Item
1. Business. General History Industry Segments Discontinued Operations Restructuring Plan Competition Product Distribution and Customers Backlog Raw Materials Patents, Licenses and Trademarks Research and Development Environmental Matters Employees 2. Properties 3. Legal Proceedings 4. Submission of Matters to a Vote of Security Holders Executive Officers of the Registrant
PART II
5. Market for the Registrant's Common Equity and Related Stockholder Matters 6. Selected Financial Data 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 8. Financial Statements and Supplementary Data 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
PART III
10. Directors and Executive Officers of the Registrant 11. Executive Compensation 12. Security Ownership of Certain Beneficial Owners and Management 13. Certain Relationships and Related Transactions
PART IV
14. Exhibits, Financial Statement Schedules and Reports on Form 8-K Exhibit Index Signatures
PART I
Item 1. Business.
General
Imo Industries Inc. (hereinafter with its subsidiaries referred to as the "Company") is an integrated multinational industrial manufacturing company that designs, produces and markets proprietary products focused on mechanical and electronic controls and on engineered power products and their support services. The Company operates in the United States, Canada, several European countries and the Pacific Rim. In 1994, the Company announced it accepted an offer to sell its Turbomachinery business segment to Mannesmann Demag of Dusseldorf, Germany. As a result of this acceptance, and the subsequent consummation of the sale, the Company has focused its operations on the remaining two core business segments, as follows:
The Morse Controls business segment designs and produces push-pull cable and control systems and automotive products including actuators, window controls, latches and door panels/assemblies.
The Pumps, Power Transmission & Instrumentation business segment designs and produces a broad range of rotary pumps, including a proprietary line of three-screw pumps; electronic adjustable-speed motor drives, gears and speed reducers; and transducers and switches for sensing, measuring and controlling pressure, temperature and liquid level and flow.
In addition to the two segments comprising the Company's continuing core operations, the Company has a third business segment entitled Other included in its continuing operations for financial reporting purposes. This segment includes operations previously sold and an operation to be sold as part of the Company's asset divestiture program.
The Company's Electro-Optical Systems and Turbomachinery businesses are being accounted for as discontinued operations and, accordingly, have been excluded from the Company's segments. The previously reported financial information has been reclassified to reflect the Turbomachinery business segment as a discontinued operation.
History
The Company, founded in 1901 in the United States by Dr. Carl Gustaf Patrick de Laval, a Swedish scientist, was acquired by Transamerica Corporation ("Transamerica") in 1963. In 1964, Transamerica merged its existing wholly owned manufacturing subsidiary, General Metals Corporation, into the Company. At the close of business on December 18, 1986, Transamerica distributed all of the issued and outstanding shares of the Company Common Stock to holders of record of Transamerica Common Stock on the basis of one share of Company Common Stock for each ten shares of Transamerica Common Stock held ("Distribution"). Following the Distribution, the Company has operated as a publicly traded company.
Industry Segments
A description of the principal products and services offered by each core business segment of the Company, as well as the principal markets for such products and services, are set forth below. Certain information in response to this item with respect to net sales, operating profit, and identifiable assets of each of these segments and by geographic area is contained in Note 11 of the Notes to Consolidated Financial Statements included in Part IV of this Form 10-K Report as indexed at Item 14(a)(1). Information regarding the businesses sold and held for sale and the discontinued operations is provided later in this section and is contained in Note 4 and Notes 2 and 3, respectively, of the Notes to Consolidated Financial Statements.
Morse Controls
The Morse Controls business segment operations, consisting of the Morse Controls and Roltra-Morse businesses, manufacture precision mechanical and electronic control products and systems that are primarily used for automotive, marine, and industrial applications.
This segment produces, among other products, push-pull cable and control systems used to control and actuate functions, such as steering and valve adjustment, and as an alternative to electrical systems. Applications include throttle control and steering systems for both off-the-road vehicles and pleasure boats. The segment also manufactures actuators, window controls, latches and door panels/assemblies for Fiat, and a manual gear shift system that is currently used in Fiat, Lotus, Porsche and other automobiles.
Pumps, Power Transmission & Instrumentation
The Pumps, Power Transmission & Instrumentation business segment units produce a wide range of products that control the speed, force and direction of motion in processes and products. Major products in this segment include speed reducers, gears, liquid level indicators, transducers and a range of rotary pumps, including a proprietary line of three-screw pumps. These products are used by a diverse customer base in the marine, elevator, oil and gas and general industrial markets. The IMO AB, IMO Pump, Warren Pumps, Boston Gear/Delroyd, Fincor Electronics, Gems Sensors and TransInstruments operations of the Company comprise this business segment.
The segment's pump operations design and manufacture screw-type fuel, lube oil and hydraulic pumps for use primarily by the marine, process, oil and gas and elevator industries. The segment's three-screw pumps are the leading low-noise-level pumps used in United States Navy vessels and in many commercial vessels. These pumps are also used to power hydraulic elevators, lubricate diesel engines and fuel gas turbines. The segment's two-screw pumps are used by the pulp and paper industry and in other high- viscosity-process applications.
The segment's power transmission operations produce speed reducers and loose gearing that are recognized as leading products in their market niches. The speed reducers and gear boxes are used to reduce the output speed and increase the torque of power trains. The operations also produce worm gear sets used as speed reducers by original equipment manufacturers, and by oil and gas and industrial machinery customers.
In addition, the power transmission sector manufactures AC and DC adjustable-speed motor controls that are utilized to variably adjust the speed of electric motors. Customized systems for process controls used in such applications as printing, tire and glass production and material handling make up a large portion of the segment's motor controls sales.
The instrumentation operations of this segment design and manufacture products that perform a wide variety of critical sensing, measuring, monitoring and control functions.
Tank level indicators, level switches, solid state relays and flow meters are manufactured principally for marine and general industrial applications. These indicators are used in ocean-going tankers, military vessels, petrochemical facilities and industrial and commercial products around the world. Hundreds of varieties of liquid-level monitors, indicators and switches are manufactured for use by more than 30,000 customers. Pressure transducers are used to measure pressure as a continuous function and are sold to a wide segment of the general industrial market.
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 which consists of the Company's subsidiaries Varo Inc. and Baird Corporation. 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 February 8, 1995, the Company announced that it has a letter of intent from Litton Industries for the acquisition of the Optical Systems and Ni-Tec divisions of Varo Inc. and the Optical Systems division of Baird Corporation. These sales will complete a substantial part the Company's planned divestiture of its Electro-Optical Systems business. The Company is continuing discussions with prospective buyers of the remaining Varo division, the Electronic Systems division, and expects to close on this sale in 1995.
Turbomachinery
On July 28, 1994, the Company announced that it had reached an agreement in principle to sell its Delaval Turbine and TurboCare divisions, which comprise substantially all of the Company's Turbomachinery business segment, and its 50% interest in Delaval-Stork, a Dutch joint venture, to Mannesmann Demag of Dusseldorf, Germany. The parties entered into a letter of intent in August 1994 and the sale was approved by the Company's Board of Directors. On January 17, 1995, the Company completed the sale for $124 million. Of this amount, $109 million was received at closing, with the remainder earning interest to the Company and to be received at specified future contract dates. 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. The transaction, which will be reflected in the Company's first quarter of 1995, will result in an estimated gain of $40 million after tax. Deferred debt expense of $4.2 million, associated with the portions of the domestic senior debt and senior subordinated debentures repaid, was written off as an extraordinary charge in the first quarter of 1995.
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.
See Notes 2 and 3 to the Consolidated Financial Statements located in Part IV of this Form 10-K Report as indexed at Item 14 (a)(1) for additional details regarding the discontinued operations.
Restructuring Plan
Asset Divestiture Program
As of December 31, 1994, the Company had substantially completed the restructuring plan announced on October 29, 1992, pursuant to which it divested six of its operating units in 1993, and two of its operating units and a portion of its underutilized real estate holdings in 1994. The divestitures included units of its aerospace businesses, units of its instruments and transducer businesses, certain other non-strategic businesses and underutilized real estate holdings. As discussed above, in January 1994, the Company announced its intention to dispose of its Electro-Optical Systems business, and on January 17, 1995 completed the sale of its Delaval Turbine and TurboCare divisions, which comprise substantially all of its Turbomachinery business segment, and its 50% interest in Delaval Stork, a Dutch joint venture. Both of these businesses are being accounted for as discontinued operations.
During 1994, the Company sold its CEC Instruments and Turboflex Ltd. operations, its Corporate headquarters building and other previously identified assets for aggregate proceeds of $13.2 million. The proceeds were used to repay a portion of the Company's domestic senior debt.
As of December 31, 1993, the Company had sold its Heim Bearings, Aerospace and Barksdale Controls operations for proceeds of approximately $91 million, and thus had completed a significant portion of the asset divestiture program. These proceeds, net of related expenses, were used to repay senior debt in the amount of $81.9 million in 1993 in accordance with the terms of the restructured credit facilities.
Excluding the Electro-Optical Systems operations, the remaining assets to be sold in this program consist of one non-strategic business and some remaining underutilized real estate holdings. The Company targets completion of these divestitures over the next 9 to 12 months.
Restructuring Program
In January 1994, the Company announced plans to reduce its cost structure and to improve productivity on a worldwide basis. In the fourth quarter of 1993, the Company recorded a charge to continuing operations of $6.6 million relating to this program. The actions taken under this restructuring plan in 1994, were to implement cost-cutting measures at its core operations to reduce its expense structure and to eliminate duplicative functions. The Company has consolidated certain operations in the European controls and automotive components divisions and has revised operating processes and reduced employment levels at the pumps and other operations. The number of employees in core operations company-wide declined by approximately 210 , or 6 % between mid-1993 and mid-1994. This program was substantially complete as of December 31, 1994, with the remainder expected to be completed by the end of the first quarter of 1995.
See Note 4 to the Consolidated Financial Statements located in Part IV of this Form 10-K Report as indexed at Item 14(a)(1) for additional details regarding the asset divestiture and restructuring program.
Competition
The Company's products and services are marketed on a worldwide basis. Approximately 50% of the Company's products are marketed outside of the United States through wholly owned subsidiaries, sales offices and several joint ventures. Most markets in which the Company operates are highly competitive. The principal elements of competition for the products manufactured in each of the Company's business segments are design features, product quality, customer service and price.
Product Distribution and Customers
The Company's products are sold primarily through the Company's direct sales forces. During 1994, sales by the Company's direct sales forces accounted for approximately 94%, 67%, and 33% of the Morse Controls, Pumps, Power Transmission & Instrumentation and Other segments, respectively. The Company's remaining sales are made through distributors, dealers and agents.
The Morse Controls segment had sales to one commercial customer (Fiat S.p.A. and its subsidiaries) that accounted for 50%, 46% and 54% of segment sales, and 21%, 15% and 18% of consolidated sales in 1994, 1993 and 1992, respectively. None of the other business segments is dependent on any single customer or a few customers, the loss of which would have a material adverse effect on the respective segments, or on the Company as a whole. Total sales to the Department of Defense in the form of prime and subcontracts were approximately 7% of net sales in 1994, 12% of sales in 1993 and 12% of sales in 1992. The level of sales from continuing operations to the United States Department of Defense has been significantly reduced from the 1992 total company-wide level of 22% (in the form of prime and subcontracts) due to the discontinuance of the Electro- Optical Systems and Turbomachinery operations. No customer other than Fiat S.p.A. and its subsidiaries and the United States Department of Defense, accounted for 10% or more of consolidated sales in 1994, 1993 or 1992.
Backlog
The Company's continuing operations' backlog of unfilled orders at February 28, 1995 and 1994 and at December 31, 1994, 1993 and 1992 by business segment was as follows:
February 28 December 31 1995 1994 1994 1993 1992 (Dollars in millions)
Morse Controls $ 49.6 $ 45.7 $ 48.7 $ 41.1 $ 42.8 Pumps, Power Transmission & Instrumentation 62.1 62.3 57.6 62.5 75.2 Other 2.3 4.7 1.8 4.6 41.4 $114.0 $112.7 $108.1 $108.3 $159.4
Backlog is considered significant only to the Warren Pumps operation of the Pumps, Power Transmission & Instrumentation Business segment, which requires long lead times for the manufacture of its products, and to the Roltra-Morse operation of the Morse Controls Business segment, the backlog for which is directly tied to a major customer's production schedule. Of the total backlog from continuing operations at December 31, 1994, the Company believes that all but approximately $2.6 million of its orders will be filled in 1995.
Raw Materials
The Company's operations obtain raw materials, component parts and supplies from a variety of sources, generally from more than one supplier. The sources are based in both the United States and foreign countries. The Company believes that its sources of raw materials are adequate for its needs.
Patents, Licenses and Trademarks
The Company owns numerous unexpired United States patents (currently having a term of 17 years from the date of issuance and expiring at various times in the future), United States design patents and foreign patents (having an initial term that is governed by the law of the country and expiring at various times in the future), including counterparts of certain of its United States patents, in major industrial countries of the world. The Company's products are marketed under various trade names and registered United States and foreign trademarks (having an initial term that is governed by the law of the country and expiring at various times in the future). However, the Company does not consider any one patent or trademark or any group thereof essential to its business as a whole, or to any of its business segments. The Company relies, to an extent, on proprietary product knowledge and manufacturing processes in its operations.
Following the removal of the distinctive modifier "Transamerica" from the corporate name prior to the Distribution, the Company changed its name to "Imo Delaval Inc." in 1986 and to "Imo Industries Inc." in 1989. The Company's use of the name "Delaval" is restricted as a result of a contract by which the Company's assets were acquired from their former Swedish owner preceding the acquisition of the Company by Transamerica. In January 1995, the Company transferred its rights to use the "Delaval" name in connection with certain products of the Turbomachinery segment to Mannesmann Demag as part of the divestiture of its Turbomachinery business.
