UNITED STATES
FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1998
-------------------------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number - 1-9294
Imo Industries Inc.
(Exact name of registrant as specified in its charter)
Delaware 21-0733751
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1009 Lenox Drive, Building Four West
Lawrenceville, New Jersey 08648
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 609-896-7600.
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X . No .
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained, and will not be contained, to the best
of Registrant's knowledge, in this Form 10-K or any amendment to this Form 10-K.
(X )
Shares of Registrant's common stock, $.01 par value, outstanding as of
March 24, 1999 ............................................................100
DOCUMENTS INCORPORATED BY REFERENCE
Identification of Documents Part into which Incorporated
None
PART I
Item 1. Business.
General
Imo Industries Inc. (hereinafter with its subsidiaries referred to as the
"Company") is an integrated multinational manufacturer of a broad range of
engineered industrial products designed primarily to transfer liquids or
regulate and control motion in a variety of industrial applications. The Company
markets its products on a worldwide basis to a diverse customer base. The
Company operates in two distinct industry segments:
Fluid Handling and Industrial Positioning.
Fluid Handling. The Fluid Handling segment designs and produces a broad
range of pumps, including screw, centrifugal and gear pumps. The pumps designed
and produced by the Fluid Handling segment serve a variety of applications in
the following industries: chemicals, marine and offshore engineering, energy and
power generation, sewage and environmental engineering, pulp and paper, water
treatment and other process industries. In Fluid Handling, the Company markets
its products principally under the Imo and Warren brand names.
Industrial Positioning. The Industrial Positioning segment designs and
produces a wide range of power transmission and motion control products,
including enclosed gear drives, speed reducers, open gearing components, AC and
DC motor controllers, push-pull cable and remote control systems. In Industrial
Positioning, the Company believes that Boston Gear and Morse Controls are sales
leaders in their respective market segments. Boston Gear products have
applications in a wide range of industrial manufacturing operations, ranging
from packaging machinery and equipment to integrated steel and pulp and paper
mills. Morse Controls products are sold into a variety of end use markets with a
concentration in the mobile equipment, marine and aviation sectors.
The Company's previously sold Roltra Morse, Instrumentation, Electro-Optical
Systems and Turbomachinery businesses are accounted for as discontinued
operations and, accordingly, have been excluded from the Company's segments. The
Company sold its Roltra Morse business on February 27, 1998. The remainder of
the Electro-Optical Systems business and the Instrumentation business were sold
in 1997.
History
The Company, founded in 1901 in the United States by Dr. Carl Gustaf Patrick de
Laval, a Swedish scientist, was incorporated in Delaware on March 2, 1959. The
Company was acquired by Transamerica Corporation ("Transamerica") in 1963, and
in 1964, Transamerica merged its existing wholly owned manufacturing subsidiary,
General Metals Corporation, into the Company. At the close of business on
December 18, 1986, Transamerica distributed all of the issued and outstanding
shares of the Company common stock to holders of record of Transamerica common
stock on the basis of one share of Company common stock for each ten shares of
Transamerica common stock held (the "Distribution") and since that time the
Company has operated on a stand-alone basis.
On August 28, 1997, Colfax Corporation ("Colfax"), previously known as II
Acquisition Corp., acquired approximately 93% of the Company's outstanding
shares of common stock pursuant to its tender offer for all outstanding shares
of common stock of the Company (the "Acquisition"). The consideration paid was
$7.05 per share of common stock or $112.1 million in total. On July 2, 1998, Imo
Merger Corp., a wholly owned subsidiary of Colfax, merged with and into Imo,
pursuant to a short-form merger under Delaware law ("back-end merger"). The
Company was the surviving corporation in the back-end merger and as result
became a wholly owned subsidiary of Colfax.
Information regarding the Acquisition of the Company is contained in Note 2 to
the Consolidated Financial Statements included in Part IV of this Form 10-K
Report as indexed at Item 14(a)(1).
Industry Segments
A description of the principal products and services offered by each business
segment of the Company, as well as the principal markets for such products and
services, are set forth below. Certain information with respect to net sales,
operating profit, and identifiable assets of each of these segments and by
geographic area is contained in Note 11 to the Consolidated Financial
Statements. Information regarding the businesses sold and the discontinued
operations is provided later in this section and is contained in Notes 3 and 4
to the Consolidated Financial Statements.
Fluid Handling
The Fluid Handling business segment is a leading worldwide manufacturer of
rotary screw pumps. The three businesses that comprise the Fluid Handling
segment -- Imo Pump, Imo AB, and Warren Pumps Inc. -- design and manufacture
screw-type fuel, lube oil and hydraulic pumps for use primarily by the marine,
process, oil and gas and elevator industries. The segment's three-screw pumps
are the leading low-noise-level pumps used in United States Navy vessels and in
many commercial vessels. These pumps are also used to power hydraulic elevators,
lubricate diesel engines and fuel gas turbines. The segment's two-screw pumps
are used by the pulp and paper industry and in other high-viscosity process
applications.
Industrial Positioning
The Industrial Positioning business segment produces speed reducers and loose
gearing, and precision mechanical and electronic control products and systems
that are recognized as leading products in their market niches. This segment is
comprised of three units: Boston Gear, a leading producer of gears and speed
reducers, Fincor Electronics, a producer of adjustable-speed motor controllers,
and Morse Controls, a manufacturer of push-pull cable and control systems. Speed
reducers are used to reduce the output speed and increase the torque of power
trains in numerous products, ranging from industrial machinery to exercise
treadmills. Adjustable-speed motor controllers are used for the accurate control
of electric motor speed, torque, shaft position and direction of rotation in
applications such as ski lifts, textile machinery, overhead cranes, and large
printing presses. These operations also produce worm gear sets used as speed
reducers by original equipment manufacturers and by oil and gas and industrial
machinery customers. Push-pull cable and control systems are used to control and
actuate functions, such as steering and valve adjustment, as an alternative to
electrical systems. Applications include throttle control and steering systems
for both off-the-road vehicles and pleasure boats.
Discontinued Operations
In August 1997 and in February 1998, the Company sold its Instrumentation and
Roltra Morse businesses, respectively. In accordance with APB Opinion No. 30,
the disposals of these business segments have been accounted for as discontinued
operations and, accordingly, their operating results have been segregated and
reported as Discontinued Operations in the accompanying Consolidated Statements
of Income.
Roltra Morse
On February 27, 1998, the Company completed the sale of its Roltra Morse
business to Magna International Inc. for cash of $30 million, plus the
assumption of Roltra Morse's debt. The sale price approximated the recorded net
book value of the business. Net proceeds were used to reduce domestic senior
debt.
Instrumentation
On August 29, 1997, the Company completed the sale of its Instrumentation
business segment to Danaher Corporation for proceeds of $85 million, which
approximated its net book value. Net cash proceeds were used to reduce domestic
senior debt. The majority shareholders of the Company are also substantial
shareholders of Danaher Corporation.
Electro-Optical Systems
On April 28, 1997, the Company completed the sale of the Varo Electronic Systems
division to a small defense contractor for $12 million in cash, the proceeds of
which were used to reduce its domestic senior debt. The sale of this business
completed the sale of the Electro-Optical Systems business. On January 3, 1995,
the Company completed the sale of its Baird Analytical Instruments division to
Thermo Instruments Systems Inc. for approximately $12.3 million, which was used
to repay a portion of the Company's domestic senior debt. On June 2, 1995, the
Company completed the sale of the Optical Systems and Ni-Tec divisions of Varo
Inc. and the Optical Systems division of Baird Corporation, which represented
the major part of its Electro-Optical Systems business, to Litton Industries for
approximately book value. The proceeds were used to reduce domestic senior debt
and to redeem $40 million of the Company's then outstanding 12.25% senior
subordinated debentures.
See Note 3 to the Consolidated Financial Statements for additional details
regarding the discontinued operations.
Cost Reduction Programs
1997 Program
In connection with the Acquisition, the Company implemented a cost reduction
program. The cost of this program was $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, $1.2 million
and $6.9 million of costs for the Company's Fluid Handling and Industrial
Positioning segments, respectively, related to severance and termination
benefits resulting from headcount reductions and the consolidation of certain
manufacturing facilities. The required cash outlay related to this program was
$8.1 million in 1997, $7.4 million in 1998 and the expected cash requirements
during 1999 are $3.1 million.
Competition
The Company's products and services are marketed on a worldwide basis. Most
markets in which the Company operates are highly competitive. The principal
elements of competition for the products manufactured in each of the Company's
business segments are design features, product quality, customer service, and
price. Because the Company competes in certain narrowly defined niche markets,
there is not any single company that competes directly with the Company across
all of the Company's product lines.
Product Distribution and Customers
The Company's products are sold primarily through the Company's direct sales
forces. During 1998, sales by the Company's direct sales forces were
approximately 78% and 62% of the Fluid Handling and Industrial Positioning
segments, respectively. The Company's remaining sales are made through
distributors, dealers, and agents.
None of the Company's business segments is dependent on any single
customer or a few customers, the loss of which would have a material
adverse effect on the respective segments, or on the Company as a whole.
No customer accounted for 10% or more of consolidated sales from
continuing operations in 1998, 1997 or 1996.
Backlog
The Company's continuing operations' backlog of unfilled orders at February 26,
1999 and 1998, and at December 31, 1998, 1997 and 1996, by business segment, was
as follows:
February 26, December 31,
1999 1998 1998 1997 1996
(Dollars in millions)
Fluid Handling $ 33.0 $ 34.0 $ 32.1 $ 29.5 $ 33.3
Industrial Positioning 29.8 32.5 30.2 31.8 29.0
---- ---- ---- ---- ----
$ 62.8 $ 66.5 $ 62.3 $ 61.3 $ 62.3
====== ====== ====== ====== ======
Backlog is considered significant only to the Fluid Handling segment, given that
the products of that operation require long lead times for manufacture. Of the
total backlog from continuing operations at December 31, 1998, the Company
believes that all but approximately $1.7 million of its orders will be filled in
1999.
Raw Materials
The Company obtains raw materials, component parts and supplies from a variety
of sources, generally from more than one supplier. The Company's principal raw
materials are metals and plastics. The Company's suppliers and sources of raw
materials are based in both the United States and foreign countries and the
Company believes that its sources of raw materials are adequate for its needs
for the foreseeable future. The loss of any one supplier would not have a
material adverse effect on the Company's financial condition or results of
operations.
Patents, Licenses and Trademarks
The Company owns numerous unexpired U.S. patents (currently having a term of 17
years from the date of issuance and expiring at various times in the future) and
foreign patents (having an initial term that is governed by the law of the
country and expiring at various times in the future), including counterparts of
certain of its U.S. patents, in major industrial countries of the world. The
Company's products are marketed under various trade names and registered U.S.
and foreign trademarks (having an initial term that is governed by the law of
the country and expiring at various times in the future). The Company, however,
does not consider any one patent or trademark or any group thereof essential to
its business as a whole, or to any of its business segments. The Company relies,
to an extent, on proprietary product knowledge and manufacturing processes in
its operations.
Research and Development
The Company's ongoing research and development programs involve the development
of new technologies to enhance the performance or lower the cost of
manufacturing its products, and the redesign of existing product lines either to
increase their efficiency or to lower their manufacturing cost. Expenditures for
research and development charged against continuing operations for 1998, 1997
and 1996 by business segment were as follows:
Year Ended December 31,
1998 1997 1996
---- ---- ----
(Dollars in millions)
Fluid Handling $2.1 $2.1 $2.1
Industrial Positioning 3.2 3.4 2.3
--- --- ---
$5.3 $5.5 $ 4.4
==== ==== =====
Environmental Matters
In connection with the Company's separation from Transamerica in 1986, three of
the Company's properties required compliance with the New Jersey Environmental
Cleanup Responsibility Act, which was amended by the Industrial Site Recovery
Act ("ISRA"). ISRA required that the Company's three New Jersey industrial
establishments undergo an approved remediation. Remediation has been completed
at two sites and final closure approvals have been sought. As a result of the
sale of a portion of the third establishment, this site has been divided into
two separate sites for ISRA compliance. Both sites have undergone cleanup, but
the New Jersey Department of Environmental Protection and Energy has requested
and received from the Company additional sampling information. If further
cleanup is required, the Company does not expect it to have a material adverse
effect on its financial condition.
The Company has been identified in a number of instances as a "Potentially
Responsible Party" by the U.S. Environmental Protection Agency, and in one
instance by the State of Washington, with respect to the disposal of hazardous
wastes at a number of facilities that have been targeted for clean-up pursuant
to the Comprehensive Environmental Response Compensation and Liability Act
("CERCLA") or similar state law. Similarly, the Company has received notice that
it is one of a number of defendants named in an action filed in the United
States District Court, for the Southern District of Ohio Western Division by a
group of plaintiffs who are attempting to allocate a share of cleanup costs, for
which they are responsible, to a large number of additional parties, including
the Company. Although CERCLA and corresponding state law liability is joint and
several, the Company believes that its liability will not have a material
adverse effect on the financial condition of the Company since it believes that
it either qualifies as a de minimis or minor contributor at each site.
Accordingly, the Company believes that the portion of remediation costs that it
will be responsible for will therefore not be material.
The Company has current and former operations in numerous locations, some of
which require environmental remediation. The Company, however, does not know of
or believe that any such matters or the cost of any required corrective measure,
either individually or in the aggregate, will have a material adverse effect on
the financial condition of the Company. There can be no assurance, however, that
these matters, or other environmental matters not currently known to the Company
will not have such a material adverse effect.
Seasonality
General economic conditions worldwide continue to create business opportunities
for the coming year in many of the markets in which the Company operates.
Management believes that because of the nature of its industrial products and
the fact that the Company sells diverse products to many markets, the Company is
not significantly affected by the cyclical behavior, or seasonality, of any
particular market that it serves.
Associates
At February 26, 1999, the Company employed approximately 1,900 associates
worldwide. Approximately 1,200 associates were employed in the United States,
and approximately 700 associates were employed outside of the United States.
There are approximately 400 associates worldwide covered by collective
bargaining agreements with various unions expiring in 1999 through 2001. The
Company considers its relations with its associates to be satisfactory.
Item 2. Properties.
The location of the Company's manufacturing facilities at February 26, 1999 are
as follows:
Location Product Owned/Leased
Fluid Handling
- - --------------
Monroe, North Carolina Three-screw and two-screw pumps Owned
Columbia, Kentucky Three-screw, gear and
elevator pumps Owned
Warren, Massachusetts Two-screw, gear and
centrifugal pumps Owned
Stockholm, Sweden Three-screw pumps Owned
Paris, France Three-screw pumps Leased
Industrial Positioning
- - ----------------------
Charlotte, North Carolina Open gearing and clutches Owned
Hudson, Ohio Cables and controls Owned
Louisburg, North Carolina Worm gear speed reducers Owned
Sarasota, Florida Marine hydraulics Owned
New Orleans, Louisiana Replacement marine engine parts Leased
York, Pennsylvania Electronic drives Owned
Basildon, England Cables and controls Leased
Heiligenhaus, Germany Cables and controls Owned
Paris, France Cables and controls Leased
Marsta, Sweden Cables and controls Owned
Singapore Cables, controls and roller chain Leased
Sydney, Australia Cables and controls Owned
The Company believes that its machinery, plants and offices are in satisfactory
operating condition and are adequate for the uses to which they are put. The
Company believes that its properties have sufficient capacity to substantially
increase its current utilization without incurring significant additional
capital expenditures.
