1
EXHIBIT 17(G)(1)
IMO INDUSTRIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands except per share amounts)
POST-ACQUISITION PRE-ACQUISITION
AUGUST 29, JANUARY 1,
1997 TO 1997 TO YEAR ENDED DECEMBER 31,
DECEMBER 31, AUGUST 28, -------------------------
1997 1997 1996* 1995*
---- ---- ----- -----
NET SALES $ 106,711 $ 210,151 $ 309,511 $ 297,114
Cost of products sold 76,597 145,276 220,589 212,787
------------ ------------ ------------ ------------
GROSS PROFIT 30,114 64,875 88,922 84,327
Selling, general and administrative expenses 21,411 46,724 62,514 60,457
Research and development expenses 1,913 3,636 4,455 3,930
Unusual items 5,000 26,344 17,440 8,124
------------ ------------ ------------ ------------
INCOME (LOSS) FROM OPERATIONS 1,790 (11,829) 4,513 11,816
Interest expense 8,069 18,190 25,981 22,648
Interest income (622) (921) (1,450) (2,169)
Other (income) expense (336) 513 355 (370)
Equity in loss (income) of unconsolidated companies 133 386 32 (302)
------------ ------------ ------------ ------------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE
INCOME TAXES AND EXTRAORDINARY ITEM (5,454) (29,997) (20,405) (7,991)
Income taxes (benefit):
Current 235 1,254 2,663 1,831
Deferred -- -- 10,000 (17,000)
------------ ------------ ------------ ------------
Total Income Taxes (Benefit) 235 1,254 12,663 (15,169)
------------ ------------ ------------ ------------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE
EXTRAORDINARY ITEM (5,689) (31,251) (33,068) 7,178
Discontinued operations:
Income (loss) from operations (net of income tax
expense of $77, $664, $1,037 and $1,256) (3,753) 2,372 (8,705) 5,351
Estimated (loss) gain on disposal (net of income taxes of
$5.2 million in 1995) (8,430) -- (8,142) 21,625
------------ ------------ ------------ ------------
Total Income (Loss) from Discontinued Operations (12,183) 2,372 (16,847) 26,976
------------ ------------ ------------ ------------
Extraordinary Item - Loss on Extinguishment of Debt (3,348) -- (8,455) (4,444)
------------ ------------ ------------ ------------
NET INCOME (LOSS) $ (21,220) $ (28,879) $ (58,370) $ 29,710
============ ============ ============ ============
EARNINGS (LOSS) PER SHARE, BASIC AND DILUTED:
Continuing operations before extraordinary item $ (.33) $ (1.82) $ (1.93) $ .42
Discontinued operations (.71) .14 (.99) 1.58
Extraordinary item (.20) -- (.49) (.26)
------------ ------------ ------------ ------------
Net income (loss) $ (1.24) $ (1.68) $ (3.41) $ 1.74
------------ ------------ ------------ ------------
Weighted average number of shares outstanding 17,127,859 17,126,192 17,100,359 17,048,622
============ ============ ============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
*Restated to conform to 1997 presentation.
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IMO INDUSTRIES INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands except par value)
December 31, 1997 1996*
- ------------ ---- -----
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 3,528 $ 1,419
Trade accounts and notes receivable, less allowance of
$1,435 in 1997 and $1,346 in 1996 53,732 47,088
Inventories-net 64,888 68,465
Deferred income taxes 10,088 9,165
Net assets of discontinued operations - current -- 11,749
Prepaid expenses and other current assets 7,568 2,992
--------- ---------
TOTAL CURRENT ASSETS 139,804 140,878
--------- ---------
Property, Plant and Equipment
Land 5,351 7,757
Buildings and improvements 22,526 34,068
Machinery and equipment 36,734 94,146
--------- ---------
64,611 135,971
Less allowances for depreciation and amortization (3,202) (69,225)
--------- ---------
Net Property, Plant and Equipment 61,409 66,746
Intangible Assets, Principally Goodwill 233,054 58,670
Investments in and Advances to Unconsolidated Companies 4,780 5,704
Net Assets of Discontinued Operations - Noncurrent 14,927 36,927
Other Assets 9,326 21,997
--------- ---------
TOTAL ASSETS $ 463,300 $ 330,922
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable $ 28,238 $ 21,998
Trade accounts payable 22,750 18,765
Accrued expenses and other liabilities 53,744 28,379
Accrued costs related to discontinued operations 4,392 8,586
Income taxes payable 5,929 7,359
Current portion of long-term debt 6,082 11,666
--------- ---------
TOTAL CURRENT LIABILITIES 121,135 96,753
--------- ---------
Long-Term Debt 192,319 245,007
Deferred Income Taxes 5,034 3,890
Accrued Postretirement Benefits - Long-Term 17,092 17,418
Accrued Pension Expense and Other Liabilities 37,473 24,241
--------- ---------
TOTAL LIABILITIES 373,053 387,309
--------- ---------
SHAREHOLDERS' EQUITY (DEFICIT)
Preferred stock: $1.00 par value; authorized and
unissued 5,000,000 shares -- --
Common stock: $1.00 par value; authorized 25,000,000
shares; issued 17,127,859 in 1997 and 18,796,897 in 1996 17,128 18,797
Additional paid-in capital 106,805 80,466
Retained earnings (deficit) (33,016) (134,962)
Cumulative foreign currency translation adjustments (670) 554
Minimum pension liability adjustment -- (2,503)
Unearned compensation -- (719)
Treasury stock at cost - 1,672,788 shares in 1996 -- (18,020)
--------- ---------
TOTAL SHAREHOLDERS' EQUITY (DEFICIT) 90,247 (56,387)
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) $ 463,300 $ 330,922
========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
* Restated to conform to 1997 presentation.
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IMO INDUSTRIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
POST-ACQUISITION PRE-ACQUISITION
AUGUST 29, JANUARY 1,
1997 TO 1997 TO YEAR ENDED DECEMBER 31,
DECEMBER 31, AUGUST 28, ----------------------
1997 1997 1996* 1995*
---- ---- ----- -----
OPERATING ACTIVITIES
Net income (loss) $ (21,220) $ (28,879) $ (58,370) $ 29,710
Adjustments to reconcile net income (loss) to net cash
used by continuing operations:
Discontinued operations 12,183 (2,372) 16,847 (5,351)
Depreciation 3,674 6,747 10,123 10,287
Amortization 2,007 1,867 3,275 3,095
Provision (benefit) for deferred income taxes -- -- 10,000 (17,000)
Extraordinary item 3,348 -- 8,455 4,444
Gain on sale of segment -- -- -- (21,625)
Unusual items 5,000 26,344 17,440 8,124
Other 369 750 1,592 94
Other changes in operating assets and liabilities:
(Increase) decrease in accounts and notes (6,467) 1,730 (5,440) 566
receivable
Decrease (increase) in inventories 1,759 (1,930) 4,300 (6,253)
Decrease in accounts payable and accrued
expenses (17,028) (9,794) (16,009) (14,078)
Other operating assets and liabilities (1,608) (3,855) 3,038 (3,338)
--------- --------- --------- ---------
Net cash used by continuing operations (17,983) (9,392) (4,749) (11,325)
Net cash used by discontinued operations (1,342) (1,377) (10,353) (20,008)
--------- --------- --------- ---------
NET CASH USED BY OPERATING ACTIVITIES (19,325) (10,769) (15,102) (31,333)
--------- --------- --------- ---------
INVESTING ACTIVITIES
Net proceeds from sale of businesses and sales
of property, plant and equipment 88,024 25,235 12,570 174,920
Purchases of property, plant and equipment (3,740) (4,555) (10,032) (13,155)
Acquisitions, net of cash acquired -- -- (7,218) (5,247)
Net investing activities of discontinued operations (5,104) (3,692) (8,072) (10,858)
Other (497) 141 63 (133)
--------- --------- --------- ---------
NET CASH PROVIDED BY (USED BY) INVESTING ACTIVITIES 78,683 17,129 (12,689) 145,527
--------- --------- --------- ---------
FINANCING ACTIVITIES
(Decrease) increase in notes payable (15,900) 18,786 6,159 23,607
Proceeds from long-term borrowings 129,270 119 266,895 5,257
Principal payments on long-term debt (164,719) (25,792) (233,350) (166,196)
Payment of debt financing costs (5,368) (384) (14,660) (401)
Proceeds from stock options exercised -- -- -- 535
Other 281 (102) 89 59
--------- --------- --------- ---------
NET CASH (USED BY) PROVIDED BY FINANCING ACTIVITIES (56,436) (7,373) 25,133 (137,139)
--------- --------- --------- ---------
Effect of exchange rate changes on cash 453 (253) 80 222
--------- --------- --------- ---------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 3,375 (1,266) (2,578) (22,723)
Cash and cash equivalents at beginning of the period 153 1,419 3,997 26,720
--------- --------- --------- ---------
CASH AND CASH EQUIVALENTS AT END OF THE PERIOD $ 3,528 $ 153 $ 1,419 $ 3,997
--------- --------- --------- ---------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 13,344 $ 19,564 $ 36,664 $ 39,519
Income taxes $ 1,263 $ 2,006 $ 4,798 $ 6,341
The accompanying notes are an integral part of these consolidated financial
statements.
*Restated to conform to 1997 presentation.
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IMO INDUSTRIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
(Dollars in thousands)
Cumulative
Foreign Minimum
Additional Retained Currency Pension Unearned
Common Paid-in Earnings Translation Liability Compen- Treasury
Stock Capital (Deficit) Adjustments Adjustment sation Stock Total
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE AT
JANUARY 1, 1995 * $ 18,680 $ 79,789 $(106,302) $ (1,549) $ (853) $ -- $ (18,020) $ (28,255)
Net income -- -- 29,710 -- -- -- -- 29,710
Foreign currency translation
adjustments -- -- -- 2,586 -- -- -- 2,586
Minimum pension liability
adjustment -- -- -- -- (948) -- -- (948)
Shares issued under stock
option plan 73 462 -- -- -- -- -- 535
Restricted shares issued under
the equity incentive plans 3 24 -- -- -- -- -- 27
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE AT
DECEMBER 31, 1995 * 18,756 80,275 (76,592) 1,037 (1,801) -- (18,020) 3,655
Net income (loss) -- -- (58,370) -- -- -- -- (58,370)
Foreign currency translation
adjustments -- -- -- (483) -- -- -- (483)
Minimum pension liability
adjustment -- -- -- -- (702) -- -- (702)
Restricted shares issued under
the equity incentive plans 41 191 -- -- -- (166) -- 66
Other -- -- -- -- -- (553) -- (553)
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE AT
DECEMBER 31, 1996 * 18,797 80,466 (134,962) 554 (2,503) (719) (18,020) (56,387)
Net income (loss) -- -- (28,879) -- -- -- -- (28,879)
Foreign currency translation
adjustments -- -- -- (3,346) -- -- -- (3,346)
Restricted shares issued under
the equity incentive plans 4 11 -- -- -- 48 -- 63
- ------------------------------------------------------------------------------------------------------------------------------------
PRE-ACQUISITION BALANCE AT
AUGUST 28, 1997 18,801 80,477 (163,841) (2,792) (2,503) (671) (18,020) (88,549)
====================================================================================================================================
Adjustment to new cost
basis of II Acquisition
Corp. on August 29, 1997 (1,673) 26,328 152,045 2,792 2,503 671 18,020 200,686
- ------------------------------------------------------------------------------------------------------------------------------------
POST-ACQUISITION BALANCE AT
AUGUST 29, 1997 17,128 106,805 (11,796) -- -- -- -- 112,137
Net income (loss) -- -- (21,220) -- -- -- -- (21,220)
Foreign currency translation
adjustments -- -- -- (670) -- -- -- (670)
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE AT
DECEMBER 31, 1997 $ 17,128 $ 106,805 $ (33,016) $ (670) $ -- $ -- $ -- $ 90,247
====================================================================================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
* Restated to conform to current year presentation.