Research and Development
The Company's ongoing research and development programs involve the development of new technologies to enhance the performance or lower the cost of manufacturing its products, and the redesign of existing product lines either to increase their efficiency or to lower their manufacturing cost. Expenditures for research and development charged against continuing operations for 1994, 1993 and 1992 by business segment were as follows:
Year Ended December 31 1994 1993 1992 (Dollars in millions)
Morse Controls $ 2.8 $ 3.3 $ 3.3 Pumps, Power Transmission & Instrumentation 3.3 3.6 3.9 Other .1 2.3 2.7 $ 6.2 $ 9.2 $ 9.9
Environmental Matters
The State of New Jersey Department of Environmental Protection and Energy (the "DEPE") has determined that the New Jersey Industrial Site Recovery Act ("ISRA") is applicable to three New Jersey "Industrial Establishments" owned by the Company at the time of the Distribution. The Company is in the process of selling a portion of one site and leasing another site. The Company will retain responsibility to meet all requirements of ISRA. Under ISRA the Company's three existing New Jersey industrial establishments will undergo a DEPE approved clean-up. All existing adverse environmental conditions and violations are being addressed through this ISRA process. Although the Company will have to correct conditions requiring clean-up under ISRA, the Company does not expect ISRA compliance to have a material adverse effect on its financial condition.
In a number of instances the Company has been identified as a Potentially Responsible Party by the United States Environmental Protection Agency, and in one instance the State of Washington, alleging that because various of its divisions had arranged for the disposal of hazardous wastes at a number of facilities that have been targeted for clean-up pursuant to the Comprehensive Environmental Response Compensation and Liability Act ("CERCLA") or similar State law. Although CERCLA and corresponding State law liability is joint and several, the Company believes that its liability will not have a material adverse effect on the financial condition of the Company since it believes that it either qualifies as a de minimis or minor contributor at each site. Accordingly, the Company believes that the portion of remediation costs that it will be responsible for will therefore not be material.
The Company has operations in numerous locations, some of which require environmental remediation. However, the Company does not know of or believe that any such matters or the cost of any required corrective measure, either individually or in the aggregate, will have a material adverse effect on the financial condition of the Company. However, there can be no guarantee that these matters or other environmental matters not currently known to the Company will not have such a material adverse effect.
Employees
At December 31, 1994, the Company employed approximately 6,200 persons worldwide of which 3,900 relate to continuing operations. Approximately 4,100 persons were employed in the United States, and approximately 2,100 persons were employed outside of the United States. Approximately 2,000 of the employees associated with continuing operations are located in the United States. There are approximately 1,200 persons worldwide covered by collective bargaining agreements with various unions expiring at various dates in 1995 through 1997. The Company considers its relations with its employees to be satisfactory.
Item 2.
Item 2. Properties.
The Company's continuing operations have 45 manufacturing facilities in 12 states in the United States, the United Kingdom, Germany, Singapore, Sweden, Switzerland, Italy, France, and Australia of which 26 are owned and 19 are leased. In addition, the Company owns 4 closed manufacturing facilities (approximately 426,000 square feet of building space on 75.4 acres of land) that are being offered for sale. The properties owned by the Company consist of approximately 3.06 million square feet of building space, inclusive of the 426,000 square feet of the closed facilities, on approximately 507.3 acres (including 227.2 acres of undeveloped land). The leases expire over a period of years from 1995 to 2054 with renewal options for varying terms contained in 9 of the leases. The Company's executive office, which is leased by the Company, is located in Lawrenceville, New Jersey and occupies approximately 37,140 square feet.
The Company believes that its machinery, plants and offices are in satisfactory operating condition and are adequate for the uses to which they are put. The Company believes that its properties have sufficient capacity to substantially increase their current utilization without incurring significant additional capital expenditures.
The manufacturing facilities of the Company by business segment are summarized below: Square Feet of Building Space Number of Plants (In thousands) Owned Leased Owned Leased Morse Controls 6 9 391 415 Pumps, Power Transmission & Instrumentation 11 1 954 120 Other (Including Discontinued Operations) 9 9 1,288 510 26 19 2,633 1,045
Item 3.
Item 3. Legal Proceedings.
In August 1985, the Company was named as defendant in a lawsuit filed by Long Island Lighting Company ("LILCO"). The action stemmed from the sale of three diesel generators to LILCO for use at its Shoreham Nuclear Power Station. During testing of the diesel generators, the crankshaft of one of the diesel generators severed. The Company's insurers have defended the action under a reservation of rights.
On April 10, 1991, a jury, in a trial limited to liability, in the U.S. District Court in the Southern District of New York, found that the warranty was in effect from the time of shipment of the diesel generators until July 1986. On July 22, 1992, the trial court entered a judgment in the amount of $18.3 million which included interest to the judgment date.
On September 22, 1993, the Second Circuit Court of Appeals affirmed all lower court decisions in this matter. On October 25, 1993, the judgment against the Company was satisfied by payment to LILCO of approximately $19.3 million by two of the Company's insurers.
In late June 1992, the Company filed an action in the United States District Court for the Northern District of California against one of its insurers in an attempt to collect amounts for defense costs paid to counsel retained by the Company in defense of the LILCO litigation. The insurer has refused to reimburse the Company for approximately $8.5 million in defense costs paid by the Company alleging that defense costs above reasonable levels were expended in defending this litigation. Upon motion by the defendant this action has now been transferred to the Southern District of New York and assigned to one of the judges who heard the underlying LILCO trial.
In January 1993, the Company was served with a complaint in a case brought in the United States District Court for the Northern District of California by another insurer alleging that the insurer was entitled to recover $10 million in defense costs previously paid in connection with the LILCO matter and $1.2 million of the judgment which was paid on behalf of the Company. The complaint alleges inter alia that the insurer's policies did not cover the matters in question in the LILCO case. In connection with this matter, the Company filed a counterclaim against the insurer seeking payment of $8.5 million in defense costs that the Company previously paid in connection with the LILCO litigation. On January 25, 1995, the Court entered a judgment based on its December 15, 1994 memorandum and order dismissing the Company's counterclaim, denying the Company's Motion for Summary Judgment, and finding sua sponte that there was no coverage under the insurer's policy for the LILCO matter. On February 8, 1995, the Company filed an Application for Leave to File Motion for Reconsideration of the Judgment which was subsequently denied. The Company also filed a Notice of Appeal with the Ninth Circuit Court of Appeals. Subsequent to entry of the District Court Judgment, the insurer moved to have the judgment modified to award the insurer the $10 million defense costs and $1.2 million indemnity payment. The Company has filed a motion in opposition to this motion. Oral arguments relating to this motion were held on February 24, 1995 and the Company is awaiting the District Court's decision.
The Company and one of its subsidiaries are two of a large number of defendants in a number of lawsuits brought by approximately 13,500 claimants who allege injury caused by exposure to asbestos. Although the Company and its subsidiary have never been producers or direct suppliers of asbestos, it is alleged that the industrial and marine products sold by the Company and the subsidiary had components which contained asbestos. The allegations state a claim for asbestos exposure when Company-manufactured equipment was maintained or installed. Suits against the Company have been tendered to its insurers who are defending under their stated reservation of rights. The insurers for the subsidiary are being identified and have been and will be provided notice. 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, are the focus of an ongoing investigation by the Office of the Inspector General of the United States Department of Defense and the Department of Justice (Criminal Division). On July 16, 1992, Ni-Tec received a subpoena for certain records as a part of the investigation, which subpoena has been responded to. Additional subpoenas for additional documents were received in September 1992, February 1993, and March 1994. The Company responded to the September and March subpoenas and the government subsequently withdrew the February subpoena. The investigation appears directed at 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. The Company continues to cooperate fully with the investigation.
The Securities and Exchange Commission (the "Commission") is conducting an inquiry into, among other things, certain accounting practices at Ni-Tec and the 1991 and 1992 fiscal year financial reporting by the Company with respect thereto. The Commission has sought certain information from the Company relating to such inquiry and the Company has cooperated with this request. This inquiry has been dormant since August 1994.
The Company was notified in August 1994 that its Electro-Optical operations are being investigated by the United States Attorney for the District of Columbia. The investigation concerns the appropriateness of certifications submitted by Company personnel regarding its contracts with the Arab Republic of Egypt that were funded by the United States Government. In connection with this investigation, the Company has received and has responded to a subpoena issued by the Grand Jury for the District of Columbia.
Regarding environmental matters, 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 United States Environmental Protection Agency, and in one instance the State of Washington, alleging that because various of its divisions had arranged for the disposal of hazardous wastes at a number of facilities that have been targeted for clean-up pursuant to the Comprehensive Environmental Response Compensation and Liability Act ("CERCLA") or similar State law. Although CERCLA and corresponding State law liability is joint and several, the Company believes that its liability will not have a material adverse effect on the financial condition of the Company since it believes that it either qualifies as a de minimis or minor contributor at each site. Accordingly, the Company believes that the portion of remediation costs that it will be responsible for will therefore not be material.
The Company is a defendant in an action filed in the United States District Court for the Middle District of Louisiana brought by Gulf States Utilities Company ("GSU"). The complaint alleges that the Company breached its contract for the sale of two emergency diesel generators delivered to GSU's River Bend Nuclear Generating Station in 1981 and 1982. GSU alleges that it has incurred a loss of $8 million and claims additional amounts for the use of money and an equitable adjustment of the purchase price. In July 1992, the District Court for the Middle District of Louisiana granted the Company's motion for Summary Judgment dismissing GSU's claims. In November 1993, the Fifth Circuit Court of Appeals reversed and remanded the case for trial. The ruling eliminated the Company's statute of limitations defense, but preserved all other defenses. In February 1995, a settlement of this matter was tentatively reached requiring a $1.8 million payment by the Company to GSU.
The Company also has two other lawsuits pending against it relating to equipment sold by its former diesel engine division and a lawsuit relating to performance shortfalls in products delivered by its former Delaval Turbine Division in a prior year.
With respect to the litigation and claims described in the preceding paragraphs, it is management's opinion that the Company either expects to prevail, has adequate insurance coverage or has established appropriate reserves to cover potential liabilities; however, the ultimate outcome of any of these matters is indeterminable at this time.
In addition, the Company is involved in various other pending legal proceedings arising out of the Company's business. The adverse outcome of any of these legal proceedings is not expected to have a material adverse effect on the financial condition of the Company. However, if all or substantially all of these legal proceedings were to be determined adversely to the Company, which is viewed by the Company as only a remote possibility, there could be a material adverse effect on the financial condition of the Company.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders.
No matter was submitted to a vote of the Company's security holders during the fourth quarter of 1994.
Executive Officers of the Registrant
The following table sets forth information concerning the names, ages and principal occupations of the executive officers of the Company:
Name Age Principal Occupation
Donald K. Farrar * 56 Chairman, Chief Executive Officer and President Thomas J. Bird, Jr. 51 Executive Vice President, General Counsel and Secretary William M. Brown 52 Executive Vice President and Chief Financial Officer J. Dwayne Attaway 53 Executive Vice President John J. Carr 52 Executive Vice President Brian Lewis 61 Executive Vice President Gary E. Walker 57 Executive Vice President David C. Christensen 61 Senior Vice President, Human Resources Robert A. Derr II 49 Vice President and Corporate Controller Geoffrey M. Dobson 57 Vice President and Treasurer
* This executive officer is a director of the Company whose current term as a director will expire in 1995.
Donald K. Farrar joined the Company as Chief Executive Officer and President in September 1993 and was elected Chairman in June 1994. Prior to joining the Company, Mr. Farrar held various positions with Textron, Inc. and Avco Corporation for 24 years. He served as President, Chief Operating Officer and director of Avco until its 1985 acquisition by Textron. Thereafter, he served as Senior Executive Vice President, Operations and a director of Textron, Inc. until December 1989. From January 1990 until joining the Company, Mr. Farrar was a private investor.
Thomas J. Bird, Jr. was promoted to his current position in October 1994. Mr. Bird served as Senior Vice President, General Counsel and Secretary from June 1992 to October 1994, and as Vice President and Associate General Counsel from July 1990 to June 1992. Prior to joining the Company in July 1990, Mr. Bird held various positions with General Electric Company for 18 years, most recently as Group Counsel RCA Aerospace and Defense division from August 1987 to February 1988 and as General Counsel to GE Aerospace of General Electric Company from February 1988 until joining the Company.
William M. Brown joined the Company in his current position in June 1992. Prior to joining the Company, Mr. Brown held various positions with ITT Corporation for 25 years, most recently as Corporate Assistant Controller and General Auditor from December 1986 to April 1991 and as Corporate Vice President and Assistant Controller from April 1991 until joining the Company.
J. Dwayne Attaway joined the Company as Executive Vice President of the Company's Varo Inc. operation in July 1989, and was promoted to his current position in December 1989. Mr. Attaway has overall responsibility for the Company's Electro-Optical Systems business which consists of the Company's Varo and Baird operations. Mr. Attaway served as Corporate Vice President of Business Development at Ranco Inc. from 1987 to 1989, as Vice President and General Manager of the Ranco Inc. Electronics Division from 1982 to 1987, and prior to that was with Varo Inc. for 17 years.
John J. Carr was promoted to his current position in July 1989. From July 1985 to July 1989, Mr. Carr was a Group Vice President of the Company. Mr. Carr is responsible for the Boston Gear/Delroyd, Fincor Electronics, Gems Sensors, IMO AB, IMO Pump, TransInstruments and Warren Pumps operations of the Company.
Brian Lewis was promoted to his current position in July 1989. Mr. Lewis was President and Chief Operating Officer of the Controls Group of Incom International Inc. (acquired by the Company in December 1987) from 1985 until January 1988 and was a Group Vice President of the Company from January 1988 to July 1989. Mr. Lewis has responsibility for the Morse Controls and Roltra-Morse operations.
Gary E. Walker was promoted to his current position in February 1993. Mr. Walker served as Group Vice President of the Company from September 1991 to February 1993 and as Vice President and General Manager of the Delaval Turbine operation from September 1988 to September 1991. Prior to joining the Company he served from January 1987 to September 1988 as Vice President and General Manager of Turbonetics Energy Incorporated, a subsidiary of Mechanical Technology Inc. Prior to that, he had held various positions with General Electric for 21 years. Mr. Walker had responsibility for the Company's former Delaval Turbine, Delaval Condenser and TurboCare operations.
David C. Christensen joined the company in his current position in August 1990. Previously, he was Senior Vice President, Human Resources for Pneumo Abex Corporation (and its predecessor Abex Corporation) from 1980 to September 1988. From September 1988 until joining the Company, Mr. Christensen was an independent human resources consultant.
