................................... $ 11,348 $ 8,905 $ 2,338
Pumps................................................ 9,884 10,447 10,357
Instrumentation...................................... 6,746 9,791 7,951
Morse Controls....................................... 5,292 5,743 457
Other................................................ -- (216) 886
-------- -------- --------
Total segment operating income............... 33,270 34,670 21,989
-------- -------- --------
Equity in income (loss) of unconsolidated companies.... 302 -- (231)
Unallocated corporate expenses......................... (12,454) (5,120) (13,407)
Net interest expense................................... (23,880) (27,576) (32,830)
-------- -------- --------
Income (loss) from continuing operations before income
taxes and extraordinary item......................... $ (2,762) $ 1,974 $(24,479)
======== ======== ========
</TABLE>
A reconciliation of segment operating income to income from operations
follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1995 1994 1993
-------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Segment operating income............................... $ 33,270 $ 34,670 $ 21,989
Unallocated corporate expenses....................... (12,454) (5,120) (13,407)
Other income......................................... (739) (219) (1,074)
-------- -------- --------
Income from operations................................. $ 20,077 $ 29,331 $ 7,508
======== ======== ========
</TABLE>
Segment operating income for the year ended December 31, 1995, includes
$2.4 million of unusual charges, of which $.9 million and $1.5 million relate to
the Instrumentation and Morse Controls segments, respectively. Unallocated
corporate expenses include unusual charges of $6.6 million for the year ended
December 31, 1995.
Segment operating income for the year ended December 31, 1993, includes
$8.1 million of unusual charges, of which $.2 million, $.5 million, $.9 million,
$2.4 million and $4.1 million relates to the Power Transmission, Pumps,
Instrumentation, Morse Controls, and Other segments, respectively. Unallocated
corporate expenses include unusual charges of $6.2 million for the year ended
December 31, 1993.
The Pumps and Instrumentation segments had sales to the United States
Department of Defense, in the form of prime and subcontracts, which accounted
for 14% of consolidated sales in 1993. No one customer accounted for 10% or more
of consolidated sales in 1995 and 1994.
F-18
<PAGE> 110
IMO INDUSTRIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
------------------------------
1995 1994 1993
-------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Identifiable assets
Power Transmission........................................... $ 86,343 $ 88,284 $ 89,301
Pumps........................................................ 69,347 63,172 60,430
Instrumentation.............................................. 42,538 44,862 47,017
Morse Controls............................................... 111,482 107,471 101,986
Other........................................................ 13,321 18,054 40,413
Corporate.................................................... 26,446 26,298 55,915
Discontinued Operations:
Electro-Optical........................................... 11,893 85,000 85,000
Turbomachinery............................................ 983 59,970 56,711
Roltra-Morse.............................................. 21,534 19,508 14,765
-------- -------- --------
Total identifiable assets............................ $383,887 $512,619 $551,538
-------- -------- --------
Depreciation and amortization
Power Transmission........................................... $ 4,618 $ 4,778 $ 4,053
Pumps........................................................ 3,972 3,578 3,878
Instrumentation.............................................. 1,840 1,464 1,518
Morse Controls............................................... 3,392 4,155 3,518
Other........................................................ -- 655 3,313
Corporate.................................................... 1,400 3,973 3,516
-------- -------- --------
Total depreciation and amortization.................. $ 15,222 $ 18,603 $ 19,796
-------- -------- --------
Capital expenditures
Power Transmission........................................... $ 3,384 $ 1,245 $ 1,317
Pumps........................................................ 7,367 2,164 1,694
Instrumentation.............................................. 1,445 1,177 1,054
Morse Controls............................................... 2,131 1,080 886
Other........................................................ -- 39 1,042
Corporate.................................................... 273 320 350
