UNITED STATES
Form 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended July 3, 1998
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________ to __________
Commission file number 1-9294
Imo Industries Inc.
(Exact name of registrant as specified in its charter)
Delaware 21-0733751
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
1009 Lenox Drive, Building Four West
Lawrenceville, New Jersey 08648
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code 609-896-7600
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: Common Stock, $1.00 Par
Value--17,127,859 shares as of August 14, 1998.
INDEX
Page
Number
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
Consolidated Condensed Statements of Income (Unaudited) Three months ended
July 3, 1998 and June 30, 1997 and six months ended July 3, 1998 and June 30,
1997
Consolidated Condensed Balance Sheets - July 3, 1998 (Unaudited) and
December 31, 1997
Consolidated Condensed Statements of Cash Flows (Unaudited) - Six months ended
July 3, 1998 and June 30, 1997
Notes to Consolidated Condensed Financial Statements (Unaudited) - July 3, 1998
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
Item 6. Exhibits and Reports on Form 8-K.
SIGNATURES
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
Imo Industries Inc. and Subsidiaries
Consolidated Condensed Statements of Income
(Dollars in thousands except per share amounts)
Three Months Ended Six Months Ended
July 3, June 30, July 3, June 30,
1998 1997 1998 1997
- --------------------------------------------------------------------------------
(Unaudited) (Unaudited)
Net Sales $ 81,084 $ 81,305 $164,115 $160,232
Cost of products sold 54,637 55,508 110,923 109,807
- --------------------------------------------------------------------------------
Gross Profit 26,447 25,797 53,192 50,425
Selling, general and administrative
expenses 14,934 18,421 30,133 35,786
Research and development expenses 1,370 1,379 2,826 2,719
Unusual items - (2,400) - 10,500
- --------------------------------------------------------------------------------
Income From Operations 10,143 8,397 20,233 1,420
Other expense (income), net (248) (164) (167) (104)
- --------------------------------------------------------------------------------
Income (Loss) From Continuing
Operations Before Interest, Income
Taxes, and Extraordinary Item 10,391 8,561 20,400 1,524
Interest Expense 5,876 6,892 11,732 13,611
- --------------------------------------------------------------------------------
Income (Loss) From Continuing
Operations Before Income Taxes and
Extraordinary Item 4,515 1,669 8,668 (12,087)
Income Tax Expense 673 464 1,502 1,036
- --------------------------------------------------------------------------------
Income (Loss) From Continuing
Operations Before Extraordinary Item 3,842 1,205 7,166 (13,123)
Income from Discontinued Operations - 1,224 - 2,710
Extraordinary Item - Loss on
Extinguishment of Debt - - (5,603) -
- --------------------------------------------------------------------------------
Net Income (Loss) $ 3,842 $ 2,429 $ 1,563 $(10,413)
================================================================================
Earnings (Loss) per share, basic and diluted
Continuing operations before
extraordinary item $ .22 $ .07 $ .42 $ (.77)
Discontinued operations - .07 - .16
Extraordinary item - - (.33) -
- --------------------------------------------------------------------------------
Net income (loss) $ .22 $ .14 $ .09 $ (.61)
- --------------------------------------------------------------------------------
Weighted average number of shares
outstanding 17,127,859 17,126,297 17,127,859 17,125,716
================================================================================
The accompanying notes are an integral part of these consolidated condensed
financial statements.
*Restated to conform to 1998 presentation. See Note C.
Imo Industries Inc. and Subsidiaries
Consolidated Condensed Balance Sheets
(Dollars in thousands except par value amounts)
July 3, December 31,
1998 1997
- -----------------------------------------------------------------------
(Unaudited)
ASSETS
Current Assets
Cash and cash equivalents $ 4,529 $ 3,528
Trade accounts and notes receivable, less
allowance of $1,376 in 1998 and $1,435 49,056 53,732
in 1997
Inventories-net 61,234 64,888
Prepaid expenses and other current assets 11,074 17,656
- -----------------------------------------------------------------------
Total Current Assets 125,893 139,804
Property, plant and equipment, net of
accumulated 59,626 61,409
depreciation of $5,338 and $3,202,
respectively
Intangible assets, principally goodwill 232,675 233,054
Net assets of discontinued operations 53 14,927
Other assets 15,776 14,106
- -----------------------------------------------------------------------
Total Assets $434,023 $463,300
- -----------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Notes payable and current portion of $ 43,812 $ 34,320
long-term debt
Trade accounts payable 17,577 22,750
Accrued expenses and other liabilities 59,138 64,065
- -----------------------------------------------------------------------
Total Current Liabilities 120,527 121,135
Long-term debt 148,297 192,319
Other liabilities 65,058 59,599
- -----------------------------------------------------------------------
Total Liabilities 333,882 373,053
- -----------------------------------------------------------------------
SHAREHOLDERS' EQUITY
Preferred stock: $1.00 par value;
5,000,000 shares authorized and unissued - -
Common stock: $1.00 par value; 25,000,000
shares authorized; issued 17,127,859 17,128 17,128
Additional paid-in capital 103,624 106,805
Retained earnings (deficit) (19,657) (33,016)
Cumulative foreign currency translation
adjustments (954) (670)
- ------------------------------------------------------------------------
Total Shareholders' Equity 100,141 90,247
========================================================================
Total Liabilities and Shareholders'
Equity $434,023 $463,300
========================================================================
The accompanying notes are an integral part of these consolidated condensed
financial statements.
