10-Q 1 a2089343z10-q.txt 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 ---------------------- FORM 10-Q /X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended July 27, 2002 or / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from_________to_________ Commission file number 1-4737 ---------------------- HIGH VOLTAGE ENGINEERING CORPORATION (Exact name of registrant as specified in its charter) MASSACHUSETTS (State or other jurisdiction of incorporation) 04-2035796 (I.R.S. Employer Identification No.) 401 Edgewater Place, Suite 680, Wakefield, MA 01880 (Address of principal executive offices) (Zip code) Registrant's telephone number, including area code (781) 224-1001 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. (1) Yes /X/ No / / (2) Yes / / No /X/ Number of Common Shares outstanding at September 16, 2002: 1,082.7429 shares. CONTENTS PART I - FINANCIAL INFORMATION ITEM 1. - FINANCIAL STATEMENTS

2 PART I FINANCIAL INFORMATION ITEM 1. - FINANCIAL STATEMENTS HIGH VOLTAGE ENGINEERING CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Dollars in Thousands)

See accompanying notes to consolidated financial statements. 3 HIGH VOLTAGE ENGINEERING CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (Dollars in Thousands, Except Per Share Data)

See accompanying notes to consolidated financial statements. 4 HIGH VOLTAGE ENGINEERING CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIENCY (Dollars in Thousands)

See accompanying notes to consolidated financial statements. 5 HIGH VOLTAGE ENGINEERING CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in Thousands)

6 HIGH VOLTAGE ENGINEERING CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in Thousands)

See accompanying notes to consolidated financial statements. 7 HIGH VOLTAGE ENGINEERING CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in Thousands, Except Per Share Data) (Unaudited) NOTE 1 - BASIS OF PRESENTATION The consolidated financial statements of High Voltage Engineering Corporation and subsidiaries (the "Company") include the accounts of the Company and its domestic and foreign subsidiaries after all significant intercompany balances and transactions have been eliminated in consolidation. The consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC") and, in the opinion of management, include all adjustments, which are of a normal and recurring nature, necessary to fairly present the financial position for the interim periods presented. The Company operates on a 52 or 53 week fiscal year. The results of operations for the three months ended July 27, 2002 and July 28, 2001 are for 13 week periods, respectively. The terms "fiscal 2003", and "fiscal 2002" refer to the Company's fiscal years ended April 26, 2003, and April 27, 2002, respectively. The consolidated financial statements do not contain all disclosures included in financial statements normally prepared in accordance with accounting principles generally accepted in the United States of America pursuant to SEC rules and regulations. These consolidated financial statements should be read in conjunction with the consolidated financial statements of the Company as of and for the fiscal year ended April 27, 2002, as filed with the SEC on July 30, 2002, and are not necessarily indicative of the results that may be expected for the year ending April 26, 2003. Liquidity The ability of the Company to satisfy its obligations under existing indebtedness and preferred stock will be primarily dependent upon the future financial and operating performance of its operating units and upon the Company's ability to renew or refinance borrowings, to sell assets or to raise additional equity capital as necessary. The Company expects it will be able to refinance any principal payment obligations that are scheduled to mature prior to maturity of the 1998 Senior Notes. Reclassification Certain reclassifications have been made to the fiscal 2002 consolidated financial statements in order to conform with the current year's presentation. NOTE 2 -- INVENTORIES Inventories consisted of the following as of:

8 HIGH VOLTAGE ENGINEERING CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Dollars in Thousands, Except Per Share Data) (Unaudited) NOTE 3 - CONTINGENCIES In March 1998, the Company's subsidiary, Robicon Corporation and subsidiary, ("Robicon") initiated litigation against Toshiba International Corporation ("Toshiba") in the U.S. District Court for the Western District of Pennsylvania alleging infringement of one of Robicon's Perfect Harmony patents. In June 1998, Toshiba filed suit against Robicon and several other defendants in the U.S. District Court for the Southern District of Texas alleging, among other things, that Robicon is infringing a patent held by Toshiba and requested a declaratory judgment that Robicon's patent, which is the subject of the Pennsylvania action, is invalid. In March 1999, the Texas District Court dismissed without prejudice all claims except the alleged patent infringement by Robicon and the request for declaratory judgment. These claims were then transferred to the Western District of Pennsylvania. On November 29, 1999, the Pennsylvania district court granted Robicon's motion to dismiss Toshiba's patent infringement claim against Robicon. The only remaining transferred claim is Toshiba's request for declaratory judgment. There has been no substantive change in the status of this litigation. Certain other claims, suits and complaints have been filed or are pending against the Company. In the opinion of the Company, all such matters are without merit or are of such kind, or involve such amounts, as would not have a material effect on the consolidated financial position or the results of operations of the Company if resolved unfavorably to the Company. If estimates change, there is no assurances these items will not require additional accruals by the Company. 9 HIGH VOLTAGE ENGINEERING CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Dollars in thousands, Except Per Share Data) (Unaudited) NOTE 4 - SEGMENT DATA The Company operates in three industry segments. Each segment operates independently with its own management team and manufacturing facilities and maintains its own independent market identity. The Industrial Power Control segment includes Ansaldo Sistemi Industriali S.p.A. ("ASI") and Robicon, together operated as "ASIRobicon". The Advanced Surface Analysis segment has two main components, equipment sales and analytical services. The segment consists of Physical Electronics, Inc. and subsidiaries ("PHI") and High Voltage Engineering Europa, B.V. ("HVE Europa") together operated as "Phymetrics". The third industry segment, Customized Monitoring Instrumentation, reflect the results of operations of Maxima Technologies, Inc. and subsidiaries ("Maxima"). The Company evaluates the performance of each segment on its ability to generate cash. Information concerning operations in these businesses is as follows:

On April 28, 2002, the Company ceased recording amortization of goodwill pursuant to SFAS No. 142. Goodwill amortization recorded during the first quarter of fiscal 2002 was $712. 10 HIGH VOLTAGE ENGINEERING CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Dollars in Thousands, Except Per Share Data) (Unaudited) NOTE 4 - SEGMENT DATA (Continued) The following represents the supplemental consolidating balance sheet for the Company's restricted and unrestricted subsidiaries at July 27, 2002.

11 HIGH VOLTAGE ENGINEERING CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Dollars in Thousands, Except Per Share Data) (Unaudited) NOTE 4 - SEGMENT DATA (Continued) The following represents the supplemental consolidating statement of operation for the Company's restricted and unrestricted subsidiaries for the three months ended July 27, 2002.

12 HIGH VOLTAGE ENGINEERING CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Dollars in Thousands, Except Per Share Data) (Unaudited) NOTE 4 - SEGMENT DATA (Continued) The following represents the supplemental consolidating balance sheet for the Company's restricted and unrestricted subsidiaries at July 28, 2001.

13 HIGH VOLTAGE ENGINEERING CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Dollars in Thousands, Except Per Share Data) (Unaudited) NOTE 4 - SEGMENT DATA (Continued) The following represents the supplemental consolidating statement of operation for the Company's restricted and unrestricted subsidiaries for the three months ended July 28, 2001.

14 HIGH VOLTAGE ENGINEERING CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Dollars in Thousands, Except Per Share Data) (Unaudited) NOTE 5 - ACCUMULATED OTHER COMPREHENSIVE (LOSS) The after-tax components of accumulated other comprehensive income (loss) are as follows:

Foreign subsidiaries primarily use the local currency as their functional currency, except for those in highly inflationary economies. Assets and liabilities of these entities are translated into U.S. dollars at rates of exchange in effect at the balance sheet date. The resulting translation adjustments are accumulated in a separate component of stockholders' deficiency and are included in operations only upon the sale or liquidation of the underlying foreign investment. Revenue and expense transactions are translated at the weighted average exchange rates for the fiscal month in which the transaction occurred. Also included are the effects of exchange rate changes on intercompany balances of a long-term investment nature. NOTE 6 - GAIN ON SALE OF ASSETS HELD FOR SALE On June 14, 2002, the Company sold a former manufacturing facility located in Brighton, Massachusetts for $9,180 of gross proceeds. Net proceeds of $8,000 from the asset sale were deposited in a restricted account pursuant to the New Revolving Credit Facility Agreement for the purpose of applying the proceeds to the semi-annual interest payment due under the Company's Senior Notes. In connection with the above the Company recorded a gain on the asset sale of $5,700. NOTE 7 - NEW ACCOUNTING PRONOUNCEMENTS In July 2002, FASB issued SFAS No. 146 "Accounting for Costs Associated with Exit or Disposal Activities", which becomes effective January 2003. SFAS No. 146 requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of commitment. Adoption of SFAS No. 146 is not expected to have a material impact on the Company's financial statements. 15 HIGH VOLTAGE ENGINEERING CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Dollars in Thousands, Except Per Share Data) (Unaudited) NOTE 7 - NEW ACCOUNTING PRONOUNCEMENTS (Continued) In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB 13, and Technical Corrections", which is effective for fiscal years beginning after May 15, 2002. Upon adoption of SFAS No. 145, companies will be required to apply the criteria in APB Opinion No. 30, "Reporting the Results Operations - Reporting the Effects of Disposal of a Segment of a Business and Extraordinary, Unusual and Infrequently Occurring Events and Transactions" in determining the classification of gains/losses resulting from the extinguishment of debt shall be classified under the criteria in APB Opinion No. 30. Adoption of SFAS No. 145 is not expected to have a material impact on the Company's financial statements. In August 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS No. 144"), Accounting for the Impairment or Disposal of Long-Lived Assets, which supersedes SFAS No. 121. SFAS No. 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets and is effective for fiscal years beginning after December 15, 2001. Effective April 28, 2002, the Company adopted the provisions of SFAS No. 144. Adoption is not expected to have a material impact on the Company's financial statements. In June 2001, the FASB issued SFAS No. 141, Business Combinations, and SFAS No. 142, Goodwill and Intangible Assets. SFAS No. 141 is effective for all business combinations completed after June 30, 2001. SFAS No. 142 is effective for fiscal years beginning after December 15, 2001; however, certain provisions of this statement apply to goodwill and other intangible assets acquired between July 1, 2001 and the effective date of SFAS No. 142. Major provisions of these statements and their effective dates for the Company are as follows: (i) all business combinations initiated after June 30, 2001 must use the purchase method of accounting; (ii) under certain conditions intangible assets acquired in a business combination must be recorded separately from goodwill; (iii) goodwill and intangible assets with indefinite lives acquired after June 30, 2001, will not be amortized. Effective April 28, 2002, the Company adopted the provisions of SFAS No. 141 and SFAS No. 142. Adoption is not expected to have a material impact on the Company's financial statements. Goodwill amortization during the first quarter of fiscal 2002 was $712. 16 ITEM 2.--MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Except as otherwise indicated, the following discussion relates to the Company on a historical basis without giving effect to certain acquisitions completed by the Company. This report may make forward-looking statements regarding future events or the future financial performance of the Company. We caution you that these statements are only predictions and that actual events or results may differ materially. We refer you to documents the Company files from time to time with the Securities and Exchange Commission. This document identifies and describes important factors that can cause the after-results to differ materially from those contained in any forward looking statements we may make. The following discussion should be read in conjunction with the consolidated financial statements and notes thereto contained elsewhere in this document. The consolidated financial statements of the Company include the accounts of High Voltage Engineering Corporation and its subsidiaries after elimination