-------- -------- --------
Total capital expenditures........................... $ 14,600 $ 6,025 $ 6,343
======== ======== ========
</TABLE>
F-19
<PAGE> 111
IMO INDUSTRIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The continuing operations of the Company on a geographic basis are as
follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1995 1994 1993
-------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Net sales
United States.................................... $244,341 $246,601 $307,918
Foreign (principally Europe)..................... 128,886 114,184 108,608
-------- -------- --------
Total net sales.......................... $373,227 $360,785 $416,526
-------- -------- --------
Segment operating income
United States.................................... $ 29,642 $ 31,679 $ 26,046
Foreign.......................................... 3,628 2,991 (4,057)
-------- -------- --------
Total segment operating income........... $ 33,270 $ 34,670 $ 21,989
-------- -------- --------
Identifiable assets
Continuing Operations:
United States................................. $234,382 $238,916 $283,614
Foreign....................................... 115,095 109,225 111,448
Discontinued Operations:
United States................................. 12,876 141,053 135,585
Foreign....................................... 21,534 23,425 20,891
-------- -------- --------
Total identifiable assets................ $383,887 $512,619 $551,538
======== ======== ========
Export sales
Asia............................................. $ 4,060 $ 2,763 $ 4,362
Latin America.................................... 2,747 2,368 1,699
Canada........................................... 4,643 3,748 3,132
Mexico........................................... 472 861 701
Europe........................................... 2,704 2,857 2,750
Other............................................ 2,568 3,293 2,596
-------- -------- --------
Total export sales....................... $ 17,194 $ 15,890 $ 15,240
======== ======== ========
</TABLE>
NOTE 11 PENSION PLANS
The Company and its subsidiaries have various pension plans covering
substantially all of their employees. Benefits are based on either years of
service or years of service and average compensation during the years
immediately preceding retirement. It is the general policy of the Company to
fund its pension plans in conformity with requirements of applicable laws and
regulations.
Pension expense was $4.2 million in 1995, $7.9 million in 1994 and $8.4
million in 1993, and includes amortization of prior service cost and transition
amounts for periods of 5 to 15 years. The 1995 expense includes costs related to
retained pension liabilities of discontinued operations. In 1994 and 1993 these
amounts were charged to discontinued operations. In 1993 the Company's
divestiture program resulted in a decrease in U.S. pension plan participants.
The total curtailment and settlement gain, in 1993, of $1.2 million was applied
to the reserve for divestitures (See Note 3). The Company included $2.0 million
of curtailment and settlement losses in its gain on disposal related to the
discontinued operations in 1995. Net pension
F-20
<PAGE> 112
IMO INDUSTRIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
expense (including $5.7 million and $4.5 million charged to discontinued
operations in 1994 and 1993, respectively) is comprised of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1995 1994 1993
-------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Service cost........................................... $ 4,297 $ 7,237 $ 7,678
Interest cost on projected benefit obligation.......... 13,429 14,158 13,802
Actual return on plan assets........................... (17,797) (449) (22,646)
Net amortization and deferral.......................... 4,274 (12,963) 9,567
--------- --------- ---------
Net pension expense.................................... $ 4,203 $ 7,983 $ 8,401
========= ========= =========
</TABLE>
Assumptions used in the accounting for the Company-sponsored defined
benefit plans:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
----------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Weighted average discount rate................................ 7.5% 8.5% 7.5%
Rate of increase in compensation levels....................... 5.3% 5.3% 5.3%
Expected long-term rate of return on assets................... 9.0% 9.0% 9.0%
</TABLE>
The following table sets forth the funded status and amounts recognized in
the consolidated balance sheet for the defined benefit pension plans:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995
----------------------------
ASSETS ACCUMULATED
EXCEED BENEFITS