Imo Industries Inc. and Subsidiaries
Consolidated Condensed Statements of Cash Flows
(Dollars in thousands)
Six Months Ended
July 3, June 30,
1998 1997*
- --------------------------------------------------------------------------
(Unaudited)
OPERATING ACTIVITIES
Net income (loss) $ 1,563 $(10,413)
Adjustments to reconcile net income (loss)
to net cash provided by
(used by) continuing operations:
Discontinued operations - (2,710)
Depreciation and amortization 5,925 6,472
Extraordinary item 5,603 -
Unusual item - 10,500
Other 43 596
Other changes in operating assets and
liabilities:
Accounts and notes receivable 4,624 (679)
Inventories 3,654 (2,452)
Accounts payable and accrued
expenses (13,139) 1,291
Other operating assets and
liabilities 6,319 (934)
- --------------------------------------------------------------------------
Net cash provided by continuing operations 14,592 1,671
Net cash used by discontinued operations (955) (1,260)
- --------------------------------------------------------------------------
Net Cash Provided by Operating Activities 13,637 411
- --------------------------------------------------------------------------
INVESTING ACTIVITIES
Purchases of property, plant and equipment (3,322) (3,338)
Proceeds from sale of business and
property, plant and equipment 30,738 15,045
Net cash used by discontinued operations (1,164) (2,205)
Other 80 581
- --------------------------------------------------------------------------
Net Cash Provided by Investing Activities 26,332 10,083
- --------------------------------------------------------------------------
FINANCING ACTIVITIES
Increase in notes payable 7,326 9,667
Proceeds from long-term borrowings 1,601 119
Principal payments on long-term debt (43,096) (20,048)
Payment of premium on notes repurchased and
debt financing costs (4,699) (384)
Other (37) (443)
- --------------------------------------------------------------------------
Net Cash Used by Financing Activities (38,905) (11,089)
- --------------------------------------------------------------------------
Effect of exchange rate changes on cash (63) (516)
- --------------------------------------------------------------------------
Increase (Decrease) in Cash and Cash Equivalents 1,001 (1,111)
Cash and cash equivalents at beginning of period 3,528 1,419
- --------------------------------------------------------------------------
Cash and Cash Equivalents at End of Period $ 4,529 $ 308
==========================================================================
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $12,598 $16,544
Income taxes $ 613 $ 2,029
The accompanying notes are an integral part of these consolidated condensed
financial statements.
* Reclassified to conform to 1998 presentation. See Note C.
Imo Industries Inc. and Subsidiaries
Notes to Consolidated Condensed Financial Statements (Unaudited with respect to
July 3, 1998 and June 30, 1997 and the periods then ended.)
NOTE A - SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation: The accompanying unaudited consolidated condensed
financial statements have been prepared in accordance with generally accepted
accounting principles. For further information, refer to the consolidated
financial statements and footnotes thereto included in the Company's annual
report on Form 10-K for the year ended December 31, 1997. In the opinion of
management, all adjustments considered necessary for a fair presentation have
been included. Operating results for the six months ended July 3, 1998 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1998.
Fiscal Year End: Effective January 1, 1998, the Company adopted a "4-4-5"
accounting calendar.
Change in Accounting Policies: The Company adopted Financial Accounting
Standards Board ("FASB") Statement No. 130, "Reporting Comprehensive Income," on
January 1, 1998. For the second quarter of 1998, total comprehensive income was
$3.9 million, compared to reported net income of $3.8 million. For the second
quarter of 1997, total comprehensive income was $2.3 million, compared to
reported net income of $2.4 million. For the six months ended July 3, 1998,
total comprehensive income was $1.3 million, compared to reported net income of
$1.6 million. For the six months ended June 30, 1997, total comprehensive loss
was $12.6 million, compared to a reported net loss of $10.4 million.
NOTE B - ACQUISITION BY II ACQUISITION CORP.
On August 28, 1997, Colfax Corporation (formerly known as II Acquisition Corp.)
acquired approximately 93% of the outstanding shares of common stock of the
Company, pursuant to its tender offer for all outstanding shares of the common
stock. The consideration paid was $7.05 per share of common stock or $112.1
million in total. The acquisition has been accounted for under the purchase
method. On July 2, 1998, Colfax Corporation's wholly-owned subsidiary, Imo
Merger Corp., merged with and into the Company, pursuant to a short-form merger
under Delaware law ("back-end merger"). The Company was the surviving
corporation in the back-end merger and as a result became a wholly-owned
subsidiary of Colfax Corporation. The unaudited pro forma information for the
six months ended June 30, 1997 set forth below gives effect to the acquisition,
and the refinancing of the Company's domestic senior debt, in connection with
the acquisition, as if they had occurred on January 1, 1997. The pro forma
information is presented for informational purposes only and is not necessarily
indicative of the results of operations that actually would have been achieved
had these transactions been consummated at the beginning of the period
presented.
Six Months
(in thousands) Ended June
30, 1997
---------------
Net Sales $160,232
Net Income (Loss) (6,768)
Earnings (Loss) Per Share, basic and diluted (.40)
NOTE C - DISCONTINUED OPERATIONS
On February 27, 1998, the Company completed the sale of its Roltra-Morse
business segment to Magna International Inc. for cash of $30 million, plus the
assumption of Roltra Morse's debt. The operating results of the Roltra-Morse
segment have been segregated and reported as a discontinued operation in the
accompanying Consolidated Condensed Statements of Income. Prior year financial
statements have been reclassified to conform to the current year presentation.
The Company has also accounted for its former Electro-Optical Systems and
Instrumentation business segments as discontinued operations. The sale of the
Varo Electronic Systems division of the Electro-Optical Systems business and the
sale of the Instrumentation business segment were completed in April 1997 and
August 1997, respectively.
