UNITED STATES
FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1997
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 of (I.R.S. Employer Identification No.)
incorporation or organization)
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.
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
Common Stock, $1.00 par value New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
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 by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained, and will not be contained, to the best of
Registrant's knowledge, in this Form 10-K or any amendment to this Form 10-K.( )
Aggregate market value of the voting stock held by non-affiliates of the
Registrant computed by reference to the closing price of such stock on the New
York Stock Exchange, Inc. on March 24, 1998......................$8,171,376
Shares of Registrant's common stock, $1.00 par value, outstanding as of
March 24, 1998 ..................................................17,127,859
DOCUMENTS INCORPORATED BY REFERENCE
Identification of Documents Part into which Incorporated
None
TABLE OF CONTENTS
PART I
Item
1. Business
General
History
Industry Segments
Discontinued Operations
Restructuring Plans and Cost Reduction Programs
Competition
Product Distribution and Customers
Backlog
Raw Materials
Patents, Licenses and Trademarks
Research and Development
Environmental Matters
Seasonality
Working Capital
Employees
2. Properties
3. Legal Proceedings
4. Submission of Matters to a Vote of Security Holders
PART II
5. Market for the Registrant's Common Equity
and Related Stockholder Matters
6. Selected Financial Data
7. Management's Discussion and Analysis of
Financial Condition and Results of Operations
7A. Quantitative and Qualitative Disclosures about
Market Risk
8. Financial Statements and Supplementary Data
9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure
PART III
10. Directors and Executive Officers of the Registrant
11. Executive Compensation
12. Security Ownership of Certain Beneficial Owners
and Management
13. Certain Relationships and Related Transactions
PART IV
14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K
Exhibit Index
Signatures
PART I
Item 1. Business.
General
Imo Industries Inc. (hereinafter with its subsidiaries referred to as the
"Company") is an integrated multinational industrial manufacturer of a broad
range of engineered industrial products through its three business segments -
Power Transmission, Pumps, and Morse Controls. The Company's products are
designed to regulate and control motion, and transfer liquids. The Company
markets its products on a worldwide basis to a diverse customer base. The
Company's three business segments are as follows:
The Power Transmission business segment designs and produces electronic
adjustable-speed motor drives, gears and speed reducers.
The Pumps business segment designs and produces a broad range of rotary pumps,
including a proprietary line of two and three-screw pumps.
The Morse Controls business segment designs and produces push-pull cable and
remote control systems.
The Company's Roltra-Morse business, along with its previously sold
Instrumentation, Electro-Optical Systems and Turbomachinery businesses are
accounted for as discontinued operations and, accordingly, have been excluded
from the Company's segments. The Company sold its Turbomachinery and most of its
Electro-Optical Systems businesses in 1995. The remainder of the Electro-Optical
Systems business and the Instrumentation business were sold in 1997. On February
2, 1998, the Company announced that it had entered into an agreement to sell its
Roltra-Morse business. The Company completed the sale of its Roltra-Morse
business on February 27, 1998. Previously reported financial information has
been reclassified to reflect the Roltra-Morse and Instrumentation business
segments as discontinued operations.
History
The Company, founded in 1901 in the United States by Dr. Carl Gustaf Patrick de
Laval, a Swedish scientist, was incorporated in Delaware on March 2, 1959. The
Company was acquired by Transamerica Corporation ("Transamerica") in 1963, and
in 1964, Transamerica merged its existing wholly owned manufacturing subsidiary,
General Metals Corporation, into the Company. At the close of business on
December 18, 1986, Transamerica distributed all of the issued and outstanding
shares of the Company common stock to holders of record of Transamerica common
stock on the basis of one share of Company common stock for each ten shares of
Transamerica common stock held (the "Distribution") and since that time the
Company has operated on a stand-alone basis as a publicly traded company.
On August 28, 1997, II Acquisition Corp. ("Acquisition Corp.") acquired
approximately 93% of the Company's outstanding shares of common stock pursuant
to its tender offer for all outstanding shares of common stock of the Company
(the "Acquisition"). The consideration paid was $7.05 per share of common stock
or $112.1 million in total. This transaction was the final outcome of the
program announced by the Company on March 21, 1997, pursuant to which it had
retained an investment banking firm to help it explore strategic alternatives,
including the possibility of a merger or sale of the Company.
Information regarding the Acquisition of the Company is contained in Note 2 to
the Consolidated Financial Statements included in Part IV of this Form 10-K
Report as indexed at Item 14(a)(1).
Industry Segments
A description of the principal products and services offered by each business
segment of the Company, as well as the principal markets for such products and
services, are set forth below. Certain information with respect to net sales,
operating profit, and identifiable assets of each of these segments and by
geographic area is contained in Note 11 to the Consolidated Financial
Statements. Information regarding the businesses sold and the discontinued
operations is provided later in this section and is contained in Notes 3 and 4
to the Consolidated Financial Statements.
Power Transmission
The Power Transmission business segment produces speed reducers and loose
gearing that are recognized as leading products in their market niches. This
segment is comprised of two units: Boston Gear, a leading producer of gears and
speed reducers, and Fincor Electronics, a producer of adjustable-speed motor
controllers. Speed reducers are used to reduce the output speed and increase the
torque of power trains in numerous products, ranging from industrial machinery
to exercise treadmills. Adjustable-speed motor controllers are used for the
accurate control of electric motor speed, torque, shaft position and direction
of rotation in applications such as ski lifts, textile machinery, overhead
cranes, and large printing presses. These operations also produce worm gear sets
used as speed reducers by original equipment manufacturers and by oil and gas
and industrial machinery customers.
Pumps
The Pumps business segment is the largest worldwide manufacturer of rotary screw
pumps. The three businesses that comprise the Pumps segment -- Imo Pump, Imo AB,
and Warren Pumps Inc. -- design and manufacture screw-type fuel, lube oil and
hydraulic pumps for use primarily by the marine, process, oil and gas and
elevator industries. The segment's three-screw pumps are the leading
low-noise-level pumps used in United States Navy vessels and in many commercial
vessels. These pumps are also used to power hydraulic elevators, lubricate
diesel engines and fuel gas turbines. The segment's two-screw pumps are used by
the pulp and paper industry and in other high-viscosity process applications.
Morse Controls
The Morse Controls business segment is a leading worldwide manufacturer of
precision mechanical and electronic control products and systems that are
primarily used for pleasure marine and industrial vehicle applications. This
segment produces, among other products, push-pull cable and control systems used
to control and actuate functions, such as steering and valve adjustment, as an
alternative to electrical systems. Applications include throttle control and
steering systems for both off-the-road vehicles and pleasure boats.
Discontinued Operations
In August 1997 and in February 1998, the Company announced that the Board of
Directors had approved plans to sell its Instrumentation and Roltra-Morse
businesses, respectively. In 1995, the Company sold its Turbomachinery and most
of its Electro-Optical Systems businesses, which sales were approved by the
Board of Directors in August 1994 and in January 1994, respectively. 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.
Roltra-Morse
On February 27, 1998, the Company completed the sale of its Roltra-Morse
business to Magna International Inc. for cash of $30.7 million, subject to final
adjustment. Roltra-Morse retained $18.4 million of its debt. The sale price
approximated the recorded net book value of the business. Net proceeds were used
to reduce domestic senior debt. This transaction will be reflected in the
Company's financial statements in the first quarter of 1998.
Instrumentation
On August 29, 1997, the Company completed the sale of its Instrumentation
business segment to Danaher Corporation for proceeds of $85 million, which
approximated its net book value after the Acquisition. Net cash proceeds were
used to reduce domestic senior debt.
Electro-Optical Systems
On April 28, 1997, the Company completed the sale of the Varo Electronic Systems
division to a small defense contractor for $12 million in cash, the proceeds of
which were used to reduce its domestic senior debt. The sale of this business
completed the sale of the Electro-Optical Systems business. 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 reduce domestic senior debt
and to redeem $40 million of the Company's then outstanding 12.25% senior
subordinated debentures.
Turbomachinery
On January 17, 1995, the Company completed the sale of its Delaval Turbine and
TurboCare divisions and its 50% interest in the Dutch partnership 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 sale agreement. It is management's expectation
that there will be no further adjustment to the purchase price. A portion of the
proceeds was used by the Company to pay off its domestic senior debt and the
Company redeemed $40 million of its then outstanding 12.25% senior subordinated
debentures with the remainder of the proceeds.
See Note 3 to the Consolidated Financial Statements for additional details
regarding the discontinued operations.
Restructuring Plans and Cost Reduction Programs
Asset Sales
Since the fourth quarter of 1992, the Company has implemented several programs
in an effort to de-lever its balance sheet through the sale of certain
businesses and non-operating real estate and the application of the proceeds
from such divestitures to reduce outstanding indebtedness. The Company divested
its Heim Bearings, Aerospace, and Barksdale Controls businesses in 1993 and its
CEC Instruments business in 1994, and sold certain of its non-operating real
estate in 1996. The proceeds from these sales, net of related expenses, were
used to repay senior debt in the amounts of $81.9 million, $13.2 million and
$8.6 million in 1993, 1994 and 1996, respectively.
In connection with a strategy adopted in late 1993, to focus on 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, the Company divested its Turbomachinery and most of its Electro-Optical
Systems businesses during 1995. The Company had planned to sell its Roltra-Morse
business in 1996, but was not successful, and withdrew Roltra-Morse from sale in
late 1996. Under the new management subsequent to the Acquisition, the Company
successfully completed the sales of its Instrumentation and Roltra-Morse
business segments. See discussion of these completed sales in the Discontinued
Operations section above.
In 1997, the Company also completed sales of certain of its non-operating real
estate for total proceeds, net of related expenses, of approximately $14.1
million. Net proceeds were used to repay domestic senior debt.
Since the completion of the sale of the Roltra-Morse business in February of
1998 as discussed in the Discontinued Operations section above, the Company has
substantially completed its asset sale program. The only remaining assets held
for sale are certain non-operating real estate with a net book value of
approximately $1 million, which amount approximates the fair market value, less
costs to sell. The Company targets completion of these sales over the next 12
months.
Cost Reduction Programs
1997 Cost Reduction Program. In connection with the Acquisition, the Company's
new management implemented a cost reduction program. The cost of this program is
estimated to be $18.6 million and was accrued for in accordance with the
purchase method of accounting. The cost is comprised of estimates related to
severance and termination benefits resulting from headcount reductions and the
consolidation of certain manufacturing facilities.
The 1997 cost reduction program reduced expenses by approximately $3 million in
the 1997 period subsequent to the Acquisition and is expected to reduce expenses
by approximately $19 million in 1998 and approximately $20 million annually
thereafter. This program includes a reduction of 237 employees, or 10.3% of the
total number of Company employees in continuing operations at the date of the
Acquisition. The required cash outlay related to this program was $8.1 million
in 1997 and the expected cash requirements during 1998 are $10.5 million.
1996 Program. The fourth quarter of 1996 includes a charge to continuing
operations of $.3 million for restructuring measures taken at the Company's
Morse German operation to further reduce operating expenses, as an extension of
its 1995 program (see 1995 Program below). The required cash outlay related to
this program was $.3 million in 1996.
1995 Program. In the fourth quarter of 1995, the Company recorded a charge to
continuing operations of $3.1 million, including severance and other expenses
related to a Company-wide program to reduce general and administrative costs.
This program reduced general and administrative expenses from the 1995 level by
approximately $2.7 million and $3.2 million in 1996 and 1997, respectively. The
required cash outlays related to this program were $.4 million, $2.4 million,
and $.3 million in 1995, 1996 and 1997, respectively.
See "Recent Events," "Restructuring Plans and Cost Reduction Programs" and
"Liquidity and Capital Resources" sections of "Management's Discussion and
Analysis of Financial Condition and Results of Operations" in Part II, Item 7,
and Note 4 to the Consolidated Financial Statements for additional details
regarding the asset divestiture and restructuring programs.
Competition
The Company's products and services are marketed on a worldwide basis. Most
markets in which the Company operates are highly competitive. The principal
elements of competition for the products manufactured in each of the Company's
business segments are design features, product quality, customer service, and
price. Because the Company competes in certain narrowly defined niche markets,
there is not any single company that competes directly with the Company across
all of the Company's product lines.
Product Distribution and Customers
The Company's products are sold primarily through the Company's direct sales
forces. During 1997, sales by the Company's direct sales forces were
approximately 29%, 79% and 88% of the Power Transmission, Pumps and Morse
Controls segments, respectively. The Company's remaining sales are made through
distributors, dealers, and agents.
None of the Company's 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 segments, or on the Company as a whole. No customer accounted for 10%
or more of consolidated sales from continuing operations in 1997, 1996 or 1995.
Backlog
The Company's continuing operations' backlog of unfilled orders at February 28,
1998 and 1997, and at December 31, 1997, 1996 and 1995, by business segment, was
as follows:
February 28, December 31,
1998 1997 1997 1996 1995
(Dollars in millions)
Power Transmission $ 8.3 $ 8.2 $ 7.8 $ 7.7 $ 8.5
Pumps 34.0 37.9 29.5 33.3 35.3
Morse Controls 24.2 21.8 24.0 21.3 21.9
---- ----- ---- ---- ----
$ 66.5 $ 67.9 $ 61.3 $ 62.3 $ 65.7
====== ====== ====== ====== ======
Backlog is considered significant only 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,
1997, the Company believes that all but approximately $2.5 million of its orders
will be filled in 1998.
Raw Materials
The Company obtains raw materials, component parts and supplies from a variety
of sources, 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 of raw materials 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.
Patents, Licenses and Trademarks
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). The Company, however,
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 manufacturing processes in
its operations.
Following the removal of the distinctive modifier "Transamerica" from the
corporate name prior to the Distribution, the Company changed its name to "Imo
Delaval Inc." in 1986 and to "Imo Industries Inc." in 1989. The Company's use of
the name "Delaval" is restricted as a result of a contract by which the
Company's assets were acquired from their former Swedish owner preceding the
acquisition of the Company by Transamerica. In January 1995, the Company
transferred its rights to use the "Delaval" name in connection with certain
products of the Turbomachinery segment to Mannesmann Demag as part of the
divestiture of its Turbomachinery business.
Research and Development
The Company's ongoing research and development programs involve the development
of new technologies to enhance the performance or lower the cost of
manufacturing its 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 1997, 1996
and 1995 by business segment were as follows:
Year Ended December 31,
1997 1996 1995
---- ---- ----
(Dollars in millions)
Power Transmission $ .6 $ .6 $ .7
Pumps 2.1 2.1 1.5
Morse Controls 2.8 1.7 1.7
--- --- ---
$5.5 $ 4.4 $ 3.9
==== ===== =====
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 approvals have been sought. 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.
The Company has been identified in a number of instances 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 the Comprehensive Environmental Response Compensation and Liability Act
("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 therefore not be material.
The Company has current and former operations in numerous locations, some of
which require environmental remediation. The Company, however, 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.
Seasonality
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.
Working Capital
Working capital at December 31, 1997 was $18.7 million, a decrease of $25.5
million from the end of 1996, due principally to the sale of the Company's
Instrumentation and its remaining Electro-Optical Systems business, and to the
additional liabilities recorded in conjunction with the Acquisition. The ratio
of current assets to current liabilities was 1.2 at December 31, 1997, compared
with 1.5 at December 31, 1996. The Company's total debt as a percent of its
total capitalization decreased to 71.5% at December 31, 1997, compared with
125.4% at December 31, 1996, as a result of the accounting for the Acquisition
and the reduction in debt with proceeds from the 1997 asset sales.
Employees
At February 28, 1998, the Company employed approximately 2,100 persons
worldwide. Approximately 1,300 persons were employed in the United States, and
approximately 800 persons were employed outside of the United States. There are
approximately 400 persons worldwide covered by collective bargaining agreements
with various unions expiring in 1998 through 2000. The Company considers its
relations with its employees to be satisfactory.
Item 2. Properties.
The location of the Company's manufacturing facilities at February 28, 1998 are
as follows:
Location Product Owned/Leased
Power Transmission
Charlotte, North Carolina Open gearing, shaft Owned
couplings and mounted
bearings
Louisburg, North Carolina Worm gear speed reducers Owned
York, Pennsylvania Electronic drives Owned
Woodbridge, New Jersey(1) Mechanical and Leased
pneumatic clutches
Pumps
Monroe, North Carolina Three-screw and Owned
two-screw pumps
Columbia, Kentucky Three-screw, gear and Owned
elevator pumps
Warren, Massachusetts Two-screw, gear and Owned
centrifugal pumps
Stockholm, Sweden Three-screw pumps Owned
Paris, France Three-screw pumps Leased
Morse Controls
Hudson, Ohio Cables and controls Owned
Sarasota, Florida Marine hydraulics Owned
New Orleans, Louisiana Replacement marine Leased
engine parts
Basildon, England Cables and controls Leased
Heiligenhaus, Germany Cable, controls and Owned
conveyer products
Paris, France Cables and controls Leased
Marsta, Sweden Cables and controls Owned
Singapore Cables, controls and Leased
roller chain
Sydney, Australia Cables and controls Owned
(1)The Company plans to close this facility during fiscal year 1998, and
consolidate its clutch manufacturing at the Charlotte, North Carolina
facility.
The Company believes that its machinery, plants and offices are in satisfactory
operating condition and are adequate for the uses to which they are put. The
Company believes that its properties have sufficient capacity to substantially
increase its current utilization without incurring significant additional
capital expenditures.
Item 3. 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 6,900
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 its insurers, who are defending under their stated reservation of
rights. In addition, the Company and the subsidiary are named in cases,
involving approximately 22,000 claimants, which in 1996 were "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 was a defendant in a lawsuit in the U.S. District Court for the
Western District of Pennsylvania, which alleged component failures in equipment
sold by its former diesel engine division. The complaint sought damages of
approximately $3 million. On September 30, 1997 the Court granted a summary
judgment motion filed by the Company which effectively dismissed all claims
against it. Plaintiffs have appealed this judgment to the United States Court of
Appeals for the Third Circuit.
The Company is a defendant in 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
million. To date the Court has granted a series of summary judgment motions
filed by the Company which have significantly reduced the scope of damages which
the plaintiff may claim but the court has also permitted additional discovery to
determine whether any other damages exist which plaintiff may be entitled to
seek at a trial.
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
and therefore a representation was breached. The contract was subsequently
awarded to the Company's Varo subsidiary and thereafter transferred to the buyer
of the Electro-Optical Systems business. 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 Company is one of five defendants in an action brought in the United States
District Court for the Middle District of Louisiana. In April 1991, the
Company's former Deltex division performed a repair of a turbine. Following the
repair, the turbine was included in a spare parts pool until January 1995. The
plaintiff alleges that following installation in its plant the turbine
experienced severe vibrations requiring the turbine to be run at less than
optimal speed. They further allege that the shortfall in performance caused them
to incur repair costs, and consequential damages in excess of $5 million. The
lawsuit is in the early discovery stage; however, 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. For
additional information see section entitled Environmental Matters in Part I,
Item 1 of this Form 10-K Report.
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 of the Company.
See Note 15 to the Consolidated Financial Statements located in Part IV of this
Form 10-K Report as indexed at Item 14(a)(1) for additional details relating to
Contingencies.
Item 4. Submission of Matters to a Vote of Security Holders.
No matter was submitted to a vote of the Company's security holders during the
fourth quarter of 1997.
PART II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters.
The Company's common stock (the "Common Stock") is listed on the New York Stock
Exchange (stock symbol IMD). The following table sets forth, for the quarters
indicated, the high and low closing price per share for the Common Stock as
reported on the New York Stock Exchange Composite Tape.
High Low
1996:
1st Quarter 7-5/8 5-3/4
2nd Quarter 8-1/8 5-3/8
3rd Quarter 5-7/8 4-7/8
4th Quarter 5-1/2 2-3/4
1997:
1st Quarter 3-7/8 2-7/8
2nd Quarter 5-7/8 2-3/4
3rd Quarter 7 5-13/16
4th Quarter 6-1/4 4-1/2
1998:
1st Quarter 6-11/16 4-1/2
(through March 24, 1998)
The last sale price for the Company's Common Stock as reported by the New York
Stock Exchange on March 24, 1998, was $6-11/16 per share. As of March 24, 1998,
there were 12,978 shareholders of record of the Company's Common Stock.
The Acquisition reduced the number of shares traded publicly and reduced the
number of holders of shares. On March 16, 1998, the Company received a letter
dated March 9, 1998, from the New York Stock Exchange, Inc. ("NYSE") indicating
the NYSE's determination that the Company had fallen below certain continued
listing criteria, and that the NYSE was carefully considering the
appropriateness of the continued listing of the Company's Common Stock. The
Company is preparing a response to the NYSE taking the position that the NYSE
should maintain the listing of the Company's Common Stock. The Company will seek
to persuade the NYSE to continue such listing, but there can be no assurance
that the NYSE will not attempt to delist the Company's Common Stock. Even if the
NYSE maintains such listing for now, the Company's Common Stock may, at some
future time, no longer meet the requirements for the NYSE for continued listing
and may be delisted from the NYSE and deregistered under the provisions of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). A decision by
the NYSE to delist the Company's Common Stock or deregistration under the
Exchange Act could adversely affect the liquidity and market value of the
remaining shares held by the public.
There were no dividends declared during 1996, 1997 or the first quarter of 1998.
Two of the Company's long-term debt agreements contain, among other provisions,
a restriction on retained earnings available for payment of dividends. Under the
most restrictive provisions the Company is prohibited from declaring or paying
cash dividends through at least August 29, 2002. Furthermore, one of the
long-term debt agreements contains restrictions on the declaration and payment
of dividends based upon certain financial ratios through May 1, 2006.
<TABLE>
Item 6. Selected Financial Data.
(Dollars in millions except per share amounts) (a)
<CAPTION>
Post-Acquisi- Pre-Acquisi-
tion August tion January 1,
29, 1997 to 1997 to Year Ended December 31,
December August --------------------------------------
31, 1997 28, 1997 1996* 1995* 1994* 1993*
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net sales $106.7 $210.2 $309.5 $297.1 $288.6 $344.1
Gross profit 30.1 64.9 88.9 84.3 82.8 101.8
Selling, general and
administrative expenses 21.4 46.7 62.5 60.5 59.9 83.7
Research and development expenses 1.9 3.6 4.5 3.9 3.9 6.7
Unusual items 5.0 26.3 17.4 8.1 --- 13.4
Income (loss) from continuing
operations before interest expense,
income taxes and extraordinary item 2.6 (11.8) 5.6 14.7 20.2 (.8)
Interest expense 8.1 18.2 26.0 22.6 25.9 28.1
Income (loss) from continuing
operations before extraordinary item (5.7) (31.2) (33.1) 7.2 (7.4) (41.9)
Discontinued operations, net of taxes (12.2) 2.4 (16.8) 27.0 16.6 (210.6)
Extraordinary item (3.3) --- (8.5) (4.4) (5.3) (18.1)
Net income (loss) (21.2) (28.9) (58.4) 29.7 3.9 (270.6)
- ------------------------------------------------------------------------------------------------
Earnings (loss) per share, basic and diluted:
Continuing operations before
extraordinary item (.33) (1.82) (1.93) .42 (.44) (2.48)
Discontinued operations, net of taxes (.71) .14 ( .99) 1.58 .98 (12.47)
Extraordinary item (.20) --- (.49) (.26) (.31) (1.07)
Net income (loss) (1.24) (1.68) (3.41) 1.74 .23 (16.02)
Cash dividends per share --- --- --- --- --- ---
- -----------------------------------------------------------------------------------------------
Capital expenditures 3.7 4.6 10.0 13.2 4.8 5.3
Depreciation and amortization expense 5.7 8.6 13.4 13.4 17.1 20.5
Working capital 18.7 44.1 62.8 135.2 107.1
Total assets:
Continuing operations 448.4 282.2 306.9 319.4 351.2
Discontinued operations 14.9 48.7 58.5 190.9 184.1
Total assets 463.3 330.9 365.4 510.3 535.3
Total long-term debt, including
current portion 198.4 256.7 226.3 383.2 348.3
Shareholders' equity (deficit) 90.2 (56.4) 3.7 (28.3) (34.7)
===============================================================================================
(a) The notes to the consolidated financial statements located in Part IV of
this Form 10-K Report as indexed at Item 14(a)(l) should be read in conjunction
with this summary.
*Restated to conform to 1997 presentation.
</TABLE>
Item 7. 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 Form 10-K
Report.
Comparisons of the results of operations for the year ended December 31, 1997,
with the results for the years ended December 31, 1996 and 1995, are being
presented on an historical basis. The four months ended December 31, 1997
include changes in depreciation and amortization that resulted from the
application of the purchase method of accounting for the Acquisition. For
further information on the pro forma effect of the Acquisition on the Company,
see Note 2 in the Notes to Consolidated Financial Statements.
Recent Events
Roltra-Morse Sale: On February 27, 1998, the Company completed the sale of its
Roltra-Morse business to Magna International Inc. for cash of $30.7 million,
subject to final adjustment. Roltra-Morse retained $18.4 million of its debt.
The sale price approximated the recorded net book value of the business. The
proceeds were used to reduce domestic senior debt by $30 million. This
transaction will be reflected in the Company's financial statements in the first
quarter of 1998.
The sale of Roltra-Morse and the use of the proceeds to reduce its domestic
senior debt increased the Company's availability under its revolving credit
facility to purchase a portion of its 11.75% senior subordinated notes (the
"Notes") on the open market. During the first quarter of 1998, the Company
purchased, in the open market at a premium, a portion of its Notes in the face
amount of $33.1 million. As a result of the early extinguishment of these Notes,
and a portion of the term loan facility with the proceeds from the Roltra-Morse
sale, an extraordinary charge of $5.6 million will be recognized in the first
quarter of 1998.
Restructuring Plans and Cost Reduction Programs
Asset Sales
1997 Asset Sales: On August 29, 1997, the Company completed the sale of its
Instrumentation business segment to Danaher Corporation for proceeds of $85
million, which approximated its net book value. The Company used a portion of
the proceeds to reduce domestic senior debt by $68.1 million.
In April 1997, the Company completed the sale of its Varo Electronic Systems
division to a small defense contractor for $12 million, which was used to reduce
its domestic senior debt. The sale of this business completed the sale of the
Electro-Optical Systems business.
In 1997, the Company also completed sales of certain of its non-operating real
estate for total proceeds of approximately $14.1 million. Net proceeds were used
to repay domestic senior debt.
On February 27, 1998, the Company successfully completed the sale of its
Roltra-Morse business segment. See "Recent Events" above.
Remaining Asset Sales: The completion of the sale of the Roltra-Morse business
in February of 1998, substantially completes the Company's asset sale program.
The only remaining assets held for sale are certain non-operating real estate
with a net book value of approximately $1 million, which amount approximates the
fair market value, less costs to sell. The Company targets completion of these
sales over the next 12 months.
Background: Since the fourth quarter of 1992, the Company has implemented
several programs in an effort to de-lever its balance sheet through the sale of
certain businesses and the application of the proceeds from such divestitures to
reduce outstanding indebtedness. Pursuant to this decision, the Company divested
its Heim Bearings, Aerospace, and Barksdale Controls businesses in 1993 and its
CEC Instruments business in 1994. In connection with a strategy adopted in late
1993 to focus on 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, the Company divested its Turbomachinery and
most of its Electro-Optical Systems businesses during 1995. The Company had
planned to sell its Roltra-Morse business in 1996, but was not successful, and
withdrew Roltra-Morse from sale in late 1996. As described above, Roltra-Morse
was sold in February 1998.
Cost Reduction Programs
1997 Cost Reduction Program. In connection with the Acquisition, the Company's
new management implemented a cost reduction program. The cost of this program is
estimated to be $18.6 million and was accrued for in accordance with the
purchase method of accounting. The cost is comprised of $10.5 million related to
severance and termination benefits, and other cost savings as a result of
headcount reductions at the Company's corporate headquarters. In addition, $1.7
million, $1.2 million and $5.2 million of costs are estimated for the Company's
Power Transmission, Pumps, and Morse Controls segments, respectively, related to
severance and termination benefits resulting from headcount reductions and the
consolidation of certain manufacturing facilities.
The 1997 cost reduction program reduced expenses by approximately $3 million in
the 1997 period subsequent to the Acquisition and is expected to reduce expenses
by approximately $19 million in 1998 and approximately $20 million annually
thereafter. This program includes a reduction of 237 employees, or 10.3% of the
total number of Company employees in continuing operations at the date of the
Acquisition. The required cash outlay related to this program was $8.1 million
in 1997 and the expected cash requirements during 1998 are $10.5 million.
1996 Program. The fourth quarter of 1996 includes a charge to continuing
operations of $.3 million for restructuring measures taken at the Company's
Morse German operation to further reduce operating expenses, as an extension of
its 1995 program (see 1995 Program below). The required cash outlay related to
this program was $.3 million in 1996.
1995 Program. In the fourth quarter of 1995, the Company recorded a charge to
continuing operations of $3.1 million, including severance and other expenses
related to a Company-wide program to reduce general and administrative costs.
This program included a reduction of 56 employees, or 2.4% of the total number
of Company employees in continuing operations at the end of 1995, including a
reduction of the corporate headquarters staff by 20%. This program reduced
general and administrative expenses by approximately $2.7 million and $3.2
million in 1996 and 1997, respectively.
Results of Operations
The Company's Roltra-Morse business, along with its previously sold
Instrumentation, Electro-Optical Systems and Turbomachinery businesses are
accounted for as discontinued operations. Accordingly, the operating results of
these businesses have been segregated and reported as Discontinued Operations in
the audited Consolidated Financial Statements included elsewhere in this Form
10-K Report. The discussion that follows concerns only the results of continuing
operations, which are grouped into three business segments for management and
segment reporting purposes: Power Transmission, Pumps, and Morse Controls.
1997 Compared to 1996
Sales. Net sales from continuing operations in 1997 increased 2.4% to $316.9
million, compared with $309.5 million in 1996, as a result of increases of 3.0%
and 4.6% in the Power Transmission and Pumps segments, respectively. Morse
Controls segment net sales remained flat year over year. See "Segment Operating
Results" below.