ACCUMULATED EXCEED
BENEFITS ASSETS
----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Actuarial present value of benefit obligations:
Vested benefit obligation................................ $ 117,455 $ 46,445
-------- ---------
Accumulated benefit obligation........................... $ 124,808 $ 46,564
-------- ---------
Projected benefit obligation............................... $ 138,866 $ 47,454
Plan assets at fair value.................................. 148,275 35,226
-------- ---------
Plan assets in excess of (less than) projected benefit
obligation............................................... 9,409 (12,228)
Unrecognized net (gain) or loss............................ (9,566) 107
Prior service cost not yet recognized in net periodic
pension cost............................................. 2,812 956
Unrecognized net (asset) obligation at transition.......... 2,037 171
Adjustment required to recognize minimum liability......... -- (3,132)
-------- ---------
Pension asset (liability) recognized in the balance
sheet.................................................... $ 4,692 $ (14,126)
======== =========
</TABLE>
F-21
<PAGE> 113
IMO INDUSTRIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1994
----------------------------
ASSETS ACCUMULATED
EXCEED BENEFITS
ACCUMULATED EXCEED
BENEFITS ASSETS
----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Actuarial present value of benefit obligations:
Vested benefit obligation........................................ $ 101,869 $ 60,492
-------- ---------
Accumulated benefit obligation................................... $ 105,020 $ 61,253
-------- ---------
Projected benefit obligation....................................... $ 119,886 $ 62,661
Plan assets at fair value.......................................... 127,850 47,542
-------- ---------
Plan assets in excess of (less than) projected benefit
obligation....................................................... 7,964 (15,119)
Unrecognized net (gain) or loss.................................... (5,897) (175)
Prior service cost not yet recognized in net periodic pension
cost............................................................. 4,066 3,348
Unrecognized net (asset) obligation at transition.................. 3,407 821
Adjustment required to recognize minimum liability................. -- (4,165)
-------- ---------
Pension asset (liability) recognized in the balance sheet.......... $ 9,540 $ (15,290)
======== =========
</TABLE>
Plan assets at December 31, 1995, are invested in fixed dollar guaranteed
investment contracts, United States Government obligations, fixed income
investments, guaranteed annuity contracts and equity securities whose values are
subject to fluctuations of the securities market.
The Company maintains two defined contribution (Employee Stock Savings)
plans covering substantially all domestic, non-union employees. Eligible
employees may generally contribute from 1% to 12% of their compensation on a
pre-tax basis. Company contributions to the plans are based on a percentage of
employee contributions. In July 1995 the Company restored its matching
contribution, previously suspended in July 1992, at 25% of the first 6% of each
participant's pre-tax contribution. The Company's expense for 1995 was $.3
million.
NOTE 12 POSTRETIREMENT BENEFITS
In addition to providing pension benefits, the Company provides certain
health care and life insurance benefits for retired employees. Substantially all
of the Company's non-union employees retiring from active service and
immediately receiving retirement benefits from one of the Company's pension
plans would be eligible to receive such benefits. The Company's unionized
retiree benefits are determined by their individually negotiated contracts. The
Company's contribution toward the full cost of the benefits is based on the
retiree's age and continuous unbroken length of service with the Company. The
Company's policy is to pay the cost of medical benefits as claims are incurred.
Life insurance costs are paid as insured premiums are due.
In March 1994, the Company amended its policy regarding retiree medical and
life insurance. This amendment, which affects some current retirees and all
future retirees, phases out the Company subsidy for retiree medical and life
insurance over a three year period ending January 1, 1997. The pre-tax amount
amortized to income from continuing operations was $4.6 million and $4.4 million
in 1995 and 1994, respectively. The Company will amortize remaining associated
reserves of approximately $5 million to income in 1996. The amendment has not
resulted in a significant increase or decrease in cash requirements during the
phase-out period.