Robert A. Derr II joined the Company in his current position in 1988. Prior to joining the Company, Mr. Derr held various positions with The Stanley Works for nine years, most recently as Director of Corporate Accounting from 1982 to 1986 and as the Controller of the Vidmar Division of The Stanley Works from 1986 until joining the Company.
Geoffrey M. Dobson joined the Company in his current position in April 1990. Prior to joining the Company, Mr. Dobson held various positions with Warner-Lambert Company for 21 years, most recently as Corporate Treasurer from August 1983 to January 1988 and as Vice President of Finance for the American Chicle Division from January 1988 until March 1989. From March 1989 until joining the Company Mr. Dobson served as President of Financial Functions Management, a financial consulting firm.
Each of these executive officers will hold office until his successor is chosen and qualifies or until his earlier resignation or removal. Any officer may be removed at any time by the Board of Directors without prejudice to any contract rights which he may have.
PART II
Item 5.
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters.
The Company's common stock (the "Common Stock") is listed on the New York Stock Exchange (stock symbol IMD). The following table sets forth, for the quarters indicated, the high and low closing price per share for the Common Stock as reported on the New York Stock Exchange Composite Tape and the amount of per share cash dividends declared by the Company during each quarter on its Common Stock.
Dividend Declared High Low Per Share
1993: 1st Quarter $ 7 1/2 $ 4 7/8 -- 2nd Quarter 7 5 7/8 -- 3rd Quarter 8 6 1/4 -- 4th Quarter 9 1/4 6 5/8 --
1994: 1st Quarter 10 1/8 7 -- 2nd Quarter 10 7/8 9 1/2 -- 3rd Quarter 12 9 3/8 -- 4th Quarter 12 1/4 8 3/4 --
1995: 1st Quarter 11 1/2 6 1/4 -- (through March 15, 1995)
The last sale price for the Company's Common Stock as reported by the New York Stock Exchange on March 15, 1995, was $6 7/8 per share. As of March 15, 1995, there were approximately 24,289 holders of record of the Company's Common Stock.
Three of the Company's long-term debt agreements contain, among other provisions, a restriction on retained earnings available for payment of dividends. Under the most restrictive provisions the Company is prohibited from declaring or paying cash dividends through at least July 31, 1997.
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
Restructuring Summary
As of March 28, 1995, the Company has either completed the sale of, or has received a letter of intent for the sale of, substantially all of the businesses included in the asset divestiture program initially begun in October, 1992. Proceeds from asset sales completed during the first quarter of 1995 have been used to repay all of the Company's outstanding senior domestic bank debt as well as to redeem $40 million of the Company's 12.25% Senior Subordinated Debentures.
Additionally, as a result of an approximately $40 million after-tax gain realized on the January 17, 1995 sale of the Turbomachinery business, shareholders' equity will be restored to a positive value in the first quarter of 1995.
The remaining businesses included in this program, not currently under contract, are expected to be under contract of sale in the near future and to be sold prior to year-end. Additionally, certain idle facilities remain to be sold and the Company continues to actively pursue the sale of these properties.
Asset Sales
The Company sold its Heim Bearings, Aerospace and Barksdale Controls operations for aggregate proceeds of approximately $91 million in 1993 and its CEC Instruments division, Corporate headquarters building and other previously identified assets for aggregate proceeds of $13.2 million in 1994. Results of these operations to their date of sale as well as an operation remaining to be sold, other than the Electro-Optical and Turbomachinery businesses, are included in continuing operations reported in the consolidated financial statements.
The Company sold the Baird Analytical Instruments division of its Electro- Optical Systems business to a subsidiary of Thermo Instruments Systems Inc. on January 3, 1995 for $12.3 million in cash, which was used to reduce its domestic senior debt.
On January 17, 1995, the Company completed the sale of its Delaval Turbine and TurboCare divisions, which comprised substantially all of the Company's Turbomachinery business segment, and its 50% interest in Delaval-Stork, a Dutch joint venture, to Mannesmann Demag of Dusseldorf, Germany, for $124 million. At closing, the Company received $109 million in cash, with the balance earning interest until it is received at specified future contract dates subject to adjustment as provided in the agreement. These proceeds were used to complete the repayment of the Company's domestic senior debt and to redeem $40 million of the Company's 12.25% senior subordinated debentures.
On February 8, 1995, the Company announced that it has a letter of intent for the acquisition of most of its Electro-Optical Systems business by Litton Industries, for approximately book value. Under the terms of the letter of intent, Litton would acquire all of the assets of the Varo night vision and laser business, other than real estate, and would lease the operations' facilities in Dallas, Texas, for two years with options to extend the leases. The sale is subject to the receipt of certain government approvals. Management believes that this transaction will close in the second quarter of 1995. Not included in the proposed agreement is Varo's Electronic Systems division, which is being marketed to interested parties. Management intends to use the proceeds of these sales to pay down debt.
Other Restructuring
In 1993, the Company recorded a charge to operations for other restructuring activities which benefited 1994 operating results. The Company has implemented cost-cutting measures at its core operations to reduce its expense structure and to eliminate duplicative functions. The Company has also consolidated certain operations in the European controls and automotive components divisions and has revised operating processes and reduced employment levels at the pumps and other operations. The number of employees in core operations company-wide declined by approximately 210, or 6 % between mid-1993 and mid-1994. These organizational restructuring measures have been providing net cash benefits, which for continuing operations, approximated $2 million in 1994 and will approximate $5 million annually thereafter based largely on reduced employment costs. The majority of the restructuring has been completed.
Results of Operations
The net income per share in 1994 was $.23 compared with a net loss per share of $16.02 in 1993 and a net loss per share of $4.90 in 1992.
1994 1993 1992 Earnings (loss) per share: Continuing operations before extraordinary item and cumulative effect of change in accounting principle $ .22 $ (2.37) $ (1.53) Discontinued operations $ .32 $(12.58) $ (1.73) Extraordinary item $ (.31) $ (1.07) --- Cumulative effect of change in accounting principle --- --- $ (1.64) Net income (loss) $ .23 $(16.02) $ (4.90)
The Electro-Optical and Turbomachinery businesses are accounted for as discontinued operations in the accompanying consolidated financial statements. Accordingly, the discussion that follows concerns only the results of continuing operations. The 1993 and 1992 amounts have been reclassified to conform to this presentation. As a result of discontinuing the Electro-Optical Systems and Turbomachinery business segments, the Company has focused its operations on the remaining two core business segments, the Morse Controls segment and the Pumps, Power Transmission & Instrumentation segment.
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 senior 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 million related to the write-off of previously deferred debt expense and $11.9 million was provided as an estimate for make-whole notes ("Make-Whole Notes") to be issued to the holders of debt being retired. Through December 31, 1993, Make-Whole Notes of $11.5 million were issued and included in long-term debt. The Make-Whole Notes were repaid in August 1994. Additionally, approximately $4 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.
The twelve months ended December 31, 1993 include net unusual charges of $15.7 million in loss from continuing operations. These charges include $6.6 million related to the restructuring and consolidation of certain of the Company's operating units ($3.7 million included in the Morse Controls segment, $1.7 million included in the Pumps, Power Transmission & Instrumentation segment and $1.2 million included in Corporate Expense, all principally comprised of severance costs), $10.1 million for an expected net loss overall related to the Company's asset divestiture program (included in the Other segment), and $5 million in debt-related financing fees (included in Corporate Expense). These charges are net of a reversal of a $6.0 million reserve during 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 $21.7 million of unusual charges, required cash outlays were approximately $7.1 million and $.2 million in 1994 and 1993, respectively. The estimated cash requirement for 1995 is $1.3 million, with the remainder representing non-cash charges.
As a result of unanticipated losses in 1993, the Company provided reserves of $13.6 million against previously recorded future tax benefits in loss from continuing operations. These tax benefits may be realized in future years.
The twelve months ended December 31, 1992 include unusual charges of $16.7 million in loss from continuing operations principally for the estimated costs associated with pending litigation and certain warranty and claim settlements. Of this amount, $6 million was reversed in the third quarter of 1993 as a result of a change in estimate. No cash outlays are anticipated in the future related to these charges.
The twelve months ended December 31, 1992 include a charge of $27.6 million after tax ($1.64 per share) related to the adoption of FASB Statement No. 106, "Employer's Accounting for Postretirement Benefits Other Than Pensions." This charge has been reported as a cumulative effect of a change in accounting principle and was retroactively applied as of January 1, 1992.
The Company had income from discontinued operations of $5.6 million (net of income tax expense of $.8 million) or $.32 per share in 1994, a loss of $212.4 million (including income tax expense of $1.4 million) or $12.58 per share in 1993, and a loss of $29.2 million (net of an income tax benefit of $13.9 million) or $1.73 per share in 1992. The loss recorded in 1993 includes an estimated loss on disposal of the Company's Electro-Optical Systems business of $168.0 million, most of which represents a non-cash adjustment to reduce the carrying value of assets to estimated realizable value. Of the total estimated loss on disposal, cash outlays are not expected to exceed $11 million, of which approximately $4.6 million was expended in 1994. The results from operations for the discontinued operations include allocations for interest of $17.4 million, $18.0 million and $13.4 million for 1994, 1993 and 1992, respectively.
The Company had income from continuing operations of $3.7 million or $.22 per share in 1994. The 1993 loss from continuing operations of $40.1 million or $2.37 per share was primarily as a result of the net unusual charges of $15.7 million and the $13.6 million tax reserve provided against previously recorded future tax benefits. The Company had a loss from continuing operations of $25.8 million or $1.53 per share in 1992 including unusual charges of $16.7 million.
Net Sales
Net sales from continuing operations in 1994 were $463.9 million, compared with $494.2 million in 1993. Sales from core operations (excluding operations divested since the beginning of 1993 or pending divestiture) were $452.9 million in 1994 compared with $413.8 million in 1993, an increase of 9.5%. A significant portion of this increase is attributable to the Company's Italian automobile business as the Company continues to be a key supplier to Fiat S.p.A.
Net sales from continuing operations in 1993 were $494.2 million, a decline of $79.0 million or 13.8% from $573.2 million for 1992. A large part of this decline, $34.7 million, is because six divisions were sold in 1993, therefore contributing for only a part of the year versus a full year for 1992. Excluding the divested divisions, the Company's core businesses had sales of $413.8 million in 1993 versus $458.1 million in 1992, a decline of $44.3 million or 9.7%. Over 80% of this decline, approximately $37 million, was due to unfavorable foreign exchange rate effects. The major portion of the remaining decline was attributable to decreases in volume occurring in the Company's Italian automobile business.
Costs and Expenses
Selling, general and administrative expenses declined $21.7 million in 1994 compared with 1993, with most of the decline attributable to businesses sold subsequent to June 30, 1993, to the phase-out of certain postretirement benefit subsidies in 1994, and lower levels of general and administrative staff. Selling, general and administrative expenses as a percent of sales decreased to 18.7% in 1994 compared with 22.0% in 1993. Research and development expenditures were 1.3% of sales in 1994, 1.9% in 1993 and 1.7% in 1992.
Selling, general and administrative expenses decreased $4.2 million in 1993 from 1992 with the Other segment accountable for $4.6 million of the decrease as a result of six of the divisions having been sold during the year. Selling expenses for the core businesses increased $1.1 million in 1993 primarily because of the consolidation of a joint venture that became wholly-owned in late 1992 offsetting decreases in other core operations. General and administrative expenses decreased slightly on a year-to-year basis. However, because sales decreased while the Company maintained its selling efforts, total selling, general and administrative expenses were 22.0% of sales in 1993 compared with 19.7% for 1992.
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 at approximately $4 million per year. The pre-tax amount amortized to income from continuing operations was $4.4 million in 1994. The Company does not anticipate a significant increase or decrease in cash requirements related to this change in policy during the phase out period.
Average borrowings in 1994 were $51 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 less than in 1993. Similarly, because average borrowings in 1993 were $21 million lower than in 1992, interest expense of $57.2 million in 1993 decreased $2.3 million compared with 1992. The interest expense for continuing operations as shown on the Consolidated Statements of Income excludes interest expense incurred by the discontinued operations as well as an interest allocation to the discontinued operations of $17.4 million in 1994, $18.0 million in 1993 and $13.4 million in 1992.
Income tax expense from continuing operations for 1994 was $2.4 million and for 1993 was $13.6 million. The 1994 amount 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 has been established in accordance with the provisions of FASB Statement No. 109, "Accounting for Income Taxes." These tax benefits may be realized in future years.
The Company has a net operating loss carryforward of approximately $70 million expiring in 2009, foreign tax credit carryforwards of approximately $16 million expiring through 1999 and minimum tax credits of approximately $2.1 million which may be carried forward indefinitely. These carryforwards are available to offset future taxable income and have been reserved in accordance with FASB Statement No. 109. 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. This policy has no impact on the Company's liquidity since the Company does not anticipate paying any U.S. tax on these unremitted earnings. The amount of foreign withholding taxes that would be payable on remittance of these earnings is approximately $1.1 million.
Segment Operating Results
The Morse Controls segment had sales of $197.0 million in 1994, compared with $163.9 million for 1993, a 20.2% increase resulting from a 32.7% increase in sales to the Italian automotive industry and an 8.9% increase in all other sales worldwide. The increased sales level resulted in operating income for the segment of $14.7 million in 1994, compared with $3.1 million in 1993. Operating income in 1993 included unusual charges of $3.7 million related to restructuring and facilities consolidations.
The Pumps, Power Transmission & Instrumentation segment had sales of $256.0 million, a 2.4% increase over the $249.9 million in 1993. Sales were up in the power transmission sector, flat in the instrumentation sector and down slightly in the pumps sector. Segment operating income was $29.1 million in 1994, a 41% improvement over 1993, largely as the result of improved volume in the power transmission sector, the phase-out of certain postretirement benefit subsidies, and reduced overhead expenses. Operating income was also adversely impacted in the fourth quarter of 1993 by restructuring charges.