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Notes to Consolidated Financial Statements
Note 1 Significant Accounting Policies
Consolidation: The consolidated financial statements include the accounts of the
Company and its majority-owned subsidiaries. Significant intercompany
transactions have been eliminated in consolidation. The Company uses the equity
method to account for investments in corporations in which it does not own a
majority voting interest but has the ability to exercise significant influence
over operating and financial policies.
Translation of Foreign Currencies: Assets and liabilities of international
operations are translated into U.S. dollars at current exchange rates. Income
and expense accounts are translated into U.S. dollars at average rates of
exchange prevailing during the year. Translation adjustments are reflected as a
separate component of shareholders' equity.
Cash Equivalents: Cash equivalents include investments in government securities
funds and certificates of deposit. Investment periods are generally less than
one month.
Inventories: Inventories are carried at the lower of cost or market, cost being
determined principally on the basis of standards which approximate actual costs
on the first-in, first-out method, and market being determined by net realizable
value. Appropriate consideration is being given to deterioration, obsolescence
and other factors in evaluating net realizable value.
Revenue Recognition: Revenues are recorded generally when the Company's products
are shipped.
Depreciation and Amortization: Depreciation and amortization of plant and
equipment are computed principally by the straight-line method based on the
estimated useful lives of the assets as follows: buildings, 10 to 40 years and
machinery and equipment, 3 to 15 years.
Earnings Per Share: At December 31, 1997, the Company adopted Financial
Accounting Standards Board ("FASB") Statement No. 128, "Earnings Per Share,"
which specifies the computation, presentation, and disclosure requirements for
earnings per share. Basic and diluted net income (loss) per share for 1997, 1996
and 1995 is calculated based on the actual weighted average shares outstanding.
For 1997 and 1996, outstanding stock options and warrants are not considered as
their effect is antidulutive. In 1995, after the inclusion of 75,453 incremental
shares from dilutive stock options, the diluted earnings per share is the same
as basic earnings per share, due to rounding.
Impact of Recently Issued Accounting Standards: In June 1997, the FASB issued
Statement No. 130, "Reporting Comprehensive Income," which establishes standards
for reporting and display of comprehensive income and its components in a full
set of general purpose financial statements. The impact on the Company's
financial statements compared to information presently available is not expected
to be significant. Also in June 1997, the FASB issued Statement No. 131,
"Disclosures about Segments of an Enterprise and Related Information," which
requires public companies to report financial and descriptive information about
operating segments. The statement intends to align reportable segments and
certain disclosures with how the operations are managed internally. The impact
of this statement on the Company's disclosure is not expected to be significant.
In February 1998, the FASB issued Statement No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits," which adds disclosure
requirements on changes in the benefit obligations and fair values of plan
assets, and eliminates certain disclosures that are no longer useful. These
statements will be adopted by the Company in fiscal year 1998.
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Intangible Assets: Goodwill of companies acquired is being amortized on the
straight-line basis over 40 years. The carrying value of goodwill is reviewed
when indicators of impairment are present, by evaluating future cash flows of
the associated operations to determine if impairment exists. Goodwill related to
continuing operations at December 31, 1997 and 1996 was $226 million and $48.2
million, respectively, net of respective accumulated amortization of $1.8
million and $12.3 million. Patents are amortized over the shorter of their legal
or estimated useful lives.
Management Estimates: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Restatements: The Consolidated Financial Statements and the notes thereto, have
been restated to reflect the Company's Roltra-Morse and Instrumentation business
segments in discontinued operations. Certain prior year amounts have been
reclassified to conform to the current year presentation.
Note 2 Acquisition By II Acquisition Corp.
On August 28, 1997, II Acquisition Corp. ("Acquisition Corp.") acquired
approximately 93% of the Company's outstanding shares of common stock pursuant
to its tender offer for all outstanding shares of the common stock of the
Company (the "Acquisition"). The consideration paid was $7.05 per share of
common stock or $112.1 million in total. The Acquisition has been accounted for
under the purchase method. The purchase price was allocated based on the
estimated fair values at the date of acquisition and resulted in an excess of
purchase price over assets acquired, liabilities assumed, and additional
purchase liabilities recorded, for continuing operations of $228 million, which
is being amortized on a straight-line basis over 40 years. The purchase price
allocation has been completed on a preliminary basis, and as a result,
adjustments to the carrying value of assets and liabilities may occur.
Additional purchase liabilities recorded included approximately $18.6 million
for severance and related costs, and consolidation of certain acquired
facilities. At December 31, 1997, approximately $10.5 million of these costs
remained on the balance sheet. The Company expects to complete its termination
of employees and consolidation of facilities in 1998. See Note 4 for additional
discussion of the 1997 cost reduction program.
The historical financial information presented in the Consolidated Statements of
Income reflect the results of the pre-Acquisition period from January 1, 1997 to
August 28, 1997 and the post-Acquisition period from August 29, 1997 to December
31, 1997, and the years ended December 31, 1996 and 1995. Due to the application
of the purchase method of accounting for the Acquisition, the pre-Acquisition
period is not comparative to the post-Acquisition period.
The unaudited pro forma information for the periods set forth below give effect
to the Acquisition, the refinancing of the Company's domestic senior debt (See
Note 9) and the sale of the Instrumentation business segment (See Note 3) as if
they had occurred on January 1, 1997 and January 1, 1996, respectively. The pro
forma results include additional expense related to the amortization of the
increased goodwill, and the reduction in interest expense resulting from the
refinancing of the domestic senior debt and repayments with the net proceeds
from the sale of Instrumentation. The pro forma information is presented for
informational purposes only and is not necessarily indicative of the results of
operations that actually would have been achieved had these transactions been
consummated at the beginning of the periods presented.
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Year Ended December 31 1997 1996
(Dollars in thousands, except per share amounts) (Unaudited)
- ---------------------------------------------------------------------------------------------------------
Net Sales $ 316,862 $ 309,511
Net Income (Loss) from Continuing Operations
before Extraordinary Item $ (35,595) $ (31,604)
Earnings (Loss) Per Share, Basic and Diluted:
Continuing Operations before Extraordinary Item $ (2.08) $ (1.85)
- ---------------------------------------------------------------------------------------------------------
In conjunction with the Acquisition, the Company recorded a third quarter 1997
charge of $15.8 million including a $10 million contract fee paid to United
Dominion Industries (`UDI") as a result of the termination of a merger agreement
between UDI and the Company, $3.4 million of commissions, advisory and legal
fees, and $2.4 million of employee retention bonuses (See Note 7).
The Acquisition reduced the number of shares traded publicly and reduced the
number of holders of shares. On March 16, 1998, the Company received a letter
dated March 9, 1998, from the New York Stock Exchange, Inc. ("NYSE") indicating
the NYSE's determination that the Company has fallen below certain continued
listing criteria, and that the NYSE was carefully considering the
appropriateness of the continued listing of the Company's common stock. The
Company is preparing a response to the NYSE taking the position that the NYSE
should maintain the listing of the Company's common stock. The Company seeks to
persuade the NYSE to continue such listing, but there can be no assurance that
the NYSE will not attempt to delist the Company's common stock. Even if the NYSE
maintains such listing for now, the Company's common stock may, at some future
time, no longer meet the requirements for the NYSE for continued listing and may
be delisted from the NYSE and deregistered under the provisions of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). A decision by
the NYSE to delist the Company's common stock or deregistration under the
Exchange Act could adversely affect the liquidity and market value of the
remaining shares held by the public.
Note 3 Discontinued Operations
In August 1997 and in February 1998, the Company announced that the Board of
Directors had approved plans to sell its Instrumentation and Roltra-Morse
businesses, respectively. In 1995, the Company sold its Turbomachinery and most
of its Electro-Optical Systems businesses, which sales were approved by the
Board of Directors in August 1994 and in January 1994, respectively. In
accordance with APB Opinion No. 30, the disposals of these business segments
have been accounted for as discontinued operations and, accordingly, their
operating results have been segregated and reported as Discontinued Operations
in the accompanying Consolidated Statements of Income.
Discontinued operations include management's best estimates of amounts expected
to be realized at the time of disposal. The amounts the Company will ultimately
realize could differ materially in the near term from the amounts used to
determine the gain or loss on disposal of the discontinued operations.
Roltra-Morse
On February 27, 1998, the Company completed the sale of its Roltra-Morse
business to Magna International Inc. for cash proceeds of $30.7 million, subject
to final adjustment. Roltra-Morse retained $18.4 million of its debt. The sale
price approximated the recorded net book value of the
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business. Net proceeds were used to reduce domestic senior debt. See Note 9 for
further information regarding the use of the proceeds. This transaction will be
reflected in the Company's financial statements in the first quarter of 1998.
Instrumentation
On August 29, 1997, the Company completed the sale of its Instrumentation
business segment to Danaher Corporation for approximately $85 million, which
approximated its net book value after the Acquisition. The majority shareholders
of the Company are also substantial shareholders of Danaher Corporation. The
purchase price was determined on the basis of arms length negotiations between
the Company and Danaher Corporation. A portion of the proceeds was used to
reduce domestic senior debt by $68.1 million.
Electro-Optical Systems
On April 28, 1997, the Company completed the sale of the Varo Electronic Systems
division to a small defense contractor for $12 million, which was used to reduce
senior domestic debt. The sale of this business completed the disposal of the
Electro-Optical Systems business. On January 3, 1995, the Company completed the
sale of its Baird Analytical Instruments Division to Thermo Instruments Systems
Inc. for approximately $12.3 million, which was used to repay a portion of the
Company's domestic senior debt outstanding under a previous credit facility. On
June 2, 1995, the Company completed the sale of the Optical Systems and Ni-Tec
divisions of Varo Inc. and the Optical Systems division of Baird Corporation,
which represented the major part of its Electro-Optical Systems business, to
Litton Industries for approximately book value. The proceeds were used to reduce
amounts outstanding under its previous credit facility by $8 million and to
redeem $40 million of the Company's then outstanding 12.25% senior subordinated
debentures.
The Company retained certain liabilities related to the Electro-Optical Systems
business of approximately $24 million. At December 31, 1993, the Company
provided for estimated losses on disposal of this segment in the amount of $168
million, which included a provision for anticipated operating losses prior to
disposal. During 1995, the Company recognized an additional $13.3 million loss
on disposal. The additional loss included $6.8 million related to the resolution
of contingencies associated with the sale of the business and charges of $6.5
million recorded primarily to write down remaining non-operating real estate to
net realizable value. During 1996, the Company recorded an additional $5.2
million loss on disposal ($.8 million in the fourth quarter), which related to
changes in estimates on legal and other reserve requirements associated with
retained liabilities of this business. In the third quarter of 1997, the Company
recorded an additional $3.4 million loss on disposal related to changes in
estimates on certain reserve requirements associated with the retained
liabilities of this business.
Turbomachinery
On January 17, 1995, the Company completed the sale of its Delaval Turbine and
TurboCare divisions and its 50% interest in Delaval-Stork, to Mannesmann Demag.
The final purchase price was $119 million, of which $109 million was received at
closing, with the remainder earning interest to the Company and to be received
at specified future contract dates subject to adjustment as provided in the
agreement. It is management's expectation that there will be no further
adjustment to the purchase price. A portion of the proceeds was used by the
Company to pay off its domestic senior debt and $40 million of its then
outstanding 12.25% senior subordinated debentures.
The Company retained certain liabilities related to the Turbomachinery business
of approximately $33 million. As a result of the sale of this business in 1995,
the Company recognized an estimated gain on disposal of $35 million, net of
income taxes of $5.2 million. During 1996 and 1997, the Company recorded
additional losses on disposal of $2.9 million and $5 million, respectively. The
additional losses included charges related to changes in estimates on legal and
other reserve requirements associated with retained liabilities of this
business.