Gross Profit. Gross profit in 1997 increased slightly to 30.0% of sales
compared with 28.7% in 1996. See "Segment Operating Results" below.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased to 21.5% of net sales in the twelve months
ended December 31, 1997, as compared with 20.2% in the 1996 period. The increase
in expenses, as a percent of sales in 1997, was due primarily to the fact that
the 1996 period benefited from a favorable adjustment of $3.9 million related to
the Company's phase-out of accumulated postretirement benefit obligations.
Additionally, goodwill amortization increased $1.1 million in the last four
months of 1997 as a result of the Acquisition. The increased selling, general
and administrative expenses in 1997 were partially offset by cost savings
realized from the immediate headcount reductions and other cost cutting measures
implemented after the Acquisition (primarily at the corporate headquarters), and
net reductions of $.6 million to previously recorded provisions. See also
discussion of Pensions and Retiree Medical and Life Insurance under "Other
Operating Results" below.
Interest Expense. Average borrowings in 1997 were approximately $6.1 million
lower than in 1996. Total interest expense (before allocation to discontinued
operations) of $33.6 million in 1997 was $1.5 million, or 4.3%, lower than in
1996, due primarily to the reduction in debt with proceeds from the sale of the
Instrumentation business segment in August 1997. Interest expense for continuing
operations excludes interest expense of the discontinued operations of $7.4
million in 1997 and $9.1 million in 1996.
Income (Loss) from Continuing Operations. The Company had a loss from continuing
operations of $36.9 million, or $2.15 per share, in 1997, which included unusual
charges of $31.3 million. In 1996, the loss from continuing operations was $33.1
million, or $1.93 per share, which included unusual charges of $17.4 million and
a reversal of a previously recognized deferred tax benefit of $10 million. See
"Other Operating Results" for discussion regarding Unusual Items and Provision
for Income Taxes.
Income (Loss) from Discontinued Operations. The Company had a loss from
discontinued operations of $9.8 million (net of income tax expense of $.7
million), or $.57 per share, in 1997 as compared to a loss of $16.8 million (net
of income tax expense of $1 million), or $.99 per share, in 1996.
Operating results from discontinued operations were a loss of $1.4 million and
$8.7 million in 1997 and 1996, respectively. Results from operations for the
discontinued operations include allocations for interest of $2.7 million in 1997
and $4.5 million in 1996.
The losses of $8.4 million recorded on the sale of discontinued operations in
the third quarter of 1997, and $8.1 million recorded in the third and fourth
quarters of 1996, represent charges related to changes in estimates on legal and
other reserve requirements of retained liabilities associated with its former
Electro-Optical and Turbomachinery businesses. The Company performs a review of
the assumptions used in determining the estimated loss from discontinued
operations on a quarterly basis. Management believes that the recorded amount is
adequate. The amounts of the recorded liabilities, which are based on current
estimates, may differ from actual results.
The Company did not retain any liabilities with respect to the sale of the
Instrumentation business. The Company retained certain liabilities upon the 1995
sales of the Electro-Optical Systems and Turbomachinery businesses of
approximately $24 million and $33 million, respectively. Required cash outlays
in 1997, 1996 and 1995 were $ 5.5 million, $6.5 million and $5.7 million,
related to the former Electro-Optical Systems business, and $3.1 million, $4.1
million and $14.1 million, related to the former Turbomachinery business. The
expected 1998 cash requirements for both the Electro-Optical Systems and
Turbomachinery liabilities, are expected to approximate the 1998 cash inflows.
Net Income (Loss). The net loss in 1997 was $50.1 million compared with a net
loss of $58.4 million in 1996. Net loss per share in 1997 was $2.92 compared
with net loss per share of $3.41 in 1996. See "Other Operating Results" below.
1996 Compared to 1995
Sales. Net sales from continuing operations in 1996 increased 4.2% to $309.5
million, compared with $297.1 million in 1995. Increases of 14.0% and 4.5% in
the Company's Pumps and Morse Controls business segments, respectively, were
partially offset by a 5.9% decrease in sales from the Power Transmission segment
compared with 1995. See "Segment Operating Results" below.
Gross Profit. The gross profit in 1996 remained relatively constant at
28.7% of sales compared with 28.4% in 1995. See "Segment Operating Results"
below.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses remained relatively constant at 20.2% of sales in 1996,
compared with 20.3% of sales in 1995. The 1996 period benefited from a decrease
in expenses of $2.7 million associated with the cost reduction program adopted
in the fourth quarter of 1995 and net reductions of approximately $1.2 million
to previously recorded provisions. These favorable items were offset by a
planned increase in 1996 in selling expenses in the Pumps segment, and
approximately $1 million in costs associated with the unsuccessful attempt to
sell the Roltra-Morse business in 1996. See also discussion of Pensions and
Retiree Medical and Life Insurance under "Other Operating Results" below.
Interest Expense. Average borrowings in 1996 were approximately $2.8 million
higher than in 1995. Total interest expense (before allocation to discontinued
operations) of $35.1 million in 1996 was $1.3 million, or 3.6%, less than in
1995, principally due to the refinancing of the corporate debt at more favorable
interest rates. Interest expense for continuing operations excludes interest
expense of the discontinued operations of $9.1 million and $13.7 million in 1996
and 1995, respectively.
Income (Loss) from Continuing Operations. The Company had a loss from continuing
operations of $33.1 million, or $1.93 per share, in 1996, which included unusual
charges of $17.4 million and a reversal of a previously recognized deferred tax
benefit of $10 million. In 1995, income from continuing operations was $7.2
million, or $.42 per share, which included unusual charges of $8.1 million and a
deferred tax benefit of $17 million. See "Other Operating Results" for
discussion regarding Unusual Items and Provision for Income Taxes.
Income (Loss) from Discontinued Operations. The Company had a loss from
discontinued operations of $16.8 million (net of income tax expense of $1
million), or $.99 per share, in 1996 as compared to income of $26.9 million (net
of income tax expense of $6.5 million), or $1.58 per share, in 1995.
Operating results from discontinued operations were a loss of $8.7 million and
income of $5.4 million in 1996 and 1995, respectively. Results from operations
for the discontinued operations include allocations for interest of $4.5 million
in 1996 and $10.3 million in 1995.
The loss on sale of discontinued operations of $8.1 million in 1996 represents
charges recorded by the Company in the third and fourth quarters of 1996 related
to changes in estimates on legal and other reserve requirements of retained
liabilities associated with its former Electro-Optical and Turbomachinery
businesses. The gain on sale of discontinued operations 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.
Net Income (Loss). The net loss in 1996 was $58.4 million compared with net
income of $29.7 million in 1995. Net loss per share in 1996 was $3.41 compared
with net income per share of $1.74 in 1995.
Other Operating Results
Unusual Items. During the year ended December 31, 1997, the Company recorded
unusual charges of $31.3 million against income from continuing operations. The
first nine months of 1997 included an unusual charge of $10.5 million relating
to the settlement of a judgment against the Company in favor of International
Insurance Company ("International"). In addition, the Company recorded unusual
charges of $20.8 million in the third quarter of 1997. Of these charges, $15.8
million related to the sale of the Company and represent indirect and general
expenses incurred by the Company in connection with the sale process which were
paid in 1997, and $5 million related to an additional legal provision concerning
certain litigation matters.
During the fourth quarter of 1996, the Company recognized unusual charges of
$17.4 million against income from continuing operations. Restructuring charges
totaled $.3 million representing severance benefits. Additionally, the Company
recognized a charge of $17.1 million related to the write-down of other assets
approved for sale and certain non-operating real estate to net realizable value
(included in Corporate Expense). Of the $17.4 million of unusual charges, the
required cash outlay in 1996 was $.3 million. There was no required cash outlay
in 1997. The remainder represents non-cash charges.
During the fourth quarter of 1995, the Company recognized unusual charges of
$8.1 million in income from continuing operations. These charges include $3.1
million in severance benefits and other expenses related to a Company-wide
program to reduce general and administrative costs ($1.5 million included in the
Morse Controls segment, and $1.6 million included in Corporate Expense). In
addition, the unusual charges include $5 million related to the write-down of
non-operating real estate to net realizable value (included in Corporate
Expense). Of the $8.1 million of unusual charges, the required cash outlays in
1995, 1996 and 1997 were $.4 million, $2.4 million and $.3 million,
respectively. The remainder represents non-cash charges.
Extraordinary Items. The twelve months ended December 31, 1997, include an
extraordinary charge of $3.3 million after-tax, representing charges related to
the early extinguishment of the Company's debt under its current senior secured
credit facilities (the "New Credit Agreement") and its Notes, as well as the
write-off of previously deferred loan costs.
As a result of the 1996 refinancing of the Company's domestic debt, the twelve
months ended December 31, 1996 include an extraordinary charge of $8.5 million
after-tax, representing the charges incurred in connection with the early
extinguishment of debt as well as the write-off of previously deferred loan
costs.
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 the Company's debt under its previous credit facility and its
formerly outstanding 12.25% senior subordinated debentures.
Provision for Income Taxes. Income tax expense from continuing operations was
expense of $1.5 million for 1997, expense of $12.7 million for 1996, and a
benefit of $15.2 million for 1995.
Income tax expense for the twelve months ended 1997, represents current tax
expense of $1.5 million for foreign and state income taxes, as the Company is
utilizing existing U.S. net operating loss carryforwards with its domestic
earnings.
The net deferred tax benefit currently recorded at December 31, 1997 is $5.1
million, a level where management believes that it is more likely than not that
the tax benefit will be realized. In 1995, the Company reduced the valuation
allowance applied against the net operating loss carryforwards by $17 million
based upon reasonable and prudent tax planning strategies and future income
projections including the planned sale of Roltra-Morse. As a result of
withdrawing Roltra-Morse from sale in 1996, the Company recorded a provision of
$10 million against deferred tax benefits previously recognized based on an
anticipated taxable gain on this sale. This reduced the deferred tax benefit to
$5.3 million at December 31, 1996, to a level where management believed that it
was more likely than not that the tax benefit would be realized. The total
amount of future taxable income in the U.S. necessary to realize the asset is
approximately $14.5 million. The Company expects to generate this income
principally through the sale of the Roltra-Morse business completed in February
1998. See "Recent Events" above. 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 establishes valuation allowances in accordance with the provisions
of FASB Statement No. 109, "Accounting for Income Taxes." The Company
continually reviews the adequacy of the valuation allowance and is recognizing
these benefits only as reassessment indicates that it is more likely than not
that the benefits will be realized.
The Company has net operating loss carryforwards of approximately $101 million
expiring in years 2002 through 2011, and minimum tax credits of approximately
$2.8 million, which may be carried forward indefinitely. Included in the net
operating loss carryforwards are foreign tax credits of approximately $7.4
million, expiring through 2001, which for financial and tax reporting purposes,
are reflected as deductible foreign taxes. These carryforwards are available to
offset future taxable income, subject to Section 382 limitations, due to the
Acquisition.
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.
The year ended December 31, 1996 includes current tax expense of $2.7 million
representing foreign and state income taxes. Additionally, as a result of
withdrawing Roltra-Morse from sale in 1996, the Company recorded a provision of
$10 million against deferred tax benefits previously recognized based on an
anticipated gain on this sale.
The 1995 amount includes current tax expense of $1.8 million representing
foreign and state income taxes, as the Company is utilizing existing U.S. net
operating loss carryforwards on its domestic earnings. This amount is offset by
a deferred tax benefit in 1995 of $17 million, representing a reduction, taken
when Roltra-Morse was approved to be held for sale, in the deferred tax
valuation allowance against U.S. net operating loss carryforwards.
Pensions and 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, phased
out the Company subsidy for retiree medical and life insurance over the
three-year period ended December 31, 1996. The Company amortized the associated
reserves to income from continuing operations over the phase-out period. The
pre-tax amount amortized to income from continuing operations was $3.9 million
in both 1996 and 1995. The Company did not experience a significant increase or
decrease in cash requirements related to this change in policy during this
phase-out period.
Effective with the December 31, 1997 measurement date, the Company revised
certain assumptions including the discount rate, the expected long-term rate of
return on assets and mortality assumptions to reflect current market and
demographic conditions. These changes are not expected to have a material effect
on future year's pension expense or Company expenses related to retiree medical
and life insurance.
Segment Operating Results
The comparisons of 1997 segment operating income to 1996 and 1995 are adversely
affected by the phase out of certain postretirement employee benefits ("OPEB"),
completed in December 1996. This non-cash gain, which resulted when the Company
amended its policy regarding retiree medical and life insurance benefits in
early 1994, was amortized to income during the phase-out years 1994 through
1996. The twelve months ended December 31, 1996 and 1995 each benefited by $3.9
million from this phase-out adjustment. Excluding this adjustment in 1996,
segment operating income of $27.5 million in 1997 increased 13.4% as compared
with 1996.
Operating results by business segment for the years 1997, 1996 and 1995 are
summarized below:
Power Transmission: 1997 1996 1995
- ------------------- ---- ---- ----
(in millions)
Net Sales $92.1 $89.5 $95.1
Segment Operating Income 8.6 8.6 10.7
Power Transmission segment net sales increased 3.0% in 1997 compared with 1996.
Sales increases in small center gearbox, shaft accessories, freight hauling and
electrical products, were partially offset by lower sales of standard products.
Although gross profit was up 4% in 1997, segment operating income remained flat
compared with the prior year, due to the fact that the 1996 period benefited
from a $2 million credit related to the OPEB phase-out. Excluding this credit in
the 1996 period, segment operating income for 1997 increased 29.3% compared with
the 1996 period.
Power Transmission segment net sales and operating income decreased 5.9% and
19.2%, respectively, in 1996 compared with 1995. The sales decrease was due to a
market shift from DC to AC drives and a downturn in the U.S. gear market in
1996, resulting in major customers' adjusting their inventory levels, after a
relatively strong year in 1995. The 19.2% decrease in segment operating income
resulted from the sales decrease and the higher unabsorbed costs experienced at
the decreased volumes.
In 1996, the segment successfully launched two compact new AC variable speed
drives for controlling electric motors from 1/6-to-1-horsepower, a range that
covers 40% of the total market for packaged drives in North America. Designed
primarily for use on pumps and ventilator fans, the new "micro" inverter has
more features and a lower price than competitive units.
Pumps: 1997 1996 1995
- ------ ---- ---- ----
(in millions)
Net Sales $112.5 $107.6 $94.4
Segment Operating Income 14.5 11.2 9.2
Pumps segment net sales and operating income increased 4.6% and 29.2%,
respectively, in 1997 compared with the prior year. Excluding the OPEB phase-out
credit in 1996, segment operating income increased 46.1% compared with 1996.
The segment's North American operations, which are comprised of its U.S. and
Canadian operations, experienced increased sales and operating income of 5.8%
and 50.5%, respectively. Although the segment's U.S operations sales remained
flat year-over-year, the turnaround at the Warren Pumps facility as a result of
certain restructuring measures taken in early 1997 made a strong contribution to
profitability, as well as the fact that the segment is starting to benefit from
the cost reduction program implemented in the fourth quarter of 1997. These
favorable items were partially offset by the elimination of the OPEB phase-out
credit at the end of 1996. The segment's Canadian operations sales increased
subsequent to the sale of the Instrumentation segment, since the Pumps segment
became a distributor for certain products of the former Instrumentation segment;
however, the contribution to operating profit was insignificant.
The segment's European operations sales remained flat in 1997 as compared with
1996, while segment operating income decreased approximately 16% when comparing
the same periods. The decrease in segment operating income was primarily due to
the unfavorable effects of a 13% change in the exchange rate for the Swedish
Krona.
Pumps segment net sales increased 14.0% and operating income increased 21.8% in
1996 compared with 1995. The results of Imo Pompes SA, a French licensee
acquired in March 1996, contributed 5.7% and 9.7% to the net sales and segment
operating income increases in 1996. Additionally, the segment is experiencing
continued growth in its U.S. industrial markets and strong export demand, driven
by products in crude oil transfer, power generation and general industrial
markets, as well as increased demand in the U.S. marine market.
Morse Controls: 1997 1996 1995
- --------------- ------ ---- ----
(in millions)
Net Sales $112.2 $112.5 $107.7
Segment Operating Income(1) 4.4 8.3 4.7
(1) The Morse Controls segment's operating income includes unusual charges of
$.3 million and $1.5 million in 1996 and 1995, respectively.
Morse Controls segment net sales of $112.2 million remained flat compared with
1996 net sales. A sales increase in the segment's U.S. operations of 3.9% was
due to a slight increase in marine product sales in 1997, and an increase in
mobile equipment sales of 17.5% as a result of growth in the agricultural and
construction markets. These increases were offset by a decrease in the European
operations sales of 3.8% due to the unfavorable effects of exchange rate
changes, which were only partially offset by increases in the aviation and
mobile equipment businesses in Germany and France, respectively. Excluding the
effects of exchange rate changes, European operations sales increased 2.1%
compared with 1996.
Segment operating income decreased 47.4% in 1997 as compared with 1996. The 1996
period benefited from a $.7 million credit related to the OPEB phase-out.
Excluding this credit in the 1996 period, segment operating income for 1997
decreased 42.8% compared with the 1996 period. Other factors contributing to the
decreased profitability in 1997 were additional warranty costs in Europe and
increased selling expenses at all locations.
Morse Controls segment net sales of $112.5 million were up 4.5% for 1996, as
compared with 1995 net sales. Segment operating income increased 74.8% compared
to the 1995 period. Excluding unusual charges in both periods, operating income
increased 37.8% in 1996. The segment has been favorably affected in 1996 by the
acquisition of a Swedish manufacturer of specialized electronic controls, which
was completed in late December 1995, and accounted for 4.9% of the net sales
increase and 18.0% of the segment operating income increase of 37.8% (excluding
unusual charges). Operating income also started to experience benefits in 1996
from improvements at the segment's operation in Germany, which was restructured
to consolidate facilities and reduce costs as part of the restructuring program
adopted in late 1995.
Company-Wide Fourth Quarter Results
Net sales from continuing operations in the fourth quarter of 1997 were $79.9
million, a 5.6% increase, compared with $75.7 million in the fourth quarter of
1996. The Company had breakeven income from continuing operations in the fourth
quarter of 1997 compared with a loss from continuing operations of $20.8
million, or $1.21 per share, in the comparable 1996 period.
Average borrowings in the fourth quarter of 1997 were approximately $62.3
million lower than the 1996 period. Total interest expense (before allocation to
discontinued operations) of $8.1 million in the fourth quarter of 1997 was $1.1
million, or 12.0%, lower than in 1996, due to the reduction in debt with
proceeds from the sale of the Instrumentation business segment in August 1997.
Interest expense for continuing operations was $5.9 million in the 1997 period,
compared with $6.5 million in the fourth quarter of 1996, and excludes interest
expense incurred by the discontinued operations, as well as an interest
allocation to the discontinued operations. Fourth quarter 1996 results were also
severely impacted by unusual charges of $17.4 million.
Power Transmission segment net sales of $23.1 million increased 3.0% compared
with the fourth quarter of 1996, largely driven by an 18% improvement in small
center distance gearbox sales offset by decreases in electrical products and
large center distance gearboxes. Segment operating income of $2.4 million
increased 13.4% compared with last year's fourth quarter. The fourth quarter of
1996 benefited from a $.5 million credit related to the OPEB phase-out.
Excluding this credit in the 1996 period, segment operating income for the
fourth quarter of 1997 increased 47.4% compared with 1996.
Pumps segment net sales of $30.6 million were up 11.2% in the fourth quarter of
1997 compared to the same period in 1996. In the fourth quarter of 1997, the
segment experienced increases in its North American operations sales to the
crude oil market, offset slightly by decreased sales to the power generation
market, as well as in its European operations.
Segment operating income of $4.6 million more than doubled when compared to the
1996 fourth quarter, despite the fact that the 1996 period benefited from a $.3
million credit related to the OPEB phase-out. The turnaround at the Warren Pumps
facility as a result of certain restructuring measures taken in early 1997 made
a strong contribution to profitability in the fourth quarter of 1997 as compared
with the 1996 period.
Morse Controls segment net sales in the fourth quarter of 1997 were $26.2
million, an increase of 1.9% compared with the 1996 period; however, segment
operating income decreased to $.5 million for the three months ended December
31, 1997, compared with $1.1 million in the fourth quarter of 1996. The 1996
period benefited from a $.3 million credit related to the OPEB phase-out.
Liquidity and Capital Resources
Short-term and Long-term Debt
On August 29, 1997, the Company completed the refinancing of its domestic senior
debt. Under terms of the refinancing, the Company entered into an agreement for
$143 million in senior secured credit facilities with a group of lenders (the
"New Credit Agreement"). Initial borrowings under the New Credit Agreement were
approximately $127.1 million. Proceeds of the New Credit Agreement were used to
refinance all obligations under the Company's previous credit agreement. The
cost of the implementation of the New Credit Agreement of $3 million will be
amortized over its term.
The New Credit Agreement provided for a five year, $70 million revolving credit
facility (which includes a $30 million letter of credit sub-facility), and a $73
million term loan facility ("Term Loans") amortizing to August 29, 2002.
Proceeds from the August 29, 1997 sale of the Instrumentation business were used
to repay amounts on the revolving credit facility and Term Loans of $54.2
million and $13.9 million, respectively. At the same time, and in keeping with
the terms of the New Credit Agreement, the $73 million term loan facility was
reduced to $59 million, which reduced the total facility to $129 million.
As of December 31, 1997, the availability under the revolving credit facility
was $31.1 million, as the Company had borrowings of $25 million outstanding
under the revolving credit facility, as well as $13.9 million of outstanding
standby letters of credit under the New Credit Agreement. The Company's
continuing operations had $8 million in foreign short-term credit facilities
with amounts outstanding at December 31, 1997 of $1.9 million.
At December 31, 1997, the Company also had outstanding under the New Credit
Agreement $59 million Term Loans amortizing to 2002. In addition, the Company
had outstanding $135.1 million of its Notes.
Cash Flow
The Company's operating activities used cash of $30.1 million in 1997, compared
with cash used of $15.1 million in 1996. The use of cash in 1997 is due
principally to the payment of (1) a legal settlement of $10.5 million with
International, (2) approximately $15.8 million representing indirect and general
expenses related to the process of selling the Company, and (3) approximately
$8.1 million related to the 1997 cost reduction program, representing severance
costs. The use of cash in 1996 is due primarily to cash used by discontinued
operations and other divested businesses. Net cash provided by investing
activities was $95.8 million in 1997, compared with cash used of $12.7 million
in 1996. Investing activities included net proceeds of $113.3 million from the
sale of the Company's Instrumentation business, the remaining Electro-Optical
systems business and certain of its non-operating real estate in 1997. Net
proceeds from the sale of properties held for sale in 1996 yielded $12.6
million; however, this was more than offset by 1996 investments in capital
equipment and acquisitions. Cash and cash equivalents were $3.5 million at
December 31, 1997, a slight increase from $1.4 million at December 31, 1996.
Working capital at December 31, 1997 was $18.7 million, a decrease of $25.5
million from the end of 1996, due principally to the sale of the Company's
Instrumentation and its remaining Electro-Optical Systems business, and to the
additional liabilities recorded in conjunction with the Acquisition. The ratio
of current assets to current liabilities was 1.2 at December 31, 1997, compared
with 1.5 at December 31, 1996. The Company's total debt as a percent of its
total capitalization decreased to 71.5% at December 31, 1997, compared with
125.4% at December 31, 1996, as a result of the accounting for the Acquisition
and the reduction in debt with proceeds from the 1997 asset sales.
Capital expenditures of continuing operations decreased slightly to $8.3 million
compared with the 1996 level of $10 million. In 1997 capital spending was used
for the purpose of maintaining and improving competitive advantages at the
Company's operations. The Company anticipates that capital expenditures in 1998
will increase over the 1997 level primarily due to expenditures related to
productivity improvements in the operating segments. There were no material
outstanding commitments for the acquisition of property, plant, and equipment at
December 31, 1997.
The Company's sale of its Roltra-Morse and Instrumentation business segments and
the refinancing of its domestic senior debt have significantly improved the
liquidity position. Management believes that cash flow from operations, cash
available from unused credit facilities and cash generated by additional asset
sales will be sufficient to meet the Company's foreseeable liquidity needs.
Year 2000
Many computer systems in use today were designed and developed using two digits,
rather than four, to specify the year. As a result, such systems will recognize
the year 2000 as "00." This could cause many computer applications to fail
completely or to create erroneous results unless corrective measures are taken.
The Company utilizes software and related computer technologies (essential to
its operations) that will be affected by this year 2000 issue. The Company has
established plans for evaluating and managing the risks and costs associated
with this problem. The computing portfolio has been identified at each business
unit and an initial assessment has been completed. The cost of achieving year
2000 compliance is not expected to materially exceed the cost of normal software
upgrades and replacements and will be incurred through fiscal 1999. The Company
expects to be compliant by the year 2000.
Impact of Recently Issued Accounting Standards
In June 1997, the FASB issued Statement No. 130, "Reporting Comprehensive
Income," which establishes standards for reporting and display of comprehensive
income and its components in a full set of general purpose financial statements.
The impact on the Company's financial statements compared to information
presently available is not expected to be significant. Also in June 1997, the
FASB issued Statement No. 131, "Disclosures about Segments of an Enterprise and
Related Information," which requires public companies to report financial and
descriptive information about operating segments. The statement intends to align
reportable segments and certain disclosures with how the operations are managed
internally. The impact of this statement on the Company's disclosure is not
expected to be significant. In February 1998, the FASB issued Statement No. 132,
"Employers' Disclosures about Pensions and Other Postretirement Benefits," which
adds disclosure requirements on changes in the benefit obligations and fair
values of plan assets, and eliminates certain disclosures that are no longer
useful. These statements will be adopted by the Company in fiscal year 1998.
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.
None of the Company's 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 segments, or on the Company as a whole. No customer accounted for 10%
or more of consolidated sales in 1997, 1996 or 1995.
Approximately 31.0% 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
forty years for buildings. In addition, property, plant and equipment of the
businesses acquired by the Company have been adjusted to 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.
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-K 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) Item 1 - "Restructuring Plans and Cost Reduction Programs" - the
impact of various cost reduction programs; and "Backlog, Raw Materials and
Environmental Matters" - the expected ability to fill existing orders in 1998,
the continued adequacy of the Company's raw materials sources, and the future
impact of environmental matters on the financial condition of the Company; (ii)
Item 3 - "Legal Proceedings" - the future impact of legal proceedings on the
financial condition of the Company; and, (iii) Item 7 - "Restructuring Plans and
Cost Reduction Programs" - the impact of various cost reduction programs; and
"Segment Operating Results" - the future performance of various programs in each
segment and the impact of such programs 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.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Not applicable.
Item 8. Financial Statements and Supplementary Data.
The consolidated financial statements and supplementary data required by Part
II, Item 8 of Form 10-K are included in Part IV of this Form 10-K Report as
indexed at Item 14(a)(1).
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.
The Company has chosen Arthur Andersen LLP as its independent public
accountants. Results for the periods ended August 28, 1997 and December 31, 1997
have been audited by Arthur Andersen LLP.
Before the Acquisition, the Company engaged Ernst & Young LLP as its independent
public accountants. Results for the years ended December 31, 1996 and 1995,
respectively, have been audited by Ernst & Young LLP.
PART III
Item 10. Directors and Executive Officers of the Registrant.
Election of Directors
The Company's Restated Certificate of Incorporation and its Amended and Restated
By-Laws provide that the directors of the Company shall be divided into three
classes, designated as Class I, Class II and Class III, and that at each annual
meeting of stockholders of the Company, successors to the directors, whose terms
expire at that annual meeting will be elected for a three-year term. The classes
are staggered so that the term of one class of directors expires each year. The
terms of the Class I directors expire in 1999, and each third year thereafter;
the terms of the Class II directors expire in 2000 and each third year
thereafter; and the term of the Class III director expires in 1998 and each
third year thereafter. The number of directors constituting the entire Board of
Directors is determined by the vote of a majority of the members of the Board of
Directors and is currently fixed at five members.
Under the Company's Amended and Restated By-Laws, no stockholder may nominate a
candidate for election as a director unless information concerning such
candidate equivalent to the information contained herein about the Board of
Directors' nominees has been submitted to the Board of Directors at least 45
days before the date of the meeting of stockholders for the election of
directors at which such nomination is proposed to be made. Any vacancy occurring
on the Board of Directors for any reason may be filled by a vote of majority of
the directors then in office until the expiration of the term of the class of
directors in which the vacancy exists.
Directors of the Registrant
The following table sets forth information concerning the names, ages, principal
occupations and terms of office of the directors of the Company:
Name Age Class Principal Occupation Term of Office
Philip W. Knisely 43 III Chairman, Chief 1997-1998
Executive Officer and
President of the Company
Steven M. Rales 46 I Chairman of the Board of 1997-1999
Directors of Danaher
Corporation
Mitchell P. Rales 41 II Chairman of the 1997-2000
Executive Committee of
the Board of Directors
of Danaher Corporation
Neil D. Cohen 43 II President of District 1997-2000
Photo, Inc.
K. David Boyer, Jr. 45 I President and Chief 1997-1999
Executive Officer of
TROY Systems, Inc.
Philip W. Knisely became a director, Chief Executive Officer and President
of the Company in August 1997. He was named Chairman of the Board in
November 1997. Mr. Knisely has been President of Constellation Capital
Partners ("Constellation"), LLC since September 1995. Prior to employment
with Constellation, Mr. Knisely was President of AMF Industries.
Steven M. Rales became a director of the Company in August 1997. During the past
five years he has been a principal in a number of private business entities with
interests in manufacturing companies, media operations and publicly traded
securities. Mr. Rales is also Chairman of the Board of Directors and a major
shareholder of Danaher Corporation.
Mitchell P. Rales became a director of the Company in August 1997. During the
past five years he has been a principal in a number of private business entities
with interests in manufacturing companies, media operations and publicly traded
securities. Mr. Rales is also Chairman of the Executive Committee of the Board
of Directors and a major shareholder of Danaher Corporation.
Neil D. Cohen became a director of the Company in August 1997. During the past
five years he has been the President of District Photo, Inc., a photofinisher.