Item 3. Legal Proceedings.
The Company and one of its subsidiaries are two of a large number of defendants
in a number of lawsuits brought in various jurisdictions by approximately 7,000
claimants who allege injury caused by exposure to asbestos. Although neither the
Company nor any of its subsidiaries has ever been a producer or direct supplier
of asbestos, it is alleged that the industrial and marine products sold by the
Company and the subsidiary named in such complaints contained components which
contained asbestos. Suits against the Company and its subsidiary have been
tendered to its insurers, who are defending under their stated reservation of
rights. In addition, the Company and the subsidiary are named in cases,
involving approximately 30,000 claimants, which 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 is a defendant in a lawsuit brought in the United States District
Court for the District of New Jersey alleging failure in performance of
equipment sold in 1986 by the Company's former Deltex division. The complaint
seeks damages in excess of $12 million. The Company believes that there are
legal and factual defenses to the claim 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, but the Company believes that there are legal and factual
defenses to the claims and intends to defend the action vigorously.
On June 3, 1997, the Company was served with a complaint in a case brought in
the Superior Court of New Jersey which alleges damages in excess of $10 million
incurred as a result of losses under a Government Contract Bid transferred in
connection with the sale of the Company's former Electro-Optical Systems
business. The Electro-Optical Systems business was sold in a transaction that
closed on June 2, 1995. The sales contract provided certain representations and
warranties as to the status of the business at the time of sale. The complaint
alleges that the Company failed to provide notice of a "reasonably anticipated
loss" under a bid that was pending at the time of the transfer of the business
and therefore a representation was breached. The contract was subsequently
awarded to the Company's Varo subsidiary and thereafter transferred to the buyer
of the Electro-Optical Systems business. The case is in the preliminary stages
of pleading but the Company believes that there are legal and factual defenses
to the claims and intends to defend the action vigorously.
The operations of the Company, like those of other companies engaged in similar
businesses, involve the use, disposal and clean up of substances regulated under
environmental protection laws. In a number of instances the Company has been
identified as a Potentially Responsible Party by the U.S. Environmental
Protection Agency, and in one instance by the State of Washington, with respect
to the disposal of hazardous wastes at a number of facilities that have been
targeted for clean-up pursuant to CERCLA or similar state law. Similarly, the
Company has received notice that it is one of a number of defendants named in an
action filed in the United States District Court, for the Southern District of
Ohio Western Division by a group of plaintiffs who are attempting to allocate a
share of cleanup costs, for which they are responsible, to a large number of
additional parties, including the Company. Although CERCLA and corresponding
state law liability is joint and several, the Company believes that its
liability will not have a material adverse effect on the financial condition of
the Company since it believes that it either qualifies as a de minimis or minor
contributor at each site. Accordingly, the Company believes that the portion of
remediation costs that it will be responsible for will not be material. For
additional information see section entitled Environmental Matters in Part I,
Item 1 of this Form 10-K Report.
The Company is also involved in various other pending legal proceedings arising
out of the ordinary course of the Company's business. None of these legal
proceedings is expected to have a material adverse effect on the financial
condition of the Company. With respect to these proceedings and the litigation
and claims described in the preceding paragraphs, management of the Company
believes that it either will prevail, has adequate insurance coverage or has
established appropriate reserves to cover potential liabilities. There can be no
assurance, however, as to the ultimate outcome of any of these matters, and if
all or substantially all of these legal proceedings were to be determined
adversely to the Company, there could be a material adverse effect on the
financial condition of the Company.
Item 4. Submission of Matters to a Vote of Security Holders.
None
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters.
The Company delisted its Common Stock from the New York Stock Exchange on July
2, 1998. The Common Stock was deregistered under the Securities Exchange Act of
1934.
Item 6. Selected Financial Data.
(Dollars in millions except per share amounts) (a)
Year Post-Acquis. Pre-Acquis.
Ended Aug. 29, Jan. 1,
Dec. 31, 1997 to to Aug.
1998* Dec. 31, 28, 1997** Year Ended
1997* December 31,
--------------
1996** 1995** 1994**
- - -------------------------------------------------------------------------------
Net sales $308.9 $106.7 $210.2 $309.5 $297.1 $288.6
Income (loss) from
continuing operations
before extraordinary
item 10.9 (5.7) (31.3) (33.1) 7.2 (7.4)
Discontinued operations,
net of taxes --- (12.2) 2.4 (16.8) 27.0 16.6
Extraordinary item (net
of tax) (5.2) (3.3) --- (8.5) (4.4) (5.3)
Net income (loss) 5.7 (21.2) (28.9) (58.4) 29.8 3.9
- - -------------------------------------------------------------------------------
(Loss) earnings per share, basic and diluted:
Continuing operations
before extraordinary
item (.33) (1.82) (1.93) .42 (.44)
Discontinued operations, net
of taxes (.71) .14 ( .99) 1.58 .98
Extraordinary item (.20) --- (.49) (.26) (.31)
Net (loss) income (1.24) (1.68) (3.41) 1.74 .23
Cash dividends per share --- --- --- --- --- ---
- - -------------------------------------------------------------------------------
Total assets 389.0 463.3 330.9 365.4 510.3
Total long-term debt,
including current portion 174.3 223.4 276.0 244.5 383.2
===============================================================================
(a) The notes to the consolidated financial statements located in Part IV of
this Form 10-K Report as indexed at Item 14(a)(l) should be read in conjunction
with this summary.
* As a result of the back-end merger on July 2, 1998, earnings per share is not
presented for 1998.
** Restated to conform to 1998 presentation.
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
The following discussion and analysis of the Company's consolidated results of
operations and financial condition should be read in conjunction with the
audited Consolidated Financial Statements included elsewhere in this Form 10-K
Report.
Comparisons of the results of operations for the year ended December 31, 1998,
with the results for the years ended December 31, 1997 and 1996, are being
presented on an historical basis. The year ended December 31, 1998 and the four
months ended December 31, 1997, include changes in depreciation and amortization
that resulted from the application of the purchase method of accounting for the
Acquisition. For further information on the pro forma effect of the Acquisition
on the Company, see Note 2 in the Notes to Consolidated Financial Statements.
Recent Events
Merger: On August 28, 1997, Colfax Corporation (previously known as II
Acquisition Corp.) acquired approximately 93% of the outstanding shares of
common stock of Imo Industries Inc. ("Imo") pursuant to its tender offer for all
outstanding shares of the common stock. The consideration paid was $7.05 per
share of common stock or $112.1 million in total. The acquisition has been
accounted for under the purchase method of accounting. On July 2, 1998, Colfax
Corporation's wholly-owned subsidiary, Imo Merger Corp., merged with and into
Imo, pursuant to a short-form merger under Delaware law ("back-end merger"). Imo
was the surviving corporation in the back-end merger and as a result became a
wholly-owned subsidiary of Colfax Corporation. At the merger date, Imo assumed
the capital structure of Imo Merger Corp., of 100 shares of common stock, par
value $.01 per share.
New York Stock Exchange: Imo delisted its Common Stock from the New York
Stock Exchange on July 2, 1998. The Common Stock was deregistered under
the Securities Exchange Act of 1934.
Consent Solicitation: On April 14, 1998, the Company commenced a consent
solicitation, seeking consents from the holders of the Company's 11.75% Senior
Subordinated Notes due 2006 ("the Notes") to certain amendments to the Indenture
governing the Notes. The proposed amendments would permit the Company to
complete the back-end merger with and into a wholly owned subsidiary of Colfax
Corporation. On May 6, 1998, the Company received sufficient consents to effect
the proposed amendments, and entered into a Supplemental Indenture with respect
to such amendments. The Company paid an aggregate of $483,650 to holders of
Notes in connection with the solicitation.
Roltra Morse Sale: On February 27, 1998, the Company completed the sale of its
Roltra Morse business to Magna International Inc. for cash of $30 million plus
the assumption of Roltra Morse's debt. The sale price approximated the recorded
net book value of the business. Net proceeds were used to reduce domestic senior
debt.
Results of Operations
The Company's former Roltra Morse, Instrumentation, Electro-Optical Systems and
Turbomachinery businesses are accounted for as discontinued operations.
Accordingly, the operating results of these businesses have been segregated and
reported as Discontinued Operations in the audited Consolidated Financial
Statements included elsewhere in this Form 10-K Report. The discussion that
follows concerns only the results of continuing operations, which are grouped
into two business segments for management and financial reporting purposes:
Fluid Handling and Industrial Positioning.
1998 Compared to 1997
Sales. Net sales from continuing operations in 1998 decreased 2.5% to $308.9
million, compared with $316.9 million in 1997, as a result of the Fluid Handling
segment's sales remaining flat and a decrease of 4.0% in the Industrial
Positioning segment's sales. The decrease in the Industrial Positioning segment
sales is primarily due to the sale of the Delroyd product line, which was sold
on December 31, 1997.
Gross Profit. Gross profit in 1998 increased as a percentage of sales to 32.5%
compared with 30.0% in 1997. The higher gross profit was a result of
productivity improvements in each segment due to cost reduction and efficiency
initiatives implemented after the Acquisition.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased to 18.3% of net sales in the twelve months
ended December 31, 1998, as compared with 21.5% in the 1997 period. The decrease
in expenses, as a percent of sales in 1998, was primarily due to the reduction
in corporate overhead expenses and Company-wide cost reduction programs
instituted after the Acquisition.
Interest Expense. Average borrowings in 1998 were approximately $102.6 million
lower than in 1997. Total interest expense of $21.3 million in 1998 was $5
million, or 19.0%, lower than in 1997, due primarily to the reduction of debt as
a result of the sale of Roltra Morse and the Instrumentation business and the
purchase of a portion of the 11.75% senior subordinated debentures during 1998.
Income (Loss) from Continuing Operations. The Company had income from continuing
operations of $10.9 million in 1998. In 1997, the loss from continuing
operations was $36.9 million, which included unusual charges of $31.3 million.
Income (Loss) from Discontinued Operations. Roltra Morse's net loss of $1.0
million, which includes $0.2 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 year ended
December 31, 1998 compared with a loss of $9.8 million for the year ended
December 31, 1997.
1997 Compared to 1996
Sales. Net sales from continuing operations in 1997 increased 2.4% to $316.9
million, compared with $309.5 million in 1996, as a result of increases of 4.6%
and 1.1% in the Fluid Handling and Industrial Positioning segments,
respectively. Fluid Handling net sales in North America increased due to a 16.8%
volume increase in sales to the crude oil market, offset by a 3.3% decrease in
sales to the power generation market. The net sales of the European operations
of Fluid Handling increased only 1.4% in 1997 compared with 1996 due to the
unfavorable effects of a 13% change in exchange rates for the Swedish Krona. Net
sales increased in the Industrial Positioning segment due to a 6.3% volume
increase in mechanical speed reducers sales, a 6.5% volume increase in
electrical products sales, a 1.4% volume increase in marine sales, and a 17.5%
increase in mobile equipment sales, offset by a 4% decrease in European
operations sales due to unfavorable effects of exchange rate changes.
Gross Profit. Gross profit in 1997 increased as a percentage of sales to 30.0%
compared with 28.7% in 1996, due in part to the fact that the 1996 period
benefited from a $2 million credit related to the phase-out of certain
post-retirement expenses.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased to 21.5% of net sales in the twelve months
ended December 31, 1997, as compared with 20.2% in the 1996 period. The increase
in expenses, as a percent of sales in 1997, was due primarily to the fact that
the 1996 period benefited from a favorable adjustment of $3.9 million related to
the Company's phase-out of accumulated postretirement benefit obligations.
Additionally, goodwill amortization increased $1.1 million in the last four
months of 1997 as a result of the Acquisition. The increased selling, general
and administrative expenses in 1997 were partially offset by cost savings
realized from the immediate headcount reductions and other cost cutting measures
implemented after the Acquisition (primarily at the corporate headquarters), and
net reductions of $0.6 million to previously recorded provisions.
Interest Expense. Average borrowings in 1997 were approximately $6.1 million
lower than in 1996. Total interest expense (before allocation to discontinued
operations) of $33.6 million in 1997 was $1.5 million, or 4.3%, lower than in
1996, due primarily to the reduction in debt with proceeds from the sale of the
Instrumentation business segment in August 1997.
Income (Loss) from Continuing Operations. The Company had a loss from continuing
operations of $36.9 million in 1997,which included unusual charges of $31.3
million. In 1996, the loss from continuing operations was $33.1 million, which
included unusual charges of $17.4 million and a reversal of a previously
recognized deferred tax benefit of $10 million.
Income (Loss) from Discontinued Operations. The Company had a loss from
discontinued operations of $9.8 million (net of income tax expense of $0.7
million, in 1997 as compared to a loss of $16.8 million (net of income tax
expense of $1 million), in 1996.
Operating results from discontinued operations were a loss of $1.4 million and
$8.7 million in 1997 and 1996, respectively. Results from operations for the
discontinued operations include allocations for interest of $2.7 million in 1997
and $4.5 million in 1996.
The losses of $8.4 million recorded on the sale of discontinued operations in
the third quarter of 1997, and $8.1 million recorded in the third and fourth
quarters of 1996, represent charges related to changes in estimates on legal and
other reserve requirements of retained liabilities associated with its former
Electro-Optical and Turbomachinery businesses. The Company performs a review of
the assumptions used in determining the estimated loss from discontinued
operations on a quarterly basis. Management believes that the recorded amount is
adequate. The amounts of the recorded liabilities, which are based on current
estimates, may differ from actual results.
The Company did not retain any liabilities with respect to the sale of the
Instrumentation business. The Company retained certain liabilities upon the 1995
sales of the Electro-Optical Systems and Turbomachinery businesses of
approximately $24 million and $33 million, respectively. Required cash outlays
in 1998, 1997 and 1996 were $0.9 million, $5.5 million and $6.5 million, related
to the former Electro-Optical Systems business, and $0.2 million, $3.1 million
and $4.1 million, related to the former Turbomachinery business.
Other Operating Results
Unusual Items. During the year ended December 31, 1997, the Company recorded
unusual charges of $31.3 million against income from continuing operations. The
first nine months of 1997 included an unusual charge of $10.5 million relating
to the settlement of a judgment against the Company in favor of International
Insurance Company ("International"). In addition, the Company recorded unusual
charges of $20.8 million in the third quarter of 1997. Of these charges, $15.8
million related to the sale of the Company and represent indirect and general
expenses incurred by the Company in connection with the sale process which were
paid in 1997, and $5 million related to an additional legal provision concerning
certain litigation matters.