F-8
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The Company reviews quarterly the assumptions used in determining the estimated
gain or loss from discontinued operations and the adequacy of the recorded
liabilities. Management believes that the recorded amount of estimated
liabilities related to the Discontinued Operations at December 31, 1997 is
adequate, however, the amounts estimated may differ from actual results.
Net assets and liabilities of the Discontinued Operations consist of the
following:
December 31 (Dollars in thousands) 1997 1996
- -------------------------------------------------------------------
Current Assets:
Cash $ 843 $ 3,125
Receivables 13,799 33,816
Inventories 12,357 33,705
Other current assets 5,083 6,762
- -------------------------------------------------------------------
32,082 77,408
- -------------------------------------------------------------------
Current Liabilities:
Notes payable 15,694 21,340
Trade accounts payable 22,043 25,690
Other current liabilities 6,522 18,629
- -------------------------------------------------------------------
44,259 65,659
- -------------------------------------------------------------------
Net Current Assets (Liabilities) (12,177) 11,749
- -------------------------------------------------------------------
Long-term Assets:
Property 21,758 35,053
Other long-term assets 14,220 21,490
- -------------------------------------------------------------------
35,978 56,543
- -------------------------------------------------------------------
Long-term Liabilities 8,874 19,616
- -------------------------------------------------------------------
Net Long-term Assets 27,104 36,927
- -------------------------------------------------------------------
Net Assets $ 14,927 $48,676
===================================================================
Net assets related to the Roltra-Morse and Turbomachinery businesses are $15.5
million and $.1 million, and $11.3 million and $.5 million as of December 31,
1997 and 1996, respectively. Net assets related to the Instrumentation business
are $22.5 million as of December 31, 1996. The Electro-Optical Systems business
contributed $.7 million of net liabilities and $14.4 million of net assets as of
December 31, 1997 and 1996, respectively.
Total long-term debt of the Discontinued Operations amounted to $6 million and
$11.7 million as of December 31, 1997 and 1996, respectively. Of these amounts,
$1.2 million and $3.4 million represent the current portions of long-term debt
as of December 31, 1997 and 1996, respectively.
F-9
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A condensed summary of operations for the Discontinued Operations is as follows:
Post-Acquisition Pre-Acquisition
August 29, 1997 to January 1, 1997 to
Year Ended December 31 December 31, August 28,
(Dollars in thousands) 1997 1997 1996 1995
- ------------------------------------------------------------------------------------------------------
Net Sales $30,257 $117,730 $181,948 $235,452
- ------------------------------------------------------------------------------------------------------
Income (loss) from operations
before income taxes and
minority interest (3,736) 3,025 (7,963) 5,882
- ------------------------------------------------------------------------------------------------------
Income taxes 77 664 1,037 1,256
Minority interest (60) (11) (295) (725)
- ------------------------------------------------------------------------------------------------------
Income (loss) from operations $(3,753) $ 2,372 $ (8,705) $ 5,351
======================================================================================================
The income (loss) from operations of the Discontinued Operations for 1997, 1996
and 1995 includes allocated interest expense of $2.7 million ($2.4 million -
pre-Acquisition), $4.5 million, and $10.3 million, respectively. Allocated
interest expense includes interest on debt of the Discontinued Operations to be
assumed by the buyers of these operations, and an allocation of corporate
interest expense to the Discontinued Operations based on the ratio of net assets
to be sold to the sum of the Company's consolidated net assets, if positive,
plus consolidated debt.
Roltra-Morse
The Roltra-Morse business had operating losses of $6.7 million and $13.8 million
for 1997 and 1996, respectively, and operating income of $.5 million in 1995.
The 1997 operating loss included an unusual charge of $.7 million
(pre-Acquisition) due to fees incurred related to the previously failed attempt
to sell the Roltra-Morse business. The operating loss in 1996 included unusual
charges of $6.2 million consisting of restructuring measures taken to reduce
operating expenses and goodwill write-offs. Included in the 1995 operating
income was an unusual charge of $1.2 million related to the shutdown of a plant
in southern Italy and the related loss on the sale of that building.
Instrumentation
The Instrumentation business had income from operations of $5.3 million, $5.1
million and $4.9 million for 1997, 1996 and 1995, respectively.
Operating income in both 1996 and 1995 included unusual charges of $.9 million
related to restructuring of operations in Europe.
Electro-Optical Systems
The Electro-Optical Systems business had income from operations of $.8 million
and $.4 million for 1997 and 1996, respectively. The income in 1997 and 1996
offset increases in estimated reserve requirements in those respective periods.
The 1995 loss of $1 million, including allocated interest, was charged against
the reserve for anticipated losses previously established by the Company.
F-10
11
Note 4 Restructuring Plans
Asset Sales
The Company divested its Turbomachinery and substantially all of its
Electro-Optical Systems businesses in 1995. The Company used the proceeds, net
of related expenses, to repay domestic senior debt in the amount of $89.7
million and to redeem $80 million of its then outstanding 12.25% senior
subordinated debentures. During 1996, the Company completed the sales of five of
its non-operating real estate holdings for net proceeds of $8.6 million. The
proceeds were used to repay the Company's domestic senior debt.
On April 28, 1997 the Company completed the sale of its Varo Electronic Systems
division, the remaining portion of its former Electro-Optical Systems business.
Proceeds of $12 million were used to reduce senior domestic debt under its
previous credit agreement.
On August 29, 1997 the Company completed the sale of its Instrumentation
business segment to Danaher Corporation for proceeds of $85 million. The Company
used a portion of the proceeds to reduce domestic senior debt by $68.1 million.
On December 31, 1997, the Company sold certain assets of its Delroyd business
unit to Nuttall Gear LLC for $2.3 million in cash. Also on December 31, 1997,
the Company acquired certain assets of the Centric Clutch business unit of
Ameridrives International, L.P. for $1.3 million in cash. Nuttall Gear LLC and
Ameridrives International, L.P. are subsidiaries of American Enterprise MPT
Corporation. Steven M. Rales and Mitchell P. Rales collectively own 76% of
American Enterprise MPT Corporation. Messrs. Rales and Rales are directors and
beneficial owners of 92.8% of the Company. The transactions were negotiated on
an arms length basis, and were based on the valuations of independent
appraisers.
In 1997, the Company completed the sales of certain of its non-operating real
estate for total proceeds of $14.1 million. Net proceeds were used to repay
domestic senior debt.
On February 27, 1998, the Company sold its Roltra-Morse business segment to
Magna International for cash subject to final adjustment. The sale resulted in a
cash transfer to the Company of $30.7 million. Net proceeds have been used by
the Company to reduce domestic senior debt.
Cost Reduction Programs
1997 Program
In connection with the Acquisition, the Company implemented a cost reduction
program. The cost of this program is estimated to be $18.6 million and was
accrued for in accordance with the purchase method of accounting. It is
comprised of $10.5 million related to severance and termination benefits as a
result of headcount reductions at the Company's corporate headquarters. In
addition, $1.7 million, $1.2 million, and $5.2 million of costs are estimated
for the Company's Power Transmission, Pumps, and Morse Controls segments,
respectively, related to severance and termination benefits resulting from
headcount reductions and the consolidation of certain manufacturing facilities.
The 1997 cost reduction program reduced expenses by approximately $3 million in
the 1997 period subsequent to the Acquisition and is expected to reduce expenses
by approximately $19.5 million in 1998 and $20.6 million annually thereafter.
The program includes a reduction of 237 employees, or 10.3% of the total number
of Company employees in continuing operations at the date of the Acquisition.
The required cash outlay related to this program was $8.1 million in 1997 and
the expected cash requirements during 1998 are $10.5 million.
F-11
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1996 Program
The fourth quarter of 1996 includes a charge of $.3 million to continuing
operations for restructuring measures taken at the Company's Morse Germany
operation.
1995 Program
In the fourth quarter of 1995, the Company recorded a charge to continuing
operations of $3.1 million, including severance and other expenses related to a
company-wide program to reduce general and administrative costs. This program
included a reduction of 56 employees, or 2.4% of the total number of Company
employees in continuing operations at the end of 1995, including a reduction of
the corporate headquarters staff by 20%. The program reduced general and
administrative expenses by approximately $2.7 million and $3.2 million in 1996
and 1997, respectively, and is expected to reduce general and administrative
expenses from the 1995 level by approximately $4.1 million in 1998 and annually
thereafter. The required cash outlays related to this program were $.4 million,
$2.4 million, and $.3 million in 1995, 1996 and 1997 respectively.
Note 5 Inventories
Inventories are summarized as follows:
December 31 (Dollars in thousands) 1997 1996
- ---------------------------------------------------------------------------------------------------------
Finished products $ 18,823 $ 23,537
Work in process 23,218 25,828
Materials and supplies 23,481 21,810
- ---------------------------------------------------------------------------------------------------------
65,522 71,175
Less customers' progress payments 634 2,710
- ---------------------------------------------------------------------------------------------------------
$ 64,888 $ 68,465
=========================================================================================================
Note 6 Accrued Expenses and Other Liabilities
Accrued expenses and other liabilities consist of the following:
December 31 (Dollars in thousands) 1997 1996
- ---------------------------------------------------------------------------------------------------------
Accrued product warranty costs $ 1,844 $ 2,007
Accrued litigation and claims costs 16,683 2,132
Payroll and related items 11,836 12,109
Accrued interest payable 3,126 3,641
Accrued restructuring costs 11,970 445
Accrued divestiture costs 1,835 2,460
Other 6,450 5,585
- ---------------------------------------------------------------------------------------------------------
$ 53,744 $ 28,379
=========================================================================================================
Note 7 Unusual Items
1997
During the year ended December 31, 1997, the Company recorded unusual charges of
$31.3 million ($1.83 per share) in income from continuing operations. The first
eight months of 1997
F-12
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included an unusual charge of $10.5 million relating to the judgment against the
Company in favor of International Insurance Company ("International"), awarding
International $11.2 million, plus interest from March 1995. The Company recorded
a charge to income in the first quarter of 1997 of $12.9 million as an unusual
item, which represented the amount of the judgment plus interest to date. On
July 15, 1997, the Company agreed to settle with International by dropping an
appeal and paid a reduced amount on July 30, 1997 in complete settlement of all
outstanding amounts. As a result of the settlement, the Company recorded a
favorable adjustment of $2.4 million as an unusual item in the second quarter of
1997.
In addition, the Company recorded unusual charges of $20.8 million in the third
quarter of 1997. Of these charges, $15.8 million related to the sale of the
Company and represented indirect and general expenses incurred by the Company in
connection with the sale process which were paid in 1997, and $5 million related
to an additional legal provision concerning certain litigation matters.
1996
During the fourth quarter of 1996, the Company recognized unusual charges of
$17.4 million ($1.02 per share) in income from continuing operations. These
charges include $.3 million related to the restructuring and cost reduction
programs within the Company's operating units, and $17.1 million related to the
write-down of certain businesses being held for sale and certain non-operating
real estate being held for sale to net realizable value.
1995
During the fourth quarter of 1995, the Company recognized unusual charges of
$8.1 million ($.48 per share) in income from continuing operations. These
charges include $3.1 million in severance benefits and other expenses related to
a Company-wide program to reduce general and administrative costs (See Note 4)
and $5 million related to the write-down of certain non-operating real estate to
net realizable value.