Net sales of the discontinued operations were $14.4 million and $95.1 million
for the six months ended July 3, 1998 and June 30, 1997, respectively, and $47.0
million for the second quarter of 1997. Operating results of the discontinued
operations resulted in net loss of $1.0 million and net income of $2.7 million
for the six months ended July 3, 1998 and June 30, 1997, respectively, and $1.2
million for the second quarter of 1997. These operating results from
discontinued operations include allocated interest expense of $.2 million for
the six months ended July 3, 1998, and $1.4 million for the six months ended
June 30, 1997.
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.
The Company reviews quarterly the assumptions used in determining the estimated
gain or loss from discontinued operations and the adequacy of the recorded
liabilities. Management believes that the recorded amount of estimated
liabilities related to the Discontinued Operations at July 3, 1998 is adequate,
however, the amounts estimated may differ from actual results.
NOTE D - INVENTORIES
Inventories are summarized as follows:
July 3, December 31,
(in thousands) 1998 1997
------------- -------------
(Unaudited)
Finished products $22,485 $18,823
Work in process 19,929 23,218
Materials and supplies 19,928 23,481
---------- ---------
62,342 65,522
Less customers' progress payments 1,108 634
========== =========
$61,234 $64,888
========== =========
NOTE E - NOTES PAYABLE AND LONG-TERM DEBT
As of July 3, 1998, the Company had revolver borrowings of $34 million and $16.6
million of outstanding standby letters of credit under the Company's existing
credit agreement. In addition, $49.7 million of term loan borrowings were
outstanding. The Company had $5.4 million in foreign short-term credit
facilities with amounts outstanding at July 3, 1998 of $2.2 million. Due to the
short-term nature of these debt instruments, it is the Company's opinion that
the carrying amounts approximate fair value. The weighted average interest rate
on short-term notes payable was 8.03% at July 3, 1998 and December 31, 1997.
In addition, the Company had outstanding $102 million of its 11.75% senior
subordinated notes due in 2006, and $49.7 million of term loan borrowings. The
sale of Roltra-Morse and the resultant reduction in domestic senior debt
increased the Company's availability under its revolving credit facility,
allowing it to purchase a portion of its 11.75% senior subordinated notes (the
"Notes") in the open market. During the first quarter of 1998, the Company
purchased, in the open market at a premium, Notes in the face amount of $33.1
million. As a result of the early extinguishment of these Notes and the
prepayment of a portion of the term loan facility, an extraordinary charge of
$5.6 million was recognized in the first quarter of 1998.
NOTE F - CONTINGENCIES
Legal Proceedings
The Company and one of its subsidiaries are two of a large number of defendants
in a number of lawsuits brought in various jurisdictions by approximately 6,000
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 a few of the industrial and marine products
formerly sold by the Company and the subsidiary named in such complaints
contained components which contained asbestos. Claims against the Company and
its subsidiary have been tendered to its insurers, who are defending pursuant to
Defense and Indemnity Agreements and under their stated reservation of rights.
In addition, the Company and the subsidiary are named in cases, involving
approximately 25,000 claimants, which have been "administratively dismissed" by
the U.S. District Court for the Eastern District of Pennsylvania. Cases that
have been "administratively dismissed" may be reinstated only upon a showing to
the Court that (i) there is satisfactory evidence of an asbestos-related injury;
and (ii) there is probative evidence that the plaintiff was exposed to products
or equipment supplied by each individual defendant in the case. The Company
believes that it has adequate insurance coverage or has established appropriate
reserves to cover potential liabilities related to these cases.
The Company is a defendant in a lawsuit brought in the Superior Court of New
Jersey on April 3, 1998, which seeks damages in excess of $17 million for
alleged problems associated with turbines sold to it in 1986 for use at a
powerplant in Long Beach, California. The Company has few details of this matter
other than as set forth in the complaint, however, the Company believes that
there are legal and factual defenses to the claims and will defend the action
vigorously.
On June 3, 1997 the Company was served with a complaint in a case brought in the
Superior Court of New Jersey which alleges damages in excess of $10 million
incurred as a result of losses under a Government Contract Bid transferred in
connection with the sale of the Company's former Electro-Optical Systems
business. The Electro-Optical Systems business was sold in a transaction that
closed on June 2, 1995. The sales contract provided certain representations and
warranties as to the status of the business at the time of sale. The complaint
alleges that the Company failed to provide notice of a "reasonably anticipated
loss" under a bid that was pending at the time of the transfer of the business.
The contract was subsequently awarded to the Company's Varo subsidiary and
thereafter transferred to the buyer of the Electro-Optical Systems business. The
complaint alleges among other matters, breach of contract, fraud, and negligent
misrepresentation. The case is in the preliminary stages of pleading but the
Company believes that there are legal and factual defenses to the claims and
intends to defend the action vigorously.
The operations of the Company, like those of other companies engaged in similar
businesses, involve the use, disposal and clean up of substances regulated under
environmental protection laws. In a number of instances the Company has been
identified as a Potentially Responsible Party by the U.S. Environmental
Protection Agency, and in one instance by the State of Washington, with respect
to the disposal of hazardous wastes at a number of facilities that have been
targeted for clean-up pursuant to CERCLA or similar state law. Similarly, the
Company has received notice that it is one of a number of defendants named in an
action filed in the United States District Court, for the Southern District of
Ohio Western Division by a group of plaintiffs who are attempting to allocate a
share of cleanup costs, for which they are responsible, to a large number of
additional parties, including the Company. Although CERCLA and corresponding
state law liability is joint and several, the Company believes that its
liability will not have a material adverse effect on the financial condition of
the Company since it believes that it either qualifies as a de minimis or minor
contributor at each site. Accordingly, the Company believes that the portion of
remediation costs that it will be responsible for will not be material.