F-22
<PAGE> 114
IMO INDUSTRIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following tables set forth the plans' combined status reconciled with
the amounts included in the consolidated balance sheet:
<TABLE>
<CAPTION>
DECEMBER 31, 1995
-----------------------------
LIFE
MEDICAL INSURANCE
PLANS PLANS TOTAL
------- --------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Accumulated postretirement benefit obligation:
Retirees................................................ $11,780 $ 4,974 $16,754
Fully eligible active plan participants................. 1,277 312 1,589
Other active plan participants.......................... 1,011 81 1,092
------- -------- -------
14,068 5,367 19,435
Plan assets............................................... -- -- --
Unrecognized prior service cost........................... 3,109 3,924 7,033
Unrecognized net gain (loss).............................. 2,379 (2,290) 89
------- -------- -------
Postretirement benefit liability recognized in the balance
sheet................................................... $19,556 $ 7,001 $26,557
======= ======== =======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1994
-----------------------------
LIFE
MEDICAL INSURANCE
PLANS PLANS TOTAL
------- --------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Accumulated postretirement benefit obligation:
Retirees................................................ $16,709 $ 4,826 $21,535
Fully eligible active plan participants................. 1,365 262 1,627
Other active plan participants.......................... 1,326 68 1,394
-------- -------- -------
19,400 5,156 24,556
Plan assets............................................... -- -- --
Unrecognized prior service cost........................... 7,840 7,376 15,216
Unrecognized net loss..................................... (2,423) (2,043) (4,466)
-------- -------- -------
Postretirement benefit liability recognized in
the balance sheet....................................... $24,817 $10,489 $35,306
======== ======== =======
</TABLE>
The 1995 accrued postretirement benefits amount is classified as follows:
$2.2 million current liabilities and $24.4 million long-term liabilities. For
1994, these amounts are $2.2 million current liabilities, $30.9 million
long-term liabilities and $2.2 million in net assets of discontinued
operations -- noncurrent.
As a result of the divestitures in 1994 and 1993, the Company recognized a
$0.3 million gain and a $2.2 million gain, respectively, related to the
curtailment of its postretirement benefit plans. These curtailment gains were
applied to the reserve for divestitures (See Note 3).
As a result of the Company's decision to sell its Electro-Optical Systems
operations a curtailment gain of $1.3 million was recognized in 1993. This
curtailment gain is a component of the loss on disposal of discontinued
operations (See Note 2).
F-23
<PAGE> 115
IMO INDUSTRIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Net periodic postretirement benefit cost (including $2.3 million credited
in 1994 and $1.0 million charged in 1993 to discontinued operations) included
the following components:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995
-----------------------------
LIFE
MEDICAL INSURANCE
PLANS PLANS TOTAL
------- --------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Service cost.............................................. $ 59 $ 5 $ 64
Interest cost............................................. 1,057 415 1,472
Amortization of prior service cost........................ (3,110) (2,319) (5,429)
Amortization of gain (loss)............................... (166) 102 (64)
-------- -------- --------
Net periodic postretirement benefit cost.................. $(2,160) $(1,797) $(3,957)
======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1994
-----------------------------
LIFE
MEDICAL INSURANCE
PLANS PLANS TOTAL
------- --------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Service cost.............................................. $ 100 $ 7 $ 107
Interest cost............................................. 1,547 289 1,836
Amortization of prior service cost........................ (5,955) (1,967) (7,922)
Amortization of loss...................................... 543 103 646
-------- -------- --------
Net periodic postretirement benefit cost.................. $(3,765) $(1,568) $(5,333)
======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1993
-----------------------------
LIFE
MEDICAL INSURANCE
PLANS PLANS TOTAL
------- --------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Service cost................................................ $ 372 $ 63 $ 435
Interest cost............................................... 2,999 750 3,749
Amortization of prior service cost.......................... -- -- --
Amortization of loss........................................ -- -- --
------ ---- ------
Net periodic postretirement benefit cost.................... $3,371 $ 813 $4,184
====== ==== ======
</TABLE>
Actual negotiated health care premiums were used in calculating 1995, 1994
and 1993 health care costs. It is expected that the annual increase in medical
costs will be 8.0% from 1995 to 1996, grading down in future years by 1.0% per
year until it reaches a future general medical inflation level of 5%. Inflation
has been capped at 200% for active non-union employees. The health care cost
trend rate assumption has a significant effect on the amounts reported. For
example, a 1% increase in the health care trend rate would increase the
accumulated postretirement benefit obligation at December 31, 1995 by $1.1
million and the net periodic cost by $.1 million for the year. Effective January
1, 1995, the Company changed its medical inflation rate to reflect actual
experience. Such change resulted in a reduction of the 1995 net periodic cost of
$.8 million. The weighted average discount rate used in determining the
accumulated postretirement benefit obligation was 7.5% and 8.5% in 1995 and
1994, respectively.