He is also a member of the Board of Trustees of the Photo Marketing Association
International, Inc., a trade association for the photo finishing industry.
K. David Boyer, Jr. became a director of the Company in August 1997. During the
past five years he has been the President and Chief Executive Officer of TROY
Systems Inc., a provider of high technology business solutions. He is also a
director of Franklin National Bank.
Steven M. Rales and Mitchell P. Rales are brothers.
Mr. Cohen and Mr. Boyer are Continuing Directors as defined in Article X of
the Company's Restated Certificate of Incorporation.
Executive Officers of the Registrant
The following table sets forth information concerning the names, ages and
principal occupations of the executive officers of the Company:
Name Age Principal Occupation
Philip W. Knisely 43 Chairman, Chief Executive Officer and
President
John A. Young 32 Vice President, Treasurer, Chief Financial
Officer, and Assistant Secretary
G. Scott Faison 36 Corporate Controller
Michael G. Ryan 45 Vice President
Joseph O. Bunting, III 36 Vice President and Secretary
Philip W. Knisely joined the Company as a director, Chief Executive Officer
and President in August 1997. He was named Chairman of the Board in
November 1997. Mr. Knisely has been President of Constellation since
September 1995. Prior to employment with Constellation, Mr. Knisely was
President of AMF Industries.
John A. Young joined the Company as Vice President and Assistant Secretary
in August 1997. He was named Treasurer and Chief Financial Officer in
November 1997. Mr. Young has been a Vice President of Constellation since
September 1995. Prior to employment with Constellation, Mr. Young was
Director, Corporate Development at AMF Industries.
G. Scott Faison joined the Company as Corporate Controller in December 1997.
Prior to joining the Company, Mr. Faison was Chief Financial Officer of Bullets
Corporation of America. Before employment with Bullets, Mr. Faison spent 10
years at AMF Bowling in various management roles. Among them, Mr. Faison was
Controller of AMF's United Kingdom subsidiary, Divisional Controller of AMF
Consumer Products Business and also served as Corporate Controller.
Michael G. Ryan joined the Company as Vice President in August 1997. Mr. Ryan
has been a Vice President of Constellation since September 1995. During the past
five years he has been an officer in a number of private business entities with
interests in manufacturing companies, media operations and publicly traded
securities.
Joseph O. Bunting, III joined the Company as Vice President in August 1997 and
became Secretary in November 1997. Mr. Bunting has been a Vice President of
Constellation since September 1995. During the past five years he has been an
officer in a number of private business entities with interests in manufacturing
companies, media operations and publicly traded securities.
Each of these executive officers will hold office until his successor is chosen
and qualifies or until his earlier resignation or removal. Any officer may be
removed at any time by the Board of Directors without prejudice to any contract
rights that he may have.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
officers and directors, and persons who own more than 10% of a registered class
of the Company's equity securities, to file reports of ownership and changes in
ownership with the Securities and Exchange Commission. A review of the Company's
records indicates that all reports required under the Section 16(a) rules were
filed in a timely manner during the year, except for the Form 3 for G. Scott
Faison. A report has now been filed.
Item 11. Executive Compensation.
Summary Compensation Table
The following table sets forth certain information with respect to compensation
paid or accrued by the Company during each of the three fiscal years ended
December 31, 1997, 1996 and 1995 to (i) the present and former chief executive
officers of the company and (ii) the two individuals who did not hold executive
officer positions as of December 31, 1997, but held such positions during 1997
and whose compensation during 1997 placed them among the four most highly
compensated executive officers. All other current executive officers'
compensation for 1997 is below the $100,000 disclosure threshold.
Long-Term Compensation
Awards
Annual Compensation ---------------------------
Restricted Securities All Other
Name and Principal ----------------- Stock Underlying Compensation
Position Year Salary($) Bonus($) Awards($) Options(#) ($)
Philip W. Knisely (1) 1997 $ --- $ --- $ --- --- $ ---
Chairman, President
and Chief Executive
Officer
Donald K. Farrar 1997 337,500 --- --- --- 2,334,881(3)
Former Chairman, 1996 450,000 80,000 196,875(2) 115,000 10,350
President and Chief 1995 450,000 90,000 --- 70,000 8,359
Executive Officer
John J. Carr 1997 254,833 --- --- --- 1,201,781(4)
Former Executive 1996 260,000 60,000 --- 25,000 9,270
Vice President 1995 240,000 65,000 --- 25,000 245
William M. Brown 1997 178,000 --- --- --- 1,056,774(5)
Former Chief 1996 255,000 50,000 --- 20,000 9,135
Financial Officer and 1995 230,000 55,000 --- 20,000 7,105
Corporate Controller
(1)Philip W. Knisely became Chief Executive Officer, President and a Director
in August 1997. Mr. Knisely did not receive any form of compensation from the
Company during fiscal year 1997.
(2)None of the 35,000 shares subject to Mr. Farrar's 1996 restricted stock
award were outstanding on December 31, 1997. While outstanding during 1997,
there were no dividends paid on the shares of restricted stock. The severance
in Note (3) below includes any payment for vested shares of restricted stock.
All other shares were canceled upon his termination of employment in
September 1997.
(3)Includes $2,292,797 in severance, $2,375 contribution by the Company to the
Employees Stock Savings Plan account, $5,738 of life insurance premiums paid
by the Company on his behalf and $33,971 in other fringe benefits. The
severance payment was (i) paid during the post-Acquisition taxable year in
which Mr. Farrar was neither an executive officer or a director of the
Company and (ii) made pursuant to a contract dated September 13, 1993 and
includes all amounts due from the Company under the Restricted Stock Plan,
Supplemental Pension Plan, and Stock Option Plan.
(4)Includes $1,183,715 in severance, $2,375 contribution by the Company to the
Employees Stock Savings Plan account, $4,174 of life insurance premiums paid
by the Company on his behalf and $11,517 in other fringe benefits. The
severance payment was (i) paid during the post-Acquisition taxable year in
which Mr. Carr was neither an executive officer or a director of the Company
and (ii) made pursuant to a contract dated January 9, 1987 and includes all
amounts due from the Company under the Restricted Stock Plan, Supplemental
Pension Plan, and Stock Option Plan.
(5)Includes $1,037,898 in severance, $2,375 contribution by the Company to the
Employees Stock Savings Plan account, $3,267 of life insurance premiums paid
by the Company on his behalf and $13,234 in other fringe benefits. The
severance payment was (i) paid during the post-Acquisition taxable year in
which Mr. Brown was neither an executive officer or a director of the Company
and (ii) made pursuant to a contract dated August 5, 1992 and includes all
amounts due from the Company under the Restricted Stock Plan, Supplemental
Pension Plan, and Stock Option Plan.
Option Grants in Last Fiscal Year
There were no options granted during fiscal 1997 to any of the executive
officers listed in the Compensation Table.
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option
Values
There were no options outstanding at fiscal year-end. All options were
accelerated, vested and paid out in fiscal 1997 as a result of the Acquisition
of the Company in August 1997.
Pension Plans
The following table shows the estimated maximum annual retirement benefits
payable to a covered participant under the Imo Industries Inc. U.S. Salaried
Plan (the "Salaried Plan"). Benefits were calculated assuming participants and
their spouses elect a straight-life annuity rather than a joint and survivor or
other form of annuity, in which case benefits would generally be lower than
shown in the table. Benefits are not subject to any deduction for Social
Security or other offset amounts.
Pension Plan Table
Years of Service
------------------------------------------------------------------
Final
Average
Earnings 10 Years 15 Years 20 Years 25 Years 30 Years 35 Years
$100,000 $16,089 $24,134 $32,178 $40,223 $43,635 $47,047
150,000 25,089 37,634 50,178 62,723 68,135 73,547
200,000 26,889 40,334 53,778 67,223 73,035 78,847
250,000 26,889 40,334 53,778 67,223 73,035 78,847
300,000 26,889 40,334 53,778 67,223 73,035 78,847
350,000 26,889 40,334 53,778 67,223 73,035 78,847
400,000 26,889 40,334 53,778 67,223 73,035 78,847
450,000 26,889 40,334 53,778 67,223 73,035 78,847
500,000 26,889 40,334 53,778 67,223 73,035 78,847
550,000 26,889 40,334 53,778 67,223 73,035 78,847
Final average earnings are based upon the highest 60 months of compensation
during the participant's last 120 months of service. The annual compensation
taken into account under the Salaried Plan is the actual monthly salary and
bonus earned in that year.
As of December 31, 1997, the persons named in the Summary Compensation Table had
the following years of benefit service as defined under the Salaried Pension
Plans: Mr. Knisely, 0 years; Mr. Farrar, 4.0 years; Mr. Carr, 31.0 years; and
Mr. Brown, 5.3 years. To be vested in the Salaried Plan benefits, a participant
must have over four years and six months of service.
While the Company was a wholly owned subsidiary of Transamerica Corporation, the
Company's employees participated in the Pension Plan for Salaried U.S. Employees
of Transamerica Corporation and Affiliates (the "Transamerica Pension Plan").
The Transamerica Pension Plan provides that, as long as the Company remains
independent, employees of the Company will continue to vest in their benefits
accrued prior to December 31, 1986, as calculated under the Transamerica Pension
Plan, taking into account only benefit service credited and compensation earned
prior to December 31, 1986, and will continue to receive credit toward the
service requirement for subsidized early retirement benefits and pre-retirement
death benefits, based upon their service with the Company after December 31,
1986. Accrued benefits under the Salaried Plan will be offset by any vested
benefits under the Transamerica Pension Plan.
The benefits shown in the Pension Plan Table reflect the applicable limitations
imposed by Sections 415 and 401(a)(17) of the Code. Benefits payable pursuant to
the Salaried Plan are restricted in accordance with the limitations of Sections
415 and 401(a)(17) of the Code. The Supplemental Plan under which the Company
made supplemental pension payments to employees whose benefits under the
Salaried Plan were reduced by the limitations imposed under Section 415 and
401(a)(17) of the Code was terminated in November 1997. There were no
contributions in fiscal year 1997 to the Supplemental Plan. As part of their
severance packages with the Company, Messrs. Farrar, Carr and Brown waived any
and all claims to any benefits due to them under the Supplemental Plan.
Compensation Committee
The members of the Compensation Committee are Steven M. Rales and Mitchell
P. Rales.
Executive Compensation
Total executive compensation is comprised of two principal components: annual
salary and annual incentive compensation. The Committee endeavors to establish
total compensation packages for each executive officer equal to the value of
that executive's services determined by both what other companies have or might
pay the executive for his services and his relationship to other executive
positions within the Company, as negotiated at the date of hire. This base is
then adjusted annually based on the Committee's assessment of individual
performance.
A fundamental element of the Company's compensation policy is that a substantial
portion of each executive's compensation be directly related to the success of
the Company. This is accomplished in two ways. First, the annual incentive
compensation program requires that the Company, or the Company's businesses for
which the executive is directly responsible, achieve certain minimum targets in
sales, profitability, working capital management and economic value added. If
performance for the year is below minimum targeted levels (generally
approximately three-quarters of the sales and profitability target must be
achieved and working capital management must exceed prior year levels) there
would be no payment. If the minimum targets are met or exceeded, each executive
receives a formula-based payout taking into account the Company's or the
Company's businesses for which the executive is directly responsible performance
and the successful completion of defined personal objectives.
CEO Compensation
Mr. Knisely did not receive any compensation from the Company during fiscal
year 1997.
Compensation of Directors
Independent directors, currently Mr. Boyer and Mr. Cohen, receive attendance
fees of $1,000 per meeting, excluding telephonic meetings, together with a
quarterly retainer of $2,500.
Item 12. Security Ownership of Certain Beneficial Owners and
Management.
Certain Beneficial Owners
The following table sets forth, as of March 24, 1998, the amount and percentage
of the Company's Common Stock beneficially owned by each person or group who is
known to the Company to be the beneficial owner of more than 5% of the Company's
outstanding common stock.
Shares Percentage of
Name and Address Beneficially Outstanding
Owned Common Stock
II Acquisition Corp. 15,905,971 92.8%
9211 Forest Hill Avenue
Suite 109
Richmond, Virginia 23235
Steven M. Rales (1) 15,905,971 92.8%
1250 24th Street, N.W.
Suite 800
Washington, DC 20037
Mitchell P. Rales (1)
1250 24th Street, N.W. 15,905,971 92.8%
Suite 800
Washington, DC 20037
(1)Steven M. Rales and Mitchell P. Rales beneficially own the Shares through
their controlling equity interest in Acquisition Corp.
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 March 24, 1998 by each director
and executive officer and the directors and executive officers as a group.
Shares Percentage of
Name of Individual or Identity Beneficially Outstanding
of Group Owned Common Stock
Philip W. Knisely --- ---
Steven M. Rales (1) 15,905,971 92.8%
Mitchell P. Rales (1) 15,905,971 92.8%
Neil D. Cohen --- ---
K. David Boyer, Jr. --- ---
John A. Young --- ---
G. Scott Faison --- ---
Michael G. Ryan --- ---
Joseph O. Bunting, III --- ---
All directors and executive 15,905,971 92.8%
officers as a group
(1)Steven M. Rales and Mitchell P. Rales beneficially own the Shares through
their controlling equity interest in Acquisition Corp.
Item 13. Certain Relationships and Related Transactions.
On August 28, 1997, Acquisition Corp., acquired 92.8% of the Company's
outstanding shares of common stock. The consideration paid was $7.05 in
cash per share of common stock or $112.1 million in total. Messrs. Rales
and Rales are directors and controlling stockholders of Acquisition Corp.
Messrs. Knisely, Young, Ryan and Bunting are all executive officers of the
Company and are all officers and stockholders and executive officers of
Acquisition Corp. Mr. Knisely is also a director of the Company.
On August 29, 1997, the Company and certain of its subsidiaries sold
substantially all of the assets of its Instrumentation Business Segment to
Danaher Corporation, a NYSE listed company, and certain of its subsidiaries for
a purchase price of $85 million in cash and the assumption of liabilities.
Steven M. Rales and Mitchell P. Rales, directors and beneficial owners of 92.8%
of the Company, are major shareholders of Danaher Corporation. Steven M. Rales
is Chairman of the Board of Directors of Danaher Corporation and Mitchell P.
Rales is Chairman of the Executive Committee of the Board of Directors of
Danaher Corporation. The transaction was negotiated at arm's length and the
Company received the opinion of an independent investment bank as to the
fairness to the Company, from a financial standpoint, of the financial terms of
the transaction taken as a whole.
On December 31, 1997, the Company sold certain assets of its Delroyd business
unit to Nuttall Gear LLC for $2.3 million in cash. Also on December 31, 1997,
the Company acquired certain assets of the Centric Clutch business unit of
Ameridrives International, L.P. for $1.3 million in cash. Nuttall Gear LLC and
Ameridrives International, L.P. are subsidiaries of American Enterprise MPT
Corporation. Steven M. Rales and Mitchell P. Rales collectively own 76% of
American Enterprise MPT Corporation. Messrs. Rales and Rales are directors and
beneficial owners of 92.8% of the Company. The transactions were negotiated on
an arms length basis, and were based on the valuations of independent
appraisers.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) (1) Financial Statements
The Financial Statements and Supplementary Data required by Part II,
Item 8 of Form 10-K are included in this Part IV of this Form 10-K Report
as follows:
Consolidated Financial Statements Page
Consolidated Statements of Income for the period from
January 1, 1997 to August 28, 1997 (pre-Acquisition) and the
period from August 29, 1997 to December 31, 1997 (post-
Acquisition) and the Years Ended December 31, 1996 and 1995........F-1
Consolidated Balance Sheets at December 31, 1997 and
1996...............................................................F-2
Consolidated Statements of Cash Flows for the period from
January 1, 1997 to August 28, 1997 (pre-Acquisition) and the
period from August 29, 1997 to December 31, 1997 (post-
Acquisition) and the Years Ended December 31, 1996 and 1995........F-3
Consolidated Statements of Shareholders' Equity (Deficit)
for the period from January 1, 1997 to August 28, 1997
(pre-Acquisition) and the period from August 29, 1997 to
December 31, 1997 (post-Acquisition) and the for the
Years Ended December 31, 1996 and 1995.............................F-4
Notes to Consolidated Financial Statements..........................F-5
Reports of Independent Public Accountants...........................F-32
Quarterly Financial Information (unaudited).........................F-35
(2) Financial Statement Schedules
The following consolidated financial statement schedule for the period
from January 1, 1997 to August 28, 1997 (pre-Acquisition) and the period
from August 29, 1997 to December 31, 1997 (post-Acquisition) and the years
ended December 31, 1996 and 1995 is filed as part of this Report and
should be read in conjunction with the Company's Consolidated Financial
Statements.
Schedule II Page
Valuation and Qualifying Accounts.....................................S-1
All other schedules for which provision is made in the applicable
regulation of the Securities and Exchange Commission are omitted because
they are not required under the related instructions or because the
required information is given in the financial statements or notes thereto.
(3) Exhibits
The Exhibits listed in the accompanying Index to Exhibits are
filed as part of this Report.
(b) Reports on Form 8-K
On November 12, 1997, the Company filed a report on Form 8-K, reporting
under Item 4, disclosing that on November 5, 1997 the Company dismissed
Ernst & Young LLP as its principal independent accountants, and engaged
Arthur Andersen LLP as its principal independent accountants to audit and
report on the financial statements of the company for the fiscal year
ending December 31, 1997.
On February 3, 1998, the Company filed a report on Form 8-K, reporting
under Item 5, disclosing Company's announcement on February 2, 1998 that it
had entered into an agreement to sell its Roltra Morse S.p.A. subsidiary to
Magna International Inc.
On March 24, 1998, the Company filed a report on Form 8-K, reporting under
Items 2 and 7, disclosing that on February 27, 1998, the Company had sold
all outstanding shares of capital stock of its Roltra Morse S.p.A.
subsidiary to Magna International Inc.
EXHIBIT INDEX
Exhibit No. Note No. Description
3(i) (23) The Company's Restated Certificate of Incorporation, as
amended March 10, 1989 and November 10, 1992 and
April 30, 1997
3(ii) The Company's Bylaws
4.1 (A) (18) Indenture, dated as of April 15, 1996,
between the Company and IBJ Schroder Bank & Trust
Company, as Trustee
(B) Second Supplemental Indenture, dated as of August 26,
1997, between the Company and IBJ Schroder Bank & Trust
Company, as Trustee
4.3 (18) Registration Rights Agreement,dated as of April 23,
1996, between the Company and the Initial Purchasers
4.3 (A) (20) Rights Agreement dated as of April 30, 1997 between the
Company and First Chicago Trust Company of New York,
which includes, as Exhibit A thereto, the Certificate of
Designation, Preferences and Rights of Series B Junior
Participating Preferred Stock of Imo Industries Inc.,
as Exhibit B thereto, the Form of Rights Certificate and
as Exhibit C thereto, the Summary of Rights to
Purchase Preferred Stock.
(B) (21) Amendment to Rights Agreement dated June 25, 1997
between the Company and First Chicago Trust Company of
New York
(C) (22) Second Amendment to Rights Agreement dated July 25, 1997
between the Company and First Chicago Trust Company
of New York
(D) (24) Third Amendment to Rights Agreement dated August 21,
1997 between the Company and First Chicago Trust Company
of New York
Management Contracts, Compensatory Plans and Arrangements:
10.1 (14) Amended and restated Equity Incentive Plan for Key
Employees
10.2 (16) Amended and restated 1988 Equity Incentive Plan for
Outside Directors
10.3 (15) 1995 Equity Incentive Plan for Outside Directors
10.4 (17) The Company's Supplemental Retirement Income Plan
10.5 (8) Change in Control Agreement dated January 9, 1987
between the Company and John J. Carr
10.6 (8) Change in Control Agreement dated August 5, 1992
between the Company and William M. Brown
10.7 (8) Change in Control Agreement dated August 13, 1992
between the Company and Thomas J. Bird
10.8 (10) Change in Control Agreement dated September 13, 1993
between the Company and Donald K. Farrar
10.9 (19) Change in Control Agreement dated May 21, 1996
between the Company and Donald N. Rosenberg
10.10 (19) Severance Agreement dated February 6, 1997 between Imo
Industries (UK) Limited and Brian Lewis
10.11 (19) Consultancy Agreement dated February 13, 1997 between
Imo Industries Inc. and Brian Lewis
Other Material Contracts:
10.12 (A) (3), (4) The Company's Salaried Employees Stock Savings Plan as
amended on July 1, 1987 and as amended on June 14, 1988
(B) (7) Amendment dated March 16, 1989 to the
Imo Industries Inc. Employees Stock Savings Plan
(C) (5) Amendments dated September 6, 1990 and
February 14, 1991 to the Imo Industries Inc. Employees
Stock Savings Plan
(D) (6) Amendment dated May 9, 1991 to the Imo
Industries Inc. Employees Stock Savings Plan
(E) (8) Amendments dated December 30, 1991 and August 3, 1992
to the Imo Industries Inc. Employees Stock Savings Plan
(F) (12) Trust Agreement for the Imo Industries
Inc. Employees Stock Savings Plan as of March 1, 1995
between the Company and Eagle Trust Company
10.13 (1) Distribution Agreement dated December 18, 1986 between
Transamerica Corporation and the Company
10.14 (1) Tax Agreement between the Company and Transamerica
Corporation
10.15 (J) (9) Warrant dated July 15, 1993 issued by the Company to
The Prudential Insurance Company of America
10.16 (2) Stock Purchase Agreement dated November 30, 1987
between the Company and TRIFIN B.V.
10.17 (5) Stock Purchase Agreement dated as of May 31, 1990
among United Scientific Holdings PLC, United Scientific
Inc. and the Company
10.18 (10) Stock Purchase Agreement dated as of October 28, 1993
among the Company, Imo Industries GmbH, Mark Controls
Corporation and Mark Controls GmbH i. Gr., as amended
10.19 (A) (18) Credit Agreement dated as of April 29, 1996
among the Company, as Borrower, Varo Inc., as Guarantor,
Warren Pumps Inc. as Guarantor, the Institutions from
time to time party thereto as Lenders and Issuing Banks,
and Citicorp USA, Inc., as Agent
10.19 (B) (19) First Amendment dated as of February 19, 1997
to the Credit Agreement dated as of April 29,
1996 among the Company, as Borrower, Varo Inc., as
Guarantor, Warren Pumps, Inc. as Guarantor, the
Institutions from time to time party thereto as Lenders
and Issuing Banks, and Citicorp USA, Inc., as Agent
10.20 (A) (11) Asset Purchase Agreement dated as of November 4, 1994
by and among the Company, Imo Industries International
Inc.and Mannesmann Capital Corporation
(B) (12) Agreement, Amendment and Waiver dated January 17,
1995 by and among the Company and Mannesmann Capital
Corporation
10.21 (12) Asset and Stock Purchase Agreement dated as of January
1, 1995 by and among the Company and Thermo Jarrell
Ash Corporation
10.22 (13) Purchase and Sale Agreement among Litton Industries,
Inc., and Litton Systems, Inc. and Imo Industries Inc.,
Baird Corporation, Optic-Electronic International, Inc.
and Varo Inc. dated May 11, 1995 and amended and
restated as of June 2, 1995
10.23 (A) (19) Asset Purchase Agreement dated as of September 13, 1996
between Varo Inc. and Varo Acquisition Corp.
(B) (19) Reinstatement Agreement dated January 28, 1997
between Varo Inc. and Varo Acquisition Corp.
10.24 (21) Agreement and Plan of Merger, dated June 26, 1997,
among United Dominion Industries Limited, UD Delaware
Corp. and Imo Industries Inc.
10.25 (22) Share Purchase Agreement, dated July 25, 1997,
between II Acquisition Corp. and the Company
10.26 (25) Asset Purchase Agreement dated as of August 29,
1997 among the Registrant and certain of its
subsidiaries and Danaher Corporation and certain of
its subsidiaries
10.27 (A) (26) Credit and Guaranty Agreement dated as of August
29, 1997 among the Company, as Borrower, II Acquisition
Corp., as Guarantor, Certain Financial Institutions, as
Lenders, The Bank of Nova Scotia, as Administrative and
Documentation Agent and Nationsbanc Capital Markets,
Inc., as Syndication Agent for the Lenders
(B) First Amendment to Credit and Guaranty Agreement
dated as of November 6, 1997
(C) Second Amendment to Credit and Guaranty Agreement
dated as of December 2, 1997
(D) Third Amendment to Credit and Guaranty Agreement
dated as of February 16, 1998
10.28 (27) Stock Purchase Agreement dated as of January 30, 1998
between the Registrant and Magna International Inc.
21 Subsidiaries of the Company
27 Financial Data Schedule as of December 31, 1997
- -----------------------------------------------
NOTES
(1) Incorporated by reference to the Company's Form 8 Amendment No. 2 filed
with the Commission on December 9, 1986 amending the Company's Form 10 as
filed with the Commission on October 15, 1986.
(2) Incorporated by reference to the Company's Form 8-K filed with the
Commission on February 17, 1987.
(3) Incorporated by reference to the Imo Industries Inc. Employees Stock
Savings Plan Form 11-K filed with the Commission on April 13, 1988.
(4) Incorporated by reference to the Company's Form 10-K filed with the
Commission on March 29, 1990.
(5) Incorporated by reference to the Company's Form 10-K filed with the
Commission on March 28, 1991.
(6) Incorporated by reference to the Company's Form S-8 filed with the
Commission on June 17, 1991.
(7) Incorporated by reference to the Company's Form 10-K filed with the
Commission on March 26, 1992.
(8) Incorporated by reference to the Company's Form 10-K filed with the
Commission on April 19, 1993.
(9) Incorporated by reference to the Company's Form 10-K/A filed with the
Commission on August 6, 1993 amending the Company's Form 10-K as filed
with the Commission on April 19, 1993.
(10) Incorporated by reference to the Company's Form 10-K filed with the
Commission on March 31, 1994.
(11) Incorporated by reference to the Company's Form 10-Q filed with the
Commission on November 14, 1994.
(12) Incorporated by reference to the Company's Form 10-K filed with the
Commission on March 29, 1995.
(13) Incorporated by reference to the Company's Form 8-K filed with the
Commission on June 19, 1995.
(14) Incorporated by reference to the Company's Form S-8 as filed with the
Commission on June 23, 1995, Registration No. 33-60533
(15) Incorporated by reference to the Company's Form S-8 as filed with the
Commission on June 23, 1995, Registration No. 33-60535
(16) Incorporated by reference to the Company's Form 10-Q filed with the
Commission on November 13, 1995.
(17) Incorporated by reference to the Company's Form 10-K filed with the
Commission on March 28, 1996.
(18) Incorporated by reference to the Company's Form S-4 (Registration No.
333-3477) filed with the Commission on May 10, 1996.
(19) Incorporated by reference to the Company's Form 10-K filed with the
Commission on March 27, 1997.
(20) Incorporated by reference to the Company's Form 8-A Registration Statement
filed with the Commission on May 2, 1997.
(21) Incorporated by reference to the Company's Schedule 14D-9
Solicitation/Recommendation Statement filed with the Commission on July 2,
1997.
(22) Incorporated by reference to the Company's Schedule 14D-9
Solicitation/Recommendation Statement filed with the Commission on July
31, 1997.
(23) Incorporated by reference to the Company's Form 10-Q filed with the
Commission on August 14, 1997.
(24) Incorporated by reference to the Company's Form 8-K filed with the
Commission on August 27, 1997.
(25) Incorporated by reference to the Company's Form 8-K filed with the
Commission on September 15, 1997.
(26) Incorporated by reference to the Company's Form 10-Q filed with the
Commission on November 14, 1997.
(27) Incorporated by reference to the Company's Form 8-K filed with the
Commission on March 13, 1998.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, Imo Industries Inc. has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Date: March 27, 1998
IMO INDUSTRIES INC.
By: /s/ JOHN A. YOUNG
John A. Young
Vice President and
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of Imo Industries Inc.
and in the capacities and on the dates indicated.
/s/ PHILIP W. KNISELY Chief Executive Officer,
Philip W. Knisely President and Director
(principal executive officer) March 27, 1998
/s/ JOHN A. YOUNG Vice President and
John A. Young Chief Financial Officer
(principal financial officer) March 27, 1998
/s/ G. SCOTT FAISON Corporate Controller
G. Scott Faison (principal accounting officer) March 27, 1998
/s/ STEVEN M. RALES Director March 27, 1998
Steven M. Rales
/s/ MITCHELL P. RALES Director March 27, 1998
Mitchell P. Rales
/s/ NEIL D. COHEN Director March 27, 1998
Neil D. Cohen
/s/ K. DAVID BOYER, JR. Director March 27, 1998
K. David Boyer, Jr.
<TABLE>
Imo Industries Inc. and Subsidiaries
Consolidated Statements of Income
(Dollars in thousands except per share amounts)
<CAPTION>
Post-Acquisition Pre-Acquisition
August January 1,
29, 1997 to 1997 to Year Ended December 31,
December August -------------------
31, 1997 28, 1997 1996* 1995*
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net Sales $106,711 $210,151 $309,511 $297,114
Cost of products sold 76,597 145,276 220,589 212,787
- -------------------------------------------------------------------------------------
Gross Profit 30,114 64,875 88,922 84,327
Selling, general and administrative expenses 21,411 46,724 62,514 60,457
Research and development expenses 1,913 3,636 4,455 3,930
Unusual items 5,000 26,344 17,440 8,124
- -------------------------------------------------------------------------------------
Income (Loss) From Operations 1,790 (11,829) 4,513 11,816
Interest expense 8,069 18,190 25,981 22,648
Interest income (622) (921) (1,450) (2,169)
Other (income) expense (336) 513 355 (370)
Equity in loss (income) of unconsolidated
companies 133 386 32 (302)
- -------------------------------------------------------------------------------------
Income (Loss) From Continuing Operations
Before Income Taxes and Extraordinary Item (5,454) (29,997) (20,405) (7,991)
Income taxes (benefit):
Current 235 1,254 2,663 1,831
Deferred --- --- 10,000 (17,000)
- -------------------------------------------------------------------------------------
Total Income Taxes (Benefit) 235 1,254 12,663 (15,169)
- -------------------------------------------------------------------------------------
Income (Loss) From Continuing Operations
Before Extraordinary Item (5,689) (31,251) (33,068) 7,178
Discontinued operations:
Income (loss) from operations (net of
income tax expense of $77, $664, $1,037
and $1,256) (3,753) 2,372 (8,705) 5,351
Estimated (loss) gain on disposal (net
of income taxes of $5.2 million in 1995) (8,430) --- (8,142) 21,625
- -------------------------------------------------------------------------------------
Total Income (Loss) from
Discontinued Operations (12,183) 2,372 (16,847) 26,976
- -------------------------------------------------------------------------------------
Extraordinary Item - Loss on
Extinguishment of Debt (3,348) --- (8,455) (4,444)
- -------------------------------------------------------------------------------------
Net Income (Loss) $ (21,220) $ (28,879)$(58,370) $ 29,710
=====================================================================================
Earnings (loss) per share, basic and diluted:
Continuing operations before
extraordinary item $ (.33) $ (1.82) $ (1.93) $ .42
Discontinued operations (.71) .14 (.99) 1.58
Extraordinary item (.20) --- (.49) (.26)
- -------------------------------------------------------------------------------------
Net income (loss) $ (1.24) $ (1.68) $ (3.41) $ 1.74
- -------------------------------------------------------------------------------------
Weighted average number of shares 17,127,859 17,126,192 17,100,359 17,048,622
outstanding
=====================================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
*Restated to conform to 1997 presentation.