Note 8 Income Taxes
The components of income tax expense (benefit) from continuing operations are:
Post-Acquisition Pre-Acquisition
August 29, 1997 January 1, 1997
Year Ended December 31 to December 31, to August 28,
(Dollars in thousands) 1997 1997 1996 1995
- -----------------------------------------------------------------------------------------------------
Current:
Federal $--- $ --- $ --- $ ---
Foreign 94 994 2,386 1,528
State 141 260 277 303
- -----------------------------------------------------------------------------------------------------
235 1,254 2,663 1,831
- -----------------------------------------------------------------------------------------------------
Deferred:
Federal --- --- 10,000 (17,000)
Foreign and State --- --- --- ---
- -----------------------------------------------------------------------------------------------------
--- --- 10,000 (17,000)
- -----------------------------------------------------------------------------------------------------
$235 $1,254 $12,663 $(15,169)
==================================================-==================================================
Income tax expense for 1997, 1996 and 1995 from discontinued operations was $.7
million, $1 million and $1.3 million, respectively.
F-13
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Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets and liabilities as of December 31, 1997 and
1996 are as follows:
December 31
(Dollars in thousands) 1997 1996
- ------------------------------------------------------------------------------------------------
Current Long-term Current Long-term
- ------------------------------------------------------------------------------------------------
Deferred tax assets:
Postretirement benefit
obligation $ 595 $ 5,809 $ 595 $ 6,367
Expenses not currently
deductible 28,911 7,280 21,516 7,185
Net operating loss carryover -- 35,436 -- 37,269
Tax credit carryover -- 2,783 -- 2,133
- ------------------------------------------------------------------------------------------------
Total deferred tax assets 29,506 51,308 22,111 52,954
Valuation allowance for
deferred tax assets (19,418) (33,839) (12,946) (31,119)
- ------------------------------------------------------------------------------------------------
Net deferred tax assets 10,088 17,469 9,165 21,835
- ------------------------------------------------------------------------------------------------
Deferred tax liabilities:
Tax over book depreciation -- 15,271 -- 18,289
Other -- 7,232 -- 7,436
- ------------------------------------------------------------------------------------------------
Total deferred tax liabilities -- 22,503 -- 25,725
- ------------------------------------------------------------------------------------------------
Net deferred tax assets
(liabilities) $ 10,088 $ (5,034) $ 9,165 $ (3,890)
================================================================================================
At December 31, 1997, unremitted earnings of foreign subsidiaries were
approximately $21.4 million. Since it is the Company's intention to indefinitely
reinvest these earnings, no U.S. taxes have been provided. Determination of the
amount of unrecognized deferred tax liability on these unremitted earnings is
not practicable. The amount of foreign withholding taxes that would be payable
upon remittance of those earnings is approximately $.9 million.
The components of income (loss) from continuing operations before income taxes
and extraordinary item:
Post-Acquisition Pre-Acquisition
August 29, 1997 January 1, 1997
Year Ended December 31 to December 31, to August 28,
(Dollars in thousands) 1997 1997 1996 1995
- ---------------------------------------------------------------------------------------------------
United States $(7,612) $(29,023) $(22,663) $(14,722)
Foreign 2,158 (974) 2,258 6,731
===================================================================================================
$(5,454) $(29,997) $(20,405) $(7,991)
===================================================================================================
U.S. income tax expense (benefit) at the statutory tax rate is reconciled below
to the overall U.S. and foreign income tax expense (benefit).
F-14
15
Post-Acquisition Pre-Acquisition
August 29, 1997 January 1, 1997
Year Ended December 31 to December 31, to August 28,
(Dollars in thousands) 1997 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------
Tax at U.S. federal income tax rate $ (1,909) $ (10,499) $ (7,142) $ (2,797)
State taxes, net of federal income
tax effect 92 169 188 197
Impact of foreign tax rates and
credits 228 (660) (331) (828)
Net U.S. tax on distributions of
current foreign earnings 355 --- 755 586
Goodwill amortization and write-off 458 222 4,276 643
Change in valuation reserve 1,720 7,472 12,390 (21,685)
Nondeductible foreign losses 89 1,017 1,914 ---
Other (798) 3,533 613 8,715
- --------------------------------------------------------------------------------------------------------------
Income tax expense (benefit) $ 235 $ 1,254 $ 12,663 $(15,169)
==============================================================================================================
The Company has net operating loss carryforwards of approximately $101 million
expiring in years 2002 through 2012, and minimum tax credits of approximately
$2.8 million, which may be carried forward indefinitely. Included in the net
operating loss carryforwards are foreign tax credits of approximately $7.4
million, expiring through 2001, which, for financial and tax reporting purposes,
are reflected as deductible foreign taxes. These carryforwards are available to
offset future federal taxable income, subject to the Section 382 limitations.
The Company establishes valuation allowances in accordance with the provisions
of FASB Statement No. 109, "Accounting for Income Taxes." The Company
continually reviews the adequacy of the valuation allowance and is recognizing
these benefits only as reassessment indicates that it is more likely than not
that the benefits will be realized.
In 1995, the Company reduced the valuation allowance applied against the net
operating loss carryforwards by $17 million based upon reasonable and prudent
tax planning strategies and future income projections including the planned sale
of Roltra-Morse. As a result of withdrawing Roltra-Morse from potential sale in
1996, the Company recorded a provision of $10 million against deferred tax
benefits previously recognized based on an anticipated gain on this sale. This
reduced the deferred tax benefit to $5.3 million at December 31, 1996, to a
level where management believes that it is more likely than not that the tax
benefit will be realized. The total amount of future taxable income in the U.S.
necessary to realize the asset is approximately $14.5 million. The Company will
generate this income principally through the completed sale of Roltra-Morse in
February 1998. Although the Company has a history of prior losses, these losses
were primarily attributable to divested businesses and unusual items. The
remaining valuation allowance is necessary due to the uncertainty of future
income estimates.
Note 9 Notes Payable and Long-Term Debt
On August 29, 1997, the Company completed the refinancing of its domestic senior
debt. Under terms of the refinancing, the Company entered into an agreement for
$143 million in senior secured credit facilities with a group of lenders (the
"New Credit Agreement"). Initial borrowings under the New Credit Agreement were
approximately $127.1 million. Proceeds of the New Credit Agreement were used to
refinance all obligations under the Company's previous credit agreement. The
cost of the implementation of the New Credit Agreement will be amortized over
its term.
F-15
16
The New Credit Agreement, which is secured by the assets of the Company's
domestic operations and all or a portion of the stock of certain subsidiaries,
provided for a five year, $70 million revolving credit facility (which includes
a $30 million letter of credit sub-facility), and a $73 million term loan
facility ("Term Loans") amortizing to August 29, 2002. Proceeds from the August
29, 1997 sale of the Instrumentation business were used to repay amounts on the
revolving credit facility and Term Loans of $54.2 million and $13.9 million,
respectively (See Note 3). At the same time, and in keeping with the terms of
the New Credit Agreement, the $73 million term loan facility was reduced to $59
million, which reduced the total facility to $129 million.
On February 27, 1998, the Company completed the sale of its Roltra-Morse
business to Magna International Inc. (See Note 3). This transaction will be
reflected in the Company's financial statements in the first quarter of 1998.
The net proceeds were used to reduce domestic senior debt by $30 million on
February 27, 1998, including $8 million of the outstanding Term Loans. The sale
of Roltra-Morse and use of the proceeds to reduce its domestic senior debt
increased the availability under its revolving credit facility to purchase a
portion of its 11.75% senior subordinated notes (the "Notes") on the open
market. During the first quarter of 1998, the Company purchased, in the open
market at a premium, a portion of its Notes in the face amount of $33.1 million.
As a result of the early extinguishment of these Notes, and a portion of the
term loan facility with the proceeds from the Roltra-Morse sale, an
extraordinary charge of $5.6 million will be recognized in the first quarter of
1998.
Notes Payable
As of December 31, 1997, the Company had under the New Credit Agreement,
borrowings of $25 million outstanding under the revolving credit facility, as
well as $13.9 million of outstanding standby letters of credit. The Company's
continuing operations had $8 million in foreign short-term credit facilities
with amounts outstanding at December 31, 1997 of $1.9 million. Due to the
short-term nature of these debt instruments it is the Company's opinion that the
carrying amounts approximate the fair value. The weighted average interest rate
on short-term notes payable was 8.03% and 8.35% at December 31, 1997 and
December 31, 1996, respectively.
Long-Term Debt
Long-term debt of continuing operations consists of the following:
December 31 (Dollars in thousands) 1997 1996
- --------------------------------------------------------------------------------------------------
Term Loans (1) (2) $ 59,000 $ --
Term Loan A, $1.25 million due quarterly July 31, 1996 to
April 30, 2001 -- 22,500
Term Loan B, $2.2 million due quarterly July 31, 1997 to
April 30, 2001 -- 28,122
Term Loan C, $.125 million due quarterly July 31, 1996 to
April 30, 2001 and $5.3 million due quarterly July 31,
2001 to April 30, 2003 -- 44,750
Senior subordinated notes with interest at 11.75%, due
May 1, 2006, net of unamortized discount of $1.7 million
in 1997 and $2.1 million in 1996 133,381 152,858
Other 6,020 8,443
- --------------------------------------------------------------------------------------------------
198,401 256,673
Less current portion 6,082 11,666
- --------------------------------------------------------------------------------------------------
$192,319 $ 245,007
==================================================================================================
F-16
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(1) Quarterly principal payments commencing May 29, 1998 are as follows: $1.475
million due quarterly May 29, 1998 to August 29, 1998; $2.2 million due
quarterly November 29, 1998 to August 29, 1999; $2.58 million due quarterly
November 29, 1999 to August 29, 2000; $3.69 million due quarterly November
29, 2000 to August 29, 2001; and $5.53 million due quarterly November 29,
2001 to August 29, 2002.
(2) These loans bear interest at prime plus 1.25%, or LIBOR plus 2.5%. The
prime and LIBOR margins are a sliding scale based on the Company's total
debt to EBITDA (Earnings Before Interest, Taxes, Depreciation and
Amortization.)
The aggregate annual maturities of long-term debt from continuing operations, in
thousands, for the four years subsequent to 1998 are: 1999 - $9,690; 2000 -
$11,770; 2001 - $17,018; and 2002 - $16,927.
Total debt of the Discontinued Operations, in thousands, amounted to $21,652 and
$33,012 as of December 31, 1997 and 1996, respectively. Of these amounts, $4,797
and $8,295 represent the long-term portion.
The Term Loans have required mandatory prepayments under certain conditions such
as from proceeds from asset sales, specified percentages of net proceeds of debt
or equity issuances, and a percentage of excess cash flow. The mandatory
prepayments will be applied to the Term Loans pro rata, and then to the
repayment of the revolving credit facility. Mandatory prepayments applied to the
Term Loans reduce the scheduled quarterly principal payments on a pro rata
basis. The interest rates on the Term Loans are based on current market rates.
Consequently, the carrying value of the Term Loans approximates fair value.
The Notes are not redeemable prior to May 1, 2001, except that, until May 1,
1999, the Company may redeem, at its option, up to an aggregate of $55 million
of the principal amount of the Notes at 110% of their principal amount plus
accrued interest with the net proceeds of one or more public equity offerings
provided that at least $100 million of the principal amount of the Notes remains
outstanding after each such redemption. On or after May 1, 2001, the Notes are
redeemable at the option of the Company, in whole or in part, at 106% of their
principal amount, plus accrued interest, declining to 100% of their principal
amount plus accrued interest on or after May 1, 2004. Interest is payable
semi-annually on May 1 and November 1. On September 16, 1997, the Company
offered to purchase all of the Notes at 101% of the principal amount, as
required under the indenture governing the Notes as a result of the Acquisition.
No Notes were tendered in the offer. On November 25, 1997, the Company
purchased, through an open market transaction, Notes in the face amount of $19.9
million at a purchase price of 111.47 % of the principal amount. The fair value
of the $135.1 million of these instruments outstanding at December 31, 1997,
based on market bid prices, was $152.3 million.
