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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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SCHEDULE 13E-3
RULE 13E-3 TRANSACTION STATEMENT
(Pursuant to Section 13(e) of the Securities Exchange Act of 1934)
---------------------------
IMO INDUSTRIES INC.
(Name of Issuer)
---------------------------
II ACQUISITION CORP.
IMO MERGER CORP.
STEVEN M. RALES
MITCHELL P. RALES
(Name of Persons Filing Statement)
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COMMON STOCK, $1.00 PAR VALUE PER SHARE, AND ASSOCIATED RIGHTS TO
PURCHASE SERIES B JUNIOR PARTICIPATING PREFERRED STOCK $1.00 PAR VALUE
PER SHARE
(Title of Class of Securities)
---------------------------
452540107
(CUSIP Number of Class of Securities)
JOHN A. YOUNG
II ACQUISITION CORP.
9211 FOREST HILL AVENUE
SUITE 109
RICHMOND, VA 23235
(Name, Address and Telephone Number of Person Authorized to Receive Notice and
Communications on Behalf of Persons Filing Statement)
WITH COPIES TO:
MEREDITH M. BROWN, ESQ.
DEBEVOISE & PLIMPTON
875 THIRD AVENUE
NEW YORK, NY 10022
(212) 909-6000
THIS TRANSACTION HAS NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON
THE FAIRNESS OR MERITS OF SUCH TRANSACTION NOR UPON THE ACCURACY OR
ADEQUACY OF THE INFORMATION CONTAINED IN THIS DOCUMENT. ANY
REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
This statement is filed in connection with (check the appropriate box):
a. / / The filing of solicitation materials or an information statement
subject to Regulation 14A, Regulation 14C or Rule 13e-3(c) under the
Securities Exchange Act of 1934.
b. / / The filing of a registration statement under the Securities Act of
1933.
c. / / A tender offer
d. /X/ None of the above.
Check the following box if the soliciting materials or information
statement referred to in checking box (a) are preliminary copies: / /
CALCULATION OF FILING FEE
<TABLE>
<CAPTION>
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TRANSACTION VALUATION* AMOUNT OF FILING FEE**
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<S> <C>
$8,614,310.40 $1,722.86
=========================================================================================================
</TABLE>
* Calculated, for purposes of determining the filing fee only, and in
accordance with Rule 0-11(b)(2) under the Securities Exchange Act of 1934,
as amended, by multiplying 1,221,888 (the number of shares of Common Stock
held by stockholders other than II Acquisition Corp. or Imo Merger Corp.)
by $7.05, the price to be paid per share.
** Calculated as 1/50 of 1% of the transaction value.
/ / Check box if any part of the fee is offset as provided by Rule
0-11(a)(2) and identify the filing with which the offsetting fee was
previously paid. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
Amount Previously Paid: N/A Filing Party: N/A
Form or Registration No.: N/A Date Filed: N/A
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INTRODUCTION
This Rule 13e-3 Transaction Statement on Schedule 13E-3 (the "Schedule 13E-3")
is being filed by (i) II Acquisition Corp., a Delaware corporation ("IIAC"),
(ii) Imo Merger Corp., a Delaware corporation and wholly-owned subsidiary of
IIAC ("Merger Sub"), (iii) Steven M. Rales, an individual, and (iv) Mitchell P.
Rales, an individual and together with Steven M. Rales, the controlling
stockholders of IIAC, pursuant to Section 13(e) of the Securities Exchange Act
of 1934, as amended (the "Exchange Act"), and Rule 13e-3 thereunder, in
connection with a "short-form" merger (the "Merger") of Merger Sub with and into
Imo Industries Inc., a Delaware corporation (the "Company"), pursuant to Section
253 of the Delaware General Corporation Law ("DGCL"). The effective date of the
merger will be July 2, 1998.
The Merger is intended to be the second step in the acquisition by IIAC of the
entire equity interest in the Company. In August 1997, IIAC acquired 92.8% of
the Company's common stock, $1.00 par value per share (the "Shares"), through a
tender offer (the "Tender Offer") at a price of $7.05 per Share, in a
transaction that was unanimously approved by the directors of the Company, none
of whom were affiliated with IIAC. In the Merger, IIAC will acquire the
remaining equity interest in the Company at a price of $7.05 per Share.
On June 1, 1998, IIAC contributed to Merger Sub 100% of IIAC's holdings of the
Shares. Under the DGCL, no action is required by the stockholders of the
Company, other than Merger Sub (through its Board of Directors), for the Merger
to become effective. The Company will be the surviving corporation in the Merger
and, as a result of the Merger, will become a wholly-owned subsidiary of IIAC.
Upon the consummation of the Merger, each of the remaining outstanding Shares
(other than Shares held by Merger Sub, the Company and holders who properly
exercise dissenters' rights under Delaware law) will be automatically converted
into the right to receive $7.05 in cash, without interest, upon surrender of the
certificate for such Share to First Chicago Trust Company of New York, as Paying
Agent. Both the redemption procedure and the statutory appraisal rights are
described in fuller detail in the Notice of Merger and Appraisal Rights and the
accompanying Letter of Transmittal, which documents accompany this Schedule
13E-3 and should be studied with care.
SPECIAL FACTORS
THE INFORMATION CONTAINED IN ITEMS 7, 8 AND 9 HEREOF CONSTITUTE
SPECIAL FACTORS, AND SPECIAL CONSIDERATION SHOULD BE GIVEN THERETO.
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ITEM 1. ISSUER AND CLASS OF SECURITY SUBJECT TO THE TRANSACTION
(a) The name of the issuer is Imo Industries Inc., a Delaware corporation
(the "Company"). The address of the principal executive offices of
the Company is 1009 Lenox Drive, Building Four West, Lawrenceville,
New Jersey 08648-0550.
(b) The class of equity securities which is the subject of the Rule 13e-3
transaction is the Common Stock, par value $1.00 per share, of the
Company (the "Shares"), including the associated rights to purchase
shares of the Company's Series B Junior Participating Preferred
Stock, par value $1.00 per share (the "Rights"), issued pursuant to
the Rights Agreement, dated as of April 30, 1997 (as amended from
time to time, the "Rights Agreement"), between the Company and First
Chicago Trust Company of New York, as Rights Agent. An aggregate of
17,127,859 Shares were outstanding as of May 29, 1998. The Company
had 12,756 holders of record of the Shares as of May 28, 1998.
(c) The Shares are listed and principally traded on the New York Stock
Exchange. The following table sets forth for the fiscal quarters
indicated, the high and low sale prices per share on the New York
Stock Exchange, as reported by Bloomberg L.P., since January 1, 1996.
On May 29, 1998, the closing price per Share as reported on the New
York Stock Exchange was $6.75. STOCKHOLDERS ARE URGED TO OBTAIN A
CURRENT MARKET QUOTATION FOR THE SHARES.
<TABLE>
<CAPTION>
Period Covered High Low
-------------- ---- ---
<S> <C> <C>
Fiscal 1996
First Quarter $7 5/8 $5 3/4
Second Quarter 8 1/8 5 1/4
Third Quarter 5 7/8 4 7/8
Fourth Quarter 5 5/8 2 3/4
Fiscal 1997
First Quarter 3 7/8 2 7/8
Second Quarter 5 7/8 2 1/4
Third Quarter 7 5 3/4
Fourth Quarter 6 3/8 4 1/2
Fiscal 1998
First Quarter 6 7/8 4 1/2
Second Quarter (through 7 1/4 6 1/2
May 29, 1998)
</TABLE>
(d) The Company did not declare or pay any dividends during 1996, 1997,
the first quarter of 1998, or the second quarter of 1998 (through
June 1st). The Company's long-term debt agreements contain, among
other provisions, restrictions 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 payments of
dividends based on certain financial ratios through May 1, 2006.
(e) Neither the Company nor any affiliate filing this schedule had made
an underwritten public offering of the Shares for cash during the
past 3 years which was registered under Securities Act of 1933 or
exempt from registration thereunder pursuant to Regulation A.
(f) Neither the Company nor any affiliate of the Company has purchased
any Shares since the closing of IIAC's tender offer (the "Tender
Offer") for all of the Shares, at $7.05 per Share, in August 1997.
ITEM 2. IDENTITY AND BACKGROUND
(a) - (d)
and (g) This Rule 13e-3 Transaction Statement on Schedule 13E-3 (the
"Schedule 13E-3") is being filed jointly by (i) II Acquisition
Corp., a Delaware corporation ("IIAC"), (ii) Imo Merger Corp., a
Delaware corporation and wholly-owned subsidiary of IIAC ("Merger
Sub"), (iii) Steven M. Rales, an individual, and (iv) Mitchell P.
Rales, an individual.
IIAC, a Delaware corporation, is a holding company that prior to June
1, 1998 owned 92.8% of the Shares of the Company. On June 1, 1998,
IIAC contributed all of the Shares that it owned to Merger Sub. IIAC
currently owns all of the outstanding equity of Merger Sub. Merger
Sub is a newly incorporated Delaware corporation organized to effect
the Merger and has not engaged in any other activities since its
formation. The principal executive offices of IIAC and Merger Sub are
each located at 9211 Forest Hill Road, Suite 109, Richmond, Virginia
23235. Steven M. Rales and Mitchell P. Rales are brothers and
controlling
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stockholders of IIAC. The following table sets forth the name,
present principal employment, and five-year employment history of the
directors, executive officers and controlling persons of each of IIAC
and Merger Sub. Each individual in the following table is a United
States citizen.
<TABLE>
<CAPTION>
Name Principal Occupation or Employment Five-Year Employment History
---- ---------------------------------- ----------------------------
<S> <C> <C>
Steven M. Rales Chairman of the Board of Directors Mr. Rales is Chairman of the Board of Danaher Corporation,
of Danaher Corporation a manufacturer of tools and process/environmental controls
products, and has held that position since 1984. Mr. Rales
is a director of IIAC, Merger Sub and the Company, and has
held those directorships since 1997, 1998 and 1997,
respectively. Mr. Rales was a General Partner of Equity
Group Holdings, a general partnership located in
Washington, D.C., with interests in manufacturing
companies, media operations, and publicly traded
securities, from 1979 until its dissolution in 1997. Mr.
Rales is also a director of Colfax Capital Corp., Janelia
Farm Corp. and American Enterprises MPT Corp. and has held
those directorships from 1997, 1988 and 1996, respectively.
Mr. Rales is also a Member of the Board of Managers of
Constellation Capital Partners LLC, a private equity firm.
Mr. Rales is also a founder and has been Chairman of Colfax
Communications, Inc. since 1991. He is also a founder of
Wabash National Corporation and was its Chairman of the
Board of Directors until 1994.
Mitchell P. Rales Chairman of the Executive Committee Mr. Rales has been a director of Danaher Corporation since
of the Board of Directors of 1984 and has been Chairman of its Executive Committee since
Danaher Corporation 1990. He is a director of IIAC, Merger Sub and the
Company, and has held those directorships since 1997, 1998
and 1997, respectively. Mr. Rales was a General Partner
of Equity Group Holdings from 1979 to 1997. Mr. Rales is
also a director of Colfax Capital Corp., Janelia Farm Corp.
and American Enterprises MPT Corp. and has held those
directorships from 1997, 1988 and 1996, respectively. Mr.
Rales is also a Member of the Board of Managers of
Constellation Capital Partners LLC. Mr. Rales is also a
founder and has been a director of Colfax Communications,
Inc., since 1991. He is also a founder of Wabash National
Corporation and was a director until 1994.
Philip W. Knisely Chairman, Chief Executive Officer Mr. Knisely became a director, Chief Executive Officer and
and President of the Company President of the Company in August 1997. He was named
Chairman of the Board in November 1997. Mr. Knisely has
been the President and Chief Executive Officer of IIAC
and Merger Sub since 1997 and 1998, respectively. Since
1995, Mr. Knisely has been on the Board of Managers and
has been President of Constellation Capital Partners LLC.
He has also been director and President of American
Enterprises MPT Corp. since 1996. From 1988 to 1995, he
was President of AMF Industries, a privately held
diversified manufacturing company at 8100 AMF Drive,
Mechanicsville, VA 23111.
John A. Young Vice President, Treasurer, Chief Mr. Young joined the Company as Vice President and
Financial Officer, and Assistant Assistant Secretary in August 1997. He was named Treasurer
Secretary of the Company and Chief Financial Officer in November 1997. Mr. Young
has been the Vice President of IIAC and Merger Sub since
1997 and 1998, respectively. Since 1995, Mr. Young has
been Vice President of Constellation Capital Partners LLC.
Mr. Young has also been the Vice President of American
Enterprises MPT Corp. since 1996. From 1992 to 1995, he was
Director of Corporate Development of AMF Industries located
at 8100 AMF Drive, Mechanicsville, VA 23111.
Michael G. Ryan Vice President of the Company Mr. Ryan joined the Company as Vice President in August
1997. He has been Secretary of IIAC and Merger Sub since
1997 and 1998, respectively. Mr. Ryan was the Chief
Financial Officer of Equity Group Holdings from 1985 to
1997. Mr. Ryan is Vice President of Constellation Capital
Partners LLC, Colfax Communications, Inc. and American
Enterprises MPT Corp. and has held those vice presidencies
since 1995, 1991 and 1996, respectively. He is also
President of Colfax Capital Corp. and Janelia Farm Corp.
and has held those presidencies since 1997 and 1988,
respectively.
</TABLE>
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<TABLE>
<CAPTION>
<S> <C> <C>
Joseph O. Bunting III Vice President and Secretary of the Mr. Bunting joined the Company as Vice President in August
Company 1997 and became Secretary in November 1997. He has been
Treasurer of IIAC since 1997. He has been Treasurer of
Merger Sub since 1998. Mr. Bunting was Controller of
Equity Group Holdings from 1987 to 1997. He is also a Vice
President of Colfax Communications, Inc., Constellation
Capital Partners LLC, Colfax Capital Corp., Janelia Farm
Corp. and American Enterprises MPT Corp. and has held those
vice presidencies since 1991, 1995, 1997, 1988 and 1996,
respectively. He was also Vice President of Yield House,
Inc. through 1993.
</TABLE>
The business address of each of Messrs. Steven M. Rales, Mitchell P.
Rales, Michael G. Ryan and Joseph O. Bunting III is 1250 24th Street,
N.W., Suite 800, Washington, DC 20037. The business address of
Messrs. Philip W. Knisely and John A. Young is 9211 Forest Hill
Avenue, Suite 109, Richmond, Virginia 23235.
(e)-(f) During the last five years, neither IIAC nor Merger Sub nor any of
the individuals listed in the table in the response to Items 2(a)-(d)
above, has been (i) convicted in a criminal proceeding (excluding
traffic violations or similar misdemeanors) or (ii) a party to a
civil proceeding of a judicial or administrative body of competent
jurisdiction and as a result of such proceeding was or is subject to
a judgment, decree or final order enjoining future violations of, or
prohibiting activities subject to, federal or state securities laws
or finding any violation of such laws.
ITEM 3. PAST CONTACTS, TRANSACTIONS OR NEGOTIATIONS
(a)(1) Except as described under Items 3(a)(2) and 3(b), since January 1,
1996, the only transactions between the Company, on the one hand, and
IIAC, Merger Sub, or their respective executive officers, directors
or controlling persons, on the other hand, have been the following:
On August 29, 1997, one day after IIAC acquired 92.8% of the Shares
as a result of the Tender Offer, the Company and certain of its
subsidiaries sold substantially all of the assets of its
Instrumentation Business Segment ("Instrumentation") to Danaher
Corporation, a company listed on the New York Stock Exchange, Inc.
("NYSE"), and certain of its subsidiaries for a purchase price of $85
million in cash and the assumption of liabilities. The agreement
governing the transactions had been negotiated by Danaher Corporation
and IIAC, which are affiliates, prior to the consummation of the
Tender Offer. Steven M. Rales and Mitchell P. Rales are major
stockholders of Danaher Corporation. Steven M. Rales is the Chairman
of Danaher's Board of Directors and Mitchell P. Rales is the
Chairman of the Executive Committee of Danaher's Board of Directors.
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. Net cash
proceeds were used to reduce domestic senior debt.
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. The transactions were negotiated on an
arm's length basis, and were based on the valuations of independent
appraisers. Net cash proceeds were used to reduce domestic senior
debt.
(a)(2) On July 31, 1997, IIAC commenced the Tender Offer. IIAC and its
and (b) affiliates had been in negotiations with the Company for
several weeks prior to the commencement of the Tender Offer, during
the pendency of another tender offer in which United Dominion
Industries Limited ("UDI") had offered to pay $6.00 per Share in cash
for all the outstanding Shares. On July 25, 1997, IIAC and the
Company entered into a Share Purchase Agreement, which provided,
among other things, for the Tender Offer. On the same day, the
Company notified UDI that it was terminating its agreement with UDI.
