-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Uwe4OOLQ8ixbYXC+2dEjT76xYZcX62IcCW8PSczCStdC5aXmuaGyl3DeLicqoTzN 7EQVfa/RZCmT6G/C9PB4vg== 0000804151-96-000023.txt : 19960816 0000804151-96-000023.hdr.sgml : 19960816 ACCESSION NUMBER: 0000804151-96-000023 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960815 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: IMO INDUSTRIES INC CENTRAL INDEX KEY: 0000804151 STANDARD INDUSTRIAL CLASSIFICATION: GENERAL INDUSTRIAL MACHINERY & EQUIPMENT [3560] IRS NUMBER: 210733751 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K/A SEC ACT: 1934 Act SEC FILE NUMBER: 001-09294 FILM NUMBER: 96616587 BUSINESS ADDRESS: STREET 1: 1009 LENOX DR STREET 2: PO BOX 6550 CITY: LAWRENCEVILLE STATE: NJ ZIP: 08648-0550 BUSINESS PHONE: 6098967600 MAIL ADDRESS: STREET 1: 1009 LENOX DR STREET 2: PO BOX 6550 CITY: LAWRENCEVILLE STATE: NJ ZIP: 08648-0550 FORMER COMPANY: FORMER CONFORMED NAME: IMO DELAVAL INC DATE OF NAME CHANGE: 19890313 FORMER COMPANY: FORMER CONFORMED NAME: TRANSAMERICA DELAVAL INC /DE DATE OF NAME CHANGE: 19861207 10-K/A 1 FORM 10-K/A FORM 10-K/A AMENDMENT NO. 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] For the fiscal year ended December 31, 1995 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the transition period from to Commission file number - 1-9294 Imo Industries Inc. (Exact name of registrant as specified in its charter) Delaware 21-0733751 (State or other jurisdiction (I.R.S. Employer Identification No.) of incorporation or organization) 1009 Lenox Drive, Building Four West Lawrenceville, New Jersey 08648 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code 609-896-7600. Securities registered pursuant to Section 12(b) of the Act: Name of each exchange on Title of each class which registered Common Stock, $1.00 par value New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X . No . Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statement incorporated by reference in Part III of this Form 10-K or any amendment to the Form 10-K. ( ) Aggregate market value of the voting stock held by non-affiliates of the Registrant computed by reference to the closing price of such stock on the New York Stock Exchange, Inc. on March 15, 1996...........................................$119,595,763 Shares of Registrant's common stock, $1.00 par value, outstanding as of March 15, 1996 ............................................17,085,109 DOCUMENTS INCORPORATED BY REFERENCE Identification of Documents Part into which Incorporated Portions of the Company's Proxy Items 10, 11, 12 of Part III Statement for its Annual Meeting of Stockholders to be held May 21, 1996 SECTIONS AMENDED BY THIS FORM 10-K/A Part II, Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations Part II, Item 8 Financial Statements and Supplementary Data - Notes 1, 2, 10, 14, and 15 to the Consolidated Financial Statements, and Report of Independent Auditors Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. The following discussion and analysis of the Company's consolidated results of operations and financial condition should be read in conjunction with the audited Consolidated Financial Statements included elsewhere in this Form 10-K Report. Overview In October 1992, the Company determined that it needed to delever its balance sheet through the sale of certain businesses and the application of the proceeds from the divestitures to reduce debt. Pursuant to this decision, the Company divested its Heim Bearings, Aerospace, Barksdale Controls and CEC Instruments businesses. See "Liquidity and Capital Resources" below. In 1993, management, under Donald K. Farrar, who became Chief Executive Officer in September 1993, initiated a strategy to reposition the Company to focus on its less capital intensive businesses that exhibited strong brand name recognition, a broad customer base and market leadership with less dependence on U.S. Government sales. In connection with this strategy, the Company divested its Turbomachinery and most of its Electro-Optical Systems businesses. This repositioning will be completed upon the sale of the Roltra-Morse business, the remaining portion of the Electro-Optical Systems business and certain non- operating real estate. See "Remaining Asset Sales" below. The Company's continuing businesses are now grouped into four core business segments for management and segment reporting purposes: Power Transmission, Pumps, Instrumentation and Morse Controls. Previously, the Power Transmission, Pumps and the Instrumentation business segments were all included in a single business segment and the Morse Controls business segment included the Roltra-Morse business. 1995 Asset Sales Electro-Optical Systems In January 1994, the Company announced a plan to sell its Electro-Optical Systems business. On January 3, 1995, the Company completed the sale of the Analytical Instruments division of its wholly owned subsidiary, Baird Corporation, for $12.3 million in cash, the proceeds of which were used to reduce outstanding amounts under its Credit Agreement dated August 5, 1994 (the "Existing Credit Agreement"). On June 2, 1995, the Company completed the sale of the Optical Systems and Ni-Tec divisions of its wholly owned subsidiary, Varo, Inc. ("Varo"), and the Optical Systems division of Baird for $50 million in cash, the proceeds of which were used to redeem $40 million in aggregate principal amount of the 12.25% senior subordinated debentures (the "Debentures") and to reduce outstanding amounts under the Existing Credit Agreement. In the second half of 1995, the Company recorded provisions totaling $13.3 million related to the Electro-Optical Systems business, $6.8 million of which was recorded in the third quarter related to the resolution of contingencies associated with such divisions sales, and $6.5 million of which was recorded in the fourth quarter related primarily to write-downs of remaining non-operating real estate to estimated fair market value. TurboMachinery On January 17, 1995, the Company completed the sale of its Delaval Turbine and TurboCare divisions, which comprised substantially all of the Company's former Turbomachinery business segment, and its 50% interest in Delaval-Stork, a Dutch joint venture. The final adjusted purchase price was $119 million, of which the Company received $109 million in cash at closing, with the balance earning interest until it is 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. The proceeds from this sale were used to repay in full term and bridge loans outstanding under the Existing Credit Agreement and to redeem $40 million in aggregate principal amount of the 12.25% Debentures. In the fourth quarter of 1995, the Company recorded a provision of $4.6 million related primarily to the resolution of contingencies associated with this sale. The fourth quarter provision partially offset the after-tax gain of $39.6 million recorded in the first quarter of 1995, bringing the net gain on these sales to $35.0 million. Remaining Asset Sales The remaining operation of the Company's Electro-Optical Systems business, which is Varo's Electronic Systems division, continues to be marketed to interested parties. The Company expects to complete the sale of this business in 1996 and plans to use the proceeds to reduce debt. In February 1996, the Company announced its intention to sell its Roltra-Morse business. The Company expects to complete the sale of this business in 1996 for proceeds in excess of net book value and plans to use the proceeds to reduce debt. Other non-operating real estate, representing less than 10% of the original value of assets announced to be sold in October 1992, remains for sale. Results for the fourth quarter of 1995 include an unusual charge of $5.0 million related to the write-down of this non-operating real estate to its net realizable value. Cost Reduction Programs In the fourth quarter of 1995, the Company recorded a charge to continuing operations of $4.0 million, including severance and other expenses related to a Company-wide program to reduce general and administrative costs. This program includes a reduction of 65 employees, or 2% of the total number of Company employees, including a reduction of the corporate headquarters staff by 20%. This program is expected to reduce general and administrative expenses by approximately $2.9 million in 1996, $4.0 million in 1997 and $5.0 million annually thereafter. The required cash outlay related to this program was $.4 million in 1995, and the expected cash requirements during 1996 are $3.2 million. The remainder of the charges represent non-cash charges. In 1993, the Company recorded a charge to continuing operations of $5.2 million for a cost reduction program which benefited 1994 and 1995 operating results. Following Mr. Farrar joining as Chief Executive Officer, the Company implemented cost-cutting measures at its core operations to reduce its expense structure and to eliminate duplicative functions. In addition, in connection with this 1993 cost reduction program, the Company consolidated certain operations in its European Instrumentation and Morse Controls businesses and revised operating processes and reduced employment levels at its Pumps segment and other operations. The number of Company employees in core operations declined by 205, or 7%, between mid-1993 and mid-1994. These organizational restructuring measures have been providing net cash benefits, compared to 1993 levels, which approximated $4.5 million and $1.5 million for continuing operations, in 1995 and 1994, respectively, and are expected to approximate $5.5 million annually thereafter, based largely on reduced employment costs. Results of Operations The Electro-Optical, Turbomachinery and Roltra-Morse businesses are accounted for as discontinued operations. Accordingly, their operating results have been segregated and reported as Discontinued Operations in the audited Consolidated Financial Statements included elsewhere in this Form 10-K. Financial results prior to 1995 have been reclassified to conform to current year presentation. 1995 Compared to 1994 Sales. Net sales from continuing operations in 1995 were $373.2 million, compared with $360.8 million in 1994. Sales from core operations (excluding operations sold in 1994 that were not accounted for as discontinued operations) increased 4.8% in 1995 compared with the 1994 level of $356.0 million. All sales in 1995 were from core operations. Each of the Company's four core business segments contributed to this increase. See "Segment Operating Results" below. Gross Profit. The gross profit in 1995 remained relatively constant at 30.8% of sales compared with 31.0% in 1994. See "Segment Operating Results" below. Selling, General and Administrative Expenses. Selling, general and administrative expenses increased $3.0 million, or 3.8%, in 1995 over the 1994 level. As a percent of sales, selling, general and administrative expenses remained relatively constant at 21.7% in 1995 compared with 21.6% in 1994. While 1995 benefited from a full year of savings from the 1993 cost reduction program implemented during 1994, a portion of these savings were offset by the Instrumentation segment's efforts to expand marketing of transducer products in the United States and Gems products in Europe, as well as to increase sales in the Far East markets. Research and development expenditures were 1.3% of sales in both 1995 and 1994. Interest Expense. Average borrowings in 1995 were approximately $120 million lower than in 1994. As a result, total interest expense (before allocation to discontinued operations) of $36.4 million in 1995 was $15.3 million, or 30%, less than in 1994. Interest expense for continuing operations excludes interest expense incurred by the discontinued operations of $3.0 million and $3.1 million in 1995 and 1994, respectively, as well as an interest allocation to the discontinued operations. Interest allocated to discontinued operations was $7.5 million in 1995 and $19.4 million in 1994. Interest Expense: 1995 1994 (in millions) Total (Before Allocations to Discontinued Operations) $36.4 $51.7 Continuing Operations 25.9 29.2 Income from Continuing Operations. The Company had income from continuing operations of $12.0 million, or $.71 per share, in 1995, which included unusual charges of $9.0 million and a deferred tax benefit of $17.0 million. In 1994, income from continuing operations was $.2 million, or $.01 per share. See "Other Operating Results" for discussion regarding Unusual Items and Provision for Income Taxes. Income (Loss) from Discontinued Operations. The Company had income from discontinued operations of $22.1 million (net of income tax expense of $6.1 million), or $1.29 per share, in 1995 as compared to income of $9.0 million (net of income tax expense of $1.4 million), or $.53 per share, in 1994. The income recorded in 1995 includes an aggregate net gain of $21.6 million on the sale of the Company's former Turbomachinery business and substantially all of its former Electro-Optical Systems business. The Company retained certain liabilities upon the sales of the Electro-Optical Systems and Turbomachinery businesses of approximately $16.0 million and $25.0 million, respectively. 