The Company is also involved in various other pending legal proceedings arising
out of the ordinary course of the Company's business. None of these legal
proceedings is expected to have a material adverse effect on the financial
condition of the Company. With respect to these proceedings and the litigation
and claims described in the preceding paragraphs, management of the Company
believes that it either will prevail, has adequate insurance coverage or has
established appropriate reserves to cover potential liabilities. There can be no
assurance, however, as to the ultimate outcome of any of these matters, and if
all or substantially all of these legal proceedings were to be determined
adversely to the Company, there could be a material adverse effect on the
financial condition or results of operations of the Company.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
The following paragraphs provide Management's discussion and analysis of the
significant factors which have affected the Company's consolidated results of
operations and financial condition during the three and six months ended July 3,
1998. This section should be read in conjunction with the Company's 1997 Form
10-K Management's Discussion and Analysis of Financial Condition and Results of
Operations.
Recent Events
Merger: On August 28, 1997, II Acquisition Corp. acquired approximately 93% of
the outstanding shares of common stock of Imo Industries Inc. ("Imo") pursuant
to its tender offer for all outstanding shares of the common stock. The
consideration paid was $7.05 per share of common stock or $112.1 million in
total. The acquisition has been accounted for under the purchase method. On July
2, 1998, II Acquisition Corp's wholly-owned subsidiary, Imo Merger Corp., merged
with and into Imo, pursuant to a short-form merger under Delaware law ("back-end
merger"). Imo was the surviving corporation in the back-end merger and as a
result became a wholly-owned subsidiary of II Acquisition Corp.
New York Stock Exchange: Imo delisted its Common Stock from the New York
Stock Exchange on July 2, 1998. The Common Stock was deregistered under the
Securities Exchange Act of 1934.
Consent Solicitation: On April 14, 1998, the Company commenced a consent
solicitation, seeking consents from the holders of the Company's 11 3/4% Senior
Subordinated Notes due 2006 ("the Notes") to certain amendments to the Indenture
governing the Notes. The proposed amendments would permit the Company to
complete the back-end merger with and into a wholly owned subsidiary of II
Acquisition Corp. On May 6, 1998, the Company received sufficient consents to
effect the proposed amendments, and entered into a Supplemental Indenture with
respect to such amendments. The Company paid an aggregate of $483,650 to holders
of Notes in connection with the solicitation.
Roltra-Morse Sale: On February 27, 1998, the Company completed the sale of its
Roltra-Morse business to Magna International Inc. for cash of $30 million plus
the assumption of Roltra-Morse's debt. The sale price approximated the recorded
net book value of the business. Net proceeds were used to reduce domestic senior
debt. This transaction is reflected in the Company's consolidated condensed
financial statements for the quarter ended April 3, 1998.
The sale of Roltra-Morse and the resultant reduction in domestic senior debt
increased the Company's availability under its revolving credit facility,
allowing it to purchase a portion of its Notes in the open market. During the
first quarter of 1998, the Company purchased, in the open market at a premium,
Notes in the face amount of $33.1 million. As a result of the early
extinguishment of these Notes and the prepayment of a portion of the term loan
facility, an extraordinary charge of $5.6 million was recognized in the first
quarter of 1998.
Results of Operations
The Roltra-Morse, Instrumentation, and Electro-Optical Systems business segments
were sold in February 1998, August 1997, and April 1997, respectively, and were
accounted for as discontinued operations in the accompanying consolidated
condensed financial statements. Accordingly, the discussion that follows
concerns only the results of continuing operations. The Company's continuing
businesses are grouped into three business segments for management and segment
reporting purposes: Power Transmission, Pumps, and Morse Controls.
Three Months Ended July 3, 1998 Compared to Three Months Ended June 30, 1997
- -----------------------------------------------------------------------------
Sales. Net sales from continuing operations for the second quarter of 1998 were
$81.1 million compared with $81.3 million in the comparable 1997 period. Second
quarter 1998 net sales increased 4.8% and 2.4% for the Pumps and Morse Controls
segments, respectively and decreased 10.1% for the Power Transmission segment,
compared to the prior year period. The increases in the Pumps and Morse Controls
segments are due to increases in volume of shipments and new products. The
decrease at the Power Transmission segment is primarily due to the sale of the
Delroyd product line, which was sold on December 31, 1997.
Gross Profit. Gross profit increased as a percentage of sales to 32.6% for the
second quarter of 1998 compared with 31.7% in the second quarter of 1997. The
higher gross profit was the result of productivity improvements in each segment.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased as a percentage of sales to 18.4% for the
second quarter of 1998 compared with 22.7% in the second quarter of 1997. The
decreased expenses as a percentage of sales in 1998 were due to the effects of
Company-wide cost reduction programs instituted in August of 1997, offset by
increased goodwill amortization resulting from the purchase of the Company by II
Acquisition Corp.
Unusual Item. On July 15, 1997, the Company agreed to settle with International
Insurance Company by dropping an appeal and paid a reduced amount on July 30,
1997 in complete settlement of all outstanding amounts. As a result of the
settlement, the Company recorded a favorable adjustment of $2.4 million as an
unusual item in the second quarter of 1997.
Interest Expense. Average borrowings in the second quarter of 1998 were
approximately $77 million lower than the second quarter of 1997. Total interest
expense (before allocation to discontinued operations) was $5.9 million for the
second quarter of 1998 compared with $7.1 million for the same period in 1997.
Interest expense for continuing operations excludes a general interest
allocation to the discontinued operations of $.2 million for the second quarter
of 1997.