F-1
</TABLE>
Imo Industries Inc. and Subsidiaries
Consolidated Balance Sheets
(Dollars in thousands except par value)
December 31, 1997 1996*
- -----------------------------------------------------------------
Assets
Current Assets
Cash and cash equivalents $ 3,528 $ 1,419
Trade accounts and notes receivable, less
allowance of $1,435 in 1997
and $1,346 in 1996 53,732 47,088
Inventories-net 64,888 68,465
Deferred income taxes 10,088 9,165
Net assets of discontinued operations - current --- 11,749
Prepaid expenses and other current assets 7,568 2,992
- -----------------------------------------------------------------
Total Current Assets 139,804 140,878
- -----------------------------------------------------------------
Property, Plant and Equipment
Land 5,351 7,757
Buildings and improvements 22,526 34,068
Machinery and equipment 36,734 94,146
- -----------------------------------------------------------------
64,611 135,971
Less allowances for depreciation and
amortization (3,202) (69,225)
- ------------------------------------------------------------------
Net Property, Plant and Equipment 61,409 66,746
Intangible Assets, Principally Goodwill 233,054 58,670
Investments in and Advances to
Unconsolidated Companies 4,780 5,704
Net Assets of Discontinued Operations -
Noncurrent 14,927 36,927
Other Assets 9,326 21,997
- -----------------------------------------------------------------
Total Assets $ 463,300 $ 330,922
=================================================================
Liabilities and Shareholders' Equity
Current Liabilities
Notes payable $ 28,238 $ 21,998
Trade accounts payable 22,750 18,765
Accrued expenses and other liabilities 53,744 28,379
Accrued costs related to discontinued
operations 4,392 8,586
Income taxes payable 5,929 7,359
Current portion of long-term debt 6,082 11,666
- -----------------------------------------------------------------
Total Current Liabilities 121,135 96,753
- -----------------------------------------------------------------
Long-Term Debt 192,319 245,007
Deferred Income Taxes 5,034 3,890
Accrued Postretirement Benefits - Long-Term 17,092 17,418
Accrued Pension Expense and Other Liabilities 37,473 24,241
- -----------------------------------------------------------------
Total Liabilities 373,053 387,309
- -----------------------------------------------------------------
Shareholders' Equity (Deficit)
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 17,127,859 in 1997
and 18,796,897 in 1996 17,128 18,797
Additional paid-in capital 106,805 80,466
Retained earnings (deficit) (33,016) (134,962)
Cumulative foreign currency translation
adjustments (670) 554
Minimum pension liability adjustment --- (2,503)
Unearned compensation --- (719)
Treasury stock at cost - 1,672,788 shares in 1996 --- (18,020)
- ------------------------------------------------------------------
Total Shareholders' Equity (Deficit) 90,247 (56,387)
- ------------------------------------------------------------------
Total Liabilities and Shareholders' Equity
(Deficit) $ 463,300 $ 330,922
==================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
* Restated to conform to 1997 presentation.
F-2
<TABLE>
Imo Industries Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Dollars in thousands)
<CAPTION>
Post-Acquisition Pre-Acquisition
August January
29, 1997 to 1, 1997 to Year Ended December 31,
December August -------------------
31, 1997 28, 1997 1996* 1995*
- ---------------------------------------------------------------------------------------
OPERATING ACTIVITIES
<S> <C> <C> <C> <C>
Net income (loss) $ (21,220) $ (28,879) $ (58,370) $ 29,710
Adjustments to reconcile net income
(loss) to net cash used by continuing operations:
Discontinued operations 12,183 (2,372) 16,847 (5,351)
Depreciation 3,674 6,747 10,123 10,287
Amortization 2,007 1,867 3,275 3,095
Provision (benefit) for deferred
income taxes --- --- 10,000 (17,000)
Extraordinary item 3,348 --- 8,455 4,444
Gain on sale of segment --- --- --- (21,625)
Unusual items 5,000 26,344 17,440 8,124
Other 369 750 1,592 94
Other changes in operating assets and liabilities:
(Increase) decrease in accounts and
notes receivable (6,467) 1,730 (5,440) 566
Decrease (increase) in inventories 1,759 (1,930) 4,300 (6,253)
Decrease in accounts payable and accrued
expenses (17,028) (9,794) (16,009) (14,078)
Other operating assets and liabilities (1,608) (3,855) 3,038 (3,338)
- --------------------------------------------------------------------------------------
Net cash used by continuing operations (17,983) (9,392) (4,749) (11,325)
Net cash used by discontinued operations (1,342) (1,377) (10,353) (20,008)
- --------------------------------------------------------------------------------------
Net Cash Used by Operating Activities (19,325) (10,769) (15,102) (31,333)
- --------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Net proceeds from sale of businesses and
sales of property, plant and equipment 88,024 25,235 12,570 174,920
Purchases of property, plant and equipment (3,740) (4,555) (10,032) (13,155)
Acquisitions, net of cash acquired --- --- (7,218) (5,247)
Net investing activities of discontinued
operations (5,104) (3,692) (8,072) (10,858)
Other (497) 141 63 (133)
- --------------------------------------------------------------------------------------
Net Cash Provided by (Used by)
Investing Activities 78,683 17,129 (12,689) 145,527
- --------------------------------------------------------------------------------------
FINANCING ACTIVITIES
(Decrease) increase in notes payable (15,900) 18,786 6,159 23,607
Proceeds from long-term borrowings 129,270 119 266,895 5,257
Principal payments on long-term debt (164,719) (25,792) (233,350) (166,196)
Payment of debt financing costs (5,368) (384) (14,660) (401)
Proceeds from stock options exercised --- --- --- 535
Other 281 (102) 89 59
- -------------------------------------------------------------------------------------
Net Cash (Used by) Provided by Financing
Activities (56,436) (7,373) 25,133 (137,139)
- -------------------------------------------------------------------------------------
Effect of exchange rate changes on cash 453 (253) 80 222
- -------------------------------------------------------------------------------------
Increase (Decrease) in Cash and Cash
Equivalents 3,375 (1,266) (2,578) (22,723)
Cash and cash equivalents at beginning
of the period 153 1,419 3,997 26,720
=====================================================================================
Cash and Cash Equivalents at End of the
Period $ 3,528 $ 153 $ 1,419 $ 3,997
=====================================================================================
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 13,344 $ 19,564 $ 36,664 $ 39,519
Income taxes $ 1,263 $ 2,006 $ 4,798 $ 6,341
The accompanying notes are an integral part of these consolidated financial
statements.
*Restated to conform to 1997 presentation.
F-3
</TABLE>
<TABLE>
Imo Industries Inc. and Subsidiaries
Consolidated Statements of Shareholders' Equity (Deficit)
(Dollars in thousands)
<CAPTION>
Cumulative
Foreign Minimum
AdditionalRetained Currency Pension Unearned
Common Paid-in Earnings Translation Liability Compen Treasury
Stock Capital (Deficit)Adjustment Adjustment sation Stock Total
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at
January 1, 1995 * $18,680 $79,789 $(106,302) $ (1,549) $ (853) $ --- $(18,020) $(28,255)
Net income --- --- 29,710 --- --- --- --- 29,710
Foreign currency
translation adjustments --- --- --- 2,586 --- --- --- 2,586
Minimum pension
liability adjustment --- --- --- --- (948) --- --- (948)
Shares issued under
stock option plan 73 462 --- --- --- --- --- 535
Restricted shares
issued under the equity
incentive plans 3 24 --- --- --- --- --- 27
- ------------------------------------------------------------------------------------------------
Balance at
December 31, 1995 * 18,756 80,275 (76,592) 1,037 (1,801) --- (18,020) 3,655
Net income (loss) --- --- (58,370) --- --- --- --- (58,370)
Foreign currency
translation adjustments --- --- --- (483) --- --- --- (483)
Minimum pension
liability adjustment --- --- --- --- (702) --- --- (702)
Restricted shares
issued under the equity
incentive plans 41 191 --- --- --- (166) --- 66
Other --- --- --- --- --- (553) --- (553)
- -------------------------------------------------------------------------------------------------
Balance at
December 31, 1996 * 18,797 80,466 (134,962) 554 (2,503) (719) (18,020) (56,387)
Net income (loss) --- --- (28,879) --- --- --- --- (28,879)
Foreign currency
translation adjustments --- --- --- (3,346) --- --- --- (3,346)
Restricted shares
issued under the equity
incentive plans 4 11 --- --- --- 48 --- 63
- ------------------------------------------------------------------------------------------------
Pre-Acquisition
Balance at
August 28, 1997 18,801 80,477 (163,841) (2,792) (2,503) (671) (18,020) (88,549)
- ------------------------------------------------------------------------------------------------
Adjustment to new cost
basis of II Acquisition
Corp. on August
29, 1997 (1,673) 26,328 152,045 2,792 2,503 671 18,020 200,686
- ------------------------------------------------------------------------------------------------
Post-Acquisition--
Balance at August
29, 1997 17,128 106,805 (11,796) --- --- --- --- 112,137
Net income (loss) --- --- (21,220) --- --- --- --- (21,220)
Foreign currency
translation adjustments --- --- --- (670) --- --- --- (670)
- ------------------------------------------------------------------------------------------------
Balance at
December 31, 1997 $17,128 $106,805 $(33,016) $(670) $ --- $ --- $ --- $ 90,247
================================================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
* Restated to conform to current year presentation.
F-4
</TABLE>
Notes to Consolidated Financial Statements
Note 1 Significant Accounting Policies
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.
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 being 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 on the
estimated useful lives of the assets as follows: buildings, 10 to 40 years and
machinery and equipment, 3 to 15 years.
Earnings Per Share: At December 31, 1997, the Company adopted Financial
Accounting Standards Board ("FASB") Statement No. 128, "Earnings Per Share,"
which specifies the computation, presentation, and disclosure requirements for
earnings per share. Basic and diluted net income (loss) per share for 1997, 1996
and 1995 is calculated based on the actual weighted average shares outstanding.
For 1997 and 1996, outstanding stock options and warrants are not considered as
their effect is antidulutive. In 1995, after the inclusion of 75,453 incremental
shares from dilutive stock options, the diluted earnings per share is the same
as basic earnings per share, due to rounding.
Impact of Recently Issued Accounting Standards: In June 1997, the FASB issued
Statement No. 130, "Reporting Comprehensive Income," which establishes standards
for reporting and display of comprehensive income and its components in a full
set of general purpose financial statements. The impact on the Company's
financial statements compared to information presently available is not expected
to be significant. Also in June 1997, the FASB issued Statement No. 131,
"Disclosures about Segments of an Enterprise and Related Information," which
requires public companies to report financial and descriptive information about
operating segments. The statement intends to align reportable segments and
certain disclosures with how the operations are managed internally. The impact
of this statement on the Company's disclosure is not expected to be significant.
In February 1998, the FASB issued Statement No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits," which adds disclosure
requirements on changes in the benefit obligations and fair values of plan
assets, and eliminates certain disclosures that are no longer useful. These
statements will be adopted by the Company in fiscal year 1998.
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, 1997 and 1996 was $226 million and $48.2
million, respectively, net of respective accumulated amortization of $1.8
million and $12.3 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 and Instrumentation business
segments in discontinued operations. Certain prior year amounts have been
reclassified to conform to the current year presentation.
Note 2 Acquisition By II Acquisition Corp.
On August 28, 1997, II Acquisition Corp. ("Acquisition Corp.") acquired
approximately 93% of the Company's outstanding shares of common stock pursuant
to its tender offer for all outstanding shares of the common stock of the
Company (the "Acquisition"). 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. The purchase price was allocated based on the
estimated fair values at the date of acquisition and resulted in an excess of
purchase price over assets acquired, liabilities assumed, and additional
purchase liabilities recorded, for continuing operations of $228 million, which
is being amortized on a straight-line basis over 40 years. The purchase price
allocation has been completed on a preliminary basis, and as a result,
adjustments to the carrying value of assets and liabilities may occur.
Additional purchase liabilities recorded included approximately $18.6 million
for severance and related costs, and consolidation of certain acquired
facilities. At December 31, 1997, approximately $10.5 million of these costs
remained on the balance sheet. The Company expects to complete its termination
of employees and consolidation of facilities in 1998. See Note 4 for additional
discussion of the 1997 cost reduction program.
The historical financial information presented in the Consolidated Statements of
Income reflect the results of the pre-Acquisition period from January 1, 1997 to
August 28, 1997 and the post-Acquisition period from August 29, 1997 to December
31, 1997, and the years ended December 31, 1996 and 1995. Due to the application
of the purchase method of accounting for the Acquisition, the pre-Acquisition
period is not comparative to the post-Acquisition period.
The unaudited pro forma information for the periods set forth below give effect
to the Acquisition, the refinancing of the Company's domestic senior debt (See
Note 9) and the sale of the Instrumentation business segment (See Note 3) as if
they had occurred on January 1, 1997 and January 1, 1996, respectively. The pro
forma results include additional expense related to the amortization of the
increased goodwill, and the reduction in interest expense resulting from the
refinancing of the domestic senior debt and repayments with the net proceeds
from the sale of Instrumentation. 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 periods presented.
Year Ended December 31 1997 1996
(Dollars in thousands, except per share amounts) (Unaudited)
- -------------------------------------------------------------------------
Net Sales $ 316,862 $ 309,511
Net Income (Loss) from Continuing Operations
before Extraordinary Item $ (35,595) $ (31,604)
Earnings (Loss) Per Share, Basic and Diluted:
Continuing Operations before
Extraordinary Item $(2.08) $(1.85)
- -------------------------------------------------------------------------
In conjunction with the Acquisition, the Company recorded a third quarter 1997
charge of $15.8 million including a $10 million contract fee paid to United
Dominion Industries (`UDI") as a result of the termination of a merger agreement
between UDI and the Company, $3.4 million of commissions, advisory and legal
fees, and $2.4 million of employee retention bonuses (See Note 7).
The Acquisition reduced the number of shares traded publicly and reduced the
number of holders of shares. On March 16, 1998, the Company received a letter
dated March 9, 1998, from the New York Stock Exchange, Inc. ("NYSE") indicating
the NYSE's determination that the Company has fallen below certain continued
listing criteria, and that the NYSE was carefully considering the
appropriateness of the continued listing of the Company's common stock. The
Company is preparing a response to the NYSE taking the position that the NYSE
should maintain the listing of the Company's common stock. The Company seeks to
persuade the NYSE to continue such listing, but there can be no assurance that
the NYSE will not attempt to delist the Company's common stock. Even if the NYSE
maintains such listing for now, the Company's common stock may, at some future
time, no longer meet the requirements for the NYSE for continued listing and may
be delisted from the NYSE and deregistered under the provisions of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). A decision by
the NYSE to delist the Company's common stock or deregistration under the
Exchange Act could adversely affect the liquidity and market value of the
remaining shares held by the public.
Note 3 Discontinued Operations
In August 1997 and in February 1998, the Company announced that the Board of
Directors had approved plans to sell its Instrumentation and Roltra-Morse
businesses, respectively. In 1995, the Company sold its Turbomachinery and most
of its Electro-Optical Systems businesses, which sales were approved by the
Board of Directors in August 1994 and in January 1994, respectively. 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.
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.
Roltra-Morse
On February 27, 1998, the Company completed the sale of its Roltra-Morse
business to Magna International Inc. for cash proceeds of $30.7 million, subject
to final adjustment. Roltra-Morse retained $18.4 million of its debt. The sale
price approximated the recorded net book value of the business. Net proceeds
were used to reduce domestic senior debt. See Note 9 for further information
regarding the use of the proceeds. This transaction will be reflected in the
Company's financial statements in the first quarter of 1998.
Instrumentation
On August 29, 1997, the Company completed the sale of its Instrumentation
business segment to Danaher Corporation for approximately $85 million, which
approximated its net book value after the Acquisition. The majority shareholders
of the Company are also substantial shareholders of Danaher Corporation. The
purchase price was determined on the basis of arms length negotiations between
the Company and Danaher Corporation. A portion of the proceeds was used to
reduce domestic senior debt by $68.1 million.
Electro-Optical Systems
On April 28, 1997, the Company completed the sale of the Varo Electronic Systems
division to a small defense contractor for $12 million, which was used to reduce
senior domestic debt. The sale of this business completed the disposal of the
Electro-Optical Systems business. 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 outstanding under a previous credit facility. 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 reduce
amounts outstanding under its previous credit facility by $8 million and to
redeem $40 million of the Company's then outstanding 12.25% senior subordinated
debentures.
The Company retained certain liabilities related to the Electro-Optical Systems
business of approximately $24 million. At December 31, 1993, the Company
provided for estimated losses on disposal of this segment in the amount of $168
million, which included a provision for anticipated operating losses prior to
disposal. During 1995, the Company recognized an additional $13.3 million loss
on disposal. The additional loss included $6.8 million related to the resolution
of contingencies associated with the sale of the business and charges of $6.5
million recorded primarily to write down remaining non-operating real estate to
net realizable value. During 1996, the Company recorded an additional $5.2
million loss on disposal ($.8 million in the fourth quarter), which related to
changes in estimates on legal and other reserve requirements associated with
retained liabilities of this business. In the third quarter of 1997, the Company
recorded an additional $3.4 million loss on disposal related to changes in
estimates on certain reserve requirements associated with the retained
liabilities of this business.
Turbomachinery
On January 17, 1995, the Company completed the sale of its Delaval Turbine and
TurboCare divisions and its 50% interest in Delaval-Stork, to Mannesmann Demag.
The final 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 was used by the
Company to pay off its domestic senior debt and $40 million of its then
outstanding 12.25% senior subordinated debentures.
The Company retained certain liabilities related to the Turbomachinery business
of approximately $33 million. As a result of the sale of this business in 1995,
the Company recognized an estimated gain on disposal of $35 million, net of
income taxes of $5.2 million. During 1996 and 1997, the Company recorded
additional losses on disposal of $2.9 million and $5 million, respectively. The
additional losses included charges related to changes in estimates on legal and
other reserve requirements associated with retained liabilities of this
business.
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 December 31, 1997 is
adequate, however, the amounts estimated may differ from actual results.
Net assets and liabilities of the Discontinued Operations consist of the
following:
December 31 (Dollars in thousands) 1997 1996
- --------------------------------------------------------------------
Current Assets:
Cash $ 843 $ 3,125
Receivables 13,799 33,816
Inventories 12,357 33,705
Other current assets 5,083 6,762
- --------------------------------------------------------------------
32,082 77,408
- --------------------------------------------------------------------
Current Liabilities:
Notes payable 15,694 21,340
Trade accounts payable 22,043 25,690
Other current liabilities 6,522 18,629
- --------------------------------------------------------------------
44,259 65,659
- --------------------------------------------------------------------
Net Current Assets (Liabilities) (12,177) 11,749
- --------------------------------------------------------------------
Long-term Assets:
Property 21,758 35,053
Other long-term assets 14,220 21,490
- --------------------------------------------------------------------
35,978 56,543
- --------------------------------------------------------------------
Long-term Liabilities 8,874 19,616
- --------------------------------------------------------------------
Net Long-term Assets 27,104 36,927
- --------------------------------------------------------------------
Net Assets $ 14,927 $ 48,676
====================================================================
Net assets related to the Roltra-Morse and Turbomachinery businesses are $15.5
million and $.1 million, and $11.3 million and $.5 million as of December 31,
1997 and 1996, respectively. Net assets related to the Instrumentation business
are $22.5 million as of December 31, 1996. The Electro-Optical Systems business
contributed $.7 million of net liabilities and $14.4 million of net assets as of
December 31, 1997 and 1996, respectively.
Total long-term debt of the Discontinued Operations amounted to $6 million and
$11.7 million as of December 31, 1997 and 1996, respectively. Of these amounts,
$1.2 million and $3.4 million represent the current portions of long-term debt
as of December 31, 1997 and 1996, respectively.
A condensed summary of operations for the Discontinued Operations is as follows:
Post-Acquisition Pre-Acquisition
August 29, January 1,
1997 to 1997 to
Year Ended December 31 December 31, August 28,
(Dollars in thousands) 1997 1997 1996 1995
- ------------------------------------------------------------------------
Net Sales $30,257 $117,730 $181,948 $235,452
- ------------------------------------------------------------------------
Income (loss) from
operations before income
taxes and minority
interest (3,736) 3,025 (7,963) 5,882
- ------------------------------------------------------------------------
Income taxes 77 664 1,037 1,256
Minority interest (60) (11) (295) (725)
- ------------------------------------------------------------------------
Income (loss) from
operations $ (3,753) $ 2,372 $ (8,705) $ 5,351
========================================================================
The income (loss) from operations of the Discontinued Operations for 1997, 1996
and 1995 includes allocated interest expense of $2.7 million ($2.4 million -
pre-Acquisition), $4.5 million, and $10.3 million, respectively. Allocated
interest expense includes interest on debt of the Discontinued Operations to be
assumed by the buyers of these operations, and an allocation of corporate
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 consolidated debt.
Roltra-Morse
The Roltra-Morse business had operating losses of $6.7 million and $13.8 million
for 1997 and 1996, respectively, and operating income of $.5 million in 1995.
The 1997 operating loss included an unusual charge of $.7 million
(pre-Acquisition) due to fees incurred related to the previously failed attempt
to sell the Roltra-Morse business. The operating loss in 1996 included unusual
charges of $6.2 million consisting of restructuring measures taken to reduce
operating expenses and goodwill write-offs. Included in the 1995 operating
income was an unusual charge of $1.2 million related to the shutdown of a plant
in southern Italy and the related loss on the sale of that building.
Instrumentation
The Instrumentation business had income from operations of $5.3 million, $5.1
million and $4.9 million for 1997, 1996 and 1995, respectively.
Operating income in both 1996 and 1995 included unusual charges of $.9 million
related to restructuring of operations in Europe.
Electro-Optical Systems
The Electro-Optical Systems business had income from operations of $.8 million
and $.4 million for 1997 and 1996, respectively. The income in 1997 and 1996
offset increases in estimated reserve requirements in those respective periods.
The 1995 loss of $1 million, including allocated interest, was charged against
the reserve for anticipated losses previously established by the Company.
Note 4 Restructuring Plans
Asset Sales
The Company divested its Turbomachinery and substantially all of its
Electro-Optical Systems businesses in 1995. The Company used the proceeds, net
of related expenses, to repay domestic senior debt in the amount of $89.7
million and to redeem $80 million of its then outstanding 12.25% senior
subordinated debentures. During 1996, the Company completed the sales of five of
its non-operating real estate holdings for net proceeds of $8.6 million. The
proceeds were used to repay the Company's domestic senior debt.
On April 28, 1997 the Company completed the sale of its Varo Electronic Systems
division, the remaining portion of its former Electro-Optical Systems business.
Proceeds of $12 million were used to reduce senior domestic debt under its
previous credit agreement.
On August 29, 1997 the Company completed the sale of its Instrumentation
business segment to Danaher Corporation for proceeds of $85 million. The Company
used a portion of the proceeds to reduce domestic senior debt by $68.1 million.
On December 31, 1997, the Company sold certain assets of its Delroyd business
unit to Nuttall Gear LLC for $2.3 million in cash. Also on December 31, 1997,
the Company acquired certain assets of the Centric Clutch business unit of
Ameridrives International, L.P. for $1.3 million in cash. Nuttall Gear LLC and
Ameridrives International, L.P. are subsidiaries of American Enterprise MPT
Corporation. Steven M. Rales and Mitchell P. Rales collectively own 76% of
American Enterprise MPT Corporation. Messrs. Rales and Rales are directors and
beneficial owners of 92.8% of the Company. The transactions were negotiated on
an arms length basis, and were based on the valuations of independent
appraisers.
In 1997, the Company completed the sales of certain of its non-operating real
estate for total proceeds of $14.1 million. Net proceeds were used to repay
domestic senior debt.
On February 27, 1998, the Company sold its Roltra-Morse business segment to
Magna International for cash subject to final adjustment. The sale resulted in a
cash transfer to the Company of $30.7 million. Net proceeds have been used by
the Company to reduce domestic senior debt.
Cost Reduction Programs
1997 Program
In connection with the Acquisition, the Company implemented a cost reduction
program. The cost of this program is estimated to be $18.6 million and was
accrued for in accordance with the purchase method of accounting. It is
comprised of $10.5 million related to severance and termination benefits as a
result of headcount reductions at the Company's corporate headquarters. In
addition, $1.7 million, $1.2 million, and $5.2 million of costs are estimated
for the Company's Power Transmission, Pumps, and Morse Controls segments,
respectively, related to severance and termination benefits resulting from
headcount reductions and the consolidation of certain manufacturing facilities.
The 1997 cost reduction program reduced expenses by approximately $3 million in
the 1997 period subsequent to the Acquisition and is expected to reduce expenses
by approximately $19.5 million in 1998 and $20.6 million annually thereafter.
The program includes a reduction of 237 employees, or 10.3% of the total number
of Company employees in continuing operations at the date of the Acquisition.
The required cash outlay related to this program was $8.1 million in 1997 and
the expected cash requirements during 1998 are $10.5 million.
1996 Program
The fourth quarter of 1996 includes a charge of $.3 million to continuing
operations for restructuring measures taken at the Company's Morse Germany
operation.
1995 Program
In the fourth quarter of 1995, the Company recorded a charge to continuing
operations of $3.1 million, including severance and other expenses related to a
company-wide program to reduce general and administrative costs. This program
included a reduction of 56 employees, or 2.4% of the total number of Company
employees in continuing operations at the end of 1995, including a reduction of
the corporate headquarters staff by 20%. The program reduced general and
administrative expenses by approximately $2.7 million and $3.2 million in 1996
and 1997, respectively, and is expected to reduce general and administrative
expenses from the 1995 level by approximately $4.1 million in 1998 and annually
thereafter. The required cash outlays related to this program were $.4 million,
$2.4 million, and $.3 million in 1995, 1996 and 1997 respectively.
Note 5 Inventories
Inventories are summarized as follows:
December 31 (Dollars in thousands) 1997 1996
- -------------------------------------------------------------------------
Finished products $ 18,823 $ 23,537
Work in process 23,218 25,828
Materials and supplies 23,481 21,810
- -------------------------------------------------------------------------
65,522 71,175
Less customers' progress payments 634 2,710
- -------------------------------------------------------------------------
$ 64,888 $ 68,465
=========================================================================
Note 6 Accrued Expenses and Other Liabilities
Accrued expenses and other liabilities consist of the following:
December 31 (Dollars in thousands) 1997 1996
- -------------------------------------------------------------------------
Accrued product warranty costs $ 1,844 $ 2,007
Accrued litigation and claims costs 16,683 2,132
Payroll and related items 11,836 12,109
Accrued interest payable 3,126 3,641
Accrued restructuring costs 11,970 445
Accrued divestiture costs 1,835 2,460
Other 6,450 5,585
- -------------------------------------------------------------------------
$ 53,744 $ 28,379
=========================================================================
Note 7 Unusual Items
1997
During the year ended December 31, 1997, the Company recorded unusual charges of
$31.3 million ($1.83 per share) in income from continuing operations. The first
eight months of 1997 included an unusual charge of $10.5 million relating to the
judgment against the Company in favor of International Insurance Company
("International"), awarding International $11.2 million, plus interest from
March 1995. The Company recorded a charge to income in the first quarter of 1997
of $12.9 million as an unusual item, which represented the amount of the
judgment plus interest to date. On July 15, 1997, the Company agreed to settle
with International 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.
In addition, the Company recorded unusual charges of $20.8 million in the third
quarter of 1997. Of these charges, $15.8 million related to the sale of the
Company and represented indirect and general expenses incurred by the Company in
connection with the sale process which were paid in 1997, and $5 million related
to an additional legal provision concerning certain litigation matters.
1996
During the fourth quarter of 1996, the Company recognized unusual charges of
$17.4 million ($1.02 per share) in income from continuing operations. These
charges include $.3 million related to the restructuring and cost reduction
programs within the Company's operating units, and $17.1 million related to the
write-down of certain businesses being held for sale and certain non-operating
real estate being held for sale to net realizable value.
1995
During the fourth quarter of 1995, the Company recognized unusual charges of
$8.1 million ($.48 per share) in income from continuing operations. These
charges include $3.1 million in severance benefits and other expenses related to
a Company-wide program to reduce general and administrative costs (See Note 4)
and $5 million related to the write-down of certain non-operating real estate to
net realizable value.