1995 required cash outlays were $5.7 million and $14.1 million, and expected 1996 cash requirements are approximately $7.0 million and $5.5 million, related to the Electro-Optical Systems and Turbomachinery sales, respectively. Results from operations for the discontinued operations include allocations for interest of $7.5 million and $19.4 million for 1995 and 1994, respectively. Net Income . Net income in 1995 was $29.7 million compared with $3.9 million in 1994. Net income per share in 1995 was $1.74 compared with a net income per share of $.23 in 1994. Net income (loss) per share by component for each year is summarized below: Earnings (loss) per share: 1995 1994 Continuing Operations Before Extraordinary Item $ .71 $ .01 Discontinued Operations 1.29 .53 Extraordinary Item (.26) (.31) Net income $1.74 $ .23 1994 Compared to 1993 Sales. Net sales from continuing operations in 1994 were $360.8 million, compared with $416.5 million in 1993. Sales from core operations (excluding operations sold in 1994 and 1993 that were not accounted for as discontinued operations) were $356.0 million in 1994 compared with $340.8 million in 1993, an increase of 4.5%. Sales in the Power Transmission and Morse Controls business segments increased 8.6% and 10.1%, respectively, in 1994 compared with 1993. Sales in the Pumps and the Instrumentation business segments in 1994 remained near 1993 levels. See "Segment Operating Results" below. Gross Profit. The gross profit margin in 1994 decreased slightly to 31.0% of sales compared with 31.8% in 1993. See "Segment Operating Results" below. Selling, General and Administrative Expenses. Selling, general and administrative expenses declined $24.9 million, or 24.2%, in 1994 from the 1993 level, with most of the decline attributable to businesses sold subsequent to June 30, 1993, the phase-out of certain postretirement benefit subsidies in 1994, and lower levels of general and administrative staff in 1994 as a result of the 1993 cost reduction plan. As a percent of sales, selling, general and administrative expenses decreased to 21.6% in 1994 compared with 24.7% in 1993. Research and development expenditures were 1.3% of sales in 1994 compared with 1.8% in 1993. Interest Expense. Average borrowings in 1994 were approximately $50 million lower than in 1993. As a result, total interest expense (before allocation to discontinued operations) of $51.7 million in 1994 was $5.5 million, or 10%, less than in 1993. Interest expense for continuing operations excludes interest expense incurred by discontinued operations of $3.1 million and $4.3 million in 1994 and 1993, respectively, as well as an interest allocation to discontinued operations of $19.4 million in 1994 and $19.6 million in 1993. Interest Expense: 1994 1993 (in millions) Total (Before Allocations to Discontinued Operations) $51.7 $57.2 Continuing Operations 29.2 33.3 Income (Loss) from Continuing Operations. The Company had income from continuing operations of $.2 million, or $.01 per share, in 1994. In 1993, loss from continuing operations was $37.9 million, or $2.25 per share, primarily as a result of the net unusual charges of $14.3 million and a $13.5 million tax reserve provided against previously recorded future tax benefits. See "Other Operating Results" for discussion regarding Unusual Items and Provision for Income Taxes. Income (Loss) from Discontinued Operations. The Company had income from discontinued operations of $9.0 million (net of income tax expense of $1.4 million),or $.53 per share, in 1994 as compared to a net loss of $214.5 million (including income tax expense of $1.5 million), or $12.70 per share, in 1993. The loss recorded in 1993 includes an estimated loss on the disposal of the Company's Electro-Optical Systems business of $168.0 million, most of which represented a non- cash adjustment to reduce the carrying value of assets to estimated realizable value. Of the total estimated loss on disposal recorded in 1993, required cash outlays were approximately $8.4 million and $4.6 million in 1995 and 1994, respectively, the remainder of which, represented non- cash charges. Results from operations for the discontinued operations include allocations for interest of $19.4 million and $19.6 million for 1994 and 1993, respectively. Net Income (Loss). Net income in 1994 was $3.9 million compared with a net loss of $270.6 million in 1993. Net income per share in 1994 was $.23 compared with a net loss per share of $16.02 in 1993. Net income (loss) per share by component for each of the periods is summarized below: Earnings (loss) per share: 1994 1993 Continuing Operations Before Extraordinary Item $ .01 $ (2.25) Discontinued Operations .53 (12.70) Extraordinary Item (.31) (1.07) Net income (loss) $ .23 $(16.02) Other Operating Results Unusual Items. During the fourth quarter of 1995, the Company recognized unusual charges of $9.0 million in income from continuing operations. These charges include $4.0 million in severance benefits and other expenses related to a Company - -wide program to reduce general and administrative costs ($.9 million included in the Instrumentation segment, $1.5 million included in the Morse Controls segment and $1.6 million included in Corporate Expense), and $5.0 million related to the write-down of non-operating real estate to net realizable value (included in Corporate Expense). Of the $9.0 million of unusual charges, the required cash outlay in 1995 was $.4 million and the expected cash requirements during 1996 are $3.2 million. The remainder represents non-cash charges. There were no unusual items in 1994. During the twelve months ended December 31, 1993, the Company recognized unusual charges of $14.3 million in loss from continuing operations. During the fourth quarter of 1993, the Company recognized charges of $20.3 million that include provisions of $5.2 million related to the restructuring and consolidation of certain of the Company's operating units ($.2 million, $.5 million, $.9 million, $2.4 million and $1.2 million, included in the Power Transmission, Pumps, Instrumentation and Morse Controls segments and Corporate Expense, respectively), $10.1 million expected net loss overall related to the Company's asset divestiture program (included in a non-core segment entitled "Other") and $5.0 million in debt related financing fees (included in Corporate Expense). These charges are net of unusual income of $6.0 million recorded in the third quarter of 1993 as a result of a change in estimate related to legal costs associated with pending litigation (included in the Other segment). Of the $20.3 million of unusual charges, required cash outlays were approximately $1.3 million, $7.1 million, and $.2 million in 1995, 1994 and 1993, respectively, with the remainder representing non-cash charges. Extraordinary Items. The twelve months ended December 31, 1995 include an extraordinary charge of $4.4 million after- tax representing charges related to the early extinguishment of portions of its debt under the Existing Credit Agreement and the 12.25% Debentures. The twelve months ended December 31, 1994 include an extraordinary charge of $5.3 million after-tax, $.31 per share, representing fees and charges related to extinguishment of debt in connection with the restructuring of the Company's credit facilities in August 1994. The results of operations for the twelve months ended December 31, 1993 included an extraordinary item of $18.1 million, $1.07 per share, representing fees and expenses related to extinguishment of senior debt of which approximately $4.0 million required immediate cash outlays, approximately $2.0 million related to the write-off of previously deferred debt expense and approximately $12.0 million was provided as an estimate for the prepayment of its senior notes. Additionally, approximately $4.0 million of fees related to the 1993 restructuring of the Company's credit facilities were paid in 1993. This amount was being amortized until August 1994, at which time, the balance was recognized as an extraordinary charge in connection with the extinguishment of the restructured credit facilities. Provision for Income Taxes. Income tax expense (benefit) from continuing operations was a benefit of $(14.8) million for 1995, and expense of $1.8 million and $13.5 million for 1994 and 1993, respectively. The 1995 amount is comprised of current tax expense of $2.2 million representing foreign and state income taxes, as the Company is utilizing existing U.S. net operating loss carryforwards on its domestic earnings. This amount is offset by a deferred tax benefit in 1995 of $(17.0) million, representing a reduction in the deferred tax valuation allowance against U.S. net operating loss carryforwards. The 1994 income tax expense represents foreign and state income taxes. The 1993 amount is principally comprised of the provision of a reserve against previously recorded tax benefits. The Company did not record a benefit for the 1993 loss as a valuation allowance was established in accordance with the provisions of FASB Statement No. 109, "Accounting for Income Taxes." The Company is recognizing these benefits only as reassessment demonstrates that it is more likely than not that they will be realized. In 1995, the Company reduced the valuation allowance applied against the net operating loss carryforward by $17 million to a level where management beleives 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 $48 million. The Company would generate this income principally from the sale of its Roltra- Morse operations in 1996 and based upon future income projections from its continuing operations. Although the Company has a history of prior losses, these losses were primarily attributable to divested businesses and unusual items. The remaining valuation allowance is necessary due to the uncertainty of future income estimates. The Company has a net operating loss carryforward of approximately $85 million expiring in years 2002 through 2010, foreign tax credit carryforwards of approximately $8.3 million expiring through 2000, and minimum tax credits of approximately $2.1 million which may be carried forward indefinitely. These carryforwards are available to offset future taxable income. These existing tax loss carryforwards will allow the Company's future earnings to be essentially free from the payment of U.S. taxes for the foreseeable future. Taxes have not been provided on the unremitted earnings of foreign subsidiaries, since it is the Company's intention to indefinitely reinvest these earnings overseas. The amount of foreign withholding taxes that would be payable on remittance of these earnings is approximately $.9 million. Retiree Medical and Life Insurance. In March 1994, the Company amended its policy regarding retiree medical and life insurance plans. This amendment, which affects some current retirees and all future retirees, phases out the Company subsidy for retiree medical and life insurance over a three- year period ending December 31, 1996. The Company expects to amortize associated reserves to income from continuing operations over the phase-out period. The pre-tax amount amortized to income from continuing operations was $4.6 million and $4.4 million in 1995 and 1994, respectively. The Company does not anticipate a significant increase or decrease in cash requirements related to this change in policy during the phase-out period. Segment Operating Results Operating results by business segment for the years 1995, 1994 and 1993 are summarized below: Power Transmission: 1995 1994 1993 (in millions) Net Sales $ 95.1 $ 93.3 $ 85.9 Segment Operating Income(1) $ 11.3 $ 8.9 $ 2.3 (1) The Power Transmission segment's operating income includes an unusual charge of $.2 million in 1993. Power Transmission segment net sales remained strong across substantially all markets in 1995, increasing 1.9% over 1994, despite a nearly $2.0 million decline in sales to the printing market. Operating income rose more than 25% for the year, largely as a result of cost containment efforts and a shift in product mix which resulted in a higher level of manufacturing activity. Power Transmission segment net sales increased 8.6% while operating profit more than tripled in 1994 as compared with 1993 levels, as results benefited from an upturn in the general mechanical and printing markets in the United States, as well as the favorable effect of the phasing out the subsidy for certain benefit plans. See "Retiree Medical and Life Insurance" above. Pumps: 1995 1994 1993 (in millions) Net Sales $94.4 $90.4 $91.6 Segment Operating Income(1) $ 9.9 $10.4 $10.4 (1) The Pumps segment's operating income includes an unusual charge of $.5 million in 1993. Pumps segment net sales in 1995 were up 4.4% from 1994, 2.1% of which was due to the effects of foreign exchange rates. However, segment operating income decreased 5.4% due to a shift in product mix. Startup costs related to a new line of corrosive-resistant composite pumps also adversely affected income, as did expenses caused by now resolved technical difficulties related to a custom, high performance product order. The Company is in the process of acquiring substantially all of the assets of a long-time three-screw pump licensee in France, which will allow the Company to gain additional market penetration in Europe and North Africa. Pumps segment net sales and operating profit in 1995 and 1994 were adversely affected by a decline in U.S. Navy sales of over $6.0 million in 1994 and over $10.0 million in 1995, as compared with 1993 levels. These declines were offset by increases in commercial sales of over $5.0 million in 1994 and over $13.5 million in 1995, as compared with 1993 levels. Instrumentation: 1995 1994 1993 (in millions) Net Sales $76.1 $72.2 $72.4 Segment Operating Income(1) $ 6.7 $9.8 $ 8.0 (1) The Instrumentation segment's operating income includes unusual charges of $.9 million in both 1993 and 1995. Instrumentation segment experienced a double-digit growth rate in its industrial business in 1995, offset by a 40% drop in sales to the U.S. Navy. The result was an overall increase in net sales of 5.4% for the year. 1995 earnings were negatively impacted by the costs associated with a restructuring of this segment's European operations coupled with a significant investment in new marketing and sales initiatives. During 1995, the Instrumentation segment closed its plant in Frankfurt, Germany and shifted production of certain products into a lower-cost manufacturing facility in the United Kingdom. Total fourth quarter costs relating to this relocation exceeded $1.2 million, including $.9 million of unusual items. In response to the growing global markets for fluid sensor products, the Company spent an additional $2.0 million in 1995 to upgrade its sales and marketing organization and launched several new marketing initiatives. The marketing efforts included an aggressive new trade advertising program designed to produce a continuing source of new sales leads. These investments should result in lower manufacturing costs and greater sales beginning in 1996. Instrumentation segment net sales in 1994 were approximately $.2 million less than 1993 net sales. Segment operating income in 1994, however, increased 23.1% from 1993. Excluding the unusual charge of $.9 million incurred in 1993, segment income in 1994 increased 10.6% from 1993 levels resulting from improved performance in the European operations. Morse Controls: 1995 1994 1993 (in millions) Net Sales $107.7 $100.1 $ 90.9 Segment Operating Income(1) $ 5.3 $ 5.7 $ .5 (1) The Morse Controls segment's operating income includes unusual charges of $2.4 million and $1.5 million in 1993 and 1995, respectively. Morse Controls segment net sales of $107.7 million were up 7.6% for 1995, as compared with $100.1 million in net sales in 1994, due to increases in the mobile equipment, aviation and other general industrial markets. 