F-24
<PAGE> 116
IMO INDUSTRIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 13 LEASES
The Company leases certain manufacturing and office facilities, equipment,
and automobiles under long-term leases. Future minimum rental payments required
under operating leases of continuing operations that have initial or remaining
noncancelable lease terms in excess of one year, as of December 31, 1995, are:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
----------------------
<S> <C>
1996...................................... $ 5,355
1997...................................... 4,362
1998...................................... 3,799
1999...................................... 2,649
2000...................................... 1,268
Thereafter................................ 4,854
----------------------
Total minimum lease payments.............. $ 22,287
======================
</TABLE>
Total rental expense under operating leases charged against continuing
operations was $7.3 million in 1995, $8.2 million in 1994 and $8.0 million in
1993.
NOTE 14 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 two of the Company's insurers.
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 one of its
insurers, International Insurance Company ("International"), alleging that,
because, among other things, its 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 Insurance Co. ("Granite State"), one of its insurers, 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
that, among other things, defense costs above reasonable levels were expended in
defending the
F-25
<PAGE> 117
IMO INDUSTRIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
LILCO litigation. The insurer subsequently paid $18.1 million of the judgment
rendered against the Company, thereby exhausting its $20 million policy. The
Company claims that the insurer's refusal to pay defense costs was in bad faith
and the Company is entitled to its cost of money and other damages. In a
counterclaim, Granite State is seeking reimbursement of all or part of the $1.7
million in defense costs previously paid by it, and has 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 represents amounts previously paid by LILCO to the
Company for generator repairs and which Granite State had paid on behalf of the
Company). The Company and Granite State have reached an agreement in principle
which will result in the dismissal of all claims and counter-claims 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. The Company has 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 has 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. and the Contract Disputes
Act, 41 USC 601 et seq., and 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.
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
F-26
<PAGE> 118
IMO INDUSTRIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
The Company also has a lawsuit pending against it 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 a lawsuit in the Circuit Court of Cook County,
Illinois, alleging performance shortfalls in products delivered by the Company's
former Delaval Turbine Division and claiming damages of approximately $8.0
million. 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 reasonably be determined.
Reported profits from the sale of certain products to the U.S. Government
and its agencies are subject to adjustments. In the opinion of management,
refunds, if any, will not have a material effect upon the consolidated financial
statements.
The Company is self-insured for a portion of its product liability and
certain other liability exposures. Depending on the nature of the liability
claim, and with certain exceptions, the Company's maximum self-insured exposure
ranges from $250,000 to $500,000 per claim with certain maximum aggregate policy
limits per claim year. With respect to the exceptions, which relate principally
to diesel and turbine units sold before 1991, the Company's maximum self-insured
exposure is $5 million per claim.
NOTE 15 SUBSEQUENT EVENT
Refinancing. On April 29, 1996, the Company completed the refinancing of
its senior domestic debt, its 12% senior subordinated debentures and its
remaining 12.25% senior subordinated debentures.
Under the terms of the refinancing, the Company has issued $155 million of
11.75% senior subordinated notes due in 2006, priced at a discount to yield 12%.
The Company also has entered into a new agreement for $175 million in senior
secured credit facilities with a group of lenders. Initial borrowings under the
senior secured credit facilities were approximately $112 million. The cost of
issuance of the new senior subordinated notes and the new credit facility will
be amortized over their respective terms.