Provision for Income Taxes. Income tax expense for continuing operations was
$0.7 million and $0.5 million for the second quarters of 1998 and 1997,
respectively. These amounts represent current tax expense for foreign and state
income taxes, as the Company is utilizing existing U.S. net operating loss
carryforwards with its domestic earnings.
Income from Continuing Operations. The Company had net income from continuing
operations of $3.8 million, or $0.22 per share, for the second quarter of 1998,
compared with net income of $1.2 million, or $0.07 per share, for the comparable
1997 period.
Income (Loss) from Discontinued Operations. There was no income from
discontinued operations for the second quarter of 1998 compared with income of
$1.2 million for the second quarter of 1997.
Net Income (Loss). The net income in the second quarter of 1998 was $3.8
million, or $0.22 per share, compared with net income of $2.4 million, or $0.07
per share, in the comparable 1997 period.
Six Months Ended July 3, 1998 Compared to Six Months Ended June 30, 1997
- ------------------------------------------------------------------------
Sales. Net sales from continuing operations for the six months ended July 3,
1998 were $164.1 million, an increase of 2.4%, compared with $160.2 million in
the comparable 1997 period. Increases in the volume of shipments and new
products provided this growth. Net sales for the six months ended July 3, 1998
increased 5.4% and 6.0% for the Pumps and Morse Controls segments, respectively.
Net sales decreased 5.7% for the Power Transmission segment, compared to the
prior year period. The increases in the Pumps and Morse Controls segments are
due to increases in volume of shipments and new products. The decrease at the
Power Transmission segment is primarily due to the sale of the Delroyd product
line, which was sold on December 31, 1997.
Gross Profit. Gross profit increased as a percentage of sales to 32.4% for the
six months ended July 3, 1998 compared with 31.5% for the comparable period in
1997. The higher gross profit was the result of increased sales volume and
productivity improvements in each segment.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased as a percentage of sales to 18.4% for the six
months ended July 3, 1998 compared with 22.3% in the comparable period in 1997.
The decreased expenses as a percentage of sales in 1998 were due to increased
sales volume and the effects of Company-wide cost reduction programs instituted
in August of 1997, offset by increased goodwill amortization resulting from the
purchase of the Company by II Acquisition Corp.
Unusual Item. In the first six months of 1997, the Company recorded an unusual
charge of $10.5 million, as a result of the reinstatement of a judgment, plus
interest to date, against the Company in favor of International Insurance
Company.
Interest Expense. Average borrowings for the six months ended July 3, 1998 were
approximately $108 million lower than the comparable period in 1997. Total
interest expense (before allocation to discontinued operations) was $11.9
million for the six months ended July 3, 1998 compared with $15.0 million for
the same period in 1997. Interest expense for continuing operations excludes a
general interest allocation to the discontinued operations of $.2 million and
$1.4 million for the first six months of 1998 and 1997, respectively.
Provision for Income Taxes. Income tax expense for continuing operations was
$1.5 million and $1.0 million for the six months ended July 3, 1998 and June 30,
1997, respectively. These amounts represent current tax expense for foreign and
state income taxes, as the Company is utilizing existing U.S. net operating loss
carryforwards with its domestic earnings.
Income from Continuing Operations. The Company had net income from continuing
operations of $7.2 million, or $.42 per share, for the six months ended July 3,
1998, compared with a net loss of $13.1 million, or $.77 per share, for the
comparable 1997 period.
Income (Loss) from Discontinued Operations. Roltra-Morse's net loss of $1
million, which includes $.2 million of allocated interest, was included with the
net book value of the assets on the date of sale February 27, 1998. Therefore,
there was no income from discontinued operations for the first six months of
1998 compared with income of $2.7 million for the first six months of 1997.
Extraordinary Item. In March 1998, the Company purchased, in the open market at
a premium, Notes in the face amount of $33.1 million. As a result of the early
extinguishment of these Notes and the prepayment of a portion of the term loan,
an extraordinary charge of $5.6 million was recognized in the six months ended
July 3, 1998.
Net Income (Loss). The net income for the six months ended July 3, 1998 was $1.6
million, or $0.09 per share, compared with a net loss of $10.4 million, or $0.61
per share, in the comparable 1997 period.
Liquidity and Capital Resources
Short-term and Long-term Debt
As of July 3, 1998, Imo had revolver borrowings of $34 million and $16.6 million
of outstanding standby letters of credit. Imo had $5.4 million in foreign
short-term credit facilities with amounts outstanding at July 3, 1998 of $2.2
million. Due to the short-term nature of these debt instruments it is the
Company's opinion that the carrying amounts approximate the fair value. The
weighted-average interest rate on short-term notes payable was 8.03% at July 3,
1998.
In addition, the Company had outstanding $102 million of its 11.75% senior
subordinated notes due in 2006, and $49.7 million of term loan borrowings.
Cash Flow
The Company's operating activities provided net cash of $13.6 million in the six
months of 1998, compared with cash provided of $0.4 million in the comparable
1997 period. The cash provided by operating activities in 1998 was attributable
to net operating profits and the decrease in working capital in the period, due
to a decrease in accounts receivable, inventories, and other current assets,
offset by a decrease in accounts payable and accrued expenses. For the six
months ended July 3, 1998, total debt reduction was $34.2 million, $30 million
of which was provided by the sale of Roltra-Morse. Cash and cash equivalents
were $4.5 million at July 3, 1998 compared with $3.5 million at December 31,
1997.
The sale of the Roltra-Morse business segment has improved the Company's
liquidity position. Management believes that cash flow from operations and cash
available from unused credit facilities will be sufficient to meet the Company's
foreseeable liquidity needs.