During the fourth quarter of 1996, the Company recognized unusual charges of
$17.4 million against income from continuing operations. Restructuring charges
totaled $0.3 million representing severance benefits. Additionally, the Company
recognized a charge of $17.1 million related to the write-down of other assets
approved for sale and certain non-operating real estate to net realizable value
(included in Corporate Expense). Of the $17.4 million of unusual charges, the
required cash outlay in 1996 was $0.3 million. There was no required cash outlay
in 1997. The remainder represents non-cash charges.
Extraordinary Items. The twelve months ended December 31, 1998, include an
extraordinary charge of $5.2 million net of tax, representing charges related to
the early extinguishment of the Company's debt under its current senior secured
credit facilities (the "New Credit Agreement") and its Notes, as well as the
write-off of previously deferred loan costs.
The twelve months ended December 31, 1997, include an extraordinary charge of
$3.3 million, representing charges related to the early extinguishment of the
Company's debt under its current senior secured credit facilities (the "New
Credit Agreement") and its Notes, as well as the write-off of previously
deferred loan costs.
As a result of the 1996 refinancing of the Company's domestic debt, the twelve
months ended December 31, 1996 include an extraordinary charge of $8.5 million
after-tax, representing the charges incurred in connection with the early
extinguishment of debt as well as the write-off of previously deferred loan
costs.
Provision for Income Taxes. Income tax expense from continuing operations was
$7.0 million, $1.5 million, and $12.7 million for 1998, 1997 and 1996,
respectively.
Income tax expense for the twelve months ended 1998, represents current tax
expense of $2.3 million for federal alternative minimum tax, foreign and state
income taxes, as the Company is utilizing existing U.S. net operating loss
carryforwards to offset its domestic earnings.
The net deferred tax benefit currently recorded at December 31, 1998 is $41.8
million, a level where management believes that it is more likely than not that
the tax benefit will be realized. Although the Company has a history of prior
losses, these losses were primarily attributable to divested businesses and
unusual items.
The Company establishes valuation allowances in accordance with the provisions
of FASB Statement No. 109, "Accounting for Income Taxes." The Company
continually reviews the adequacy of the valuation allowance and is recognizing
these benefits only as reassessment indicates that it is more likely than not
that the benefits will be realized. The valuation allowance was $1.7 million and
$53.3 million for December 31, 1998 and December 31, 1997, respectively. In
1998, the Company reduced its valuation reserve by $51.6 million due to its
belief that it is more likely than not these tax benefits will be realized in
future years. The revision of the valuation reserve is due to the change in
purchase accounting estimates during the first year after acquisition.
The Company has net operating loss carryforwards of approximately $92.3 million
expiring in years 2002 through 2012, and minimum tax credits of approximately
$2.8 million, which may be carried forward indefinitely. Tax credit
carryforwards include foreign tax credits of approximately $1.7 million,
expiring beginning in the year 2002. These carryforwards are available to offset
future taxable income, subject to Section 382 limitations, due to the
Acquisition.
Taxes have not been provided on the unremitted earnings of foreign subsidiaries
since it is the Company's intention to indefinitely reinvest these earnings
overseas. The amount of foreign withholding taxes that would be payable on
remittance of these earnings is approximately $1.2 million.
Liquidity and Capital Resources
Short-term and Long-term Debt
As of December 31, 1998, the Company had $15.6 million of outstanding standby
letters of credit. The Company had $6.0 million in foreign short-term credit
facilities with amounts outstanding at December 31, 1998 of $0.8 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.
In addition, the Company had outstanding $78.5 million of its 11.75% senior
subordinated notes due in 2006, $46.5 million of term loan borrowings, $41
million in revolver borrowings, and $5 million due to Ameridrives International,
L.P., whose majority shareholders are also the majority shareholders of the
Company.
Cash Flow
The Company's operating activities provided cash of $39.6 million in 1998,
compared with cash used of $30.1 million in 1997. The cash provided in 1998 is
principally due to net operating profits and the decrease in working capital.
The use of cash in 1997 is due principally to the payment of (1) a legal
settlement of $10.5 million, (2) approximately $15.8 million representing
indirect and general expenses related to the process of selling the Company, and
(3) approximately $8.1 million related to the 1997 cost reduction program,
representing severance costs.
The Company's total debt as a percent of its total capitalization decreased to
62.6% at December 31, 1998, compared with 71.5% at December 31, 1997, as a
result of the debt paid down resulting from the sale of Roltra Morse and
internal cash generation.
Capital expenditures of continuing operations decreased to $6 million compared
with the 1997 level of $8.3 million. In 1998 capital spending was used for the
purpose of maintaining and improving competitive advantages at the Company's
operations. The Company anticipates that capital expenditures in 1999 will
increase over the 1998 level primarily due to expenditures related to
productivity improvements in the operating segments. There were no material
outstanding commitments for the acquisition of property, plant, and equipment at
December 31, 1998.
The Company's sale of its Roltra Morse subsidiary improved its liquidity
position. Management believes that cash flow from operations and cash available
from unused credit facilities will be sufficient to fund future anticipated
working capital needs, capital spending requirements and debt service
requirements.
Year 2000
The Company has conducted a review of the software, databases, microcode,
hardware, systems and devices with date-related functionality (collectively,
"Systems") used in the businesses of Imo (whether used on a stand-alone basis or
in combination with other software, hardware, systems or devices), and has
taken, or is in the process of taking, all steps that the Company believes are
necessary or appropriate to ensure that such Systems accurately process all
dates, including those before, on or after January 1, 2000, without loss of
functionality, interoperability or performance. The Company has assessed the
impact of the Year 2000 issue on its embedded Systems and is not currently aware
of any material risks. Although all such embedded Systems are not presently Year
2000 compliant, the Company believes it has identified all non-compliant
embedded Systems and is seeking solutions to make such systems Year 2000
compliant. The Company has assessed the impact of the Year 2000 issue upon those
third parties with which the Company has a material relationship, and the
Company is not currently aware of any material third-party risks resulting from
the Year 2000 issue.
The Company estimates that the remaining cost of investigating and remediating
(where required) any Year 2000 issues relating to its businesses will be less
than $750,000. Due to the nature of its businesses, the Company does not believe
that its customers or suppliers will be materially adversely affected by the
Year 2000 issue. Although the Company's Boston Gear subsidiary relies to a
significant extent on online ordering, the Company does not believe that the
Year 2000 issue will materially adversely affect the Company's business or
results of operations.
Seasonality; Customer Concentration; Inflation
General economic conditions worldwide continue to create business opportunities
for the coming year in many of the markets in which the Company operates.
Management believes that because of the nature of its industrial products and
the fact that the Company sells diverse products to many markets, the Company is
not significantly affected by the cyclical behavior, or seasonality, of any
particular market that it serves.
None of the Company's business segments is dependent on any single customer or a
few customers, the loss of which would have a material adverse effect on the
respective segments, or on the Company as a whole. No customer accounted for 10%
or more of consolidated sales in 1998, 1997 or 1996.
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995. Except for historical matters, the
matters discussed in this Form 10-K Report are forward-looking statements based
on current expectations and involve risks and uncertainties. Forward-looking
statements include, but are not limited to, statements under the following
headings: (i) Item 1 "Backlog, Raw Materials and Environmental Matters" - the
expected ability to fill existing orders in 1999, the continued adequacy of the
Company's raw materials sources, and the future impact of environmental matters
on the financial condition of the Company; (ii) Item 3 - "Legal Proceedings" -
the future impact of legal proceedings on the financial condition of the
Company. The Company wishes to caution the reader that, in addition to the
matters described above, various factors such as delays in contracts from key
customers, demand and market acceptance risk for new products, continued or
increased competitive pricing and the effects of under-utilization of plants and
facilities, particularly in Europe, and the impact of worldwide economic
conditions on demand for the Company's products, could cause results to differ
materially from those in any forward-looking statement.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
The Company periodically enters into foreign exchange contracts for purposes of
hedging its exposure to foreign currency exchange rate fluctuations. These
contracts hedge firm commitments between the Swedish Krona and the German
Deutschmark and the United States Dollar. At December 31, 1998, the Company had
foreign currency contracts with notional amounts totaling approximately $2.4
million with various expiration dates through September 1999. The amount of
deferred gain or loss associated with these contracts is not material.
All foreign currency derivative agreements are with major commercial banks;
therefore the risk of credit loss from nonperformance by the banks is considered
by management to be minimal. The Company evaluates its exposure to credit loss
on an ongoing basis.
Item 8. Financial Statements and Supplementary Data.
The consolidated financial statements and supplementary data required by Part
II, Item 8 of Form 10-K are included in Part IV of this Form 10-K Report as
indexed at Item 14(a)(1).
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None
PART III
Item 10. Directors and Executive Officers of the Registrant.
Not Applicable
Item 11. Executive Compensation.
Not Applicable
Item 12. Security Ownership of Certain Beneficial Owners and Management.
Not Applicable
Item 13. Certain Relationships and Related Transactions.
None
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) (1) Financial Statements
The Financial Statements and Supplementary Data required by Part II,
Item 8 of Form 10-K are included in this Part IV of this Form 10-K Report
as follows:
Consolidated Financial Statements
Consolidated Statements of Income for Year Ended December 31, 1998,
the period from January 1, 1997 to August 28, 1997 (pre-Acquisition)
and the period from August 29, 1997 to December 31, 1997
(post-Acquisition) and the Year Ended December 31, 1996
Consolidated Balance Sheets at December 31, 1998 and 1997
Consolidated Statements of Cash Flows for the Year Ended
December 31, 1998, the period from January 1, 1997 to August 28,
1997 (pre-Acquisition) and the period from August 29, 1997 to
December 31, 1997 (post-Acquisition) and the Year Ended December
31, 1996
Consolidated Statements of Shareholders' Equity (Deficit)
for the Year Ended December 31, 1998, the period from January 1, 1997
to August 28, 1997 (pre-Acquisition) and the period from August 29,
1997 to December 31, 1997 (post-Acquisition) and for the Year Ended
December 31, 1996
Notes to Consolidated Financial Statements
Reports of Independent Public Accountants
Quarterly Financial Information (unaudited)
(2) Financial Statement Schedules
The following consolidated financial statement schedule for the year ended
December 31, 1998, the period from January 1, 1997 to August 28, 1997
(pre-Acquisition) and the period from August 29, 1997 to December 31, 1997
(post-Acquisition) and the year ended December 31, 1996 is filed as part
of this Report and should be read in conjunction with the Company's
Consolidated Financial Statements.
Schedule
II Valuation and Qualifying Accounts
All other schedules for which provision is made in the applicable
regulation of the Securities and Exchange Commission are omitted because
they are not required under the related instructions or because the
required information is given in the financial statements or notes
thereto.
(3) Exhibits
The Exhibits listed in the accompanying Index to Exhibits are filed as
part of this Report.
(b) Reports on Form 8-K
None
EXHIBIT INDEX
Exhibit No. Note No. Description
3(i) (23) The Company's Restated Certificate of Incorporation, as
amended March 10, 1989 and November 10, 1992 and April
30, 1997
3(ii) (28) The Company's Bylaws
4.1 (A) (18) Indenture, dated as of April 15, 1996, between the
Company and IBJ Schroder Bank & Trust Company, as Trustee
(B) (28) Second Supplemental Indenture, dated as of August 26,
1997, between the Company and IBJ Schroder Bank & Trust
Company, as Trustee
4.3 (18) Registration Rights Agreement, dated as of April 23,
1996, between the Company and the Initial Purchasers
4.3 (A) (20) Rights Agreement dated as of April 30, 1997 between the
Company and First Chicago Trust Company of New York,
which includes, as Exhibit A thereto, the Certificate of
Designation, Preferences and Rights of Series B Junior
Participating Preferred Stock of Imo Industries Inc., as
Exhibit B thereto, the Form of Rights Certificate and as
Exhibit C thereto, the Summary of Rights to Purchase
Preferred Stock.
(B) (21) Amendment to Rights Agreement dated June 25, 1997 between
the Company and First Chicago Trust Company of New York
(C) (22) Second Amendment to Rights Agreement dated July 25, 1997
between the Company and First Chicago Trust Company of
New York
(D) (24) Third Amendment to Rights Agreement dated August 21, 1997
between the Company and First Chicago Trust Company of
New York
(E) (29) Fourth Amendment to Rights Agreement dated April 30, 1998
between the Company and First Chicago Trust Company of
New York
Management Contracts, Compensatory Plans and Arrangements:
10.1 (14) Amended and restated Equity Incentive Plan for Key
Employees
10.2 (16) Amended and restated 1988 Equity Incentive Plan for
Outside Directors
10.3 (15) 1995 Equity Incentive Plan for Outside Directors
10.4 (17) The Company's Supplemental Retirement Income Plan
10.5 (8) Change in Control Agreement dated January 9, 1987 between
the Company and John J. Carr
10.6 (8) Change in Control Agreement dated August 5, 1992 between
the Company and William M. Brown
10.7 (8) Change in Control Agreement dated August 13, 1992 between
the Company and Thomas J. Bird
10.8 (10) Change in Control Agreement dated September 13, 1993
between the Company and Donald K. Farrar
10.9 (19) Change in Control Agreement dated May 21, 1996 between
the Company and Donald N. Rosenberg
10.10 (19) Severance Agreement dated February 6, 1997 between Imo
Industries (UK) Limited and Brian Lewis
10.11 (19) Consultancy Agreement dated February 13, 1997 between
Imo Industries Inc. and Brian Lewis
Other Material Contracts:
10.12 (A) (3),(4) The Company's Salaried Employees Stock Savings Plan as
amended on July 1, 1987 and as amended on June 14, 1988
(B) (7) Amendment dated March 16, 1989 to the Imo Industries Inc.
Employees Stock Savings Plan
(C) (5) Amendments dated September 6, 1990 and February 14, 1991
to the Imo Industries Inc. Employees Stock Savings Plan
(D) (6) Amendment dated May 9, 1991 to the Imo Industries Inc.
Employees Stock Savings Plan
(E) (8) Amendments dated December 30, 1991 and August 3, 1992 to
the Imo Industries Inc. Employees Stock Savings Plan
(F) (12) Trust Agreement for the Imo Industries Inc. Employees
Stock Savings Plan as of March 1, 1995 between the
Company and Eagle Trust Company
10.13 (1) Distribution Agreement dated December 18, 1986 between
Transamerica Corporation and the Company
10.14 (1) Tax Agreement between the Company and Transamerica
Corporation
10.15 (J) (9) Warrant dated July 15, 1993 issued by the Company to The
Prudential Insurance Company of America
10.16 (2) Stock Purchase Agreement dated November 30, 1987 between
the Company and TRIFIN B.V.