Note 8 Income Taxes
The components of income tax expense (benefit) from continuing operations are:
Post-Acquisition Pre-Acquisition
August 29, January 1,
1997 1997
Year Ended December 31 to December to August
(Dollars in thousands) 31, 1997 28, 1997 1996 1995
- ----------------------------------------------------------------------
Current:
Federal $ --- $ --- $ --- $ ---
Foreign 94 994 2,386 1,528
State 141 260 277 303
- ----------------------------------------------------------------------
235 1,254 2,663 1,831
- ----------------------------------------------------------------------
Deferred:
Federal --- --- 10,000 (17,000)
Foreign and State --- --- --- ---
- -----------------------------------------------------------------------
--- --- 10,000 (17,000)
- -----------------------------------------------------------------------
$ 235 $1,254 $12,663 $(15,169)
=======================================================================
Income tax expense for 1997, 1996 and 1995 from discontinued operations was $.7
million, $1 million and $1.3 million, respectively.
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, 1997 and
1996 are as follows:
December 31
(Dollars in thousands) 1997 1996
- ---------------------------------------------------------------------
Current Long-term Current Long-term
- ---------------------------------------------------------------------
Deferred tax assets:
Postretirement benefit
obligation $ 595 $ 5,809 $ 595 $ 6,367
Expenses not currently
deductible 28,911 7,280 21,516 7,185
Net operating loss carryover --- 35,436 --- 37,269
Tax credit carryover --- 2,783 --- 2,133
- ---------------------------------------------------------------------
Total deferred tax assets 29,506 51,308 22,111 52,954
Valuation allowance for
deferred tax assets (19,418) (33,839) (12,946) (31,119)
- ---------------------------------------------------------------------
Net deferred tax assets 10,088 17,469 9,165 21,835
- ---------------------------------------------------------------------
Deferred tax liabilities:
Tax over book depreciation --- 15,271 --- 18,289
Other --- 7,232 --- 7,436
- ---------------------------------------------------------------------
Total deferred tax liabilities --- 22,503 --- 25,725
=====================================================================
Net deferred tax assets
(liabilities) $ 10,088 $(5,034) $9,165 $ (3,890)
=====================================================================
At December 31, 1997, unremitted earnings of foreign subsidiaries were
approximately $21.4 million. Since it is the Company's intention to indefinitely
reinvest these earnings, no U.S. taxes have been provided. 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:
Post-Acquisition Pre-Acquisition
August 29, January 1,
1997 1997
Year Ended December 31 to December to August
(Dollars in thousands) 31, 1997 28, 1997 1996 1995
- ----------------------------------------------------------------------
United States $(7,612) $(29,023) $(22,663) $(14,722)
Foreign 2,158 (974) 2,258 6,731
======================================================================
$(5,454) $(29,997) $(20,405) $(7,991)
======================================================================
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).
Post-Acquisition Pre-Acquisition
August 29, January 1,
1997 1997
Year Ended December 31 to December to August
(Dollars in thousands) 31, 1997 28, 1997 1996 1995
- ----------------------------------------------------------------------------
Tax at U.S. federal income
tax rate $ (1,909) $ (10,499) $ (7,142) $ (2,797)
State taxes, net of federal
income tax effect 92 169 188 197
Impact of foreign tax rates and
credits 228 (660) (331) (828)
Net U.S. tax on distributions of
current foreign earnings 355 --- 755 586
Goodwill amortization and
write-off 458 222 4,276 643
Change in valuation reserve 1,720 7,472 12,390 (21,685)
Nondeductible foreign losses 89 1,017 1,914 ---
Other (798) 3,533 613 8,715
- ----------------------------------------------------------------------------
Income tax expense (benefit) $ 235 $ 1,254 $ 12,663 $ (15,169)
============================================================================
The Company has net operating loss carryforwards of approximately $101 million
expiring in years 2002 through 2012, and minimum tax credits of approximately
$2.8 million, which may be carried forward indefinitely. Included in the net
operating loss carryforwards are foreign tax credits of approximately $7.4
million, expiring through 2001, which, for financial and tax reporting purposes,
are reflected as deductible foreign taxes. These carryforwards are available to
offset future federal taxable income, subject to the Section 382 limitations.
The Company establishes valuation allowances in accordance with the provisions
of FASB Statement No. 109, "Accounting for Income Taxes." The Company
continually reviews the adequacy of the valuation allowance and is recognizing
these benefits only as reassessment indicates that it is more likely than not
that the benefits will be realized.
In 1995, the Company reduced the valuation allowance applied against the net
operating loss carryforwards by $17 million based upon reasonable and prudent
tax planning strategies and future income projections including the planned sale
of Roltra-Morse. As a result of withdrawing Roltra-Morse from potential sale in
1996, the Company recorded a provision of $10 million against deferred tax
benefits previously recognized based on an anticipated gain on this sale. This
reduced the deferred tax benefit to $5.3 million at December 31, 1996, to a
level where management believes that 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 $14.5 million. The Company will
generate this income principally through the completed sale of Roltra-Morse in
February 1998. 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.
Note 9 Notes Payable and Long-Term Debt
On August 29, 1997, the Company completed the refinancing of its domestic senior
debt. Under terms of the refinancing, the Company entered into an agreement for
$143 million in senior secured credit facilities with a group of lenders (the
"New Credit Agreement"). Initial borrowings under the New Credit Agreement were
approximately $127.1 million. Proceeds of the New Credit Agreement were used to
refinance all obligations under the Company's previous credit agreement. The
cost of the implementation of the New Credit Agreement will be amortized over
its term.
The New Credit Agreement, which is secured by the assets of the Company's
domestic operations and all or a portion of the stock of certain subsidiaries,
provided for a five year, $70 million revolving credit facility (which includes
a $30 million letter of credit sub-facility), and a $73 million term loan
facility ("Term Loans") amortizing to August 29, 2002. Proceeds from the August
29, 1997 sale of the Instrumentation business were used to repay amounts on the
revolving credit facility and Term Loans of $54.2 million and $13.9 million,
respectively (See Note 3). At the same time, and in keeping with the terms of
the New Credit Agreement, the $73 million term loan facility was reduced to $59
million, which reduced the total facility to $129 million.
On February 27, 1998, the Company completed the sale of its Roltra-Morse
business to Magna International Inc. (See Note 3). This transaction will be
reflected in the Company's financial statements in the first quarter of 1998.
The net proceeds were used to reduce domestic senior debt by $30 million on
February 27, 1998, including $8 million of the outstanding Term Loans. The sale
of Roltra-Morse and use of the proceeds to reduce its domestic senior debt
increased the availability under its revolving credit facility to purchase a
portion of its 11.75% senior subordinated notes (the "Notes") on the open
market. During the first quarter of 1998, the Company purchased, in the open
market at a premium, a portion of its Notes in the face amount of $33.1 million.
As a result of the early extinguishment of these Notes, and a portion of the
term loan facility with the proceeds from the Roltra-Morse sale, an
extraordinary charge of $5.6 million will be recognized in the first quarter of
1998.
Notes Payable
As of December 31, 1997, the Company had under the New Credit Agreement,
borrowings of $25 million outstanding under the revolving credit facility, as
well as $13.9 million of outstanding standby letters of credit. The Company's
continuing operations had $8 million in foreign short-term credit facilities
with amounts outstanding at December 31, 1997 of $1.9 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% and 8.35% at December 31, 1997 and
December 31, 1996, respectively.
Long-Term Debt
Long-term debt of continuing operations consists of the following:
December 31 (Dollars in thousands) 1997 1996
- --------------------------------------------------------------------
Term Loans (1) (2) $ 59,000 $ ---
Term Loan A, $1.25 million due quarterly
July 31, 1996 to April 30, 2001 --- 22,500
Term Loan B, $2.2 million due quarterly
July 31, 1997 to April 30, 2001 --- 28,122
Term Loan C, $.125 million due quarterly
July 31, 1996 to April 30, 2001 and
$5.3 million due quarterly July 31,
2001 to April 30, 2003 --- 44,750
Senior subordinated notes with interest
at 11.75%, due May 1, 2006, net of
unamortized discount of $1.7 million
in 1997 and $2.1 million in 1996 133,381 152,858
Other 6,020 8,443
- --------------------------------------------------------------------
198,401 256,673
Less current portion 6,082 11,666
- --------------------------------------------------------------------
$192,319 $245,007
====================================================================
(1)Quarterly principal payments commencing May 29, 1998 are as follows: $1.475
million due quarterly May 29, 1998 to August 29, 1998; $2.2 million due
quarterly November 29, 1998 to August 29, 1999; $2.58 million due quarterly
November 29, 1999 to August 29, 2000; $3.69 million due quarterly November
29, 2000 to August 29, 2001; and $5.53 million due quarterly November 29,
2001 to August 29, 2002.
(2) These loans bear interest at prime plus 1.25%, or LIBOR plus 2.5%. The
prime and LIBOR margins are a sliding scale based on the Company's total debt
to EBITDA (Earnings Before Interest, Taxes, Depreciation and
Amortization.)
- -------------------------------------------------------------------
The aggregate annual maturities of long-term debt from continuing operations, in
thousands, for the four years subsequent to 1998 are: 1999 - $9,690; 2000 -
$11,770; 2001 - $17,018; and 2002 - $16,927.
Total debt of the Discontinued Operations, in thousands, amounted to $21,652 and
$33,012 as of December 31, 1997 and 1996, respectively. Of these amounts, $4,797
and $8,295 represent the long-term portion.
The Term Loans have required mandatory prepayments under certain conditions such
as from proceeds from asset sales, specified percentages of net proceeds of debt
or equity issuances, and a percentage of excess cash flow. The mandatory
prepayments will be applied to the Term Loans pro rata, and then to the
repayment of the revolving credit facility. Mandatory prepayments applied to the
Term Loans reduce the scheduled quarterly principal payments on a pro rata
basis. The interest rates on the Term Loans are based on current market rates.
Consequently, the carrying value of the Term Loans approximates fair value.
The Notes are not redeemable prior to May 1, 2001, except that, until May 1,
1999, the Company may redeem, at its option, up to an aggregate of $55 million
of the principal amount of the Notes at 110% of their principal amount plus
accrued interest with the net proceeds of one or more public equity offerings
provided that at least $100 million of the principal amount of the Notes remains
outstanding after each such redemption. On or after May 1, 2001, the Notes are
redeemable at the option of the Company, in whole or in part, at 106% of their
principal amount, plus accrued interest, declining to 100% of their principal
amount plus accrued interest on or after May 1, 2004. Interest is payable
semi-annually on May 1 and November 1. On September 16, 1997, the Company
offered to purchase all of the Notes at 101% of the principal amount, as
required under the indenture governing the Notes as a result of the Acquisition.
No Notes were tendered in the offer. On November 25, 1997, the Company
purchased, through an open market transaction, Notes in the face amount of $19.9
million at a purchase price of 111.47 % of the principal amount. The fair value
of the $135.1 million of these instruments outstanding at December 31, 1997,
based on market bid prices, was $152.3 million.
The New Credit Agreement requires the Company to meet certain objectives with
respect to financial ratios. The New Credit Agreement and the Notes contain
provisions, which place certain limitations on dividend payments and outside
borrowings. Under the most restrictive of such provisions, the New Credit
Agreement requires the Company to maintain certain minimum interest coverage,
fixed charge coverage and maximum permitted debt levels and prohibits dividends.
The Company was in compliance with all of its covenants under the New Credit
Agreement at December 31, 1997.
An extraordinary charge of $3.3 million ($.20 per share) was recorded in 1997.
In the third quarter of 1997, a $.3 million extraordinary charge consisting of
the write-off of deferred debt expense was recorded related to the repayment of
a portion of the Term Loans under the New Credit Agreement with the proceeds
from the sale of the Instrumentation business. An extraordinary charge of $3
million was recorded in the fourth quarter of 1997, as a result of the open
market purchase of $19.9 million of the Notes in November 1997. This charge
represents a cash outlay of $2.3 million incurred in connection with the early
extinguishment of the debt as well as the write-off of previously deferred loan
costs.
An extraordinary charge of $8.5 million ($.49 per share) was recorded in the
second quarter of 1996, as a result of the April 1996 refinancing of the
Company's domestic senior debt and its then outstanding 12% and 12.25% senior
subordinated debentures. This charge represents cash outlays of $5.1 million
incurred in connection with the early extinguishment of the debt as well as the
write-off of previously deferred loan costs.
In connection with the early repayment and redemption of domestic senior debt
and $80 million of the then outstanding 12.25% senior subordinated debentures in
1995, the Company recorded a $4.4 million ($.26 per share) charge as an
extraordinary item. 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.
Note 10 Shareholders' Equity
Equity Incentive Plans
On August 29, 1997, the Board of Directors accelerated the exercisability and
deemed exercised for cash all stock options outstanding under the Company's
Equity Incentive Plan for Key Employees, the Equity Incentive Plan for Outside
Directors, and the 1995 Equity Incentive Plan for Outside Directors,
(collectively the "Plans"). The cash paid for outstanding stock options deemed
exercised was based upon the greater of the excess of the tender offer price of
Acquisition Corp. of $7.05 over the per share option exercise price and zero.
The cash payment of outstanding options resulted in no options remaining
outstanding as of August 29, 1997. In addition, on November 5, 1997, pursuant to
resolution of the Board of Directors, the Plans were terminated effective August
29, 1997.
Stock options granted during 1997 under the Plans have been valued based upon
the difference between the exercise price on the date of grant and Acquisition
Corp.'s tender offer price of $7.05. The Company has followed Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees"
("APB 25") in accounting for its stock option plans, but has disclosed the
supplemental information as required under FASB Statement No. 123, "Accounting
for Stock-Based Compensation" ("Statement 123"). Under APB 25, because the
exercise price of the Company's employee stock options equals the market price
of the underlying stock on the date of grant, no compensation expense is
recognized other than for restricted stock awards.
Under the Company's Equity Incentive Plan for Key Employees, up to 3,050,000
shares of the Company's $1.00 par value common stock were issuable pursuant to
the granting of stock options, stock appreciation rights, restricted stock
awards and restricted unit awards to key employees. Options were granted at no
less than 100 percent of the fair market value of the Company's common stock on
the date of grant or on the prospective date fixed by the Board of Directors.
None of these options were exercisable 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, could be exercised in each of the following four years.
Additionally, each option terminated no later than 10 years from the date of
grant.
The Equity Incentive Plan for Key Employees permitted 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 administering the Equity
Incentive Plan. The vesting of restricted stock awards was subject to a defined
vesting period and to the Company's common stock achieving certain performance
levels during such period. No grants of restricted stock were made in 1997 or
1995. Grants of 35,000 shares of restricted stock were made in 1996. All
employees, who held vested restricted stock as August 29, 1997, were compensated
for the stock in cash at the Acquisition Corp. tender offer price of $7.05. No
restricted stock was outstanding as of December 31, 1997.
A summary of the Company's stock option activity under the Equity Incentive Plan
for Key Employees and related information is as follows:
Weighted Weighted Weighted
-Average -Average -Average
Year Ended December 31 Exercise Exercise Exercise
(Shares in thousands) 1997 Price 1996 Price 1995 Price
- --------------------------------------------------------------------
Options:
Granted 15 $3.00 254 $4.08 250 $6.00
Exercised (455) $4.77 --- --- (73) $7.32
Forfeited (101) $8.30 (292) $8.12 (210) $10.27
Canceled (885) $8.44 --- --- --- ---
Outstanding at end
of year --- --- 1,426 $7.32 1,464 $8.02
Exercisable at end
of year --- --- 718 $8.15 691 $8.24
Available for grant
at end of year --- 868 865
Weighted-average fair
value of options granted
during the year $4.05 $2.50 $3.53
- ---------------------------------------------------------------------
At December 31, 1997, the Company had no options outstanding under the plan
pursuant to the termination of the plan by the Board of Directors on November 5,
1997, effective August 29, 1997.
During 1988, the Company adopted the Equity Incentive Plan for Outside
Directors. This plan provided 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 could be granted at no less than 100 percent of the fair market
value of the Company's common stock on a date five business days after the
option was granted and no option granted could be exercised during the first
year after its grant. After this waiting period, 25 percent of each option, on a
cumulative basis, could be exercised in each of the following four years. Each
option terminated no later than 10 years from the date of grant. In February
1988, 320,000 stock options were granted at $16.19 per share. In December 1990,
40,000 stock options were granted at $10.375 per share. In June 1995, the plan
was amended to reduce the number of shares issuable to an aggregate of 360,000
and to provide that no future options could be granted thereunder. All
outstanding stock options under the plan were canceled effective August 29, 1997
pursuant to resolution of the Company's Board of Directors. On November 5, 1997,
the plan was terminated pursuant to resolution of the Board of Directors
effective August 29, 1997.
In June 1995, the Company adopted the 1995 Equity Incentive Plan for Outside
Directors. This plan provided 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 was
granted, on an annual basis, options to purchase 4,000 shares of the Company's
common stock. The exercise price of the options was 100 percent of the fair
market value of the common stock at the date of grant and no options granted
could be exercised during the first year after its grant subject to certain plan
provisions. After this waiting period, the options became exercisable in four
equal annual installments of 1,000 shares. Additionally, each option terminated
no later than 10 years from the date of grant. This plan also provided for the
granting of an annual restricted stock award of 1,000 shares of the Company's
common stock. Each award was made in four quarterly installments of 250 shares
beginning July 1, 1995. The shares comprising the restricted stock awards could
not be sold or otherwise transferred by the outside director until termination
from service. Restricted stock awards of 3,750 shares, 5,500 shares and 3,000
shares were granted during 1997, 1996 and 1995, respectively.
A summary of the Company's stock option activity under the 1995 Equity Incentive
Plan for Outside Directors and related information is as follows:
Weighted Weighted Weighted
-Average -Average -Average
Year Ended December 31 Exercise Exercise Exercise
(Shares in thousands) 1997 Price 1996 Price 1995 Price
- ---------------------------------------------------------------------
Options:
Granted 20 $2.87 20 $7.88 24 $8.00
Exercised (20) $2.87 --- --- --- ---
Canceled (44) $7.83 --- --- --- ---
Outstanding at end
of year --- --- 44 $7.94 24 $8.00
Exercisable at end
of year --- --- 6 $8.00 --- ---
Available for grant
at end of year --- 188 213
Weighted-average fair
value of options granted
during the year $4.18 $5.58 $5.61
- ---------------------------------------------------------------------
At December 31, 1997, the Company had no options outstanding under the plan
pursuant to the termination of the plan by the Board of Directors on November 5,
1997, effective August 29, 1997.
Pro forma net income (loss) and earnings (loss) per share determined as if the
Company has accounted for its employee stock options granted subsequent to
December 31, 1994 under the fair value method of Statement 123 follows:
Post-Acquisition Pre-Acquisition
August 29, January 1,
1997 to 1997 to
December 31, August 28,
1997 1997 1996 1995
- -----------------------------------------------------------------------
Net income (loss) - as
reported $(21,220) $(28,879) $(58,370) $29,710
Net income (loss) - pro
forma $(21,220) $(28,879) $(58,643) $29,668
Earnings (loss) per share -
as reported $(1.24) $(1.68) $(3.41) $1.74
Earnings (loss) per share -
pro forma $(1.24) $(1.68) $(3.42) $1.74
- -----------------------------------------------------------------------
The fair value for options and restricted stock awards granted in 1996 and 1995
was estimated at the date of grant using a Black-Scholes option pricing model
with the following weighted-average assumptions for the Equity Incentive Plans:
1996 1995
Equity Incentive Plan --------------------- ------
for Key Employees Stock Restricted Stock
Options Stock Awards Options
- -------------------------------------------------------------------
Expected stock price volatility 0.528 0.510 0.495
Risk-free interest rate 6.16% 6.26% 5.93%
Expected life of equity
instrument 7 years 5 years 7 years
Expected dividend yield 0% 0% 0%
- -------------------------------------------------------------------
Stock options granted under the plan during 1997 have been valued based upon the
difference between the exercise price on the date of grant and Acquisition
Corp.'s tender offer price of $7.05.
During 1995, there were no restricted stock awards under the Equity Incentive
Plan for Key Employees.
1996 1995
1995 Equity Incentive Plan -------------------- ----------------------
for Outside Directors Stock Restricted Stock Restricted
Options Stock Awards Options Stock Awards
- ----------------------------------------------------------------------------
Expected stock price volatility 0.522 0.523 0.512 0.497
Risk-free interest rate 6.31% 5.93% 6.31% 5.93%
Expected life of equity
instrument 7 years 4 years 7 years 5 years
Expected dividend yield 0% 0% 0% 0%
- ----------------------------------------------------------------------------
For 1996 and 1995, the expected life of the restricted stock awards under the
plan represents the weighted-average of the remaining years until each of the
members of the Board of Directors attains the mandatory retirement age of 72.
This assumed that each of the directors would continue their directorships until
the mandatory retirement age.
The risk-free interest rates are based on U.S. Treasury Notes on the date of
grant with maturities equal to the respective stock option and restricted stock
award expected lives.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options and restricted stock awards. Option and restricted
stock valuation models require the input of highly subjective assumptions
including the expected stock price volatility.
For purposes of pro forma disclosures, the estimated fair value of the options
and restricted stock awards is amortized to expense over the options' vesting
period. Total compensation expense related to stock-based compensation awards
under Statement 123 for 1996 and 1995 was approximately $300,000 and $48,000,
respectively. In 1997, actual compensation expense is included in the net income
pro forma disclosures table. Compensation expense recorded by the Company under
APB 25 in 1997, 1996 and 1995 for awards granted during those years was
approximately $1.2 million, $27,000 and $6,000, respectively.
Preferred Stock Purchase Rights
On April 30, 1997, the Board of Directors declared a distribution of one
Preferred Stock Purchase Right (a "Right") for each outstanding share of Company
common stock to shareholders of record at the close of business on May 4, 1997.
Each Right entitles the registered holder to purchase from the Company a unit
consisting of 1/100 of a share (a "Unit") of Series B Junior Participating
Preferred Stock, par value $1.00 per share at a purchase price of $15 per Unit,
subject to adjustment. The Rights will separate from the common stock and a
Distribution Date will occur upon the earlier of (i) 10 days following a public
announcement that a person or group of affiliated or associated persons has
acquired, or obtained the right to acquire, beneficial ownership of 15% or more
of the outstanding shares of Company common stock (the "Stock Acquisition Date")
or (ii) 10 business days following the commencement of a tender offer or
exchange offer that would result in a person or group beneficially owning 15% or
more of such outstanding shares of common stock. In the event that, at any time
following the Distribution Date, (i) the Company is the surviving corporation in
a merger and its common stock is not changed or exchanged, or (ii) a person or
beneficial owner of more than 15 % of the then outstanding shares of common
stock other than pursuant to an offer for all outstanding shares of common stock
that the independent directors determines to be fair to, and otherwise in the
best interests of stockholders, each holder of a Right will have the right to
receive Company common stock having a value equal to two times the exercise
price of the Right. If the Company is acquired subsequent to the Stock
Acquisition Date in which the Company is not the surviving corporation or 50% or
more of the Company's assets or earning power is sold or transferred, each
holder of a Right shall thereafter have the right to receive, upon exercise,
common stock of the acquiring company having a value equal to two times the
exercise price of the Right. At any time until 10 days following the Stock
Acquisition Date, the Company may redeem the Rights in whole, but not in part,
at a price of $.01 per Right, payable in cash or stock. After the redemption
period has expired, the Company's right of redemption may be reinstated if an
acquiring person reduces his beneficial ownership to 10% or less of the
outstanding shares of common stock in a transaction or series of transactions
not involving the Company. The Rights have certain antitakeover effects. The
Rights should not interfere with any merger or other business combination
approved by the Board of Directors of the Company since the Board of Directors
may, at its option, at any time prior to 10 days following the Stock Acquisition
Date redeem all but not less than all of the then outstanding Rights. In
addition, as a result of an amendment to the agreement governing the Rights, in
certain circumstances, the Rights by their terms will not interfere with a
merger between the Company and Acquisition Corp. or any affiliate of Acquisition
Corp. Pursuant to the agreement governing the Rights, the Board of Directors of
the Company may in general further amend the terms of the Rights. The Rights are
not exercisable until the Distribution Date and will expire at the close of
business on May 4, 2007.
Employees Stock Savings Plan
Prior to August 1, 1997, up to 1,600,000 shares of the Company's common stock
were reserved for issuance under the Company's Employee Stock Savings Plan
("ESSP"). The Committee of the ESSP approved a policy change, effective August
1, 1997, in that employer matching contributions to the ESSP are to be paid in
cash rather than through issuance of Company common stock. As of August 1, 1997,
this plan policy change effectively eliminated the restriction on the use of
authorized but unissued shares of common stock.
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.
Treasury Stock
On August 29, 1997, the Company canceled the shares of treasury stock
outstanding as of that date totaling 1,672,788 shares of the Company's common
stock with a cost basis of approximately $18 million.
Note 11 Operations by Industry Segment and Geographic Area
The Company classifies its continuing operations into three business segments:
Power Transmission, Pumps, and Morse Controls. Detailed information regarding
products by segment is contained in the section entitled "Business" included in
Part I, Item 1 of this Form 10-K Report. Amounts related to pre-Acquisition and
post-Acquisition have not been separated, as the effect of the Acquisition on
the segments was not material. The 1996 and 1995 amounts have been restated to
reflect Instrumentation and Roltra-Morse segments as discontinued operations.
Information about the business of the Company by business segment, foreign
operations and geographic area is presented below:
Year Ended December 31
(Dollars in thousands) 1997 1996 1995
- ---------------------------------------------------------------------
Net Sales
Power Transmission $ 92,130 $ 89,456 $ 95,075
Pumps 112,486 107,567 94,375
Morse Controls 112,246 112,488 107,664
- ---------------------------------------------------------------------
Total net sales $316,862 $309,511 $297,114
- ---------------------------------------------------------------------
Segment operating income
Power Transmission $ 8,617 $ 8,618 $ 10,673
Pumps 14,503 11,229 9,219
Morse Controls 4,367 8,299 4,748
- ---------------------------------------------------------------------
Total segment operating
income 27,487 28,146 24,640
- ---------------------------------------------------------------------
Equity in income (loss) of
unconsolidated companies (519) (32) 302
Unallocated corporate expenses(1) (37,703) (23,988) (12,454)
Net interest expense (24,716) (24,531) (20,479)
- ---------------------------------------------------------------------
Income (loss) from continuing
operations before income
taxes and extraordinary item $ (35,451) $ (20,405) $ (7,991)
=====================================================================
A reconciliation of segment operating income to income from operations follows:
Year Ended December 31
(Dollars in thousands) 1997 1996 1995
- ---------------------------------------------------------------------
Segment operating income $ 27,487 $ 28,146 $ 24,640
Unallocated corporate expenses(1) (37,703) (23,988) (12,454)
Other (income) expense 177 355 (370)
- ---------------------------------------------------------------------
Income (loss) from operations $ (10,039) $ 4,513 $ 11,816
=====================================================================
(1) Unallocated corporate expenses include unusual items of $31.3 million, $17.1
million and $6.6 million for the years ended December 31, 1997, 1996 and 1995,
respectively.
Segment operating income includes $.3 million and $1.5 million of unusual items
related to the Morse Controls segment for the years ended December 31, 1996 and
1995, respectively.
Year Ended December 31
(Dollars in thousands) 1997 1996 1995
- ---------------------------------------------------------------------
Identifiable assets
Power Transmission $ 41,903 $ 70,533 $ 86,343
Pumps 66,932 73,806 69,347
Morse Controls 74,585 110,141 111,482
Corporate 264,953 27,766 39,767
Discontinued Operations:
Electro-Optical (672) 14,356 11,893
Instrumentation --- 22,516 24,003
Roltra-Morse 15,489 11,331 21,534
Turbomachinery 110 473 983
- ---------------------------------------------------------------------
Total identifiable assets $ 463,300 $ 330,922 $ 365,352
- ---------------------------------------------------------------------
Depreciation and amortization
Power Transmission $ 4,412 $ 4,438 $ 4,618
Pumps 3,695 4,114 3,972
Morse Controls 4,073 3,335 3,392
Corporate 2,115 1,511 1,400
- ---------------------------------------------------------------------
Total depreciation and
amortization $ 14,295 $ 13,398 $ 13,382
- ---------------------------------------------------------------------
Capital expenditures
Power Transmission $ 1,333 $ 2,699 $ 3,384
Pumps 3,706 4,568 7,367
Morse Controls 3,144 2,554 2,131
Corporate 112 211 273
- ---------------------------------------------------------------------
Total capital expenditures $ 8,295 $ 10,032 $ 13,155
=====================================================================
Identifiable assets of corporate at December 31, 1997 include goodwill of $226
million related to the Acquisition (See Note 2). As such, at December 31, 1997,
the identifiable assets of the segments in continuing operations do not include
goodwill. The Roltra-Morse discontinued segment had goodwill of $8 million
included in identifiable assets as of December 31, 1997.
Identifiable assets at December 31, 1996 include $26.5 million, $6.7 million and
$28.5 million of goodwill for the Power Transmission, Pumps, and Morse Controls
segments, respectively, and goodwill of $.6 million and $9.5 million for the
Instrumentation and Roltra-Morse discontinued segments, respectively.
Identifiable assets at December 31, 1995 include $27.4 million, $5.3 million and
$29.6 million of goodwill for the Power Transmission, Pumps, and Morse Controls
segments, respectively, and goodwill of $.8 million and $12.1 million for the
Instrumentation and Roltra-Morse discontinued segments, respectively.
The continuing operations of the Company on a geographic basis are as follows:
Year Ended December 31
(Dollars in thousands) 1997 1996 1995
- ---------------------------------------------------------------------
Net sales
United States $214,150 $210,196 $205,717
Foreign (principally Europe) 102,712 99,315 91,397
- ---------------------------------------------------------------------
Total net sales $316,862 $309,511 $297,114
- ---------------------------------------------------------------------
Segment operating income
United States $ 25,050 $ 20,948 $ 20,572
Foreign 2,437 7,198 4,068
- ---------------------------------------------------------------------
Total segment operating income $ 27,487 $ 28,146 $ 24,640
- ---------------------------------------------------------------------
Identifiable assets
Continuing Operations:
United States $380,263 $196,373 $221,449
Foreign 68,110 85,873 85,490
Discontinued Operations:
United States (562) 23,210 21,219
Foreign 15,489 25,466 37,194
- ---------------------------------------------------------------------
Total identifiable assets $463,300 $330,922 $365,352
=====================================================================
Export sales
Asia $ 5,011 $ 5,724 $ 3,469
Canada 4,878 3,236 4,641
Europe 2,745 3,133 2,590
Latin America 779 906 470
Middle East & North Africa 604 1,943 231
South America 7,349 6,739 2,678
Other 2,236 3,333 2,208
- ---------------------------------------------------------------------
Total export sales $ 23,602 $ 25,014 $ 16,287
=====================================================================
No one customer accounted for 10% or more of consolidated sales in 1997, 1996 or
1995.