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995. Except for historical matters, the
matters discussed in this Form 10-Q Report are forward-looking statements based
on current expectations and involve risks and uncertainties. Forward-looking
statements include, but are not limited to, statements under the following
headings: (i) Legal Proceedings - the future impact of legal proceedings on the
financial condition of the Company; and, (ii) "Results of Operations" - the
future performance of various programs and foreign market conditions in each
segment and the impact of such programs and foreign market conditions on future
sales and on operating income. The Company wishes to caution the reader that, in
addition to the matters described above, various factors such as delays in
contracts from key customers, demand and market acceptance risk for new
products, continued or increased competitive pricing and the effects of
under-utilization of plants and facilities, particularly in Europe, and the
impact of worldwide economic conditions on demand for the Company's products,
could cause results to differ materially from those in any forward-looking
statement.
The Company is filing this report pursuant to the filing requirements related to
the 11-3/4% Senior Subordinated Debentures due in 2006.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
For information regarding certain pending lawsuits, reference is made to the
Company's Form 10-K for the year ended December 31, 1997, which is incorporated
herein by reference, and to Note F in Part I of this Form 10-Q Report.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
The following exhibits are being filed as part of this Report:
Exhibit No. Description
10.27 (F) Fifth Amendment to Credit and Guaranty Agreement dated as
of June 1, 1998
27 Financial Data Schedule as of July 3, 1998
(b) Reports on Form 8-K:
On April 17, 1998, the Company filed a report on Form 8-K, reporting under Item
5, disclosing that on April 14, 1998, the Company announced that it is
soliciting the consents of holders of its 11 3/4% Senior Subordinated Notes due
2006 to certain amendments to the Indenture governing the Notes.
On May 1, 1998, the Company filed a report on Form 8-K, reporting under Item 5,
disclosing that on April 30, 1998, the Company announced that it is
supplementing its Consent Solicitation Statement, dated April 14, 1998, in which
the Company is soliciting the consents of holders of its 11 3/4% Senior
Subordinated Notes due 2006 to certain amendments to the Indenture governing the
Notes.
On May 12, 1998, the Company filed a report on Form 8-K, reporting under Item 5,
disclosing that on May 7, 1998, the Company announced that holders of more than
51% of the outstanding principal amount of the Company's 11 3/4% Senior
Subordinated Notes due 2006 consented to certain proposed amendments to the
Indenture governing the Notes, pursuant to the Company's Consent Solicitation.
On July 2, 1998, the Company filed a report on Form 8-K, reporting under Item 5,
that II Acquisition Corp., an affiliate of Constellation Capital, completed its
acquisition of Imo Industries Inc.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Imo Industries Inc.
(Registrant)
Date: August 14, 1998
/s/ JOHN A.YOUNG
John A. Young
Chief Financial Officer
Date: August 14, 1998
/s/ G. SCOTT FAISON
G. Scott Faison
Corporate Controller
FIFTH AMENDMENT TO CREDIT
AND GUARANTY AGREEMENT
THIS FIFTH AMENDMENT, dated as of June 1, 1998 (this "Amendment") to the
Existing Credit Agreement referred to below, is among IMO INDUSTRIES INC., a
Delaware corporation (the "Borrower"), II ACQUISITION CORP., a Delaware
corporation (the "Parent") and the Lenders (as defined below) signatories
hereto.
W I T N E S S E T H:
WHEREAS, the Borrower, the Parent, certain financial institutions from
time to time parties thereto (collectively, the "Lenders"), The Bank of Nova
Scotia, as the Administrative Agent and the Documentation Agent and NationsBanc
Capital Markets, Inc., as the Syndication Agent have entered into the Credit and
Guaranty Agreement, dated as of August 29, 1997 (as amended, supplemented,
amended and restated or otherwise modified prior to the date hereof, the
"Existing Credit Agreement" and, as amended by this Amendment, the "Credit
Agreement"); and
WHEREAS, the Borrower and the Parent have requested that the Existing
Credit Agreement be amended in certain respects and that the Lenders grant
limited waivers of certain provisions of the Existing Credit Agreement and the
Lenders have agreed to amend the Existing Credit Agreement and to grant such
limited waivers (subject to the terms and conditions of this Amendment);
NOW, THEREFORE, in consideration of the premises and the other provisions
herein contained, the parties hereto hereby agree as follows.
PART I
DEFINITIONS
SUBPART I.1. Use of Defined Terms. Unless otherwise defined herein or the
context otherwise requires, terms used in this Amendment, including its preamble
and recitals, have the meanings provided therefor in the Existing Credit
Agreement.
PART II
AMENDMENTS AND WAIVERS TO
THE EXISTING CREDIT AGREEMENT
Effective upon (and subject to the occurrence of) the Fifth Amendment
Effective Date (as defined in Subpart 3.1), certain terms and provisions of the
Existing Credit Agreement are hereby amended, and the limited waivers described
below are hereby granted, all in accordance with this Part. Except as so
amended, modified or waived by this Amendment, the Existing Credit Agreement and
the Loan Documents shall continue in full force and effect in accordance with
their terms.
SUBPART II.1. Amendment to Article I. Article I of the Existing Credit
Agreement is hereby amended in accordance with Subparts 2.1.1 through 2.1.2.
SUBPART II.1.1. Section 1.1 of the Existing Credit Agreement is hereby
amended by adding the following new definitions in their appropriate
alphabetical sequence:
"Relevant Period" means the period from April 23, 1998 through (and
including) July 15, 1998.
"VHC" means VHC Inc., a Texas corporation and a wholly-owned
Subsidiary of the Borrower.