1995 segment operating income of $5.3 million decreased only $.4 million, as compared with the 1994 level of $5.7 million. In the fourth quarter of 1995, the segment recorded unusual charges of $1.5 million related to a major downsizing of its European operations, and non-cash adjustments of $1.5 million, principally related to inventory. Excluding unusual items and non-cash charges, segment operating income increased to $8.3 million in 1995, as compared with $5.7 million in 1994. In the third quarter of 1995, Morse entered into a joint- venture in China with an affiliate of Dong Feng Motor Corporation, China's largest truck manufacturer. The joint- venture will manufacture push-pull cables, pull-only cables and other products used in trucks and other vehicles. In the last quarter in 1995, Morse also completed the strategic acquisition of RMH Controls, a small, specialized manufacturer of electronic controls with operations in Sweden and the United Kingdom. RMH's technology will permit Morse to expand its product offering in microprocessor-based electronic controls for marine and industrial applications. The Morse Controls segment had net sales of $100.1 million in 1994, compared with net sales of $90.9 million for 1993, an increase of 10.1%, based on increased pleasure marine sales. The increased sales level resulted in operating income for the segment of $5.7 million in 1994, compared with $.5 million in 1993. Operating income in 1993 included unusual charges of $2.4 million related to restructuring and facilities consolidations. Company-wide Fourth Quarter Results Net sales from continuing operations in the fourth quarter of 1995 were $90.0 million, compared with $90.3 million in the fourth quarter of 1994. The Company had income from continuing operations of $4.0 million, or $.23 per share, in the fourth quarter of 1995 compared with a loss from continuing operations of $.3 million, or $.02 per share, in the comparable 1994 period. Income from continuing operations benefited from a reduction in deferred tax asset valuation allowances of $17.0 million, partially offset by the unusual charges of $9.0 million in the fourth quarter of 1995. Power Transmission segment net sales experienced a decline of 3.6% to $22.4 million in the fourth quarter of 1995 compared to the same period in 1994 as the general mechanical market slowed. Despite this sales decrease, segment operating income increased 11.7% to $2.2 million in the 1995 fourth quarter as compared with the 1994 period, largely as a result of cost containment efforts and a shift in product mix. Pumps segment net sales of $24.8 million were up 4.9% in the fourth quarter of 1995 compared to the same period in 1994. Segment operating income was down 20.8% to $1.6 million, when compared to the same period in 1994, due in part to a shift in product mix and to startup costs related to a new line of corrosive-resistant composite pumps and expenses caused by now-resolved technical difficulties related to a custom, high performance product order. Instrumentation segment fourth quarter 1995 net sales were $18.6 million, a decrease of 2.9%, compared with the same period in 1994. Fourth quarter 1995 earnings of $.2 million, which compared with $ 2.8 million in the fourth quarter of 1994, were negatively impacted primarily by the costs associated with a restructuring of its European operations. Total costs relating to this relocation exceeded $1.2 million including $.9 million of unusual items. In addition, the increased investment in new marketing and sales initiatives during 1995 contributed to the decrease compared to the 1994 fourth-quarter period. Morse Controls segment net sales in the fourth quarter of both 1995 and 1994 were $24.2 million. The segment incurred an operating loss of $1.9 million in the fourth quarter of 1995, as compared with operating income of $1.3 million in the comparable 1994 period. Unusual items totaling $1.5 million were recorded related to a major downsizing of its European Operations. Additionally, fourth quarter 1995 results were negatively impacted by approximately $1.5 million of non-cash adjustments principally related to inventory. Liquidity and Capital Resources Short-term and Long-term Debt The Company's domestic liquidity requirements are currently served by the $60 million revolving credit facility (including a letter of credit subfacility) under the Existing Credit Agreement, while its needs outside the United States are covered by short and intermediate term credit facilities from foreign banks. As of December 31, 1995, there were $18.2 million of revolving credit borrowings and $7.8 million of standby letters of credit outstanding under the Existing Credit Agreement . The Company also has, in the aggregate, foreign short-term credit facilities of approximately $35.5 million. As of December 31, 1995, $18.8 million is outstanding under these foreign facilities, of which $9.8 million relates to indebtedness of discontinued operations. In addition, at December 31, 1995, the Company had outstanding $70.0 million in aggregate principal amount of the 12.25% Debentures, maturing in 1997, and $150 million in aggregate principal amount of the 12% Debentures, maturing in amounts of $37.5 million in 1999, $37.5 million in 2000 and $75.0 million in 2001. The Debentures contain covenants that, among other things, restrict indebtedness to specified levels. Under certain circumstances, such covenants could result in the Company's inability to fully utilize the revolving credit facility under the Existing Credit Agreement and the foreign short-term credit facilities. The Company sold its CEC Instruments division, corporate headquarters building and other previously identified assets for aggregate proceeds of $13.2 million in 1994, and its Heim Bearings, Aerospace and Barksdale Controls operations for aggregate proceeds of approximately $91 million in 1993. The Company used the net proceeds from these sales to reduce amounts outstanding under its then existing senior notes and revolving credit facility. In the first quarter of 1995, the Company repaid outstanding term and bridge loans under the Existing Credit Agreement in the aggregate principal amounts of $36.7 million and $45.0 million, respectively. In 1995, the Company redeemed $80 million in aggregate principal amount of the 12.25% Debentures at 100% of their principal amount, $40 million of which were redeemed in March 1995 with proceeds from the sale of the Company's former Turbomachinery business, and an additional $40 million of which were redeemed in July 1995 with proceeds from the sale of a majority of the Company's Electro-Optical Systems business. As a result of these actions, total interest expense has been significantly reduced as compared with prior period levels. As a result of the early extinguishment of debt referred to above, a $4.1 million, or $.24 per share, charge was recorded as an extraordinary item in the first quarter of 1995. The charge consisted of the write-off of deferred debt expense associated with the portions of the debt repaid under the Existing Credit Agreement and the redemption of a portion of the 12.25% Debentures. The redemption of $40 million in aggregate principal amount of the 12.25% Debentures on July 6, 1995 resulted in an extraordinary charge of approximately $.3 million, or $0.02 per share, in the third quarter of 1995. Management continues to actively pursue opportunities to further reduce its high interest debt. The Company plans to use the proceeds from the sales of its Roltra-Morse and Varo's Electronic Systems businesses to reduce debt. Moreover, the Company is currently negotiating to refinance the Existing Credit Agreement and the Debentures. Management expects to complete the refinancing in the first half of 1996. Cash Flow The Company's operating activities used cash of $31.7 million in 1995, compared with providing cash of $16.8 million in 1994, due principally to cash requirements of $22.0 million related to discontinued operations, cash requirements related to previously sold operations (not classified as discontinued operations) and a net increase in working capital items within the Company's continuing operations. Net cash provided by investing activities was $145.5 million in 1995, compared with cash used of $.3 million in 1994. The 1995 increase in net cash provided by investing activities is principally a result of $174.9 million of net proceeds generated from the sale of businesses and assets in 1995 versus $13.6 million in 1994. Cash and cash equivalents decreased to $3.8 million at December 31, 1995 from $26.9 million at December 31, 1994, due to cash used by operating activities and increased capital expenditures during 1995. Working capital at December 31, 1995 was $81.0 million, a decrease of $51.2 million from the end of 1994, due principally to the sales of the Company's former Turbomachinery business and substantially all of its Electro- Optical Systems business. The reduction in assets was partially offset by a reduction in current debt and accrual levels (related primarily to previously sold businesses) in 1995. The ratio of current assets to current liabilities was 2.0 at December 31, 1995, compared with 2.2 at December 31, 1994. Principally as a result of the aforementioned sales of businesses, the gain on the disposal of the Turbomachinery business and the related debt repayments during 1995, the Company's total debt as a percent of its total capitalization decreased to 97.2%, compared to 107.0% and 109.4% at December 31, 1994 and 1993, respectively. Capital expenditures of continuing operations of $14.6 million increased significantly over the 1994 level of $6.0 million. The 1995 level was a planned increase over the 1994 level in order to make investments to maintain and to improve competitive advantages at the Company's operations. The Company anticipates that capital expenditures in 1996 will increase slightly over the 1995 level primarily to improve productivity. There were no material outstanding commitments for the acquisition of property, plant and equipment at December 31, 1995. Management of the Company believes that cash flow from operations, cash available from unused credit facilities and cash generated by additional asset sales will be sufficient to meet its foreseeable liquidity needs. Seasonality; Customer Concentration; Inflation General economic conditions worldwide continue to create business opportunities for the coming year in many of the markets in which the Company operates. Management believes that because of the nature of its industrial products and the fact that the Company sells diverse products to many markets, the Company is not significantly affected by the cyclical behavior, or seasonality, of any particular market that it serves. Total sales to the United States Department of Defense in the form of prime and subcontracts were approximately 7% of net sales from continuing operations in 1995, 9% of sales in 1994 and 14% of sales in 1993. Approximately 31% of the property, plant and equipment of the Company's continuing operations has been acquired over the past five years and has a remaining useful life ranging from five years to fifteen years for equipment to thirty years for buildings. In addition, property, plant and equipment of the businesses acquired by the Company have been adjusted to their fair value at the time of acquisition. Assets acquired in prior years are expected to be replaced at higher costs but this will take place over many years. The newer assets will result in higher depreciation charges but, in many cases, due to technological improvements, there will be operating cost savings as well. The Company considers these matters in establishing its pricing policies. Item 8. Financial Statements and Supplementary Data. The consolidated financial statements and supplementary data required by Part II, Item 8 of Form 10-K are included in Part IV of this Form 10-K Report as indexed at Item 14(a)(1). PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K. (a) (1) Financial Statements The Financial Statements and Supplementary Data required by Part II, Item 8 of Form 10-K are included in this Part IV of this Form 10-K Report as follows: Consolidated Financial Statements Page Consolidated Statements of Income for the Years Ended December 31, 1995, 1994 and 1993................F-1 Consolidated Balance Sheets at December 31, 1995 and 1994..............................................F-2 Consolidated Statements of Cash Flows for the Years Ended December 31, 1995, 1994 and 1993......... F-3 Consolidated Statements of Shareholders' Equity for the Years Ended December 31, 1995, 1994 and 1993..F-4 Notes to Consolidated Financial Statements............. F-5 Report of Independent Auditors..........................F-29 Quarterly Financial Information.........................F-30 (2) Financial Statement Schedules The following consolidated financial statement schedule for the year ended December 31, 1995, 1994 and 1993 is filed as part of this Report and should be read in conjunction with the Company's Consolidated Financial Statements. Schedule Page II Valuation and Qualifying Accounts.......... S-1 All other schedules for which provision is made in the applicable regulation of the Securities and Exchange Commission are omitted because they are not required under the related instructions or because the required information is given in the financial statements or notes thereto. (3) Exhibits The Exhibits listed in the accompanying Index to Exhibits are filed as part of this Report. (b) Reports on Form 8-K Not Applicable. EXHIBIT INDEX Exhibit No. Note No. Description 3(i) (10) The Company's Restated Certificate of Incorporation, as amended March 10, 1989 and November 10, 1992 3(ii) (14) The Company's Bylaws 4.1 (A) (6) Indenture agreement dated August 15, 1987 between the Company and IBJ Schroder Bank & Trust Company, Trustee (B) (12) First Supplemental Indenture dated as of February 14, 1994 between the Company and IBJ Schroder Bank & Trust Company, Trustee 4.2 (6) Indenture agreement dated November 1, 1989 between the Company and IBJ Schroder Bank & Trust Company, Trustee 4.3 (A) (3) Rights Agreement dated as of April 22, 1987 between the Company and Philadelphia National Bank, as Rights Agent (B) (10) Amendment dated December 16, 1991 between the Company and First Chicago Trust Company of New York Management Contracts, Compensatory Plans and Arrangements: 10.1 (16) Amended and restated Equity Incentive Plan for Key Employees 10.2 (18) Amended and restated 1988 Equity Incentive Plan for Outside Directors 10.3 (17) 1995 Equity Incentive Plan for Outside Directors 10.4 (19) The Company's Supplemental Retirement Income Plan 10.5 (10) Change in Control Agreement dated January 9, 1987 between the Company and John J. Carr 10.6 (10) Change in Control Agreement dated December 23, 1988 between the Company and Brian Lewis 10.7 (10) Change in Control Agreement dated August 5, 1992 between the Company and William M. Brown 10.8 (10) Change in Control Agreement dated August 13, 1992 between the Company and Thomas J. Bird 10.9 (A) (12) Employment Agreement dated September 13, 1993 between the Company and Donald K. Farrar (B) (14) Amendment dated November 17, 1994 to the Employment Agreement between the Company and Donald K. Farrar 10.10 (12) Change in Control Agreement dated September 13, 1993 between the Company and Donald K. Farrar 10.11 (19) Change in Control Agreement dated October 2, 1995 between the Company and David C. Christensen Other Material Contracts: 10.12(A) (4), (6) The Company's Salaried Employees Stock Savings Plan as amended on July 1,1987 and as amended on June 14, 1988 (B) (9) Amendment dated March 16, 1989 to the Imo Industries Inc. Employees Stock Savings Plan (C) (7) Amendments dated September 6, 1990 and February 14, 1991 to the Imo Industries Inc. Employees Stock Savings Plan (D) (8) Amendment dated May 9, 1991 to the Imo Industries Inc. Employees Stock Savings Plan (E) (10) Amendments dated December 30, 1991 and August 3, 1992 to the Imo Industries Inc. Employees Stock Savings Plan (F) (14) Trust Agreement for the Imo Industries Inc. Employees Stock Savings Plan as of March 1, 1995 between the Company and Eagle Trust Company 10.13 (1) Distribution Agreement dated December 18, 1986 between