10.17 (5) Stock Purchase Agreement dated as of May 31, 1990 among
United Scientific Holdings PLC, United Scientific Inc.
and the Company
10.18 (10) Stock Purchase Agreement dated as of October 28, 1993
among the Company, Imo Industries GmbH, Mark Controls
Corporation and Mark Controls GmbH i. Gr., as amended
10.19 (A) (18) Credit Agreement dated as of April 29, 1996 among the
Company, as Borrower, Varo Inc., as Guarantor, Warren
Pumps Inc. as Guarantor, the Institutions from time to
time party thereto as Lenders and Issuing Banks, and
Citicorp USA, Inc., as Agent
(B) (19) First Amendment dated as of February 19, 1997 to the
Credit Agreement dated as of April 29, 1996 among the
Company, as Borrower, Varo Inc., as Guarantor, Warren
Pumps, Inc. as Guarantor, the Institutions from time to
time party thereto as Lenders and Issuing Banks, and
Citicorp USA, Inc., as Agent
10.20 (A) (11) Asset Purchase Agreement dated as of November 4, 1994 by
and among the Company, Imo Industries International Inc.
and Mannesmann Capital Corporation
(B) (12) Agreement, Amendment and Waiver dated January 17, 1995 by
and among the Company and Mannesmann Capital Corporation
10.21 (12) Asset and Stock Purchase Agreement dated as of January 1,
1995 by and among the Company and Thermo Jarrell Ash
Corporation
10.22 (13) Purchase and Sale Agreement among Litton Industries,Inc.,
and Litton Systems, Inc. and Imo Industries Inc., Baird
Corporation, Optic-Electronic International, Inc. and
Varo Inc. dated May 11, 1995 and amended and restated as
of June 2, 1995
10.23 (A) (19) Asset Purchase Agreement dated as of September 13, 1996
between Varo Inc. and Varo Acquisition Corp.
(B) (19) Reinstatement Agreement dated January 28, 1997 between
Varo Inc. and Varo Acquisition Corp.
10.24 (21) Agreement and Plan of Merger, dated June 26, 1997, among
United Dominion Industries Limited, UD Delaware Corp. and
Imo Industries Inc.
10.25 (22) Share Purchase Agreement, dated July 25, 1997, between II
Acquisition Corp. and the Company
10.26 (25) Asset Purchase Agreement dated as of August 29, 1997
among the Registrant and certain of its subsidiaries
and Danaher Corporation and certain of its subsidiaries
10.27 (A) (26) Credit and Guaranty Agreement dated as of August 29, 1997
among the Company, as Borrower, II Acquisition Corp.,
as Guarantor, Certain Financial Institutions, as Lenders,
The Bank of Nova Scotia, as Administrative and
Documentation Agent and Nationsbanc Capital Markets,
Inc., as Syndication Agent for the Lenders
(B) (28) First Amendment to Credit and Guaranty Agreement dated as
of November 6, 1997
(C) (28) Second Amendment to Credit and Guaranty
Agreement dated as of December 2, 1997
(D) (28) Third Amendment to Credit and Guaranty
Agreement dated as of February 16, 1998
(E) (30) Fourth Amendment to Credit and Guaranty
Agreement dated as of March 9, 1998
(F) (31) Fifth Amendment to Credit and Guaranty
Agreement dated as of June 1, 1998
(G) Sixth Amendment to Credit and Guaranty Agreement dated as
of October 15, 1998
10.28 (27) Stock Purchase Agreement dated as of January 30, 1998
between the Registrant and Magna International Inc.
21 Subsidiaries of the Company
27 Financial Data Schedule as of December 31, 1998
- - -----------------------------------------------
NOTES
(1) Incorporated by reference to the Company's Form 8 Amendment No. 2 filed
with the Commission on December 9, 1986 amending the Company's Form 10 as
filed with the Commission on October 15, 1986.
(2) Incorporated by reference to the Company's Form 8-K filed with the
Commission on February 17, 1987.
(3) Incorporated by reference to the Imo Industries Inc. Employees Stock
Savings Plan Form 11-K filed with the Commission on April 13, 1988.
(4) Incorporated by reference to the Company's Form 10-K filed with the
Commission on March 29, 1990.
(5) Incorporated by reference to the Company's Form 10-K filed with the
Commission on March 28, 1991.
(6) Incorporated by reference to the Company's Form S-8 filed with the
Commission on June 17, 1991.
(7) Incorporated by reference to the Company's Form 10-K filed with the
Commission on March 26, 1992.
(8) Incorporated by reference to the Company's Form 10-K filed with the
Commission on April 19, 1993.
(9) Incorporated by reference to the Company's Form 10-K/A filed with the
Commission on August 6, 1993 amending the Company's Form 10-K as filed with
the Commission on April 19, 1993.
(10) Incorporated by reference to the Company's Form 10-K filed with the
Commission on March 31, 1994.
(11) Incorporated by reference to the Company's Form 10-Q filed with the
Commission on November 14, 1994.
(12) Incorporated by reference to the Company's Form 10-K filed with the
Commission on March 29, 1995.
(13) Incorporated by reference to the Company's Form 8-K filed with the
Commission on June 19, 1995.
(14) Incorporated by reference to the Company's Form S-8 as filed with the
Commission on June 23, 1995, Registration No. 33-60533
(15) Incorporated by reference to the Company's Form S-8 as filed with the
Commission on June 23, 1995, Registration No. 33-60535
(16) Incorporated by reference to the Company's Form 10-Q filed with the
Commission on November 13, 1995.
(17) Incorporated by reference to the Company's Form 10-K filed with the
Commission on March 28, 1996.
(18) Incorporated by reference to the Company's Form S-4 (Registration No.
333-3477) filed with the Commission on May 10, 1996.
(19) Incorporated by reference to the Company's Form 10-K filed with the
Commission on March 27, 1997.
(20) Incorporated by reference to the Company's Form 8-A Registration Statement
filed with the Commission on May 2, 1997.
(21) Incorporated by reference to the Company's Schedule 14D-9
Solicitation/Recommendation Statement filed with the Commission on July 2,
1997.
(22) Incorporated by reference to the Company's Schedule 14D-9
Solicitation/Recommendation Statement filed with the Commission on July 31,
1997.
(23) Incorporated by reference to the Company's Form 10-Q filed with the
Commission on August 14, 1997.
(24) Incorporated by reference to the Company's Form 8-K filed with the
Commission on August 27, 1997.
(25) Incorporated by reference to the Company's Form 8-K filed with the
Commission on September 15, 1997.
(26) Incorporated by reference to the Company's Form 10-Q filed with the
Commission on November 14, 1997.
(27) Incorporated by reference to the Company's Form 8-K filed with the
Commission on March 13, 1998.
(28) Incorporated by reference to the Company's Form 10-K filed with the
Commission on March 31, 1998.
(29) Incorporated by reference to the Company's Form 8-A/A filed with the
Commission on May 1, 1998.
(30) Incorporated by reference to the Company's Form 10-Q filed with the
Commission on May 13, 1998.
(31) Incorporated by reference to the Company's Form 10-Q filed with the
Commission on August 14, 1998.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, Imo Industries Inc. has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Date: March 31, 1999
IMO INDUSTRIES INC.
By: /s/ JOHN A. YOUNG
John A. Young
Vice President and Chief
Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of Imo Industries Inc.
and in the capacities and on the dates indicated.
/s/ PHILIP W. KNISELY Chief Executive Officer,
Philip W. Knisely President and Director
(principal executive officer) March 31, 1999
/s/ JOHN A. YOUNG Vice President and
John A. Young Chief Financial Officer
(principal financial officer) March 31, 1999
/s/ G. SCOTT FAISON Corporate Controller
G. Scott Faison (principal accounting officer) March 31, 1999
/s/ STEVEN M. RALES Director March 31, 1999
Steven M. Rales
/s/ MITCHELL P. RALES Director March 31, 1999
Mitchell P. Rales
/s/ NEIL D. COHEN Director March 31, 1999
Neil D. Cohen
Imo Industries Inc. and Subsidiaries
Consolidated Statements of Income and Comprehensive Income
(Dollars in thousands except per share amounts)
Post-Acquis. Pre-Acquis.
August January
Year 29, 1, 1997 Year
Ended 1997 to to Ended
December December August December
31, 1998 31, 1997 28, 1997 31, 1996
- - -------------------------------------------------------------------------------
Net Sales $308,870 $106,711 $210,151 $309,511
Cost of products sold 208,579 76,597 145,276 220,589
- - -------------------------------------------------------------------------------
Gross Profit 100,291 30,114 64,875 88,922
Selling, general and
administrative expenses 56,464 21,411 46,724 62,514
Research and development expenses 5,317 1,913 3,636 4,455
Unusual items --- 5,000 26,344 17,440
- - -------------------------------------------------------------------------------
Income (Loss) From Operations 38,510 1,790 (11,829) 4,513
Other income 684 825 22 1,063
Income (Loss) From Continuing
Operations Before
Interest, Income Taxes and
Extraordinary Item 39,194 2,615 (11,807) 5,576
Interest expense 21,293 8,069 18,190 25,981
Income (Loss) From Continuing
Operations Before Income
Taxes and Extraordinary Item 17,901 (5,454) (29,997) (20,405)
Income taxes 7,008 235 1,254 12,663
Income (Loss) From Continuing
Operations Before
Extraordinary Item 10,893 (5,689) (31,251) (33,068)
Discontinued operations:
Income (loss) from operations
(net of income tax expense of
$0, $77, $664 and $1,037) --- (3,753) 2,372 (8,705)
Estimated loss on disposal --- (8,430) --- (8,142)
- - -------------------------------------------------------------------------------
Total Income (Loss) from
Discontinued Operations --- (12,183) 2,372 (16,847)
- - -------------------------------------------------------------------------------
Extraordinary item - loss on
extinguishment of debt (net of tax) (5,223) (3,348) --- (8,455)
- - -------------------------------------------------------------------------------
Net Income (Loss) $5,670 $(21,220) $(28,879) $ (58,370)
===============================================================================
Other comprehensive income
(loss), net of taxes -
Minimum pension liability --- --- --- (702)
Foreign currency
translation adjustments (266) 2,122 (3,346) (483)
- - -------------------------------------------------------------------------------
Comprehensive Income (Loss) $5,404 $(19,098) $(32,225) $(59,555)
===============================================================================
Earnings (loss) per share, basic and
diluted: (See Note 1)
Continuing operations
before extraordinary item $ (.33) $(1.82) $(1.93)
Discontinued operations (.71) .14 (.99)
Extraordinary item (.20) --- (.49)
- - -------------------------------------------------------------------------------
Net loss $(1.24) $(1.68) $(3.41)
- - -------------------------------------------------------------------------------
Weighted average number of
shares outstanding 17,127,859 17,126,192 17,100,359
===============================================================================
The accompanying notes are an integral part of these consolidated financial
statements
Imo Industries Inc. and Subsidiaries
Consolidated Balance Sheets
(Dollars in thousands except par value)
December 31, 1998 1997
- - ------------------------------------------------------------------
Assets
Current Assets
Cash and cash equivalents $ 6,230 $ 3,528
Trade accounts and notes receivable,
less allowance of $1,058 in 1998
and $1,435 in 1997 40,125 53,732
Inventories 53,114 64,888
Deferred income tax assets 16,096 10,088
Prepaid expenses and other current assets 2,525 7,568
- - ------------------------------------------------------------------
Total Current Assets 118,090 139,804
- - ------------------------------------------------------------------
Property, plant and equipment
Land 4,450 5,351
Buildings and improvements 21,063 22,526
Machinery and equipment 41,577 36,734
- - ------------------------------------------------------------------
67,090 64,611
Less accumulated depreciation and
amortization (7,660) (3,202)
- - ------------------------------------------------------------------
Net property, plant and equipment 59,430 61,409
Intangible assets, principally
goodwill, net 177,826 233,054
Investments in and advances to
unconsolidated companies 4,536 4,780
Net assets of discontinued operations --- 14,927
Deferred income tax assets 25,680 ---
Other assets 3,410 9,326
- - ------------------------------------------------------------------
Total Assets $ 388,972 $ 463,300
==================================================================
Liabilities and Shareholders' Equity
Current Liabilities
Notes payable $ 817 $ 3,238
Trade accounts payable 15,350 22,750
Accrued expenses and other liabilities 43,125 53,744
Accrued costs related to discontinued
operations 4,289 4,392
Income taxes payable 5,505 5,929
Current portion of long-term debt 8,486 6,082
- - ------------------------------------------------------------------
Total Current Liabilities 77,572 96,135
- - ------------------------------------------------------------------
Long-term debt 165,843 217,319
Deferred income tax liabilities --- 5,034
Accrued postretirement benefits -
long-term 9,155 17,092
Accrued pension expense and other
liabilities 32,136 37,473
- - ------------------------------------------------------------------
Total Liabilities 284,706 373,053
- - ------------------------------------------------------------------
Shareholders' Equity
Preferred stock: $1.00 par value;
authorized and unissued 5,000,000 shares --- ---
Common stock: $1.00 par value;
authorized 100 and 25,000,000 shares in
1998 and 1997; issued 100 and
17,127,859 in 1998 and 1997 1 17,128
Additional paid-in capital 120,751 106,805
Retained deficit (15,550) (33,016)
Cumulative foreign currency
translation adjustments (936) (670)
- - ------------------------------------------------------------------
Total Shareholders' Equity 104,266 90,247
- - ------------------------------------------------------------------
Total Liabilities and Shareholders'
Equity $ 388,972 $ 463,300
==================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
Imo Industries Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Dollars in thousands)
Post-Acquis. Pre-Acquis.