The Tender Offer expired on August 27, 1997, and 92.8% of the Shares
were validly tendered. Upon consummation of the Tender Offer, the
members of the Board of Directors of the Company each resigned, and
the current Board of Directors took office. Messrs. Neil D. Cohen and
King David Boyer, Jr. were appointed as "Continuing Directors" for
purposes of the Company's Certificate of Incorporation.
On July 25, 1997, in connection with certain restrictions in the
Company's Certificate of Incorporation, before consummation of the
Tender Offer, the directors of the Company (none of whom were
affiliated with IIAC) approved a business combination between IIAC
and the Company, provided, among other things, that if the business
combination occurred before July 25, 1998, holders of Shares would
receive an amount in cash of not less than $7.05 per Share. In the
Tender Offer, IIAC stated that it intended to consummate a merger
with the Company if and when practicable, but noted that the
indenture governing the Company's 11 3/4% Senior Subordinated Notes
due May 1, 2006 (the "Notes") limited the ability of IIAC to
consummate such a Merger.
On September 16, 1997, the Company offered to repurchase all of the
outstanding Notes at 101% of the principal amount. No Notes were
tendered in the offer. On April 14, 1998, the Company commenced a
consent solicitation seeking the approval of holders of the Notes to
amend the indenture governing the Notes to permit the Company to
complete a "short-form" merger with and into a wholly-owned
subsidiary of IIAC. On May 6, 1998, the Company received sufficient
consents to effect the proposed amendments, and entered into a
supplemental indenture enacting the proposed amendments.
ITEM 4. TERMS OF THE TRANSACTION
(a)-(b) On June 1, 1998, IIAC, which had been the 92.8% owner of the Shares,
contributed 100% of its holdings of the Shares to Merger Sub, its
newly incorporated and wholly-owned Delaware subsidiary. Merger Sub
will be merged with and into the Company pursuant to Section 253 of
the Delaware General Corporation Law ("DGCL"). Under the DGCL,
because Merger Sub owns more than 90% of the Company, no action will
be required by the stockholders of the Company, other than Merger
Sub (through its Board of
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Directors), for the Merger to become effective. The effective date
of the Merger will be July 2, 1998 (the "Effective Date of the
Merger").
The Company will be the surviving corporation in the Merger and, as a
result of the Merger, will become a wholly-owned subsidiary of IIAC.
At the Effective Date of the Merger, each of the remaining
outstanding Shares (other than Shares held by Merger Sub, the
Company, and holders who properly exercise dissenters' rights under
Delaware law) will be automatically converted into the right to
receive $7.05 in cash, without interest, upon surrender of the
certificate for such Share to First Chicago Trust Company of New
York, as Paying Agent (the "Paying Agent"). The Notice of Merger and
Appraisal Rights and the accompanying Letter of Transmittal, which
explain the redemption procedure and the statutory appraisal rights
in fuller detail, are being sent to holders of the Shares together
with this Schedule 13E-3.
ITEM 5. PLANS OR PROPOSALS OF THE ISSUER OR AFFILIATE
It is currently expected that, following the consummation of the Merger,
the business and operations of the Company will, except as set forth in
this Schedule 13E-3, be conducted by the Company substantially as they are
currently being conducted. IIAC intends to continue to evaluate the
business and operations of the Company with a view to maximizing the
Company's potential. As such, it will take such actions as it deems
appropriate under the circumstances and market conditions then existing.
The Company currently intends to terminate the registration of the Shares
under Section 12(g) of the Securities Exchange Act of 1934, as amended
(the "Exchange Act") following the Merger, which would result in the
suspension of the Company's duty to file reports pursuant to Section
15(d) of the Exchange Act. The Company also intends, following the
Merger, to delist its Shares from the NYSE.
Certain affiliates of the Company are considering restructuring various
assets and entities (including the Company) that are directly or
indirectly owned or controlled by such affiliates. Any such restructuring
would occur subsequent to the Merger, and as part of any such
restructuring, IIAC's ownership of the Company may be transferred to
another entity or be combined with the ownership of other entities. In
connection with any such restructuring, subject to market conditions, such
affiliates may pursue any of a variety of capital transactions involving
their combined holdings including, but not limited to, (i) acquiring other
manufacturing assets or companies, (ii) combining all or a part of such
holdings with a third party or (iii) pursuing a public offering of the
holder of the combined interests. Furthermore, in addition to or as part
of any such transactions, such affiliates may deem it appropriate to
pursue certain refinancing transactions involving the Company, including,
but not limited to, (i) refinancing the Notes, or (ii) refinancing the
Company's bank debt. However, no specific plans regarding any
restructuring involving the Company or any of its assets have been
considered by IIAC or its affiliates, and no assurance can be given as
to the timing of any such actions or whether they will occur at all.
As a consequence of the Merger, the equity capitalization of the Company
will be changed, although the debt capitalization will be unaffected by
the Merger. Following the Merger, the equity of the Company will consist
of 100 shares of common stock, $0.01 par value per share, all of which
will be owned by IIAC.
ITEM 6. SOURCE AND AMOUNTS OF FUNDS OR OTHER CONSIDERATION
(a);(c) The total amount of funds required to consummate the Merger and to
pay related fees and expenses is estimated to be approximately $9
million. The Merger will be funded through contributions of equity to
the Company by IIAC. IIAC will obtain such funds through revolving
loans with each of its principal stockholders, Messrs. Steven M.
Rales and Mitchell P. Rales, for this purpose. Each such loan will be
in the form of a Subordinated Note due May 15, 2008, with a committed
face amount of $4,500,000 and a variable interest rate equal to the
sum of (a) the rate published from time to time in the Wall Street
Journal, as its "prime" rate determined with respect to the date that
is two business days prior to the applicable interest payment date
and (b) 0.375%, from the date of such note, payable in arrears on
the fifteenth day of November and May of each year.
(b) The estimated fees and expenses incurred and to be incurred by IIAC,
Merger Sub and the Company in connection with the Merger will be paid
by the Company and are as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
Paying Agent fees.......................... $5,000
Legal fees................................. $140,000
Accounting fees............................ $10,000
SEC filing fees............................ $1,723
Printing and mailing....................... $25,000
Miscellaneous.............................. $3,277
</TABLE>
ITEM 7. PURPOSE(S), ALTERNATIVES, REASONS AND EFFECTS
(a)-(c) The purpose of the Merger is to enable IIAC to acquire the remaining
equity interest in the Company, as well as to provide a source of
liquidity to the minority stockholders who desire to convert their
interests to cash. The Merger is also expected to enhance operating
flexibility and to reduce expenses. IIAC and Merger Sub are
structuring the transaction as a "short-form" merger under Section
253 of the DGCL to minimize the costs associated with effecting the
Merger.
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IIAC is undertaking the transaction at this time because the final
obstacles to such a transaction have now been removed. On July 31,
1997, IIAC commenced the Tender Offer. At the time of the Tender
Offer, IIAC stated its intention to purchase, if and when
practicable, any minority interest not acquired during the Tender
Offer. Prior to the commencement of the Tender Offer, the Company
made appropriate amendments to the Rights Agreement to permit a
second-step merger. The Company's directors (none of whom were
affiliated with IIAC), in order to nullify certain restrictive
provisions in the Company's Certificate of Incorporation, approved a
business combination between IIAC (or an affiliate thereof) and the
Company, provided, among other things, that if the business
combination occurred before July 25, 1998, holders of Shares would
receive an amount in cash of not less than $7.05 per Share. However,
if IIAC had effected a second-step merger, the Company would have
been in breach of certain restrictive covenants in the indenture
governing the Notes. On April 14, 1998, the Company commenced a
consent solicitation to holders of the Notes seeking approval to
amend the indenture governing the Notes to permit the Company to
effect the Merger. On May 6, 1998, the Company received the
requisite consents and executed a supplemental indenture enacting
the proposed amendments. Having removed the obstacles to acquiring
the remaining equity interest in the Company at the Tender Offer
price, IIAC intends now to effect the Merger.
In addition to the foregoing, certain correspondence from the NYSE
indicated that the Shares, which already trade infrequently, could
become even more illiquid. Specifically, on March 16, 1998, the
Company received a letter from the 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 Shares. The Company
has been in contact with representatives of the NYSE, has taken the
position that the NYSE should maintain the listing of the Shares, and
has sought to persuade the NYSE to continue such listing. There can
be no assurance, however, that the NYSE will not attempt to delist
the Shares, and their future liquidity and market value may thus be
adversely affected. The Merger thus affords holders of the Shares an
outlet for liquidity, and is responsive to requests received by the
Company following the expiration of the Tender Offer from
unaffiliated holders of the Shares to purchase their Shares at $7.05
per Share.
(d) Certain Effects of the Merger
If the Merger is consummated, holders of the Shares (other than
Shares held by Merger Sub, the Company, and persons who have properly
exercised dissenters' rights under Delaware law) will have the right
to receive $7.05 per Share in cash, without interest, upon surrender
of the certificate for such Share to the Paying Agent.
As a result of the Merger, such stockholders will cease to have any
ownership interest in the Company, and will cease to participate in
future earnings and growth, if any, of the Company. Moreover, if the
Merger is consummated, public trading of the Shares will cease. IIAC
intends to have the Shares delisted from the NYSE. In addition, as a
consequence of the Merger, IIAC intends to deregister the Shares
under the Exchange Act; the Company will no longer be required under
the federal securities laws to file reports with the Commission and
will no longer be subject to the proxy rules under the Exchange Act.
However, as long as the Notes are outstanding, the Company will
continue to make periodic filings with the Commission as required by
the indenture governing the Notes.
The Shares are currently "margin securities," as such term is defined
under the rules of the Board of Governors of the Federal Reserve
System (the "Federal Reserve Board"), which has the effect, among
other things, of allowing banks to extend credit on the collateral of
such securities. Depending upon certain factors, following the
Merger, it is possible that the Shares might no longer constitute
"margin securities" for purposes of the margin regulations of the
Federal Reserve Board, in which event such Shares might no longer be
eligible for collateral for loans made by banks.
In the Merger, IIAC will pay approximately $8.6 million plus expenses
to acquire the equity interest represented by the Shares it does not
already own. As a result of the Merger, IIAC will increase its
ownership of the Company from 92.8% to 100%.
On a pro forma basis, IIAC's beneficial interest in the Company's net
book value (shareholder's equity) at April 3, 1998 would increase
from $81.3 million to $87.6 million, and its share of the Company's
net losses for the three months then ended would increase from $2.1
million to $2.3 million.
Certain Federal Income Tax Consequences of the Merger.
The following discussion summarizes the material United States
federal income tax consequences of the Merger, based on the Internal
Revenue Code of 1986, as amended (the "Code"), currently applicable
Treasury regulations, and judicial and administrative decisions and
rulings. Future legislative, judicial or administrative changes or
interpretations could alter or modify the statements and conclusions
set forth herein, and any such changes or interpretations could be
retroactive and could affect the tax consequences to holders of
Shares.
The discussion below does not purport to deal with all aspects of
United States federal income taxation that may affect particular
stockholders in light of their individual circumstances, and does not
deal with stockholders subject to special treatment under the federal
income tax law (including insurance companies, tax-exempt
organizations, financial institutions, broker-dealers, foreign
persons, stockholders who hold their Shares as part of a hedge,
appreciated financial position, straddle or conversion transaction,
stockholders who do not hold their stock as capital assets and
stockholders who have acquired their Shares upon the exercise of
employee options or otherwise as compensation).
A stockholder whose shares are converted, pursuant to the Merger,
into a right to receive cash will recognize gain or loss equal to the
difference between (i) the amount of cash that such stockholder
receives in the Merger and (ii) such stockholder's adjusted tax basis
in such Shares, assuming that such stockholder redeems all of the
Shares that such stockholder actually owns or constructively owns
under Section 318 of the Code. Such gain or loss will be capital gain
or loss, and generally will be long-term capital gain or loss if at
the Effective Date of the Merger the stockholder's holding period
for the Shares is more than one year. Under recently enacted
legislation, a reduced rate on capital gains will apply to an
individual stockholder if the stockholder's holding period for the
Shares is more than 18 months at the Effective Date of the Merger.
Holders of Shares should be aware that the Paying Agent will be
required in certain cases to withhold and remit to the United
States Treasury 31% of amounts payable in the Merger to any
stockholder that (i) has provided either an incorrect tax
identification number or no number at all, (ii) is subject to backup
withholding by the Internal Revenue Service for failure to report
the receipt of interest or dividend income properly, or (iii) has
failed to certify to the Paying Agent that such stockholder is not
subject to
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backup withholding or that such stockholder is an "Exempt Recipient."
Backup withholding is not an additional tax, but rather may be
credited against the taxpayer's tax liability for the year.
Neither IIAC, nor Messrs. Steven M. Rales and Mitchell P. Rales, nor
the Company expects to recognize any gain, loss or income by reason
of the Merger.
EACH HOLDER OF SHARES IS STRONGLY URGED TO CONSULT WITH SUCH HOLDER'S
TAX ADVISER TO DETERMINE THE PARTICULAR UNITED STATES FEDERAL INCOME
TAX CONSEQUENCES OF THE MERGER TO SUCH HOLDER IN LIGHT OF SUCH
HOLDER'S SPECIFIC CIRCUMSTANCES, AS WELL AS THE APPLICABILITY AND
EFFECT OF STATE, LOCAL AND FOREIGN TAX LAWS.
ITEM 8. FAIRNESS OF THE TRANSACTION
(a)-(f) Each of IIAC and Merger Sub believes that the transaction described
in this Schedule 13E-3 is fair to the public stockholders of the
Company. In reaching such determinations, the following factors were
considered. The discussion of the factors considered is not intended
to be exhaustive but summarizes the material factors considered.
- The fact that the price per Share ($7.05) is the same price as
that offered in the Tender Offer, which was unanimously
recommended by the Company's directors, none of whom was
affiliated with IIAC. The Company's Board of Directors at that
time had obtained an opinion of Credit Suisse First Boston
Corporation, dated July 25, 1997, to the effect that, subject to
the matters set forth therein, the consideration to be received
by holders of Shares in the Tender Offer was, as of the date of
such opinion, fair to such holders from a financial point of
view. Holders of more than 92% of the Shares tendered their
Shares in response to the Tender Offer, and, since the
expiration of the Tender Offer, the Company has received
requests to purchase Shares at $7.05 per Share from
unaffiliated stockholders who failed to tender such Shares in
the Tender Offer.
- The fact that, immediately prior to the Tender Offer, UDI had
offered to purchase all the outstanding Shares at $6.00 per
Share, and the Company's Board of Directors had received a
fairness opinion from Credit Suisse First Boston Corporation as
to the $6.00 offer price, along the same lines as the opinion
described above. The Merger price per Share represents a premium
of 17.5% over the price offered by UDI.
- The fact that before IIAC became an affiliate of the Company,
the Company's Board of Directors, in order to permit a future
merger between IIAC and the Company and to satisfy limitations
otherwise applicable to such a merger under the Company's
Certificate of Incorporation, approved a business combination
between IIAC (or an affiliate of IIAC) and the Company, provided
that, among other things, it occurred by July 25, 1998 and
involved the receipt by holders of Shares of at least $7.05 per
Share in cash.
- The trading price and volume history of the Shares since the
consummation of the Tender Offer and the fact that the daily
closing price of the Shares has not exceeded $7.00 since the
consummation of the Tender Offer. The Merger price represents a
premium of 18% over the average daily closing price of the
Shares between August 29, 1997, the date of the consummation of
the Tender Offer, and May 29, 1998, the last trading day before
this Schedule 13E-3 was filed.
- The fact that IIAC is not interested in selling its Shares.
- The fact that the Merger price represents a significant premium
over various internal valuation analyses prepared by IIAC. Such
analyses include comparisons to comparable companies based on
trailing and projected earnings as well as a "breakup" valuation
analysis.
- The fact that the Merger price represents a premium of 37.7%
over the $5.12 book value per Share as of April 3, 1998, the
most recent quarter-end, and a premium of $14.96 per Share over
the negative net tangible book value of $7.91 as of April 3,
1998.
- The continued illiquidity of the Shares, including the facts
that there has been limited public trading in the Shares
following completion of the Tender Offer (the average daily
trading volume of the Shares since the consummation of the
Tender Offer has been less than 2,600 Shares per day) and, as
noted in Item 7(c), the NYSE has observed 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 Shares.
- The fact that the Company's long-term debt instruments place a
variety of restrictions on the Company's ability to pay
dividends on the Shares.
- IIAC's belief that the Merger price is fair, relative to the
Company's operating results and prospects, after taking into
account the sales of Roltra-Morse and Instrumentation.