Proceeds of the new senior subordinated notes and a portion of the new
credit facility 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. Proceeds were also used to refinance
all obligations under the previous credit facility.
As a result of the refinancing, an extraordinary charge of approximately
$8.5 million will be recorded in the second quarter of 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.
F-27
<PAGE> 119
IMO INDUSTRIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Discontinued Operations. The Company is currently negotiating the final
wording of the contract for the 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 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.
F-28
<PAGE> 120
REPORT OF INDEPENDENT AUDITORS
Board of Directors,
Imo Industries Inc.
We have audited the accompanying consolidated balance sheets of Imo
Industries Inc. and subsidiaries as of December 31, 1995 and 1994, and the
related consolidated statements of income, cash flows and shareholders' equity
for each of the three years in the period ended December 31, 1995. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatements. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Imo Industries
Inc. and subsidiaries at December 31, 1995 and 1994, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1995, in conformity with generally accepted
accounting principles.
ERNST & YOUNG LLP
Princeton, New Jersey
February 15, 1996,
except for Note 15,
as to which the date is August 1, 1996
F-29
<PAGE> 121
IMO INDUSTRIES INC. AND SUBSIDIARIES
QUARTERLY FINANCIAL INFORMATION
(UNAUDITED)
Quarterly financial information for 1995 and 1994 is as follows:
<TABLE>
<CAPTION>
1995(A)
-------------------------------------------
1ST* 2ND* 3RD* 4TH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
(DOLLARS IN THOUSANDS EXCEPT PER SHARE
AMOUNTS)
<S> <C> <C> <C> <C>
Net Sales................................... $95,884 $98,576 $88,727 $90,040
Gross profit................................ 30,894 30,943 27,389 25,666
Income (loss) before extraordinary item:
Continuing Operations..................... 2,586 2,962 2,515 3,966
Discontinued Operations................... 40,577 448 (6,938) (11,962)
Extraordinary Item........................ (4,140) -- (304) --
Net income (loss)........................... 39,023 3,410 (4,727) (7,996)
Earnings (loss) per share:
Before extraordinary item:
Continuing Operations.................. .15 .18 .15 .23
Discontinued Operations................ 2.38 .02 (.41) (.70)
Extraordinary Item........................ (.24) -- (.02) --
Net income (loss)......................... 2.29 .20 (.28) (.47)
Cash dividends per share(b)................. -- -- -- --
</TABLE>
<TABLE>
<CAPTION>
1994(A)
-------------------------------------------
1ST* 2ND* 3RD* 4TH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
(DOLLARS IN THOUSANDS EXCEPT PER SHARE
AMOUNTS)
<S> <C> <C> <C> <C>
Net Sales................................... $87,800 $91,478 $91,235 $90,272
Gross profit................................ 27,759 28,296 27,278 28,617
Income (loss) before extraordinary item:
Continuing Operations..................... 341 (1,045) 1,208 (320)
Discontinued Operations................... 564 2,797 1,580 4,105
Extraordinary Item........................ -- -- (5,299) --
Net income (loss)........................... 905 1,752 (2,511) 3,785
Earnings (loss) per share:
Before extraordinary item:
Continuing Operations.................. .02 (.06) .07 (.02)
Discontinued Operations................ .03 .17 .09 .24
Extraordinary Item........................ -- -- (.31) --
Net income (loss)......................... .05 .11 (.15) .22
Cash dividends per share(b)................. -- -- -- --
</TABLE>
- ---------------
(a) The notes to the consolidated financial statements, appearing elsewhere in
this Prospectus, should be read in conjunction with this summary.
(b) See Note 8 for information regarding restrictions on dividend payments.
* Reclassified to conform to 1995 full year presentation.