The New Credit Agreement requires the Company to meet certain objectives with
respect to financial ratios. The New Credit Agreement and the Notes contain
provisions, which place certain limitations on dividend payments and outside
borrowings. Under the most restrictive of such provisions, the New Credit
Agreement requires the Company to maintain certain minimum interest coverage,
fixed charge coverage and maximum permitted debt levels and prohibits dividends.
The Company was in compliance with all of its covenants under the New Credit
Agreement at December 31, 1997.
An extraordinary charge of $3.3 million ($.20 per share) was recorded in 1997.
In the third quarter of 1997, a $.3 million extraordinary charge consisting of
the write-off of deferred debt expense was recorded related to the repayment of
a portion of the Term Loans under the New Credit Agreement with the proceeds
from the sale of the Instrumentation business. An extraordinary charge of $3
million was recorded in the fourth quarter of 1997, as a result of the open
market purchase of $19.9
F-17
18
million of the Notes in November 1997. This charge represents a cash outlay of
$2.3 million incurred in connection with the early extinguishment of the debt as
well as the write-off of previously deferred loan costs.
An extraordinary charge of $8.5 million ($.49 per share) was recorded in the
second quarter of 1996, as a result of the April 1996 refinancing of the
Company's domestic senior debt and its then outstanding 12% and 12.25% senior
subordinated debentures. This charge represents cash outlays of $5.1 million
incurred in connection with the early extinguishment of the debt as well as the
write-off of previously deferred loan costs.
In connection with the early repayment and redemption of domestic senior debt
and $80 million of the then outstanding 12.25% senior subordinated debentures in
1995, the Company recorded a $4.4 million ($.26 per share) charge as an
extraordinary item. The charge consisted of the write-off of deferred debt
expense associated with portions of the domestic senior debt repaid and the
12.25% senior subordinated debentures redeemed.
Note 10 Shareholders' Equity
Equity Incentive Plans
On August 29, 1997, the Board of Directors accelerated the exercisability and
deemed exercised for cash all stock options outstanding under the Company's
Equity Incentive Plan for Key Employees, the Equity Incentive Plan for Outside
Directors, and the 1995 Equity Incentive Plan for Outside Directors,
(collectively the "Plans"). The cash paid for outstanding stock options deemed
exercised was based upon the greater of the excess of the tender offer price of
Acquisition Corp. of $7.05 over the per share option exercise price and zero.
The cash payment of outstanding options resulted in no options remaining
outstanding as of August 29, 1997. In addition, on November 5, 1997, pursuant to
resolution of the Board of Directors, the Plans were terminated effective August
29, 1997.
Stock options granted during 1997 under the Plans have been valued based upon
the difference between the exercise price on the date of grant and Acquisition
Corp.'s tender offer price of $7.05. The Company has followed Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees"
("APB 25") in accounting for its stock option plans, but has disclosed the
supplemental information as required under FASB Statement No. 123, "Accounting
for Stock-Based Compensation" ("Statement 123"). Under APB 25, because the
exercise price of the Company's employee stock options equals the market price
of the underlying stock on the date of grant, no compensation expense is
recognized other than for restricted stock awards.
Under the Company's Equity Incentive Plan for Key Employees, up to 3,050,000
shares of the Company's $1.00 par value common stock were issuable pursuant to
the granting of stock options, stock appreciation rights, restricted stock
awards and restricted unit awards to key employees. Options were granted at no
less than 100 percent of the fair market value of the Company's common stock on
the date of grant or on the prospective date fixed by the Board of Directors.
None of these options were exercisable for at least a one-year period from the
date of grant. After this waiting period, 25 percent of each option, on a
cumulative basis, could be exercised in each of the following four years.
Additionally, each option terminated no later than 10 years from the date of
grant.
The Equity Incentive Plan for Key Employees permitted awards of restricted stock
to key employees subject to a restricted period and a purchase price, if any, to
be paid by the employee as determined by the committee administering the Equity
Incentive Plan. The vesting of restricted stock awards was subject to a defined
vesting period and to the Company's common stock achieving certain
F-18
19
performance levels during such period. No grants of restricted stock were made
in 1997 or 1995. Grants of 35,000 shares of restricted stock were made in 1996.
All employees, who held vested restricted stock as August 29, 1997, were
compensated for the stock in cash at the Acquisition Corp. tender offer price of
$7.05. No restricted stock was outstanding as of December 31, 1997.
A summary of the Company's stock option activity under the Equity Incentive Plan
for Key Employees and related information is as follows:
Year Ended December 31 Weighted Weighted Weighted
(Shares in thousands) -Average -Average -Average
Exercise Exercise Exercise
1997 Price 1996 Price 1995 Price
- ------------------------------------------------------------------------------------------------------
Options:
Granted 15 $3.00 254 $4.08 250 $ 6.00
Exercised (455) $4.77 -- -- (73) $ 7.32
Forfeited (101) $8.30 (292) $8.12 (210) $10.27
Canceled (885) $8.44 -- -- -- --
Outstanding at end of year -- -- 1,426 $7.32 1,464 $ 8.02
Exercisable at end of year -- -- 718 $8.15 691 $ 8.24
Available for grant at end of
year -- 868 865
Weighted-average fair value
of options granted during
the year $4.05 $ 2.50 $ 3.53
- ------------------------------------------------------------------------------------------------------
At December 31, 1997, the Company had no options outstanding under the plan
pursuant to the termination of the plan by the Board of Directors on November 5,
1997, effective August 29, 1997.
During 1988, the Company adopted the Equity Incentive Plan for Outside
Directors. This plan provided for the granting of non-qualified stock options of
up to 360,000 shares of the Company's common stock to directors of the Company
who are not employees of the Company or any of its affiliates. Pursuant to this
plan, options could be granted at no less than 100 percent of the fair market
value of the Company's common stock on a date five business days after the
option was granted and no option granted could be exercised during the first
year after its grant. After this waiting period, 25 percent of each option, on a
cumulative basis, could be exercised in each of the following four years. Each
option terminated no later than 10 years from the date of grant. In February
1988, 320,000 stock options were granted at $16.19 per share. In December 1990,
40,000 stock options were granted at $10.375 per share. In June 1995, the plan
was amended to reduce the number of shares issuable to an aggregate of 360,000
and to provide that no future options could be granted thereunder. All
outstanding stock options under the plan were canceled effective August 29, 1997
pursuant to resolution of the Company's Board of Directors. On November 5, 1997,
the plan was terminated pursuant to resolution of the Board of Directors
effective August 29, 1997.
In June 1995, the Company adopted the 1995 Equity Incentive Plan for Outside
Directors. This plan provided for the granting of restricted stock awards and
non-qualified stock options of up to 240,000 shares of the Company's common
stock to outside directors of the Company who are not employees of the Company
or any of its affiliates. Pursuant to this plan, each outside director was
granted, on an annual basis, options to purchase 4,000 shares of the Company's
common stock. The exercise price of the options was 100 percent of the fair
market value of the common stock at the date of grant and no options granted
could be exercised during the first year after its grant subject to certain plan
provisions. After this waiting period, the options became exercisable in four
equal annual installments of 1,000 shares. Additionally, each option terminated
no later than 10 years from the date of grant. This plan also provided for the
granting of an annual restricted stock
F-19
20
award of 1,000 shares of the Company's common stock. Each award was made in four
quarterly installments of 250 shares beginning July 1, 1995. The shares
comprising the restricted stock awards could not be sold or otherwise
transferred by the outside director until termination from service. Restricted
stock awards of 3,750 shares, 5,500 shares and 3,000 shares were granted during
1997, 1996 and 1995, respectively.
A summary of the Company's stock option activity under the 1995 Equity Incentive
Plan for Outside Directors and related information is as follows:
Year Ended December 31 Weighted Weighted Weighted
(Shares in thousands) -Average -Average -Average
Exercise Exercise Exercise
1997 Price 1996 Price 1995 Price
- -------------------------------------------------------------------------------------------------
Options:
Granted 20 $2.87 20 $7.88 24 $8.00
Exercised (20) $2.87 -- -- -- --
Canceled (44) $7.83 -- -- -- --
Outstanding at end of year -- -- 44 $7.94 24 $8.00
Exercisable at end of year -- -- 6 $8.00 -- --
Available for grant at end of
year -- 188 213
Weighted-average fair value
of options granted during
the year $4.18 $5.58 $5.61
- -------------------------------------------------------------------------------------------------
At December 31, 1997, the Company had no options outstanding under the plan
pursuant to the termination of the plan by the Board of Directors on November 5,
1997, effective August 29, 1997.
Pro forma net income (loss) and earnings (loss) per share determined as if the
Company has accounted for its employee stock options granted subsequent to
December 31, 1994 under the fair value method of Statement 123 follows:
Post-Acquisition Pre-Acquisition
August 29, 1997 January 1, 1997 to
to December 31, August 28,
1997 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------
Net income (loss) - as reported $(21,220) $(28,879) $(58,370) $29,710
Net income (loss) - pro forma $(21,220) $(28,879) $(58,643) $29,668
Earnings (loss) per share - as
reported $ (1.24) $ (1.68) $ (3.41) $ 1.74
Earnings (loss) per share - pro
forma $ (1.24) $ (1.68) $ (3.42) $ 1.74
- ---------------------------------------------------------------------------------------------------------------
F-20
21
The fair value for options and restricted stock awards granted in 1996 and 1995
was estimated at the date of grant using a Black-Scholes option pricing model
with the following weighted-average assumptions for the Equity Incentive Plans:
Equity Incentive Plan 1996 1995
for Key Employees ----------------------------- -------------
Stock Restricted Stock
Options Stock Awards Options
- ------------------------------------------------------------------------------------------------
Expected stock price volatility 0.528 0.510 0.495
Risk-free interest rate 6.16% 6.26% 5.93%
Expected life of equity instrument 7 years 5 years 7 years
Expected dividend yield 0% 0% 0%
- ------------------------------------------------------------------------------------------------
Stock options granted under the plan during 1997 have been valued based upon the
difference between the exercise price on the date of grant and Acquisition
Corp.'s tender offer price of $7.05.
During 1995, there were no restricted stock awards under the Equity Incentive
Plan for Key Employees.
1995 Equity Incentive Plan 1996 1995
for Outside Directors -------------------------- ---------------------------
Stock Restricted Stock Restricted
Options Stock Awards Options Stock Awards
- --------------------------------------------------------------------------------------------------------
Expected stock price volatility 0.522 0.523 0.512 0.497
Risk-free interest rate 6.31% 5.93% 6.31% 5.93%
Expected life of equity instrument 7 years 4 years 7 years 5 years
Expected dividend yield 0% 0% 0% 0%
- --------------------------------------------------------------------------------------------------------
For 1996 and 1995, the expected life of the restricted stock awards under the
plan represents the weighted-average of the remaining years until each of the
members of the Board of Directors attains the mandatory retirement age of 72.
This assumed that each of the directors would continue their directorships until
the mandatory retirement age.
The risk-free interest rates are based on U.S. Treasury Notes on the date of
grant with maturities equal to the respective stock option and restricted stock
award expected lives.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options and restricted stock awards. Option and restricted
stock valuation models require the input of highly subjective assumptions
including the expected stock price volatility.
For purposes of pro forma disclosures, the estimated fair value of the options
and restricted stock awards is amortized to expense over the options' vesting
period. Total compensation expense related to stock-based compensation awards
under Statement 123 for 1996 and 1995 was approximately $300,000 and $48,000,
respectively. In 1997, actual compensation expense is included in the net income
pro forma disclosures table. Compensation expense recorded by the Company under
APB 25 in 1997, 1996 and 1995 for awards granted during those years was
approximately $1.2 million, $27,000 and $6,000, respectively.
Preferred Stock Purchase Rights
On April 30, 1997, the Board of Directors declared a distribution of one
Preferred Stock Purchase Right (a "Right") for each outstanding share of Company
common stock to shareholders of record at the close of business on May 4, 1997.