In light of the number and variety of factors considered in
connection with the evaluation of the Merger, it was not deemed
practicable to assign relative weights to the foregoing factors, and,
accordingly, no relative weights were assigned.
The Merger is structured so as not to require the approval of a
majority of the Shares held by public stockholders. The Tender Offer
was conditioned on the tender of more than 80% of the outstanding
Shares, and more than 92% of the outstanding Shares were in fact
tendered in the Tender Offer.
Because the Merger is being effected as a "short-form" merger under
Delaware law, it does not require approval either by stockholders
(other than Merger Sub) or by the Board of Directors of the Company.
As noted above, the Tender Offer was unanimously recommended by the
Board of Directors (including the non-employee directors) of the
Company, none of whom was affiliated with IIAC. IIAC and Merger Sub
believe that effecting the transaction as a "short-form" merger is
the quickest and least costly way to effect the acquisition of the
remaining equity interest in the Company, and to pay the purchase
price for that equity interest to the other stockholders as quickly
as possible.
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ITEM 9. REPORTS, OPINIONS, APPRAISALS AND CERTAIN NEGOTIATIONS
(a)-(c) The Company has not obtained a report from an outside party relating
to the Merger.
ITEM 10. INTEREST IN SECURITIES OF THE ISSUER
(a) Merger Sub is the beneficial owner of 15,905,971 Shares, representing
92.8% of the outstanding Shares. Because IIAC owns 100% of the equity
interest in Merger Sub, and because Messrs. Steven M. Rales and
Mitchell P. Rales have a controlling equity interest in IIAC, each
may also be deemed to be the beneficial owners of these Shares.
(b) With the exception of the contribution of the Shares from IIAC to
Merger Sub on June 1, 1998, none of the Shares referred to in the
preceding paragraph was acquired in the past 60 days.
ITEM 11. CONTRACTS, ARRANGEMENTS OR UNDERSTANDINGS WITH RESPECT TO THE
ISSUER'S SECURITIES
The senior bank lenders under the Credit and Guaranty Agreement,
dated as of August 29, 1997, among the Company, IIAC, certain
financial institutions, The Bank of Nova Scotia and NationsBanc
Capital Markets Inc., as amended (the "Credit and Guaranty
Agreement"), were granted a lien on the 92.8% of the Shares owned by
IIAC. As a result of the Merger, IIAC will own, and the senior bank
lenders will have a lien upon, 100% of the outstanding common stock
of the Company.
ITEM 12. PRESENT INTENTION AND RECOMMENDATION OF CERTAIN PERSONS WITH REGARD
TO THE TRANSACTION
(a) Not applicable.
(b) As a "short form" merger pursuant to Section 253 of the DGCL, the
transaction described in this Schedule 13E-3 will not require
approval by the board of directors of the Company or by any of the
Company's stockholders other than Merger Sub (by action of its
board).
ITEM 13. OTHER PROVISIONS OF THE TRANSACTION
(a) Holders of the Shares are entitled to appraisal rights under Section
262 of the DGCL. A person having a beneficial interest in Shares held
of record in the name of another person, such as a broker or nominee,
must act promptly to cause the record holder to follow the steps
summarized below properly and in a timely manner to perfect whatever
appraisal rights the beneficial owner may have.
THE FOLLOWING DISCUSSION IS NOT A COMPLETE STATEMENT OF THE LAW
PERTAINING TO APPRAISAL RIGHTS UNDER THE DGCL AND IS QUALIFIED IN ITS
ENTIRETY BY THE FULL TEXT OF SECTION 262, WHICH IS REPRINTED IN ITS
ENTIRETY AS APPENDIX A TO THE NOTICE OF MERGER AND APPRAISAL RIGHTS
ATTACHED TO THIS SCHEDULE 13E-3 AS EXHIBIT (E). All references in
Section 262 and in this summary to a "stockholder" are to the record
holder of the Shares as to which appraisal rights are asserted. As
used herein, "Surviving Corporation" means the Company as the
corporation surviving the Merger.
Under the DGCL, holders of Shares who do not wish to accept pursuant
to the Merger the consideration of $7.05 per Share and who follow the
procedures set forth in Section 262 will be entitled to have their
Shares appraised by the Delaware Court of Chancery and to receive
payment in cash of the "fair value" of such Shares, exclusive of any
element of value arising from the accomplishment or expectation of
the Merger, together with a fair rate of interest, if any, as
determined by such court. Any holder of Shares who wishes to exercise
such appraisal rights, or who wishes to preserve his right to do so,
should review carefully the following discussion, the Notice of
Merger and Appraisal Rights and the Appendix A thereto, because
failure to timely and properly comply with the procedures specified
will result in the loss of appraisal rights under the DGCL.
A holder of Shares wishing to exercise his appraisal rights must
deliver to the Secretary of the Company, ON OR BEFORE JUNE 25, 1998,
a written demand for appraisal of his Shares. A demand for appraisal
should be delivered to the Company at the following address:
Imo Industries Inc.
1009 Lenox Drive, Building Four West
Lawrenceville, New Jersey 08648-0550
Attn: Corporate Secretary
As provided under Section 262, failure of a holder of Shares to make
a written demand for appraisal (or a beneficial owner of Shares who
fails to cause the record holder of such Shares to demand an
appraisal of such Shares) within such time limit will result in the
loss of such holder's appraisal rights.
Only a holder of record of the Shares is entitled to assert appraisal
rights for the Shares registered in that holder's name. A demand for
appraisal must be executed by or on behalf of the holder of record,
fully and correctly, as his or her name appears on the stock
certificates for the Shares. If the Shares are owned of record in a
fiduciary or representative capacity, such as by a trustee, guardian
or custodian, execution of the demand should be made in that
capacity, and if the Shares are owned of record by more than one
person, as in a joint tenancy and tenancy in common, the demand
should be executed by or on behalf of all joint owners. An authorized
agent, including one or more joint owners, may execute a demand for
appraisal on behalf of a holder of record; however, the agent must
identify the record owner or owners and expressly disclose the fact
that, in executing the demand, the agent is agent for such owner or
owners. A record holder such as a broker who holds Shares as nominee
for several beneficial owners may exercise appraisal rights with
respect to the Shares held for one or more beneficial owners while
not exercising such rights with respect to the Shares held for other
beneficial owners; in such case, the written demand should set forth
the number of Shares as to which appraisal is sought and when no
number of Shares is expressly mentioned the demand will be presumed
to cover all Shares held in the name of the record owner.
Stockholders who hold
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their Shares in brokerage accounts or other nominee forms and who
wish to exercise appraisal rights are urged to consult with their
brokers to determine the appropriate procedures for the making of a
demand for appraisal by such a nominee.
Within 120 calendar days after the Effective Date of the Merger, but
not thereafter, the Surviving Corporation, or any stockholder who is
entitled to appraisal rights under Section 262 and has complied with
the requirements of Section 262, may file a petition in the Delaware
Court of Chancery demanding a determination of the fair value of the
Shares. The Surviving Corporation is under no obligation to and has
no present intention to file a petition in respect to the appraisal
of the fair value of the Shares. Accordingly, it is the obligation of
the stockholders to initiate all necessary action to perfect their
appraisal rights within the time prescribed in Section 262. At any
time within 60 calendar days after the Effective Date of the Merger,
any stockholder who has demanded appraisal has the right to withdraw
the demand and accept the consideration offered pursuant to the
Merger.
Within 120 days after the Effective Date of the Merger, any
stockholder who has complied with the requirements under Section 262
for exercise of appraisal rights will be entitled, upon written
request, to receive from the Surviving Corporation a statement
setting forth the aggregate number of Shares with respect to which
demands for appraisal have been received and the aggregate number of
holders of such Shares. Such statement must be mailed (a) within 10
calendar days after a written request therefor has been received by
the Surviving Corporation, or (b) by July 5, 1998 (i.e., within 10
calendar days after the expiration of the period of delivery of
demands for appraisal), whichever is later.
If a petition for an appraisal is duly filed by a holder of Shares,
and a copy thereof is delivered to the Surviving Corporation. the
Surviving Corporation will then be obligated within 20 calendar days
to provide the Register in Chancery with a duly verified list
containing the names and addresses of all holders of Shares who have
demanded an appraisal of their Shares and with whom agreements as to
the value of their Shares have not been reached by the Company. After
notice to holders of Shares, the Delaware Court of Chancery is
empowered to conduct a hearing on such petition to determine those
holders of Shares who have complied with Section 262 and who have
become entitled to appraisal rights. The Delaware Court of Chancery
may require the holders of Shares who have demanded an appraisal for
their Shares to submit their stock certificates to the Register in
Chancery for notation thereon of the pendency of the appraisal
proceeding; and if any holder of Shares fails to comply with such
direction, the Delaware Court of Chancery may dismiss the proceedings
as to such stockholder.
After determining the stockholders entitled to an appraisal, the
Delaware Court of Chancery will appraise the "fair value" of their
Shares, exclusive of any element of value arising from the
accomplishment or expectation of the Merger, together with a fair
rate of interest, if any, to be paid upon the amount determined to be
the fair value. The Delaware Supreme Court has stated that "proof of
value by any techniques or methods which are generally considered
acceptable in the financial community and otherwise admissible in
court" should be considered in the appraisal proceedings. In
addition, Delaware courts have held that the Section 262 appraisal
remedy, depending on factual circumstances, may or may not be a
dissenter's exclusive remedy. The Court will also determine the
amount of interest, if any, to be paid upon the amounts to be
received by persons whose Shares have been appraised.
The costs of the appraisal proceeding may be determined by the Court
and taxed upon the parties as the Court deems equitable in the
circumstances. The Court may also order that all or a portion of the
expenses incurred by any stockholder in connection with an appraisal,
including, without limitation, reasonable attorneys' fees and the
fees and expenses of experts utilized in the appraisal proceeding, be
charged pro rata against the value of all the Shares entitled to be
appraised.
No stockholder, whether or not he has duly demanded an appraisal in
compliance with Section 262, will, from and after the Effective Date
of the Merger, be entitled to vote any Shares for any purpose or be
entitled to the payment of dividends or other distributions on any
Shares (except dividends or other distributions payable to
stockholders of record at a date prior to the Effective Date of the
Merger).
If any stockholder who demands appraisal of his Shares under Section
262 fails to perfect, or effectively withdraws or loses, his or her
right to appraisal, as provided in the DGCL, the Shares of such
stockholder will be converted into the right to receive $7.05 in cash
per Share, without interest. Such stockholders must follow the
procedures set forth in the Letter of Transmittal and accompanying
instructions.
FAILURE TO FOLLOW THE STEPS REQUIRED BY SECTION 262 OF THE DGCL FOR
PERFECTING APPRAISAL RIGHTS MAY RESULT IN THE LOSS OF SUCH RIGHTS.
(b)-(c) Not applicable.
ITEM 14. FINANCIAL INFORMATION
(a)(1)-(2) Exhibits (g)(1) and (g)(2) are incorporated herein by reference.
(a)(3) The ratio of earnings to fixed charges of the Company for the
quarter ending April 3, 1998, was 1.64. For fiscal 1996, the period
in fiscal 1997 prior to the consummation of the Tender Offer and the
period in fiscal 1997 subsequent to the consummation of the Tender
Offer, the fixed charges of the Company exceeded its earnings by
$20.4 million, $30.0 million and $5.5 million, respectively.
(a)(4) Book value per share of the Company as of the end of fiscal year 1997
and as of April 3, 1998, were $5.27 and $5.12, respectively.
(b) Completion of the Merger is not expected to have a material effect on
the Company's balance sheet, earnings, or book value per share.
ITEM 15. PERSONS AND ASSETS EMPLOYED, RETAINED OR UTILIZED
(a); (b) None.
ITEM 16. ADDITIONAL INFORMATION
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None.
ITEM 17. MATERIAL TO BE FILED AS EXHIBITS
(a)(1) Subordinated Note dated May 29, 1998 issued by IIAC to Michell P.
Rales.
(a)(2) Subordinated Note dated May 29, 1998 issued by IIAC to Steven M.
Rales.
(b) None.
(c) Credit and Guaranty Agreement dated as of August 29, 1997 among IIAC,
the Company, certain financial institutions, the Bank of Nova Scotia,
and NationsBanc Capital Markets, Inc.**
(d) Letter to Stockholders from the IIAC.*
(e) Notice of Merger and Appraisal Rights.*
(f) None.
(g)(1) Audited financial statements for the fiscal years required to be
filed with the Company's annual report for the year ended December
31, 1997.*
(g)(2) Unaudited financial statements required to be included in the
Company's quarterly report for the period ended April 3, 1998.*
* Included in materials sent to stockholders.
**Incorporated by reference to Exhibit 10 to the Company's Quarterly Report on
Form 10-Q for the period ending September 30, 1997.
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SIGNATURE
After due inquiry and to the best of my knowledge and belief, I
certify that the information set forth in this statement is true,
complete and correct.
June 1, 1998
II ACQUISITION CORP.
By: /s/ Philip W. Knisely
____________________________
Name: Philip W. Knisely
Title: Chief Executive Officer
and President
IMO MERGER CORP.
By: /s/ Philip W. Knisely
____________________________
Name: Philip W. Knisely
Title: Chief Executive Officer
and President
/s/ Steven M. Rales
_______________________________
Steven M. Rales
/s/ Mitchell P. Rales
_______________________________
Mitchell P. Rales
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INDEX OF EXHIBITS
(a)(1) Subordinated Note dated May 29, 1998 issued by IIAC to Michell P.
Rales.
(a)(2) Subordinated Note dated May 29, 1998 issued by IIAC to Steven M.
Rales.
(b) None.
(c) Credit and Guaranty Agreement dated as of August 29, 1997 among IIAC,
the Company, certain financial institutions, the Bank of Nova Scotia,
and NationsBanc Capital Markets, Inc.**
(d) Letter to Stockholders from the IIAC.*
(e) Notice of Merger and Appraisal Rights.*
(f) None.
(g)(1) Audited financial statements for the fiscal years required to be
filed with the Company's annual report for the year ended December
31, 1997.*
(g)(2) Unaudited financial statements required to be included in the
Company's quarterly report for the period ended April 3, 1998.*
* Included in materials sent to stockholders.
**Incorporated by reference to Exhibit 10 to the Company's Quarterly Report on
Form 10-Q for the period ending September 30, 1997.
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EXHIBIT 17(A)(1)
II ACQUISITION CORP.
SUBORDINATED NOTE
No. R-3 May 29, 1998
$4,500,000
FOR VALUE RECEIVED, II ACQUISITION CORP. (herein called the
"Borrower"), a corporation organized and existing under the laws of the State of
Delaware, hereby promises to pay to MITCHELL P. RALES or registered assigns
(each, a "Lender"), the sum of (x) the lesser of (a) FOUR MILLION, FIVE HUNDRED
THOUSAND DOLLARS (the "Committed Amount"), and (b) the aggregate unpaid amount
of all revolving loans (the "Loans") made under this Note by the Lender to the
Borrower from time to time during the period (the "Borrowing Period") from and
including the date hereof to May 15, 2008 (the "Termination Date"); and (y)
amounts accrued pursuant to the immediately following paragraph. During the
Borrowing Period, the Borrower may (i) borrow up to the Committed Amount, (ii)
prepay the Loans in whole or in part, and (iii) reborrow, all in accordance with
the terms and conditions hereof; provided, that (A) at no time shall the sum of
the outstanding amount of the Loans hereunder (excluding any amounts accrued
pursuant to the immediately following paragraph) exceed the Committed Amount;
and (B) other than under clause (ii) of this sentence, Loans shall be used by
the Borrower only to fund the merger (the "Merger"), pursuant to Section 253 of
the Delaware General Corporation Law, of Imo Industries Inc. ("Imo") and Imo
Merger Corp., each a Delaware corporation.
The Borrower further agrees to pay interest (computed on the basis
of a 360-day year consisting of twelve 30-day months) on the aggregate unpaid
principal amount of the Loans at a variable rate per annum equal to the sum of
(a) the rate published from time to time in the Wall Street Journal as the
"prime" rate, determined with respect to the date that is two business days
prior to the applicable interest payment date, and (b) 0.375%, from the date
hereof, payable semiannually in arrears on the fifteenth day of November and May
in each year, with the first interest payment being due on November 15, 1998.
The Lender agrees, on the terms and conditions set forth herein, to
make from time to time during the Borrowing Period, upon written request of the
Borrower, Loans to the Borrower; provided, (A) that at no time shall the sum of
the outstanding amount of the Loans hereunder exceed the Committed Amount; and
(B) that other than
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to prepay the Loans in whole or in part, such Loans shall be used by the
Borrower only to fund the Merger.