Transamerica Corporation and the Company 10.14 (1) Tax Agreement between the Company and Transamerica Corporation 10.15(J) (11) Warrant dated July 15, 1993 issued by the Company to The Prudential Insurance Company of America 10.16 (2) Stock Purchase Agreement dated November 30, 1987 between the Company and TRIFIN B.V. 10.17 (5) Agreement and Plan of Merger, dated as of August 21, 1988 by and among the Company, VI Acquisition Corp. and Varo Inc. 10.18 (5) Stock option agreement, dated as of August 21, 1988, between VI Acquisition Corp. and Varo Inc. 10.19 (6) Agreement for the purchase of the stock of Warren Pumps Inc. by the Company dated April 3, 1989 among the Company, Warren Pumps Inc. and the holders of all of the issued and outstanding stock of Warren Pumps Inc. 10.20 (7) Stock Purchase Agreement dated as of May 31, 1990 among United Scientific Holdings PLC, United Scientific Inc. and the Company 10.21 (12) Stock Purchase Agreement dated as of October 28, 1993 among the Company, Imo Industries GmbH, Mark Controls Corporation and Mark Controls GmbH i. Gr., as amended 10.22 (12) German Asset Purchase Agreement among Imo Industries GmbH, Mark Controls GmbH i. Gr., the Company and Mark Controls Corporation, as amended 10.23(A) (13) Credit Agreement dated as of August 5, 1994 among the Company, as Borrower, Baird Corporation, as Guarantor, Warren Pumps Inc., as Guarantor, the Institutions from time to time party thereto as Lenders and as Issuing Banks, and Citibank, N.A., as Agent (B) (14) First Amendment dated as of November 18, 1994, Second Amendment dated as of January 11, 1995, and Third Amendment dated as of February 17, 1995 to the Credit Agreement dated as of August 5, 1994 among the Company as Borrower, Baird Corporation, as Guarantor, Warren Pumps Inc., as Guarantor, the Institutions from time to time party thereto as Lenders and as Issuing Banks, and Citibank, N.A., as Agent (C) (19) Fourth Amendment dated as of May 3, 1995, Fifth Amendment dated as of August 14, 1995, Sixth Amendment dated as of December 11, 1995, and Seventh Amendment dated as of March 4, 1996 to the Credit Agreement dated as of August 4, 1994 among the Company as Borrower, Baird Corporation, as Guarantor, Warren Pumps Inc., as Guarantor, the Institutions from time to time party thereto as Lenders and as Issuing Banks, and Citibank, N.A., as Agent 10.24(A) (13) Asset Purchase Agreement dated as of November 4, 1994 by and among the Company, Imo Industries International Inc. and Mannesmann Capital Corporation (B) (14) Agreement, Amendment and Waiver dated January 17, 1995 by and among the Company and Mannesmann Capital Corporation 10.25 (14) Asset and Stock Purchase Agreement dated as of January 1, 1995 by and among the Company and Thermo Jarrell Ash Corporation 10.26 (15) Purchase and Sale Agreement among Litton Industries, Inc., and Litton Systems, Inc. and Imo Industries Inc., Baird Corporation, Optic-Electronic International, Inc. and Varo Inc. dated May 11, 1995 and amended and restated as of June 2, 1995 20 Proxy Statement for the Company's 1996 Annual Meeting of Stockholders (incorporated by reference to the Company's Proxy Statement to be filed separately with the Commission pursuant to Regulation 14A of the Securities Exchange Act of 1934, as amended) 21 (19) Subsidiaries of the Company 23 Consent of Ernst & Young LLP dated August 15, 1996 27 (19) Financial Data Schedule as of December 31, 1995 _______________________________________________ NOTES (1) Incorporated by reference to the Company's Form 8 Amendment No. 2 filed with the Commission on December 9, 1986 amending the Company's Form 10 as filed with the Commission on October 15, 1986. (2) Incorporated by reference to the Company's Form 8-K filed with the Commission on February 17, 1987. (3) Incorporated by reference to the Company's Form 8-K filed with the Commission on May 4, 1987. (4) Incorporated by reference to the Imo Industries Inc. Employees Stock Savings Plan Form 11-K filed with the Commission on April 13, 1988. (5) Incorporated by reference to the Company's Form 8-K filed with the Commission on October 14, 1988. (6) Incorporated by reference to the Company's Form 10-K filed with the Commission on March 29, 1990. (7) Incorporated by reference to the Company's Form 10-K filed with the Commission on March 28, 1991. (8) Incorporated by reference to the Company's Form S-8 filed with the Commission on June 17, 1991. (9) Incorporated by reference to the Company's Form 10-K filed with the Commission on March 26, 1992. (10) Incorporated by reference to the Company's Form 10-K filed with the Commission on April 19, 1993. (11) Incorporated by reference to the Company's Form 10-K/A filed with the Commission on August 6, 1993 amending the Company's Form 10-K as filed with the Commission on April 19, 1993. (12) Incorporated by reference to the Company's Form 10-K filed with the Commission on March 31, 1994. (13) Incorporated by reference to the Company's Form 10-Q filed with the Commission on November 14, 1994. (14) Incorporated by reference to the Company's Form 10-K filed with the Commission on March 29, 1995. (15) Incorporated by reference to the Company's Form 8-K filed with the Commission on June 19, 1995. (16) Incorporated by reference to the Company's Form S-8 as filed with the Commission on June 23, 1995, Registration No. 33-60533 (17) Incorporated by reference to the Company's Form S-8 as filed with the Commission on June 23, 1995, Registration No. 33-60535 (18) Incorporated by reference to the Company's Form 10-Q filed with the Commission on November 13, 1995. (19) Incorporated by reference to the Company's Form 10-K filed with the Commission on March 28, 1996. SIGNATURE Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Imo Industries Inc. has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. IMO INDUSTRIES INC. Date: August 13, 1996 By: /s/ WILLIAM M. BROWN William M. Brown Executive Vice President, Chief Financial Officer and Corporate Controller Imo Industries Inc. and Subsidiaries Consolidated Statements of Income (Dollars in thousands except per share amounts)
Year Ended December 31, 1995 1994* 1993* Net Sales $373,227 $360,785 $416,526 Cost of products sold 258,335 248,835 284,227 Gross Profit 114,892 111,950 132,299 Selling, general and administrative expenses 80,964 77,973 102,916 Research and development expenses 4,831 4,646 7,537 Unusual items 9,020 --- 14,338 Income from Operations 20,077 29,331 7,508 Interest expense 25,860 29,168 33,341 Interest income (1,980) (1,592) (511) Other income (739) (219) (1,074) Equity in (income) loss of unconsolidated companies (302) --- 231 Income (Loss) From Continuing Operations Before Taxes and Extraordinary Item (2,762) 1,974 (24,479) Income taxes (benefit): Current 2,209 1,790 --- Deferred (17,000) --- 13,450 Total Income Taxes (Benefit) (14,791) 1,790 13,450 Income (Loss) From Continuing Operations Before Extraordinary Item 12,029 184 (37,929) Discontinued Operations: Income (Loss) from Operations (net of income tax expense of $.9 million in 1995, $1.4 million in 1994 and $1.5 million in 1993) 500 9,046 (46,528) Estimated Gain (Loss) on Disposal (net of income taxes of $5.2 million in 1995) 21,625 --- (168,014) Total Income (Loss) from Discontinued Operations 22,125 9,046 (214,542) Extraordinary Item - Loss on Extinguishment of Debt (4,444) (5,299) (18,095) Net Income (Loss) $ 29,710 $ 3,931 $(270,566) Earnings (loss) per share: Continuing operations before extraordinary item $ .71 $ .01 $ (2.25) Discontinued operations $ 1.29 $ .53 $(12.70) Extraordinary item $ (.26) $ (.31) $ (1.07) Net income (loss) $ 1.74 $ .23 $(16.02) Weighted average number of shares outstanding 17,048,622 16,926,071 16,890,501 See accompanying notes to consolidated financial statements. *Reclassified to conform to 1995 presentation. F-1
Imo Industries Inc. and Subsidiaries Consolidated Balance Sheets (Dollars in thousands)
December 31, 1995 1994* Assets Current Assets Cash and cash equivalents $ 3,809 $ 26,942 Trade accounts and notes receivable, less allowance of $2,030 in 1995 and $2,192 in 1994 53,965 53,909 Inventories-net 85,030 76,902 Deferred income taxes 11,371 4,328 Net assets of discontinued operations - current 5,220 75,165 Prepaid expenses and other current assets 4,617 5,089 Total Current Assets 164,012 242,335 Property, Plant and Equipment - on the basis of cost Land 10,407 5,930 Buildings and improvements 44,786 40,449 Machinery and equipment 109,156 102,730 164,349 149,109 Less allowances for depreciation and amortization (82,996) (71,867) Net Property, Plant and Equipment 81,353 77,242 Intangible Assets, Principally Goodwill 68,664 73,834 Investments in and Advances to Unconsolidated Companies 5,415 3,653 Deferred income taxes - Long-Term 4,609 --- Net Assets of Discontinued Operations - Noncurrent 29,190 89,313 Other Assets 30,644 26,242 Total Assets $ 383,887 $ 512,619 Liabilities and Shareholders' Equity Current Liabilities Notes payable $ 9,019 $ 9,699 Trade accounts payable 23,733 22,012 Accrued expenses and other liabilities 38,069 51,620 Accrued costs related to discontinued operations 3,055 6,444 Income taxes payable 8,354 6,671 Current portion of long-term debt 805 13,675 Total Current Liabilities 83,035 110,121 Long-Term Debt 245,802 372,365 Deferred Income Taxes --- 7,364 Accrued Postretirement Benefits - Long-Term 24,372 30,918 Accrued Pension Expense and Other Liabilities 23,794 17,696 Total Liabilities 377,003 538,464 Shareholders' Equity 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 18,756,397 and 18,680,428 in 1995 and 1994, respectively 18,756 18,680 Additional paid-in capital 80,275 79,789 Retained earnings (deficit) (76,592) (106,302) Cumulative foreign currency translation adjustments 4,266 861 Minimum pension liability adjustment (1,801) (853) Treasury stock at cost - 1,672,788 shares in 1995 and 1994 (18,020) (18,020) Total Shareholders' Equity 6,884 (25,845) Total Liabilities and Shareholders' Equity $ 383,887 $ 512,619 See accompanying notes to consolidated financial statements. * Restated to conform to 1995 presentation. F-2
Imo Industries Inc. and Subsidiaries Consolidated Statements of Cash Flows (Dollars in thousands)
Year Ended December 31, 1995 1994* 1993* OPERATING ACTIVITIES Net income (loss) $29,710 $ 3,931 $(270,566) Adjustments to reconcile net income (loss) to net cash (used by) provided by continuing operations: Discontinued operations (22,125) (9,046) 214,542 Depreciation 12,100 12,771 15,325 Amortization 3,122 5,832 4,471 Provision (credit) for deferred income taxes (17,000) --- 13,450 Extraordinary item 4,444 5,299 18,095 Unusual items 9,020 --- 14,338 Other 172 666 1,243 Other changes in operating assets and liabilities: Decrease (increase) in accounts and notes receivable 236 (1,557) 9,491 (Increase) decrease in inventories (7,157) (368) 7,198 Decrease in recoverable income taxes --- 3,826 7,270 (Decrease) increase in accounts payable and accrued expenses (13,273) (9,160) 7 Other operating assets and liabilities (9,014) (5,387) (8,846) Net cash (used by) provided by continuing operations (9,765) 6,807 26,018 Net cash (used by) provided by discontinued operations (21,978) 9,971 986 Net Cash (Used in) Provided by Operating Activities (31,743) 16,778 27,004 INVESTING ACTIVITIES Net proceeds from sale of businesses and sales of property, plant and equipment 174,922 13,568 86,619 Purchases of property, plant and equipment (14,600) (6,025) (6,343) Acquisitions, net of cash acquired (5,247) --- --- Net investing activities of discontinued operations (9,426) (6,994) (9,724) Other (122) (857) 252 Net Cash Provided by (Used in) Investing Activities 145,527 (308) 70,804 FINANCING ACTIVITIES (Decrease) increase in notes payable 5,407 (31,346) (29,915) Proceeds from long-term borrowings 45,461 86,951 4,377 Principal payments on long-term debt (188,200) (56,759) (55,575) Payment of debt financing costs (401) (11,277) (8,326) Proceeds from stock options exercised 535 415 --- Other 59 15 (318) Net Cash Used in Financing Activities (137,139) (12,001) (89,757) Effect of exchange rate changes on cash 222 117 (462) (Decrease) increase in Cash and Cash Equivalents (23,133) 4,586 7,589 Cash and cash equivalents at beginning of year 26,942 22,356 14,767 Cash and Cash Equivalents at End of Year $ 3,809 $26,942 $22,356 See accompanying notes to consolidated financial statements. *Reclassified to conform to 1995 presentation. F-3
Imo Industries Inc. and Subsidiaries Consolidated Statements of Shareholders' Equity (Dollars in thousands)
Cumulative Addit- Foreign Minimum ional Retained Currency Pension Common Paid-In Earnings Translation Liability Treasury Stock Capital (Deficit) Adjustments Adjustment Stock Total Balance at January 1, 1993 * $18,554 $78,557 $160,333 $ 491 $ --- $(18,020) $239,915 Net loss --- --- (270,566) --- --- --- (270,566) Foreign currency translation adjustments --- --- --- (1,638) --- --- (1,638) Minimum pension liability adjustment --- --- --- --- (1,768) --- (1,768) Issuance of common stock warrants --- 336 --- --- --- --- 336 Restricted shares issued under the equity incentive plan 30 187 --- --- --- --- 217 Balance at December 31, 1993 * 18,584 79,080 (110,233) (1,147) (1,768) (18,020) (33,504) Net income --- --- 3,931 --- --- --- 3,931 Foreign currency translation adjustments --- --- --- 2,008 --- --- 2,008 Minimum pension liability adjustment --- --- --- --- 915 --- 915 Shares issued under stock option plan 56 359 --- --- --- --- 415 Restricted shares issued under the equity incentive plan 40 350 --- --- --- --- 390 Balance at December 31, 1994 * 18,680 79,789 (106,302) 861 (853) (18,020) (25,845) Net income --- --- 29,710 --- --- --- 29,710 Foreign currency translation adjustments --- --- --- 3,405 --- --- 3,405 Minimum pension liability adjustment --- --- --- --- (948) --- (948) Shares issued under stock option plan 73 462 --- --- --- --- 535 Restricted shares issued under the equity incentive plan 3 24 --- --- --- --- 27 Balance at December 31, 1995 $18,756 $80,275 $(76,592) $4,266 $(1,801) $(18,020) $6,884 See accompanying notes to consolidated financial statements. * Reclassified to conform to current year presentation. F-4