"VHC Proceeding" means the involuntary bankruptcy proceeding case
(number 398-33624-RCM-7) with respect to VHC, filed in the United States
Bankruptcy Court, Northern District of Texas, Dallas Division on April 23,
1998.
SUBPART II.1.2. Section 1.1 of the Existing Credit Agreement is hereby
further amended by amending clause (a) of the definition of "Commitment
Termination Event" in its entirety to read as follows:
"(a) the occurrence of any Event of Default described in clauses
(a) through (d) of Section 8.1.9; or"
SUBPART II.2. General Amendment to Existing Credit Agreement and Other
Loan Documents. The parties hereto agree that, notwithstanding the terms of the
Credit Agreement (but subject to Subpart 2.3.4 below) and other Loan Documents
to the contrary (including the definitions of "Commitment Termination Event" and
"Revolving Loan Commitment Termination Date" and Section 8.2, in each case
contained in the Credit Agreement, and the terms of the Subsidiary Guaranty), a
Commitment Termination Event and acceleration of the Obligations shall not
automatically occur (or be deemed to have occurred) during or after the Relevant
Period with respect to VHC and the VHC Proceeding unless the VHC Proceeding has
not been discharged and the Required Lenders deliver a written notice to the
Administrative Agent in which they declare that a Commitment Termination Event
has occurred and they require the Obligations to be accelerated pursuant to
Section 8.3 of the Credit Agreement, and the Credit Agreement and other Loan
Documents are hereby amended mutatis mutandis to the extent necessary to effect
such amendments.
SUBPART II.3. Waivers of Certain Provisions of the Existing Credit
Agreement. The limited waivers set forth below are hereby granted in accordance
with Subparts 2.3.1 through 2.3.4.
SUBPART II.3.1. Waiver Regarding Section 5.2.1 and Section 8.1.2 of the
Existing Credit Agreement ("Compliance with Warranties, No Default, etc.";
"Breach of Warranty"). The Lenders hereby waive any Event of Default under
Section 8.1.2 of the Existing Credit Agreement resulting from any breach of the
representation made by the Borrower pursuant to Section 5.2.2 of the Existing
Credit Agreement (including under clause (d) of Section 5.2.1 of the Existing
Credit Agreement) on the occasion of the making of any Credit Extension to the
extent that such breach of representation was in respect of the VHC Proceeding.
SUBPART II.3.2. Waiver Regarding Section 7.1.1 of the Existing Credit
Agreement ("Financial Information, Reports, Notices, etc."). The Lenders hereby
waive each Event of Default under clause (c) of Section 7.1.1 of the Existing
Credit Agreement resulting from the Borrower's failure to inform the
Administrative Agent of (i) the Default under Section 8.1.9 of the Existing
Credit Agreement caused by the VHC Proceeding and (ii) the other Defaults waived
by the Lenders in this Part.
SUBPART II.3.3. Waiver Regarding Section 7.2.6 of the Existing Credit
Agreement ("Restricted Payments, etc."). The Lenders hereby waive any Default
under Section 7.2.6 of the Existing Credit Agreement resulting from the payment
on or about May 1, 1998 of accrued interest on the Senior Subordinated Notes, to
the extent that such payment would (by the terms of Section 7.2.6) be prohibited
by the institution of the VHC Proceeding or any of the Defaults waived by the
Lenders in this part.
SUBPART II.3.4. Time Limited Waiver Regarding Section 8.1.9 of the
Existing Credit Agreement ("Bankruptcy, Insolvency, etc."). For purposes of (i)
exercising any of their rights and remedies (including their rights to declare
the Commitments terminated and the Obligations due and payable pursuant to
Sections 8.2 and 8.3 of the Existing Credit Agreement) under the Loan Documents
and (ii) enabling the Borrower to satisfy the conditions precedent to further
Credit Extensions set forth in Sections 5.2.1 and 5.2.2 of the Existing Credit
Agreement, the Lenders hereby waive through (and including), the Relevant
Period, the Default under clause (d) of Section 8.1.9 of the Existing Credit
Agreement resulting from the VHC Proceeding (including as a result of the
Default caused by the VHC Proceeding potentially developing into an Event of
Default on or around June 22, 1998).
PART III
CONDITIONS TO EFFECTIVENESS
SUBPART III.1. This Amendment shall become effective on the date first set
forth above (the "Fifth Amendment Effective Date") when all of the following
conditions have been satisfied to the satisfaction of the Administrative Agent.
SUBPART III.1.1. Execution of Counterparts. The Administrative Agent shall
have received copies of this Amendment, duly executed and delivered by the
Borrower, the Parent and the Lenders.
SUBPART III.1.2. Affirmation and Consent. The Administrative Agent shall
have received an affirmation and consent in form and substance satisfactory to
it, duly executed and delivered by each Subsidiary Guarantor.
SUBPART III.1.3. Satisfactory Legal Form. All documents executed or
submitted pursuant hereto shall be satisfactory in form and substance to the
Administrative Agent and its counsel. The Administrative Agent and its counsel
shall have received all information and such counterpart originals or such
certified or other copies or such materials, as the Administrative Agent or its
counsel may reasonably request, and all legal matters incident to the
transactions contemplated by this Amendment shall be satisfactory to the
Administrative Agent and its counsel.
PART IV
REPRESENTATIONS AND WARRANTIES
In order to induce the Lenders and the Issuers to enter into this
Amendment, the Borrower and the Parent represent and warrant to the
Administrative Agent, each Issuer and each Lender as set forth in this Part.