F-30
<PAGE> 122
<TABLE>
<CAPTION>
1995 1994
------------------- -------------------
HIGH LOW HIGH LOW
------- ------- ------- -------
<S> <C> <C> <C> <C>
Stock Market Closing Prices
1st Quarter............................... 11 1/2 6 1/4 10 1/8 7
2nd Quarter............................... 9 1/8 6 1/2 10 7/8 9 1/2
3rd Quarter............................... 9 7/8 8 1/4 12 9 3/8
4th Quarter............................... 9 5 3/4 12 1/4 8 3/4
</TABLE>
- ---------------
There were 22,942 shareholders of record on December 31, 1995.
F-31
<PAGE> 123
ANNEX A
GLOSSARY OF PRODUCT DESCRIPTIONS
I. POWER TRANSMISSION
Enclosed worm gear reducer -- a speed reducer used in conjunction with an
electric motor, directly or indirectly, to reduce motor speed and generate
torque, for use in a variety of industrial and non-industrial applications.
These reducers are provided with varying output speeds, responding to specific
customer requirements.
Enclosed helical gear reducer -- a speed reducer that uses highly efficient
gears that run in-line on parallel shafts in conjunction with an electric motor,
directly or indirectly, to reduce motor speed and generate torque. The
efficiency and high torque generation of these reducers makes them attractive
for an increased number of industrial applications and customers.
Open gears -- gears available in a wide range of configurations and types
that operate on intersecting or parallel shafts and are used to transmit both
speed and torque. These gears are available in a variety of product materials,
ranging from steel and cast iron to plastic. They are offered to both industrial
and non-industrial customers in conjunction with a broad array of available
sizes. The range of products includes worm, worm gear, spur, helical, miter and
bevel gears.
Variable speed control -- a speed drive used in conjunction with an AC or
DC electric motor to alter the speed or affect the positioning of a rotating
shaft. These speed drives allow for an unlimited number of performance
possibilities for production line or process flow applications. The product is
sold for both industrial and non-industrial applications and can be manufactured
to accommodate horsepower requests from fractional to one thousand horsepower.
II. PUMPS
Rotary Screw Pump -- a pump that uses two or more intermeshing screws to
transport a liquid through the pump as the screws mesh and rotate.
Three-screw Pump -- a rotary screw pump with only three moving
parts -- a power rotor that drives two idler rotors. As the screws rotate,
the threads seal against each other and the casing, creating an enclosed
chamber that propels the fluid through the pump at a constant speed. The
screws are ground to very close tolerances and are lubricated by the fluid
being pumped. The simplicity of the design makes it efficient, reliable and
extremely quiet.
Two-screw Pump -- a rotary screw pump that employs a pair of
intermeshing screws on two shafts contained in a single housing. The
two-screw pump differs from the three-screw pump in two principal ways: (1)
external timing gears in the two-screw pump drive and synchronize the
screws and therefore do not depend on one screw driving the other; and (2)
the two-screw pump does not depend on the fluid being pumped for its
lubrication, and therefore can pump a number of low-lubricity fluids like
pulp, paper, adhesives and molasses.
Centrifugal Pump -- a rotary screw pump that employs an impeller with fixed
blades inside a casing. When the impeller spins, momentum is applied to the
liquid being pumped, propelling fluid from the inlet side of the pump to the
outlet side by centrifugal force.
Gear Pump -- a device that uses gears to pump fluid. The internal gear type
produced by Imo uses a pumping action produced by a pair of star-shaped gears.
As the gears rotate, the sequence of expanding and contracting gear pockets
draws the liquid from the inlet side to the outlet side of the pump and forces
it out under pressure. Internal gear pumps are quiet and capable of handling a
variety of high-pressure hydraulic applications, such as machines tools,
injection molding equipment and hydraulic presses.
A-1
<PAGE> 124
III. INSTRUMENTATION
Level Switch -- a device that senses a liquid level and sends an electrical
signal to a switch. The Company produces these switches in hundreds of different
sizes, shapes and configurations, employing technologies ranging from simple
floats to fiber optics.