Imo Industries Inc. and Subsidiaries 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. Financial Instruments: The Company uses forward exchange contracts to hedge certain firm foreign commitments denominated in foreign currencies. Gains or losses on forward contracts are deferred and offset against the foreign exchange gains and losses on the underlying hedged item. The forward exchange contracts are for periods of less than one year, and the amounts outstanding as well as gains or losses on such contracts are not material. 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 35 years and machinery and equipment, 3 to 15 years. Interest Expense: Interest expense incurred during the construction of facilities and equipment is capitalized as part of the cost of those assets. Total interest paid by the Company amounted to $39.5 million in 1995, $49.5 million in 1994 and $56.7 million in 1993. There was no interest capitalized in 1995. Interest capitalized in 1994 and 1993 was $.2 million and $.1 million, respectively. Earnings Per Share: Earnings per share are based upon the weighted average number of shares of common stock outstanding. Common stock equivalents related to stock options are excluded because their effect is not material. Impact of Recently Issued Accounting Standards: In March 1995, the FASB issued Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of", which requires impairment losses to be recorded on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying amount. Statement 121 also addresses the accounting for long-lived assets that are expected to be disposed of. The Company will adopt Statement 121 in the first quarter of 1996 and, based on current circumstances, does not believe the effect of adoption will be material. Stock Compensation: The Company grants stock options and shares of restricted stock to certain employees under its Equity Incentive Plan. The stock options are for a fixed number of shares and have an exercise price equal to the fair value of the shares at the date of grant. Restricted shares are valued at fair value of the shares at the date of grant and compensation expense is recognized over the vesting period. In October 1995, the FASB issued Statement No. 123, "Accounting for Stock-Based Compensation", which encourages companies to recognize expense for stock- based awards based on their estimated fair value on the date of grant. The Company accounts for its stock compensation arrangements under the provisions of APB 25, "Accounting for Stock Issued to Employees", and intends to continue to do so. For the fiscal year ended December 31, 1996, the Company will be required to provide pro- forma disclosures of what net income and earnings per share would have been for 1996 and 1995 had the new fair value method been used and to provide additional general disclosures regarding employee stock options, as required by Statement No. 123. 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, 1995 and 1994 was $63.1 million and $61.2 million, respectively, net of respective accumulated amortization of $14.6 million and $12.9 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 business segment as a discontinued operation in accordance with Accounting Principles Board Opinion No. 30. Certain prior year amounts have been reclassified to conform to the current year presentation. Note 2 Discontinued Operations Electro-Optical Systems In January 1994, pursuant to a plan approved by the Board of Directors, the Company announced its intention to dispose of its Electro-Optical Systems operations. On January 3, 1995, the Company completed the sale of its Baird Analytical Instruments Division to Thermo Instruments Systems Inc. for approximately $12.3 million, which was used to repay a portion of the Company's domestic senior debt. On June 2, 1995, the Company completed the sale of the Optical Systems and Ni- Tec divisions of Varo Inc. and the Optical Systems division of Baird Corporation, which represented the major part of its Electro-Optical Systems business, to Litton Industries for approximately book value. The proceeds were used to pay off $8 million outstanding under the revolving credit facility on June 2, 1995 and to redeem $40 million of its 12.25% senior subordinated debentures on July 6, 1995. Remaining assets to be sold include the Electro-Optical System's Varo Electronic Systems division and non-operating real estate, which continue to be marketed to interested parties. Turbomachinery In August 1994 the Board of Directors approved a plan to sell the Company's Turbomachinery operations. 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 adjusted purchase price was $119 million of which, $109 million was received at closing, with the remainder earning interest to the Company and to be received at specified future contract dates subject to adjustment as provided in the agreement. It is management's expectation that there will be no further adjustment to the purchase price. A portion of the proceeds were used by the Company to pay off its domestic senior debt in January 1995 and in March 1995 the Company redeemed $40 million of its 12.25% senior subordinated debentures with the remainder of the proceeds. Roltra-Morse In February 1996 the Company announced a plan to sell its Roltra-Morse operations. The Company has engaged an investment banking firm to assist in the sale which is expected to be completed in 1996 with proceeds in excess of net book value of the operations. 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. Prior year financial statements have been reclassified to conform to the current year presentation. 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. Net assets and liabilities of the Discontinued Operations consist of the following: December 31 (Dollars in thousands) 1995 1994 Current Assets: Receivables $ 25,956 $ 88,793 Inventories 21,484 70,194 Other current assets 6,351 4,986 53,791 163,973 Current Liabilities: Notes Payable 9,849 3,072 Trade accounts payable 27,687 46,733 Other current liabilities 11,035 39,003 48,571 88,808 Net Current Assets $ 5,220 $ 75,165 Long-term Assets: Property $ 22,112 $ 82,684 Intangible assets 12,645 12,589 Other long-term assets 11,666 9,308 46,423 104,581 Long-term Liabilities 17,233 15,268 Net Long-term Assets $ 29,190 $ 89,313 Net Assets $ 34,410 $164,478 Net assets related to the Electro-Optical Systems business are $11.9 million and $85 million as of December 31, 1995 and 1994, respectively; net assets related to the Turbomachinery business are $1.0 million and $60 million as of December 31, 1995 and 1994, respectively; and net assets related to the Roltra-Morse business are $21.5 million and $19.5 million as of December 31, 1995 and 1994, respectively. The Discontinued Operations have $19.4 million in foreign short-term credit facilities with amounts outstanding at December 31, 1995 of $9.8 million. Total long-term debt of discontinued operations amounted to $7.1 million and $9.6 million as of December 31, 1995 and 1994, respectively. Of these amounts, $1.6 million and $3.4 million represent the current portion. A condensed summary of operations for the Discontinued Operations is as follows: Year Ended December 31 (Dollars in thousands) 1995 1994 1993 Net Sales $159,339 $444,656 $396,731 Income (loss) from operations before income taxes and minority interest 653 10,882 (44,431) Income taxes 878 1,443 1,550 Minority interest (725) 393 547 Income (loss) from operations $ 500 $ 9,046 $(46,528) The income (loss) from operations of the Discontinued Operations for 1995, 1994 and 1993 includes allocated interest expense of $7.5 million, $19.4 million, and $19.6 million, respectively. Allocated interest expense includes interest on debt of the discontinued operations to be assumed by the buyer, and an allocation of 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. Electro-Optical Business The Electro-Optical loss from operations was $45.3 million for 1993. Losses from the Electro-Optical Systems operations for 1995 and 1994 resulted in a net charge of $1.0 million and $6.2 million, respectively, to reserves established as of December 31, 1993. The Company recorded charges of $155.3 million at December 31, 1993, which included a $104.6 million goodwill write-off to reduce the carrying amount of the Electro-Optical discontinued operation to estimated realizable value. During 1995 the Company recognized an additional $13.3 million loss on disposal. Included in the additional loss was $6.8 million related to the resolution of contingencies associated with the sale of the business and fourth quarter charges of $6.5 million primarily to write-down remaining non-operating real estate to net realizable value. As of December 31, 1995, the Company has an accrual for anticipated operating losses of $.6 million (including $.9 million of allocated interest) through the date of sale, which is expected to occur during the second half of 1996. Turbomachinery Business The Turbomachinery business income from operations was $5.6 million and $1.0 million for 1994 and 1993, respectively. As a result of the sale of the Turbomachinery business in 1995, the Company recognized an estimated gain on disposal of $35.0 million, net of income taxes of $5.2 million. The gain is net of fourth quarter charges of $4.6 million, related to the resolution of contingencies associated with the sale to Mannesmann Demag and to a write-down of remaining assets to net realizable value. Roltra-Morse The Roltra-Morse business had income from operations of $.5 million and $3.5 million for 1995 and 1994, respectively, and a loss from operations of $2.1 million in 1993. Note 3 Restructuring Plan Asset Sales In October 1992, the Company announced a plan to strengthen its balance sheet through the sale of certain businesses and the application of the proceeds to reduce debt. Pursuant to this plan, the Company divested its Heim Bearings, Aerospace, Barksdale Controls and CEC Instruments businesses. In 1993, the Company sold its Heim Bearings, Aerospace and Barksdale Controls operations for proceeds of approximately $91 million, and in 1994, sold its CEC Instruments and Turboflex Ltd. operations, its Corporate headquarters building and other previously identified assets for aggregate proceeds of $13.2 million. These proceeds, net of related expenses, were used to repay senior debt in the amount of $81.9 million in 1993 and $13.2 million in 1994, in accordance with the terms of the 1993 restructured credit facilities. Other non-operating real estate, representing less than 10% of the original value of assets announced to be sold in October 1992, remain for sale. Results for the fourth quarter of 1995 include an unusual charge of $5.0 million related to the write-down of this non-operating real estate to its net realizable value (See Note 6). The Company targets completion of the divestitures over the next 9 to 12 months. In the fourth quarter of 1993, management initiated a strategy to reposition the Company on its less capital intensive businesses that exhibited strong brand name recognition, a broad customer base and market leadership with less dependence on U.S. Government sales. In connection with this strategy, the Company divested its Turbomachinery and most of its Electro-Optical Systems businesses in 1995. This repositioning will be completed upon the sales of the Roltra-Morse business, and the remaining portion of the Electro-Optical Systems business, which are expected to be completed in 1996 (See Note 2). Cost Reduction Programs In the fourth quarter of 1995, the Company recorded a charge to continuing operations of $4.0 million, including severance and other expenses related to a Company-wide program to reduce general and administrative costs (See Note 6). This program includes a reduction of 65 employees, or 2% of the total number of Company employees, including a reduction of the corporate headquarters staff by 20%. This program is expected to reduce general and administrative expenses by approximately $2.9 million in 1996, $4.0 million in 1997 and $5.0 million annually thereafter. The required cash outlay related to this program was $.4 million in 1995, and the expected cash requirements during 1996 are $3.2 million. The remainder represents non-cash charges. In 1993, the Company recorded a charge to continuing operations of $5.2 million for a cost reduction program which benefited 1994 and 1995 operating results (See Note 6). The Company implemented cost-cutting measures at its core operations to reduce its expense structure and to eliminate duplicative functions. In addition, in connection with this 1993 cost reduction program, the Company consolidated certain operations in its European Instruments and Morse Controls businesses and revised operating processes and reduced employment levels at its Pumps segment and other operations. The number of Company employees in core operations declined by 205, or 7%, between mid-1993 and mid-1994. These organizational restructuring measures have been providing net cash benefits, compared to 1993 levels, which approximated $4.5 million and $1.5 million for continuing operations, in 1995 and 1994, respectively, and are expected to approximate $5.5 million annually thereafter, based largely on reduced employment costs. Note 4 Inventories Inventories are summarized as follows: December 31 (Dollars in thousands) 1995 1994 Finished products $ 39,684 $ 33,350 Work in process 31,235 30,049 Materials and supplies 26,372 27,022 97,291 90,421 Less customers' progress payments 689 1,635 Less valuation allowance 11,572 11,884 $ 85,030 $ 76,902 Note 5 Accrued Expenses and Other Liabilities Accrued expenses and other liabilities consist of the following: December 31 (Dollars in thousands) 1995 1994 Accrued contract completion costs $ 94 $ 556 Accrued product warranty costs 2,737 4,310 Accrued litigation and claims costs 1,674 4,493 Payroll and related items 14,328 12,547 Accrued interest payable 6,511 10,167 Accrued restructuring costs 1,688 960 Accrued divestiture costs 2,861 8,582 Other 8,176 10,005 $ 38,069 $ 51,620 Note 6 Unusual Items During the fourth quarter of 1995, the Company recognized unusual charges of $9.0 million ($.53 per share) in income from continuing operations. These charges include $4.0 million in severance benefits and other expenses related to a Company-wide program to reduce general and administrative costs (See Note 3) and $5.0 million related to the write-down of certain non- operating real estate to net realizable value (See Note 3). During the twelve months ended December 31, 1993, the Company recognized unusual charges of $14.3 million ($.85 per share) in loss from continuing operations. During the fourth quarter of 1993, the Company recognized charges of $20.3 million that include provisions of $5.2 million related to the restructuring and consolidation of certain of the Company's operating units (See Note 3), $10.1 million expected net loss overall related to the Company's asset divestiture program (See Note 3) and $5.0 million in debt related financing fees associated with obtaining consents from holders of its 12.25% senior subordinated debentures to amend the indenture governing these debentures and obtain waivers from its senior lenders for non- compliance with certain financial covenants as of December 31, 1993, as a result of the fourth quarter net loss. These charges are net of unusual income of $6.0 million recorded in the third quarter of 1993 as a result of a change in estimate related to legal costs associated with pending litigation. Note 7 Income Taxes The components of income tax expense (benefit) from continuing operations are: Year Ended December 31 (Dollars in thousands) 1995 1994 1993 Current: Federal $ --- $ --- $ --- Foreign 1,906 1,330 --- State 303 460 --- 2,209 1,790 --- Deferred: Federal (17,000) --- 13,000 Foreign and State --- --- 450 (17,000) --- 13,450 $(14,791) $ 1,790 $ 13,450 Income tax expense from discontinued operations, in thousands, is as follows: 1995 - $878; 1994 - $1,443; and 1993 - $1,550. 