Each Right entitles the registered holder to purchase from the Company a unit
consisting of 1/100 of a share (a "Unit") of Series B Junior Participating
Preferred Stock, par value $1.00 per share at a purchase price of $15 per Unit,
subject to
F-21
22
adjustment. The Rights will separate from the common stock and a Distribution
Date will occur upon the earlier of (i) 10 days following a public announcement
that a person or group of affiliated or associated persons has acquired, or
obtained the right to acquire, beneficial ownership of 15% or more of the
outstanding shares of Company common stock (the "Stock Acquisition Date") or
(ii) 10 business days following the commencement of a tender offer or exchange
offer that would result in a person or group beneficially owning 15% or more of
such outstanding shares of common stock. In the event that, at any time
following the Distribution Date, (i) the Company is the surviving corporation in
a merger and its common stock is not changed or exchanged, or (ii) a person or
beneficial owner of more than 15 % of the then outstanding shares of common
stock other than pursuant to an offer for all outstanding shares of common stock
that the independent directors determines to be fair to, and otherwise in the
best interests of stockholders, each holder of a Right will have the right to
receive Company common stock having a value equal to two times the exercise
price of the Right. If the Company is acquired subsequent to the Stock
Acquisition Date in which the Company is not the surviving corporation or 50% or
more of the Company's assets or earning power is sold or transferred, each
holder of a Right shall thereafter have the right to receive, upon exercise,
common stock of the acquiring company having a value equal to two times the
exercise price of the Right. At any time until 10 days following the Stock
Acquisition Date, the Company may redeem the Rights in whole, but not in part,
at a price of $.01 per Right, payable in cash or stock. After the redemption
period has expired, the Company's right of redemption may be reinstated if an
acquiring person reduces his beneficial ownership to 10% or less of the
outstanding shares of common stock in a transaction or series of transactions
not involving the Company. The Rights have certain antitakeover effects. The
Rights should not interfere with any merger or other business combination
approved by the Board of Directors of the Company since the Board of Directors
may, at its option, at any time prior to 10 days following the Stock Acquisition
Date redeem all but not less than all of the then outstanding Rights. In
addition, as a result of an amendment to the agreement governing the Rights, in
certain circumstances, the Rights by their terms will not interfere with a
merger between the Company and Acquisition Corp. or any affiliate of Acquisition
Corp. Pursuant to the agreement governing the Rights, the Board of Directors of
the Company may in general further amend the terms of the Rights. The Rights are
not exercisable until the Distribution Date and will expire at the close of
business on May 4, 2007.
Employees Stock Savings Plan
Prior to August 1, 1997, up to 1,600,000 shares of the Company's common stock
were reserved for issuance under the Company's Employee Stock Savings Plan
("ESSP"). The Committee of the ESSP approved a policy change, effective August
1, 1997, in that employer matching contributions to the ESSP are to be paid in
cash rather than through issuance of Company common stock. As of August 1, 1997,
this plan policy change effectively eliminated the restriction on the use of
authorized but unissued shares of common stock.
Common Stock Warrants
In July 1993, the Company issued warrants to purchase 200,000 shares of its
common stock at $9.02 per share (subject to adjustment in certain events), to
one of its senior lenders in connection with the restructuring of its senior
credit facilities. The warrants are exercisable on or before December 31, 1998.
Treasury Stock
On August 29, 1997, the Company canceled the shares of treasury stock
outstanding as of that date totaling 1,672,788 shares of the Company's common
stock with a cost basis of approximately $18 million.
F-22
23
Note 11 Operations by Industry Segment and Geographic Area
The Company classifies its continuing operations into three business segments:
Power Transmission, Pumps, and Morse Controls. Detailed information regarding
products by segment is contained in the section entitled "Business" included in
Part I, Item 1 of this Form 10-K Report. Amounts related to pre-Acquisition and
post-Acquisition have not been separated, as the effect of the Acquisition on
the segments was not material. The 1996 and 1995 amounts have been restated to
reflect Instrumentation and Roltra-Morse segments as discontinued operations.
Information about the business of the Company by business segment, foreign
operations and geographic area is presented below:
Year Ended December 31
(Dollars in thousands) 1997 1996 1995
- ---------------------------------------------------------------------------------------
Net Sales
Power Transmission $ 92,130 $ 89,456 $ 95,075
Pumps 112,486 107,567 94,375
Morse Controls 112,246 112,488 107,664
- ---------------------------------------------------------------------------------------
Total net sales $ 316,862 $ 309,511 $ 297,114
- ---------------------------------------------------------------------------------------
Segment operating income
Power Transmission $ 8,617 $ 8,618 $ 10,673
Pumps 14,503 11,229 9,219
Morse Controls 4,367 8,299 4,748
- ---------------------------------------------------------------------------------------
Total segment operating
income 27,487 28,146 24,640
- ---------------------------------------------------------------------------------------
Equity in income (loss) of
unconsolidated companies (519) (32) 302
Unallocated corporate expenses (1) (37,703) (23,988) (12,454)
Net interest expense (24,716) (24,531) (20,479)
- ---------------------------------------------------------------------------------------
Income (loss) from continuing
operations before income taxes and
extraordinary item $ (35,451) $ (20,405) $ (7,991)
=======================================================================================
A reconciliation of segment operating income to income from operations follows:
Year Ended December 31
(Dollars in thousands) 1997 1996 1995
- -----------------------------------------------------------------------------
Segment operating income $ 27,487 $ 28,146 $ 24,640
Unallocated corporate
expenses (1) (37,703) (23,988) (12,454)
Other (income) expense 177 355 (370)
- -----------------------------------------------------------------------------
Income (loss) from operations $(10,039) $ 4,513 $ 11,816
=============================================================================
(1) Unallocated corporate expenses include unusual items of $31.3 million, $17.1
million and $6.6 million for the years ended December 31, 1997, 1996 and 1995,
respectively.
Segment operating income includes $.3 million and $1.5 million of unusual items
related to the Morse Controls segment for the years ended December 31, 1996 and
1995, respectively.
F-23
24
Year Ended December 31
(Dollars in thousands) 1997 1996 1995
- -----------------------------------------------------------------------------------------
Identifiable assets
Power Transmission $ 41,903 $ 70,533 $ 86,343
Pumps 66,932 73,806 69,347
Morse Controls 74,585 110,141 111,482
Corporate 264,953 27,766 39,767
Discontinued Operations:
Electro-Optical (672) 14,356 11,893
Instrumentation -- 22,516 24,003
Roltra-Morse 15,489 11,331 21,534
Turbomachinery 110 473 983
- -----------------------------------------------------------------------------------------
Total identifiable assets $ 463,300 $330,922 $365,352
- -----------------------------------------------------------------------------------------
Depreciation and amortization
Power Transmission $ 4,412 $ 4,438 $ 4,618
Pumps 3,695 4,114 3,972
Morse Controls 4,073 3,335 3,392
Corporate 2,115 1,511 1,400
- -----------------------------------------------------------------------------------------
Total depreciation and
amortization $ 14,295 $ 13,398 $ 13,382
- -----------------------------------------------------------------------------------------
Capital expenditures
Power Transmission $ 1,333 $ 2,699 $ 3,384
Pumps 3,706 4,568 7,367
Morse Controls 3,144 2,554 2,131
Corporate 112 211 273
- -----------------------------------------------------------------------------------------
Total capital expenditures $ 8,295 $ 10,032 $ 13,155
=========================================================================================
Identifiable assets of corporate at December 31, 1997 include goodwill of $226
million related to the Acquisition (See Note 2). As such, at December 31, 1997,
the identifiable assets of the segments in continuing operations do not include
goodwill. The Roltra-Morse discontinued segment had goodwill of $8 million
included in identifiable assets as of December 31, 1997.
Identifiable assets at December 31, 1996 include $26.5 million, $6.7 million and
$28.5 million of goodwill for the Power Transmission, Pumps, and Morse Controls
segments, respectively, and goodwill of $.6 million and $9.5 million for the
Instrumentation and Roltra-Morse discontinued segments, respectively.
Identifiable assets at December 31, 1995 include $27.4 million, $5.3 million and
$29.6 million of goodwill for the Power Transmission, Pumps, and Morse Controls
segments, respectively, and goodwill of $.8 million and $12.1 million for the
Instrumentation and Roltra-Morse discontinued segments, respectively.
F-24
25
The continuing operations of the Company on a geographic basis are as follows:
Year Ended December 31
(Dollars in thousands) 1997 1996 1995
- -----------------------------------------------------------------------------------------
Net sales
United States $214,150 $210,196 $ 205,717
Foreign (principally Europe) 102,712 99,315 91,397
- -----------------------------------------------------------------------------------------
Total net sales $316,862 $309,511 $ 297,114
- -----------------------------------------------------------------------------------------
Segment operating income
United States $ 25,050 $ 20,948 $ 20,572
Foreign 2,437 7,198 4,068
- -----------------------------------------------------------------------------------------
Total segment operating income $ 27,487 $ 28,146 $ 24,640
- -----------------------------------------------------------------------------------------
Identifiable assets
Continuing Operations:
United States $380,263 $196,373 $ 221,449
Foreign 68,110 85,873 85,490
Discontinued Operations:
United States (562) 23,210 21,219
Foreign 15,489 25,466 37,194
- -----------------------------------------------------------------------------------------
Total identifiable assets $463,300 $330,922 $ 365,352
=========================================================================================
Export sales
Asia $ 5,011 $ 5,724 $ 3,469
Canada 4,878 3,236 4,641
Europe 2,745 3,133 2,590
Latin America 779 906 470
Middle East & North Africa 604 1,943 231
South America 7,349 6,739 2,678
Other 2,236 3,333 2,208
- -----------------------------------------------------------------------------------------
Total export sales $ 23,602 $ 25,014 $ 16,287
=========================================================================================
No one customer accounted for 10% or more of consolidated sales in 1997, 1996 or
1995.
Note 12 Pension Plans
The Company and its subsidiaries have various pension plans covering
substantially all of their employees. Benefits are based on either years of
service or years of service and average compensation during the years
immediately preceding retirement. It is the general policy of the Company to
fund its pension plans in conformity with requirements of applicable laws and
regulations. Effective December 31, 1996, all domestic pay-related plans were
merged into the Imo Industries Inc. Retirement Plan for U.S. Salaried Employees.
Pension benefits were not affected by the merger. For 1997, amounts related to
pre-Acquisition and post-Acquisition have not been separated due to materiality
and practicality.
Pension expense was $3.8 million in 1997, $4.3 million in 1996 and $4.2 million
in 1995, and includes amortization of prior service cost and transition amounts
for periods of 5 to 15 years. The 1997, 1996 and 1995 expense includes costs
related to retained pension liabilities of discontinued operations. The Company
included $2 million of curtailment and settlement losses in its gain on
f-25
26
disposal related to the discontinued operations in 1995. Net pension expense is
comprised of the following:
Year Ended December 31
(Dollars in thousands) 1997 1996 1995
- -----------------------------------------------------------------------------------------------------
Service cost $ 3,107 $ 4,282 $ 4,297
Interest cost on projected benefit
obligation 14,711 14,471 13,429
Actual return on plan assets (25,678) (20,868) (17,797)
Net amortization and deferral 11,689 6,374 4,274
- -----------------------------------------------------------------------------------------------------
Net pension expense $ 3,829 $ 4,259 $ 4,203
=====================================================================================================
Assumptions used to determine the net pension expense of the Company-sponsored
defined benefit plans are as follows:
Year Ended December 31 1997 1996 1995
- ---------------------------------------------------------------------------------------------------
Weighted average discount rate 7.5% 7.5% 8.5%
Rate of increase in compensation levels 5.3% 5.3% 5.3%
Expected long-term rate of return on assets 9.0% 9.0% 9.0%
===================================================================================================
The following table sets forth the funded status and amounts recognized in the
consolidated balance sheets for the defined benefit pension plans using discount
rates of 7.25% and 7.75% at December 31, 1997, and 1996, respectively. The
assumed rate of increase in compensation levels was 5.3% in both years.