Note 12 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. Effective December 31, 1996, all domestic pay-related plans were
merged into the Imo Industries Inc. Retirement Plan for U.S. Salaried Employees.
Pension benefits were not affected by the merger. For 1997, amounts related to
pre-Acquisition and post-Acquisition have not been separated due to materiality
and practicality.
Pension expense was $3.8 million in 1997, $4.3 million in 1996 and $4.2 million
in 1995, and includes amortization of prior service cost and transition amounts
for periods of 5 to 15 years. The 1997, 1996 and 1995 expense includes costs
related to retained pension liabilities of discontinued operations. The Company
included $2 million of curtailment and settlement losses in its gain on disposal
related to the discontinued operations in 1995. Net pension expense is comprised
of the following:
Year Ended December 31
(Dollars in thousands) 1997 1996 1995
- ---------------------------------------------------------------------
Service cost $3,107 $ 4,282 $ 4,297
Interest cost on projected benefit
obligation 14,711 14,471 13,429
Actual return on plan assets (25,678) (20,868) (17,797)
Net amortization and deferral 11,689 6,374 4,274
=====================================================================
Net pension expense $3,829 $ 4,259 $ 4,203
=====================================================================
Assumptions used to determine the net pension expense of the Company-sponsored
defined benefit plans are as follows:
Year Ended December 31 1997 1996 1995
- ---------------------------------------------------------------------
Weighted average discount rate 7.5% 7.5% 8.5%
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%
=====================================================================
The following table sets forth the funded status and amounts recognized in the
consolidated balance sheets for the defined benefit pension plans using discount
rates of 7.25% and 7.75% at December 31, 1997, and 1996, respectively. The
assumed rate of increase in compensation levels was 5.3% in both years.
Year Ended December 31
(Dollars in thousands) 1997 1996
- -------------------------------------------------------------------------------
Assets Accumulated Assets Accumulated
Exceed Benefits Exceed Benefits
Accumulated Exceed Accumulated Exceed
Benefits Assets Benefits Assets
- -------------------------------------------------------------------------------
Actuarial present value of benefit
obligations:
Vested benefit obligation $186,675 $7,417 $163,375 $ 29,395
- -------------------------------------------------------------------------------
Accumulated benefit obligation $191,421 $7,849 $166,927 $ 29,783
- -------------------------------------------------------------------------------
Projected benefit obligation $200,929 $7,849 $182,288 $ 30,723
Plan assets at fair value 196,807 4,831 180,889 16,800
- -------------------------------------------------------------------------------
Plan assets in excess of (less than)
projected benefit obligation (4,122) (3,018) (1,399) (13,923)
Unrecognized net (gain) or loss --- --- (2,908) 2,734
Prior service cost not yet recognized
in net periodic pension cost --- --- 2,884 1,097
Unrecognized net (asset) obligation
at transition --- --- 1,836 4
Adjustment required to recognize
minimum liability --- --- --- (3,797)
================================================================================
Pension asset (liability) recognized
in the balance sheet $ (4,122) $ (3,018) $ 413 $ (13,885)
================================================================================
Effective with the December 31, 1996 measurement date, the discount rate,
expected long-term rate of return on assets and mortality assumptions were
revised to reflect current market and demographic conditions. As a result of
these changes, the December 31, 1996 projected benefit obligation increased by
approximately $11 million. These changes had no effect on the 1996 pension
expense and are not expected to have a material effect on future year's expense.
Plan assets at December 31, 1997 are invested in fixed dollar guaranteed
investment contracts, U.S. 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 plans covering substantially all
domestic, non-union employees. Eligible employees may generally contribute from
1% to 15% 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 at 25% of the first 6% of each
participant's pre-tax contribution. The Company's expense for 1997, 1996 and
1995 was $.6 million, $.7 million and $.3 million, respectively.
Note 13 Postretirement Benefits
In addition to providing pension benefits, the Company provides certain health
care and life insurance benefits for certain retired union employees. 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 non-union retiree
medical and life insurance. This amendment, which affects all current and future
non-union retirees, phased out the Company subsidy for retiree medical and life
insurance over the three-year period ended December 31, 1996. The pre-tax amount
amortized to income from continuing operations was $3.9 million in 1996 and in
1995. The amendment did not result in a significant increase or decrease in cash
requirements during the phase-out period.
The following tables set forth the plans' combined status reconciled with the
amounts included in the consolidated balance sheet:
December 31 (Dollars in thousands) 1997
- ----------------------------------------------------------------------
Life
Medical Insurance
Plans Plans Total
- ----------------------------------------------------------------------
Accumulated postretirement benefit obligation:
Retirees $ 7,165 $1,869 $9,034
Fully eligible active plan participants 76 49 125
Other active plan participants 144 42 186
- ----------------------------------------------------------------------
7,385 1,960 9,345
Plan assets --- --- ---
Unrecognized prior service cost --- 1,459 1,459
Unrecognized net gain 6,555 705 7,260
======================================================================
Postretirement benefit liability
recognized in the balance sheet $13,940 $4,124 $18,064
======================================================================
December 31 (Dollars in thousands) 1996
- ----------------------------------------------------------------------
Life
Medical Insurance
Plans Plans Total
- ----------------------------------------------------------------------
Accumulated postretirement benefit obligation:
Retirees $ 7,551 $1,965 $ 9,516
Fully eligible active plan participants 206 46 252
Other active plan participants 395 47 442
- ----------------------------------------------------------------------
8,152 2,058 10,210
Plan assets --- --- ---
Unrecognized prior service cost --- 1,605 1,605
Unrecognized net gain 6,502 801 7,303
======================================================================
Postretirement benefit liability
recognized in the balance sheet $14,654 $4,464 $19,118
======================================================================
The 1997 accrued postretirement benefits amount is classified as follows: $1.1
million current liabilities and $17 million long-term liabilities. For 1996,
these amounts are $1.7 million current liabilities and $17.4 million long-term
liabilities.
Effective January 1, 1997, the Company subsidy for medical coverage under the
Warren Pump Union plan was terminated. This termination resulted in a
curtailment gain of $.6 million for the year ended December 31, 1996.
Net periodic postretirement benefit cost included the following components:
Year Ended December 31
(Dollars in thousands) 1997
- ---------------------------------------------------------------------
Life
Medical Insurance
Plans Plans Total
- ---------------------------------------------------------------------
Service cost $ 7 $ 2 $ 9
Interest cost 571 154 725
Amortization of prior service cost --- (146) (146)
Amortization of gain (466) (40) (506)
- ---------------------------------------------------------------------
Net periodic postretirement benefit
cost $ 112 $ (30) $ 82
=====================================================================
Year Ended December 31
(Dollars in thousands) 1996
- ---------------------------------------------------------------------
Life
Medical Insurance
Plans Plans Total
- ---------------------------------------------------------------------
Service cost $ 24 $ 2 $ 26
Interest cost 650 157 807
Amortization of prior service cost (3,110) (2,318) (5,428)
Amortization of gain (449) (44) (493)
- ----------------------------------------------------------------------
Net periodic postretirement benefit
cost $(2,885) $(2,203) $(5,088)
======================================================================
Year Ended December 31
(Dollars in thousands) 1995
- ---------------------------------------------------------------------
Life
Medical Insurance
Plans Plans Total
- ---------------------------------------------------------------------
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)
======================================================================
Actual negotiated health care premiums were used in calculating 1997, 1996 and
1995 health care costs. It is expected that the annual increase in medical costs
will be 6.0% from 1997 to 1998, grading down to 5% general medical inflation
level in future years. 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, 1997 by $.6 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 7.75%
in 1997 and 1996.
Note 14 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, 1997, are:
(Dollars in thousands)
- ---------------------------------------------------------------------
1998 $ 4,975
1999 3,477
2000 2,532
2001 2,176
2002 1,973
Thereafter 5,230
- ---------------------------------------------------------------------
Total minimum lease payments $20,363
=====================================================================
Total rental expense under operating leases charged against continuing
operations was $7.8 million in 1997, $7.2 million in 1996 and $6.7 million in
1995.
Note 15 Contingencies
LILCO Insurance Litigation. 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 International was entitled to
recover $10 million in defense costs, and $1.2 million of a judgment, each of
which was paid on behalf of the Company in connection with litigation between
the Company and Long Island Lighting Company ("LILCO") which was concluded in
October 1993. International's principal contention was that the International
policies did not cover the matters in question in the LILCO case. 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. On May 8, 1997, the Company was informed that
the Court had reinstated the International Judgment. The Company therefore
recorded a charge to income in the first quarter of 1997 of $12.9 million as an
unusual item, which represented the amount of the judgment plus interest to
date. On July 15, 1997 the Company agreed to settle with International 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 (See Note 7).
Additional Litigation and Claims. 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 6,900 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. In addition, the Company and
the subsidiary are named in cases involving approximately 22,000 claimants which
in 1996 were "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 was a defendant in a lawsuit in the U.S. District Court for the
Western District of Pennsylvania, which alleged component failures in equipment
sold by its former diesel engine division. The complaint sought damages of
approximately $3 million. On September 30, 1997 the Court granted a Summary
Judgment motion filed by the Company which effectively dismissed all claims
against it. Plaintiffs have appealed this judgment to the United States Court of
Appeals for the Third Circuit.
The Company is a defendant in 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
million. To date the Court has granted a series of Summary Judgment motions
filed by the Company which have significantly reduced the scope of damages which
the Plaintiff may claim but has permitted additional discovery to determine
whether any other damages exist which plaintiff may be entitled to seek at a
trial.
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 plus
interest 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 and therefore a representation was breached. The contract was
subsequently awarded to the Company's Varo subsidiary and thereafter transferred
to the buyer. 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 Company is one of five defendants in an action brought in the United States
District Court for the Middle District of Louisiana. In April 1991 the Company's
former Deltex Division performed a repair of a turbine. Following the repair the
turbine was included in a spare parts pool until January 1995. The plaintiff
alleges that following installation in its plant the turbine experienced severe
vibrations requiring the turbine to be run at less than optimal speed. They
further allege that the shortfall in performance caused them to incur repair
costs, and consequential damages in excess of $5 million. The lawsuit is in the
early discovery stage, however, 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 of the Company.
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.
Report of Independent Public Accountants
To the Shareholders and Board of Directors of
Imo Industries Inc.:
We have audited the accompanying consolidated balance sheet of Imo Industries
Inc. (a Delaware corporation) and subsidiaries as of December 31, 1997, and the
related consolidated statements of income, shareholders' equity and cash flows
for the periods from August 29, 1997 through December 31, 1997
(post-Acquisition), and from January 1, 1997 through August 28, 1997
(pre-Acquisition.) 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 an audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Imo Industries Inc.
and subsidiaries as of December 31, 1997, and the results of their operations
and their cash flows for the periods from August 29, 1997 through December 31,
1997 (post-Acquisition), and from January 1, 1997 through August 28, 1997
(pre-Acquisition), in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Richmond, Virginia
March 20, 1998
F-32
Report of Independent Public Accountants on Schedule II
To the Shareholders and Board of Directors of
Imo Industries Inc.:
We have audited in accordance with generally accepted auditing standards, the
consolidated financial statements included in the Form 10-K Annual Report of Imo
Industries Inc. (a Delaware corporation) and subsidiaries as of December 31,
1997, and for the periods from August 29, 1997 through December 31, 1997
(post-Acquisition), and from January 1, 1997 through August 28, 1997
(pre-Acquisition), and have issued our report thereon dated March 20, 1998. Our
audits were made for the purpose of forming an opinion on the basic consolidated
financial statements taken as a whole. Schedule II filed as a part of the
Company's Form 10-K Annual Report is the responsibility of the Company's
management and is presented for purposes of complying with the Securities and
Exchange Commission's rules and is not a part of the basic consolidated
financial statements. This schedule has been subjected to the auditing
procedures applied in the audit of the basic consolidated financial statements
and, in our opinion, fairly states, in all material respects, the financial data
required to be set forth therein in relation to the basic consolidated financial
statements taken as a whole.
ARTHUR ANDERSEN LLP
Richmond, Virginia
March 20, 1998
F-33
REPORT OF INDEPENDENT AUDITORS
Board of Directors,
Imo Industries Inc.
We have audited the accompanying consolidated balance sheet of Imo Industries
Inc. and subsidiaries as of December 31, 1996, and the related consolidated
statements of income, shareholders' equity, and cash flows for each of the two
years in the period ended December 31, 1996. Our audits also included the
financial statement schedule listed in the Index at Item 14(a) for these same
periods. These financial statements and schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and schedule 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 also 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, 1996, and the consolidated
results of their operations and their cash flows for each of the two years in
the period ended December 31, 1996, in conformity with generally accepted
accounting principles. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic financial statements taken as
a whole, presents fairly in all material respects the information set forth
therein.
ERNST & YOUNG LLP
Princeton, New Jersey
February 19, 1997, except for
Note 3 as to which the date
is February 2, 1998
F-34
<TABLE>
Imo Industries Inc. and Subsidiaries
Quarterly Financial Information (Unaudited)
Quarterly financial information for 1997 and 1996 is as follows:
<CAPTION>
Pre-Acquisition Post-Acquisition
July 1, August
1997 to 29, 1997 to
1997 (Dollars in thousands 1st 2nd August September 4th
except per share amounts) (a) Quarter Quarter 28, 1997 30, 1997 Quarter
<S> <C> <C> <C> <C> <C>
Net Sales $ 78,927 $ 81,305 $ 49,919 $ 26,816 $ 79,895
Gross profit 24,628 25,797 14,450 7,316 22,798
Income (loss) before extraordinary item:
Continuing Operations (14,328) 1,205 (18,128) (5,717) 28
Discontinued Operations 1,486 1,224 (338) (8,860) (3,323)
Extraordinary Item --- --- --- (287) (3,061)
Net income (loss) (12,842) 2,429 (18,466) (14,864) (6,356)
Earnings (loss) per share, basic
and diluted:
Before extraordinary item:
Continuing Operations (.84) .07 (1.05) (.33) ---
Discontinued Operations .09 .07 (.02) (.52) (.19)
Extraordinary Item --- --- --- (.02) (.18)
Net income (loss) (.75) .14 (1.07) (.87) (.37)
1st* 2nd* 3rd* 4th*
1996 (Dollars in thousands except per Quarter Quarter Quarter Quarter
share amounts) (a)
Net Sales $ 80,062 $ 78,299 $ 75,498 $ 75,652
Gross profit 23,517 22,460 20,444 22,501
Income (loss) before extraordinary item:
Continuing Operations 749 (494) (12,525) (20,798)
Discontinued Operations 1,191 1,350 (7,241) (12,147)
Extraordinary Item --- (8,455) --- ---
Net income (loss) 1,940 (7,599) (19,766) (32,945)
Earnings (loss) per share, basic and
diluted:
Before extraordinary item:
Continuing Operations .04 (.03) (.73) (1.21)
Discontinued Operations .07 .08 (.43) (.71)
Extraordinary Item --- (.49) --- ---
Net income (loss) .11 (.44) (1.16) (1.92)
* Restated to conform to 1997 full year presentation.
(a) The notes to the consolidated financial statements located in Part IV of
this Form 10-K Report as indexed at Item 14(a)(1) should be read in conjunction
with this summary.
F-35
</TABLE>
<TABLE>
SCHEDULE II
IMO INDUSTRIES INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(Dollars in thousands)
THREE-YEAR PERIOD ENDED DECEMBER 31, 1997
- -----------------------------------------------------------------------------------------------
<CAPTION>
ADDITIONS
BALANCE ----------------------
AT CHARGED BALANCE
BEGINNING TO COSTS OTHER DEDUCTIONS AT END
OF YEAR EXPENSES - DESCRIBE - DESCRIBE OF YEAR
------- -------- ---------- ---------- -------
YEAR ENDED DECEMBER 31, 1997:
<S> <C> <C> <C> <C> <C> <C> <C>
Allowance for doubtful $ 1,346 $ 1,813 $ 32 (2) $ 295 (3) $ 1,435
accounts 55 (1)
1,406 (9)
========= ========= ========== ========= =========
Inventory valuation $ 9,929 $ 13,418 $ 360 (2) $ 3,613 (5) $ 9,508
allowance 382 (1)
10,204 (9)
========= ========= ========== ========= =========
Valuation allowance for $44,065 $ 9,192 $ --- $ --- $ 53,257
deferred tax assets
========= ========= ========== ========= =========
Accrued product $ 2,007 $ 1,815 $ --- $ 28 (1) $ 1,844
warranty liability 1,950 (4)
========= ========= ========== ========= =========
YEAR ENDED DECEMBER 31, 1996: *
Allowance for doubtful $ 1,507 $ 252 $ 19 (2) $ 398 (3) $ 1,346
accounts 34 (1)
========= ========= ========== ========= =========
Inventory valuation $ 9,560 $ 1,136 $ 305 (2) $ 1,213 (5) $ 9,929
allowance 141 (1)
========= ========= ========== ========= =========
Valuation allowance for $31,675 $12,390 $ --- $ --- $ 44,065
deferred tax assets
========= ========= ========== ========= =========
Accrued product $ 2,159 $ 2,473 $ --- $ 2,458 (4) $ 2,007
warranty liability 143 (2)
24 (1)
========= ========= ========== ========= =========
YEAR ENDED DECEMBER 31, 1995: *
Allowance for doubtful $ 1,696 $ 314 $ 30 (1) $ 545 (3) $ 1,507
accounts 12 (6)
========= ========= ========== ========= =========
Inventory valuation $ 9,582 $ 2,125 $ 273 (1) $ 74 (2) $ 9,560
allowance 30 (6) 2,376 (5)
========= ========= ========== ========= =========
Valuation allowance for $68,910 $ --- $ --- $ 15,550 (2) $31,675
deferred tax assets 17,000 (7)
4,685 (8)
========= ========= ========== ========= =========
Accrued product $ 1,925 $ 1,121 $ 404 (2) $ 1,342 (4) $ 2,159
warranty liability 42 (1)
9 (6)
========= ========= ========== ========= =========
* Restated to conform to the 1997 presentation (continuing operations).
(1) Foreign exchange adjustments
(2) Reclassifications and adjustments.
(3) Uncollectible accounts written off, net of recoveries.
(4) Product warranty claims honored during the year.
(5) Charges against inventory valuation account during the year.
(6) Opening balance of companies acquired during the year.
(7) Adjustment due to revaluation of realizable tax benefit.
(8) Utilization of net operating loss carryforwards by
discontinued operations.
(9) In conjunction with the Acquisition of the Company and purchase
accounting adjustments as of August 28, 1997, the reserves were reset
to zero.
S-1
</TABLE>
Amended and restated as of
December 17, 1997.
BY-LAWS
OF
IMO INDUSTRIES INC.
ARTICLE I
OFFICES
Section I.1 The registered office of the Corporation shall be in the
City of Wilmington, County of New Castle, State of Delaware.
Section 1.2 The Corporation may also have offices at such other
places as the Board of Directors may from time to time determine or the business
of the Corporation may require.
ARTICLE II
SEAL
Section II.1 The corporate seal shall have inscribed thereon the
name of the Corporation, and the words "Incorporated March 2, 1959 Delaware."
Said seal may be used by causing it or a facsimile thereof to be impressed or
affixed or otherwise reproduced. The Secretary may have duplicate seals made and
deposited for use with such offices as the Board of Directors may designate.
Section II.2 It shall not be necessary to the validity of any
instrument executed by any authorized officer or officers of the Corporation
that the execution of such instrument be evidenced by the corporate seal. All
documents, instruments, contracts and writings of all kinds signed on behalf of
the Corporation by any authorized officer or officers thereof shall be as
effectual and binding on the Corporation without the corporate seal as if the
execution of the same had been evidenced by affixing the corporate seal thereto.
ARTICLE III
MEETINGS OF STOCKHOLDERS
Section III.1 All meetings of the stockholders shall be held at such
office or place, within or without the State of Delaware, as may be designated
by the Board of Directors and as shall be specified in the notice of the
meeting.
Section III.2 The annual meeting of the stockholders shall be held
on such day of the year and at such place and time as shall be designated by the
Board of Directors and specified in the notice of the annual meeting. At the
annual meeting the stockholders shall elect a Board of Directors by a plurality
vote and by written ballot, and transact such other business as may properly be
brought before the meeting.
Section III.3 The holders of a majority of the shares of stock
issued and outstanding and entitled to vote, present in person or represented by
proxy, shall be requisite and shall constitute a quorum at all meetings of the
stockholders for the transaction of business except as otherwise provided by
law, by the Restated Certificate of Incorporation or by these By-Laws. If,
however, such majority shall not be present or represented at any meeting of the
stockholders, the stockholders entitled to vote, present in person or by proxy,
shall have power to adjourn the meeting from time to time, without notice other
than announcement at the meeting, until a quorum shall be present or
represented. At such adjourned meeting at which a quorum is present or
represented, any business may be transacted which might have been transacted at
the original meeting.
Section III.4 At each meeting of the stockholders every stockholder
having the right to vote shall be entitled to vote in person or by proxy
appointed by an instrument in writing executed by such stockholder or by his
duly authorized attorney and submitted to the Secretary at or before such
meeting, but no such proxy shall be voted or acted upon after three years from
its date, unless proxy provides for a longer period. Each stockholder shall have
one vote for each share of stock having voting power, registered in his name on
the books of the Corporation; provided, however, that except where a date shall
have been fixed as a record date for the determination of stockholders entitled
to vote as provided in these By-Laws, no share of stock shall be voted at any
election for directors which has been transferred on the books of the
Corporation after the close of business on the day next preceding the day on
which notice of such meeting is given. The Board of Directors, in its
discretion, or the officer of the Corporation presiding at a meeting of
stockholders, in his discretion, may require that any votes cast at such meeting
shall be cast by written ballot except that all elections of directors by the
stockholders shall be by written ballot. When a quorum exists at any meeting,
the vote of the holders of a majority of the stock having voting power present
in person or represented by proxy shall decide any question brought before such
meeting, unless the question is one for which, by express provision of statute
or of the Restated Certificate of Incorporation or of these By-Laws, a different
vote is required.
Section III.5 Written notice of the annual meeting shall be mailed
to each stockholder entitled to vote thereat at such address as appears on the
records of the corporation, not less than ten nor more than sixty days prior to
the meeting.
Section III.6 Special meetings of the stockholders, for any purpose
or purposes, unless otherwise prescribed by statute, may be called by the
Chairman of the Board and shall be called by him or the Secretary at the request
in writing of a majority of the Board of Directors then in office. Such request
shall state the purpose or purposes of the proposed meeting.
Section III.7 Business transacted at all special meetings shall be
confined to the objects stated in the notice thereof.
Section III.8 Written notice of a special meeting of stockholders,
stating the time and place and object thereof, shall be mailed, postage prepaid,
at least ten but not more than sixty days before such meeting, to each
stockholder entitled to vote thereat at such address as appears on the records
of the Corporation.
Section III.9 The officer of the Corporation who has charge of the
stock ledger of the Corporation shall prepare and make, at least ten days before
every meeting of stockholders, a complete list of the stockholders entitled to
vote at the meeting, arranged in alphabetical order, and showing the address of
each stockholder and the number of shares registered in the name of each
stockholder. Such list shall be open to the examination of any stockholder, for
any purpose germane to the meeting, during ordinary business hours, for a period
of at least ten days prior to the meeting, either at a place within the city
where the meeting is to be held, which place shall be specified in the notice of
the meeting, or, if not so specified, at the place where the meeting is to be
held. The list shall also be produced and kept at the time and place of the
meeting during the whole time thereof, and may be inspected by any stockholder
of the Corporation who is present. The stock ledger of the Corporation shall be
the only evidence as to who are the stockholders entitled to examine the stock
ledger, the list required by this Section 3.9 or the books of the Corporation,
or to vote in person or by proxy at any meeting of stockholders.
Section III.10 In advance of any meeting of the stockholders, the
Board of Directors may appoint judges of election, who need not be stockholders,
to act at such meeting or any adjournment thereof. If judges of election are not
so appointed, the chairman of any such meeting may make such appointment at the
meeting. The number of judges shall be one or three. No person who is a
candidate for office shall act as a judge. The judges of election shall do all
such acts as may be proper to conduct the election or vote and such other duties
as may be prescribed by statute with fairness to all stockholders, and, if
requested by the chairman of the meeting, shall make a written report of any
matter determined by them and execute a certificate as to any fact found by
them. If there be three judges of election, the decision, act or certificate of
a majority shall be the decision, act or certificate of all.
Section III.11 Meetings of the stockholders shall not be conducted
pursuant to Robert's Rules of order and shall be conducted in such manner and by
such practices and procedures as the Chairman of such meeting shall, in his
discretion, deem to be fair and equitable.
Section III.12 Any stockholder who wishes to nominate an individual
as a director of the Corporation must submit in writing to the Board of
Directors, at least 45 days before the date of the meeting of stockholders for
election of directors at which such nomination is proposed to be made,
information concerning such candidate equivalent to the information contained in
the Corporation's Proxy Statement concerning the Board of Directors' nominee;
provided, however, that with respect only to the 1987 annual meeting of
stockholders such information must be submitted at least ten days before the
date of the 1987 annual meeting of stockholders.
ARTICLE IV
DIRECTORS
Section IV.1 The business and affairs of the Corporation shall be
managed by or under the direction of the Board of Directors. The specific number
of directors shall be fixed from time to time exclusively by the Board of
Directors. The directors shall be divided into three classes, designated Class
I, Class II and Class III, and each Class shall consist, as nearly as may be
possible, of one-third of the total number of directors constituting the entire
Board of Directors. As of the adoption (in December 1986) of these By-Laws, five
directors have been elected, of which one is a Class I Director with a term
expiring at the 1987 annual meeting of stockholders, two are Class II Directors
with terms expiring at the 1988 annual meeting of stockholders, and two are
Class III Directors with terms expiring at the 1989 annual meeting of
stockholders. At the 1987 annual meeting of stockholders, a Class I Director
shall be elected for a three-year term. At each succeeding annual meeting of
stockholders beginning in 1988, successors to the class of directors whose term
expires at that annual meeting shall be elected for a three-year term. In case
the Board of Directors shall change the number of directors, any increase or
decrease shall be apportioned among the classes so as to maintain the number of
directors in each class as nearly equal as possible and any additional directors
of any class elected to fill a vacancy resulting from an increase in such class
shall hold office for a term that shall coincide with the remaining term of that
class, but in no case will a decrease in the number of directors shorten the
term of any incumbent director. A director shall hold office until the annual
meeting for the year in which such director's term expires and until his or her
successor shall be elected and qualified, subject, however, to such director's
prior death, resignation, retirement, disqualification or removal from office.
Section IV.2 Any vacancy in the Board of Directors which results
from an increase in the number of directors may be filled by a majority of the
directors then in office, provided that a quorum is present, and any other
vacancy occurring in the Board of Directors may be filled by a majority of the
directors then in office, even if less than a quorum, or by a sole remaining
director, and each director elected to fill a vacancy not resulting from an
increase in the number of directors shall have the same remaining term as that
of such director's predecessor.
Notwithstanding the foregoing, whenever the holders of any one or
more classes or series of preferred stock issued by the Corporation shall have
the right, voting separately by class or series, to elect directors at an annual
or special meeting of stockholders, the election, term of office, filling of
vacancies and other features of such directorships shall be governed by the
terms of the Corporation's Restated Certificate of Incorporation applicable
thereto, and such directors so elected shall not be divided into classes unless
expressly provided by the terms thereof. The directors of the Corporation need
not be stockholders.
Section IV.3 The directors may hold their meetings and have one or
more offices, and keep the books of the Corporation outside of Delaware or at
such other offices of the Corporation or other places as they may from time to
time determine.
Section IV.4 Directors, in addition to expenses of attendance, shall
be allowed such compensation as may be fixed from time to time by the Board of
Directors; provided that nothing herein contained shall be construed to preclude
any director from serving the Corporation in any other capacity and receiving
compensation therefor.
Section IV.5 In addition to the powers by these By-Laws expressly
conferred upon it, the Board may exercise all such powers of the Corporation and
do all such lawful acts and things as are not by statute or by the Restated
Certificate of Incorporation or by these By-Laws directed or required to be
exercised or done by the stockholders.
Section IV.6 directors may hold office until age 72. If any director
will attain age 72 later than 24 months following April 1 in the year in which
such director would stand for election or re-election, he may do so. If any
director will attain age 72 earlier than 24 months following April 1 in the year
in which such director would stand for election or reelection, he may not do so.
Nevertheless, directors who are also employees of the Corporation or any of its
subsidiaries shall be limited to remaining a director for a period of one year
following termination of employment unless such employee-director was the Chief
Executive Officer of the Corporation immediately preceding termination of
employment, in which case only the age 72 limitation shall apply, as described
herein. Nothing stated herein shall affect the right to otherwise disqualify or
remove a director from office as stated in section 4.1 hereof.
ARTICLE V
COMMITTEES
Section 5.1 The Board of Directors may designate an Executive
Committee to consist of three or more directors to hold office at the
pleasure of the Board and may fill vacancies in, or reconstitute the
membership of, the Executive Committee. Meetings of the Executive
Committee for any purpose or purposes may be called by the Chairman of the
Board or the Chairman of the Executive Committee, and shall be called by
either of them at the request in writing of at least two members of the
Executive Committee, to be held in such places as shall be designated from
time to time by the Chairman of the Board, the Chairman of the Executive
Committee or such members of the Executive Committee and indicated in the
notice of such meetings. At least twenty-four hours' notice of such
meetings shall be given to each member of the Executive Committee either
personally or by facsimile or by telephone.