This Note will mature and become due and payable in full on the
Termination Date.
Payments of principal of and interest on this Note are to be made at
the main office of the holder, or at such other place as the holder shall
designate to the Borrower hereof in writing, in lawful money of the United
States of America.
All Loans as well as repayments of interest or principal shall be
recorded by the registered holder hereof and appropriate notations to evidence
the foregoing information with respect to the principal amount then outstanding
shall be endorsed by such registered holder on the SCHEDULE attached hereto, or
on a continuation of such schedule attached to and made a part hereof; provided
that the failure of such registered holder to make any such recordation or
endorsement shall not affect the obligations of the Borrower hereunder.
1. Prepayment. The Borrower may at any time and from time to time,
upon notice to the holder of this Note, prepay all or any portion of the
indebtedness represented by this Note, with interest accrued to the date fixed
for prepayment, subject to the subordination provisions set forth below.
2. Subordination. The Borrower agrees, and the registered holder by
accepting this Note agrees, that all indebtedness evidenced by this Note is
subordinated in right of payment, to the extent and in the manner provided
herein, to the prior indefeasible payment in full, for a period of time in
excess of all applicable preference or other similar periods under applicable
bankruptcy, insolvency or creditors' rights law, to all principal of and
premium, if any, interest (including, without limitation, Post-Petition
Interest), costs, expenses, fees, reimbursements, indemnities and other
obligations of the Borrower on or with respect to (a) the Credit and Guaranty
Agreement, dated as of August 29, 1997, between the Borrower, Imo, The Bank of
Nova Scotia as Administrative Agent and Documentation Agent, certain financial
institutions as lenders and NationsBanc Capital Markets, Inc. as Syndication
Agent, and any refinancing or extension thereof; the Note, issued by the
Borrower to Janelia Farm Corp., dated July 23, 1997 and (b) any other
refinancing or extension thereof; and any indebtedness for money borrowed issued
after the date hereof, except indebtedness that is designated as being pari
passu or subordinated in right of payment to this Note (all such nonexcluded
indebtedness, the "Senior Debt") and that the subordination is for the benefit
of, and
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shall be enforceable by, the holder of the Senior Debt. This Note shall be pari
passu and shall not be subordinated in right of payment to the notes issued by
the Borrower to Mitchell P. Rales and Steven M. Rales, bearing the registration
numbers R-1, R-2, R-4, R-5, and R-6. For purposes of this Section 2:
"Insolvency or Liquidation Proceeding" means (i) any insolvency or
bankruptcy case or proceeding, of any receivership, liquidation,
reorganization or other similar case or proceeding in connection
therewith, relating to the Borrower or its assets, or (ii) any
liquidation, dissolution or other winding up of the Borrower, whether
voluntary or involuntary or whether or not involving insolvency or
bankruptcy, or (iii) any assignment for the benefit of creditors or any
other marshaling of assets or liabilities of the Borrower.
"Post-Petition Interest" means all interest accrued or accruing
after the commencement of any Insolvency or Liquidation Proceeding (and
interest that would accrue but for the commencement of any Insolvency or
Liquidation Proceeding) in accordance with and at the contract rate
(including, without limitation, any rate applicable upon default)
specified in the agreement or instrument creating, evidencing or governing
any indebtedness, whether or not, pursuant to applicable law or otherwise,
the claim for such interest is allowed as a claim in such Insolvency or
Liquidation Proceeding.
(a) Liquidation; Dissolution; Bankruptcy. Upon any distribution or
payment to creditors of the Borrower in a liquidation, dissolution, winding up
or reorganization of the Borrower of any kind or character and whether voluntary
or involuntary or in a bankruptcy, reorganization, insolvency, receivership or
similar proceeding relating to the Borrower, its property or to its creditors as
such or in an assignment for the benefit of creditors or any marshaling of the
assets and liabilities of the Borrower:
(i) the holder of the Senior Debt shall be entitled to receive
indefeasible payment in full (where used in this Note, "in full" shall
mean the indefeasible payment in cash in full of all amounts owing to the
holders of Senior Debt) of all amounts owing with respect to the Senior
Debt (including, without limitation, interest and expenses accrued after
the occurrence of any such event or the commencement of any such
proceeding at the rate specified in the Senior Debt regardless of whether
or not such interest is allowable as a bankruptcy claim in such
proceeding) before the registered holder shall be entitled to receive,
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directly or indirectly, any payment of or distribution with respect to
principal, premium, if any, or interest on this Note; and
(ii) until the Senior Debt is paid in full, any payment or
distribution to which the registered holder would be entitled but for
these subordination provisions shall be made to the holder of the Senior
Debt, as its interest may appear, except that the registered holder may
receive securities that are subordinated to at least the same extent as
this Note to the Senior Debt.
(b) Default on Senior Debt. So long as a default in the payment of
any Senior Debt exists and is continuing, the Borrower may not pay principal of,
premium, if any, or cash interest on this Note and may not repurchase, redeem or
otherwise retire this Note (collectively, "pay this Note"), and the registered
holder agrees that it shall not ask, demand or sue for, or take or receive from
Borrower, directly or indirectly, in cash, securities or other property or by
way of set-off, any payment of this Note, subject to the terms of the Senior
Debt.
(c) When Distribution Must Be Paid Over. In the event that a pay
ment or distribution is made to the registered holder at a time when such
payment or distribution is prohibited by paragraphs (a) and (b) hereof, the
registered holder who receives the payment or distribution shall hold it in
trust for the benefit of, and promptly pay it over (in the same form as received
but with any necessary endorsements) to, the holder of the Senior Debt as its
interest may appear, or its agent or representative or the trustee under the
indenture or other agreement (if any) pursuant to which the Senior Debt may have
been issued, as their respective interests may appear, for application to the
payment of all obligations with respect to the Senior Debt remaining unpaid to
the extent necessary to pay such obligations in full in accordance with their
terms, after giving effect to any concurrent payment or distribution to or for
the holder of the Senior Debt.
(d) Notice by the Borrower. The Borrower shall promptly notify the
registered holder in writing of any facts known to the Borrower that would cause
a payment of any amounts with respect to this Note to violate the provisions
hereof, but failure to give such notice shall not affect the subordination of
this Note to the Senior Debt.
(e) Subrogation. After all Senior Debt is indefeasibly paid in full
in cash for a period of time in excess of all applicable preference or similar
periods under applicable bankruptcy, insolvency or creditors' rights laws, and
until this Note is paid in full, the registered holder shall be subrogated
(equally and ratably with all other debt that
4
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is pari passu with this Note) to the rights of the holder of the Senior Debt to
receive distributions applicable to the Senior Debt to the extent that
distributions otherwise payable to the registered holder have been applied to
the payment of Senior Debt. A distribution made under the subordination
provisions of this Note to the holder of the Senior Debt which otherwise would
have been made to the registered holder is not, as between the Borrower and the
registered holder, a payment by the Borrower on this Note.
(f) Relative Rights. This Note defines the relative rights of the
registered holder and the holder of the Senior Debt. Nothing in this Note shall:
(i) impair, as between the Borrower and the registered holder, the
obligation of the Borrower, which is absolute and unconditional, to pay
principal of and interest on this Note in accordance with its terms;
(ii) affect the relative rights of the registered holder and
creditors of the Borrower other than their rights in relation to the
holder of the Senior Debt; or
(iii) prevent the registered holder from exercising any available
remedies, subject to the rights of the holder of the Senior Debt to
receive distributions and payments otherwise payable to the registered
holder.
(g) Subordination May Not Be Impaired. No right of any present or
future holder of Senior Debt to enforce the subordination of the obligations
with respect to this Note shall be prejudiced or impaired by any act or failure
to act by the Borrower or by any act or failure to act or waiver of any terms of
this Note, by any such holder, or by any noncompliance by the Borrower with the
terms of the subordination provisions of this Note, regardless of any knowledge
thereof which any such holder may have or be otherwise charged with. The holder
of the Senior Debt may extend, renew, modify or amend the terms of the Senior
Debt or any security therefor and release, sell or exchange such security and
otherwise deal freely with the Borrower, all without the consent of or notice
to, and without affecting the liabilities and obligations of, the Borrower or
the registered holder. No provision in any supplemental agreement or document
which modifies the subordination provisions of this Note or otherwise affects
the superior position of the holder of the Senior Debt shall be effective
against the holder of the Senior Debt if such holder has not consented thereto
in accordance with the provisions of the document governing such Senior Debt.
5
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(h) The Registered Holder Entitled to Rely. Upon any payment or
distribution pursuant to these subordination provisions, the registered holder
shall be entitled to rely (i) upon any order or decree of a court of competent
jurisdiction in which any proceedings of the nature referred to in paragraph (a)
above are pending, (ii) upon a certificate of the liquidating trustee or agent
or other person making such payment or distribution to the registered holder or
(iii) upon the representatives for the holder of the Senior Debt for the purpose
of ascertaining the persons entitled to participate in such payment or
distribution, the holder of the Senior Debt and other indebtedness of the
Borrower, the amount thereof or payable thereon, the amount or amounts paid or
distributed thereon and all other facts pertinent thereto or to the
subordination provisions of this Note.
(i) Reliance by the Holder of the Senior Debt on Subordination
Provisions. The registered holder, by accepting this Note, acknowledges and
agrees that the foregoing subordination provisions are, and are intended to be,
an inducement and a consideration to the holder of the Senior Debt, whether such
Senior Debt was created or acquired before or after the issuance of this Note,
to acquire and continue to hold, or to continue to hold, such Senior Debt, and
such holder of Senior Debt shall be deemed conclusively to have relied on such
subordination provisions in acquiring and continuing to hold, or in continuing
to hold, such Senior Debt. These subordination provisions are intended to be for
the benefit of, and shall be enforceable directly by, the holder of the Senior
Debt. The registered holder hereby waives to the fullest extent permitted by law
any right to compel marshaling or to otherwise seek to compel the holder of the
Senior Debt to follow any particular order of realization upon any collateral
for or any particular order or manner of enforcement of remedies with respect to
the Senior Debt.
3. Registration, Transfer and Exchange of Notes. (a) The Borrower
shall keep at its principal executive office a register for the registration and
registration of transfers of this Note and any Notes issued upon the transfer or
exchange hereof ("Notes"). The name and address of each holder of one or more
Notes, each transfer thereof and the name and address of each transferee of one
or more Notes shall be registered in such register. Prior to due presentment for
registration of transfer, the Person in whose name any Note shall be registered
shall be deemed and treated as the owner and holder thereof for all purposes
hereof, and the Borrower shall not be affected by any notice or knowledge to the
contrary.
(b) Upon surrender of any Note at the principal executive office of
the Borrower for registration of transfer or exchange (and in the case of a
surrender for registration of transfer, duly endorsed or accompanied by a
written instrument of transfer
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duly executed by the registered holder of such Note or his attorney duly
authorized in writing and accompanied by the address for notices of each
transferee of such Note or part thereof), the Borrower shall execute and
deliver, at the Borrower's expense (except as provided below), one or more new
Notes (as requested by the holder thereof) in exchange therefor, in an aggregate
principal amount equal to the unpaid principal amount of the surrendered Note.
Each such new Note shall be payable to such Person as such holder may request
and shall be substantially in the form of this Note. Each such new Note shall be
dated and bear interest from the date to which interest shall have been paid on
the surrendered Note or dated the date of the surrendered Note if no interest
shall have been paid thereon.
THIS SUBORDINATED NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND MAY NOT BE OFFERED, SOLD OR
OTHERWISE TRANSFERRED, PLEDGED OR HYPOTHECATED UNLESS AND UNTIL (I) THIS
SUBORDINATED NOTE HAS BEEN REGISTERED UNDER THE SECURITIES ACT, OR (II) THE
HOLDER HEREOF PROVIDES THE BORROWER WITH (A) A WRITTEN OPINION OF LEGAL COUNSEL,
WHICH COUNSEL AND OPINION (IN FORM AND SUBSTANCE) SHALL BE REASONABLY
SATISFACTORY TO THE BORROWER, TO THE EFFECT THAT THE PROPOSED TRANSFER OF THIS
SUBORDINATED NOTE MAY BE EFFECTED WITHOUT REGISTRATION UNDER THE SECURITIES ACT,
OR (B) A "NO ACTION" LETTER FROM THE SECURITIES AND EXCHANGE COMMISSION (THE
"COMMISSION") REASONABLY SATISFACTORY TO THE BORROWER TO THE EFFECT THAT UNDER
THE SECURITIES ACT THE PROPOSED TRANSFER OF THIS SUBORDINATED NOTE WITHOUT
REGISTRATION WILL NOT RESULT IN A RECOMMENDATION BY THE STAFF OF THE COMMISSION
THAT ACTION BE TAKEN WITH RESPECT THERETO, OR (C) SUCH OTHER EVIDENCE AS MAY BE
REASONABLY SATISFACTORY TO THE BORROWER THAT THE PROPOSED TRANSFER OF THIS
SUBORDINATED NOTE MAY BE EFFECTED WITHOUT REGISTRATION UNDER THE SECURITIES ACT.
7
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This Note shall be governed by and construed and enforced in
accordance with the law of the State of Delaware.
II ACQUISITION CORP.
By: /s/ Michael G. Ryan
-----------------------------------
Michael G. Ryan
Vice President
/s/ Mitchell P. Rales
--------------------------------------
Mitchell P. Rales
8
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Schedule to
Note R-3
CALCULATION OF PRINCIPAL AMOUNT
Date Amount Interest Deferred Payment Unpaid Notation
Borrowed and Constituting Hereunder Principal Made By
Hereunder Principal Balance
Hereunder
<PAGE> 1
CONFORMED COPY
EXHIBITS 17(A)(2)
II ACQUISITION CORP.
SUBORDINATED NOTE
No. R-4 May 29, 1998
$4,500,000
FOR VALUE RECEIVED, II ACQUISITION CORP. (herein called the
"Borrower"), a corporation organized and existing under the laws of the State of
Delaware, hereby promises to pay to STEVEN M. RALES or registered assigns (each,
a "Lender"), the sum of (x) the lesser of (a) FOUR MILLION, FIVE HUNDRED
THOUSAND DOLLARS (the "Committed Amount"), and (b) the aggregate unpaid amount
of all revolving loans (the "Loans") made under this Note by the Lender to the
Borrower from time to time during the period (the "Borrowing Period") from and
including the date hereof to May 15, 2008 (the "Termination Date"); and (y)
amounts accrued pursuant to the immediately following paragraph. During the
Borrowing Period, the Borrower may (i) borrow up to the Committed Amount, (ii)
prepay the Loans in whole or in part, and (iii) reborrow, all in accordance with
the terms and conditions hereof; provided, that (A) at no time shall the sum of
the outstanding amount of the Loans hereunder (excluding any amounts accrued
pursuant to the immediately following paragraph) exceed the Committed Amount;
and (B) other than under clause (ii) of this sentence, Loans shall be used by
the Borrower only to fund the merger (the "Merger"), pursuant to Section 253 of
the Delaware General Corporation Law, of Imo Industries Inc. ("Imo") and Imo
Merger Corp., each a Delaware corporation.
The Borrower further agrees to pay interest (computed on the basis
of a 360-day year consisting of twelve 30-day months) on the aggregate unpaid
principal amount of the Loans at a variable rate per annum equal to the sum of
(a) the rate published from time to time in the Wall Street Journal as the
"prime" rate, determined with respect to the date that is two business days
prior to the applicable interest payment date, and (b) 0.375%, from the date
hereof, payable semiannually in arrears on the fifteenth day of November and May
in each year, with the first interest payment being due on November 15, 1998.
The Lender agrees, on the terms and conditions set forth herein, to
make from time to time during the Borrowing Period, upon written request of the
Borrower, Loans to the Borrower; provided, (A) that at no time shall the sum of
the outstanding amount of the Loans hereunder exceed the Committed Amount; and
(B) that other than
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to prepay the Loans in whole or in part, such Loans shall be used by the
Borrower only to fund the Merger.
This Note will mature and become due and payable in full on the
Termination Date.
Payments of principal of and interest on this Note are to be made at
the main office of the holder, or at such other place as the holder shall
designate to the Borrower hereof in writing, in lawful money of the United
States of America.
All Loans as well as repayments of interest or principal shall be
recorded by the registered holder hereof and appropriate notations to evidence
the foregoing information with respect to the principal amount then outstanding
shall be endorsed by such registered holder on the SCHEDULE attached hereto, or
on a continuation of such schedule attached to and made a part hereof; provided
that the failure of such registered holder to make any such recordation or
endorsement shall not affect the obligations of the Borrower hereunder.
1. Prepayment. The Borrower may at any time and from time to time,
upon notice to the holder of this Note, prepay all or any portion of the
indebtedness represented by this Note, with interest accrued to the date fixed
for prepayment, subject to the subordination provisions set forth below.