Year Ended December 31
(Dollars in thousands) 1997 1996
- ------------------------------------------------------------------------------------------------------------------
Assets Accumulated Assets Accumulated
Exceed Benefits Exceed Benefits
Accumulated Exceed Accumulated Exceed
Benefits Assets Benefits Assets
- ------------------------------------------------------------------------------------------------------------------
Actuarial present value of benefit obligations:
Vested benefit obligation $186,675 $ 7,417 $163,375 $ 29,395
- ------------------------------------------------------------------------------------------------------------------
Accumulated benefit obligation $191,421 $ 7,849 $166,927 $ 29,783
- ------------------------------------------------------------------------------------------------------------------
Projected benefit obligation $200,929 $ 7,849 $182,288 $ 30,723
Plan assets at fair value 196,807 4,831 180,889 16,800
- ------------------------------------------------------------------------------------------------------------------
Plan assets in excess of (less than) projected
benefit obligation (4,122) (3,018) (1,399) (13,923)
Unrecognized net (gain) or loss -- -- (2,908) 2,734
Prior service cost not yet recognized in net
periodic pension cost -- -- 2,884 1,097
Unrecognized net (asset) obligation at transition -- -- 1,836 4
Adjustment required to recognize minimum
liability -- -- -- (3,797)
- ------------------------------------------------------------------------------------------------------------------
Pension asset (liability) recognized in the
balance sheet $ (4,122) $(3,018) $ 413 $(13,885)
==================================================================================================================
F-26
27
Effective with the December 31, 1996 measurement date, the discount rate,
expected long-term rate of return on assets and mortality assumptions were
revised to reflect current market and demographic conditions. As a result of
these changes, the December 31, 1996 projected benefit obligation increased by
approximately $11 million. These changes had no effect on the 1996 pension
expense and are not expected to have a material effect on future year's expense.
Plan assets at December 31, 1997 are invested in fixed dollar guaranteed
investment contracts, U.S. Government obligations, fixed income investments,
guaranteed annuity contracts and equity securities whose values are subject to
fluctuations of the securities market.
The Company maintains two defined contribution plans covering substantially all
domestic, non-union employees. Eligible employees may generally contribute from
1% to 15% of their compensation on a pre-tax basis. Company contributions to the
plans are based on a percentage of employee contributions. In July 1995, the
Company restored its matching contribution at 25% of the first 6% of each
participant's pre-tax contribution. The Company's expense for 1997, 1996 and
1995 was $.6 million, $.7 million and $.3 million, respectively.
Note 13 Postretirement Benefits
In addition to providing pension benefits, the Company provides certain health
care and life insurance benefits for certain retired union employees. The
Company's unionized retiree benefits are determined by their individually
negotiated contracts. The Company's contribution toward the full cost of the
benefits is based on the retiree's age and continuous unbroken length of service
with the Company. The Company's policy is to pay the cost of medical benefits as
claims are incurred. Life insurance costs are paid as insured premiums are due.
In March 1994, the Company amended its policy regarding non-union retiree
medical and life insurance. This amendment, which affects all current and future
non-union retirees, phased out the Company subsidy for retiree medical and life
insurance over the three-year period ended December 31, 1996. The pre-tax amount
amortized to income from continuing operations was $3.9 million in 1996 and in
1995. The amendment did not result in a significant increase or decrease in cash
requirements during the phase-out period.
The following tables set forth the plans' combined status reconciled with the
amounts included in the consolidated balance sheet:
December 31 (Dollars in thousands) 1997
- ---------------------------------------------------------------------------------------
Life
Medical Insurance
Plans Plans Total
- ---------------------------------------------------------------------------------------
Accumulated postretirement benefit obligation:
Retirees $ 7,165 $1,869 $ 9,034
Fully eligible active plan participants 76 49 125
Other active plan participants 144 42 186
- ---------------------------------------------------------------------------------------
7,385 1,960 9,345
Plan assets -- -- --
Unrecognized prior service cost -- 1,459 1,459
Unrecognized net gain 6,555 705 7,260
- ---------------------------------------------------------------------------------------
Postretirement benefit liability
recognized in the balance sheet $13,940 $4,124 $18,064
=======================================================================================
F-27
28
December 31 (Dollars in thousands) 1996
- ------------------------------------------------------------------------------------------------------
Life
Medical Insurance
Plans Plans Total
- ------------------------------------------------------------------------------------------------------
Accumulated postretirement benefit obligation:
Retirees $ 7,551 $ 1,965 $ 9,516
Fully eligible active plan participants 206 46 252
Other active plan participants 395 47 442
- ------------------------------------------------------------------------------------------------------
8,152 2,058 10,210
Plan assets -- -- --
Unrecognized prior service cost -- 1,605 1,605
Unrecognized net gain 6,502 801 7,303
- ------------------------------------------------------------------------------------------------------
Postretirement benefit liability
recognized in the balance sheet $14,654 $ 4,464 $19,118
======================================================================================================
The 1997 accrued postretirement benefits amount is classified as follows: $1.1
million current liabilities and $17 million long-term liabilities. For 1996,
these amounts are $1.7 million current liabilities and $17.4 million long-term
liabilities.
Effective January 1, 1997, the Company subsidy for medical coverage under the
Warren Pump Union plan was terminated. This termination resulted in a
curtailment gain of $.6 million for the year ended December 31, 1996.
Net periodic postretirement benefit cost included the following components:
Year Ended December 31
(Dollars in thousands) 1997
- --------------------------------------------------------------------------------------------
Life
Medical Insurance
Plans Plans Total
- --------------------------------------------------------------------------------------------
Service cost $ 7 $ 2 $ 9
Interest cost 571 154 725
Amortization of prior service cost -- (146) (146)
Amortization of gain (466) (40) (506)
- --------------------------------------------------------------------------------------------
Net periodic postretirement benefit cost $ 112 $ (30) $ 82
============================================================================================
Year Ended December 31
(Dollars in thousands) 1996
- --------------------------------------------------------------------------------------------------
Life
Medical Insurance
Plans Plans Total
- --------------------------------------------------------------------------------------------------
Service cost $ 24 $ 2 $ 26
Interest cost 650 157 807
Amortization of prior service cost (3,110) (2,318) (5,428)
Amortization of gain (449) (44) (493)
- --------------------------------------------------------------------------------------------------
Net periodic postretirement benefit cost $(2,885) $(2,203) $(5,088)
==================================================================================================
F-28
29
Year Ended December 31
(Dollars in thousands) 1995
- --------------------------------------------------------------------------------------------------
Life
Medical Insurance
Plans Plans Total
- --------------------------------------------------------------------------------------------------
Service cost $ 59 $ 5 $ 64
Interest cost 1,057 415 1,472
Amortization of prior service cost (3,110) (2,319) (5,429)
Amortization of (gain) loss (166) 102 (64)
- --------------------------------------------------------------------------------------------------
Net periodic postretirement benefit cost $(2,160) $(1,797) $(3,957)
==================================================================================================
Actual negotiated health care premiums were used in calculating 1997, 1996 and
1995 health care costs. It is expected that the annual increase in medical costs
will be 6.0% from 1997 to 1998, grading down to 5% general medical inflation
level in future years. The health care cost trend rate assumption has a
significant effect on the amounts reported. For example, a 1% increase in the
health care trend rate would increase the accumulated postretirement benefit
obligation at December 31, 1997 by $.6 million and the net periodic cost by $.1
million for the year. Effective January 1, 1995, the Company changed its medical
inflation rate to reflect actual experience. Such change resulted in a reduction
of the 1995 net periodic cost of $.8 million. The weighted average discount rate
used in determining the accumulated postretirement benefit obligation was 7.75%
in 1997 and 1996.
Note 14 Leases
The Company leases certain manufacturing and office facilities, equipment, and
automobiles under long-term leases. Future minimum rental payments required
under operating leases of continuing operations that have initial or remaining
noncancelable lease terms in excess of one year, as of December 31, 1997, are:
(Dollars in thousands)
- -----------------------------------------------------------
1998 $ 4,975
1999 3,477
2000 2,532
2001 2,176
2002 1,973
Thereafter 5,230
- -----------------------------------------------------------
Total minimum lease payments $20,363
===========================================================
Total rental expense under operating leases charged against continuing
operations was $7.8 million in 1997, $7.2 million in 1996 and $6.7 million in
1995.
Note 15 Contingencies
LILCO Insurance Litigation. In January 1993, the Company was served with a
complaint in a case brought in the U.S. District Court for the Northern District
of California by International alleging that International was entitled to
recover $10 million in defense costs, and $1.2 million of a judgment, each of
which was paid on behalf of the Company in connection with litigation between
the Company and Long Island Lighting Company ("LILCO") which was concluded in
October 1993. International's principal contention was that the International
policies did not cover the
F-29
30
matters in question in the LILCO case. In June 1995, the Court entered a
judgment in favor of International awarding it $11.2 million, plus interest from
March 1995 (the "International Judgment"). The International Judgment, however,
was not supported by an order, and in July 1995, the Court vacated the
International Judgment as being premature because certain outstanding issues of
recoverability of the $10 million in defense costs had not been finally
determined. On May 8, 1997, the Company was informed that the Court had
reinstated the International Judgment. The Company therefore recorded a charge
to income in the first quarter of 1997 of $12.9 million as an unusual item,
which represented the amount of the judgment plus interest to date. On July 15,
1997 the Company agreed to settle with International by dropping an appeal and
paid a reduced amount on July 30, 1997 in complete settlement of all outstanding
amounts. As a result of the settlement, the Company recorded a favorable
adjustment of $2.4 million as an unusual item in the second quarter of 1997 (See
Note 7).
Additional Litigation and Claims. The Company and one of its subsidiaries are
two of a large number of defendants in a number of lawsuits brought in various
jurisdictions by approximately 6,900 claimants who allege injury caused by
exposure to asbestos. Although neither the Company nor any of its subsidiaries
has ever been a producer or direct supplier of asbestos, it is alleged that the
industrial and marine products sold by the Company and the subsidiary named in
such complaints contained components which contained asbestos. Suits against the
Company and its subsidiary have been tendered to their insurers, who are
defending under their stated reservation of rights. In addition, the Company and
the subsidiary are named in cases involving approximately 22,000 claimants which
in 1996 were "administratively dismissed" by the U.S. District Court for the
Eastern District of Pennsylvania. Cases that have been "administratively
dismissed" may be reinstated only upon a showing to the Court that (i) there is
satisfactory evidence of an asbestos-related injury; and (ii) there is probative
evidence that the plaintiff was exposed to products or equipment supplied by
each individual defendant in the case. The Company believes that it has adequate
insurance coverage or has established appropriate reserves to cover potential
liabilities related to these cases.
The Company was a defendant in a lawsuit in the U.S. District Court for the
Western District of Pennsylvania, which alleged component failures in equipment
sold by its former diesel engine division. The complaint sought damages of
approximately $3 million. On September 30, 1997 the Court granted a Summary
Judgment motion filed by the Company which effectively dismissed all claims
against it. Plaintiffs have appealed this judgment to the United States Court of
Appeals for the Third Circuit.
The Company is a defendant in a lawsuit in the Circuit Court of Cook County,
Illinois alleging performance shortfalls in products delivered by the Company's
former Delaval Turbine Division and claiming damages of approximately $8
million. To date the Court has granted a series of Summary Judgment motions
filed by the Company which have significantly reduced the scope of damages which
the Plaintiff may claim but has permitted additional discovery to determine
whether any other damages exist which plaintiff may be entitled to seek at a
trial.