The Executive Committee shall have full power to take all action
which the Board of Directors has power to take, except as limited by
Section 141 of the General Corporation Law of the State of Delaware. All
obligations incurred by the Corporation pursuant to action of the
Executive Committee shall be as valid and legally binding upon the
Corporation as those incurred pursuant to the action of the Board of
Directors. The Secretary or a member of the Executive Committee shall keep
minutes of all its proceedings, all of which shall be reported as soon as
practicable to the Board of Directors, but in no event later than the next
meeting of the Board of Directors. The Chairman of the Executive Committee
shall preside at all meetings of the Executive Committee and in his
absence the Executive Committee shall select from its members a Chairman
of each meeting. The presence of a majority of the members of the
Executive Committee (but in no event less than two) shall be necessary to
constitute a quorum for the transaction of business. A majority of the
members of the Executive Committee shall be "independent directors."
Independent directors are directors who are not at the time employees of
the Company. If there is an Executive Committee, the Chairman of the Board
shall at all times be a member, and may also be the Chairman of the
Executive Committee.
Section 5.2 The Board of Directors shall have an Audit Committee and
a Compensation Committee composed of directors and having such purposes,
powers and duties as the Board shall prescribe. The Executive, Audit and
Compensation Committee are referred to as "Standing Committees." The Board
of Directors may from time to time create such other committees of the
Board composed of directors for such purposes and with such powers and
duties as the Board shall prescribe. Such other committees are referred to
as "Special Committees." A majority of all the members of any Standing
Committee or Special Committee may take action on its behalf. The Chairman
of any Standing or Special Committee (except as provided in paragraph 5.1
with respect to the Executive Committee) shall fix the time and place of
its meetings unless the Board of Directors shall otherwise provide. The
Board of Directors shall have power to change the members of any such
Standing or Special Committee at any time, to fill vacancies, and to
discharge any such Standing or Special Committee, either with or without
cause, at any time. The Board may delegate to a Standing or Special
Committee the full power of the Board with respect to a particular matter.
Section 5.3 Members of the Executive Committee and of any other
Special or Standing Committee shall, in addition to expenses of
attendance, be allowed such compensation as may be fixed from time to time
by the Board of Directors.
Section 5.4 The term of a Standing Committee shall be for one year
unless otherwise prescribed by the Board.
ARTICLE VI
MEETINGS OF THE BOARD
Section VI.1 The organization meeting of each newly elected Board of
Directors may be held immediately following the stockholders meeting at which
such directors were elected without the necessity of notice to such directors to
constitute a legally convened meeting or at such time and place as may be fixed
by a notice, or a waiver of notice, or a consent signed by all of such
directors.
Section VI.2 Regular meetings of the Board of Directors shall be
held without call or notice at such time and place as shall from time to time be
fixed by the Board.
Section VI.3 Special meetings of the Board may be called by the
Chairman of the Board on forty-eight hours' notice to each director, either
personally or in writing by mail, or by telegram, or by telephone; special
meetings shall be called by the Chairman of the Board or the Secretary in like
manner and on like notice on the written request of three directors. Notice of
special meetings of the Board shall state the time and place of the meeting but
need not state the purpose thereof except as otherwise expressly provided in
these By-Laws.
Section VI.4 One or more directors may participate in any meeting of
the Board of Directors, or of any committee thereof, by means of a conference
telephone or similar communications equipment which enables all persons
participating in the meeting to hear one another, and such participation in a
meeting shall constitute presence in person at the meeting.
Section VI.5 At all meetings of the Board of Directors, the
presence, in person or by telephonic or similar communications equipment, of a
majority of the directors shall constitute a quorum for the transaction of
business, and the act of a majority of the directors present at a duly convened
meeting at which a quorum is present shall be the act of the Board of Directors,
except as may be otherwise specifically provided by statute or by the Restated
Certificate of Incorporation or by these By-Laws. If a quorum shall not be
present, in person or by telephonic or similar communications equipment, at any
meeting of the Board of Directors, the directors present may adjourn the meeting
from time to time, without notice other than announcement at the meeting, until
a quorum shall be present.
Section VI.6 Any action required or permitted to be taken at any
meeting of the Board of Directors or of any committee thereof may be taken
without a meeting if all members of the Board of Directors or a committee
thereof, as the case may be, consent thereto in writing, and such consent or
consents is or are filed with the Secretary of the Corporation.
ARTICLE VII
OFFICERS
Section VII.1 The officers of the Corporation shall be chosen by the
directors and shall be a Chairman of the Board, a President, one or more
Vice-Presidents, a Treasurer, a Secretary, and one or more Assistant Treasurers,
and Assistant Secretaries. The Board of Directors may also choose such other
officers as they may determine. Any number of offices may be held by the same
person.
Section VII.2 The Board of Directors, at its organizational meeting
after each annual meeting of stockholders, shall choose a Chairman of the Board,
a President, one or more Vice-Presidents, the Secretary, the Treasurer, and such
other officers as they may determine, none of whom, except the Chairman of the
Board, need be members of the Board. At such meeting, the Board of Directors
shall also choose a Chairman of the Executive, Audit and Compensation
Committees, respectively.
Section VII.3 The Board may appoint such other officers and agents
as it shall deem necessary, who shall hold their offices for such terms and
shall exercise such powers and perform such duties as shall be determined from
time to time by the Board.
Section VII.4 The salary of the Chairman of the Board shall be fixed
by the Board of Directors. The salaries of all officers of the Corporation may
be fixed by the Board of Directors or the Board may authorize the Chairman of
the Board to fix their salaries and report thereon to the Board.
Section VII.5 The officers of the Corporation shall hold office
until their successors are chosen and qualify or until their earlier resignation
or removal. Any officer elected or appointed by the Board of Directors may be
removed at any time by the Board of Directors without prejudice to his contract
rights. If the office of any officers or officers becomes vacant for any reason,
the vacancy shall be filled by the Board of Directors.
Section VII.6 In the case of the absence of any officer of the
Corporation, or for any other reason that the Board may deem sufficient, the
Board may delegate, for the time being, the powers or duties, or any of them, of
such officer to any other officer.
ARTICLE VIII
THE CHAIRMAN OF THE BOARD
Section VIII.1 The Chairman of the Board shall preside at all
meetings of the stockholders and of the Board of Directors. The Chairman of
the Board shall be an officer of the Corporation.
Section VIII.2 In the absence of disability of the Chairman of the
Board, the President shall perform the duties and exercise the powers of the
Chairman of the Board.
ARTICLE IX
THE PRESIDENT
Section IX.1 The President shall perform such duties and have such
powers as from time to time may be assigned to him by the Board of Directors or
the Chairman of the Board.
Section IX.2 In the absence or disability of the President, a
Vice-President designated by the Board of Directors or by the Chairman of the
Board shall perform the duties and exercise the powers of the President.
ARTICLE X
VICE-PRESIDENTS
Section X.1 The Vice-Presidents shall respectively perform such
duties and have such powers as may be assigned to each of them by the Board of
Directors or by the Chairman of the Board.
ARTICLE XI
THE SECRETARY AND ASSISTANT SECRETARIES
Section XI.1 The Secretary shall attend all sessions of the Board
and all meetings of the stockholders and record all votes and the minutes of all
proceedings in a book to be kept for that purpose; and shall perform like duties
for the Standing Committees when required. The Secretary shall give, or cause to
be given, notice of all meetings of the stockholders and the Board of Directors.
The Secretary shall keep in safe custody the seal of the Corporation, and shall
have authority to affix the same to any instrument requiring it.
Section XI.2 The Assistant Secretaries, in the order of their
seniority, shall, in the absence or disability of the Secretary, perform the
duties and exercise the powers of the Secretary.
ARTICLE XII
THE TREASURER AND ASSISTANT TREASURERS
Section XII.1 The Treasurer shall have the custody of the corporate
funds and securities and shall deposit all moneys and other valuable effects in
the name and to the credit of the Corporation, in such depositories as may be
designated by the Board of Directors.
Section XII.2 The Treasurer shall disburse the funds of the
Corporation as may be ordered by the Board or by the Chairman of the Board,
taking proper vouchers for such disbursements, and shall render to the Chairman
of the Board and the Board of Directors, at the regular meetings of the Board,
or whenever they may require it, an account of all his transactions as
Treasurer.
Section XII.3 The Treasurer shall give the Corporation a bond, if
required by the Board of Directors, in a sum, and with one or more sureties,
satisfactory to the Board, for the faithful performance of the duties of his
office, and for the restoration to the Corporation, in case of his death,
resignation, retirement or removal from office, of all books, papers, vouchers,
money and other property of whatever kind in his possession or under his control
belonging to the Corporation; but the Board of Directors may, if they see fit,
dispense with such bond.
Section XII.4 The Assistant Treasurers, in the order of their
seniority shall, in the absence or disability of the Treasurer, perform the
duties and exercise the powers of the Treasurer.
ARTICLE XIII
INDEMNIFICATION
Section XIII.1 Subject to the Section 13.3, the Corporation shall
indemnify any person who was or is a party or is threatened to be made a party
to any threatened, pending or completed action, suit or proceeding, whether
civil, criminal, administrative or investigative (other than an action by or in
the right of the Corporation) by reason of the fact that he is or was a
director, officer or employee of the Corporation, or is or was serving at the
request of the Corporation as a director, officer, or employee of another
corporation, partnership, joint venture, trust or other enterprise, against
expenses (including attorneys' fees), judgments, fines and amounts paid in
settlement actually and reasonably incurred by him in connection with such
action, suit or proceeding if he acted in good faith and in a manner he
reasonably believed to be in, or not opposed to the best interests of the
Corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful. The termination of any
action, suit or proceeding by judgment, order, settlement, conviction, or upon a
plea of nolo contendere or its equivalent, shall not, of itself, create a
presumption that the person did not act in good faith and in a manner which he
reasonably believed to be in, or not opposed to, the best interests of the
Corporation, and, with respect to any criminal action or proceeding, had
reasonable cause to believe that his conduct was unlawful.
Section XIII.2 Subject to Section 13.3, the Corporation shall
indemnify any person who was or is a party or is threatened to be made a party
to any threatened, pending or completed action or suit by or in the right of the
Corporation to procure a judgment in its favor by reason of the fact that he is
or was a director, officer, or employee of the Corporation, or is or was serving
at the request of the Corporation as a director, officer, or employee of another
corporation, partnership, joint venture, trust or other enterprise against
expenses (including attorneys' fees) actually and reasonably incurred by him in
connection with the defense or settlement of such action or suit if he acted in
good faith and in a manner he reasonably believed to be in, or not opposed to,
the best interests of the Corporation; except that no indemnification shall be
made in respect of any claim, issue or matter as to which such person shall have
been adjudged to be liable to the Corporation unless and only to the extent that
the Court of Chancery or the court in which such action or suit was brought
shall determine upon application that, despite the adjudication of liability but
in view of all the circumstances of the case, such person is fairly and
reasonably entitled to indemnity for such expenses which the Court of Chancery
or such other court shall deem proper.
Section XIII.3 Any indemnification under this Article XIII (unless
ordered by a court) shall be made by the Corporation only as authorized in the
specific case upon a determination that indemnification of the director,
officer, or employee is proper in the circumstances because he has met the
applicable standard of conduct set forth in Section 13.1 or Section 13.2 of this
Article XIII, as the case may be. Such determination shall be made (i) by the
Board of Directors by a majority vote of a quorum consisting of directors who
were not parties to such action, suit or proceeding, or (ii) if such a quorum is
not obtainable, or, even if obtainable a quorum of disinterested directors so
directs, by independent legal counsel in a written opinion, or (iii) by the
stockholders. To the extent, however, that a director, officer, or employee of
the Corporation has been successful on the merits or otherwise in defense of any
action, suit or proceeding described above, or in defense of any claim, issue or
matter therein, he shall be indemnified against expenses (including attorneys'
fees) actually and reasonably incurred by him in connection therewith, without
the necessity of authorization in the specific case.
Section XIII.4 For purposes of any determination under Section 13.3
of this Article XIII, a person shall be deemed to have acted in good faith and
in a manner he reasonably believed to be in, or not opposed to, the best
interests of the Corporation, or, with respect to any criminal action or
proceeding, to have had no reasonable cause to believe his conduct was unlawful,
if his action is based on the records or books of account of the Corporation or
another enterprise, or on information supplied to him by the officers of the
Corporation or another enterprise in the course of their duties, or on the
advice of legal counsel for the Corporation or another enterprise or on
information or records given or reports made to the Corporation or another
enterprise by an independent certified public accountant or by an appraiser or
other expert selected with reasonable care by the Corporation or another
enterprise. The term "another enterprise" as used in this Section 13.4 shall
mean any other corporation or any partnership, joint venture, trust or other
entity of which such person is or was serving at the request of the Corporation
as a director, officer, or employee. The provisions of this Section 13.4 shall
not be deemed to be exclusive or to limit in any way the circumstances in which
a person may be deemed to have met the applicable standard of conduct set forth
in Sections 13.1 or 13.2 of this Article XIII, as the case may be.
Section XIII.5 Notwithstanding any contrary determination in the
specific case under Section 13.3 of this Article XIII, and notwithstanding the
absence of any determination thereunder, any director, officer, or employee may
apply to any court of competent jurisdiction in the State of Delaware for
indemnification to the extent otherwise permissible under Sections 13.1 or 13.2
of this Article XIII. The basis of such indemnification by a court shall be a
determination by such court that indemnification of the director, officer, or
employee is proper in the circumstances because he has met the applicable
standards of conduct set forth in Sections 13.1 or 13.2 of this Article XIII, as
the case may be. Notice of any application for indemnification pursuant to this
Section 13.5 shall be given to the Corporation promptly upon the filing of such
application.
Section XIII.6 Expenses incurred in defending or investigating a
threatened or pending action, suit or proceeding shall be paid by the
Corporation in advance of the final disposition of such action, suit or
proceeding upon receipt of an undertaking by or on behalf of the director,
officer, or employee to repay such amount if it shall ultimately be determined
that he is not entitled to be indemnified by the Corporation as authorized in
this Article XIII.
Section XIII.7 The indemnification and advancement of expenses
provided by, or granted pursuant to, the other Sections of this Article XIII
shall not be deemed exclusive of any other rights to which those seeking
indemnification or advancement of expenses may be entitled under any By-Law,
agreement, contract, vote of stockholders or disinterested directors or pursuant
to the direction (howsoever embodied) of any court of competent jurisdiction or
otherwise, both as to action in his official capacity and as to action in
another capacity while holding such office, it being the policy of the
Corporation that indemnification of, and advancement of expenses to, the persons
specified in Sections 13.1 and 13.2 of this Article XIII shall be made to the
fullest extent permitted by law. To this end, the provisions of this Article
XIII shall be deemed to have been amended for the benefit of such persons
effective immediately upon any modification of the General Corporation Law of
Delaware which expands or enlarges the power or obligation of corporations
organized under such Law to indemnify, or advance expenses to, such persons. The
Corporation shall have authority to (i) deposit funds in trust or in escrow,
(ii) establish any form of self-insurance, (iii) secure its indemnity obligation
by grant of a security interest or other lien on the assets of the Corporation,
or (iv) establish a letter of credit, guaranty or surety arrangement for the
benefit of such persons in connection with the anticipated indemnification or
advancement of expenses contemplated in this Article XIII. The provisions of
this Article XIII shall not be deemed to preclude the indemnification of, or
advancement of expenses to, any person who is not specified in Sections 13.1 or
13.2 of this Article XIII but whom the Corporation has the power or obligation
to indemnify, or to advance expenses for, under the provisions of the General
Corporation Law of the State of Delaware, or otherwise. The indemnification and
advancement of expenses provided by, or granted pursuant to, this Article XIII
shall, unless otherwise provided when authorized or ratified, continue as to a
person who has ceased to be a director, officer and employee and shall inure to
the benefit of the heirs, executors and administrators of such person. The
undertaking of the Corporation to provide indemnification and advancement of
expenses, which is provided by or granted pursuant to this Article XIII, shall
constitute a contractual obligation between the Corporation and each director,
officer and employee of the Corporation.
Section XIII.8 The Corporation may purchase and maintain insurance
on behalf of any person who is or was a director, officer or employee of the
Corporation, or is or was serving at the request of the Corporation as a
director, officer or employee of another corporation, partnership, joint
venture, trust or other enterprise against any liability asserted against him
and incurred by him in any such capacity, or arising out of his status as such,
whether or not the Corporation would have the power of the obligation to
indemnify him against such liability under the provisions of this Article XIII.
Section XIII.9 For purposes of this Article XIII, references to the
"Corporation" shall include, in addition to the resulting corporation, any
constituent corporation (including any constituent of a constituent) absorbed in
a consolidation or merger which, if its separate existence had continued, would
have had power and authority to indemnify its directors, officers, and employees
so that any person who is or was a director, officer or employee of such
constituent corporation, or is or was serving at the request of such constituent
corporation as a director, officer or employee of another corporation,
partnership, joint venture, trust or other enterprise, shall stand in the same
position under the provisions of this Article XIII with respect to the resulting
or surviving corporation as he would have with respect to such constituent
corporation if its separate existence had continued.
Section XIII.10 Notwithstanding any other provision of these
By-Laws, the repeal of any amendment of this Article XIII which diminishes,
impairs or otherwise adversely affects the rights to indemnification or
advancement of expenses afforded to a director, officer or employee by, or
granted pursuant to, this Article XIII shall be effective only with respect to
acts or omissions occurring after the effective date of such repeal or
amendment. The provisions of this Article XIII in effect immediately prior to
such repeal or amendment shall be determinative as to the rights to
indemnification and advancement of expenses afforded to such persons with
respect to acts or omissions occurring at any time prior to such repeal or
amendment.
ARTICLE XIV
CERTIFICATES OF STOCK
Section XIV.1 The certificates of stock of the Corporation shall be
numbered and shall be entered in the books of the Corporation as they are
issued. They shall exhibit the holder's name and number of shares and shall be
signed by the Chairman of the Board, the President or a Vice-President, and by
the Treasurer or an Assistant Treasurer or the Secretary or an Assistant
Secretary. Where a certificate is countersigned (a) by a transfer agent other
than the Corporation or its employee, or (b) by a registrar other than the
Corporation or its employee, any other signature on the certificate may be
facsimile. In case any officer, transfer agent or registrar who has signed or
whose facsimile signature has been placed upon a certificate shall have ceased
to be such officer, transfer agent or registrar before such certificate is
issued, it may be issued by the Corporation with the same effect as if he were
such officer, transfer agent or registrar at the date of issue.
ARTICLE XV
TRANSFERS OF STOCK
Section XV.1 Transfers of stock shall be made on the books of the
Corporation only by the person named in the certificate or by attorney, lawfully
constituted in writing, and upon surrender of the certificate therefor.
ARTICLE XVI
FIXING RECORD DATE
Section XVI.1 In order that the Corporation may determine the
stockholders entitled to notice of or to vote at any meeting of stockholders or
any adjournment thereof, or entitled to receive payment of any dividend or other
distribution or allotment of any rights, or entitled to exercise any rights in
respect of any change, conversion or exchange of stock or for the purpose of any
other lawful action, the Board of Directors may fix, in advance, a record date,
which shall not be more than sixty nor less than ten days before the date of
such meeting, nor more than sixty days prior to any other action. A
determination of stockholders or record entitled to notice of or to vote at a
meeting of stockholders shall apply to any adjournments of the meeting;
provided, however, that the Board of Directors may fix a new record date for the
adjourned meeting.
ARTICLE XVII
REGISTERED STOCKHOLDERS
Section XVII.1 The Corporation shall be entitled to treat the holder
of record of any share of shares of stock as the holder in fact thereof and
accordingly shall not be bound to recognize any equitable or other claim to or
interest in such share on the part of any other person, whether or not it shall
have express or other notice thereof, save as expressly provided by the laws of
Delaware.
ARTICLE XVIII
LOST CERTIFICATES
Section XVIII.1 The Board of Directors may authorize the issue of a
new certificate of stock in the place or any certificate theretofore issued by
the Corporation, alleged to have been lost, stolen or destroyed, and the Board
of Directors may, in their discretion, require the owner of the lost, stolen or
destroyed certificate, or his legal representatives, to give the Corporation a
bond sufficient to indemnify the Corporation against any claim that may be made
against it on account of the alleged loss, theft or destruction of any such
certificate and to furnish some proof of the loss, theft or destruction of such
certificate as they shall deem proper and to comply with such other regulations
as the Board shall from time to time fix including advertising such loss or
destruction in such manner as the Board of Directors may require. A new
certificate may be issued without requiring any bond when, in the judgment of
the Board of Directors, it is proper to do so.
ARTICLE XIX
INSPECTION OF BOOKS AND RECORDS
Section XIX.1 The directors shall determine from time to time
whether, and if allowed, when and under what conditions and regulations the
books and records of the Corporation (except such as may by statute be
specifically open to inspection) or any of them shall be open to the inspection
of the stockholders, and the stockholders' rights in this respect are and shall
be restricted and limited accordingly.
ARTICLE XX
CHECKS
Section XX.1 All checks or demands for money and notes of the
Corporation shall be signed by such officer or officers as the Board of
Directors may from time to time designate.
ARTICLE XXI
FISCAL YEAR
Section XXI.1 The fiscal year of the Corporation shall be as
determined by the Board of Directors.
ARTICLE XXII
DIVIDENDS
Section XXII.1 Dividends upon the capital stock of the Corporation,
subject to the provisions of the Restated Certificate of Incorporation, if any,
may be declared by the Board of Directors at any regular or special meeting,
pursuant to law. Dividends may be paid in cash, in property, or in shares of the
capital stock.
Section XXII.2 Before payment of any dividend, there may be set
aside out of any funds of the Corporation available for dividends such sum or
sums as the directors from time to time, in their absolute discretion, think
proper as a reserve fund to meet contingencies, or for equalizing dividends, or
for repairing or maintaining any property of the Corporation, or for such other
purpose as the directors shall think conducive to the interests of the
Corporation.
ARTICLE XXIII
DIRECTORS' ANNUAL STATEMENTS
Section XXIII.1 The Board of Directors shall present at each annual
meeting of the stockholders a full and clear statement of the business and
affairs of the Corporation for the preceding year.
ARTICLE XXIV
NOTICES
Section XXIV.1 Whenever under the provisions of these By-Laws notice
is required to be given to any director, committee member, officer or
stockholder, it shall not be construed to mean personal notice, but such notice
may be given, in the case of stockholders, in writing, by mail, by depositing
the same in the post office or letter-box, in a postpaid sealed wrapper,
addressed to such stockholder, at such address as appears on the books of the
Corporation, or, in default of other address, to such stockholder at the General
Post Office in the City of Wilmington, Delaware, and in the case of directors,
committee members and officers, by telephone, or by mail or by telegram to the
last business address known to the Secretary of the Corporation, and such notice
shall be deemed to be given at the time when the same shall be thus mailed or
telegraphed or telephoned.
ARTICLE XXV
WAIVER OF NOTICE
Section XXV.1 Whenever, under the provisions of these By-Laws or of
any law, the stockholders, directors or committees are authorized to hold any
meeting after notice or after a particular notice, or after the lapse of any
prescribed period of time, such meeting may be held without notice or without
said particular notice or without such lapse of time by the written waiver or
waivers of notice and written consent or consents to act, signed by every person
entitled to such notice, or entitled to be present at any such meeting or
participate in any such action, whether signed before or after the time stated
therein. Except as otherwise provided by law, attendance of a person at a
meeting shall constitute a waiver of notice of such meeting.
ARTICLE XXVI
AMENDMENTS
Section XXVI.1 These By-Laws may be amended or repealed and new
By-Laws may be adopted by (a) the affirmative vote of a majority of the Board of
Directors then in office, at any meeting of the Board of Directors or (b) the
affirmative vote of the holders of at least eighty percent (80%) of the voting
power of all of the issued and outstanding shares of stock of the Corporation
which are entitled to vote either (i) at the annual stockholders meeting or (ii)
at any special stockholders meeting, provided, in the case of the annual or any
special meeting of stockholders, a brief description of such proposed amendment
or repeal and adoption of new By-Laws is contained in the notice of such annual
or special stockholders meeting. Notwithstanding the foregoing, the repeal or
any amendment of Article XIII shall be subject to the provisions of Section
13.10.
SECOND SUPPLEMENTAL INDENTURE
SECOND SUPPLEMENTAL INDENTURE dated as of August 26, 1997 between
IMO INDUSTRIES INC., a Delaware corporation (the "Company"), and IBJ SCHRODER
BANK & TRUST COMPANY, as trustee (the "Trustee").
W I T N E S S E T H :
WHEREAS, the Company and the Trustee have heretofore entered into an
Indenture dated as of April 15, 1996 (as previously supplemented, the
"Indenture"); and
WHEREAS, the Company desires and has requested the Trustee to join
with it in the execution and delivery of this Supplemental Indenture; and
WHEREAS, Section 9.1(1) of the Indenture provides that the Company
and the Trustee may enter into indentures supplemental to the Indenture for the
purpose of curing any ambiguity, omission, defect or inconsistency, without the
consent of any Holder; and
WHEREAS, the Company has represented to the Trustee that all
conditions precedent to the execution and delivery of this Supplemental
Indenture have been satisfied;
NOW, THEREFORE, the parties hereto agree as follows:
SECTION 1. Unless otherwise specifically defined herein, each term
used herein which is defined in the Indenture shall have the meaning assigned to
such term in the Indenture.
SECTION 2. Effective as of the date hereof, the following sentence
is hereby added at the end of the definition of Permitted Liens in Section 1.01
of the Indenture:
"For the avoidance of uncertainty, Permitted Liens may secure all
obligations in respect of the Indebtedness permitted to be secured,
including without limitation accrued and unpaid interest (including
Post-Petition Interest) and any costs, expenses, fees, reimbursements,
indemnities and other obligations of the Company or any Subsidiary in
respect of or in connection with such Indebtedness."
SECTION 3. The Trustee accepts the amendment of the Indenture
affected by this Supplemental Indenture and agrees to execute the trust created
by the Indenture, as hereby amended, but only upon the terms and conditions set
forth in the Indenture, as hereby amended, including the terms and provisions
defining and limiting the liabilities and responsibilities of the Trustee, which
terms and provisions shall in like manner define and limit its liabilities in
the performance of the trust created by the Indenture, as hereby amended, and
the Trustee makes no representations as to the validity or sufficiency of this
Supplemental Indenture and shall incur no liability or responsibility in respect
of the validity thereof.
SECTION 4. The Company agrees to indemnify the Trustee and hold the
Trustee harmless from and against any and all liabilities, losses, damages,
claims or actions to which the Trustee may become subject as a result of or in
connection with the execution of this Supplemental Indenture and the amendment
of the Indenture pursuant hereto, and will reimburse the Trustee for any legal
or other expenses reasonably incurred by the Trustee in connection with
investigating or defending any such liability, loss, damage, claim or action.
SECTION 5. Except as expressly amended hereby, the Indenture is in
all respects ratified and confirmed, and all the terms, conditions and
provisions thereof shall remain in full force and effect.
SECTION 6. This Supplemental Indenture shall form a part of the
Indenture for all purposes, and every holder of Securities heretofore or
hereafter authenticated and delivered shall be bound hereby.
SECTION 7. This Supplemental Indenture shall be governed by and
construed in accordance with the law of the State of New York.
IN WITNESS WHEREOF, the parties hereto have caused this SECOND
SUPPLEMENTAL INDENTURE to be duly executed as of the date hereof.
IMO INDUSTRIES INC.
By:/s/ T.J. Bird
Name: T.J. Bird
Title: Executive Vice President
IBJ SCHRODER BANK & TRUST
COMPANY, as Trustee
By:/s/ Barbara McCluskey
Name: Barbara McCluskey
Title: Vice President
IMO INDUSTRIES INC.
11 3/4% Senior Subordinated Notes Due 2006
SUPPLEMENTAL INDENTURE
Dated as of August 26, 1997
to
INDENTURE
Dated as of April 15, 1996
IBJ SCHRODER BANK & TRUST C0MPANY,
as Trustee
FIRST AMENDMENT TO CREDIT
AND GUARANTY AGREEMENT
FIRST AMENDMENT TO CREDIT AND GUARANTY AGREEMENT, dated as of November 6,
1997 (this "First Amendment"), among IMO INDUSTRIES INC., a Delaware corporation
(the "Borrower"), II ACQUISITION CORP., a Delaware corporation (the "Parent") as
a guarantor, VHC INC., as a guarantor, WARREN PUMPS INC., as a guarantor (VHC
Inc. and Warren Pumps Inc., collectively, the "Guarantors"), the various
financial institutions parties hereto (collectively, the "Lenders") and THE BANK
OF NOVA SCOTIA ("Scotiabank"), as administrative agent (in such capacity, the
"Administrative Agent").
W I T N E S S E T H:
WHEREAS, the Borrower, the Parent, the Lenders, the Administrative Agent
and NATIONSBANC CAPITAL MARKETS, INC. ("NationsBanc"), as syndication agent for
the Lenders have heretofore entered into a certain Credit and Guaranty
Agreement, dated as of August 29, 1997 (the "Existing Credit Agreement" and, as
amended by, and together with, this First Amendment, the "Credit Agreement");
and
WHEREAS, the Borrower, the Parent and the Lenders desire to amend the
Existing Credit Agreement to modify certain provisions thereto;
NOW, THEREFORE, in consideration of the premises and the other provisions
herein contained, the parties hereto hereby agree as follows:
ARTICLE I
DEFINITIONS
SECTION I.1. Use of Defined Terms. Unless otherwise defined herein or the
context otherwise requires, terms used in this First Amendment, including its
preamble and recitals, have the respective meanings provided therefor in the
Credit Agreement.
ARTICLE II
AMENDMENT TO CERTAIN PROVISIONS OF
THE CREDIT AGREEMENT
Subject to receipt by the Administrative Agent of counterparts of this
First Amendment duly executed by the Borrower, the Parent, the Guarantors and
the Required Lenders, certain terms and provisions of the Existing Credit
Agreement are hereby modified and amended in accordance with this Article II.
Except as so amended, the Existing Credit Agreement shall continue in full force
and effect in accordance with its terms.