August January
Year 29, 1, 1997 Year
Ended 1997 to to Ended
December December August December
31, 1998 31, 1997 28, 1997 31, 1996
- - --------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income (loss) $5,670 $(21,220) $ (28,879) $(58,370)
Adjustments to reconcile net income
(loss) to net cash used by continuing
operations:
Discontinued operations --- 12,183 (2,372) 16,847
Depreciation 4,880 3,674 6,747 10,123
Amortization 6,872 2,007 1,867 3,275
Provision for deferred income
taxes 4,668 --- --- 10,000
Extraordinary item 5,223 3,348 --- 8,455
Unusual items --- 5,000 26,344 17,440
Other 49 369 750 1,592
Other changes in operating assets and
liabilities (excluding the effects
of acquisitions and dispositions):
Accounts and notes
receivable 13,549 (6,467) 1,730 (5,440)
Inventories 11,774 1,759 (1,930) 4,300
Accounts payable and
accrued expenses (21,019) (17,028) (9,794) (16,009)
Other operating assets
and liabilities 9,163 (1,608) (3,855) 3,038
- - -------------------------------------------------------------------------------
Net cash provided by (used
by) continuing operations 40,829 (17,983) (9,392) (4,749)
Net cash used by discontinued
operations (1,219) (1,342) (1,377) (10,353)
- - -------------------------------------------------------------------------------
Net Cash Provided by (Used by)
Operating Activities 39,610 (19,325) (10,769) (15,102)
- - -------------------------------------------------------------------------------
INVESTING ACTIVITIES
Net proceeds from sale of
businesses and sales of property,
plant and equipment 32,726 88,024 25,235 12,570
Purchases of property, plant and
equipment (6,049) (3,740) (4,555) (10,032)
Acquisitions, net of cash acquired --- --- --- (7,218)
Net investing activities of
discontinued operations (1,164) (5,104) (3,692) (8,072)
Other 80 (497) 141 63
- - -------------------------------------------------------------------------------
Net Cash Provided by (Used by)
Investing Activities 25,593 78,683 17,129 (12,689)
- - -------------------------------------------------------------------------------
FINANCING ACTIVITIES
Increase (decrease) in notes
payable (2,421) (15,900) 18,786 6,159
Proceeds from long-term borrowings 23,559 129,270 119 266,895
Principal payments on long-term
debt (71,583) (164,719) (25,792) (233,350)
Purchase of minority shares (6,247) --- --- ---
Payment of debt financing costs --- (5,368) (384) (14,660)
Premium payment on repurchase of
long-term debt (5,822) --- --- ---
Other (37) 281 (102) 89
- - -------------------------------------------------------------------------------
Net Cash (Used by) Provided by (62,551) (56,436) (7,373) 25,133
Financing Activities
- - -------------------------------------------------------------------------------
Effect of exchange rate changes on
cash 50 453 (253) 80
- - -------------------------------------------------------------------------------
Increase (Decrease) in Cash and
Cash Equivalents 2,702 3,375 (1,266) (2,578)
Cash and cash equivalents at
beginning of the period 3,528 153 1,419 3,997
- - -------------------------------------------------------------------------------
Cash and Cash Equivalents at End
of the Period $6,230 $ 3,528 $ 153 $ 1,419
===============================================================================
Supplemental disclosures of cash
flow information:
Cash paid during the period for:
Interest $22,443 $ 13,344 $ 19,564 $36,664
Income taxes $ 2,725 $ 1,263 $ 2,006 $ 4,798
The accompanying notes are an integral part of these consolidated financial
statements.
<TABLE>
Imo Industries Inc. and Subsidiaries
Consolidated Statements of Shareholders' Equity
(Dollars in thousands)
<CAPTION>
Cumulative
Foreign Minimum
Additional Currency Pension Unearned
Common Paid-in Retained Translation Liabilities Compen- Treasury
Stock Capital Deficit Adjustmen Adjustment sation Stock Total
- - ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at
January 1, 1996 $18,756 $80,275 $(76,592) $1,037 $(1,801) $ --- $(18,020) $3,655
Net loss --- --- (58,370) --- --- --- --- (58,370)
Foreign currency
translation
adjustments --- --- --- (483) --- --- --- (483)
Minimum pension
liability
adjustment --- --- --- --- (702) --- --- (702)
Restricted shares
issued under
the equity 41 191 --- --- --- (166) --- 66
incentive plans
Other --- --- --- --- --- (553) --- (553)
- - ----------------------------------------------------------------------------------------------------
Balance at
December 31, 1996 18,797 80,466 (134,962) 554 (2,503) (719) (18,020) (56,387)
Net 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
Colfax
Corporation 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 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
Net income --- --- 5,670 --- --- --- --- 5,670
Purchase of
minority interest --- (3,181) 11,796 --- --- --- --- 8,615
New equity
structure upon
merger with Imo
Merger Corp. (17,127) 17,127 --- --- --- --- --- ---
Foreign currency
translation
adjustments --- --- --- (266) --- --- --- (266)
- - ---------------------------------------------------------------------------------------------------
Balance at
December 31,
1998 $ 1 $120,751 $(15,550) $ (936) $ --- $ --- $ --- $104,266
===================================================================================================
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
Notes to Consolidated Financial Statements
Note 1 Significant Accounting Policies
Consolidation: The consolidated financial statements include the accounts of the
Company and its majority-owned subsidiaries. Significant intercompany
transactions have been eliminated in consolidation. The Company uses the equity
method to account for investments in corporations in which it does not own a
majority voting interest but has the ability to exercise significant influence
over operating and financial policies. Prior year financial statements have been
restated to conform with 1998 presentation.
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 and comprehensive income.
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. Revenue is recorded on unshipped, completed products only when the
customer requests to be billed prior to shipment, in which case title and risk
of loss pass to the customer at the billing date.
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 and improvements, 10
to 40 years and machinery and equipment, 3 to 15 years.
Accounting Calendar: Effective January 1, 1998, the Company adopted a "4-4-5"
accounting calendar, which enables all quarters to be more comparable. The first
two months of each quarter have four weeks, and the third month of each quarter
has five weeks.
Earnings Per Share: Basic and diluted net income (loss) per share for 1997 and
1996 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. As a result of the back-end merger on July 2,
1998, earnings per share is not presented for 1998. (See Note 2). Earnings per
share for 1997 and 1996 have not been restated.
Recent Accounting Pronouncements: On January 1, 1998, the Company adopted FASB
Statement No. 130, "Reporting Comprehensive Income," which establishes standards
for the reporting and displaying of comprehensive income. On December 31, 1998,
the Company adopted FASB 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. On December 31,
1998, the Company adopted FASB 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.
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, 1998 and 1997 was $173.1 million and
$217.2 million, respectively, net of respective accumulated amortization of $7.5
million and $1.8 million. The reduction in goodwill is primarily due to the
change in purchase accounting estimates during the first year after acquisition.
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.
Note 2 Acquisition By Colfax Corporation
On August 28, 1997, Colfax Corporation ("Colfax"), previously known as II
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. On July 2, 1998,
Imo Merger Corp., a wholly owned subsidiary of Colfax, merged with and into Imo,
pursuant to a short-form merger under Delaware law ("back-end merger"). The
Company was the surviving corporation in the back-end merger and as result
became a wholly owned subsidiary of Colfax. At December 31, 1998, 886,003 of the
outstanding 1,221,888 common shares held by minority shareholders were converted
to cash. A payable of $2.4 million was accrued at December 31, 1998 for the
remaining 335,885 shares that were not converted as of that date. Total
consideration for the purchase of Imo was $120.7 million.
The Acquisition has been accounted for under the purchase method. The purchase
price was allocated as follows: tangible assets - $314.5 million; other
intangible assets - $8.4 million; and liabilities - $382.7 million. The
allocation was 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 $180.5 million, which is being amortized on a straight-line basis over 40
years.
Included in the purchase liabilities above were approximately $18.6 million for
severance and related costs, and consolidation of certain acquired facilities.
At December 31, 1998 and 1997, approximately $3.1 million and $10.5 million of
these liabilities remained on the balance sheet, respectively. Of the $15.5
million charged against the liability to date, $13.6 million relates to
restructuring and $1.9 million relates to severance payments.
In conjunction with the Acquisition, the Company recorded a charge of $15.8
million including a $10.0 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).
Note 3 Discontinued Operations
In February 1998 and August 1997, the Company sold its Roltra Morse and
Instrumentation businesses, respectively. In April 1997, the Company completed
the sale of the Varo Electronic Systems division. 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 and Comprehensive Income. Roltra Morse On
February 27, 1998, the Company completed the sale of its Roltra Morse business
to Magna International Inc. for cash of $30 million, plus the assumption of
Roltra Morse's debt. The sale price approximated the recorded net book value of
the business. Net proceeds were used to reduce domestic senior debt.
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. 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.
The Company retained certain liabilities related to the Electro-Optical Systems
business of approximately $24 million. 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.
At December 31, 1998, there are no assets or liabilities in discontinued
operations. Currently the Company has accruals for liabilities assumed upon the
disposal of the discontinued operations.
Net assets and liabilities of the Discontinued Operations consist of the
following:
December 31 (Dollars in thousands) 1998 1997
- - -----------------------------------------------------------
Current Assets:
Cash $--- $ 843
Receivables --- 13,799
Inventories --- 12,357
Other current assets --- 5,083
- - -----------------------------------------------------------
--- 32,082
- - -----------------------------------------------------------
Current Liabilities:
Notes payable --- 15,694
Trade accounts payable --- 22,043
Other current liabilities --- 6,522
- - -----------------------------------------------------------
--- 44,259
- - -----------------------------------------------------------
Net Current Assets (Liabilities) --- (12,177)
- - -----------------------------------------------------------
Long-term Assets:
Property --- 21,758
Other long-term assets --- 14,220
- - -----------------------------------------------------------
--- 35,978
Long-term Liabilities --- 8,874
- - -----------------------------------------------------------
Net Long-term Assets --- 27,104
- - -----------------------------------------------------------
Net Assets $--- $ 14,927
===========================================================
Net assets related to the Roltra Morse and Turbomachinery businesses were $15.5
million and $0.1 million as of December 31, 1997. The Electro-Optical Systems
business contributed $0.7 million of net liabilities as of December 31, 1997.
Total long-term debt of the Discontinued Operations amounted to $6.0 million as
of December 31, 1997. Of this amount, $1.2 million represented the current
portion of long-term debt.
A condensed summary of operations for the Discontinued Operations is as follows:
Post-Acquis. Pre-Acquis.
August 29, January 1,
1997 to 1997 to
Year Ended December 31 December 31, August 28,
(Dollars in thousands) 1998 1997 1997 1996
- - ---------------------------------------------------------------------
Net Sales $14,355 $30,257 $117,730 $181,948
- - ---------------------------------------------------------------------
Income (loss)
from operations
before income
taxes and
minority
interest --- (3,736) 3,025 (7,963)
- - ---------------------------------------------------------------------
Income taxes --- 77 664 1,037
Minority interest --- (60) (11) (295)
- - ---------------------------------------------------------------------
Income (loss)
from operations $ --- $(3,753) $ 2,372 $(8,705)
=====================================================================
The income (loss) from operations of the Discontinued Operations for 1998, 1997
and 1996 includes allocated interest expense of $0.2 million, $2.7 million ($2.4
million - pre-Acquisition), and $4.5 million, respectively. Allocated interest
expense 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. The
operating loss of $0.9 million for Roltra Morse for the two months ended
February 28, 1998 was accrued as a portion of the estimated loss on disposal as
of December 31, 1997.
Roltra Morse
The Roltra Morse business had operating losses of $0.9 million, $6.7 million and
$13.8 million for 1998, 1997 and 1996, respectively.
The 1997 operating loss included an unusual charge of $0.7 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.
Instrumentation
The Instrumentation business had income from operations of $5.3 million and $5.1
million for 1997 and 1996, respectively. Operating income in 1996 included
unusual charges of $0.9 million related to restructuring of operations in
Europe.
Electro-Optical Systems
The Electro-Optical Systems business had income from operations of $0.8 million
and $0.4 million for 1997 and 1996, respectively. The income in 1997 and 1996
offset increases in estimated reserve requirements in those respective periods.
Note 4 Restructuring Plans
Asset Sales
1998 Assets Sales: On February 27, 1998, the Company sold its Roltra Morse
business segment to Magna International. During 1998, the Company also completed
the sales of certain non-operating real estate for net proceeds of $0.6 million.
1997 Asset Sales: On August 29, 1997, the Company completed the sale of its
Instrumentation business segment to Danaher Corporation for proceeds of $85
million, which approximated its net book value. In April 1997, the Company
completed the sale of its Varo Electronic Systems division to a small defense
contractor for $12 million. The sale of this business completed the sale of the
Electro-Optical Systems business. In 1997, the Company also completed sales of
certain of its non-operating real estate for total proceeds of approximately
$14.1 million.
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 Enterprises MPT
Corp. Steven M. Rales and Mitchell P. Rales collectively own 75% of American
Enterprises MPT Corp. 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.
Cost Reduction Programs
1997 Program
In connection with the Acquisition, the Company implemented a cost reduction
program. The cost of this program was $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, $1.2 million
and $6.9 million of costs for the Company's Fluid Handling and Industrial
Positioning segments, respectively, related to severance and termination
benefits resulting from headcount reductions and the consolidation of certain
manufacturing facilities. The required cash outlay related to this program was
$8.1 million in 1997, $7.4 million in 1998 and the expected cash requirements
during 1999 are $3.1 million.
Note 5 Inventories
Inventories are summarized as follows:
December 31 (Dollars in 1998 1997
thousands)
- - ---------------------------------------------------------------
Finished products $ 18,926 $ 18,823
Work in process 17,880 23,218
Materials and supplies 17,545 23,481
- - ---------------------------------------------------------------
54,351 65,522
Less customers' progress payments (1,237) (634)
- - ----------------------------------------------------------------
$ 53,114 $ 64,888
===============================================================
Note 6 Accrued Expenses and Other Liabilities
Accrued expenses and other liabilities consist of the following:
December 31 (Dollars in thousands) 1998 1997
- - ---------------------------------------------------------------
Accrued product warranty costs $ 1,423 $ 1,844
Accrued litigation and claims costs 15,003 16,683
Payroll and related items 8,845 11,836
Accrued interest payable 2,014 3,126
Accrued restructuring costs 3,126 11,970
Accrued divestiture costs 1,502 1,835
Accrued environmental costs 1,934 2,190
Advance customer payments 1,363 223
Other 7,915 4,037
- - ---------------------------------------------------------------
$ 43,125 $ 53,744
===============================================================
Note 7 Unusual Items
1997
During the year ended December 31, 1997, the Company recorded unusual charges of
$31.3 million ($1.83 per share) in income from continuing operations. The first
eight months of 1997 included an unusual charge of $10.5 million relating to the
judgment against the Company in favor of International Insurance Company
("International"), awarding International $11.2 million, plus interest from
March 1995. The Company recorded a charge to income in the first quarter of 1997
of $12.9 million as an unusual item, which represented the amount of the
judgment plus interest to date. On July 15, 1997, the Company agreed to settle
with International by dropping an appeal and paid a reduced amount on July 30,
1997 in complete settlement of all outstanding amounts. As a result of the
settlement, the Company recorded a favorable adjustment of $2.4 million as an
unusual item in the second quarter of 1997.
In addition, the Company recorded unusual charges of $20.8 million in the third
quarter of 1997. Of these charges, $15.8 million related to the sale of the
Company and represented indirect and general expenses incurred by the Company in
connection with the sale process which were paid in 1997, and $5 million related
to an additional legal provision concerning certain litigation matters.
1996
During the fourth quarter of 1996, the Company recognized unusual charges of
$17.4 million ($1.02 per share) in income from continuing operations. These
charges include $0.3 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.
Note 8 Income Taxes
The components of income tax expense from continuing operations are:
Post-Acquis. Pre-Acquis.