On June 3, 1997 the Company was served with a complaint in a case brought in the
Superior Court of New Jersey which alleges damages in excess of $10 million plus
interest incurred as a result of losses under a Government Contract Bid
transferred in connection with the sale of the Company's former Electro-Optical
Systems business. The Electro-Optical Systems business was sold in a transaction
that closed on June 2, 1995. The sales contract provided certain representations
and warranties as to the status of the business at the time of sale. The
complaint alleges that the Company failed to provide notice of a "reasonably
anticipated loss" under a bid that was pending at the time of the transfer of
the business and therefore a representation was breached. The contract was
subsequently awarded to the Company's Varo subsidiary and thereafter transferred
to the buyer. The case is in the preliminary stages of pleading but the Company
believes that there are legal and factual defenses to the claims and intends to
defend the action vigorously.
F-30
31
The Company is one of five defendants in an action brought in the United States
District Court for the Middle District of Louisiana. In April 1991 the Company's
former Deltex Division performed a repair of a turbine. Following the repair the
turbine was included in a spare parts pool until January 1995. The plaintiff
alleges that following installation in its plant the turbine experienced severe
vibrations requiring the turbine to be run at less than optimal speed. They
further allege that the shortfall in performance caused them to incur repair
costs, and consequential damages in excess of $5 million. The lawsuit is in the
early discovery stage, however, the Company believes that there are legal and
factual defenses to the claims and intends to defend the action vigorously.
The operations of the Company, like those of other companies engaged in similar
businesses, involve the use, disposal and clean up of substances regulated under
environmental protection laws. In a number of instances the Company has been
identified as a Potentially Responsible Party by the U.S. Environmental
Protection Agency, and in one instance by the State of Washington, with respect
to the disposal of hazardous wastes at a number of facilities that have been
targeted for clean-up pursuant to CERCLA or similar state law. Similarly, the
Company has received notice that it is one of a number of defendants named in an
action filed in the United States District Court, for the Southern District of
Ohio Western Division by a group of plaintiffs who are attempting to allocate a
share of cleanup costs, for which they are responsible, to a large number of
additional parties, including the Company. Although CERCLA and corresponding
state law liability is joint and several, the Company believes that its
liability will not have a material adverse effect on the financial condition of
the Company since it believes that it either qualifies as a de minimis or minor
contributor at each site. Accordingly, the Company believes that the portion of
remediation costs that it will be responsible for will not be material.
The Company is also involved in various other pending legal proceedings arising
out of the ordinary course of the Company's business. None of these legal
proceedings is expected to have a material adverse effect on the financial
condition of the Company. With respect to these proceedings and the litigation
and claims described in the preceding paragraphs, management of the Company
believes that it either will prevail, has adequate insurance coverage or has
established appropriate reserves to cover potential liabilities. There can be no
assurance, however, as to the ultimate outcome of any of these matters, and if
all or substantially all of these legal proceedings were to be determined
adversely to the Company, there could be a material adverse effect on the
financial condition of the Company.
The Company is self-insured for a portion of its product liability and certain
other liability exposures. Depending on the nature of the liability claim, and
with certain exceptions, the Company's maximum self-insured exposure ranges from
$250,000 to $500,000 per claim with certain maximum aggregate policy limits per
claim year. With respect to the exceptions, which relate principally to diesel
and turbine units sold before 1991, the Company's maximum self-insured exposure
is $5 million per claim.
F-31
32
ARTHUR ANDERSEN LLP
Report of Independent Public Accountants
To the Shareholders and Board of Directors of
Imo Industries Inc.:
We have audited the accompanying consolidated balance sheet of Imo Industries
Inc. (a Delaware corporation) and subsidiaries as of December 31, 1997, and the
related consolidated statements of income, shareholders' equity and cash flows
for the periods from August 29, 1997 through December 31, 1997
(post-Acquisition), and from January 1, 1997 through August 28, 1997
(pre-Acquisition.) These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Imo Industries Inc.
and subsidiaries as of December 31, 1997, and the results of their operations
and their cash flows for the periods from August 29, 1997 through December 31,
1997 (post-Acquisition), and from January 1, 1997 through August 28, 1997
(pre-Acquisition), in conformity with generally accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
Richmond, Virginia
March 20, 1998
F-32
33
ARTHUR ANDERSEN LLP
Report of Independent Public Accountants on Schedule II
To the Shareholders and Board of Directors of
Imo Industries Inc.:
We have audited in accordance with generally accepted auditing standards the
consolidated financial statements included in the Form 10-K Annual Report of Imo
Industries Inc. (a Delaware corporation) and subsidiaries as of December 31,
1997, and for the periods from August 29, 1997 through December 31, 1997
(post-Acquisition), and from January 1, 1997 through August 28, 1997
(pre-Acquisition), and have issued our report thereon dated March 20, 1998. Our
audits were made for the purpose of forming an opinion on the basic consolidated
financial statements taken as a whole. Schedule II filed as a part of the
Company's Form 10-K Annual Report is the responsibility of the Company's
management and is presented for purposes of complying with the Securities and
Exchange Commission's rules and is not a part of the basic consolidated
financial statements. This schedule has been subjected to the auditing
procedures applied in the audit of the basic consolidated financial statements
and, in our opinion, fairly states, in all material respects, the financial data
required to be set forth therein in relation to the basic consolidated financial
statements taken as a whole.
/s/ ARTHUR ANDERSEN LLP
Richmond, Virginia
March 20, 1998
F-33
34
REPORT OF INDEPENDENT AUDITORS
Board of Directors,
Imo Industries Inc.
We have audited the accompanying consolidated balance sheet of Imo Industries
Inc. and subsidiaries as of December 31, 1996 and the related consolidated
statements of income, shareholders' equity, and cash flows and for each of the
two years in the period ended December 31, 1996. Our audits also included the
financial statement schedule listed in the Index at Item 14(a) for these same
periods. These financial statements and schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatements. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Imo Industries
Inc. and subsidiaries at December 31, 1996, and the consolidated results of
their operations and their cash flows for each of the two years in the period
ended December 31, 1996, in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic financial statements as a whole, presents
fairly in all material respects the information set forth therein.
/s/ ERNST & YOUNG LLP
Princeton, New Jersey
February 19, 1997, except for Note 3 as to which
the date is February 2, 1998
F-34
35
IMO INDUSTRIES INC. AND SUBSIDIARIES
QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Quarterly financial information for 1997 and 1996 is as follows:
PRE- POST-
ACQUISITION ACQUISITION
JULY 1, AUGUST 29,
1ST 2ND 1997 TO 1997 TO 4TH
1997 (Dollars in thousands except per share amounts) (a) QUARTER QUARTER AUGUST 28, SEPTEMBER QUARTER
1997 30, 1997
Net Sales $ 78,927 $81,305 $ 49,919 $ 26,816 $ 79,895
Gross profit 24,628 25,797 14,450 7,316 22,798
Income (loss) before extraordinary item:
Continuing Operations (14,328) 1,205 (18,128) (5,717) 28
Discontinued Operations 1,486 1,224 (338) (8,860) (3,323)
Extraordinary Item -- -- -- (287) (3,061)
Net income (loss) (12,842) 2,429 (18,466) (14,864) (6,356)
Earnings (loss) per share, basic and diluted: Before extraordinary item:
Continuing Operations (.84) .07 (1.05) (.33) --
Discontinued Operations .09 .07 (.02) (.52) (.19)
Extraordinary Item -- -- -- (.02) (.18)
Net income (loss) (.75) .14 (1.07) (.87) (.37)
1st* 2nd* 3rd* 4th*
1996 (Dollars in thousands except per share amounts) (a) Quarter Quarter Quarter Quarter
Net Sales $80,062 $ 78,299 $ 75,498 $ 75,652
Gross profit 23,517 22,460 20,444 22,501
Income (loss) before extraordinary item:
Continuing Operations 749 (494) (12,525) (20,798)
Discontinued Operations 1,191 1,350 (7,241) (12,147)
Extraordinary Item -- (8,455) -- --
Net income (loss) 1,940 (7,599) (19,766) (32,945)
Earnings (loss) per share, basic and diluted:
Before extraordinary item:
Continuing Operations .04 (.03) (.73) (1.21)
Discontinued Operations .07 .08 (.43) (.71)
Extraordinary Item -- (.49) -- --
Net income (loss) .11 (.44) (1.16) (1.92)
* Restated to conform to 1997 full year presentation.
(a) The notes to the consolidated financial statements located in Part IV of
this Form 10-K Report as indexed at Item 14(a)(1) should be read in
conjunction with this summary.
F-35
36
SCHEDULE II
IMO INDUSTRIES INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(Dollars in thousands)
THREE-YEAR PERIOD ENDED DECEMBER 31, 1997
ADDITIONS
BALANCE ----------------------
AT CHARGED BALANCE
BEGINNING TO COSTS OTHER - DEDUCTIONS - AT END
OF YEAR EXPENSES DESCRIBE DESCRIBE OF YEAR
------- ------- ------- ------- -------
YEAR ENDED DECEMBER 31, 1997:
Allowance for doubtful accounts $ 1,346 $ 1,813 $ 32 (2) $ 295 (3) $ 1,435
55 (1)
1,406 (9)
======= ======= ======= ======= =======
Inventory valuation allowance $ 9,929 $13,418 $ 360 (2) $ 3,613 (5) $ 9,508
382 (1)
10,204 (9)
======= ======= ======= ======= =======
Valuation allowance for deferred $44,065 $ 9,192 $ -- $ -- $53,257
tax assets
======= ======= ======= ======= =======
Accrued product warranty liability $ 2,007 $ 1,815 $ -- $ 28 (1) $ 1,844
1,950 (4)
======= ======= ======= ======= =======
YEAR ENDED DECEMBER 31, 1996: *
Allowance for doubtful accounts $ 1,507 $ 252 $ 19 (2) $ 398 (3) $ 1,346
34 (1)
======= ======= ======= ======= =======
Inventory valuation allowance $ 9,560 $ 1,136 $ 305 (2) $ 1,213 (5) $ 9,929
141 (1)
======= ======= ======= ======= =======
Valuation allowance for deferred $31,675 $12,390 $ -- $ -- $44,065
tax assets
======= ======= ======= ======= =======
Accrued product warranty liability $ 2,159 $ 2,473 $ -- $ 2,458 (4) $ 2,007
143 (2)
24 (1)
======= ======= ======= ======= =======
YEAR ENDED DECEMBER 31, 1995: *
Allowance for doubtful accounts $ 1,696 $ 314 $ 30 (1) $ 545 (3) $ 1,507
12 (6)
======= ======= ======= ======= =======
Inventory valuation allowance $ 9,582 $ 2,125 $ 273 (1) $ 74 (2) $ 9,560
30 (6) 2,376 (5)
======= ======= ======= ======= =======
Valuation allowance for deferred $68,910 $ -- $ -- $15,550 (2) $31,675
tax assets 17,000 (7)
4,685 (8)
======= ======= ======= ======= =======
Accrued product warranty liability $ 1,925 $ 1,121 $ 404 (2) $ 1,342 (4) $ 2,159
42 (1)
9 (6)
======= ======= ======= ======= =======
* Restated to conform to the 1997 presentation (continuing operations).
(1) Foreign exchange adjustments.
(2) Reclassifications and adjustments.
(3) Uncollectible accounts written off, net of recoveries.
(4) Product warranty claims honored during the year.
(5) Charges against inventory valuation account during the year.
(6) Opening balance of companies acquired during the year.
(7) Adjustment due to revaluation of realizable tax benefit.
(8) Utilization of net operating loss carryforwards by discontinued operations.
(9) In conjunction with the Acquisition of the Company and purchase accounting
adjustments as of August 28, 1997, the reserves were reset to zero.
S-1