SECTION II.1. Amendment to definition of Applicable Commitment Fee Margin.
The phrase "Fiscal Quarter ended September 30, 1997" contained in the definition
of Applicable Commitment Fee Margin in the Existing Credit Agreement is hereby
amended and replaced by the phrase "Fiscal Quarter ended December 31, 1997".
SECTION II.2. Amendment to definition of Applicable Margin. The phrase
"Fiscal Quarter ended September 30, 1997" contained in the definition of
Applicable Margin in the Existing Credit Agreement is hereby amended and
replaced by the phrase "Fiscal Quarter ended December 31, 1997".
SECTION II.3. Amendment to Section 7.2.2(d) ("Indebtedness"). Section
7.2.2(d) ("Indebtedness") of the Existing Credit Agreement is hereby amended by
deleting such section in its entirety and replacing such section with the
following:
(d) Indebtedness of Non-U.S. Subsidiaries in an amount not in excess
of $45,000,000 (which amount shall automatically be reduced to $25,000,000
immediately following the sale of Roltra Morse), provided that no more
than $40,000,000 of such amount may constitute intercompany Indebtedness,
or if less than such amount at any time, the Permitted Amount.
Notwithstanding anything to the contrary in this Agreement, the secured
Indebtedness of Non-U.S. Subsidiaries permitted pursuant to Section
7.2.3(b)(ii) hereof may be refinanced by such Non-U.S. Subsidiaries;
provided that (i) such refinancing shall not result in an increase in the
principal amount of such secured Non-U.S. Subsidiary Indebtedness (or, in
the case of any revolving credit facility, the maximum lender commitment
pursuant thereto), (ii) such refinancing shall not result in any
additional collateral being pledged to secure such Non-U.S. Subsidiary
Indebtedness, and (iii) any secured Non-U.S. Subsidiary Indebtedness that
has been repaid and extinguished may not be reborrowed or reissued as
secured Non-U.S. Subsidiary Indebtedness. Notwithstanding clause (iii)
hereof, however, an aggregate amount not in excess of $2,500,000 of such
secured Non-U.S. Subsidiary Indebtedness which has been repaid and
extinguished by one or more Non-U.S. Subsidiaries may be reborrowed or
reissued as secured Non-U.S. Subsidiary Indebtedness by the same or any
other Non-U.S. Subsidiary from the same or any other lender; provided that
the market value of any collateral pledged in connection therewith shall
not exceed twice the amount of secured Non-U.S. Subsidiary Indebtedness
which has been reborrowed or reissued pursuant to this sentence.
SECTION II.4. Amendment to Section 7.2.3(b) ("Liens"). Section 7.2.3(b)
("Liens") of the Existing Credit Agreement is hereby amended by deleting such
subsection in its entirety and replacing such subsection with the following:
(b) Liens granted to secure payment of Indebtedness described in (i)
clause (c) of Section 7.2.2 to the extent such Liens are identified in
Item 7.2.2(c) ("Ongoing Indebtedness") of the Disclosure Schedule and (ii)
clause (d) of Section 7.2.2 to the extent such Liens (x) are identified in
Item 7.2.3(b)(ii) ("Liens on Foreign Assets") of the Disclosure Schedule
or (y) secure secured Indebtedness of a Non-U.S. Subsidiary permitted
pursuant to Section 7.2.2(d);
SECTION II.5. Amendments to Section 10.1. ("Actions"). The phrase "act as
collateral Administrative Agent" contained in Section 10.1 ("Actions") of the
Existing Credit Agreement is hereby amended and replaced by the phrase "act as
collateral agent". The phrase "resulted solely from the gross negligence or
wilful misconduct of the Administrative Agent" also contained in Section 10.1 is
hereby amended and replaced by the phrase "resulted from the gross negligence or
wilful misconduct of the Administrative Agent".
SECTION II.6. Amendments to Section 11.1. ("Waivers, Amendments, etc.").
The phrase "extend any Commitment Termination Date without" contained in clause
(c) of Section 11.1 ("Waivers, Amendments, etc.") of the Existing Credit
Agreement is hereby amended and replaced by the phrase "extend any Commitment
Termination Date shall be effective without". The phrase "any Letter of Credit"
contained in clause (d) of Section 11.1 is hereby amended and replaced by the
phrase "any Letter of Credit shall be effective". The phrase "in its capacity as
Issuer," contained in clause (e) of Section 11.1 is hereby amended and replaced
by the phrase "in its capacity as Issuer, shall be effective".
SECTION II.7. Amendment to Schedule I ("DISCLOSURE SCHEDULE"). Schedule I
("DISCLOSURE SCHEDULE") to the Existing Credit Agreement is hereby amended by
(i) adding at the end of the index page to such Schedule a reference to "ITEM
7.2.3(b)(ii) Liens on Foreign Assets", (ii) replacing ITEM 6.9 thereto with ITEM
6.9 attached hereto as Exhibit A, and (iii) adding ITEM 7.2.3(b)(ii), attached
hereto as Exhibit B, to Schedule I as ITEM 7.2.3(b)(ii) thereto.
ARTICLE III
REPRESENTATIONS AND WARRANTIES
In order to induce the Lenders and the Administrative Agent to enter into
this First Amendment, the Borrower, the Parent and the Guarantors jointly and
severally represent and warrant unto the Administrative Agent, each Issuer and
each Lender as set forth in this Article III.
SECTION III.1. Compliance with Warranties. The representations and
warranties set forth herein, in Article VI of the Credit Agreement and in each
other Loan Document delivered in connection herewith or therewith 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).
SECTION III.2. Due Authorization, Non-Contravention, etc. The execution,
delivery and performance by the Borrower, the Parent and the Guarantors of this
First Amendment are within the Borrower's, the Parent's and the Guarantors'
corporate powers, have been duly authorized by all necessary corporate action,
and do not (i) contravene either the Borrower's, the Parent's or the Guarantors'
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, the Parent or the Guarantors, or (iii) result
in, or require the creation or imposition of, any Lien (except as contemplated
in or created by the Loan Documents).
SECTION III.3. Validity, etc. This First Amendment has been duly executed
and delivered by the Borrower, the Parent and the Guarantors and constitutes the
legal, valid and binding obligation of the Borrower, the Parent and the
Guarantors 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.
SECTION III.4. Compliance With Existing Credit Agreement. As of the
execution and delivery of this First Amendment and as of the date hereof, each
of the Borrower, the Parent, the Guarantors and each other Obligor, if any, is
in compliance with all the terms and conditions of the Existing Credit Agreement
and the other Loan Documents to be observed or performed by it, and no Default
has occurred and is continuing.
ARTICLE IV
MISCELLANEOUS PROVISIONS
SECTION IV.1. Ratification of and Limited Amendment to the Credit
Agreement. This First Amendment shall be deemed to be an amendment to the
Existing Credit Agreement, and the Existing Credit Agreement, as amended hereby,
is hereby ratified, approved and confirmed in each and every respect. Except as
specifically amended or modified herein, the Existing Credit Agreement 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 First Amendment
preclude the Lenders from refusing to enter into any further or future
amendments. This First Amendment shall be deemed to be a "Loan Document" for all
purposes of the Credit Agreement.
SECTION IV.2. Consent and Acknowledgment of Guarantors. By their
signatures below, each of the Parent, VHC Inc. and Warren Pumps Inc., in their
capacity as a guarantor and as a grantor of collateral security under a Loan
Document, hereby acknowledges, consents and agrees to this First Amendment and
hereby ratifies and confirms its obligations as a guarantor under each Loan
Document executed and delivered by it in all respects.
SECTION IV.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 First Amendment.
SECTION IV.4. Expenses. The Borrower and the Parent jointly and severally
agree to pay all out-of-pocket expenses incurred by the Administrative Agent in
connection with the preparation, negotiation, execution and delivery of this
First Amendment.
SECTION IV.5. Headings; Counterparts. The various headings of this First
Amendment are inserted for convenience only and shall not affect the meaning or
interpretation of this First Amendment or any provisions hereof. This First
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.
SECTION IV.6. Governing Law; Entire Agreement. THIS FIRST AMENDMENT SHALL
BE DEEMED TO BE A CONTRACT MADE UNDER AND GOVERNED BY THE LAWS OF THE STATE OF
NEW YORK. This First 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. This First Amendment
and the provisions contained herein may be modified only by an instrument in
writing executed by the Borrower, the Administrative Agent and the Required
Lenders.
IN WITNESS WHEREOF, the parties hereto have caused this First Amendment to
be executed by their respective officers thereunto duly authorized as of the day
and year first above written.
IMO INDUSTRIES INC.
as Borrower
By: John A. Young
Title: Vice President
II ACQUISITION CORP.
as a Guarantor
By: John A. Young
Title: Vice President
VHC INC.
as a Guarantor
By: John A. Young
Title: Vice President
THE BANK OF NOVA SCOTIA
as Administrative Agent
By: James R. Trimble
Title: Senior Relationship Manager
LENDERS:
THE BANK OF NOVA SCOTIA
By: James R. Trimble
Title: Senior Relationship Manager
NATIONSBANK, NA
By: Chittaranjan D. Swamidasan
Title: Vice President
SECOND AMENDMENT TO CREDIT
AND GUARANTY AGREEMENT
SECOND AMENDMENT TO CREDIT AND GUARANTY AGREEMENT, dated as of December 2,
1997 (this "Second Amendment"), among IMO INDUSTRIES INC., a Delaware
corporation (the "Borrower"), II ACQUISITION CORP., a Delaware corporation (the
"Parent") as a guarantor, VHC INC., as a guarantor, WARREN PUMPS INC., as a
guarantor (VHC Inc. and Warren Pumps Inc., collectively, the "Guarantors"), the
various financial institutions parties hereto (collectively, the "Lenders") and
THE BANK OF NOVA SCOTIA ("Scotiabank"), as administrative agent (in such
capacity, the "Administrative Agent").
W I T N E S S E T H:
WHEREAS, the Borrower, the Parent, the Lenders, the Administrative Agent
and NATIONSBANC CAPITAL MARKETS, INC. ("NationsBanc"), as syndication agent for
the Lenders have heretofore entered into a certain Credit and Guaranty
Agreement, dated as of August 29, 1997 (as heretofor amended, supplemented or
otherwise modified, the "Existing Credit Agreement" and, as amended by, and
together with, this Second Amendment, the "Credit Agreement"); and
WHEREAS, the Borrower, the Parent and the Lenders desire to amend the
Existing Credit Agreement to modify certain provisions thereto;
NOW, THEREFORE, in consideration of the premises and the other provisions
herein contained, the parties hereto hereby agree as follows:
ARTICLE I
DEFINITIONS
SECTION I.1. Use of Defined Terms. Unless otherwise defined herein or the
context otherwise requires, terms used in this Second Amendment, including its
preamble and recitals, have the respective meanings provided therefor in the
Credit Agreement.
ARTICLE II
AMENDMENT TO CERTAIN PROVISIONS OF
THE CREDIT AGREEMENT
Subject to receipt by the Administrative Agent of counterparts of this
Second Amendment duly executed by the Borrower, the Parent, the Guarantors and
the Required Lenders, certain terms and provisions of the Existing Credit
Agreement are hereby modified and amended in accordance with this Article II.
Except as so amended, the Existing Credit Agreement shall continue in full force
and effect in accordance with its terms.
SECTION II.1. Amendment to Section 4.10(iv) ("Use of Proceeds"). The
phrase "open market purchases in an amount up to $25,000,000" contained in
Section 4.10(iv) ("Use of Proceeds") of the Existing Credit Agreement is hereby
amended and replaced by the phrase "open market purchases in an amount up to
$40,000,000".
ARTICLE III
REPRESENTATIONS AND WARRANTIES
In order to induce the Lenders and the Administrative Agent to enter into
this Second Amendment, the Borrower, the Parent and the Guarantors jointly and
severally represent and warrant unto the Administrative Agent, each Issuer and
each Lender as set forth in this Article III.
SECTION III.1. Compliance with Warranties. The representations and
warranties set forth herein, in Article VI of the Credit Agreement and in each
other Loan Document delivered in connection herewith or therewith 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).
SECTION III.2. Due Authorization, Non-Contravention, etc. The execution,
delivery and performance by the Borrower, the Parent and the Guarantors of this
Second Amendment are within the Borrower's, the Parent's and the Guarantors'
corporate powers, have been duly authorized by all necessary corporate action,
and do not (i) contravene either the Borrower's, the Parent's or the Guarantors'
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, the Parent or the Guarantors, or (iii) result
in, or require the creation or imposition of, any Lien (except as contemplated
in or created by the Loan Documents).
SECTION III.3. Validity, etc. This Second Amendment has been duly executed
and delivered by the Borrower, the Parent and the Guarantors and constitutes the
legal, valid and binding obligation of the Borrower, the Parent and the
Guarantors 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.
SECTION III.4. Compliance With Existing Credit Agreement. As of the
execution and delivery of this Second Amendment and as of the date hereof, each
of the Borrower, the Parent, the Guarantors and each other Obligor, if any, is
in compliance with all the terms and conditions of the Existing Credit Agreement
and the other Loan Documents to be observed or performed by it, and no Default
has occurred and is continuing.
ARTICLE IV
MISCELLANEOUS PROVISIONS
SECTION IV.1. Ratification of and Limited Amendment to the Credit
Agreement. This Second Amendment shall be deemed to be an amendment to the
Existing Credit Agreement, and the Existing Credit Agreement, as amended hereby,
is hereby ratified, approved and confirmed in each and every respect. Except as
specifically amended or modified herein, the Existing Credit Agreement 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 Second Amendment
preclude the Lenders from refusing to enter into any further or future
amendments. This Second Amendment shall be deemed to be a "Loan Document" for
all purposes of the Credit Agreement.
SECTION IV.2. Consent and Acknowledgment of Guarantors. By their
signatures below, each of the Parent, VHC Inc. and Warren Pumps Inc., in their
capacity as a guarantor and as a grantor of collateral security under a Loan
Document, hereby acknowledges, consents and agrees to this Second Amendment and
hereby ratifies and confirms its obligations as a guarantor under each Loan
Document executed and delivered by it in all respects.
SECTION IV.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 Second Amendment.
SECTION IV.4. Expenses. The Borrower agrees to pay all out-of-pocket
expenses incurred by the Administrative Agent in connection with the
preparation, negotiation, execution and delivery of this Second Amendment.
SECTION IV.5. Headings; Counterparts. The various headings of this Second
Amendment are inserted for convenience only and shall not affect the meaning or
interpretation of this Second Amendment or any provisions hereof. This Second
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.
SECTION IV.6. Governing Law; Entire Agreement. THIS SECOND AMENDMENT SHALL
BE DEEMED TO BE A CONTRACT MADE UNDER AND GOVERNED BY THE LAWS OF THE STATE OF
NEW YORK. This Second 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. This Second Amendment
and the provisions contained herein may be modified only by an instrument in
writing executed by the Borrower, the Administrative Agent and the Required
Lenders.
IN WITNESS WHEREOF, the parties hereto have caused this Second Amendment
to be executed by their respective officers thereunto duly authorized as of the
day and year first above written.
IMO INDUSTRIES INC.
as Borrower
By: John A. young
Title: Vice President
II ACQUISITION CORP.
as a Guarantor
By: John A. Young
Title: Vice President
VHC INC.
as a Guarantor
By: John A. Young
Title: Vice President
THE BANK OF NOVA SCOTIA
as Administrative Agent
By: James R. Trimble
Title: Senior Relationship Manager
LENDERS:
THE BANK OF NOVA SCOTIA
By: James R. Trimble
Title:Senior Relationship Manager
NATIONSBANK, N.A.
By: Chittaranjan D. Swamidasan
Title: 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: Benjamin Marzouk
Title:Vice President
By: Anthony Berti
Title:Assistant Treasurer
TRANSAMERICA BUSINESS CREDIT
CORPORATION
By: Perry Vavoules
Title:Senior Vice President
USTRUST
By: Thomas F. Macina
Title:Vice President
THIRD AMENDMENT TO CREDIT
AND GUARANTY AGREEMENT
THIS THIRD AMENDMENT, dated as of February 16, 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) parties 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 NationsBanc Capital Markets, Inc., as
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, and together with, 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 the Lenders have agreed to
amend the Existing Credit Agreement (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 respective meanings provided therefor in the Existing
Credit Agreement.
PART II
AMENDMENTS TO
THE EXISTING CREDIT AGREEMENT
Effective upon (and subject to) the occurrence of the Third Amendment
Effective Date (as defined in Subpart 3.1), certain terms and provisions of the
Existing Credit Agreement are hereby amended in accordance with this Part.
Except as so amended, the Existing Credit Agreement shall continue in full force
and effect in accordance with its 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 and 2.1.2.
SUBPART II.1.1. Section 1.1 of the Existing Credit Agreement is hereby
amended by inserting the following definitions in the appropriate alphabetical
order:
"Amendment No. 3" means the Third Amendment, dated as of February
16, 1998, to this Agreement among the Borrower, the Parent and the
Lenders parties thereto.
"Governmental Refund" means the amount received by the Borrower or
any of its Subsidiaries from the United States Air Force ("USAF") in
settlement of Contract Number F09603-86-C-2278, dated October 23, 1986,
between Varo, Inc. (now known as VHC, Inc., a Subsidiary of the Borrower)
and the USAF.
"Third Amendment Effective Date" is defined is Subpart 3.1 of
Amendment No. 3.
SUBPART II.1.2. Section 1.1 of the Existing Credit Agreement is hereby
further amended as follows:
(a) the definition of "Permitted Amount" is hereby amended in its
entirety to read as follows:
"Permitted Amount" means in the case of (a) the permitted maximum
amount of Revolving Loans which may be applied by the Borrower to purchase
outstanding Senior Subordinated Notes "put" to the Borrower pursuant to
the "put" provision contained in the Senior Subordinated Notes in the
event of a Change of Control (as defined therein) pursuant to the terms of
Section 4.10, $40,000,000, (b) the permitted maximum amount of Revolving
Loans which may be applied by the Borrower to open market purchases or
redemptions of outstanding Senior Subordinated Notes pursuant to the terms
of Section 4.10, the sum of (I) $50,000,000 (payable in respect of the
face amount of Senior Subordinated Notes purchased or redeemed) plus (ii)
an amount (referred to as the "Additional Amount") payable in respect of
any premium over the face amount of the Senior Subordinated Notes
purchased or redeemed by it in the open market (with the payment of such
Additional Amount being in all events subject to the terms of clause (iv)
of Section 4.10), (c) the permitted maximum amount of Revolving Loans
which may be applied by the Borrower to make intercompany loans to
Non-U.S. Subsidiaries to refinance existing Indebtedness of such Non-U.S.
Subsidiaries, $40,000,000, which amount shall automatically be reduced to
$25,000,000 following the sale of Roltra Morse and (d) guarantees by the
Borrower of Indebtedness of Non-U.S. Subsidiaries, in an amount not to
exceed $20,000,000; provided, however, that the sum of clauses (a), (b),
(c) and (d) above shall not at any time exceed $50,000,000 plus (in the
case of clause (b) only), the Additional Amount.
SUBPART II.2. Amendment to Article III. Article III of the Existing Credit
Agreement is hereby amended in accordance with Subparts 2.2.1 and 2.2.2.
SUBPART II.2.1. The first proviso contained in clause (c) of Section 3.1.2
of the Existing Credit Agreement is hereby amended in its entirety to read as
follows:
(provided, however, in the case of the disposition of Roltra Morse,
if the net cash proceeds received from such sale are in excess of
$15,000,000 (after the repayment of outstanding Indebtedness of
Roltra Morse), then $8,000,000 of such net proceeds shall be deemed
to be Net Disposition Proceeds that shall be required to be applied
as a prepayment of the Term Loans)
SUBPART II.2.2. Section 3.1.2 of the Existing Credit Agreement is further
amended by (I) deleting the word "and" at the end of clause (c), (ii) changing
clause (d) to become clause (e) and (iii) adding a new clause (d), to read in
its entirety as follows:
(d) the Borrower shall promptly (and in any event within three
Business Days) following the receipt of Net Disposition Proceeds
from the sale of Roltra Morse make a mandatory prepayment of the
outstanding principal amount of Revolving Loans with such Net
Disposition Proceeds in excess of $8,000,000; and
SUBPART II.3. Amendment to Article IV. Clause (iv) of Section 4.10 of the
Existing Credit Agreement and the remaining portion of such Section is hereby
amended in its entirety to read as follows:
"(iv) to refinance up to $40,000,000 (or if less than such amount at
any time, the Permitted Amount) (the "Subordinated Debt Refunding
Availability") of the Borrower's Senior Subordinated Notes through
redemptions pursuant to the put provision contained in the Senior
Subordinated Notes in the event of a Change of Control (as defined
therein) or subject to certain conditions, open market purchases or
redemptions in an amount up to the lesser of (A) the then existing
Permitted Amount and (B) $50,000,000 (which amount shall only be
applicable to the face amount of Senior Subordinated Notes purchased
or redeemed, it being agreed that such amount in this clause (iv)(B)
may be increased (subject to the terms of the following proviso) by
the Additional Amount); provided, that the average purchase price
paid pursuant to any such open market purchases or redemptions
(which for purposes of this calculation shall include both the face
amount of the Senior Subordinated Notes purchased or redeemed and
any premium paid over such face amount), when aggregated with such
purchase price (and premium) paid for all prior open market
purchases and redemptions made by the Borrower or another Obligor
since the Effective Date, shall not exceed 115% of the face amount
of such Senior Subordinated Notes previously purchased or redeemed
and then being purchased or redeemed (the "Subordinated Debt
Refunding"); provided, further, that on a pro forma basis after
giving effect to each Subordinated Debt Refunding and the aggregate
amount of Revolving Loans used to make intercompany loans to
Non-U.S. Subsidiaries, the Borrower must maintain availability under
the Revolving Loan Commitment of no less than $15,000,000 (as
increased, Dollar for Dollar, by the amount of the Governmental
Refund received by the Borrower or any other Obligor). The Borrower
shall apply the Term Loans to refinance the term loans of the
Borrower outstanding under the Existing Credit Facility."
SUBPART II.4. Amendment to Article VII. Article VII of the Existing Credit
Agreement is hereby amended in accordance with Subparts 2.4.1 and 2.4.2.
SUBPART II.4.1. Section 7.1.1 of the Existing Credit Agreement is hereby
amended by (I) deleting the word "and" at the end of clause (j), (ii) changing
clause (k) to become clause (m) and (iii) adding new clauses (k) and (l), to
read as follows:
"(k) promptly, and in any event within one Business Day following
receipt, notify the Administrative Agent of the receipt and amount
of the Governmental Refund;
(l) on the date of delivery of (and as part of) the Compliance
Certificate delivered pursuant to clause (b), a report stating (I)
the face amount of such Senior Subordinated Notes purchased or
redeemed and the premium (or amount in excess of the face amount)
(if any) paid in respect thereof during the Fiscal Quarter that is
covered by such Compliance Certificate and (ii) the aggregate face
amount of all Senior Subordinated Notes purchased or redeemed by the
Obligors since the Effective Date through the last day of the Fiscal
Quarter reported on such Compliance Certificate and a calculation of
the Additional Amount from the Effective Date through the last day
of the Fiscal Quarter reported on such Compliance Certificate; and"
SUBPART II.4.2. Clause (b) of Section 7.2.6 of the Existing Credit
Agreement is hereby amended in its entirety to read as follows:
"(b) purchase or redeem Senior Subordinated Notes in a face amount
not in excess of the lesser of (I) the Permitted Amount then in
effect and (ii)$50,000,000 (in respect of the face amount of Senior
Subordinated Notes) plus the Additional Amount, through open market
purchases or redemptions so long as the average purchase price of
such Senior Subordinated Notes purchased or redeemed remains in
compliance with clause (iv) of Section 4.10."
PART III
CONDITIONS TO EFFECTIVENESS
SUBPART III.1. This Amendment shall become effective on the date (the
"Third 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 Required Lenders.
SUBPART III.1.2. Affirmation and Comment. The Administrative Agent shall
have received an affirmation and consent in form and substance satisfactory to
it, duly executed and delivered by the Parent and each other Guarantor.
SUBPART III.1.3. Payment of Fees, etc. The Administrative Agent shall have
received evidence satisfactory to it that all fees and expenses of Mayer, Brown
& Platt arising in connection with the Existing Credit Agreement have been paid
in full.
SUBPART III.1.4. Satisfactory Legal Form. All documents executed or
submitted pursuant hereto shall be satisfactory in form and substance to the
Administrative Agent as 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
Agents and its counsel.
PART IV
REPRESENTATIONS AND WARRANTIES
In order to induce the Lenders 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. The representations and
warranties set forth herein, in Article VI of the Credit Agreement and in each
other Loan Document delivered in connection herewith or therewith 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).
SUBPART IV.2. Due Authorization, Non-Contravention, etc. The execution,
delivery and performance by the Borrower, the Parent and the Guarantors of this
Amendment and other documents delivered pursuant hereto are within the
Borrower's, the Parent's and the Guarantors' corporate powers, have been duly
authorized by all necessary corporate action, and do not (I) contravene either
the Borrower's, the Parent's or the Guarantors' 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, the Parent or the Guarantors, 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 Third
Amendment Effective Date, each of the Borrower and each other Obligor is in
compliance with all the terms and conditions of the Existing Credit Agreement
and the other Loan Documents to be observed or performed by it, and both before
and after giving effect to the terms of this Amendment no Default has occurred
and is continuing.
PART V
MISCELLANEOUS PROVISIONS
SUBPART V.1. Ratification of and Limited Amendment to the Credit
Agreement. This Amendment shall be deemed to be an amendment to the Existing
Credit Agreement, and the Existing Credit Agreement, as amended hereby, is
hereby ratified, approved and confirmed in each and every respect. Except as
specifically amended or modified herein, the Existing Credit Agreement 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. This
Amendment shall be deemed to be a "Loan Document" for all purposes of the Credit
Agreement.
SUBPART V.2. 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.3. Expenses. The Borrower agrees to pay all out-of-pocket
expenses incurred by the Administrative Agent in connection with the
preparation, negotiation, execution and delivery of this Amendment.
SUBPART V.4. 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.5. 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.6. 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: Chittaranjan D. Swamidasan
Title: 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: Anthony Rock
Title: Vice President
CRESTAR BANK
By: Christopher B. Werner
Title: Vice President
DRESDNER BANK AG, NEW YORK AND
GRAND CAYMAN BRANCHES
By: Kam Pasha
Title: Vice President
By: Anthony Berti
Title: Assistant Treasurer
TRANSAMERICA BUSINESS CREDIT CORPORATION
By: Steven Fischer
Title: Executive Vice President
US TRUST
By: Thomas F. Macina
Title: Vice President
SUBSIDIARIES AND AFFILIATES OF IMO INDUSTRIES INC.
Date: 3/16/98 STATE OR
COUNTRY OF
INCORPORATION
NAME OR ORGANIZATION
IMO INDUSTRIES (UK) LIMITED..................................ENGLAND
BAIRD ATOMIC LTD.......................................ENGLAND
MORSE CONTROLS LIMITED.................................ENGLAND
MORSE CONTROLS AB...................................SWEDEN
RMH CONTROLS LIMITED................................ENGLAND
MORSE CONTROLS PTY. LTD.............................NEW SOUTH WALES
MORSE CONTROLS (NZ) LIMITED.....................NEW ZEALAND
TELEFLEX-MORSE (N.Z.) LTD.......................NEW ZEALAND
IMO INDUSTRIES PENSION TRUSTEE LIMITED..............ENGLAND
BOSTON GEAR COMPANY LIMITED.........................ENGLAND
TELEFLEX LIMITED....................................ENGLAND
TELEFLEX MORSE LTD..................................ENGLAND
IMO INDUSTRIES LIMITED.................................ENGLAND
IMO INDUSTRIES GmbH..........................................GERMANY
MORSE CONTROLS SARL..........................................FRANCE
MORSE CONTROLS S.L. .........................................SPAIN
IMO INDUSTRIES PTE LTD.......................................SINGAPORE
NHK MORSE CO., LTD...........................................JAPAN (1)
NHK JABSCO CO., LTD.................................JAPAN (2)
IMO AB.......................................................SWEDEN
IMO-PUMPEN AG.......................................SWITZERLAND
IMO GRESHAM PUMPS (INDIA) LTD.......................INDIA (3)
IMO POMPES S.A......................................FRANCE
IMO-PUMPEN GmbH..............................................GERMANY
IMO INDUSTRIES (CANADA) INC..................................CANADA
DELSALESCO, INC..............................................U.S. VIRGIN
ISLANDS
IMOVEST INC..................................................DELAWARE
BAIRD CORPORATION............................................MASSACHUSETTS
LABTEST EQUIPMENT COMPANY..............................CALIFORNIA
INCOM TRANSPORTATION, INC....................................DELAWARE
BOSTON GEAR INDUSTRIES OF CANADA INC.........................CANADA
VHC INC. ....................................................TEXAS
VARO TECHNOLOGY CENTER, INC............................TEXAS
VARO TECHNOLOGY CENTER JOINT VENTURE...................TEXAS (4)
TURBODEL INC...........................................TEXAS
TRIPOWER VENTURE....................................TEXAS (5)
APPLIED OPTICS CENTER CORPORATION......................MASSACHUSETTS
ITT AND VARO, A JOINT VENTURE..........................TEXAS (6)
KEI LASER, INC.........................................MARYLAND
OPTIC-ELECTRONIC INTERNATIONAL, INC....................TEXAS
WARREN PUMPS INC.............................................DELAWARE
DELTEX SERVICE INC...........................................TEXAS
SHANGHAI DONG FENG MORSE CONTROL CABLE CO., LTD..............CHINA (1)
BOMBAS IMO DE VENEZUELA C.V..................................VENEZUELA
(1) 50% owned by Imo Industries Inc.
(2) 50% owned by NHK Morse Co., Ltd.
(3) 40$ owned by IMO AB
(4) 50% owned by Varo Technology Center, Inc. and 50% owned by VHC Inc.
(5) 50% owned by Turbodel Inc.
(6) 50% owned by VHC Inc.
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