Power transmission sales and operating profit both improved for the year compared with 1993, benefiting from the upturn in general industrial activity in the U.S. Pump operations sales and operating profit were adversely affected by the continued fall-off in defense business.
Fourth Quarter Results
Net sales from continuing operations of $116.5 million in the fourth quarter of 1994 were $4.4 million higher than the $112.1 million for the fourth quarter of 1993. However, excluding operations divested since the beginning of 1993 or pending divestiture, fourth quarter sales of core operations were $114.8 million, or 11.0% higher than 1993 fourth quarter sales of $103.4 million. The fourth quarter of 1994 includes income of $1.3 million (pre-tax) related to the phase-out of certain postretirement benefit subsidies. The fourth quarter of 1994 had income from continuing operations of $1.1 million ($.07 per share), compared with a loss from continuing operations of $40.5 million ($2.39 per share) in the same period of 1993. A charge of $21.7 million of unusual items and the provision of a $13.6 million reserve against previously recorded future tax benefits were recorded in the fourth quarter of 1993.
Morse Controls segment sales for the fourth quarter of 1994, were 22.4% ahead of sales in the fourth quarter of 1993. Roltra-Morse's revenue gained 34%, while worldwide sales elsewhere in the segment were up 11%. Operations for the quarter benefited from increased sales, and from cost- cutting actions taken at the end of 1993; operating income was $3.8 million, compared with a $3.9 million loss in the fourth quarter of 1993 as a result of unusual items related to restructuring and facilities consolidations.
Roltra-Morse, the segment's automotive components supplier, participated in an increase in Fiat car production as well as a higher market share on certain Fiat models, and a successful entry into production in Poland. Worldwide, there was continued recovery in major sectors served by the segment's other mechanical and electronic controls products, such as pleasure marine, construction, agriculture and truck markets.
Pumps, Power Transmission & Instrumentation segment sales in the fourth quarter were 3.9% ahead of the comparable year-earlier period, and operating profit improved substantially to $6.8 million, compared with $2.9 million in 1993.
Fourth-quarter Pump group sales were flat year-over-year, as the continued decline in Navy business was matched by an increase in commercial business to such markets as pulp and paper, chemical and hydrocarbon processing, crude oil and machinery.
Power Transmission sales advanced 7.8% year-over-year, primarily into industrial distribution channels, reflecting the stronger general economic environment that has persisted in the U.S. throughout 1994. A wide range of OEMs and end-users are served via this conduit.
Instrumentation group sales comparisons were favorable by 4.2%, as improvement in Europe and Canada outpaced a moderate decline in U.S. shipments. There was a major shipment of instrumentation to the Navy in the fourth quarter of 1993 that was not repeated in 1994.
Liquidity and Capital Resources
The Company's domestic liquidity requirements are served by a revolving credit facility, while its needs outside the U.S. are covered by short and intermediate term credit facilities from foreign banks.
Effective August 5, 1994, the Company obtained credit facilities for borrowings up to $150 million from a group of lenders (the "New 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 New 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 New Credit Agreement were used to repay the Company's working capital loans under the former domestic senior credit facilities, its $30 million 12.75% Senior Note and its $12.4 million Make-Whole Note.
As a result of the extinguishment of the prior facilities in connection with the New Credit Agreement, the Company incurred a $5.3 million extraordinary charge in the third quarter of 1994, of which $3.7 million represents a prepayment premium paid for the $30 million 12.75% Senior Note.
The Company's operating activities provided cash of $16.8 million in 1994, compared with providing cash of $25.1 million in 1993. Net cash used by investing activities was $.3 million in 1994, compared with cash provided of $70.8 million in the 1993 period. The change in net cash provided by investing activities is principally a result of $13.2 million of net proceeds generated from the sale of assets in the 1994 period versus $86.5 million in 1993. Cash and cash equivalents were $26.9 million at December 31, 1994 compared with $22.4 million at December 31, 1993.
Working capital at December 31, 1994 was $135.2 million, an increase of $28.1 million from the end of 1993, due principally to the reduction in current debt in 1994. The ratio of current assets to current liabilities was 1.9 at December 31, 1994, compared with 1.6 at December 31, 1993. Principally as a result of the 1993 loss, the Company's total debt as a percent of its total capitalization was 107.5% at December 31, 1994, and 109.7% at December 31, 1993.
Depreciation for continuing operations decreased $2.6 million to $15.7 million in 1994, from $18.3 million in 1993 which, in turn, decreased $1.6 million from 1992. Amortization of intangibles for continuing operations was $6.3 million in 1994, $4.9 million in 1993, and $4.4 million in 1992. Additions to property, plant and equipment, made primarily to improve productivity, were $9.2 million in 1994. The Company anticipates that capital expenditures in 1995 will increase significantly over the 1994 level to make the necessary investments to maintain and improve competitive advantages at its operations. There were no material outstanding commitments for the acquisition of property, plant and equipment at December 31, 1994.
At December 31, 1994, the Company had outstanding $150 million of 12.25% senior subordinated debentures maturing in 1997 and $150 million of 12% senior subordinated debentures maturing in amounts of $37.5 million in 1999, $37.5 million in 2000 and $75.0 million in 2001. In addition, the Company had $36.7 million and $45 million in term and bridge loans, respectively, outstanding under the New Credit Agreement, both of which were repaid with proceeds received in January 1995 from the sales of the Baird Analytical Instruments division and the Turbomachinery business. In March 1995, $40 million of the 12.25% senior subordinated debentures were redeemed with the remainder of these proceeds. Deferred debt expense of $4.2 million, associated with the portions of the domestic senior debt and senior subordinated debentures repaid, was written off as an extraordinary charge in the first quarter of 1995. The Company expects to use proceeds from the remainder of its divestiture program to reduce its 12.25% senior subordinated debentures thereby further reducing the Company's interest expense. As of December 31, 1994, there were no borrowings under the $65 million revolving credit facility; however $35 million of standby letters of credit were outstanding. Letter of credit exposure was reduced to $20.5 million after the Turbomachinery business sale in January 1995. At the same time, and in keeping with the terms of the New Credit Agreement, the $65 million revolving credit facility was reduced to $50 million. The Company also has approximately $30.7 million in foreign short-term credit facilities with approximately $12.8 million outstanding as of December 31, 1994.
Business Environment
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 its multiple niche market strategy helps the Company moderate effects from the cyclical behavior of any particular market segment that it serves.
Approximately 45% of the Company's property, plant and equipment of 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 companies 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.
Total sales to the DoD in the form of prime and subcontracts were approximately 7% of net sales from continuing operations in 1994 and 12% in 1993. The level of sales from continuing operations to the United States Department of Defense has been significantly reduced from the 1992 total company-wide level of 22% (in the form of prime and subcontracts) due to the discontinuance of the Electro-Optical Systems and Turbomachinery operations.
Item 8.
Item 8. Financial Statements and Supplementary Data.
The consolidated financial statements and supplementary data required by Part II, Item 8 of Form 10-K are included in Part IV of this Form 10-K Report as indexed at Item 14(a)(1).
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
Not Applicable.
PART III
Item 10.
Item 10. Directors and Executive Officers of the Registrant.
Reference is made to the information to be set forth in the section entitled "Election of Directors" in the Company's Proxy Statement, for the Annual Meeting of Stockholders which will be held on May 18, 1995 (the "Proxy Statement"), which section is incorporated herein by reference. The Proxy Statement will be filed with the Securities and Exchange Commission not later than 120 days after December 31, 1994, pursuant to Regulation 14A of the Securities Exchange Act of 1934, as amended.
The information under the caption "Executive Officers of the Company," following Item 4 of Part I of this Form 10-K Report, is incorporated herein by reference.
None of the executive officers or directors of the Company is related to any of the other executive officers or directors of the Company.
Item 11.
Item 11. Executive Compensation.
Reference is made to the information to be set forth in the section entitled "Executive Compensation" in the Proxy Statement, which section (except for its Compensation Committee Report and its Performance Graph) is incorporated herein by reference.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
Reference is made to the information to be set forth in the section entitled "Beneficial Ownership of Common Stock" in the Proxy Statement, which section is incorporated herein by reference.
Item 13.
Item 13. Certain Relationships and Related Transactions.
Not Applicable.
PART IV
Item 14.
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, 1994, 1993 and 1992...................F-1 Consolidated Balance Sheets at December 31, 1994 and 1993.................................................F-2 Consolidated Statements of Cash Flows for the Years Ended December 31, 1994, 1993 and 1992.............F-3 Consolidated Statements of Shareholders' Equity (Deficit) for the Years Ended December 31, 1994, 1993 and 1992.....F-4 Notes to Consolidated Financial Statements.................F-5 Report of Independent Auditors...............................F-6 Quarterly Financial Information..............................F-7
(2) Financial Statement Schedules
The following consolidated financial statement schedule for the year ended December 31, 1994, 1993 and 1992 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 The following reports on Form 8-K were filed during the quarter ended December 31, 1994:
On December 23, 1994, the Company filed a Report on Form 8-K reporting under Items 5 and 7.
EXHIBIT INDEX
Exhibit No. Note No. Description
3(i) (15) The Company's Restated Certificate of Incorporation, as amended March 10, 1989 and November 10, 1992
3(ii) The Company's Bylaws
4.1 (A) (11) Indenture agreement dated August 15, 1987 between the Company and IBJ Schroder Bank & Trust Company, Trustee
(B) (17) First Supplemental Indenture dated as of February 14, 1994 between the Company and IBJ Schroder Bank & Trust Company, Trustee
4.2 (11) Indenture agreement dated November 1, 1989 between the Company and IBJ Schroder Bank & Trust Company, Trustee
4.3 (A) (5) Rights Agreement dated as of April 22, 1987 between the Company and Philadelphia National Bank, as Rights Agent
(B) (15) Amendment dated December 16, 1991 between the Company and First Chicago Trust Company of New York
Management Contracts, Compensatory Plans and Arrangements:
10.1 (A) (3) The Company's Equity Incentive Plan for Key Employees
(B) (7) Amendment to the Equity Incentive Plan for Key Employees
10.2 (A) (7) Equity Incentive Plan for Outside Directors
(B) (12) Amendment effective as of July 2, 1990 to the Equity Incentive Plan for Outside Directors
10.3 (A) (12) Employment Agreement dated September 1, 1986 by and between the Company and William J. Holcombe, as amended October 1, 1987, as restated and amended May 9, 1989, and as amended March 6, 1991
(B) Amendment dated January 1, 1993 to the Employment Agreement between the Company and William J. Holcombe, as amended July 19, 1994
10.4 (15) Change in Control Agreement dated January 9, 1987 between the Company and John J. Carr
10.5 (15) Change in Control Agreement dated April 8, 1990 between the Company and J. Dwayne Attaway
10.6 Letter Agreements between the Company and J. Dwayne Attaway dated April 21, 1994 and April 29, 1994, respectively
10.7 (15) Change in Control Agreement dated December 23, 1988 between the Company and Brian Lewis
10.8 (15) Change in Control Agreement dated August 5, 1992 between the Company and William M. Brown
10.9 (15) Change in Control Agreement dated August 13, 1992 between the Company and Thomas J. Bird
10.10 (17) Change in Control Agreement dated April 19, 1993 between the Company and Gary E. Walker and agreed to by him on May 10, 1993
10.11 Letter Agreements dated May 19, 1994 between the Company and Gary E. Walker
10.12 (A) (17) Employment Agreement dated September 13, 1993 between the Company and Donald K. Farrar
(B) Amendment dated November 17, 1994 to the Employment Agreement between the Company and Donald K. Farrar
10.13 (17) Change in Control Agreement dated September 13, 1993 between the Company and Donald K. Farrar
Other Material Contracts:
10.14 (2) The Company's Retirement Plan for Salaried Employees
10.15 (A) (8) The Company's Salaried Employees Stock Savings Plan (11) as amended on July 1, 1987 and as amended on June 14, 1988
(B) (14) Amendment dated March 16, 1989 to the Imo Industries Inc. Employees Stock Savings Plan
(C) (12) Amendments dated September 6, 1990 and February 14, 1991 to the Imo Industries Inc. Employees Stock Savings Plan
(D) (13) Amendment dated May 9, 1991 to the Imo Industries Inc. Employees Stock Savings Plan
(E) (14) Trust Agreement for the Imo Industries Inc. Employees Stock Savings Plan as of January 1, 1992 between the Company and Merrill Lynch Trust Company
(F) (15) Amendments dated December 30, 1991 and August 3, 1992 to the Imo Industries Inc. Employees Stock Savings Plan
(G) Trust Agreement for the Imo Industries Inc. Employees Stock Savings Plan as of March 1, 1995 between the Company and Eagle Trust Company
10.16 (1) Distribution Agreement dated December 18, 1986 between Transamerica Corporation and the Company
10.17 (1) Tax Agreement between the Company and Transamerica Corporation
10.18 (A) (9) Revolving Credit Agreement, dated September 16, 1988 (10) by and among the Company, Bankers Trust Company, Barclays Bank PLC, Canadian Imperial Bank of Commerce as amended December 15, 1988, as amended February 28, 1989, as amended May 9, 1989 and as amended September 11, 1989
(B) (12) Amendment dated as of August 31, 1990 to the agreement dated September 16, 1988 by and among the Company, Bankers Trust Company, Barclays Bank PLC, Canadian Imperial Bank of Commerce, Manufacturers Hanover Trust Company and National City Bank
(C) (14) Amendment dated as of December 31, 1991 to the agreement dated September 16, 1988 by and among the Company, Bankers Trust Company, Barclays Bank PLC, Manufacturers Hanover Trust Company and National City Bank
(D)(i) (16) Combined Restated Credit Agreement dated July 15, 1993 among the Company, Bankers Trust Company as lender, issuer and agent, Chemical Bank, CIBC, Inc., Barclays Bank PLC, National City Bank, ABN-AMRO Bank N.V., New York Branch, Commerzbank AG, New York Branch, and Istituto Bancario San Paolo Di Torino S.p.A.
(ii) (17) Amendment No. 1 dated as of November 22, 1993 to the Combined Restated Credit Agreement dated as of July 15, 1993 among the Company, Bankers Trust Company as lender, issuer and agent, Chemical Bank, CIBC, Inc., Barclays Bank PLC, National City Bank, ABN-AMRO Bank N.V., New York Branch, Commerzbank AG, New York Branch, and Istituto Bancario San Paolo Di Torino S.p.A.