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, 1995 and 1994 are as follows: December 31 (Dollars in thousands) 1995 1994 Current Long-term Current Long-term Deferred tax assets: Postretirement benefit obligation $ 765 $ 8,940 $ 765 $ 11,593 Expenses not currently deductible 19,101 9,895 19,174 25,879 Net operating loss carryover --- 30,041 --- 24,673 Tax credit carryover --- 5,033 --- 8,653 Total deferred tax assets 19,866 53,909 19,939 70,798 Valuation allowance for deferred tax assets (8,495) (23,180) (15,140) (53,770) Net deferred tax assets 11,371 30,729 4,799 17,028 Deferred tax liabilities: Tax over book depreciation --- 18,593 --- 18,838 Difference between book and tax basis of income recognition --- --- 471 1,230 Other --- 7,527 --- 4,324 Total deferred tax liabilities --- 26,120 471 24,392 Net deferred tax assets (liabilities) $11,371 $ 4,609 $ 4,328 $ (7,364) At December 31, 1995, unremitted earnings of foreign subsidiaries were approximately $23.4 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: Year Ended December 31 (Dollars in thousands) 1995 1994 1993 United States $(5,584) $ (322) $(21,086) Foreign 2,822 2,296 (3,393) $(2,762) $ 1,974 $(24,479) 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). Year Ended December 31 (Dollars in thousands) 1995 1994 1993 Tax at U.S. federal income tax rate $ (967) $ 691 $ (8,567) State taxes, net of federal income tax effect 197 299 396 Impact of foreign tax rates and credits 918 526 --- Net U.S. tax on distributions of current foreign earnings 586 935 --- Goodwill amortization 643 656 694 Other/valuation reserve (16,168) (1,317) 20,927 Income tax expense (benefit) $ (14,791) $ (1,790) $ 13,450 Net income taxes paid during 1995 and 1994 were $6.3 million and $.2 million, respectively, and net income tax refunds received during 1993 were $7 million. The Company has net operating loss carryforwards of approximately $85 million expiring in years 2002 through 2010, foreign tax credit carryforwards of approximately $8.3 million expiring through 2000, which, for financial reporting purposes, are reflected as deductible foreign taxes, and minimum tax credits of approximately $2.1 million which may be carried forward indefinitely. These carryforwards are available to offset future federal taxable income. In 1995, the Company reduced the valuation allowance applied against the net operating loss carryforward by $17 million to a level where management believes 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 $48 million. The Company would generate this income from the execution of reasonable and prudent tax planning strategies and based upon future income projections, including the Company's announced plan to sell Roltra-Morse SpA in 1996. The amount of the deferred tax asset considered realizable, however, could be reduced in the near term if estimates of future taxable income during the carryforward period are reduced. Note 8 Notes Payable and Long-Term Debt In August 1994, the Company obtained credit facilities for borrowings up to $150 million from a group of lenders (the "Existing Credit Agreement"), secured by the assets of the Company's domestic operations and all or a portion of the stock of certain of the Company's subsidiaries. The Existing Credit Agreement provided for a $65 million revolving credit facility through July 31, 1997, a $40 million term loan amortizing to July 1997, and a $45 million bridge loan maturing January 1996. The revolving credit facility is extendible to July 1999 under certain conditions. Proceeds from the Existing Credit Agreement were used to repay the Company's working capital loans under the former domestic senior credit facilities, as well as other outstanding senior debt obligations. In January 1995, proceeds from the sales of the Baird Analytical Instruments division and the Turbomachinery business were used to repay amounts outstanding on the term and bridge loans of $36.7 million and $45 million, respectively (See Note 2). At the same time, and in keeping with the terms of the Existing Credit Agreement, the $65 million revolving credit facility was reduced to $50.0 million. In December 1995, the Existing Credit Agreement was amended to increase the revolving credit facility to $60 million. At December 31, 1995 the Company had borrowings of $18.2 million outstanding under the revolving credit facility in addition to $7.8 million of outstanding standby letters of credit. The Company's continuing operations currently have $16.1 million in foreign short-term credit facilities with amounts outstanding at December 31, 1995 of $9.0 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 8.0% and 8.5% at December 31, 1995 and 1994, respectively. Long-term debt of continuing operations consists of the following: December 31 (Dollars in thousands) 1995 1994 Borrowings on revolving credit facility expiring July 31, 1997 (1) $18,200 $ --- Bridge loan due January 31, 1996 --- 45,000 Term loan, $3.3 million due quarterly October 31, 1994 to July 31, 1997 --- 36,667 Senior subordinated debentures with interest at 12.25%, due August 15, 1997 70,000 150,000 Senior subordinated debentures with interest at 12%, due November 1, 1999 to 2001 150,000 150,000 Other 8,407 4,373 246,607 386,040 Less current portion 805 13,675 $245,802 $372,365 (1) These loans bear interest at a rate equal to LIBOR plus 2.25%. ___________________________________________________________________ The aggregate annual maturities of long-term debt from continuing operations, in thousands, for the four years subsequent to 1996 are: 1997 - $90,460; 1998 - $935; 1999 - $37,672; and 2000 - $37,662. The 12.25% senior subordinated debentures are redeemable in whole or in part, at the option of the Company at any time, at 100% of their principal amount, plus accrued interest. Interest is payable semi-annually on February 15 and August 15. The fair value of these instruments at December 31, 1995, based on market bid prices, was $70.4 million. In March 1995, $40 million of the 12.25% senior subordinated debentures were redeemed from the proceeds received from the sale of the Turbomachinery business in January 1995 and on July 6, 1995 an additional $40 million were redeemed with proceeds from the sale of the Company's Electro-Optical Systems businesses (See Note 2). The 12% senior subordinated debentures are currently redeemable in whole or in part, at the option of the Company, at 102.5% of their principal amount, plus accrued interest. The redemption price declines to 100% on or after November 1, 1996. Interest is payable semi- annually on May 1 and November 1. The fair value of these instruments at December 31, 1995, based on market bid prices, was $153.0 million. The Existing Credit Agreement requires the Company to meet certain objectives with respect to financial ratios and it and the 12.25% and 12% senior subordinated debentures contain provisions which place certain limitations on dividend payments and outside borrowings. Under the most restrictive of such provisions, the Company must maintain certain minimum consolidated net worth levels, interest coverage and fixed charge coverage levels and the Company is prohibited from declaring or paying cash dividends through at least July 31, 1997. The senior subordinated debentures contain covenants that, among other things, restrict indebtedness to specified levels. Under certain circumstances, such covenants could result in the Company's inability to fully utilize the revolving credit facility under the Existing Credit Agreement and the foreign short-term credit facilities. At December 31, 1995, the Company was in technical violation of one of the covenants under the Existing Credit Agreement which was subsequently amended. The Company received a waiver of this technical violation. In connection with the early repayment and redemption of domestic senior debt and $80 million of the 12.25% senior subordinated debentures, as discussed in the preceding paragraphs, a $4.4 million ($.26 per share) charge was recorded as an extraordinary item in 1995. 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. Bank, advisory and legal fees associated with the 1994 refinancing of the Existing Credit Agreement amounted to approximately $5.6 million in 1994. In addition, a $5.3 million ($.31 per share) charge related to the extinguishment of senior debt under the former domestic senior credit facilities was recorded as an extraordinary charge in 1994. The $5.3 million charge is comprised of a $3.7 million premium paid in 1994 on the prepayment of its $30 million 12.75% senior promissory note and the write-off of approximately $1.6 million of previously deferred loan costs. Bank, advisory and legal fees associated with the 1993 restructuring of the Company's domestic senior credit facilities amounted to approximately $8.0 million payable in 1993. In addition, 200,000 warrants for the Company's common stock, valued at approximately $.4 million, were issued to one senior lender and, as part of the $125 million repayment plan, the Company has recognized a charge in 1993 of approximately $12 million on the prepayment of its senior notes which was partially financed with Make-Whole Notes issued to one of its senior lenders and the write-off of approximately $2 million of previously deferred loan costs. Approximately $18.1 million ($1.07 per share) of the above amounts relate to the extinguishment of senior debt and were recorded as an extraordinary item in 1993. Note 9 Shareholders' Equity Equity Incentive Plan Under the Company's Equity Incentive plan, up to 3,050,000 shares of the Company's $1.00 par value common stock can be issued pursuant to the granting of stock options, stock appreciation rights, restricted stock awards and restricted unit awards to key employees. Options can be granted at no less than 100 percent of the fair market value of the stock on the date of grant or on the prospective date fixed by the Board of Directors. None of these options can be exercised 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, can be exercised in each of the following four years. Additionally, each option shall terminate no later than 10 years from the date of grant. On August 17, 1993, the Board of Directors approved the repricing of certain outstanding non-qualified stock options granted on previous dates under the Plan. This resulted in the replacement of 468,000 non-qualified stock options at various exercise prices ranging from $10.375 to $20.375, by 272,865 non-qualified stock options at an exercise price of $7.375, the fair market value at the date of the replacement grant, subject to the market price of the Company's stock exceeding $10 per share for a period of 30 days. During 1994, the aforementioned criteria was met. Vested dates are based on the original grant dates of the replaced options. On June 20, 1994, certain additional outstanding non- qualified stock options, granted on previous dates under the Plan, were repriced pursuant to the August 17, 1993 Board of Directors approval. This resulted in the replacement of 15,000 non-qualified stock options at various exercise prices ranging from $11.625 to $20.375, by 9,970 non-qualified stock options at an exercise price of $10.25, the fair market value at the date of the replacement grant. Vested dates are based on the original grant dates of the replaced options. On June 23, 1995, the Company's Equity Incentive Plan was amended to increase the total issuable shares by 850,000 to 3,050,000 and to prohibit repricing without prior shareholder approval. The Plan permits 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 of the Equity Incentive Plan. Grants of 40,000 shares and 30,000 shares of restricted stock were made in 1994 and 1993, respectively, all of which were outstanding as of December 31, 1995. Vesting of such awards is subject to a defined vesting period and to the Company's stock achieving certain performance levels during such period. Stock option activity under the plan was as follows: Year Ended December 31 (Shares in thousands) 1995 1994 1993 Options: Granted 250 410 498 Exercised (73) (56) --- Canceled (210) (159) (150) Repricing Canceled --- (15) (468) Issued --- 10 273 Outstanding at end of year 1,464 1,497 1,307 Exercisable at end of year 691 654 652 Available for grant at end of year 865 55 341 Option price range per share: Granted $ 6.00 $ 9.75- $ 7.375 $ 10.25 Exercised $ 7.00- $ 7.00- --- $ 7.375 $ 7.375 During 1988, the Company adopted the Equity Incentive Plan for Outside Directors. The plan provides 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 can be granted at no less than 100 percent of the fair market value of the stock on a date five business days after the option is granted and no option granted may be exercised during the first year after its grant. After this waiting period, 25 percent of each option, on a cumulative basis, can be exercised in each of the following four years. In February 1988, 320,000 stock options were granted at $16.19 per share, all of which were exercisable as of December 31, 1995. In December 1990, 40,000 stock options were granted at $10.375 per share, all of which were exercisable as of December 31, 1995. In June 1995, the Plan was amended to reduce the number of shares issuable to an aggregate of 360,000. In June 1995, the Company adopted the 1995 Equity Incentive Plan for Outside Directors. The Plan provides 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 will be granted, on an annual basis, options to purchase 4,000 shares of the Company's common stock. The exercise price of the options will be 100 percent of the fair market value of the common stock at the date of grant and no option granted may be exercised during the first year after its grant subject to certain plan provisions. After this waiting period, the options become exercisable in four equal annual installments of 1,000 shares. Additionally, each option terminates no later than 10 years from the date of grant. The plan also provides for the granting of an annual restricted stock award of 1,000 shares of the Company's common stock. Each award is made in four quarterly installments of 250 shares beginning July 1, 1995. The shares comprising the restricted stock awards may not be sold or otherwise transferred by the outside director until termination from service. During 1995, 24,000 stock options were granted at $8.00 per share, none of which were excercisable as of December 31, 1995, and 3,000 shares of restricted stock awards were issued. Preferred Stock Purchase Rights On April 22, 1987, the Board of Directors declared a distribution of one Preferred Stock Purchase Right for each share of common stock outstanding. Each right will entitle the holder to buy from the Company a unit consisting of 1/100 of a share of Junior Participating Preferred Stock, Series A, at an exercise price of $70 per unit. The rights become exercisable ten days after public announcement that a person or group has acquired 20 percent or more of the Company's common stock or has commenced a tender offer for 30 percent or more of common stock. The rights may be redeemed prior to becoming exercisable by action of the Board of Directors at a redemption price of $0.025 per right. If more than 35 percent of the Company's common stock becomes held by a beneficial owner, other than pursuant to an offer deemed in the best interest of the shareholders by the Company's independent directors, each right may be exercised for common stock, or other property, of the Company having a value of twice the exercise price of each right. If the Company is acquired by any person after the rights become exercisable, each right will entitle its holder to receive common stock of the acquiring company having a market value of twice the exercise price of each right. The rights expire on May 4, 1997. Employee Stock Savings Plan Up to 600,000 shares of the Company's common stock are reserved for issuance under the Company's Employee Stock Savings Plan. (See Note 11) 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. Note 10 Operations by Industry Segment and Geographic Area The Company classifies its continuing operations into four core business segments: Power Transmission, Pumps, Instrumentation 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. A fifth business segment entitled Other is included in continuing operations for financial reporting purposes, and includes operations previously sold as part of the Company's asset divestiture program, such as units of the Company's aerospace business and certain other non-strategic businesses, which no longer fit into its core business segments as redefined in 1993 and 1995. The 1994 and 1993 amounts have been restated to reflect Roltra-Morse as a discontinued operation and the redefinition of the Company's business segments. 