August 29, January 1,
1997 to 1997 to
Year Ended December 31 December 31, August 28,
(Dollars in thousands) 1998 1997 1997 1996
--------------------------------------------------------------------
Current:
Federal $ 233 $ --- $ --- $ ---
Foreign 1,801 94 994 2,386
State 306 141 260 277
- - --------------------------------------------------------------------
2,340 235 1,254 2,663
- - --------------------------------------------------------------------
Deferred:
Federal 4,668 --- --- 10,000
Foreign and State --- --- --- ---
- - --------------------------------------------------------------------
4,668 --- --- 10,000
- - --------------------------------------------------------------------
$7,008 $235 $1,254 $12,663
====================================================================
Income tax expense for 1997 and 1996 from discontinued operations was $.7
million, and $1 million, respectively. There was no income tax expense for
discontinued operations during 1998.
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, 1998 and
1997 are as follows:
December 31
(Dollars in thousands) 1998 1997
- - ------------------------------------------------------------
Current Long-term Current Long-term
- - ------------------------------------------------------------
Deferred tax assets:
Postretirement
benefit obligation $ 234 $ 3,204 $ 595 $ 5,809
Expenses not
currently
deductible 17,066 7,720 28,911 7,280
Net operating loss
carryover --- 32,299 --- 35,436
Tax credit
carryover --- 4,471 --- 2,783
- - ------------------------------------------------------------
Total deferred tax assets 17,300 47,694 29,506 51,308
Valuation allowance for
deferred tax assets (1,204) (516)(19,418) (33,839)
- - ------------------------------------------------------------
Net deferred tax assets 16,096 47,178 10,088 17,469
- - ------------------------------------------------------------
Deferred tax liabilities:
Tax over book
depreciation --- 14,487 --- 15,271
Other --- 7,011 --- 7,232
- - ------------------------------------------------------------
Total deferred tax
liabilities --- 21,498 --- 22,503
=============================================================
Net deferred tax
assets (liabilities) $16,096 $ 25,680 $10,088 $(5,034)
=============================================================
The net deferred tax asset currently recorded at December 31, 1998 is $41.8
million, a level where management believes that it is more likely than not that
the tax benefit will be realized. Although the Company has a history of prior
losses, these losses were primarily attributable to divested businesses and
unusual items.
The Company establishes valuation allowances in accordance with the provisions
of FASB Statement No. 109, "Accounting for Income Taxes." The Company
continually reviews the adequacy of the valuation allowance and is recognizing
these benefits only as reassessment indicates that it is more likely than not
that the benefits will be realized. The valuation allowance was $1.7 million and
$53.3 million for December 31, 1998 and December 31, 1997, respectively. In
1998, the Company reduced its valuation reserve by $51.6 million due to its
belief that it is more likely than not that these tax benefits will be realized
in future years. The revision of the valuation reserve is due to the change in
purchase accounting estimates during the first year after acquisition.
At December 31, 1998, unremitted earnings of foreign subsidiaries were
approximately $29 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 $1.2 million.
The components of income (loss) from continuing operations before income taxes
and extraordinary item:
Post-Acquis. Pre-Acquis.
August 29, January 1,
1997 to 1997 to
Year Ended December 31 December 31, August 28,
(Dollars in thousands) 1998 1997 1997 1996
- - -----------------------------------------------------------------------
United States $ 7,963 $(7,612) $(29,023) $(22,663)
Foreign 9,938 2,158 (974) 2,258
=======================================================================
$17,901 $(5,454) $(29,997) $(20,405)
=======================================================================
U.S. income tax expense (benefit) at the statutory tax rate is reconciled
below to the overall U.S. and foreign income tax expense.
Post-Acquis. Pre-Acquis.
August 29, January 1,
1997 to 1997 to
Year Ended December 31 December 31, August 28,
(Dollars in thousands) 1998 1997 1997 1996
-------------------------------------------------------------------
Tax at U.S. federal
income tax rate $ 6,265 $ (1,909) $ (10,499) $ (7,142)
State taxes, net of
federal income
tax effect 198 92 169 188
Impact of foreign tax
rates and credits (1,677) 228 (660) (331)
Net U.S. tax on
distributions of
current foreign
earnings 266 355 --- 755
Goodwill amortization
and write-off 1,995 458 222 4,276
Change in valuation --- 1,720 7,472 12,390
reserve
Nondeductible foreign
losses --- 89 1,017 1,914
Other (39) (798) 3,533 613
====================================================================
Income tax expense $ 7,008 $ 235 $ 1,254 $12,663
====================================================================
The Company has net operating loss carryforwards of approximately $92.3 million
expiring in years 2002 through 2012, and minimum tax credits of approximately
$2.8 million, which may be carried forward indefinitely. Tax credit
carryforwards include foreign tax credits of approximately $1.7 million that
expire beginning in the year 2002. These carryforwards are available to offset
future federal taxable income, subject to the Section 382 limitations, due to
the Acquisition.
Note 9 Long-Term Debt and Notes Payable
Long-Term Debt
Long-term debt of continuing operations consists of the following:
December 31 (Dollars in thousands) 1998 1997
- - ------------------------------------------------------------------
Term Loans (1) (2) $46,538 $59,000
Revolver Loans (1) (2) 41,000 25,000
Due to Amerdrives International, L.P. (3) 5,000 ---
Senior subordinated notes with interest
at 11.75%, due May 1, 2006, net of
unamortized discount of $0.9 million
in 1998 and $1.7 million in 1997 77,591 133,381
Other 4,200 6,020
- - ------------------------------------------------------------------
174,329 223,401
Less current portion (8,486) (6,082)
- - ------------------------------------------------------------------
$165,843 $217,319
==================================================================
(1)Quarterly principal payments are as follows: $1.9 million due quarterly
November 29, 1998 to August 29, 1999; $2.2 million due quarterly November 29,
1999 to August 29, 2000; $3.2 million due quarterly November 29, 2000 to
August 29, 2001; and $4.8 million due quarterly November 29, 2001 to August
29, 2002. All revolver balances are due on August 29, 2002.
(2)These loans bear interest at prime plus .50%, or LIBOR plus 1.75%. 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.)
(3)The majority shareholders of Ameridrives International, L.P. are also
the majority shareholders of the Company. This loan bears interest at
LIBOR + 1.25%.
- - -------------------------------------------------------------------
On August 29, 1997, the Company completed the refinancing of its domestic senior
debt. Under terms of the refinancing, the Company entered into an agreement for
$143 million in senior secured credit facilities with a group of lenders (the
"New Credit Agreement"). Initial borrowings under the New Credit Agreement were
approximately $127.1 million. Proceeds of the New Credit Agreement were used to
refinance all obligations under the Company's previous credit agreement. The
cost of the implementation of the New Credit Agreement will be amortized over
its term.
The New Credit Agreement, which is secured by the assets of the Company's
domestic operations and all or a portion of the stock of certain subsidiaries,
provided for a five year, $70 million revolving credit facility (which includes
a $30 million letter of credit sub-facility), and a $73 million term loan
facility ("Term Loans") amortizing to August 29, 2002. Proceeds from the August
29, 1997 sale of the Instrumentation business were used to repay amounts on the
revolving credit facility and Term Loans of $54.2 million and $13.9 million,
respectively (See Note 3). At the same time, and in keeping with the terms of
the New Credit Agreement, the $73 million term loan facility was reduced to $59
million, which reduced the total facility to $129 million. On February 27, 1998,
the Company completed the sale of its Roltra Morse business to Magna
International Inc. (See Note 3). 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, third and fourth quarters 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, $9.5 million and $14 million,
respectively. As a result of the early extinguishment of these Notes, and the
prepayment of a portion of the term loan facility with the proceeds from the
Roltra Morse sale, extraordinary charges of $5.6 million, $1.1 million and $1.3
million were recognized in the first, third and fourth quarters of 1998.
The aggregate annual maturities of long-term debt from continuing operations, in
thousands, for the four years subsequent to 1999 are:
(Dollars in thousands)
- - ------------------------------------------------------------
2000 $10,362
2001 14,885
2002 60,814
2003 470
Thereafter 79,312
- - ------------------------------------------------------------
Total $ 165,843
============================================================
Total debt of the Discontinued Operations, in thousands, amounted to $21,652 as
of December 31, 1997. Of this amount, $4,797 represent the long-term portion.
There was no remaining debt of Discontinued Operations at December 31, 1998.
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 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, 1998.
The Notes are not redeemable prior to May 1, 2001. 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, as a
result of the Acquisition, the Company offered to purchase all of the Notes at
101% of the principal amount, as required under the indenture governing the
Notes. 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.
On February 4, 1999, the Company purchased in the open market at a premium, $3.5
million of the Notes. The fair value of the remaining $75 million of Notes on
February 4, 1999, based on market bid prices, was $79.5 million.
The twelve months ended December 31, 1998, include an extraordinary charge of
$5.2 million net of tax, representing charges related to the early
extinguishment of the Company's debt under its current senior secured credit
facilities and its Notes, as well as the write-off of previously deferred loan
costs.
An extraordinary charge of $3.3 million was recorded in 1997. In the third
quarter of 1997, a $0.3 million extraordinary charge consisting of the write-off
of deferred debt expense was recorded related to the repayment of a portion of
the Term Loans under the New Credit Agreement with the proceeds from the sale of
the Instrumentation business. An extraordinary charge of $3 million was recorded
in the fourth quarter of 1997, as a result of the open market purchase of $19.9
million of the Notes in November 1997. This charge represents a cash outlay of
$2.3 million incurred in connection with the early extinguishment of the debt as
well as the write-off of previously deferred loan costs.
An extraordinary charge of $8.5 million 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.
Notes Payable
The Company's continuing operations had $6 million in foreign short-term credit
facilities with amounts outstanding at December 31, 1998 of $0.8 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. As of December 31, 1998, the
Company had $15.6 million of outstanding standby letters of credit.
Note 10 Shareholders' Equity
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.
On July 2, 1998, Colfax Corporation's wholly-owned subsidiary, Imo Merger Corp.,
merged with and into Imo, pursuant to a short-form merger under Delaware law
("back-end merger"). Imo was the surviving corporation in the back-end merger
and as a result became a wholly-owned subsidiary of Colfax. At the merger date,
Imo assumed the capital structure of Imo Merger Corp., of 100 shares of common
stock, par value $.01 per share.
Employees Stock Savings Plan
Prior to August 1, 1997, up to 1,600,000 shares of the Company's common stock
were reserved for issuance under the Company's Employee Stock Savings Plan
("ESSP"). The Committee of the ESSP approved a policy change, effective August
1, 1997, in that employer matching contributions to the ESSP are to be paid in
cash rather than through issuance of Company common stock. As of August 1, 1997,
this plan policy change effectively eliminated the restriction on the use of
authorized but unissued shares of common stock.
Common Stock Warrants
In July 1993, the Company issued warrants to purchase 200,000 shares of its
common stock at $9.02 per share (subject to adjustment in certain events), to
one of its senior lenders in connection with the restructuring of its senior
credit facilities. The warrants are exercisable on or before December 31, 1998.
Treasury Stock
On August 29, 1997, the Company canceled the shares of treasury stock
outstanding as of that date totaling 1,672,788 shares of the Company's common
stock with a cost basis of approximately $18 million.
Note 11 Operations by Industry Segment and Geographic Area
The Company classifies its continuing operations into two business segments:
Fluid Handling and Industrial Positioning. 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. Information about the business of the Company by
business segment, foreign operations and geographic area is presented below:
Year Ended December 31
(Dollars in thousands) 1998 1997 1996
- - -------------------------------------------------------------------
Net Sales
Fluid Handling $112,768 $112,486 $107,567
Industrial Positioning 196,102 204,376 201,944
- - ------------------------------------------------------------------
Total net sales $308,870 $316,862 $309,511
- - ------------------------------------------------------------------
Segment operating income
Fluid Handling $ 21,462 $14,503 $11,229
Industrial Positioning 26,323 12,984 16,917
- - ------------------------------------------------------------------
Total segment operating income 47,785 27,487 28,146
- - ------------------------------------------------------------------
Equity in income (loss) of
unconsolidated companies 31 (519) (32)
Unallocated corporate expenses (1) (9,275) (37,703) (23,988)
Net interest expense (20,640) (24,716) (24,531)
- - ------------------------------------------------------------------
Income (loss) from continuing
operations before income taxes
and extraordinary item $ 17,901 $(35,451) $(20,405)
==================================================================
A reconciliation of segment operating income to income from operations follows:
Year Ended December 31
(Dollars in thousands) 1998 1997 1996
- - ----------------------------------------------------------------
Segment operating
income (1) $ 47,785 $27,487 $ 28,146
Unallocated corporate
expenses (2) (9,275) (37,703) (23,988)
Other expense --- 177 355
- - ----------------------------------------------------------------
Income (loss) from operations $ 38,510 $ (10,039) $4,513
================================================================
(1)Segment operating income includes $0.3 million of unusual items related to
the Industrial Positioning segment for the year ended December 31, 1996.
(2)Unallocated corporate expenses include unusual items of $31.3 million and
$17.1 million for the years ended December 31, 1997 and 1996, respectively.
Year Ended December 31
(Dollars in thousands) 1998 1997 1996
- - ------------------------------------------------------------
Identifiable assets
Fluid Handling $ 58,090 $66,932 $73,806
Industrial Positioning 105,169 116,488 180,674
Corporate 225,713 264,953 27,766
Discontinued Operations:
Electro-Optical --- (672) 14,356
Instrumentation --- --- 22,516
Roltra Morse --- 15,489 11,331
Turbomachinery --- 110 473
- - ------------------------------------------------------------
Total identifiable assets $388,972 $463,300 $330,922
============================================================
Depreciation and amortization
Fluid Handling $ 1,651 $ 3,695 $ 4,114
Industrial Positioning 2,930 8,485 7,773
Corporate 7,171 2,115 1,511
- - ------------------------------------------------------------
Total depreciation and
amortization $11,752 $14,295 $13,398
============================================================
Capital expenditures
Fluid Handling $ 2,768 $ 3,706 $ 4,568
Industrial Positioning 3,233 4,477 5,253
Corporate 48 112 211
- - ------------------------------------------------------------
Total capital expenditures $ 6,049 $ 8,295 $10,032
============================================================
Identifiable assets of corporate at December 31, 1998 and 1997 include goodwill
of $173.1 million and $217.2 million related to the Acquisition, respectively
(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 $6.7 million and $55 million of
goodwill for the Fluid Handling and Industrial Positioning segments,
respectively, and goodwill of $0.6 million and $9.5 million for the
Instrumentation and Roltra Morse discontinued segments, respectively.