(iii) Amended and Restated Combined Restated Credit Agreement dated as of August 19, 1994 among the Company, Bankers Trust Company as lender, issuer and agent, Chemical Bank, CIBC, Inc., Barclays Bank PLC, National City Bank, ABN-AMRO Bank N.V., New York Branch, Commerzbank AG, New York Branch, and Istituto Bancario San Paolo Di Torino S.p.A.
(iv) Consent, Amendment No. 1 and Agreement dated as of January 17, 1995 among the Company, Bankers Trust Company as lender, issuer and agent, Chemical Bank, CIBC, Inc., Barclays Bank PLC, and National City Bank, Istituto Bancario San Paolo Di Torino S.p.A., Commerzbank AG, New York Branch, ABN-AMRO Bank N.V., New York Branch, The Prudential Insurance Company of America as lenders and Mannesmann Capital Corporation as Assignee
(E)(i) (16) Credit Agreement dated July 15, 1993 among the Company, Bankers Trust Company as lender, issuer and agent, Chemical Bank, CIBC, Inc., Barclays Bank PLC, National City Bank, ABN-AMRO Bank N.V., New York Branch, Commerzbank AG, New York Branch, Istituto Bancario San Paolo Di Torino S.p.A., and The Prudential Insurance Company of America
(ii) (17) Amendment No. 1 dated as of November 22, 1993 to the Credit Agreement dated as of July 15, 1993 among the Company, Bankers Trust Company as lender, issuer and agent, Chemical Bank, CIBC, Inc., Barclays Bank PLC, National City Bank, ABN-AMRO Bank N.V., New York Branch, Commerzbank AG, New York Branch, Istituto Bancario San Paolo Di Torino S.p.A., and The Prudential Insurance Company of America
(iii) Amended and Restated Credit Agreement dated as of August 19, 1994 among the Company, Bankers Trust Company as lender, issuer and agent, Chemical Bank, CIBC, Inc., Barclays Bank PLC, National City Bank, ABN-AMRO Bank N.V., New York Branch, Commerzbank AG, New York Branch, and Istituto Bancario San Paolo Di Torino S.p.A., and The Prudential Insurance Company of America
(iv) Consent, Amendment No. 1 and Agreement dated as of January 17, 1995 among the Company, Bankers Trust Company as lender, issuer and agent, Chemical Bank, CIBC, Inc., Barclays Bank PLC, and National City Bank, Istituto Bancario San Paolo Di Torino S.p.A., Commerzbank AG, New York Branch, ABN-AMRO Bank N.V., New York Branch, The Prudential Insurance Company of America as lenders and Mannesmann Capital Corporation as Assignee
(F) (17) Guarantee Agreement dated July 15, 1993 by certain of the Company's Subsidiaries in favor of Bankers Trust Company as collateral agent (re-executed to reflect certain signatories which are different from those on the version of this Agreement appended as Exhibit 10.16 (F) to the Company's Form 10-K/A for the fiscal year ended December 31, 1992)
(G)(i) (16) General Security Agreement dated July 15, 1993 by the Company and certain of its Subsidiaries in favor of Bankers Trust Company as collateral agent
(ii) (17) Letter Agreement dated December 1, 1993 between the Company's Varo Inc. Subsidiary and Bankers Trust Company as collateral agent, regarding the General Security Agreement identified herein as Exhibit 10.18 (G)(i)
(H)(i) (16) Securities Pledge Agreement dated July 15, 1993 by the Company and certain of its Subsidiaries in favor of Bankers Trust Company as collateral agent
(ii) (17) Letter Agreement dated December 1, 1993 between the Company's Varo Inc. Subsidiary and Bankers Trust Company as collateral agent, regarding the Securities Pledge Agreement identified herein as Exhibit 10.18 (H)(i)
(I)(i) (16) Intellectual Property Pledge Agreement dated July 15, 1993 by the Company and certain of its Subsidiaries in favor of Bankers Trust Company as collateral agent
(ii) (17) Letter Agreement dated December 1, 1993 between the Company's Varo Inc. Subsidiary and Bankers Trust Company as collateral agent, regarding the Intellectual Property Pledge Agreement identified herein as Exhibit 10.18 (I)(i)
(J) (16) Collection Deposit and Concentration Account Pledge Agreement dated July 15, 1993 by the Company and certain of its Subsidiaries in favor of Bankers Trust Company as collateral agent
(K) (16) Intercreditor and Collateral Agency Agreement dated July 15, 1993 among the Company, Bankers Trust Company as lender, issuer, agent and collateral agent, Chemical Bank, CIBC, Inc., Barclays Bank PLC, National City Bank, ABN-AMRO Bank N.V., New York Branch, Commerzbank AG, New York Branch, Istituto Bancario San Paolo Di Torino S.p.A., and The Prudential Insurance Company of America
(L) (16) Mortgage, Assignment of Rents, Assignment Agreement and Fixture Filing dated July 15, 1993 by the Company in favor of Bankers Trust Company relating to premises in Mercer County, New Jersey
(M) (16) Schedule of Omitted Mortgages and Deeds of Trust
(N) (17) Schedule of Additional Omitted Mortgages and Deeds of Trust
10.19 (A) (4) 12.75% Note Agreement dated December 29, 1982 between the Company and The Prudential Insurance Company of America ("Prudential")
(B) (4) Agreement dated December 22, 1986 between the Company and Prudential amending the 12.75% Note Agreement dated December 29, 1982 between the Company and Prudential
(C) (11) Amendment dated as of September 16, 1988 to the Agreement dated December 29, 1982 between the Company and Prudential
(D) (11) Amendment dated as of June 13, 1989 to the Agreement dated December 29, 1982 between the Company and Prudential
(E) (12) Amendment dated November 27, 1990 to the agreement dated December 29, 1982 between the Company and Prudential
(F) (14) Amendment dated April 2, 1991, Amendment dated May 14, 1991, Amendment dated November 5, 1991, Amendment dated November 12, 1991 and Amendment dated February 13, 1992 between the Company and Prudential
(G) (15) Amendment dated August 7, 1992 between the Company and Prudential
(H) (16) Amendment Agreement dated July 15, 1993 between the Company and The Prudential Insurance Company of America
(I)(i) (16) Amended and Restated 12.75% Promissory Note Agreement dated July 15, 1993 between the Company and The Prudential Insurance Company of America
(ii) (17) Amendment No. 1 dated as of December 17, 1993 to the Amended and Restated 12.75% Promissory Note Agreement dated July 15, 1993 between the Company and The Prudential Insurance Company of America
(J) (16) Warrant dated July 15, 1993 issued by the Company to The Prudential Insurance Company of America
10.20 (A) (4) 9.60% Note Agreement dated November 5, 1975 between the Company and Prudential
(B) (4) Agreement dated December 22, 1986 between the Company and Prudential amending the 9.60% Note Agreement dated November 5, 1975 between the Company and Prudential
10.21 (A) (9) 10.35% Note Agreement dated September 16, 1988 between the Company and Prudential
(B) (11) Amendment dated as of June 13, 1989 to the Agreement dated September 16, 1988 between the Company and Prudential
(C) (12) Amendment dated November 27, 1990 to the agreement dated September 16, 1988 between the Company and Prudential
(D) (14) Amendment dated April 2, 1991, Amendment dated May 14, 1991, Amendment dated November 5, 1991, Amendment dated November 12, 1991 and Amendment dated February 13, 1992 between the Company and Prudential
(E) (15) Amendment dated August 7, 1992 between the Company and Prudential
(F) (16) Amendment Agreement dated July 15, 1993 between the Company and The Prudential Insurance Company of America
(G) (16) Amended and Restated 10.35% Promissory Note Agreement dated July 15, 1993 between the Company and The Prudential Insurance Company of America
(H) (17) Amendment No. 1 dated as of December 17, 1993 to the Amended and Restated 10.35% Promissory Note Agreement dated July 15, 1993 between the Company and The Prudential Insurance Company of America
10.22 (A) (17) Amendment No. 2 dated as of December 31, 1993 to the New Credit Agreement, the Combined Restated Credit Agreement and the Prudential Agreements among the Company, Bankers Trust Company as lender, issuer and agent, Chemical Bank, CIBC, Inc., Barclays Bank PLC, National City Bank, ABN-AMRO Bank N.V., New York Branch, Commerzbank AG, New York Branch, Istituto Bancario San Paolo Di Torino S.p.A., and The Prudential Insurance Company of America. This Amendment No. 2 Amends: (i) the Combined Restated Credit Agreement identified herein as Exhibit 10.18(D)(i) as amended, (ii) the Credit Agreement identified herein as Exhibit 10.18(E)(i) as amended, (iii) the Amended and Restated 12.75% Promissory Note Agreement identified herein as Exhibit 10.19(I)(i) as amended, and (iv) the Amended and Restated 10.35% Promissory Note Agreement identified herein as Exhibit 10.21(G) as amended.
(B) (17) Consent and Amendment No. 3 dated as of February 28, 1994 to the New Credit Agreement, the Combined Restated Credit Agreement and the Prudential Agreements among the Company, Bankers Trust Company as lender, issuer and agent, Chemical Bank, CIBC, Inc., Barclays Bank PLC, National City Bank, ABN- AMRO Bank N.V., New York Branch, Commerzbank AG, New York Branch, Istituto Bancario San Paolo Di Torino S.p.A., and The Prudential Insurance Company of America. This Consent and Amendment No. 3 amends: (i) the Combined Restated Credit Agreement identified herein as Exhibit 10.18(D)(i) as amended, (ii) the Credit Agreement identified herein as Exhibit 10.18(E)(i) as amended,(iii) the Amended and Restated 12.75% Promissory Note Agreement identified herein as Exhibit 10.19(I)(i) as amended, and (iv) the Amended and Restated 10.35% Promissory Note Agreement identified herein as Exhibit 10.21(G) as amended.
10.23 (6) Agreement and Plan of Merger dated July 13, 1987 among the Company, BC Acquisition Corp. and Baird Corporation
10.24 (4) Stock Purchase Agreement dated November 30, 1987 between the Company and TRIFIN B.V.
10.25 (9) Agreement and Plan of Merger, dated as of August 21, 1988 by and among the Company, VI Acquisition Corp. and Varo Inc.
10.26 (9) Stock option agreement, dated as of August 21, 1988, between VI Acquisition Corp. and Varo Inc.
10.27 (11) 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.
10.28 (11) Share Purchase Agreement dated April 27, 1989, among Aureoleena Investments Limited, Bushbranch Investments Limited, and Holdings Limited, as vendors, and R. J. Burns, C. P. Burns and J. A. Burns as guarantors, and Morse Controls Limited as purchaser
10.29 (11) Stock Purchase Agreement dated July 31, 1989 between Immobiliare Marsicana S.R.L. and Ser-Fid Italiana S.p.A.
10.30 (11) Agreement for sale of assets dated November 30, 1989 among Ferguson Gear Company, Robert E. Lewis and the Company
10.31 (12) Agreement for sale of assets dated June 15, 1990 among Clifford G. Brockmyre, Robert Healy, Quabbin Industries Inc., Pro Mac Engineering Inc., BHP Associates, Industrial Airpark Associates and the Company
10.32 (12) Stock Purchase Agreement dated as of May 31, 1990 among United Scientific Holdings PLC, United Scientific Inc. and the Company
10.33 (17) Asset Sale Agreement dated as of May 10, 1993 between the Company and Roller Bearing Company of America
10.34 (17) Stock Sale and Asset Transfer Agreement dated as of July 14, 1993 between the Company and Nova Digm Acquisition, Inc.
10.35 (i) (17) Stock Purchase Agreement dated as of October 28, 1993 among the Company, Imo Industries GmbH, Mark Controls Corporation and Mark Controls GmbH i. Gr.
(ii) (17) Amendment No. 1 dated as of November 11, 1993 to Stock Purchase Agreement dated as of October 28, 1993, among the Company, Imo Industries GmbH, Mark Controls Corporation and Mark Controls GmbH i. Gr.
(iii) (17) Amendment No. 2 dated as of December 1, 1993 to Stock Purchase Agreement dated as of October 28, 1993 among the Company, Mark Controls Corporation, Imo Industries GmbH and Mark Controls GmbH i. Gr.
10.36 (i) (17) German Asset Purchase Agreement among Imo Industries GmbH, Mark Controls GmbH i. Gr., the Company and Mark Controls Corporation
(ii) (17) Amendment No. 1 dated as of November 23, 1993 to German Asset Purchase Agreement dated as of November 18, 1993 among Imo Industries GmbH, the Company, Mark Controls GmbH i. Gr. and Mark Controls Corporation
(iii) (17) Amendment No. 2 dated as of December 1, 1993 to the German Asset Purchase Agreement dated as of November 23, 1993 among the Company, Mark Controls Corporation, Imo Industries GmbH and Mark Controls GmbH i. Gr.
10.37 (A) (18) 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) 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
10.38 (A) (18) Asset Purchase Agreement dated as of October 14, 1994 by and among the Company, Varo Inc., Baird Corporation, Optic Electronic International, Inc., TPG Partners, L.P. and Varo Acquisition Corp.
(B) (18) Amendment dated as of October 28, 1994 to the Asset Purchase Agreement dated as of October 14, 1994 by and among the Company, Varo Inc., Baird Corporation, Optic Electronic International, Inc., TPG Partners, L.P. and Varo Acquisition Corp.
(C) Letter dated December 20, 1994 issued to the Company by Varo Systems, Inc., (formerly Varo Acquisition Corp.), Varo Holdings Corp. and TPG Partners L.P. terminating the Asset Purchase Agreement dated as of October 14, 1994 by and among the Company, Varo Inc., Baird Corporation, Optic Electronic International Inc., TPG Partners L.P. and Varo Acquisition Corp.