SUBPART IV.1. Compliance with Warranties. After giving effect to the terms
of this Amendment, the representations and warranties set forth herein, in
Article VI of the Credit Agreement and in each other Loan Document are true and
correct in all material respects with the same effect as if made on and as of
the date hereof (unless stated to relate solely to an earlier date, in which
case they were true and correct as of such earlier date). Furthermore, the VHC
Proceeding will not have a material adverse effect on the financial condition,
operations, assets, business, properties, revenues or prospects of the Borrower
and its Subsidiaries, taken as a whole.
SUBPART IV.2. Due Authorization, Non-Contravention, etc. The execution,
delivery and performance by the Borrower and the Parent of this Amendment and
other documents delivered pursuant hereto are within the Borrower's and the
Parent's corporate powers, have been duly authorized by all necessary corporate
action, and do not (i) contravene either the Borrower's or the Parent's Organic
Documents, (ii) contravene or result in a default under any contractual
restriction, law or governmental regulation or court decree or order binding on
or affecting either the Borrower or the Parent, or (iii) result in, or require
the creation or imposition of, any Lien (except as contemplated in or created by
the Loan Documents).
SUBPART IV.3. Validity, etc. This Amendment has been duly executed and
delivered by the Borrower and the Parent and constitutes the legal, valid and
binding obligation of the Borrower and the Parent enforceable in accordance with
its terms, subject as to enforcement to bankruptcy, insolvency, reorganization,
moratorium or other similar laws affecting creditors' rights generally and to
general principles of equity, regardless of whether enforcement is sought in a
proceeding at law or in equity.
SUBPART IV.4. Compliance With Existing Credit Agreement. As of the Fifth
Amendment Effective Date, after giving effect to the terms of this Amendment, no
Event of Default has occurred and is continuing.
PART V
MISCELLANEOUS PROVISIONS
SUBPART V.1. Ratification of and Limited Amendment to the Credit
Agreement. The Existing Credit Agreement, as amended hereby, is hereby ratified,
approved and confirmed in each and every respect by the parties hereto. Except
as specifically amended or modified herein, the Existing Credit Agreement and
the other Loan Documents shall continue in full force and effect in accordance
with the provisions thereof and except as expressly set forth herein the
provisions hereof shall not operate as a waiver of or amendment of any right,
power or privilege of the Administrative Agent and the Lenders nor shall the
entering into of this Amendment preclude the Lenders from refusing to enter into
any further or future amendments.
SECTION V.2. Consent and Acknowledgment of Guarantor, etc. By its
signature below, the Parent in its capacity as a guarantor and as grantor of
collateral security under certain Loan Documents, hereby acknowledges, consents
and agrees to this Amendment and hereby ratifies and confirms its obligations
under its guaranty and each Loan Document executed and delivered by it in all
respects.
SUBPART V.3. Credit Agreement, References, etc. All references to the
Credit Agreement in any other document, instrument, agreement or writing shall
hereafter be deemed to refer to the Existing Credit Agreement as amended hereby.
As used in the Credit Agreement, the terms "Agreement", "herein", "hereinafter",
"hereunder", "hereto" and words of similar import shall mean, from and after the
date hereof, the Existing Credit Agreement as amended by this Amendment.
SUBPART V.4. Expenses. The Borrower agrees to pay all out-of-pocket
expenses incurred by the Administrative Agent (including fees and expenses of
counsel to the Administrative Agent) in connection with the preparation,
negotiation, execution and delivery of this Amendment.
SUBPART V.5. Headings; Counterparts. The various headings of this
Amendment are inserted for convenience only and shall not affect the meaning or
interpretation of this Amendment or any provisions hereof. This Amendment may be
signed in any number of separate counterparts, each of which shall be an
original, and all of which taken together shall constitute one instrument.
SUBPART V.6. Governing Law; Entire Agreement. THIS AMENDMENT SHALL BE
DEEMED TO BE A CONTRACT MADE UNDER AND GOVERNED BY THE LAWS OF THE STATE OF NEW
YORK. This Amendment constitutes the entire understanding among the parties
hereto with respect to the subject matter hereof and supersedes any prior
agreements, written or oral, with respect thereto.
SUBPART V.7. Loan Document Pursuant to Credit Agreement. This Amendment is
a Loan Document executed pursuant to the Credit Agreement and shall be
construed, administered and applied in accordance with all of the terms and
provisions of the Credit Agreement.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
executed by their respective officers thereunto duly authorized as of the day
and year first above written.
IMO INDUSTRIES INC.
By: John A. Young
Title: Vice President
II ACQUISITION CORP.
By: John A. Young
Title: Vice President
THE BANK OF NOVA SCOTIA
By: James R. Trimble
Title: Senior Relationship Manager
NATIONSBANK, N.A.
By: Chitt A. Swamidasan
Title: Senior Vice President
THE FIRST NATIONAL BANK OF CHICAGO
By: Amy L. Robbins
Title: Vice President
FLEET CAPITAL CORPORATION
By: Roland J. Robinson
Title: Senior Vice President
COMPAGNIE FINANCIERE DE CIC ET DE L'UNION
EUROPEENNE
By: Brian O'Leary
Title: Vice President
By: Sean Mounier
Title: First Vice President
CRESTAR BANK
By: Christopher B. Werner
Title: Vice President
DRESDNER BANK AG, NEW YORK AND GRAND
CAYMAN BRANCHES
By: Robert Von Finckenstein
Title: Vice President
By: Richard W. Conroy
Title: Vice President
TRANSAMERICA BUSINESS CREDIT CORPORATION
By: Perry Vavoules
Title: Senior Vice President
US TRUST
By: Thomas F. Macina
Title: Vice President
CIBC INC.
By: William W. Swenson
Title: Authorized Signatory
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