The continuing operations of the Company on a geographic basis are as follows:
Year Ended December 31
(Dollars in thousands) 1998 1997 1996
- - ------------------------------------------------------------
Net sales
United States $203,685 $214,150 $210,196
Foreign 105,185 102,712 99,315
- - ------------------------------------------------------------
Total net sales $308,870 $316,862 $309,511
============================================================
Segment operating income
United States $34,522 $25,050 $20,948
Foreign 13,262 2,437 7,198
- - ------------------------------------------------------------
Total segment operating
income $47,784 $27,487 $28,146
============================================================
Identifiable assets
Continuing Operations:
United States $327,720 $380,263 $196,373
Foreign 61,252 68,110 85,873
Discontinued Operations:
United States --- (562) 23,210
Foreign --- 15,489 25,466
- - ------------------------------------------------------------
Total identifiable assets $388,972 $463,300 $330,922
============================================================
Export sales
Asia $5,277 $ 5,011 $ 5,724
Canada 3,801 4,878 3,236
Europe 3,288 2,745 3,133
Latin America 1,241 779 906
Middle East & North
Africa 769 604 1,943
South America 7,031 7,349 6,739
Other 3,440 2,236 3,333
- - ------------------------------------------------------------
Total export sales $ 24,847 $23,602 $25,014
============================================================
No one customer accounted for 10% or more of consolidated sales in 1998, 1997 or
1996.
Note 12 Pension Plans and Other Postretirement Benefits
The Company and its subsidiaries have various pension plans covering
substantially all of their employees. Benefits under these pension plans for
substantially all U.S. employees ceased to accrue on January 31, 1999, when the
Company froze benefits under its primary pension plan. At the same time, the
Company increased the length of service credit for the pension plan by 20% and
enhanced its 401k plan. Curtailment of the pension plan resulted in a
curtailment gain of $6.5 million, while the increased length of service resulted
in a loss of $4.9 million. Both changes were contemplated at acquisition and
have been recorded as purchase accounting adjustments.
It is the general policy of the Company to fund its pension plans in conformity
with requirements of applicable laws and regulations. Net Periodic pension cost
was $0.7 million in 1998, $3.8 million in 1997 and $4.3 million in 1996, and
includes amortization of prior service cost and transition amounts for periods
of 5 to 15 years. The 1998, 1997 and 1996 expense includes costs related to
retained pension liabilities of discontinued operations.
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.
For 1997, amounts related to pre-Acquisition and post-Acquisition have not been
separated due to materiality and practicality.
Pension Benefits Other Benefits
- - ---------------------------------------------------------------
Year Ended December 31
(Dollars in thousands) 1998 1997 1998 1997
- - ---------------------------------------------------------------
Change in benefit obligation:
Benefit obligation at
beginning of year $208,778 $213,011 $9,345 $10,210
Service cost 2,190 2,561 9 9
Interest cost 15,169 14,186 674 725
Amendments 241 --- 85 ---
Actuarial loss (gain) 13,420 6,002 1,027 (463)
Purchase accounting &
Instrumentation
business sale (7,292) (9,616) --- ---
Benefits paid (13,432) (17,366) (1,136) (1,136)
- - ---------------------------------------------------------------
Benefit obligation at
end of year $219,638 $208,778 $10,004 $9,345
- - ---------------------------------------------------------------
Change in plan assets:
Fair value of plan
assets at beginning of
Year $201,638 $197,689 --- ---
Actual return on plan
assets 25,424 26,242 --- ---
Employer contribution 830 2,262 --- ---
Benefits paid (13,150) (13,595) --- ---
Instrumentation business
sale --- (10,960) --- ---
- - ---------------------------------------------------------------
Fair value of plan
assets at end of year $214,742 $201,638 --- ---
- - ---------------------------------------------------------------
Funded status $ (4,896) $(7,140) $(10,004) $(9,345)
Unrecognized actuarial loss (340) --- 508 ---
Unrecognized prior
service cost 55 --- 85 ---
- - ----------------------------------------------------------------
Accrued benefit cost $ (5,181) $(7,140) $ (9,411) $(9,345)
================================================================
Pension Benefits Other Benefits
- - ---------------------------------------------------------------
Year Ended December 31
(Dollars in thousands) 1998 1997 1998 1997
- - ---------------------------------------------------------------
Discount rate 6.75% 7.5% 6.75% 7.25%
Expected return on plan
assets 9.0% 9.0% --- ---
Rate of compensation
increase 5.3% 5.3% --- ---
For measurement purposes, a 5% annual rate of increase in the per capita cost of
covered health care benefits was assumed for 1999 and in all future years.
Pension Benefits Other Benefits
- - ---------------------------------------------------------------
Year Ended December 31
(Dollars in thousands) 1998 1997 1998 1997
- - ---------------------------------------------------------------
Components of net periodic benefit cost:
Service cost $2,367 $2,738 $9 $9
Interest cost 15,169 14,711 674 725
Expected return on plan
assets (16,834) (25,678) --- ---
Amortization of prior
service cost (8) 11,689 --- (652)
Curtailment --- 369 --- ---
===============================================================
Net periodic benefit cost $694 $3,829 $683 $82
===============================================================
The projected benefit obligation, accumulated benefit obligation, and fair value
of plan assets for the pension plan with accumulated benefit obligations in
excess of plan assets were $203.4 million, $203.4 million and $197.8 million,
respectively, as of December 31, 1998, and $7.8 million, $7.4 million and $4.8
million, respectively, as of December 31, 1997.
Assumed health care cost trend rates have a significant effect on the amounts
reported for the health care plan. A one-percentage-point change in assumed
health care cost trend rates would have the following effects:
1-Percentage 1-Percentage
(Dollars in thousands) Point Increase Point Decrease
- - -------------------------------------------------------------
Effect on total of
service and interest
cost components $54 ($46)
Effect on the
postretirement benefit
Obligation $744 ($640)
Plan assets at December 31, 1998 are invested in fixed income investments and
equity securities whose values are subject to fluctuations of the securities
market.
The Company maintains a defined contribution plan 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
plan are based on 25% of the first 6% of each participant's pre-tax
contribution. The Company's expense for 1998, 1997 and 1996 was $.4 million, $.6
million and $.7 million, respectively. Effective February 1, 1999, company
contributions are based on 50% of the first 6% of each participant's pre-tax
contribution. Effective January 1, 1999, the company will contribute 3% of all
employees' salary (including non-contribution plan participants) to the defined
contribution plan.
Note 13 Leases
The Company leases certain manufacturing and office facilities, equipment, and
automobiles under long-term leases. Future minimum rental payments required
under operating leases of continuing operations that have initial or remaining
noncancelable lease terms in excess of one year, as of December 31, 1998, are:
(Dollars in thousands)
- - ------------------------------------------------------------
1999 $ 3,686
2000 2,779
2001 2,383
2002 1,890
2003 1,528
Thereafter 3,265
- - ------------------------------------------------------------
Total minimum lease payments $ 15,531
============================================================
Total rental expense under operating leases charged against continuing
operations was $7.3 million in 1998, $7.8 million in 1997 and $7.2 million in
1996.
Note 14 Foreign Exchange Contracts
The Company periodically enters into foreign exchange contracts for purposes of
hedging its exposure to foreign currency exchange rate fluctuations. These
contracts hedge firm commitments between the Swedish Krona and the German
Deutschmark and the United States Dollar. At December 31, 1998, the Company had
foreign currency contracts with notional amounts totaling approximately $2.4
million with various expiration dates through September 1999. The amount of
deferred gain or loss associated with these contracts is not material.
All foreign currency derivative agreements are with major commercial banks;
therefore the risk of credit loss from nonperformance by the banks is considered
by management to be minimal. The Company evaluates its exposure to credit loss
on an ongoing basis.
Note 15 Contingencies
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 7,000
claimants who allege injury caused by exposure to asbestos. Although neither the
Company nor any of its subsidiaries has ever been a producer or direct supplier
of asbestos, it is alleged that the industrial and marine products sold by the
Company and the subsidiary named in such complaints contained components which
contained asbestos. Suits against the Company and its subsidiary have been
tendered to their insurers, who are defending under their stated reservation of
rights. In addition, the Company and the subsidiary are named in cases involving
approximately 30,000 claimants which 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 is a defendant in a lawsuit brought in the United States District
Court for the District of New Jersey alleging failure in performance of
equipment sold in 1986 by the Company's former Delavel Turbine division. The
complaint seeks damages in excess of $12 million. The Company believes that
there are legal and factual defenses to the claim 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 has permitted additional discovery to determine
whether any other damages exist which plaintiff may be entitled to seek at a
trial, but the Company believes that there are legal and factual defenses to the
claims and intends to defend the action vigorously.
On June 3, 1997 the Company was served with a complaint in a case brought in the
Superior Court of New Jersey which alleges damages in excess of $10 million plus
interest incurred as a result of losses under a Government Contract Bid
transferred in connection with the sale of the Company's former Electro-Optical
Systems business. The Electro-Optical Systems business was sold in a transaction
that closed on June 2, 1995. The sales contract provided certain representations
and warranties as to the status of the business at the time of sale. The
complaint alleges that the Company failed to provide notice of a "reasonably
anticipated loss" under a bid that was pending at the time of the transfer of
the business and therefore a representation was breached. The contract was
subsequently awarded to the Company's Varo subsidiary and thereafter transferred
to the buyer. The case is in the preliminary stages of pleading but the Company
believes that there are legal and factual defenses to the claims and intends to
defend the action vigorously.
The 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 a
minor contributor at each site. Accordingly, the Company believes that the
portion of remediation costs that it will be responsible for will not be
material.
The Company is also involved in various other pending legal proceedings arising
out of the ordinary course of the Company's business. None of these legal
proceedings is expected to have a material adverse effect on the financial
condition of the Company. With respect to these proceedings and the litigation
and claims described in the preceding paragraphs, management of the Company
believes that it either will prevail, has adequate insurance coverage or has
established appropriate reserves to cover potential liabilities. There can be no
assurance, however, as to the ultimate outcome of any of these matters, and if
all or substantially all of these legal proceedings were to be determined
adversely to the Company, there could be a material adverse effect on the
financial condition of the Company.
The Company is self-insured for a portion of its product liability and certain
other liability exposures. Depending on the nature of the liability claim, and
with certain exceptions, the Company's maximum self-insured exposure ranges from
$250,000 to $500,000 per claim with certain maximum aggregate policy limits per
claim year. With respect to the exceptions, which relate principally to diesel
and turbine units sold before 1991, the Company's maximum self-insured exposure
is $5 million per claim.
Report of Independent Public Accountants
To the Shareholders and Board of Directors of
Imo Industries Inc.:
We have audited the accompanying consolidated balance sheets of Imo Industries
Inc. (a Delaware corporation) and subsidiaries as of December 31, 1998 and 1997,
and the related consolidated statements of income and comprehensive income,
shareholders' equity and cash flows for the year ended December 31, 1998, 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.) 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, 1998 and 1997, and the results of their
operations and their cash flows for the year ended December 31, 1998, 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), in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Richmond, Virginia
March 5, 1999
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,
1998 and 1997, and for the year ended December 31, 1998, 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 5, 1999. Our audits were made for the purpose of
forming an opinion on the basic consolidated financial statements taken as a
whole. Schedule II filed as a part of the Company's Form 10-K Annual Report is
the responsibility of the Company's management and is presented for purposes of
complying with the Securities and Exchange Commission's rules and is not a part
of the basic consolidated financial statements. This schedule has been subjected
to the auditing procedures applied in the audit of the basic consolidated
financial statements and, in our opinion, fairly states, in all material
respects, the financial data required to be set forth therein in relation to the
basic consolidated financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Richmond, Virginia
March 5, 1999
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Imo Industries Inc.
We have audited the consolidated statement of income, shareholders equity and
cash flows of Imo Industries Inc. and subsidiaries for the year ended December
31, 1996. Our audit also included the financial statement schedule listed in the
Index at Item 14(a) for this same period. 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
audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated results of operations and cash flows of
Imo Industries Inc. and subsidiaries for the year 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.
ERNST & YOUNG LLP
Princeton, New Jersey
February 19, 1997, except for Note 3 as to which
the date is February 2, 1998
Imo Industries Inc. and Subsidiaries
Quarterly Financial Information (Unaudited)
Quarterly financial information for 1998 and 1997 is as follows:
1st 2nd 3rd 4th
1998 (Dollars in thousands except Quarter Quarter Quarter Quarter
per share amounts) (a)
Net Sales $ 83,031 $81,084 $75,464 $ 69,291
Gross profit 26,745 26,447 24,047 23,052
Income (loss)from continuing
operations before extraordinary item 3,324 3,842 3,772 (45)
Extraordinary Item (5,603) --- (1,114) 1,494
Net income (loss) (2,279) 3,842 2,658 1,449
Pre-Acquis. Post-Acquis.
July August
1, 29,
1st 2nd 1997 to 1997 to 4th
Quarter Quarter August September Quarter
28, 30,
1997 1997
1997 (Dollars in thousands except
per share amounts) (a)
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)
(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.
SCHEDULE II
IMO INDUSTRIES INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(Dollars in thousands)
THREE-YEAR PERIOD ENDED DECEMBER 31, 1998
- - --------------------------------------------------------------------------------
ADDITIONS
BALANCE -------------------
AT CHARGED BALANCE
BEGINNING TO COSTS OTHER - DEDUCTIONS AT END
OF YEAR EXPENSES DESCRIBE - DESCRIBE OF YEAR
YEAR ENDED DECEMBER 31, 1998:
Allowance for doubtful $ 1,435 $ (158) $ 3 (2) $ 229 (3) $1,058
accounts (7) (1)
======== ======== ======== ======== ========
Inventory valuation $ 9,508 $ 974 $ 53 (2) $ 3,249 (5) $7,222
allowance 64 (1)
======== ======== ======== ======== ========
Valuation allowance for
deferred tax assets $53,257 $51,537 (7) $1,720
======== ======== ======== ======== ========
Accrued product warranty $ 1,844 $ 1,224 $ 46 $ 1,691 (4) $1,423
liability
======== ======== ======== ======== ========
YEAR ENDED DECEMBER 31, 1997:
Allowance for doubtful
accounts $1,346 $ 1,813 $ 32 (2) $ 295 (3) $1,435
55 (1)
1,406 (6)
======== ======== ======== ======== ========
Inventory valuation $9,929 $13,418 $ 360 (2) $3,613 (5) $9,508
allowance 382 (1)
10,204 (6)
======== ======== ======== ======== ========
Valuation allowance for
deferred tax assets $44,065 $9,192 $ --- $ --- $53,257
======== ======== ======== ======== ========
Accrued product warranty $2,007 $1,815 $ --- $ 28 (1) $1,844
liability 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 tax assets $31,675 $12,390 $ --- $ --- $44,065
======== ======== ======== ======== ========
Accrued product warranty $2,159 $2,473 $ --- $2,458 (4) $2,007
liability 143 (2)
24 (1)
======== ======== ======== ======== ========
(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. deferred tax
benefits
(6) In conjunction with the acquisition of the Company and purchase accounting
adjustments as of August 28, 1997, the reserves were reset to zero.