10.39 (A) (18) Asset Purchase Agreement dated as of November 4, 1994 by and among the Company, Imo Industries International Inc. and Mannesmann Capital Corporation
(B) Agreement, Amendment and Waiver dated January 17, 1995 by and among the Company and Mannesmann Capital Corporation
10.40 Asset and Stock Purchase Agreement dated as of January 1, 1995 by and among the Company and Thermo Jarrell Ash Corporation
20 Proxy Statement for the Company's 1995 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 Subsidiaries of the Company
23 Consent of Ernst & Young LLP dated March 29, 1995
27 Financial Data Schedule as of December 31, 1994
_______________________________________________
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 10-K filed with the Commission for the fiscal year ended December 31, 1986. (3) Incorporated by reference to the Company's Form S-8 as filed with the Commission on April 10, 1987. (4) Incorporated by reference to the Company's Form 8-K filed with the Commission on February 17, 1987. (5) Incorporated by reference to the Company's Form 8-K filed with the Commission on May 4, 1987. (6) Incorporated by reference to the Company's Schedule 14D-1 as filed with the Commission on July 14, 1987. (7) Incorporated by reference to the Company's Form 10-K filed with the Commission on March 28, 1988. (8) Incorporated by reference to the Imo Industries Inc. Employees Stock Savings Plan Form 11-K filed with the Commission on April 13, 1988. (9) Incorporated by reference to the Company's Form 8-K filed with the Commission on October 14, 1988. (10)Incorporated by reference to the Company's Form S-1 filed with the Commission on October 23, 1989. (11)Incorporated by reference to the Company's Form 10-K filed with the Commission on March 29, 1990. (12)Incorporated by reference to the Company's Form 10-K filed with the Commission on March 28, 1991. (13)Incorporated by reference to the Company's Form S-8 filed with the Commission on June 17, 1991. (14)Incorporated by reference to the Company's Form 10-K filed with the Commission on March 26, 1992. (15)Incorporated by reference to the Company's Form 10-K filed with the Commission on April 19, 1993. (16)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. (17)Incorporated by reference to the Company's Form 10-K filed with the Commission on March 31, 1994. (18)Incorporated by reference to the Company's Form 10-Q filed with the Commission on November 14, 1994.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Imo Industries Inc. has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: March 29, 1995 IMO INDUSTRIES INC.
By: /s/ DONALD K. FARRAR Donald K. Farrar Chairman, Chief Executive Officer, President and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of Imo Industries Inc. and in the capacities and on the dates indicated.
/s/ DONALD K. FARRAR Chairman, Chief Executive Officer, Donald K. Farrar President and Director (principal executive officer) March 29, 1995
/s/ WILLIAM M. BROWN Executive Vice President and William M. Brown Chief Financial Officer (principal financial officer) March 29, 1995
/s/ ROBERT A. DERR II Vice President and Robert A. Derr II Corporate Controller (principal accounting officer) March 29, 1995
/s/ JAMES B. EDWARDS Director March 29, 1995 James B. Edwards
/s/ J. SPENCER GOULD Director March 29, 1995 J. Spencer Gould
/s/ RICHARD J. GROSH Director March 29, 1995 Richard J. Grosh
/s/ CARTER P. THACHER Director March 29, 1995 Carter P. Thacher
/s/ ARTHUR E. VAN LEUVEN Director March 29, 1995 Arthur E. Van Leuven
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.
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.
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.
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 $49.5 million in 1994, $56.7 million in 1993 and $58.4 million in 1992. Total interest capitalized was $.2 million in 1994, $.1 million in 1993 and $.9 million in 1992.
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.
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, 1994 and 1993 was $68.7 million and $73.6 million, respectively, net of respective accumulated amortization of $14.4 million and $12.9 million. As a result of the decision to sell the Electro-Optical Systems businesses, approximately $104.6 million of associated goodwill was written off at December 31, 1993 in connection with the adjustment of the net investment to estimated net realizable value. Patents are amortized over the shorter of their legal or estimated useful lives.
Restatements: The Consolidated Financial Statements, and the notes thereto, have been restated to reflect the Company's Electro-Optical Systems business and Turbomachinery business segments as discontinued operations 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 (See Note 3). On February 8, 1995, the Company announced that it has a letter of intent from Litton Industries for the acquisition of the Optical Systems and Ni-Tec divisions of Varo Inc. and the Optical Systems division of Baird Corporation. These sales will complete a substantial part of the Company's planned divestiture of its Electro-Optical Systems business. The Company is continuing discussions with prospective buyers of the remaining Varo division, the Electronic Systems division, and expects to complete this sale in 1995.
Turbomachinery On July 28, 1994, the Company announced that it had reached an agreement in principle to sell its Delaval Turbine and TurboCare divisions, which comprise substantially all of the Company's Turbomachinery business segment, and its 50% interest in Delaval-Stork, a Dutch joint venture, to Mannesmann Demag of Dusseldorf, Germany. The parties entered into a letter of intent in August 1994 and the sale was approved by the Company's Board of Directors. 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 for $124 million. Of this amount, $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. A portion of the proceeds have been 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. The transaction, which will be reflected in the Company's first quarter of 1995, will result in an estimated gain of $40 million after tax (See Note 3).
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. 	 Net assets and liabilities of the Discontinued Operations consist of the following:
December 31 (Dollars in thousands) 1994 1993 Current Assets: Receivables $ 57,778 $ 48,122 Inventories 60,280 80,241 Other current assets 2,031 2,068 120,089 130,431
Current Liabilities: Trade accounts payable 21,049 23,637 Other current liabilities 30,343 33,028 51,392 56,665
Net Current Assets $ 68,697 $ 73,766
Long-term Assets: Property $ 67,522 $ 72,778 Intangible assets 3,988 4,873 Other long-term assets 9,308 5,195 80,818 82,846
Long-term Liabilities 4,545 14,901
Net Long-term Assets $ 76,273 $ 67,945
Net Assets $144,970 $141,711
Net assets related to the Electro-Optical Systems business are $85 million as of December 31, 1994 and 1993, and net assets related to the Turbomachinery business are $60 million and $56.7 million as of December 31, 1994 and 1993, respectively.
A condensed summary of operations for the Discontinued Operations is as follows:
Year Ended December 31 (Dollars in thousands) 1994 1993 1992
Net Sales $341,550 $319,074 $355,074
Income (loss) from operations before income taxes and minority interest 6,375 (42,587) (43,250)
Income taxes (benefit) 800 1,400 (13,875) Minority interest --- 383 (206)
Income (loss) from operations $5,575 $(44,370) $(29,169)
The income (loss) from operations of the Discontinued Operations for 1994, 1993 and 1992 includes allocated interest expense. Interest expense of $17.4 million, $18.0 million, and $13.4 million, respectively, was allocated based on the ratio of the estimated net assets to be sold in relation to the sum of the Company's shareholders' equity and the aggregate of outstanding debt at each year end.
Electro-Optical Business	 The Electro-Optical loss from operations was $45.3 million and $32.7 million for 1993 and 1992, respectively. In 1994, losses from the Electro- Optical Systems operations resulted in a net charge of $6.2 million to the Accrued Expenses of Discontinued Operations reserve established as of December 31, 1993. Included in the 1993 loss are unusual charges of $23.3 million. These charges are principally provisions for revised estimates-to- complete on current contracts of $13.9 million, other costs of $5.6 million related to the write-down of assets to net realizable value, $1.9 million of estimated costs associated with settlements of pending litigation and other costs of $1.9 million. Included in the 1992 loss are unusual charges of $27.9 million. These charges include provisions for the estimated costs associated with operational disruptions and restructuring, including revised estimates-to-complete on current contracts, of $22 million, costs associated with pending litigation and certain warranty and claim settlements of $4 million, and other costs of $1.9 million related to the write-down of assets, principally inventories, to net realizable value.
The Company also recorded charges of $155.3 million at December 31, 1993, which includes a $104.6 million goodwill write-off (See Note 1) to reduce the carrying amount of the Electro-Optical discontinued operation to estimated realizable value. As of December 31, 1994, the Company has an accrual for anticipated operating losses of $6.4 million (including $4.2 million of allocated interest) through the date of sale, which is expected to occur during the second quarter of 1995.
Turbomachinery Business The Turbomachinery business income from operations was $5.6 million, $1.0 million and $3.6 million for 1994, 1993 and 1992, respectively. Included in the 1993 income are unusual charges of $2.0 million consisting of restructuring costs. Included in the 1992 income are unusual charges of $7.3 million of which $3.0 million is estimated costs associated with pending litigation and $4.0 million related to estimated warranty and performance claims.
See Note 15 for discussion of contingencies related to the Electro-Optical Systems and Turbomachinery businesses.
Note 3 Subsequent Events
On January 3, 1995, the Company completed the sale of the Baird Analytical Instruments division of its Electro-Optical Systems business to Thermo Instrument Systems Inc., a subsidiary of Thermo Electron Corporation, for $12.3 million in cash, which was used to reduce its domestic senior debt. A loss was previously recognized in connection with the net realizable value adjustment on the entire Electro-Optical Systems business recorded in 1993.
On January 17, 1995, the Company completed the sale of its Delaval Turbine and TurboCare divisions, which comprise substantially all of the Company's Turbomachinery business segment, and its 50% interest in Delaval-Stork, a Dutch joint venture, to Mannesmann Capital Corporation, a subsidiary of Mannesmann Demag of Dusseldorf, Germany, for $124 million in cash. At closing, the Company received $109 million, with the balance earning interest until it is received at specified future contract dates subject to adjustment as provided in the agreement. A portion of these proceeds were used to complete the repayment of the Company's domestic senior debt in January 1995. In March 1995, $40 million of the 12.25% Senior Subordinated Debentures were redeemed with the remainder of these proceeds. This transaction, which will be reflected in the Company's financial statements in the first quarter of 1995, will result in an estimated after-tax gain of $40 million.
Deferred debt expense of $4.2 million, associated with the portions of the domestic senior debt and senior subordinated debentures extinguished in connection with the above transactions, was written off as an extraordinary charge in the first quarter of 1995.
Both the Electro-Optical Systems and Turbomachinery business segments have been accounted for as discontinued operations, and an interest allocation has been included in the income (loss) from operations of the discontinued operations in each of the three years in the period ended December 31, 1994 (See Note 2).
Presented below is an unaudited condensed balance sheet which sets forth historical information as adjusted to give effect to the sales of the Company's Baird Analytical Instruments division and its Turbomachinery business including its 50% interest in Delaval-Stork, and the related debt repayments. The adjustments assume that the transactions occurred on the balance sheet date.
December 31, 1994 (Dollars in thousands) Reported Adjustments Adjusted (Unaudited) (Unaudited)
Cash and cash equivalents $ 26,942 $ --- $ 26,942 Other current assets 182,668 5,000 187,668 Noncurrent assets 220,079 5,800 225,879 Net assets of discontinued operations 144,970 (72,870) 72,100 Total Assets $574,659 $ (62,070) $512,589
Notes payable and current portion of long-term debt $ 29,810 $ (13,333) $ 16,477 Other liabilities 195,855 23,797 219,652 Long-term debt 376,998 (108,334) 268,664 Shareholders' equity (deficit) (28,004) 35,800 7,796 Total Liabilities and Shareholders' Equity (Deficit) $574,659 $ (62,070) $512,589
Note 4 Restructuring Plan
Asset Divestiture Program As of December 31, 1994, the Company had substantially completed the restructuring plan announced on October 29, 1992, pursuant to which it divested six of its operating units in 1993, two of its operating units and a portion of its underutilized real estate holdings in 1994. The divestitures included units of its aerospace businesses, units of its instruments and transducer businesses, certain other non-strategic businesses and underutilized real estate holdings. As discussed above, in January 1994, the Company announced its intention to dispose of its Electro-Optical Systems business, and on January 17, 1995 completed the sale of its Delaval Turbine and TurboCare divisions, which comprise substantially all of its Turbomachinery business segment, and its 50% interest in Delaval-Stork, a Dutch joint venture. Both of these businesses are being accounted for as discontinued operations (See Note 2).
During 1994, the Company sold its CEC Instruments and Turboflex Ltd. operations, its Corporate headquarters building and other previously identified assets for aggregate proceeds of $13.2 million. The proceeds were used to repay a portion of the Company's domestic senior debt.
As of December 31, 1993, the Company had sold its Heim Bearings, Aerospace and Barksdale Controls operations for proceeds of approximately $91 million, and thus had completed a significant portion of the asset divestiture program. These proceeds, net of related expenses, were used to repay senior debt in the amount of $81.9 million in 1993 in accordance with the terms of the 1993 restructured credit facilities.
Excluding the Electro-Optical Systems operations, the remaining assets to be sold in this program consist of one non-strategic business and the remainder of its underutilized real estate holdings. The Company targets completion of the divestitures over the next 9 to 12 months.
The operating units sold and the remaining assets to be sold as part of the asset divestiture program, except for the Electro-Optical Systems and Turbomachinery businesses, have been grouped as a separate segment entitled Other for segment reporting purposes. See Note 11 for segment operating results for the years ending December 31, 1994, 1993 and 1992. These units in total produced a loss before income taxes of $2 million in 1994 and essentially break-even results before unusual items and income taxes for the years 1993 and 1992. These results are net of $2.2 million , $5.9 million and $8.3 million of interest expense which has been allocated based on net assets for the years 1994, 1993 and 1992, respectively.
Restructuring Program In January 1994, the Company announced plans to reduce the Company's cost structure and to improve productivity on a worldwide basis. In the fourth quarter of 1993, the Company recorded a charge in continuing operations of $6.6 million relating to this program. The actions taken in 1994, under this restructuring plan, were to implement cost-cutting measures at its core operations to reduce its expense structure and to eliminate duplicative functions. The company has consolidated certain operations in the European controls and automotive components divisions and has revised operating processes and reduced employment levels at the pumps and other operations. The number of employees in core operations declined by approximately 210, or 6% between mid-1993 and mid-1994. This program was substantially complete as of December 31, 1994, with the remainder expected to be completed by the end of the first quarter of 1995.
In the fourth quarter of 1993, the Company recorded a charge of $6.6 million ($.39 per share) relating to this program, which amount was classified as an unusual charge in loss from continuing operations (See Note 7). The restructuring charge was principally comprised of severance costs and impacts both the Company's industry segments and the Corporate office (See Note 11). Accrued restructuring costs included in accrued expenses and other liabilities are $1.3 million and $6.4 million at December 31, 1994 and 1993, respectively.