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) 1995 1994 1993 Net Sales Power Transmission $ 95,075 $ 93,308 $ 85,906 Pumps 94,375 90,428 91,556 Instrumentation 76,113 72,226 72,434 Morse Controls 107,664 100,075 90,876 Other --- 4,748 75,754 Total net sales $373,227 $360,785 $416,526 Segment operating income Power Transmission $ 11,348 $ 8,905 $ 2,338 Pumps 9,884 10,447 10,357 Instrumentation 6,746 9,791 7,951 Morse Controls 5,292 5,743 457 Other --- (216) 886 Total segment operating income 33,270 34,670 21,989 Equity in income (loss) of unconsolidated companies 302 --- (231) Unallocated corporate expenses (12,454) (5,120) (13,407) Net interest expense (23,880) (27,576) (32,830) Income (loss) from continuing operations before income taxes and extraordinary item $ (2,762) $ 1,974 $ (24,479) A reconciliation of segment operating income to income from operations follows: Year Ended December 31 (Dollars in thousands) 1995 1994 1993 Segment operating income $ 33,270 $ 34,670 $ 21,989 Unallocated corporate expenses (12,454) (5,120) (13,407) Other income (739) (219) (1,074) Income from operations $ 20,077 $ 29,331 $ 7,508 Segment operating income for the year ended December 31, 1995, includes $2.4 million of unusual charges, of which $.9 million and $1.5 million relate to the Instrumentation and Morse Controls segments, respectively. Unallocated corporate expenses include unusual charges of $6.6 million for the year ended December 31, 1995. Segment operating income for the year ended December 31, 1993, includes $8.1 million of unusual charges, of which $.2 million, $.5 million, $.9 million, $2.4 million and $4.1 million relates to the Power Transmission, Pumps, Instrumentation, Morse Controls, and Other segments, respectively. Unallocated corporate expenses include unusual charges of $6.2 million for the year ended December 31, 1993. The Pumps and Instrumentation segments had sales to the United States Department of Defense, in the form of prime and subcontracts, which accounted for 14% of consolidated sales in 1993. No one customer accounted for 10% or more of consolidated sales in 1995 and 1994. Year Ended December (Dollars in thousands) 1995 1994 1993 Identifiable assets Power Transmission $ 86,343 $ 88,284 $ 89,301 Pumps 69,347 63,172 60,430 Instrumentation 42,538 44,862 47,017 Morse Controls 111,482 107,471 101,986 Other 13,321 18,054 40,413 Corporate 26,446 26,298 55,915 Discontinued Operations: Electro-Optical 11,893 85,000 85,000 Turbomachinery 983 59,970 56,711 Roltra-Morse 21,534 19,508 14,765 Total identifiable assets $383,887 $512,619 $551,538 Depreciation and amortization Power Transmission $ 4,618 $ 4,778 $ 4,053 Pumps 3,972 3,578 3,878 Instrumentation 1,840 1,464 1,518 Morse Controls 3,392 4,155 3,518 Other --- 655 3,313 Corporate 1,400 3,973 3,516 Total depreciation and amortization $ 15,222 $ 18,603 $ 19,796 Capital expenditures Power Transmission $ 3,384 $ 1,245 $ 1,317 Pumps 7,367 2,164 1,694 Instrumentation 1,445 1,177 1,054 Morse Controls 2,131 1,080 886 Other --- 39 1,042 Corporate 273 320 350 Total capital expenditures $ 14,600 $ 6,025 $ 6,343 The continuing operations of the Company on a geographic basis are as follows: Year Ended December 31 (Dollars in thousands) 1995 1994 1993 Net sales United States $244,341 $246,601 $307,918 Foreign (principally Europe) 128,886 114,184 108,608 Total net sales $373,227 $360,785 $416,526 Segment operating income United States $ 29,642 $ 31,679 $ 26,046 Foreign 3,628 2,991 (4,057) Total segment operating income $ 33,270 $ 34,670 $ 21,989 Identifiable assets Continuing Operations: United States $234,382 $238,916 $283,614 Foreign 115,095 109,225 111,448 Discontinued Operations: United States 12,876 141,053 135,585 Foreign 21,534 23,425 20,891 Total identifiable assets $383,887 $512,619 $551,538 Export sales Asia $ 4,060 2,763 4,362 Latin America 2,747 2,368 1,699 Canada 4,643 3,748 3,132 Mexico 472 861 701 Europe 2,704 2,857 2,750 Other 2,568 3,293 2,596 Total export sales $ 17,194 $ 15,890 $ 15,240 Note 11 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. Pension expense was $4.2 million in 1995, $7.9 million in 1994 and $8.4 million in 1993, and includes amortization of prior service cost and transition amounts for periods of 5 to 15 years. The 1995 expense includes costs related to retained pension liabilities of discontinued operations. In 1994 and 1993 these amounts were charged to discontinued operations. In 1993 the Company's divestiture program resulted in a decrease in U.S. pension plan participants. The total curtailment and settlement gain, in 1993, of $1.2 million was applied to the reserve for divestitures (See Note 3). The Company included $2.0 million of curtailment and settlement losses in its gain on disposal related to the discontinued operations in 1995. Net pension expense (including $5.7 million and $4.5 million charged to discontinued operations in 1994 and 1993, respectively) is comprised of the following: Year Ended December 31 (Dollars in thousands) 1995 1994 1993 Service cost $ 4,297 $ 7,237 $ 7,678 Interest cost on projected benefit obligation 13,429 14,158 13,802 Actual return on plan assets (17,797) (449) (22,646) Net amortization and deferral 4,274 (12,963) 9,567 Net pension expense $ 4,203 $ 7,983 $ 8,401 Assumptions used in the accounting for the Company- sponsored defined benefit plans: Year Ended December 31 1995 1994 1993 Weighted average discount rate 7.5% 8.5% 7.5% 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 sheet for the defined benefit pension plans: Year Ended December 31 (Dollars in thousands) 1995 Assets Accumulated Exceed Benefits Accumulated Exceed Benefits Assets Actuarial present value of benefit obligations: Vested benefit obligation $117,455 $ 46,445 Accumulated benefit obligation $124,808 $ 46,564 Projected benefit obligation $138,866 $ 47,454 Plan assets at fair value 148,275 35,226 Plan assets in excess of (less than) projected benefit obligation 9,409 (12,228) Unrecognized net (gain) or loss (9,566) 107 Prior service cost not yet recognized in net periodic pension cost 2,812 956 Unrecognized net (asset) obligation at transition 2,037 171 Adjustment required to recognize minimum liability --- (3,132) Pension asset (liability) recognized in the balance sheet $ 4,692 $(14,126) Year Ended December 31 (Dollars in thousands) 1994 Assets Accumulated Exceed Benefits Accumulated Exceed Benefits Assets Actuarial present value of benefit obligations: Vested benefit obligation $101,869 $ 60,492 Accumulated benefit obligation $105,020 $ 61,253 Projected benefit obligation $119,886 $ 62,661 Plan assets at fair value 127,850 47,542 Plan assets in excess of (less than) projected benefit obligation 7,964 (15,119) Unrecognized net (gain) or loss (5,897) (175) Prior service cost not yet recognized in net periodic pension cost 4,066 3,348 Unrecognized net (asset) obligation at transition 3,407 821 Adjustment required to recognize minimum liability --- (4,165) Pension asset (liability) recognized in the balance sheet $ 9,540 $ (15,290) Plan assets at December 31, 1995, are invested in fixed dollar guaranteed investment contracts, United States 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 (Employee Stock Savings) plans covering substantially all domestic, non-union employees. Eligible employees may generally contribute from 1% to 12% 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, previously suspended in July 1992, at 25% of the first 6% of each participant's pre- tax contribution. The Company's expense for 1995 was $.3 million. Note 12 Postretirement Benefits In addition to providing pension benefits, the Company provides certain health care and life insurance benefits for retired employees. Substantially all of the Company's non-union employees retiring from active service and immediately receiving retirement benefits from one of the Company's pension plans would be eligible to receive such benefits. 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 retiree medical and life insurance. This amendment, which affects some current retirees and all future retirees, phases out the Company subsidy for retiree medical and life insurance over a three year period ending January 1, 1997. The pre-tax amount amortized to income from continuing operations was $4.6 million and $4.4 million in 1995 and 1994, respectively. The Company will amortize remaining associated reserves of approximately $5 million to income in 1996. The amendment has not resulted 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) 1995 Life Medical Insurance Plans Plans Total Accumulated postretirement benefit obligation: Retirees $11,780 $4,974 $16,754 Fully eligible active plan participants 1,277 312 1,589 Other active plan participants 1,011 81 1,092 14,068 5,367 19,435 Plan assets --- --- --- Unrecognized prior service cost 3,109 3,924 7,033 Unrecognized net gain (loss) 2,379 (2,290) 89 Postretirement benefit liability recognized in the balance sheet $19,556 $7,001 $26,557 December 31 (Dollars in thousands) 1994 Life Medical Insurance Plans Plans Total Accumulated postretirement benefit obligation: Retirees $16,709 $ 4,826 $21,535 Fully eligible active plan participants 1,365 262 1,873 Other active plan participants 1,326 68 1,148 19,400 5,156 24,556 Plan assets --- --- --- Unrecognized prior service cost 7,840 7,376 15,216 Unrecognized net loss (2,423) (2,043) (4,466) Postretirement benefit liability recognized in the balance sheet $24,817 $10,489 $35,306 The 1995 accrued postretirement benefits amount is classified as follows: $2.2 million current liabilities and $24.4 million long-term liabilities. For 1994, these amounts are $2.2 million current liabilities, $30.9 million long-term liabilities and $2.2 million in net assets of discontinued operations - noncurrent. As a result of the divestitures in 1994 and 1993, the Company recognized a $0.3 million gain and a $2.2 million gain, respectively, related to the curtailment of its postretirement benefit plans. These curtailment gains were applied to the reserve for divestitures (See Note 3). As a result of the Company's decision to sell its Electro-Optical Systems operations a curtailment gain of $1.3 million was recognized in 1993. This curtailment gain is a component of the loss on disposal of discontinued operations (See Note 2). Net periodic postretirement benefit cost (including $2.3 million credited in 1994 and $1.0 million charged in 1993 to discontinued operations) included the following components: 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) Year Ended December 31 (Dollars in thousands) 1994 Life Medical Insurance Plans Plans Total Service cost $ 100 $ 7 $ 107 Interest cost 1,547 289 1,836 Amortization of prior service cost (5,955) (1,967) (7,922) Amortization of loss 543 103 646 Net periodic postretirement benefit cost $(3,765) $(1,568) $(5,333) Year Ended December 31 (Dollars in thousands) 1993 Life Medical Insurance Plans Plans Total Service cost $ 372 $ 63 $ 435 Interest cost 2,999 750 3,749 Amortization of prior service cost --- --- --- Amortization of loss --- --- --- Net periodic postretirement benefit cost $ 3,371 $ 813 $ 4,184 Actual negotiated health care premiums were used in calculating 1995, 1994 and 1993 health care costs. It is expected that the annual increase in medical costs will be 8.0% from 1995 to 1996, grading down in future years by 1.0% per year until it reaches a future general medical inflation level of 5%. Inflation has been capped at 200% for active non-union employees. 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, 1995 by $1.1 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 7.5% and 8.5% in 1995 and 1994, respectively. Note 13 Leases The Company leases certain manufacturing and office facilities, equipment, and automobiles under long-term leases. Future minimum rental payments required under operating leases of continuing operations that have initial or remaining noncancelable lease terms in excess of one year, as of December 31, 1995, are: (Dollars in thousands) 1996 $5,355 1997 4,362 1998 3,799 1999 2,649 2000 1,268 Thereafter 4,854 Total minimum lease payments $22,287 Total rental expense under operating leases charged against continuing operations was $7.3 million in 1995, $8.2 million in 1994 and $8.0 million in 1993. Note 14 Contingencies Legal Proceedings LILCO Litigation. In August 1985, the Company was named as defendant in a lawsuit filed in the U.S. District Court, Southern District of New York, by Long Island Lighting Company ("LILCO") following the severing of a crankshaft in a diesel generator sold to LILCO by the Company. LILCO's complaint contained 11 counts, including counts for breach of warranty, negligence and fraud, and sought $250 million in damages. In various decisions from 1986 through 1990, 10 of the original 11 counts and various additional amended counts were dismissed with only the original breach of warranty count remaining. Thereafter, the trial court entered a judgment against the Company in the amount of $18.3 million. In September 1993, the Second Circuit Court of Appeals affirmed the judgment, and in October 1993, the judgment was satisfied by payment to LILCO of approximately $19.3 million (which amount included approximately $1.0 million of post- judgment interest) by International Insurance Company ("International") and Granite State Insurance Co. ("Granite State"), two of the Company's insurers. 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, because, among other things, its policies did not cover the matters in question in the LILCO case, it was entitled to recover $10 million in defense costs previously paid in connection with such case and $1.2 million of the judgment which was paid on behalf of the Company. 