(7) True up balances and reduce valuation reserve due to management's belief
that it is more likely than not that deferred tax benefits will be utilized
in the future.
SIXTH AMENDMENT TO CREDIT
AND GUARANTY AGREEMENT
THIS SIXTH AMENDMENT, dated as of October 15, 1998 (this "Amendment") to
the Existing Credit Agreement referred to below is among IMO INDUSTRIES INC., a
Delaware corporation (the "Borrower"), II ACQUISITION CORP., a Delaware
corporation (the "Parent") and the Lenders (as defined below) parties hereto.
W I T N E S S E T H:
WHEREAS, the Borrower, the Parent, certain financial institutions from
time to time parties thereto (collectively, the "Lenders"), The Bank of Nova
Scotia, as the Administrative Agent and NationsBanc Capital Markets, Inc., as
the Syndication Agent have entered into the Credit and Guaranty Agreement, dated
as of August 29, 1997 (as amended, supplemented, amended and restated or
otherwise modified prior to the date hereof, the "Existing Credit Agreement"
and, as amended by, and together with, this Amendment, the "Credit Agreement");
and
WHEREAS, the Borrower and the Parent have requested that the Existing
Credit Agreement be amended in certain respects, and the Lenders have agreed to
amend the Existing Credit Agreement subject to the terms and conditions of this
Amendment;
NOW, THEREFORE, in consideration of the premises and the other provisions
herein contained, the parties hereto hereby agree as follows.
PART I
DEFINITIONS
SUBPART I.1. Use of Defined Terms. Unless otherwise defined herein or the
context otherwise requires, terms used in this Amendment, including its preamble
and recitals, have the meanings set forth in the Existing Credit Agreement.
PART II
AMENDMENTS TO
THE EXISTING CREDIT AGREEMENT
Effective upon (and subject to) the occurrence of the Sixth Amendment
Effective Date (as defined in Subpart 3.1), certain terms and provisions of the
Existing Credit Agreement are hereby amended in accordance with this Part.
Except as so amended or modified by this Amendment, the Existing Credit
Agreement shall continue in full force and effect in accordance with its terms.
SUBPART II.1. Amendments to Article I. Article I of the Existing Credit
Agreement is hereby amended in accordance with Subparts 2.1.1 and 2.1.2.
SUBPART II.1.1. Section 1.1 of the Existing Credit Agreement is hereby
amended by inserting the following definitions in the appropriate alphabetical
order:
"Amendment No. 6" means the Sixth Amendment, dated as of October
14, 1998, to this Agreement among the Borrower, the Parent and the
Lenders parties thereto.
"Sixth Amendment Effective Date" is defined in Subpart 3.1 of
Amendment No. 6.
SUBPART II.1.2. Section 1.1 of the Existing Credit Agreement is hereby
further amended by amending the definition of "Permitted Amount" in its entirety
to read as follows:
"Permitted Amount" means in the case of (a) the permitted maximum
amount of Revolving Loans which may be applied by the Borrower to purchase
outstanding Senior Subordinated Notes "put" to the Borrower pursuant to
the "put" provision contained in the Senior Subordinated Notes in the
event of a Change of Control (as defined therein) pursuant to the terms of
Section 4.10, $40,000,000, (b) the permitted maximum aggregate amount of
Revolving Loans which may be applied from time to time by the Borrower to
open market purchases or redemptions of outstanding Senior Subordinated
Notes pursuant to the terms of Section 4.10 (whether or not the Borrower
has repaid or prepaid Revolving Loans subsequent to the date such
Revolving Loans were made (even if all Revolving Loans are repaid or
prepaid in full on any given date)), the sum of (i) $85,000,000 (payable
in respect of the face amount of Senior Subordinated Notes purchased or
redeemed) plus (ii) an amount (referred to as the "Additional Amount")
payable in respect of any premium over the face amount of the Senior
Subordinated Notes purchased or redeemed by it in the open market (with
the payment of such Additional Amount being in all events subject to the
terms of clause (iv) of Section 4.10), (c) the permitted maximum amount of
Revolving Loans which may be applied by the Borrower to make intercompany
loans to Non-U.S. Subsidiaries to refinance existing Indebtedness of such
Non-U.S. Subsidiaries, $25,000,000, and (d) guarantees by the Borrower of
Indebtedness of Non-U.S. Subsidiaries, in an amount not to exceed
$20,000,000; provided, however, that the sum of clauses (a), (b), (c) and
(d) above shall not at any time exceed $85,000,000 plus (in the case of
clause (b) only), the Additional Amount.
SUBPART II.2. Amendment to Article IV. Clause (iv)(B) of Section 4.10 of
the Existing Credit Agreement is hereby amended by (i) deleting the figure
"$75,000,000" in such clause, and inserting the figure "$85,000,000" in its
place, (ii) deleting the percentage "115%" in such clause, and inserting the
percentage "114%" in its place and (iii) amending the final proviso in such
clause in its entirety to read as follows:
"provided, further, that on a pro forma basis after giving effect to each
Subordinated Debt Refunding and the aggregate amount of Revolving Loans
used to make intercompany loans to Non-U.S. Subsidiaries, the Borrower
must maintain availability under the Revolving Loan Commitment of not less
than for all periods prior to the Sixth Amendment Effective Date, the
amount required by this Agreement before giving effect to the Sixth
Amendment, (B) $10,000,000 for the period from the Sixth Amendment
Effective Date through (and including) the 60th day thereafter, (C)
$15,000,000 from the 61st day through (and including) the 90th day
subsequent to the Sixth Amendment Effective Date, and (D) $20,000,000 on
each day thereafter."
SUBPART II.3. Amendment to Article VII. Clause (b)(ii) of Section 7.2.6 of
the Existing Credit Agreement is hereby amended by deleting the figure
"$75,000,000" in such clause and inserting the figure "$85,000,000" in its
place.
PART III
CONDITIONS TO EFFECTIVENESS
SUBPART III.1. This Amendment shall become effective on the date (the
"Sixth Amendment Effective Date") that the Administrative Agent delivers a
notice to the Borrower stating that all of the following conditions have been
satisfied to the satisfaction of the Administrative Agent.
SUBPART III.1.1. Execution of Counterparts. The Administrative Agent shall
have received copies of this Amendment, duly executed and delivered by the
Borrower, the Parent and the Required Lenders.
SUBPART III.1.2. Affirmation and Consent. The Administrative Agent shall
have received an affirmation and consent in form and substance satisfactory to
it, duly executed and delivered by the Parent and each other Guarantor.
SUBPART III.1.3. Satisfactory Legal Form. All documents executed or
submitted pursuant hereto shall be satisfactory in form and substance to the
Administrative Agent and its counsel. The Administrative Agent and its counsel
shall have received all information and such counterpart originals or such
certified or other copies or such materials, as the Administrative Agent or its
counsel may reasonably request, and all legal matters incident to the
transactions contemplated by this Amendment shall be satisfactory to the
Administrative Agents and its counsel.
PART IV
REPRESENTATIONS AND WARRANTIES
In order to induce the Lenders to enter into this Amendment, the Borrower
and the Parent represent and warrant to the Administrative Agent, each Issuer
and each Lender as set forth in this Part.
SUBPART IV.1. Compliance with Warranties. The representations and
warranties set forth herein, in Article VI of the Credit Agreement and in each
other Loan Document delivered in connection herewith or therewith are true and
correct in all material respects with the same effect as if made on and as of
the date hereof (unless stated to relate solely to an earlier date, in which
case they were true and correct as of such earlier date).
SUBPART IV.2. Due Authorization, Non-Contravention, etc. The execution,
delivery and performance by the Borrower, the Parent and the Guarantors of this
Amendment and other documents delivered pursuant hereto are within the
Borrower's, the Parent's and the Guarantors' corporate powers, have been duly
authorized by all necessary corporate action, and do not (i) contravene either
the Borrower's, the Parent's or the Guarantors' Organic Documents, (ii)
contravene or result in a default under any contractual restriction, law or
governmental regulation or court decree or order binding on or affecting either
the Borrower, the Parent or the Guarantors, or (iii) result in, or require the
creation or imposition of, any Lien (except as contemplated in or created by the
Loan Documents).
SUBPART IV.3. Validity, etc. This Amendment has been duly executed and
delivered by the Borrower and the Parent and constitutes the legal, valid and
binding obligation of the Borrower and the Parent enforceable in accordance with
its terms, subject as to enforcement to bankruptcy, insolvency, reorganization,
moratorium or other similar laws affecting creditors' rights generally and to
general principles of equity, regardless of whether enforcement is sought in a
proceeding at law or in equity.
SUBPART IV.4. Compliance With Existing Credit Agreement. As of the Sixth
Amendment Effective Date, and both before and after giving effect to the terms
of this Amendment, no Default has occurred and is continuing.
PART V
MISCELLANEOUS PROVISIONS
SUBPART V.1. Ratification of and Limited Amendment to the Credit
Agreement. This Amendment shall be deemed to be an amendment to the Existing
Credit Agreement, and the Existing Credit Agreement, as amended hereby, is
hereby ratified, approved and confirmed in each and every respect. Except as
specifically amended or modified herein, the Existing Credit Agreement shall
continue in full force and effect in accordance with the provisions thereof and
except as expressly set forth herein the provisions hereof shall not operate as
a waiver of or amendment of any right, power or privilege of the Administrative
Agent and the Lenders nor shall the entering into of this Amendment preclude the
Lenders from refusing to enter into any further or future amendments.
SUBPART V.2. Credit Agreement, References, etc. All references to the
Credit Agreement in any other document, instrument, agreement or writing shall
hereafter be deemed to refer to the Existing Credit Agreement as amended hereby.
As used in the Credit Agreement, the terms "Agreement", "herein", "hereinafter",
"hereunder", "hereto" and words of similar import shall mean, from and after the
date hereof, the Existing Credit Agreement as amended by this Amendment.
SUBPART V.3. Expenses. The Borrower agrees to pay all out-of-pocket
expenses incurred by the Administrative Agent in connection with the
preparation, negotiation, execution and delivery of this Amendment.
SUBPART V.4. Headings; Counterparts. The various headings of this
Amendment are inserted for convenience only and shall not affect the meaning or
interpretation of this Amendment or any provisions hereof. This Amendment may be
signed in any number of separate counterparts, each of which shall be an
original, and all of which taken together shall constitute one instrument.
SUBPART V.5. Governing Law; Entire Agreement. THIS AMENDMENT SHALL BE
DEEMED TO BE A CONTRACT MADE UNDER AND GOVERNED BY THE LAWS OF THE STATE OF NEW
YORK. This Amendment constitutes the entire understanding among the parties
hereto with respect to the subject matter hereof and supersedes any prior
agreements, written or oral, with respect thereto.
SUBPART V.6. Loan Document Pursuant to Credit Agreement. This Amendment is
a Loan Document executed pursuant to the Credit Agreement and shall be
construed, administered and applied in accordance with all of the terms and
provisions of the Credit Agreement.
SUBSIDIARIES AND AFFILIATES OF IMO INDUSTRIES INC.
STATE OR
COUNTRY OF
INCORPORATION
NAME OR ORGANIZATION
IMO INDUSTRIES (UK) LIMITED..........................ENGLAND
BAIRD ATOMIC LTD...............................ENGLAND
MORSE CONTROLS LIMITED.........................ENGLAND
MORSE CONTROLS AB............................SWEDEN
RMH CONTROLS LIMITED.........................ENGLAND
MORSE CONTROLS PTY. LTD......................NEW SOUTH WALES
MORSE CONTROLS (NZ) LIMITED...............NEW ZEALAND
TELEFLEX-MORSE (N.Z.) LTD.................NEW ZEALAND
IMO INDUSTRIES PENSION TRUSTEE LIMITED.......ENGLAND
BOSTON GEAR COMPANY LIMITED..................ENGLAND
TELEFLEX LIMITED.............................ENGLAND
TELEFLEX MORSE LTD...........................ENGLAND
IMO INDUSTRIES LIMITED.........................ENGLAND
IMO INDUSTRIES GmbH..................................GERMANY
MORSE CONTROLS SARL..................................FRANCE
MORSE CONTROLS S.L. .................................SPAIN
IMO INDUSTRIES PTE LTD...............................SINGAPORE
NHK MORSE CO., LTD...................................JAPAN (1)
NHK JABSCO CO., LTD..........................JAPAN (2)
IMO AB...............................................SWEDEN
IMO-PUMPEN AG................................SWITZERLAND
IMO GRESHAM PUMPS (INDIA) LTD................INDIA (3)
IMO POMPES S.A...............................FRANCE
IMO-PUMPEN GmbH......................................GERMANY
IMO INDUSTRIES (CANADA) INC..........................CANADA
DELSALESCO, INC......................................U.S. VIRGIN ISLANDS
IMOVEST INC..........................................DELAWARE
BAIRD CORPORATION....................................MASSACHUSETTS
LABTEST EQUIPMENT COMPANY......................CALIFORNIA
INCOM TRANSPORTATION, INC............................DELAWARE
BOSTON GEAR INDUSTRIES OF CANADA INC.................CANADA
VHC INC..............................................TEXAS
VARO TECHNOLOGY CENTER, INC....................TEXAS
VARO TECHNOLOGY CENTER JOINT VENTURE...........TEXAS (4)
TURBODEL INC...................................TEXAS
TRIPOWER VENTURE.............................TEXAS (5)
APPLIED OPTICS CENTER CORPORATION..............MASSACHUSETTS
ITT AND VARO, A JOINT VENTURE..................TEXAS (6)
KEI LASER, INC.................................MARYLAND
OPTIC-ELECTRONIC INTERNATIONAL, INC............TEXAS
WARREN PUMPS INC.....................................DELAWARE
DELTEX SERVICE INC...................................TEXAS
SHANGHAI DONG FENG MORSE CONTROL CABLE CO., LTD......CHINA (1)
BOMBAS IMO DE VENEZUELA C.V..........................VENEZUELA
(1) 50% owned by Imo Industries Inc.
(2) 50% owned by NHK Morse Co., Ltd.
(3) 40% owned by IMO AB
(4) 50% owned by Varo Technology Center, Inc. and 50% owned by VHC Inc.
(5) 50% owned by Turbodel Inc.
(6) 50% owned by VHC Inc.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 6,230
<SECURITIES> 0
<RECEIVABLES> 41,183
<ALLOWANCES> (1,058)
<INVENTORY> 40,125
<CURRENT-ASSETS> 118,090
<PP&E> 67,090
<DEPRECIATION> (7,660)
<TOTAL-ASSETS> 388,972
<CURRENT-LIABILITIES> 77,572
<BONDS> 165,843
0
0
<COMMON> 1
<OTHER-SE> 104,265
<TOTAL-LIABILITY-AND-EQUITY> 388,972
<SALES> 308,870
<TOTAL-REVENUES> 308,870
<CGS> 208,579
<TOTAL-COSTS> 208,579
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<INTEREST-EXPENSE> 21,293
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