2. Subordination. The Borrower agrees, and the registered holder by
accepting this Note agrees, that all indebtedness evidenced by this Note is
subordinated in right of payment, to the extent and in the manner provided
herein, to the prior indefeasible payment in full, for a period of time in
excess of all applicable preference or other similar periods under applicable
bankruptcy, insolvency or creditors' rights law, to all principal of and
premium, if any, interest (including, without limitation, Post-Petition
Interest), costs, expenses, fees, reimbursements, indemnities and other
obligations of the Borrower on or with respect to (a) the Credit and Guaranty
Agreement, dated as of August 29, 1997, between the Borrower, Imo, The Bank of
Nova Scotia as Administrative Agent and Documentation Agent, certain financial
institutions as lenders and NationsBanc Capital Markets, Inc. as Syndication
Agent, and any refinancing or extension thereof; the Note, issued by the
Borrower to Janelia Farm Corp., dated July 23, 1997 and (b) any other
refinancing or extension thereof; and any indebtedness for money borrowed issued
after the date hereof, except indebtedness that is designated as being pari
passu or subordinated in right of payment to this Note (all such nonexcluded
indebtedness, the "Senior Debt") and that the subordination is for the benefit
of, and
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shall be enforceable by, the holder of the Senior Debt. This Note shall be pari
passu and shall not be subordinated in right of payment to the notes issued by
the Borrower to Mitchell P. Rales and Steven M. Rales, bearing the registration
numbers R-1, R-2, R-3, R-5, and R-6. For purposes of this Section 2:
"Insolvency or Liquidation Proceeding" means (i) any insolvency or
bankruptcy case or proceeding, of any receivership, liquidation,
reorganization or other similar case or proceeding in connection
therewith, relating to the Borrower or its assets, or (ii) any
liquidation, dissolution or other winding up of the Borrower, whether
voluntary or involuntary or whether or not involving insolvency or
bankruptcy, or (iii) any assignment for the benefit of creditors or any
other marshaling of assets or liabilities of the Borrower.
"Post-Petition Interest" means all interest accrued or accruing
after the commencement of any Insolvency or Liquidation Proceeding (and
interest that would accrue but for the commencement of any Insolvency or
Liquidation Proceeding) in accordance with and at the contract rate
(including, without limitation, any rate applicable upon default)
specified in the agreement or instrument creating, evidencing or governing
any indebtedness, whether or not, pursuant to applicable law or otherwise,
the claim for such interest is allowed as a claim in such Insolvency or
Liquidation Proceeding.
(a) Liquidation; Dissolution; Bankruptcy. Upon any distribution or
payment to creditors of the Borrower in a liquidation, dissolution, winding up
or reorganization of the Borrower of any kind or character and whether voluntary
or involuntary or in a bankruptcy, reorganization, insolvency, receivership or
similar proceeding relating to the Borrower, its property or to its creditors as
such or in an assignment for the benefit of creditors or any marshaling of the
assets and liabilities of the Borrower:
(i) the holder of the Senior Debt shall be entitled to receive
indefeasible payment in full (where used in this Note, "in full" shall
mean the indefeasible payment in cash in full of all amounts owing to the
holders of Senior Debt) of all amounts owing with respect to the Senior
Debt (including, without limitation, interest and expenses accrued after
the occurrence of any such event or the commencement of any such
proceeding at the rate specified in the Senior Debt regardless of whether
or not such interest is allowable as a bankruptcy claim in such
proceeding) before the registered holder shall be entitled to receive,
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directly or indirectly, any payment of or distribution with respect to
principal, premium, if any, or interest on this Note; and
(ii) until the Senior Debt is paid in full, any payment or
distribution to which the registered holder would be entitled but for
these subordination provisions shall be made to the holder of the Senior
Debt, as its interest may appear, except that the registered holder may
receive securities that are subordinated to at least the same extent as
this Note to the Senior Debt.
(b) Default on Senior Debt. So long as a default in the payment of
any Senior Debt exists and is continuing, the Borrower may not pay principal of,
premium, if any, or cash interest on this Note and may not repurchase, redeem or
otherwise retire this Note (collectively, "pay this Note"), and the registered
holder agrees that it shall not ask, demand or sue for, or take or receive from
Borrower, directly or indirectly, in cash, securities or other property or by
way of set-off, any payment of this Note, subject to the terms of the Senior
Debt.
(c) When Distribution Must Be Paid Over. In the event that a pay
ment or distribution is made to the registered holder at a time when such
payment or distribution is prohibited by paragraphs (a) and (b) hereof, the
registered holder who receives the payment or distribution shall hold it in
trust for the benefit of, and promptly pay it over (in the same form as received
but with any necessary endorsements) to, the holder of the Senior Debt as its
interest may appear, or its agent or representative or the trustee under the
indenture or other agreement (if any) pursuant to which the Senior Debt may have
been issued, as their respective interests may appear, for application to the
payment of all obligations with respect to the Senior Debt remaining unpaid to
the extent necessary to pay such obligations in full in accordance with their
terms, after giving effect to any concurrent payment or distribution to or for
the holder of the Senior Debt.
(d) Notice by the Borrower. The Borrower shall promptly notify the
registered holder in writing of any facts known to the Borrower that would cause
a payment of any amounts with respect to this Note to violate the provisions
hereof, but failure to give such notice shall not affect the subordination of
this Note to the Senior Debt.
(e) Subrogation. After all Senior Debt is indefeasibly paid in full
in cash for a period of time in excess of all applicable preference or similar
periods under applicable bankruptcy, insolvency or creditors' rights laws, and
until this Note is paid in full, the registered holder shall be subrogated
(equally and ratably with all other debt that
4
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is pari passu with this Note) to the rights of the holder of the Senior Debt to
receive distributions applicable to the Senior Debt to the extent that
distributions otherwise payable to the registered holder have been applied to
the payment of Senior Debt. A distribution made under the subordination
provisions of this Note to the holder of the Senior Debt which otherwise would
have been made to the registered holder is not, as between the Borrower and the
registered holder, a payment by the Borrower on this Note.
(f) Relative Rights. This Note defines the relative rights of the
registered holder and the holder of the Senior Debt. Nothing in this Note shall:
(i) impair, as between the Borrower and the registered holder, the
obligation of the Borrower, which is absolute and unconditional, to pay
principal of and interest on this Note in accordance with its terms;
(ii) affect the relative rights of the registered holder and
creditors of the Borrower other than their rights in relation to the
holder of the Senior Debt; or
(iii) prevent the registered holder from exercising any available
remedies, subject to the rights of the holder of the Senior Debt to
receive distributions and payments otherwise payable to the registered
holder.
(g) Subordination May Not Be Impaired. No right of any present or
future holder of Senior Debt to enforce the subordination of the obligations
with respect to this Note shall be prejudiced or impaired by any act or failure
to act by the Borrower or by any act or failure to act or waiver of any terms of
this Note, by any such holder, or by any noncompliance by the Borrower with the
terms of the subordination provisions of this Note, regardless of any knowledge
thereof which any such holder may have or be otherwise charged with. The holder
of the Senior Debt may extend, renew, modify or amend the terms of the Senior
Debt or any security therefor and release, sell or exchange such security and
otherwise deal freely with the Borrower, all without the consent of or notice
to, and without affecting the liabilities and obligations of, the Borrower or
the registered holder. No provision in any supplemental agreement or document
which modifies the subordination provisions of this Note or otherwise affects
the superior position of the holder of the Senior Debt shall be effective
against the holder of the Senior Debt if such holder has not consented thereto
in accordance with the provisions of the document governing such Senior Debt.
5
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CONFORMED COPY
(h) The Registered Holder Entitled to Rely. Upon any payment or
distribution pursuant to these subordination provisions, the registered holder
shall be entitled to rely (i) upon any order or decree of a court of competent
jurisdiction in which any proceedings of the nature referred to in paragraph (a)
above are pending, (ii) upon a certificate of the liquidating trustee or agent
or other person making such payment or distribution to the registered holder or
(iii) upon the representatives for the holder of the Senior Debt for the purpose
of ascertaining the persons entitled to participate in such payment or
distribution, the holder of the Senior Debt and other indebtedness of the
Borrower, the amount thereof or payable thereon, the amount or amounts paid or
distributed thereon and all other facts pertinent thereto or to the
subordination provisions of this Note.
(i) Reliance by the Holder of the Senior Debt on Subordination
Provisions. The registered holder, by accepting this Note, acknowledges and
agrees that the foregoing subordination provisions are, and are intended to be,
an inducement and a consideration to the holder of the Senior Debt, whether such
Senior Debt was created or acquired before or after the issuance of this Note,
to acquire and continue to hold, or to continue to hold, such Senior Debt, and
such holder of Senior Debt shall be deemed conclusively to have relied on such
subordination provisions in acquiring and continuing to hold, or in continuing
to hold, such Senior Debt. These subordination provisions are intended to be for
the benefit of, and shall be enforceable directly by, the holder of the Senior
Debt. The registered holder hereby waives to the fullest extent permitted by law
any right to compel marshaling or to otherwise seek to compel the holder of the
Senior Debt to follow any particular order of realization upon any collateral
for or any particular order or manner of enforcement of remedies with respect to
the Senior Debt.
3. Registration, Transfer and Exchange of Notes. (a) The Borrower
shall keep at its principal executive office a register for the registration and
registration of transfers of this Note and any Notes issued upon the transfer or
exchange hereof ("Notes"). The name and address of each holder of one or more
Notes, each transfer thereof and the name and address of each transferee of one
or more Notes shall be registered in such register. Prior to due presentment for
registration of transfer, the Person in whose name any Note shall be registered
shall be deemed and treated as the owner and holder thereof for all purposes
hereof, and the Borrower shall not be affected by any notice or knowledge to the
contrary.
(b) Upon surrender of any Note at the principal executive office of
the Borrower for registration of transfer or exchange (and in the case of a
surrender for registration of transfer, duly endorsed or accompanied by a
written instrument of transfer
6
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duly executed by the registered holder of such Note or his attorney duly
authorized in writing and accompanied by the address for notices of each
transferee of such Note or part thereof), the Borrower shall execute and
deliver, at the Borrower's expense (except as provided below), one or more new
Notes (as requested by the holder thereof) in exchange therefor, in an aggregate
principal amount equal to the unpaid principal amount of the surrendered Note.
Each such new Note shall be payable to such Person as such holder may request
and shall be substantially in the form of this Note. Each such new Note shall be
dated and bear interest from the date to which interest shall have been paid on
the surrendered Note or dated the date of the surrendered Note if no interest
shall have been paid thereon.
THIS SUBORDINATED NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND MAY NOT BE OFFERED, SOLD OR
OTHERWISE TRANSFERRED, PLEDGED OR HYPOTHECATED UNLESS AND UNTIL (I) THIS
SUBORDINATED NOTE HAS BEEN REGISTERED UNDER THE SECURITIES ACT, OR (II) THE
HOLDER HEREOF PROVIDES THE BORROWER WITH (A) A WRITTEN OPINION OF LEGAL COUNSEL,
WHICH COUNSEL AND OPINION (IN FORM AND SUBSTANCE) SHALL BE REASONABLY
SATISFACTORY TO THE BORROWER, TO THE EFFECT THAT THE PROPOSED TRANSFER OF THIS
SUBORDINATED NOTE MAY BE EFFECTED WITHOUT REGISTRATION UNDER THE SECURITIES ACT,
OR (B) A "NO ACTION" LETTER FROM THE SECURITIES AND EXCHANGE COMMISSION (THE
"COMMISSION") REASONABLY SATISFACTORY TO THE BORROWER TO THE EFFECT THAT UNDER
THE SECURITIES ACT THE PROPOSED TRANSFER OF THIS SUBORDINATED NOTE WITHOUT
REGISTRATION WILL NOT RESULT IN A RECOMMENDATION BY THE STAFF OF THE COMMISSION
THAT ACTION BE TAKEN WITH RESPECT THERETO, OR (C) SUCH OTHER EVIDENCE AS MAY BE
REASONABLY SATISFACTORY TO THE BORROWER THAT THE PROPOSED TRANSFER OF THIS
SUBORDINATED NOTE MAY BE EFFECTED WITHOUT REGISTRATION UNDER THE SECURITIES ACT.
7
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This Note shall be governed by and construed and enforced in
accordance with the law of the State of Delaware.
II ACQUISITION CORP.
By: /s/ Michael G. Ryan
-----------------------------------
Michael G. Ryan
Vice President
/s/ Steven M. Rales
--------------------------------------
Steven M. Rales
8
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Schedule to
Note R-4
CALCULATION OF PRINCIPAL AMOUNT
Date Amount Interest Deferred Payment Unpaid Notation
Borrowed and Constituting Hereunder Principal Made By
Hereunder Principal Balance
Hereunder
<PAGE> 1
EXHIBIT 17(D)
II ACQUISITION CORP.
9211 Forest Hill Avenue, Suite 109
Richmond, Virginia 23235
Dear Imo Stockholder:
On July 2, 1998, Imo Industries Inc. will merge with a
newly-created and wholly-owned subsidiary of II Acquisition Corp. Last August,
II Acquisition Corp. acquired 92.8% of Imo's Common Stock in a tender offer at a
price of $7.05 per share. At that time, II Acquisition Corp. stated its
intention to cash out, if and when practicable, any minority interest in Imo not
acquired during the tender offer. Certain obstacles have now been removed that
permit II Acquisition Corp. to complete the second step of its acquisition at
this time by means of the merger.
Imo will be the surviving corporation in the merger and, as a
result of the merger, will become a wholly-owned subsidiary of II Acquisition
Corp. Imo will cease to be a publicly traded company and will delist its Common
Stock from the New York Stock Exchange. The Common Stock will be deregistered
under the Securities Exchange Act of 1934, and Imo will no longer be obligated
under the federal securities laws to file certain reports with the Securities
and Exchange Commission.
Under the Delaware General Corporation Law, because II
Acquisition Corp. owns more than 90% of Imo's Common Stock, no vote or action
will be required on your part for the merger to become effective. On July 2,
1998, unless you have perfected your appraisal rights under Delaware law, each
of your shares of Common Stock of Imo will automatically be converted into the
right to receive $7.05 per share in cash, without interest, upon the proper
surrender of the certificate for such share.
The enclosed Schedule 13E-3, Notice of Merger and Appraisal
Rights and Letter of Transmittal describe the pending merger, the redemption
procedure and your statutory appraisal rights in much greater detail. We
recommend that you review them with great care. In addition, the merger may have
federal income tax consequences for you, and you should consult with your tax
advisor in order to understand fully how the merger will affect you.
Sincerely,
PHILIP W. KNISELY
Philip W. Knisely
Chief Executive Officer and President
<PAGE> 1
EXHIBIT 17(E)
NOTICE OF MERGER AND APPRAISAL RIGHTS
AVAILABLE TO STOCKHOLDERS OF
IMO INDUSTRIES INC.
IN CONNECTION WITH
THE MERGER OF
IMO MERGER CORP.,
A WHOLLY OWNED SUBSIDIARY OF
II ACQUISITION CORP.,
WITH AND INTO
IMO INDUSTRIES INC.
TO THE HOLDERS OF CERTIFICATES
REPRESENTING OR FORMERLY REPRESENTING COMMON STOCK OF
IMO INDUSTRIES INC.:
NOTICE IS HEREBY GIVEN pursuant to Section 262(d)(2) of the
Delaware General Corporation Law (the "DGCL") that effective on July 2, 1998
(the "Effective Time of the Merger"), Imo Merger Corp., a Delaware corporation
("Merger Sub") and wholly-owned subsidiary of II Acquisition Corp., a Delaware
corporation ("IIAC"), will be merged (the "Merger") with and into Imo Industries
Inc., a Delaware corporation (the "Company"), with the Company as the surviving
corporation. The Merger will be effected pursuant to Section 253 of the DGCL
when Merger Sub files a Certificate of Ownership and Merger with the Secretary
of State of Delaware. Immediately prior to the Merger, Merger Sub will own
approximately 92.8% of the outstanding shares of Common Stock, par value $1.00
per share (the "Shares"), of the Company. Under the DGCL, no action will be
required by the stockholders of the Company, other than Merger Sub (through its
Board of Directors), for the Merger to become effective.
As a result of the Merger, the Company will become a
wholly-owned subsidiary of IIAC, and, at the Effective Time of the Merger, each
of the remaining outstanding Shares of the Company (other than Shares held by
Merger Sub and Shares held in the treasury of the Company) will be automatically
converted, subject to the appraisal rights described below, into the right to
receive $7.05 in cash, without interest, upon surrender of the certificate for
such Share to First Chicago Trust Company of New York, as Paying Agent (the
"Paying Agent"), as set forth in the enclosed letter of transmittal (the "Letter
of Transmittal").