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 of 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. The Company is awaiting a final decision. If the International Judgment is reinstated, the Company intends to appeal. If the ultimate outcome of this matter is unfavorable, the Company will record a charge for the judgment amount plus accrued interest. In June 1992, the Company filed an action, subsequently transferred to the U.S. District Court, Southern District of New York, that is currently pending against Granite State in an attempt to collect amounts for defense costs paid to counsel retained by the Company in defense of the LILCO litigation. After having reimbursed the Company for $1.7 million in defense costs, Granite State refused to reimburse the Company for $8.5 million in additional defense costs paid by the Company, alleging, among other things, that defense costs above reasonable levels were expended in defending the LILCO litigation. The insurer subsequently paid $18.1 million of the judgment rendered against the Company, thereby exhausting its $20 million policy. The Company claims that the insurer's refusal to pay defense costs was in bad faith and the Company s entitled to its cost of money and other damages. In a counterclaim, Granite State is seeking reimbursement of all or part of the $1.7 million in defense costs peviously paid by it, and has indicated that it may seek additional damages beyond the reimbursement of defense costs, including recoupment of approximately $4.0 million of the amount awarded by the jury in the LILCO litigation (which $4.0 million represents amounts previously paid by LILCO to the Company for generator repairs and which Granite State had repaid on behalf of the Company). In May 1996, the Company and Granite State reached an agreement in principle which will result in the dismissal of all claims and counterclaims and the elimination of all issues concerning the $20 million payment previously made on behalf of the Company under the terms of the Granite State policy. This agreement preserves the Company's ability to seek reimbursement of the $8.5 million of defense costs from persons other than Granite State. Additional Litigation. 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 19,000 claimants who allege injury caused by exposure to asbestos. Although neither the Company nor any of its subsidiaries has ever been a producer or direct supplier of asbestos, it is alleged that the industrial and marine products sold by the Company and the subsidiary named in such complaints contained components which contained asbestos. Suits against the Company and its subsidiary have been tendered to their insurers who are defending under their stated reservation of rights. On May 10, 1996, the Company learned that the U.S. District Court for the Eastern District of Pennsylvania entered an order which "administratively dismissed" without predjudice approximately 18,000 maritime asbestos injury cases, including approximately 13,000 cases involving claims against the Company and a number of other defendents. 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 defendent in the case. Should settlements for these claims be reached at levels comparable to those reached by the Company in the past, they would not be expected to have a material effect on the Company. The activities of certain employees of the Ni-Tec Division of the Company's Varo Inc. subsidiary ("Ni-Tec"), headquartered in Garland, Texas, were the focus of an investigation by the Office of the Inspector General of the U.S. Department of Defense and the Department of Justice (Criminal Division). Ni-Tec received subpoenas for certain records as a part of the investigation in 1992, 1993 and 1994, each of which was responded to. The investigation was apparently directed at alleged failures in quality control, testing and documentation activities which began at Ni-Tec while it was a division of Optic-Electronic Corp. Optic- Electronic Corp. was acquired by the Company in November 1990 and subsequently merged with Varo Inc. in 1991. On July 15, 1996, the Company reached an agreement with the U.S. government to settle all claims related to this investigation and a related qui tam civil action brought in the U.S. District Court for the Northern District of Texas by a former Varo employee who has consented to the settlement. The U.S. government recently notified the Company that it intended to intervene in this civil action, which had been under seal. The settlement involves the payment by Varo of approximately $2.0 million in consideration for, among other things, dismissal of all civil and administrative claims under the False Claims Act, 31 USC 3929 et seq., the Contract Disputes Act, 41 USC 601 et seq., and claims of common law fraud and breach of contract. This settlement amount was previously reserved in full by the Company. As a result of the settlement, Varo will receive approximately $400,000 in contract payments which were being held by a prime contractor pending resolution of Varo's dispute with the government. 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. Although CERCLA and corresponding State law liability is joint and several, the Company believes that its liability will not have a material adverse effect on the financial condition of the Company since it believes that it either qualifies as a de minimis or minor contributor at each site. Accordingly, the Company believes that the portion of remediation costs that it will be responsible for will not be material. For additional information see section entitled Environmental Matters in Part I, Item I of this Form 10-K Report. The Company also has a lawsuit pending against it in the U.S. District Court for the Western District of Pennsylvania alleging component failures in equipment sold by its former diesel engine division and claiming damages of approximately $3.0 million and 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 $8.0 million. Each lawsuit is in the document discovery stage. With respect to the litigation and claims described in the preceding paragraphs, management of the Company believes that it either expects to prevail, has adequate insurance coverage or has established appropriate reserves to cover potential liabilities. There can be no assurance, however, on the ultimate outcome of any of these matters. 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. A range of possible outcomes for all of these legal proceedings currently cannot be reasonably determined. Reported profits from the sale of certain products to the U.S. Government and its agencies are subject to adjustments. In the opinion of management, refunds, if any, will not have a material effect upon the consolidated financial statements. 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. Note 15 Subsequent Events Refinancing. On April 29, 1996, the Company completed the refinancing of its senior domestic debt (the "Old Credit Agreement"), its 12% senior subordinated debentures and its remaining 12.25% senior subordinated debentures. Under terms of the refinancing, the Company has issued $155 million of 11.75% senior subordinated notes ( the "New Notes") due in 2006, priced at a discount to yield 12%. The Company also has entered into a new agreement for $175 million in senior secured credit facilities (the "New Credit Agreement") with a group of lenders. Initial borrowings under the New Credit Agreement were approximately $112 million. The cost of issuance of the New Notes and the implementation of the New Credit Agreement will be amortized over their respective terms. Proceeds of the New Notes and a portion of the New Credit Agreement were used to redeem the remaining $70 million of the Company's 12.25% senior subordinated debentures due 1997 and all $150 million of its 12% senior subordinated debentures due 2001, together with accrued interest and a prepayment premium for the latter issue. Proceeds were also used to refinance all obligations under the Old Credit Agreement. As a result of the refinancing, an extraordinary charge of approximately $8.5 million was recorded in the second quarter of 1996. This charge represents the costs incurred in connection with the early extinguishment of the debt as well as the write-off of previously deferred loan costs. Discontinued Operations. The Company is currently negotiating the final wording of the contract for the sale of Varo Electronic Systems division, a division of its former Electro-Optical Systems business, with a small defense contractor. The Company beleives that there do not appear to be any major outstanding issues unresolved at this point. Both parties are in agreement as to the contract price based on a range of net asset value on the date of closing (which includes the buyer's assumption of certain recorded liabilities). The steps left to complete prior to the execution of a definitve contract are: 1) finalization of the contract, and 2) completion of all financial schedules and exhibits to the contract. The Company estimates that an agreement and signing of a definitive contract could be reached within two to four weeks. Closing of the sale would be contingent on the buyer's ability to obtain financing and to finalize due diligence efforts. The Company estimates that if an agreement is reached within this time frame that the sale could close before the end of the fourth quarter of 1996. REPORT OF INDEPENDENT AUDITORS Board of Directors, Imo Industries Inc. We have audited the accompanying consolidated balance sheets of Imo Industries Inc. and subsidiaries as of December 31, 1995 and 1994, and the related consolidated statements of income, cash flows and shareholders' equity for each of the three years in the period ended December 31,1995. Our audits also included the financial statement schedule listed in the Index at Item 14(a). 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, 1995 and 1994, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1995, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements as a whole, presents fairly in all material respects the information set forth therein. ERNST & YOUNG LLP Princeton, New Jersey February 15, 1996, except for Note 15, as to which the date is August 1, 1996 Imo Industries Inc. and Subsidiaries Quarterly Financial Information (Unaudited) Quarterly financial information for 1995 and 1994 is as follows: 1995 (Dollars in thousands except 1st* 2nd* 3rd* 4th per share amounts (a) Quarter Quarter Quarter Quarter Net Sales $95,884 $98,576 $88,727 $90,040 Gross profit 30,894 30,943 27,389 25,666 Income (loss) before extraordinary item: Continuing Operations 2,586 2,962 2,515 3,966 Discontinued Operations 40,577 448 (6,938) (11,962) Extraordinary Item (4,140) --- (304) --- Net income (loss) 39,023 3,410 (4,727) (7,996) Earnings (loss) per share: Before extraordinary item: Continuing Operations .15 .18 .15 .23 Discontinued Operations 2.38 .02 (.41) (.70) Extraordinary Item (.24) --- (.02) --- Net income (loss) 2.29 .20 (.28) (.47) 1994 (Dollars in thousands except 1st* 2nd* 3rd* 4th* per share amounts (a) Quarter Quarter Quarter Quarter Net Sales $87,800 $91,478 $91,235 $90,272 Gross profit 27,759 28,296 27,278 28,617 Income (loss) before extraordinary item: Continuing Operations 341 (1,045) 1,208 (320) Discontinued Operations 564 2,797 1,580 4,105 Extraordinary Item --- --- (5,299) --- Net income (loss) 905 1,752 (2,511) 3,785 Earnings (loss) per share: Before extraordinary item: Continuing Operations .02 (.06) .07 (.02) Discontinued Operations .03 .17 .09 .24 Extraordinary Item --- --- (.31) --- Net income (loss) .05 .11 (.15) .22 (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. * Reclassified to conform to 1995 full year presentation. SCHEDULE II IMO INDUSTRIES INC. AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS (Dollars in thousands) THREE-YEAR PERIOD ENDED DECEMBER 31, 1995
ADDITIONS BALANCE AT CHARGED TO BALANCE BEGINNING COSTS AND OTHER - DEDUCTIONS - AT END OF YEAR EXPENSES DESCRIBE DESCRIBE OF YEAR YEAR ENDED DECEMBER 31, 1995: Allowance for doubtful accounts $ 2,192 $ 394 $ 74(2) $ 642(4) $ 2,030 12(9) Inventory Valuation Allowance $11,884 $ 2,454 $ 312(2) $ 2,918(7) $11,572 30(9) 190(3) Valuation allowance for deferred tax assets $68,910 $ --- $ --- $15,550(3) $31,675 17,000(10) 4,685(11) Accrued product warranty liability $ 4,310 $ 1,563 $ 9(9) $ 1,341(5) $ 2,737 45(2) 2,253(3) 404(3) Accrued contract completion costs $ 556 $ 91 $ --- $ 183(6) $ 94 370(3) YEAR ENDED DECEMBER 31, 1994: * Allowance for doubtful accounts $ 2,371 $ 742 $ 123(2) $ 839(4) $ 2,192 205(3) Inventory Valuation Allowance $11,577 $ 5,452 $ --- $ 4,381(7) $11,884 764(3) Valuation allowance for deferred tax assets $60,215 $ --- $ 8,695(3) $ --- $68,910 Accrued product warranty liability $ 3,777 $ 1,188 $ 17(2) $ 672(5) $ 4,310 Accrued contract completion costs $ 886 $ 324 $ --- $ 179(3) $ 556 475(6) YEAR ENDED DECEMBER 31, 1993: * Allowance for doubtful accounts $ 2,338 $ 1,374 $ --- $ 327(8) $ 2,371 914(4) 37(2) 63(3) Inventory Valuation Allowance $14,033 $ 3,435 $ --- $ 2,591(7) $11,577 1,870(3) 1,430(8) Valuation allowance for deferred tax assets $ 1,500 $15,000 $43,715(1) $ --- $60,215 Accrued product warranty liability $ 5,272 $ 1,191 $ 30(2) $ 2,719(5) $ 3,777 63(3) 60(3) Accrued contract completion costs $ 701 $ 627 $ 60(3) $ 502(6) $ 886 * Reclassified to conform to the 1995 presentation (continuing operations). (1) Net change in allowance primarily to offset tax benefit of current year tax loss. (2) Foreign exchange adjustments. (3) Reclassification and adjustments. (4) Uncollectible accounts written off, net of recoveries. (5) Product warranty claims honored during the year. (6) Current year charges for contract completion. (7) Charges against inventory valuation account during the year. (8) Ending balances of businesses sold. (9) Opening balance of companies acquired during the year. (10) Reduction due to revaluation of realizable tax benefit. (11) Utilization of net operating loss carryforwards by discontinued operations. S-1
EX-23 2 EXHIBIT 23 EXHIBIT 23 -- CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statements (Forms S-8 No. 33-13362, No. 33-41260, and No. 33- 60533) pertaining to the Imo Industries Inc. Employees' Stock Savings Plan, Registration Statement (Form S-8 No. 33-26118) pertaining to the Imo Industries Inc. Equity Incentive Plan for Key Employees and the Equity Incentive Plan for Outside Directors, as amended on June 23, 1995, Registration Statement (Form S-8 No. 33-60535) pertaining to the Imo Industries Inc. 1995 Equity Incentive Plan for Outside Directors of Imo Industries Inc. of our report dated February 15, 1996, (except Note 15, as to which the date is August 1, 1996), with respect to the consolidated financial statements and schedule of Imo Industries Inc. included in this amended Annual Report on Form 10-K/A for the year ended December 31, 1995. ERNST & YOUNG LLP Princeton, New Jersey August 15, 1996 -----END PRIVACY-ENHANCED MESSAGE-----