Flow Switch -- a device that employs pistons, paddles or shuttles contained
within a housing to monitor the flow of liquids or gases. The Company produces
both pre-set and adjustable flow switches, capable of measuring flow rates
ranging from 50 cubic centimeters per minute to 100 gallons per minute.
Pressure Transducer -- a device that converts one form of energy to another
form of energy. There are many types of transducers. A pressure transducer
consists of a thin metal disc (called a diaphragm) to which a sensor (called a
strain gage) is attached. Pressure causes the diaphragm to deflect, and the
sensor measures the level of deflection and transmits that information
electrically to a pressure gauge or monitor. The transducer thereby converts
mechanical energy (the deflection of the diaphragm) to the electrical energy
required to transmit data to a monitor. Transducers are used to monitor pressure
in many different industrial products and processes.
Liquid Level Indicator -- a device that employs a magnet-equipped float
that moves up and down along a stem inside a storage vessel as the liquid level
rises and falls. The level is read from a calibrated indicator outside the tank.
The Company's patented SureSite(R) indicators use brilliantly colored flags that
are flipped by magnets as the liquid rises and falls, offering an indication of
liquid level that can be seen from some distance.
Cryogenic Valves -- fittings used in the transport, distribution and
control of super-cooled gases, such as oxygen, nitrogen, neon, argon and helium.
These valves are used in nuclear fusion research, in the space industry for
rocket fueling and testing, and in the gas industry for the production of
liquefied gases.
IV. MORSE CONTROLS
Push-Pull Cable Systems -- systems that use wire cables which slide back
and forth within a conduit. On construction equipment like road graders,
bulldozers and backhoes, cable controls actuate the hydraulic valves that make
the blades and buckets move. Such systems are also used to control
transmissions, steering, braking and other motion control features of dump
trucks, firetrucks and school buses. Industrial uses include stationary
generators and material handling systems, including drycleaning conveyors.
Remote Control Systems -- systems that use mechanical, hydraulic or
electronic means of transfering motion from a remote input device to an output
device. Motion control can be linear-to-rotary (a steering wheel) or
linear-to-linear (an accelerator pedal). A simple remote control system on a
pleasure boat might consist of a control lever attached by a cable to the engine
throttle. Pushing the control lever forward engages the throttle and makes the
boat travel faster.
Mechanical Controls -- see Push-Pull Cable Systems above.
Electronic Controls -- systems that employ electronic input devices to
direct the output device and to specify the sequence of output device
operations. Many leisure marine boat producers favor electronic control systems
because of their smoother and more accurate effect.
Hydraulic Controls -- systems that employ an oil-actuated pump to provide
the power to control motion. Power steering on an automobile is an example of a
hydraulic control system. The Company makes hydraulic steering control systems
for commercial boats, including fishing boats and tug boats.
A-2
<PAGE> 125
- ------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THE EXCHANGE OFFER COVERED BY THIS PROSPECTUS. IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL
OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY IN ANY
JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER IN SUCH
JURISDICTION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE
HEREOF OR THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE SUCH
DATE.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information................. i
Incorporation of Certain Documents By
Reference........................... i
Prospectus Summary.................... 1
Risk Factors.......................... 11
Capitalization........................ 17
Selected Historical Consolidated
Financial Data...................... 18
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 21
Business.............................. 32
Management............................ 43
Security Ownership of Certain
Beneficial Owners and Management.... 46
The Exchange Offer.................... 49
Description of the Notes.............. 55
Description of New Credit Agreement... 82
Certain U.S. Federal Income Tax
Consequences........................ 83
Plan of Distribution.................. 88
Notice to Canadian Residents.......... 88
Legal Matters......................... 89
Experts............................... 89
Index to Consolidated Financial
Statements.......................... F-1
Glossary of Product Descriptions...... A-1
</TABLE>
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LOGO
Imo Industries Inc.
$155,000,000
11 3/4% Senior Subordinated
Notes Due 2006
PROSPECTUS
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