Note 5 Inventories
Inventories are summarized as follows:
December 31 (Dollars in thousands) 1994 1993
Finished products $ 35,649 $ 38,476 Work in process 31,990 28,669 Materials and supplies 32,952 36,037 100,591 103,182 Less customers' progress payments 1,635 2,255 Less valuation allowance 12,133 11,821
$ 86,823 $ 89,106
Note 6 Accrued Expenses and Other Liabilities
Accrued expenses and other liabilities consist of the following:
December 31 (Dollars in thousands) 1994 1993
Accrued contract completion costs $ 556 $ 886 Accrued product warranty costs 5,037 4,050 Accrued litigation and claim costs 4,493 14,312 Payroll and related items 12,773 13,872 Accrued interest payable 10,573 11,590 Accrued restructuring costs 1,321 6,389 Accrued divestiture costs 8,582 4,178 Other 10,341 18,380
$ 53,676 $ 73,657
Note 7 Unusual Items
During the twelve months ended December 31, 1993, the Company recognized unusual charges of $15.7 million ($.93 per share) in loss from continuing operations. During the fourth quarter of 1993, the Company recognized charges of $21.7 million that include provisions of $6.6 million related to the restructuring and consolidation of certain of the Company's operating units (See Note 4), $10.1 million expected net loss overall related to the Company's asset divestiture program (See Note 4) 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.
The twelve months ended December 31, 1992 include unusual charges of $16.7 million in loss from continuing operations. These charges are principally provisions for the estimated costs associated with pending litigation and certain warranty and claim settlements.
Note 8 Income Taxes
The components of income tax expense (benefit) from continuing operations are:
Year Ended December 31 (Dollars in thousands) 1994 1993 1992
Current: Federal $ --- $ --- $ --- Foreign 1,973 --- --- State 460 --- --- 2,433 --- --- Deferred: Federal --- 13,000 (7,498) Foreign and State --- 600 (4,513) --- 13,600 (12,011)
$ 2,433 $ 13,600 $(12,011)
Income tax expense (benefit) from discontinued operations, in thousands, is as follows: 1994 - $800; 1993 - $1,400; and 1992 - $(13,875).
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, 1994 and 1993 are as follows:
December 31 (Dollars in thousands) 1994 1993 Current Long-term Current Long-term Deferred tax assets: Postretirement benefit obligation $ 765 $ 11,593 $ 765 $ 14,340 Expenses not currently deductible 19,174 25,879 21,308 32,436 Net operating loss carryover --- 24,673 --- 17,150 Tax credit carryover --- 8,653 --- 1,755 Total deferred tax assets 19,939 70,798 22,073 65,681 Valuation allowance for deferred tax assets (15,140) (53,770) (15,061) (45,154)
Net deferred tax assets 4,799 17,028 7,012 20,527
Deferred tax liabilities: Tax over book depreciation --- 14,908 --- 17,708 Difference between book and tax basis of property --- 3,930 --- 8,455 Difference between book and tax basis of income recognition 471 1,230 4,332 4,332 Other --- 4,324 --- 3,976
Total deferred tax liabilities 471 24,392 4,332 34,471
Net deferred tax assets (liabilities) $ 4,328 $ (7,364) $ 2,680 $(13,944)
At December 31, 1994, unremitted earnings of foreign subsidiaries were approximately $23.3 million. Since it is the Company's intention to indefinitely reinvest these earnings, no U.S. taxes have been provided. Determination of the amount of unrecognized deferred tax liability on these unremitted earnings is not practicable. The amount of foreign withholding taxes that would be payable upon remittance of those earnings is approximately $1.1 million.
The components of income (loss) from continuing operations before income taxes, minority interest, extraordinary item and cumulative effect of change in accounting principle are:
Year Ended December 31 (Dollars in thousands) 1994 1993 1992
United States $(2,322) $(22,656) $(39,685) Foreign 8,803 (3,667) 2,269
$ 6,481 $(26,323) $(37,416)
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) 1994 1993 1992 Tax at U.S. federal income tax rate $ 2,268 $ (9,213) $(12,721) State taxes, net of federal income tax effect 299 396 (1,092) Impact of foreign tax rates and credits (1,108) --- 141 Impact of foreign sales corporation exempt income --- --- (702) Net U.S. tax on distributions of current foreign earnings 935 --- 175 Goodwill amortization 656 694 1,554 Other/valuation reserve (617) 21,723 634
Income tax expense (benefit) $ 2,433 $ 13,600 $(12,011)
Net income taxes paid during 1994 and 1992 were $.2 million and $3.7 million, respectively, and net income tax refunds received during 1993 were $7 million.
The Company has net operating loss carryforwards of approximately $70 million expiring through 2009, foreign tax credit carryforwards of approximately $16 million expiring through 1999, 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 taxable income and have been reserved in accordance with FASB Statement No. 109.
Note 9 Notes Payable and Long-Term Debt
Effective August 5, 1994, the Company obtained credit facilities for borrowings up to $150 million from a group of lenders (the "New 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 New 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. Both the revolving credit facility and the term loan are extendible to July 1999 under certain conditions. Proceeds from the New Credit Agreement were used to repay the Company's working capital loans under the former domestic senior credit facilities, its $30 million 12.75% Senior Note and its $12.4 million Make- Whole Notes.
At December 31, 1994, the Company had $36.7 million and $45 million in term and bridge loans, respectively, outstanding under the New Credit Agreement, both of which were repaid with proceeds received in January 1995 from the sales of the Baird Analytical Instruments division and the Turbomachinery business (See Note 3). As of December 31, 1994, there were no borrowings under the $65 million revolving credit facility; however $35.1 million in standby letters of credit were outstanding. Letter of credit exposure was reduced to $20.5 million after the Turbomachinery business sale in January 1995. At the same time, and in keeping with the terms of the New Credit Agreement, the $65 million revolving credit facility was reduced to $50 million. The Company currently has approximately $30.7 million in foreign short-term credit facilities with approximately $12.8 million outstanding as of December 31, 1994. 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 8.8% and 8.2% at December 31, 1994 and 1993, respectively.
Long-term debt of continuing operations consists of the following:
December 31 (Dollars in thousands) 1994 1993
Promissory note with interest at 12.75%, due March 31, 1995 $ --- $ 30,000 Promissory note with interest at 10.35%, $5 million due annually from 1994 to 2003 --- 4,379 Make-Whole Notes with interest at 2% over the prime rate, due December 31, 1996 --- 11,519 Bridge Loan due January 31, 1996 (1) 45,000 --- Term Loan, $3.3 million due quarterly October 31, 1994 to July 31, 1997 (2) 36,667 --- Senior subordinated debentures with interest at 12.25%, due August 15, 1997 150,000 150,000 Senior subordinated debentures with interest at 12%, due November 1, 1999 to 2001 150,000 150,000 Other 12,370 16,381 394,037 362,279 Less current portion 17,039 8,527
$376,998 $353,752
(1) This loan bears interest at a rate equal to the sum of the "Eurodollar Rate" calculated in accordance with the New Credit Agreement plus 4.5% for the first six months after the closing date of the New Credit Agreement, and increasing by 0.25% every three months thereafter.
(2) This loan bears interest at the rate of 2.75% in excess of the "Eurodollar Rate" calculated in accordance with the New Credit Agreement. ___________________________________________________________________
The aggregate annual maturities of long-term debt from continuing operations, in thousands, for the four years subsequent to 1995 are: 1996 - $60,525; 1997 - $161,381; 1998 - $2,059; and 1999 - $37,533.
Total debt of the discontinued operations, in thousands, amounted to $1,654 and $3,277 as of December 31, 1994 and 1993, respectively. Of these amounts, approximately $1,605 and $1,807 represent the long-term portion.
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, 1994, based on market bid prices, was $151.1 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 (See Note 3).
The 12% senior subordinated debentures are currently redeemable in whole or in part, at the option of the Company, at 105% of their principal amount, plus accrued interest. The redemption price declines to 102.5% on November 1, 1995 and 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, 1994, based on market bid prices, was $151.9 million.
The New Credit Agreement requires the Company, among other things, 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.
Bank, advisory and legal fees associated with the 1994 refinancing of the New Credit Agreement amounted to approximately $5.6 million payable 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 from 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.
Deferred debt expense of $4.2 million, associated with the portions of the domestic senior debt and the 12.25% senior subordinated debentures repaid in the first quarter of 1995 as discussed in the preceding paragraphs, was written off as an extraordinary charge in the first quarter of 1995 (See Note 3).
Note 10 Shareholders' Equity
	Equity Incentive Plan Under the Company's Equity Incentive Plan, up to 2,200,000 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.
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, 1994. 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) 1994 1993 1992
Options: Granted 450 498 197 Exercised (56) --- (14) Canceled (159) (150) (225) Repricing Canceled (15) (468) --- Issued 10 273 --- Outstanding at end of year 1,537 1,307 1,154 Exercisable at end of year 654 652 767 Available for grant at end of year 55 341 524
Option price range per share: Granted $ 9.75 $7.375 $11.125 -$ 10.25 -$12.00 Exercised $ 7.00 --- $10.375 -$ 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 600,000 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, 1994. In December 1990, 40,000 stock options were granted at $10.375 per share, all of which were exercisable as of December 31, 1994.
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.
Employees Stock Savings Plan Up to 600,000 shares of the Company's common stock are reserved for issuance under the Company's Employees Stock Savings Plan. (See Note 12)
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 11 Operations by Industry Segment and Geographic Area
The Company classifies its continuing operations into two core business segments: Morse Controls and Pumps, Power Transmission & Instrumentation. 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 third business segment entitled Other is included in continuing operations for financial reporting purposes, and includes operations previously sold and operations to be sold as part of the Company's asset divestiture program. Certain 1993 and 1992 amounts have been restated to conform to the 1994 presentation reflecting the Turbomachinery business segment as a discontinued operation. 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) 1994 1993 1992
Net Sales Morse Controls $196,955 $163,876 $192,733 Pumps, Power Transmission & Instrumentation 255,962 249,896 265,336 Other 10,974 80,411 115,114 Total net sales $463,891 $494,183 $573,183
Segment operating income Morse Controls $ 14,677 $ 3,090 $ 6,031 Pumps, Power Transmission & Instrumentation 29,143 20,646 18,263 Other 38 1,117 (8,739) Total segment operating income 43,858 24,853 15,555 Equity in income (loss) of unconsolidated companies --- (231) 983 Unallocated corporate expenses (5,120) (13,160) (10,233) Net interest expense (32,257) (37,785) (43,721) Income (loss) from continuing operations before income taxes, minority interest, extraordinary item and cumulative effect of change in accounting principle $ 6,481 $(26,323) $(37,416)
A reconciliation of segment operating income to income from operations follows:
Year Ended December 31 (Dollars in thousands) 1994 1993 1992
Segment operating income $ 43,858 $ 24,853 $ 15,555 Unallocated corporate expenses (5,120) (13,160) (10,233) Other income (876) (605) (817) Income from operations $ 37,862 $ 11,088 $ 4,505
Segment operating income for the year ended December 31, 1993, includes $9.5 million of unusual charges, of which $3.7 million, $1.7 million, and $4.1 million relates to the Morse Controls, Pumps, Power Transmission & Instrumentation, and Other segments, respectively. Unallocated corporate expenses include unusual charges of $6.2 million for the year ended December 31, 1993.
Segment operating income for the year ended December 31, 1992, includes unusual charges of $16.7 million, of which $.3 million, $.4 million, and $16.0 million relates to the Morse Controls, Pumps, Power Transmission & Instrumentation, and Other segments, respectively.
The Morse Controls segment had sales to one commercial customer (Fiat S.p.A. and its subsidiaries) that accounted for 21%, 15% and 18% of consolidated sales in 1994, 1993 and 1992, respectively. No other customer accounted for 10% or more of any segment's sales in 1994, 1993 or 1992.