<PAGE> 2
SURRENDER OF CERTIFICATES
The Paying Agent will accept the surrender of certificates
formerly representing Shares in exchange for the $7.05 per Share cash payment.
TO RECEIVE THE $7.05 PER SHARE CASH PAYMENT FOR ALL OR PART OF
A STOCKHOLDER'S SHARES, THE STOCKHOLDER OR A DULY AUTHORIZED REPRESENTATIVE MUST
(A) DELIVER THE ENCLOSED LETTER OF TRANSMITTAL, APPROPRIATELY COMPLETED AND
EXECUTED, TO THE PAYING AGENT AND (B) SURRENDER SUCH SHARES BY DELIVERING THE
STOCK CERTIFICATE OR CERTIFICATES THAT, PRIOR TO THE MERGER, HAD EVIDENCED SUCH
SHARES TO THE PAYING AGENT, ALL AS SET FORTH IN THE LETTER OF TRANSMITTAL AND
ACCOMPANYING INSTRUCTIONS.
Each person who does NOT plan to seek an appraisal of all such
person's Shares is urged to execute (or, if such person is not the record holder
of such Shares, to arrange for such record holder or such holder's duly
authorized representative to execute) and mail postage paid or deliver a Letter
of Transmittal to the Paying Agent at one of the addresses set forth in the
Letter of Transmittal. STOCKHOLDERS SHOULD NOTE THAT SURRENDER TO THE PAYING
AGENT OF CERTIFICATE(S) FOR THEIR SHARES MAY CONSTITUTE A WAIVER OF APPRAISAL
RIGHTS UNDER THE DGCL.
Each Company stockholder should note that the method of
delivery of the Letter of Transmittal, stock certificate(s) and all other
required documents is at the election and risk of the stockholder. IF THE
DECISION IS MADE TO SEND STOCK CERTIFICATE(S) BY MAIL, IT IS RECOMMENDED THAT
SUCH CERTIFICATE(S) BE SENT BY REGISTERED MAIL PROPERLY INSURED, WITH RETURN
RECEIPT REQUESTED.
APPRAISAL RIGHTS
Notwithstanding the Merger, Shares held by stockholders of the
Company who (a) do not execute and return (or cause to be executed and returned)
a Letter of Transmittal with respect to such Shares or otherwise surrender such
Shares for the $7.05 per Share cash payment, (b) perfect their rights to
appraisal of such Shares in accordance with Section 262 of the DGCL ("Section
262") and (c) do not thereafter withdraw their demands for appraisal of such
Shares or otherwise lose or waive their appraisal rights, in each case in
accordance with the DGCL, shall represent the right to receive from the Company
such payment as the holders thereof may be entitled to receive as determined by
the Delaware Court of Chancery in an appraisal proceeding.
Section 262 provides a procedure by which persons who were
stockholders of the Company at the Effective Time of the Merger may seek an
appraisal of their Shares in lieu of accepting the $7.05 per Share cash payment.
A demand for appraisal must be made in writing by or for the stockholder of
record wishing to demand appraisal and must reasonably inform the Company of the
identity of the stockholder making the demand for appraisal and that such
stockholder intends thereby to demand appraisal of his Shares. In any such
appraisal proceeding, the Delaware Court of Chancery would determine the fair
value of the Shares, exclusive of any element of value arising from
2
<PAGE> 3
the accomplishment or expectation of the Merger. Stockholders should recognize
that such appraisal could result in a determination of a value higher or lower
than or equivalent to $7.05 per Share. Following such an appraisal proceeding,
the Delaware Court of Chancery would direct the Company (as the surviving
corporation in the Merger), pursuant to Section 262, to make payment of such
fair value of the Shares, together with a fair rate of interest, if any, to the
former stockholders entitled thereto who properly demanded appraisal.
APPRAISAL PROCEDURE
This Notice of Merger and Appraisal Rights from the Company
affords stockholders of the Company the notice required by Section 262(d)(2) of
the DGCL. The right to appraisal will be lost unless it is perfected by full and
precise satisfaction of the requirements of Section 262, the text of which is
set forth in full in APPENDIX A hereto. MERE FAILURE TO EXECUTE AND RETURN A
LETTER OF TRANSMITTAL TO THE PAYING AGENT DOES NOT SATISFY THE REQUIREMENTS OF
SECTION 262; RATHER, A SEPARATE WRITTEN DEMAND FOR APPRAISAL MUST BE PROPERLY
EXECUTED AND DELIVERED TO THE COMPANY AS DESCRIBED BELOW:
A stockholder of the Company who wishes to demand appraisal of
his Shares must make a written demand for appraisal ON OR PRIOR TO JUNE 25, 1998
(i.e., within 20 calendar days after the date of mailing of this Notice of
Merger and Appraisal Rights). A demand for appraisal should be addressed to the
Company at the following address:
Imo Industries Inc.
1009 Lenox Drive, Building Four West
Lawrenceville, New Jersey 08648-0550
Attn: Corporate Secretary
As provided under Section 262, failure of a stockholder of the
Company to make a written demand for appraisal (or a beneficial owner of Shares
who fails to cause the record holder of such Shares to demand an appraisal of
such Shares) within such time limit will result in the loss of such
stockholder's appraisal rights. The written demand for appraisal must be
executed by or for the stockholder of record, fully and correctly, as such
stockholder's name appears on the certificate(s) for his Shares. If the Shares
are owned of record in a fiduciary or representative capacity, such as by a
trustee, executor, administrator, guardian, attorney-in-fact or officer of a
corporation, execution of the demand must be made in such capacity, and if the
Shares are owned of record by more than one person, such as in a joint tenancy
or tenancy in common, the demand must be executed by or for all joint owners. An
authorized agent, including one of two or more joint owners may execute the
demand for appraisal for a stockholder of record; however, the agent must
identify the record owner(s) and expressly disclose the fact that, in executing
the demand, the agent is acting as agent for the record owner(s).
A beneficial owner of Shares held in "street name" who desires
appraisal should take such actions as may be necessary to ensure that a timely
and proper demand for appraisal is made by the record holder of such Shares.
Shares held through brokerage firms, banks and other financial
3
<PAGE> 4
institutions are frequently deposited with and held of record in the name of a
nominee of a central security deposit, such as Cede & Co., Philadep and others.
Any beneficial holder desiring appraisal who holds Shares through a brokerage
firm, bank or other financial institution is responsible for ensuring that the
demand for appraisal is made by the record holder. The beneficial holder of such
Shares should instruct such firm, bank or institution that the demand for
appraisal may be made by the record holder of the Shares, which may be the
nominee of a central security depository if the Shares have been so deposited.
As required by Section 262, a demand for appraisal must reasonably inform the
Company of the identity of the holder(s) of record (which may be a nominee as
described above) and of such holder's intention thereby to demand appraisal of
such Shares.
Within 120 calendar days after the Effective Time of the
Merger, the Company or any former stockholder entitled to appraisal rights under
Section 262 who has complied with the provisions thereof may file a petition in
the Delaware Court of Chancery demanding a determination of the value of the
Shares of all such stockholders. The Company is under no obligation, and has no
present intention, to file such a petition. Accordingly, any stockholder who
wishes to perfect his appraisal rights will be required to initiate all
necessary action within the time prescribed in Section 262. At any time within
60 calendar days after the Effective Time of the Merger, any former stockholder
who has demanded appraisal has the right to withdraw the demand and accept the
consideration offered pursuant to the Merger.
Within 120 calendar days after the Effective Time of the
Merger, any stockholder who has complied with the requirements for exercise of
appraisal rights will be entitled, upon written request, to receive from the
Company a statement setting forth the aggregate number of Shares with respect to
which demands for appraisal have been received and the aggregate number of
holders of such Shares. Such statement must be mailed (a) within 10 calendar
days after a written request therefor has been received by the Company or (b) by
July 5, 1998 (i.e., 10 calendar days after expiration of the period for delivery
of demands for appraisal), whichever is later.
If a petition for an appraisal is timely filed and a copy
thereof is delivered to the Company, the Company will then be obligated within
20 calendar days to provide the Register in Chancery with a duly verified list
containing the names and addresses of all former stockholders of the Company who
have demanded an appraisal of their Shares and with whom agreements as to the
value of their Shares have not been reached by the Company. After notice to such
former stockholders, the Court of Chancery is empowered to conduct a hearing on
such petition to determine those former stockholders who have complied with
Section 262 and who have become entitled to appraisal rights. The Court of
Chancery may require the holders of Shares who have demanded an appraisal for
their Shares to submit their stock certificates to the Register in Chancery for
notation thereon of the pendency of the appraisal proceeding; and if any former
stockholder fails to comply with such direction, the Court of Chancery may
dismiss the proceedings as to such former stockholder.
After determining the stockholders entitled to an appraisal,
the Court of Chancery will appraise the "fair value" of their Shares, exclusive
of any element of value arising from the accomplishment or expectation of the
Merger, together with a fair rate of interest, if any, to be paid upon the
amount determined to be the fair value. The Delaware Supreme Court has stated
that "proof
4
<PAGE> 5
of value by any techniques or methods which are generally considered acceptable
in the financial community and otherwise admissible in court" should be
considered in the appraisal proceedings. In addition, Delaware courts have held
that the Section 262 appraisal remedy, depending on factual circumstances, may
or may not be a dissenter's exclusive remedy.
The costs of the appraisal proceeding may be determined by the
Court and taxed upon the parties as the Court deems equitable in the
circumstances. The Court may also order that all or a portion of the expenses
incurred by any former stockholder in connection with an appraisal, including,
without limitation, reasonable attorney's fees and the fees and expenses of
experts utilized in the appraisal proceeding, be charged pro rata against the
value of all the Shares entitled to be appraised.
No former stockholder, whether or not he has duly demanded an
appraisal in compliance with Section 262, will, from and after the Effective
Time of the Merger, be entitled to vote any Shares for any purpose or be
entitled to the payment of dividends or other distributions on any Shares
(except dividends or other distributions payable to stockholders of record at a
date prior to the Effective Time of the Merger).
If any stockholder who demands appraisal of his Shares under
Section 262 fails to perfect, or effectively withdraws or loses, his or her
right to appraisal, as provided in the DGCL, the Shares of such stockholder
will, at or after the Effective Time of the Merger, be converted into the right
to receive $7.05 in cash per Share, without interest. Such stockholders must
follow the procedures set forth in the Letter of Transmittal and accompanying
instructions.
The foregoing brief summary does not purport to be a complete
description of the applicable provisions of Section 262, and is qualified in its
entirety by reference to Section 262, which is attached hereto in full as
APPENDIX A.
INFORMATION CONCERNING THE COMPANY
Prior to the Effective Time of the Merger, the Company was
subject to the information reporting and other requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and, in accordance
therewith, was, and, in certain circumstances, is required to file reports and
other information with the Securities and Exchange Commission (the "Commission")
relating to the Company's business, financial condition and certain other
matters. These reports and other information should be available for inspection
at the public reference facilities maintained by the Commission at 450 Fifth
Street, N.W., Room 1024, Washington, D.C. 20549, and also should be available
for inspection and copying at the regional offices of the Commission located at
Seven World Trade Center (Suite 1300), New York, New York 10048; Northwest
Atrium Center, 500 West Madison Street (Suite 1400), Chicago, Illinois 60661;
and 5670 Wilshire Boulevard, 11th Floor, Los Angeles, California 90036. Copies
may also be obtained by mail, upon payment of the Commission's customary fees,
from the Public Reference Section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549. The Commission also maintains a World Wide Web site on
the Internet at http://www.sec.gov that contains certain reports and other
information regarding registrants that file
5
<PAGE> 6
electronically with the Commission. In addition, such information may also be
inspected and copied at the offices of the New York Stock Exchange at 20 Broad
Street, New York, New York 10005.
For more information concerning the Company and recent
transactions, former stockholders are directed in particular to the Company's
Annual Report on Form 10-K for the period ended December 31, 1997, copies of
which were mailed to such stockholders on or about April 8, 1998, and the
Company's Quarterly Report on Form 10-Q for the period ended April 3, 1998. Each
such Report shall be deemed to have been incorporated by reference herein, and
may be obtained as described in the immediately preceding paragraph.
Date: June 1, 1998
IMO INDUSTRIES INC.
6
<PAGE> 7
APPENDIX A
DELAWARE GENERAL CORPORATION LAW
SECTION 262. APPRAISAL RIGHTS
(a) Any stockholder of a corporation of this State who holds
shares of stock on the date of the making of a demand pursuant to subsection (d)
of this section with respect to such shares, who continuously holds such shares
through the effective date of the merger or consolidation, who has otherwise
complied with subsection (d) of this section and who has neither voted in favor
of the merger or consolidation nor consented thereto in writing pursuant to
Section 228 of this title shall be entitled to an appraisal by the Court of
Chancery of the fair value of the stockholder's shares of stock under the
circumstances described in subsections (b) and (c) of this section. As used in
this section, the word "stockholder" means a holder of record of stock in a
stock corporation and also a member of record of a nonstock corporation; the
words "stock" and "share" mean and include what is ordinarily meant by those
words and also membership or membership interest of a member of a nonstock
corporation; and the words "depository receipt" mean a receipt or other
instrument issued by a depository representing an interest in one or more
shares, or fractions thereof, solely of stock of a corporation, which stock is
deposited with the depository.
(b) Appraisal rights shall be available for the shares of any
class or series of stock of a constituent in a merger or consolidation to be
effected pursuant to Section 251 (other than a merger effected pursuant to
Section 251(g) of this title, Section 252, Section 254, Section 257,
Section 258, Section 263 or Section 264 of this title:
(1) Provided, however, that no appraisal rights under this
section shall be available for the shares of any class or series of
stock, which stock, or depository receipts in respect thereof, at the
record date fixed to determine the stockholders entitled to receive
notice of and to vote at the meeting of stockholders to act upon the
agreement of merger or consolidation, were either (i) listed on a
national securities exchange or designated as a national market system
security on an interdealer quotation system by the National Association
of Securities Dealers, Inc. or (ii) held of record by more than 2,000
holders; and further provided that no appraisal rights shall be
available for any shares of stock of the constituent corporation
surviving a merger if the merger did not require for its approval the
vote of the stockholders of the surviving corporation as provided in
subsection (f) of Section 251 of this title.
(2) Notwithstanding paragraph (1) of this subsection,
appraisal rights under this section shall be available for the shares
of any class or series of stock of a constituent corporation if the
holders thereof are required by the terms of an agreement of merger or
consolidation pursuant to Sections 251, 252, 254, 257, 258, 263
and 264 of this title to accept for such stock anything except:
a. Shares of stock of the corporation surviving or
resulting from such merger or consolidation, or depository
receipts in respect thereof;
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b. Shares of stock of any other corporation, or
depository receipts in respect thereof, which shares of stock
(or depository receipts in respect thereof) or depository
receipts at the effective date of the merger or consolidation
will be either listed on a national securities exchange or
designated as a national market system security on an
interdealer quotation system by the National Association of
Securities Dealers, Inc. or held of record by more than 2,000
holders;
c. Cash in lieu of fractional shares or fractional
depository receipts described in the foregoing subparagraphs
a. and b. of this paragraph; or
d. Any combination of the shares of stock,
depository receipts and cash in lieu of fractional shares or
fractional depository receipts described in the foregoing
subparagraphs a., b. and c. of this paragraph.
(3) In the event all of the stock of a subsidiary Delaware
corporation party to a merger effected under Section 253 of this title
is not owned by the parent corporation immediately prior to the merger,
appraisal rights shall be available for the shares of the subsidiary
Delaware corporation.
(c) Any corporation may provide in its certificate of
incorporation that appraisal rights under this section shall be available for
the shares of any class or series of its stock as a result of an amendment to
its certificate of incorporation, any merger or consolidation in which the
corporation is a constituent corporation or the sale of all or substantially all
of the assets of the corporation. If the certificate of incorporation contains
such a provision, the procedures of this section, including those set forth in
subsections (d) and (e) of this section, shall apply as nearly as is
practicable.