Year Ended December (Dollars in thousands) 1994 1993 1992
Identifiable assets Morse Controls $165,148 $155,745 $167,717 Pumps, Power Transmission & Instrumentation 196,318 196,748 194,408 Other 24,074 46,434 130,599 Corporate 44,149 55,915 91,118 Discontinued Operations: Electro-Optical 85,000 85,000 266,092 Turbomachinery 59,970 56,711 61,894 Total identifiable assets $574,659 $596,553 $911,828
Depreciation and amortization Morse Controls $ 7,374 $ 6,775 $ 7,737 Pumps, Power Transmission & Instrumentation 9,820 9,449 9,388 Other 826 3,435 4,622 Corporate 3,973 3,516 2,499 Total depreciation and amortization $ 21,993 $ 23,175 $ 24,246
Capital expenditures Morse Controls $ 4,042 $ 4,907 $ 5,638 Pumps, Power Transmission & Instrumentation 4,586 4,065 5,055 Other 68 1,069 982 Corporate 510 352 3,282 Total capital expenditures $ 9,206 $ 10,393 $ 14,957
The continuing operations of the Company on a geographic basis are as follows:
Year Ended December 31 (Dollars in thousands) 1994 1993 1992
Net sales United States $246,601 $307,918 $344,808 Foreign (principally Europe) 217,290 186,265 228,375 Total net sales $463,891 $494,183 $573,183
Segment operating income United States $ 31,679 $ 26,046 $ 8,451 Foreign 12,179 (1,193) 7,104 Total segment operating income $ 43,858 $ 24,853 $ 15,555
Identifiable assets Continuing Operations: United States $254,261 $283,614 $408,297 Foreign 175,428 171,228 175,545 Discontinued Operations: United States 141,053 135,585 322,827 Foreign 3,917 6,126 5,159 Total identifiable assets $574,659 $596,553 $911,828
Export sales Asia $ 2,763 $ 4,362 $ 5,547 Latin America 2,368 1,699 4,202 Canada 3,748 3,132 7,280 Mexico 861 701 530 Europe 2,857 2,750 5,505 Other 3,293 2,596 3,474 Total export sales $ 15,890 $ 15,240 $ 26,538
Note 12 Pension Plans
The Company and its subsidiaries have various pension plans covering substantially all of their employees. Benefits are based on either years of service or years of service and average compensation during the years immediately preceding retirement. Pension expense was $7.9 million in 1994, $8.4 million in 1993 and $8.7 million in 1992, and includes amortization of prior service cost and transition amounts for periods of 6 to 13 years. 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 4). The Company included a $1.9 million curtailment loss in its estimated loss on disposal related to the discontinued operation in 1993. It is the general policy of the Company to fund its pension plans in conformity with requirements of applicable laws and regulations. Pension expense (including $5.7 million, $4.5 million and $3.9 million charged to discontinued operations in 1994, 1993 and 1992, respectively) is comprised of the following:
Year Ended December 31 (Dollars in thousands) 1994 1993 1992
Service cost $ 7,237 $ 7,678 $ 7,526 Interest cost on projected benefit obligation 14,158 13,802 14,271 Actual return on plan assets (449) (22,646) (10,620) Net amortization and deferral (12,963) 9,567 (2,452) Net pension expense $ 7,983 $ 8,401 $ 8,725
Assumptions used in the accounting for the Company-sponsored defined benefit plans:
Year Ended December 31 1994 1993 1992
Weighted average discount rate 8.5% 7.5% 8.0% 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) 1994 1993 Assets Accumulated Assets Accumulated Exceed Benefits Exceed Benefits Accumulated Exceed Accumulated Exceed Benefits Assets Benefits Assets Actuarial present value of benefit obligations: Vested benefit obligation $101,869 $ 60,492 $102,819 $ 62,394 Accumulated benefit obligation $105,020 $ 61,253 $107,089 $ 63,428 Projected benefit obligation $119,886 $ 62,661 $128,485 $ 64,432 Plan assets at fair value 127,850 47,542 135,616 49,326 Plan assets in excess of (less than) projected benefit obligation 7,964 (15,119) 7,131 (15,106) Unrecognized net (gain) or loss (5,897) (175) (1,300) 1,752 Prior service cost not yet recognized in net periodic pension cost 4,066 3,348 4,779 3,524 Unrecognized net (asset) obligation at transition 3,407 821 4,198 1,251 Adjustment required to recognize minimum liability _ (4,165) _ (6,507) Pension asset (liability) recognized in the balance sheet $ 9,540 $ (15,290) $ 14,808 $(15,086)
Plan assets at December 31, 1994, 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 a defined contribution (Employees Stock Savings) plan covering substantially all domestic, non-union employees. Eligible employees may generally contribute from 1% to 12% of their compensation on a pretax basis. The Company's historical matching percentage is 50% of the first 6% of each participant's pretax contribution. The employer matching contributions have been temporarily suspended since July 1992. The Company's expense was $1.8 million for 1992.
Note 13 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 December 1990, the FASB issued Statement No. 106, "Employer's Accounting for Postretirement Benefits Other Than Pensions," which requires the accrual method of accounting for postretirement benefits. The accumulated benefit obligation at transition of $44.5 million was recognized as a cumulative effect of a change in accounting principle net of $16.9 million of income taxes calculated in accordance with the FASB's Statement No. 109, "Accounting for Income Taxes" (See Note 8), and retroactively applied as of January 1, 1992. In prior years, the cost for life insurance benefits was recognized as premiums were paid and the cost of retiree health care was recognized when claims were paid.
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 Company expects to amortize associated reserves to income over the phase- out period at approximately $4 million per year. The Company does not anticipate a significant increase or decrease in cash requirements related to this change in policy during the phase-out period. The Company also increased the discount rate in 1994 to 8.5% from 7.5% in 1993 in line with the change in the overall economic environment. This change has an insignificant effect on the net periodic postretirement benefit cost.
The following tables set forth the plans' combined status reconciled with the amounts included in the consolidated balance sheet:
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
December 31 (Dollars in thousands) 1993 Life Medical Insurance Plans Plans Total
Accumulated postretirement benefit obligation: Retirees $ 28,134 $ 8,035 $ 36,169
Fully eligible active plan participants 6,130 1,200 7,330 Other active plan participants 3,750 520 4,270 38,014 9,755 47,769 Plan assets --- --- --- Unrecognized prior service cost --- --- --- Unrecognized net loss (3,693) (920) (4,613) Postretirement benefit liability recognized in the balance sheet $ 34,321 $ 8,835 $ 43,156
The 1994 accrued postretirement benefits amount is classified as follows; $2.2 million current liabilities, $30.9 million long-term liabilities, and $2.2 million in net assets of discontinued operations - noncurrent. For 1993, these amounts are $2.2 million, $33.2 million and $7.8 million, respectively.
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 4).
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 estimated 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) 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 1994 and 1993 health care costs. It is expected that the annual increase in medical costs will be 13.5% from 1994 to 1995, grading down in future years by .5% per year until it reaches a future general medical inflation level of 6%. 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 by $1.7 million at beginning of year 1994 and the net periodic cost by $.1 million for the year. The weighted average discount rate used in determining the accumulated postretirement benefit obligation was 8.5% and 7.5% in 1994 and 1993, respectively.
Note 14 Leases
The Company leases certain manufacturing and office facilities, equipment, and automobiles under long-term leases. Future minimum rental payments required under operating leases of continuing operations that have initial or remaining noncancelable lease terms in excess of one year, as of December 31, 1994, are:
(Dollars in thousands) 1995 $ 5,100 1996 4,567 1997 3,433 1998 3,081 1999 1,505 Thereafter 3,503
Total minimum lease payments $ 21,189
Total rental expense under operating leases charged against continuing operations was $8.9 million in 1994, $9.3 million in 1993 and $10.9 million in 1992.
Note 15 Contingencies
In August 1985, the Company was named as defendant in a lawsuit filed by Long Island Lighting Company ("LILCO"). The action stemmed from the sale of three diesel generators to LILCO for use at its Shoreham Nuclear Power Station. During testing of the diesel generators, the crankshaft of one of the diesel generators severed. The Company's insurers have defended the action under a reservation of rights.
On April 10, 1991, a jury, in a trial limited to liability, in the U.S. District Court in the Southern District of New York, found that the warranty was in effect from the time of shipment of the diesel generators until July 1986. On July 22, 1992, the trial court entered a judgment in the amount of $18.3 million which included interest to the judgment date.
On September 22, 1993, the Second Circuit Court of Appeals affirmed all lower court decisions in this matter. On October 25, 1993, the judgment against the Company was satisfied by payment to LILCO of approximately $19.3 million by two of the Company's insurers.
In late June 1992, the Company filed an action in the United States District Court for the Northern District of California against one of its insurers in an attempt to collect amounts for defense costs paid to counsel retained by the Company in defense of the LILCO litigation. The insurer has refused to reimburse the Company for approximately $8.5 million in defense costs paid by the Company alleging that defense costs above reasonable levels were expended in defending this litigation. Upon motion by the defendant this action has now been transferred to the Southern District of New York and assigned to one of the judges who heard the underlying LILCO trial.
In January 1993, the Company was served with a complaint in a case brought in United States District Court for the Northern District of California by another insurer alleging that the insurer was entitled to recover $10 million in defense costs previously paid in connection with the LILCO matter and $1.2 million of the judgment which was paid on behalf of the Company. The complaint alleges inter alia that the insurer's policies did not cover the matters in question in the LILCO case. In connection with this matter, the Company filed a counterclaim against the insurer seeking payment of $8.5 million in defense costs that the Company previously paid in connection with the LILCO litigation. On January 25, 1995, the Court entered a judgment, based on its December 15, 1994 memorandum and order, dismissing the Company's counterclaim, denying the Company's Motion for Summary Judgment, and finding sua sponte that there was no coverage under the insurer's policy for the LILCO matter. On February 8, 1995, the Company filed an Application for Leave to File Motion for Reconsideration of the Judgment which was subsequently denied. The Company also filed a Notice of Appeal with the Ninth Circuit Court of Appeals. Subsequent to entry of the District Court Judgment, the insurer moved to have the judgment modified to award the insurer the $10 million defense costs and $1.2 million indemnity payment. The Company has filed a motion in opposition to this motion. Oral arguments relating to this motion were held on February 24, 1995 and the Company is awaiting the District Court's decision.
The Company and one of its subsidiaries are two of a large number of defendants in a number of lawsuits brought by approximately 13,500 claimants who allege injury caused by exposure to asbestos. Although the Company and its subsidiary have never been producers or direct suppliers of asbestos, it is alleged that the industrial and marine products sold by the Company and the subsidiary had components which contained asbestos. The allegations state a claim for asbestos exposure when Company-manufactured equipment was maintained or installed. Suits against the Company have been tendered to its insurers who are defending under their stated reservation of rights. The insurers for the subsidiary are being identified and have been and will be provided notice. 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, are the focus of an ongoing investigation by the Office of the Inspector General of the United States Department of Defense and the Department of Justice (Criminal Division). On July 16, 1992, Ni-Tec received a subpoena for certain records as a part of the investigation, which subpoena has been responded to. Additional subpoenas for additional documents were received in September 1992, February 1993, and March 1994. The Company responded to the September and March subpoenas and the government subsequently withdrew the February subpoena. The investigation appears directed at 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. The Company continues to cooperate fully with the investigation.
The Securities and Exchange Commission (the "Commission") is conducting an inquiry into, among other things, certain accounting practices at Ni-Tec and the 1991 and 1992 fiscal year financial reporting by the Company with respect thereto. The Commission has sought certain information from the Company relating to such inquiry and the Company has cooperated with this request. This inquiry has been dormant since August 1994.
The Company was notified in August 1994 that its Electro-Optical operations are being investigated by the United States Attorney for the District of Columbia. The investigation concerns the appropriateness of certifications submitted by Company personnel regarding its contracts with the Arab Republic of Egypt that were funded by the United States Government. In connection with this investigation, the Company has received and has responded to a subpoena issued by the Grand Jury for the District of Columbia.
Regarding environmental matters, 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 United States Environmental Protection Agency, and in one instance the State of Washington, alleging that because various of its divisions had arranged for the disposal of hazardous wastes at a number of facilities that have been targeted for clean-up pursuant to the Comprehensive Environmental Response Compensation and Liability Act ("CERCLA") or similar State law. Although CERCLA and corresponding State law liability is joint and several, the Company believes that its liability will not have a material adverse effect on the financial condition of the Company since it believes that it either qualifies as a de minimis or minor contributor at each site. Accordingly, the Company believes that the portion of remediation costs that it will be responsible for will therefore not be material. For additional information see section entitled Environmental Matters in Part I, Item 1 of this Form 10-K Report.
The Company is a defendant in an action filed in the United States District Court for the Middle District of Louisiana brought by Gulf States Utilities Company ("GSU"). The complaint alleges that the Company breached its contract for the sale of two emergency diesel generators delivered to GSU's River Bend Nuclear Generating Station in 1981 and 1982. GSU alleges that it has incurred a loss of $8 million and claims additional amounts for the use of money and an equitable adjustment of the purchase price. In July 1992, the District Court for the Middle District of Louisiana granted the Company's motion for Summary Judgment dismissing GSU's claims. In November 1993, the Fifth Circuit Court of Appeals reversed and remanded the case for trial. The ruling eliminated the Company's statute of limitations defense, but preserved all other defenses. In February 1995, a settlement of this matter was tentatively reached requiring a $1.8 million payment by the Company to GSU.
The Company also has one other lawsuit pending against it relating to equipment sold by its former diesel engine division and a lawsuit relating to performance shortfalls in products delivered by its Delaval Turbine Division in a prior year.
With respect to the litigation and claims described in the preceding paragraphs, it is management's opinion that the Company either expects to prevail, has adequate insurance coverage or has established appropriate reserves to cover potential liabilities; however, the ultimate outcome of any of these matters is indeterminable at this time.
In addition, the Company is involved in various other pending legal proceedings arising out of the Company's business. The adverse outcome of any of these legal proceedings is not expected to have a material adverse effect on the financial condition of the Company. However, if all or substantially all of these legal proceedings were to be determined adversely to the Company, which is viewed by the Company as only a remote possibility, there could be a material adverse effect on the financial condition of the Company.
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.
REPORT OF ERNST & YOUNG LLP, 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, 1994 and 1993, and the related consolidated statements of income, cash flows and shareholders' equity (deficit) for each of the three years in the period ended December 31, 1994. 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 also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Imo Industries Inc. and subsidiaries at December 31, 1994 and 1993, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1994, 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.
As discussed in Note 13 to the financial statements, in 1992 the Company changed its method of accounting for postretirement benefits other than pensions.
ERNST & YOUNG LLP Princeton, New Jersey February 15, 1995
Imo Industries Inc. and Subsidiaries Quarterly Financial Information (Unaudited)
Quarterly financial information for 1994 and 1993 is as follows: (Dollars in thousands except per share amounts) 1st* 2nd* 3rd 4th 1994 (a) Quarter Quarter Quarter Quarter
Net sales $110,742 $123,230 $113,421 $116,498 Gross profit 31,200 33,799 31,629 34,165 Income (loss) before extraordinary item: Continuing operations 511 (12) 2,051 1,105 Discontinued operations 394 1,764 737 2,680 Extraordinary item --- --- (5,299) --- Net income (loss) 905 1,752 (2,511) 3,785 Earnings (loss) per share: Before extraordinary item: Continuing operations .03 --- .12 .07 Discontinued operations .02 .10 .04 .15 Extraordinary item --- --- (.31) --- Net income (loss) .05 .10 (.15) .22
1st* 2nd* 3rd* 4th* 1993 (a) Quarter Quarter Quarter Quarter
Net sales $132,868 $131,643 $117,546 $112,126 Gross profit 37,571 39,557 35,251 32,136 Income (loss) before extraordinary income: Continuing operations (1,807) 1,861 347 (40,488) Discontinued operations (619) (111) (6,584) (205,070) Extraordinary item --- (11,219) (6,876) --- Net income (loss) (2,426) (9,469) (13,113) (245,558) Earnings (loss) per share: Before extraordinary item: Continuing operations (.11) .11 .02 (2.39) Discontinued operations (.03) (.01) (.39) (12.13) Extraordinary item --- (.66) (.41) --- Net income (loss) (.14) (.56) (.78) (14.52)
(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 1994 full year presentation.