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which
appraisal rights are provided under this section is to be submitted for
approval at a meeting of stockholders, the corporation, not less than
20 days prior to the meeting, shall notify each of its stockholders who
was such on the record date for such meeting with respect to shares for
which appraisal rights are available pursuant to subsections (b) or (c)
hereof that appraisal rights are available for any or all of the shares
of the constituent corporations, and shall include in such notice a
copy of this section. Each stockholder electing to demand the appraisal
of his shares shall deliver to the corporation, before the taking of
the vote on the merger or consolidation, a written demand for appraisal
of his shares. Such demand will be sufficient if it reasonably informs
the corporation of the identity of the stockholder and that the
stockholder intends thereby to demand the appraisal of his shares. A
proxy or vote against the merger or consolidation shall not constitute
such a demand. A stockholder electing to take such action must do so by
a separate written demand as herein provided. Within 10 days after the
effective date of such merger or consolidation, the surviving or
resulting corporation shall notify each stockholder of each constituent
corporation who has complied with this
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subsection and has not voted in favor of or consented to the merger or
consolidation of the date that the merger or consolidation has become
effective; or
(2) If the merger or consolidation was approved pursuant to
Section 228 or Section 253 of this title, each constituent corporation,
either before the effective date of the merger or consolidation or
within 10 days thereafter, shall notify each of the holders of any
class or series of stock of such constituent corporation who are
entitled to appraisal rights of the approval of the merger or
consolidation and that appraisal rights are available for any or all
shares of such class or series of stock of such constituent
corporation, and shall include in such notice a copy of this section;
provided that, if the notice is given on or after the effective date of
the merger or consolidation, such notice shall be given by the
surviving or resulting corporation to all such holders of any class or
series of stock of a constituent corporation that are entitled to
appraisal rights. Such notice may, and, if given on or after the
effective date of the merger or consolidation, shall, also notify such
stockholders of the effective date of the merger or consolidation. Any
stockholder entitled to appraisal rights may, within 20 days after the
date of mailing of such notice, demand in writing from the surviving or
resulting corporation the appraisal of such holder's shares. Such
demand will be sufficient if it reasonably informs the corporation of
the identity of the stockholder and that the stockholder intends
thereby to demand the appraisal of such holder's shares. If such notice
did not notify stockholders of the effective date of the merger or
consolidation, either (i) each such constituent corporation shall send
a second notice before the effective date of the merger or
consolidation notifying each of the holders of any class or series of
stock of such constituent corporation that are entitled to appraisal
rights of the effective date of the merger or consolidation or (ii) the
surviving or resulting corporation shall send such a second notice to
all such holders on or within 10 days after such effective date;
provided, however, that if such second notice is sent more than 20 days
following the sending of the first notice, such second notice need only
be sent to each stockholder who is entitled to appraisal rights and who
has demanded appraisal of such holder's shares in accordance with this
subsection. An affidavit of the secretary or assistant secretary or of
the transfer agent of the corporation that is required to give either
notice that such notice has been given shall, in the absence of fraud,
be prima facie evidence of the facts stated therein. For purposes of
determining the stockholders entitled to receive either notice, each
constituent corporation may fix, in advance, a record date that shall
be not more than 10 days prior to the date the notice is given;
provided, that if the notice is given on or after the effective date of
the merger or consolidation, the record date shall be such effective
date. If no record date is fixed and the notice is given prior to the
effective date, the record date shall be the close of business on the
day next preceding the day on which the notice is given.
(e) Within 120 days after the effective date of the merger or
consolidation, the surviving or resulting corporation or any stockholder who has
complied with subsections (a) and (d) hereof and who is otherwise entitled to
appraisal rights, may file a petition in the Court of Chancery demanding a
determination of the value of the stock of all such stockholders.
Notwithstanding the foregoing, at any time within 60 days after the effective
date of the merger or consolidation, any stockholder shall have the right to
withdraw his demand for appraisal and to accept the terms offered upon the
merger or consolidation. Within 120 days after the effective date of the merger
or consolidation, any
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stockholder who has complied with the requirements of subsections (a) and (d)
hereof, upon written request, shall be entitled to receive from the corporation
surviving the merger or resulting from the consolidation a statement setting
forth the aggregate number of shares not voted in favor of the merger or
consolidation and with respect to which demands for appraisal have been received
and the aggregate number of holders of such shares. Such written statement shall
be mailed to the stockholder within 10 days after his written request for such a
statement is received by the surviving or resulting ration or within 10 days
after expiration of the period for delivery of demands for appraisal under
subsection (d) hereof, whichever is later.
(f) Upon the filing of any such petition by a stockholder, service of
a copy thereof shall be made upon the surviving or resulting corporation, which
shall within 20 days after such service file in the office of the Register in
Chancery in which the petition was filed a duly verified list containing the
names and addresses of all stockholders who have demanded payment for their
shares and with whom agreements as to the value of their shares have not been
reached by the surviving or resulting corporation. If the petition shall be
filed by the surviving or resulting corporation, the petition shall be
accompanied by such a duly verified list. The Register in Chancery, if so
ordered by the Court, shall give notice of the time and place fixed for the
hearing of such petition by registered or certified mail to the surviving or
resulting corporation and to the stockholders shown on the list at the addresses
therein stated. Such notice shall also be given by 1 or more publications at
least 1 week before the day of the hearing, in a newspaper of general
circulation published in the City of Wilmington, Delaware or such publication as
the Court deems advisable. The forms of the notices by mail and by publication
shall be approved by the Court, and the costs thereof shall be borne by the
surviving or resulting corporation.
(g) At the hearing on such petition, the Court shall determine the
stockholders who have complied with this section and who have become entitled to
appraisal rights. The Court may require the stockholders who have demanded an
appraisal for their shares and who hold stock represented by certificates to
submit their certificates of stock to the Register in Chancery for notation
thereon of the pendency of the appraisal proceedings; and if any stockholder
fails to comply with such direction, the Court may dismiss the proceedings as to
such stockholder.
(h) After determining the stockholders entitled to an appraisal, the
Court shall appraise the shares, determining their fair value exclusive of any
element of value arising from the accomplishment or expectation of the merger or
consolidation, together with a fair rate of interest, if any, to be paid upon
the amount determined to be the fair value. In determining such fair value, the
Court shall take into account all relevant factors. In determining the fair rate
of interest, the Court may consider all relevant factors, including the rate of
interest which the surviving or resulting corporation would have had to pay to
borrow money during the pendency of the proceeding. Upon application by the
surviving or resulting corporation or by any stockholder entitled to participate
in the appraisal proceeding, the Court may, in its discretion, permit discovery
or other pretrial proceedings and may proceed to trial upon the appraisal prior
to the final determination of the stockholder entitled to an appraisal. Any
stockholder whose name appears on the list filed by the surviving or resulting
corporation pursuant to subsection (f) of this section and who has submitted his
certificates of stock to the Register in Chancery, if such is required, may
participate fully in all proceedings until it is finally determined that he is
not entitled to appraisal rights under this section.
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(i) The Court shall direct the payment of the fair value of the
shares, together with interest, if any, by the surviving or resulting
corporation to the stockholders entitled thereto. Interest may be simple or
compound, as the Court may direct. Payment shall be so made to each such
stockholder, in the case of holders of uncertificated stock forthwith, and the
case of holders of shares represented by certificates upon the surrender to the
corporation of the certificates representing such stock. The Court's decree may
be enforced as other decrees in the Court of Chancery may be enforced, whether
such surviving or resulting corporation be a corporation of this State or of any
state.
(j) The costs of the proceeding may be determined by the Court and
taxed upon the parties as the Court deems equitable in the circumstances. Upon
application of a stockholder, the Court may order all or a portion of the
expenses incurred by any stockholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorney's fees and the
fees and expenses of experts, to be charged pro rata against the value of all
the shares entitled to an appraisal.
(k) From and after the effective date of the merger or consolidation,
no stockholder who has demanded his appraisal rights as provided in subsection
(d) of this section shall be entitled to vote such stock for any purpose or to
receive payment of dividends or other distributions on the stock (except
dividends or other distributions payable to stockholders of record at a date
which is prior to the effective date of the merger or consolidation); provided,
however, that if no petition for an appraisal shall be filed within the time
provided in subsection (e) of this section, or if such stockholder shall deliver
to the surviving or resulting corporation a written withdrawal of his demand for
an appraisal and an acceptance of the merger or consolidation, either within 60
days after the effective date of the merger or consolidation as provided in
subsection (e) of this section or thereafter with the written approval of the
corporation, then the right of such stockholder to an appraisal shall cease.
Notwithstanding the foregoing, no appraisal proceeding in the Court of Chancery
shall be dismissed as to any stockholder without the approval of the Court, and
such approval may be conditioned upon such terms as the Court deems just.
(l) The shares of the surviving or resulting corporation to which the
shares of such objecting stockholders would have been converted had they
assented to the merger or consolidation shall have the status of authorized and
unissued shares of the surviving or resulting corporation.
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EXHIBIT 17(G)(1)
IMO INDUSTRIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands except per share amounts)
<TABLE>
<CAPTION>
POST-ACQUISITION PRE-ACQUISITION
AUGUST 29, JANUARY 1,
1997 TO 1997 TO YEAR ENDED DECEMBER 31,
DECEMBER 31, AUGUST 28, -------------------------
1997 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 outstanding 17,127,859 17,126,192 17,100,359 17,048,622
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
*Restated to conform to 1997 presentation.
F-1
<PAGE> 2
IMO INDUSTRIES INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands except par value)
<TABLE>
<CAPTION>
December 31, 1997 1996*
- ------------ ---- -----
ASSETS
CURRENT ASSETS
<S> <C> <C>
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
========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
* Restated to conform to 1997 presentation.
F-2
<PAGE> 3
IMO INDUSTRIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
POST-ACQUISITION PRE-ACQUISITION
AUGUST 29, JANUARY 1,
1997 TO 1997 TO YEAR ENDED DECEMBER 31,
DECEMBER 31, AUGUST 28, ----------------------
1997 1997 1996* 1995*
---- ---- ----- -----
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
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 (6,467) 1,730 (5,440) 566
receivable
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.
</TABLE>
F-3
<PAGE> 4
IMO INDUSTRIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
(Dollars in thousands)
<TABLE>
<CAPTION>
Cumulative
Foreign Minimum
Additional Retained Currency Pension Unearned
Common Paid-in Earnings Translation Liability Compen- Treasury
Stock Capital (Deficit) Adjustments 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
====================================================================================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
* Restated to conform to current year presentation.
F-4
<PAGE> 5
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.
F-5
<PAGE> 6
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.
F-6
<PAGE> 7
<TABLE>
<CAPTION>
Year Ended December 31 1997 1996
(Dollars in thousands, except per share amounts) (Unaudited)
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
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)
- ---------------------------------------------------------------------------------------------------------
</TABLE>
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
F-7
<PAGE> 8
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.
F-8
<PAGE> 9
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:
<TABLE>
<CAPTION>
December 31 (Dollars in thousands) 1997 1996
- -------------------------------------------------------------------
<S> <C> <C>
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
===================================================================
</TABLE>
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.
F-9
<PAGE> 10
A condensed summary of operations for the Discontinued Operations is as follows:
<TABLE>
<CAPTION>
Post-Acquisition Pre-Acquisition
August 29, 1997 to January 1, 1997 to
Year Ended December 31 December 31, August 28,
(Dollars in thousands) 1997 1997 1996 1995
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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
======================================================================================================
</TABLE>
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.
F-10
<PAGE> 11
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.
F-11
<PAGE> 12
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:
<TABLE>
<CAPTION>
December 31 (Dollars in thousands) 1997 1996
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
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
=========================================================================================================
</TABLE>
Note 6 Accrued Expenses and Other Liabilities
Accrued expenses and other liabilities consist of the following:
<TABLE>
<CAPTION>
December 31 (Dollars in thousands) 1997 1996
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
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
=========================================================================================================
</TABLE>
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
F-12
<PAGE> 13
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:
<TABLE>
<CAPTION>
Post-Acquisition Pre-Acquisition
August 29, 1997 January 1, 1997
Year Ended December 31 to December 31, to August 28,
(Dollars in thousands) 1997 1997 1996 1995
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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)
==================================================-==================================================
</TABLE>
Income tax expense for 1997, 1996 and 1995 from discontinued operations was $.7
million, $1 million and $1.3 million, respectively.
F-13
<PAGE> 14
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:
<TABLE>
<CAPTION>
December 31
(Dollars in thousands) 1997 1996
- ------------------------------------------------------------------------------------------------
Current Long-term Current Long-term
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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)
================================================================================================
</TABLE>
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:
<TABLE>
<CAPTION>
Post-Acquisition Pre-Acquisition
August 29, 1997 January 1, 1997
Year Ended December 31 to December 31, to August 28,
(Dollars in thousands) 1997 1997 1996 1995
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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)
===================================================================================================
</TABLE>
U.S. income tax expense (benefit) at the statutory tax rate is reconciled below
to the overall U.S. and foreign income tax expense (benefit).
F-14
<PAGE> 15
<TABLE>
<CAPTION>
Post-Acquisition Pre-Acquisition
August 29, 1997 January 1, 1997
Year Ended December 31 to December 31, to August 28,
(Dollars in thousands) 1997 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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)
==============================================================================================================
</TABLE>
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.
F-15
<PAGE> 16
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:
<TABLE>
<CAPTION>
December 31 (Dollars in thousands) 1997 1996
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
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
==================================================================================================
</TABLE>
F-16
<PAGE> 17
(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
F-17
<PAGE> 18
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
F-18
<PAGE> 19
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:
<TABLE>
<CAPTION>
Year Ended December 31 Weighted Weighted Weighted
(Shares in thousands) -Average -Average -Average
Exercise Exercise Exercise
1997 Price 1996 Price 1995 Price
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
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
- ------------------------------------------------------------------------------------------------------
</TABLE>
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
F-19
<PAGE> 20
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:
<TABLE>
<CAPTION>
Year Ended December 31 Weighted Weighted Weighted
(Shares in thousands) -Average -Average -Average
Exercise Exercise Exercise
1997 Price 1996 Price 1995 Price
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
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
- -------------------------------------------------------------------------------------------------
</TABLE>
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:
<TABLE>
<CAPTION>
Post-Acquisition Pre-Acquisition
August 29, 1997 January 1, 1997 to
to December 31, August 28,
1997 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
F-20
<PAGE> 21
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:
<TABLE>
<CAPTION>
Equity Incentive Plan 1996 1995
for Key Employees ----------------------------- -------------
Stock Restricted Stock
Options Stock Awards Options
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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%
- ------------------------------------------------------------------------------------------------
</TABLE>
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.
<TABLE>
<CAPTION>
1995 Equity Incentive Plan 1996 1995
for Outside Directors -------------------------- ---------------------------
Stock Restricted Stock Restricted
Options Stock Awards Options Stock Awards
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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%
- --------------------------------------------------------------------------------------------------------
</TABLE>
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
F-21
<PAGE> 22
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.
F-22
<PAGE> 23
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:
<TABLE>
<CAPTION>
Year Ended December 31
(Dollars in thousands) 1997 1996 1995
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
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)
=======================================================================================
</TABLE>
A reconciliation of segment operating income to income from operations follows:
<TABLE>
<CAPTION>
Year Ended December 31
(Dollars in thousands) 1997 1996 1995
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
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
=============================================================================
</TABLE>
(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.
F-23
<PAGE> 24
<TABLE>
<CAPTION>
Year Ended December 31
(Dollars in thousands) 1997 1996 1995
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
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
=========================================================================================
</TABLE>
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.
F-24
<PAGE> 25
The continuing operations of the Company on a geographic basis are as follows:
<TABLE>
<CAPTION>
Year Ended December 31
(Dollars in thousands) 1997 1996 1995
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
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
=========================================================================================
</TABLE>
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
f-25
<PAGE> 26
disposal related to the discontinued operations in 1995. Net pension expense is
comprised of the following:
<TABLE>
<CAPTION>
Year Ended December 31
(Dollars in thousands) 1997 1996 1995
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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
=====================================================================================================
</TABLE>
Assumptions used to determine the net pension expense of the Company-sponsored
defined benefit plans are as follows:
<TABLE>
<CAPTION>
Year Ended December 31 1997 1996 1995
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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%
===================================================================================================
</TABLE>
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.
<TABLE>
<CAPTION>
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
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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)
==================================================================================================================
</TABLE>
F-26
<PAGE> 27
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:
<TABLE>
<CAPTION>
December 31 (Dollars in thousands) 1997
- ---------------------------------------------------------------------------------------
Life
Medical Insurance
Plans Plans Total
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
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
=======================================================================================
</TABLE>
F-27
<PAGE> 28
<TABLE>
<CAPTION>
December 31 (Dollars in thousands) 1996
- ------------------------------------------------------------------------------------------------------
Life
Medical Insurance
Plans Plans Total
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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
======================================================================================================
</TABLE>
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:
<TABLE>
<CAPTION>
Year Ended December 31
(Dollars in thousands) 1997
- --------------------------------------------------------------------------------------------
Life
Medical Insurance
Plans Plans Total
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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
============================================================================================
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31
(Dollars in thousands) 1996
- --------------------------------------------------------------------------------------------------
Life
Medical Insurance
Plans Plans Total
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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)
==================================================================================================
</TABLE>
F-28
<PAGE> 29
<TABLE>
<CAPTION>
Year Ended December 31
(Dollars in thousands) 1995
- --------------------------------------------------------------------------------------------------
Life
Medical Insurance
Plans Plans Total
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost $ 59 $ 5 $ 64
Interest cost 1,057 415 1,472
Amortization of prior service cost (3,110) (2,319) (5,429)
Amortization of (gain) loss (166) 102 (64)
- --------------------------------------------------------------------------------------------------
Net periodic postretirement benefit cost $(2,160) $(1,797) $(3,957)
==================================================================================================
</TABLE>
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:
<TABLE>
<CAPTION>
(Dollars in thousands)
- -----------------------------------------------------------
<S> <C>
1998 $ 4,975
1999 3,477
2000 2,532
2001 2,176
2002 1,973
Thereafter 5,230
- -----------------------------------------------------------
Total minimum lease payments $20,363
===========================================================
</TABLE>
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
F-29
<PAGE> 30
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.
F-30
<PAGE> 31
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.
F-31
<PAGE> 32
ARTHUR ANDERSEN LLP
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.
/s/ ARTHUR ANDERSEN LLP
Richmond, Virginia
March 20, 1998
F-32
<PAGE> 33
ARTHUR ANDERSEN LLP
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.
/s/ ARTHUR ANDERSEN LLP
Richmond, Virginia
March 20, 1998
F-33
<PAGE> 34
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 and 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 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 as a whole, presents
fairly in all material respects the information set forth therein.
/s/ ERNST & YOUNG LLP
Princeton, New Jersey
February 19, 1997, except for Note 3 as to which
the date is February 2, 1998
F-34
<PAGE> 35
IMO INDUSTRIES INC. AND SUBSIDIARIES
QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Quarterly financial information for 1997 and 1996 is as follows:
<TABLE>
<CAPTION>
PRE- POST-
ACQUISITION ACQUISITION
JULY 1, AUGUST 29,
1ST 2ND 1997 TO 1997 TO 4TH
1997 (Dollars in thousands except per share amounts) (a) QUARTER QUARTER AUGUST 28, SEPTEMBER QUARTER
1997 30, 1997
<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)
</TABLE>
<TABLE>
<CAPTION>
1st* 2nd* 3rd* 4th*
1996 (Dollars in thousands except per share amounts) (a) Quarter Quarter Quarter Quarter
<S> <C> <C> <C> <C>
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)
</TABLE>
* 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
<PAGE> 36
SCHEDULE II
IMO INDUSTRIES INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(Dollars in thousands)
THREE-YEAR PERIOD ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
ADDITIONS
BALANCE ----------------------
AT CHARGED BALANCE
BEGINNING TO COSTS OTHER - DEDUCTIONS - AT END
OF YEAR EXPENSES DESCRIBE DESCRIBE OF YEAR
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1997:
Allowance for doubtful accounts $ 1,346 $ 1,813 $ 32 (2) $ 295 (3) $ 1,435
55 (1)
1,406 (9)
======= ======= ======= ======= =======
Inventory valuation allowance $ 9,929 $13,418 $ 360 (2) $ 3,613 (5) $ 9,508
382 (1)
10,204 (9)
======= ======= ======= ======= =======
Valuation allowance for deferred $44,065 $ 9,192 $ -- $ -- $53,257
tax assets
======= ======= ======= ======= =======
Accrued product warranty liability $ 2,007 $ 1,815 $ -- $ 28 (1) $ 1,844
1,950 (4)
======= ======= ======= ======= =======
YEAR ENDED DECEMBER 31, 1996: *
Allowance for doubtful accounts $ 1,507 $ 252 $ 19 (2) $ 398 (3) $ 1,346
34 (1)
======= ======= ======= ======= =======
Inventory valuation allowance $ 9,560 $ 1,136 $ 305 (2) $ 1,213 (5) $ 9,929
141 (1)
======= ======= ======= ======= =======
Valuation allowance for deferred $31,675 $12,390 $ -- $ -- $44,065
tax assets
======= ======= ======= ======= =======
Accrued product warranty liability $ 2,159 $ 2,473 $ -- $ 2,458 (4) $ 2,007
43 (2)
24 (1)
======= ======= ======= ======= =======
YEAR ENDED DECEMBER 31, 1995: *
Allowance for doubtful accounts $ 1,696 $ 314 $ 30 (1) $ 545 (3) $ 1,507
12 (6)
======= ======= ======= ======= =======
Inventory valuation allowance $ 9,582 $ 2,125 $ 273 (1) $ 74 (2) $ 9,560
30 (6) 2,376 (5)
======= ======= ======= ======= =======
Valuation allowance for deferred $68,910 $ -- $ -- $15,550 (2) $31,675
tax assets 17,000 (7)
4,685 (8)
======= ======= ======= ======= =======
Accrued product warranty liability $ 1,925 $ 1,121 $ 404 (2) $ 1,342 (4) $ 2,159
42 (1)
9 (6)
======= ======= ======= ======= =======
</TABLE>
* 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
<PAGE> 1
EXHIBIT 17(g)(2)
ITEM 1. FINANCIAL STATEMENTS.
IMO INDUSTRIES INC. AND
SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(Dollars in thousands except per share amounts)
<TABLE>
<CAPTION>
Quarter Ended
April 3, 1998 March 31, 1997*
- ------------------------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C>
NET SALES $ 83,031 $ 78,927
Cost of products sold 56,286 54,299
- ------------------------------------------------------------------------------------------------------------
GROSS PROFIT 26,745 24,628
Selling, general and administrative expenses 15,199 17,365
Research and development expenses 1,456 1,340
Unusual item --- 12,900
- ------------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM OPERATIONS 10,090 (6,977)
Interest and other expense, net 5,937 6,779
- ------------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME
TAXES, DISCONTINUED OPERATIONS AND EXTRAORDINARY ITEM 4,153 (13,756)
Income tax expense 829 572
- ------------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM CONTINUING OPERATIONS 3,324 (14,328)
Income from Discontinued Operations --- 1,486
Extraordinary Item - Loss on Extinguishment of Debt (5,603) ---
- ------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) $ (2,279) $ (12,842)
============================================================================================================
EARNINGS (LOSS) PER SHARE, BASIC AND DILUTED:
Continuing operations $ 0.20 $ (0.84)
Discontinued operations --- 0.09
Extraordinary item (0.33) ---
- ------------------------------------------------------------------------------------------------------------
Net income (loss) $ (0.13) $ (0.75)
- ------------------------------------------------------------------------------------------------------------
Weighted average number of shares outstanding 17,127,859 17,125,047
============================================================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated condensed
financial statements.
* Reclassified to conform to 1998 presentation. See Note C.
1
<PAGE> 2
IMO INDUSTRIES INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(Dollars in thousands except par value amounts)
<TABLE>
<CAPTION>
April 3, December 31,
1998 1997
- -------------------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 2,158 $ 3,528
Trade accounts and notes receivable, less
allowance of $1,408 in 1998 and $1,435 in 1997 54,204 53,732
Inventories-net 65,302 64,888
Prepaid expenses and other current assets 12,938 17,656
- -------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 134,602 139,804
Property, plant and equipment, net of accumulated
depreciation of $4,571 and $3,202, respectively 61,684 61,409
Intangible assets, principally goodwill 223,034 233,054
Net assets of discontinued operations 35 14,927
Other assets 14,611 14,106
- -------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 433,966 $ 463,300
=======================================================================================================
- -------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable and current portion of long-term debt $ 43,504 $ 34,320
Trade accounts payable 21,348 22,750
Accrued expenses and other liabilities 65,758 64,065
- -------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 130,610 121,135
Long-term debt 150,159 192,319
Other liabilities 65,572 59,599
- -------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 346,341 373,053
- -------------------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
Preferred stock: $1.00 par value; 5,000,000 shares
authorized and unissued --- ---
Common stock: $1.00 par value; 25,000,000 shares
authorized; issued 17,127,859 17,128 17,128
Additional paid-in capital 106,805 106,805
Retained earnings (deficit) (35,295) (33,016)
Cumulative foreign currency translation
adjustments (1,013) (670)
- -------------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 87,625 90,247
- -------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 433,966 $ 463,300
========================================================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated condensed
financial statements.
2
<PAGE> 3
IMO INDUSTRIES INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
Quarter Ended
April 3, 1998 March 31, 1997*
- -----------------------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ (2,279) $ (12,842)
Adjustments to reconcile net income (loss) to net cash provided
by (used by) continuing operations:
Discontinued operations --- (1,486)
Depreciation and amortization 3,020 3,324
Extraordinary item 5,603 ---
Unusual item --- 12,900
Other 16 271
Other changes in operating assets and liabilities:
Increase in accounts and notes receivable (504) (5,129)
Increase in inventories (414) (1,756)
(Decrease) increase in accounts payable and accrued
expenses (2,862) 3,715
Other operating assets and liabilities 6,232 (3,578)
- -----------------------------------------------------------------------------------------------------------
Net cash provided by (used by) continuing operations 8,812 (4,581)
Net cash (used by) provided by discontinued operations (920) 1,080
- -----------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED BY) OPERATING ACTIVITIES 7,892 (3,501)
- -----------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Purchases of property, plant and equipment (2,058) (1,912)
Proceeds from sale of business and property, plant and
equipment 30,735 264
Net cash used by discontinued operations (1,164) (1,029)
Other 80 528
- -----------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED BY) INVESTING ACTIVITIES 27,593 (2,149)
- -----------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Increase in notes payable 7,533 9,185
Principal payments on long-term debt (40,089) (3,065)
Payment of premium on notes repurchase and debt financing costs (4,199) (384)
Other (37) (480)
- -----------------------------------------------------------------------------------------------------------
NET CASH (USED BY) PROVIDED BY FINANCING ACTIVITIES (36,792) 5,256
- -----------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash (63) (459)
- -----------------------------------------------------------------------------------------------------------
DECREASE IN CASH AND CASH EQUIVALENTS (1,370) (853)
Cash and cash equivalents at beginning of period 3,528 1,419
- -----------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 2,158 $ 566
===========================================================================================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 3,532 $ 3,196
===========================================================================================================
Income taxes $ 442 $ 1,171
===========================================================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated condensed
financial statements.
* Reclassified to conform to 1998 presentation. See Note C.
3
<PAGE> 4
Imo Industries Inc. and Subsidiaries
Notes to Consolidated Condensed Financial Statements (Unaudited with respect to
April 3, 1998 and March 31, 1997 and the periods then ended.)
NOTE A--SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation: The accompanying unaudited consolidated condensed
financial statements have been prepared in accordance with generally accepted
accounting principles. For further information, refer to the consolidated
financial statements and footnotes thereto included in the Company's annual
report on Form 10-K for the year ended December 31, 1997. In the opinion of
management, all adjustments considered necessary for a fair presentation have
been included. Operating results for the first quarter of 1998 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1998.
Basis of Accounting: Effective January 1, 1998, the Company adopted a "4-4-5"
accounting calendar.
Change in Accounting Policies: The Company adopted Financial Accounting
Standards Board ("FASB") Statement No. 130, "Reporting Comprehensive Income," on
January 1, 1998. For the first quarter of 1998, total comprehensive loss was
$2.6 million, compared to a reported net loss of $2.3 million. For the first
quarter of 1997, total comprehensive loss was $14.8 million, compared to a
reported net loss of $12.8 million.
NOTE B - ACQUISITION BY II ACQUISITION CORP.
On August 28, 1997, II Acquisition Corp. acquired approximately 93% of the
Company's outstanding shares of common stock. The unaudited pro forma
information for the quarter ended March 31, 1997 set forth below gives effect to
the acquisition, and the refinancing of the Company's domestic senior debt, in
connection with the acquisition, as if they had occurred on January 1, 1997. The
pro forma information is presented for informational purposes only and is not
necessarily indicative of the results of operations that actually would have
been achieved had these transactions been consummated at the beginning of the
periods presented.
<TABLE>
<CAPTION>
Quarter Ended March 31, 1997
--------------
<S> <C>
Net Sales $ 78,927
Net Income (Loss) (11,057)
Earnings (Loss) Per Share, basic and diluted (.65)
</TABLE>
<PAGE> 5
NOTE C--DISCONTINUED OPERATIONS
On February 27, 1998, the Company completed the sale of its Roltra-Morse
business segment to Magna International Inc. for cash proceeds of $30 million
plus the assumption of Roltra-Morse's debt. The operating results of the
Roltra-Morse segment have been segregated and reported as a discontinued
operation in the accompanying Consolidated Condensed Statements of Income. The
Company has also accounted for its former Electro-Optical Systems and
Instrumentation business segments as discontinued operations. The sale of the
Varo Electronic Systems division of the Electro-Optical Systems business and the
sale of the Instrumentation business segment were completed in April 1997 and
August 1997, respectively. Prior year financial statements have been
reclassified to conform to the current year presentation.
Net sales of the discontinued operations were $14.4 million and $48.1 million
for the first quarters of 1998 and 1997, respectively. Operating results of
discontinued operations for the first quarter of 1998 resulted in a net loss of
$1 million, or $.06 per share compared to net income of $1.5 million, or $.09
per share for the first quarter of 1997. Roltra-Morse's net loss of $1 million,
which includes $.2 million of allocated interest, was included with the net book
value of the assets on the date of sale, February 27, 1998. Therefore, there was
no income from discontinued operations for the first quarter of 1998. The
operating results from discontinued operations include allocated interest
expense of $.2 million and $1.2 million for the first quarters of 1998 and 1997,
respectively.
Allocated interest expense includes interest on debt of the discontinued
operations to be assumed by the buyer and an allocation of other consolidated
interest expense to the discontinued operations based on the ratio of net assets
to be sold to the sum of the Company's consolidated net assets, if positive,
plus other consolidated debt.
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 its discontinued operations at April 3, 1998 is adequate.
However, the amounts estimated may differ from actual results.
<PAGE> 6
NOTE D--INVENTORIES
Inventories (in thousands of dollars) are summarized as follows:
<TABLE>
<CAPTION>
April 3, December 31,
1998 1997
------------------- ------------------
(Unaudited)
<S> <C> <C>
Finished products $23,354 $18,823
Work in process 22,144 23,218
Materials and supplies 20,414 23,481
------------- -------------
65,912 65,522
Less customers' progress payments 610 634
------------- -------------
$65,302 $64,888
============= =============
</TABLE>
NOTE E--NOTES PAYABLE AND LONG-TERM DEBT
As of April 3, 1998, the Company had revolver borrowings of $35 million and
$19.6 million of outstanding standby letters of credit under the Company's
existing credit agreement. The Company had $7 million in foreign short-term
credit facilities with amounts outstanding at April 3, 1998 of $1.4 million. The
weighted average interest rate on short-term notes payable was 8.37% and 8.03%
at April 3, 1998 and December 31, 1997, respectively.
In addition, the Company had outstanding $102 million of its 11.75% senior
subordinated notes due in 2006, and $51 million of term loan borrowings. The
sale of Roltra-Morse and the resultant reduction in domestic senior debt
increased the Company's availability under its revolving credit facility,
allowing it to purchase a portion of its 11.75% senior subordinated notes (the
"Notes") in the open market. During the first quarter of 1998, the Company
purchased, in the open market at a premium, Notes in the face amount of $33.1
million. As a result of the early extinguishment of these Notes and the
prepayment of a portion of the term loan facility, an extraordinary charge of
$5.6 million was recognized in the first quarter of 1998.
NOTE F--CONTINGENCIES
Legal Proceedings
The Company and one of its subsidiaries are two of a large number of defendants
in a number of lawsuits brought in various jurisdictions by approximately 6,900
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 formerly sold
by the
<PAGE> 7
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.
On April 3, 1998 the Company was served with a complaint in an action brought by
Dravo Corporation seeking damages in excess of $17 million for problems
associated with turbines sold to it in 1986 for use at a powerplant in Long
Beach, California. The Company has few details of this matter other than as set
forth in the complaint, however, the Company believes that there are legal and
factual defenses to the claims and intends to defend the action vigorously.
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
<PAGE> 8
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.
The Company is also involved in various other pending legal proceedings arising
out of the ordinary course of the Company's business. None of these legal
proceedings is expected to have a material adverse effect on the financial
condition of the Company. With respect to these proceedings and the litigation
and claims described in the preceding paragraphs, management of the Company
believes that it either will prevail, has adequate insurance coverage or has
established appropriate reserves to cover potential liabilities. There can be no
assurance, however, as to the ultimate outcome of any of these matters, and if
all or substantially all of these legal proceedings were to be determined
adversely to the Company, there could be a material adverse effect on the
financial condition or results of operations of the Company.