of material inter-company transactions and balances. As used in this filing, the terms "fiscal 2003" and "fiscal 2002" refer to the Company's fiscal years ended April 26, 2003 and April 27, 2002, respectively. The Company operates on a 52 or 53 week fiscal year. The three months ended July 27, 2002 and July 28, 2001 include the results of operations of the Company for 13 week periods, respectively. Seasonality; Variability Operating Results The majority of the Company's operating units have historically recorded the strongest operating results in the fourth quarter of the fiscal year due in part to seasonal considerations and other factors. The timing of orders placed by the Company's customers has varied with, among other factors, the introduction of new products, product life cycles, customer attempts to manage inventory levels, competitive conditions, general economic conditions and the availability of funding for scientific and educational research. The variability of the level and timing of orders has, from time to time, resulted in significant periodic and quarterly fluctuations in the operations of the Company's operating units. Results of Operations Consolidated Net sales for the first quarter of fiscal 2003 were $94.9 million, which was an increase of $147 or 0.2% from the same period in fiscal 2002. The Company reported a net loss of $1.8 million for the first quarter of fiscal 2003 compared to a net loss of $9.5 million for the same period in fiscal 2002. The primary differences in the decrease in net loss for the first quarter of fiscal 2003 as compared to the same period in fiscal 2002 were: (i) gain on sale of assets held for sale in the amount $5.7 million (ii) lower sales volume due to the depressed semiconductor market, served by the Advanced Surface Analysis Segment, continued weakness in the off-highway equipment, heavy truck and specialty vehicles markets served by the Customized Monitoring Instrumentation Segment, (ii) offset by higher margins in the Industrial Power Control segment (iii) decrease in amortization expense, and (iv) a decrease of foreign tax provisions. 17 Segment Analysis: Three Months Ended July 27, 2002 Compared to Three Months Ended July 28, 2001 The Industrial Power Control Segment reported net sales of $69.8 million for the first quarter of fiscal 2003, an increase of $6.9 million or 10.9% from the same period in fiscal 2002. Robicon's net sales increased $11.8 million or 57.9% during the first quarter of fiscal 2003 compared to the same period in fiscal 2002. This increase in net sales was primarily attributable to the increased volume in the medium voltage product line due to stronger energy and utility markets combined with an increase in the low voltage product line. Net sales for ASI decreased $4.9 million or 11.6% during the first quarter of fiscal 2003 compared to the same period in fiscal 2002. The decrease for ASI can be attributed to (i) delays in customer acceptance and timing of shipments including delays in plant commissioning, primarily in metals markets as well as; (ii) weak business conditions in shorter lead time products for industrial markets, as compared to the stronger business conditions particularly on larger products during the holiday shutdown period in European and certain other international markets during the first quarter of fiscal 2002. Backlog at ASI has increased $30.0 million or 24.0% to $154.9 million compared to the backlog at April 27, 2002 of $124.8 million reflecting a strong order book for motors, drive systems and a large metals order during the first quarter of fiscal 2003. The backlog in U.S. dollars has also been positively impacted by the stronger euro. Backlog at Robicon decreased $1.1 million or 1.9% to $56.6 million compared to backlog at April 27, 2002 of $57.7. Operating income for the segment increased $3.0 million to $2.4 million during the first quarter of fiscal 2003 compared to an operating loss of $0.7 million during the same period in fiscal 2002. This increase in operating income was primarily due to improved gross margins which improved $5.9 million or 48.8% to $18.0 million during the first quarter of fiscal 2003 compared to the same period in fiscal 2002. Robicon's gross margin improved $6.0 million as a result of higher sales volume, material cost reductions and efficiencies of higher production. ASI's gross margin decreased by $95,000 but improved in gross margin percentage by 2.1% due to the benefits of the restructuring carried out during fiscal 2001, improved product mix with increased service revenue and more selective contract management improved the profitability of the company. The improved gross margin was offset by increases in operating expenses due to higher sales commissions, investment in sales channel development and organization infrastructure development. The Advanced Surface Analysis Segment reported net sales of $11.5 million for the first quarter of fiscal 2003, which is a decrease of $7.1 million or 38.3% compared to the first quarter of fiscal 2002. Equipment sales, which includes PHI and HVE Europa, declined $6.0 million or 48.7% to $6.3 million during first quarter of fiscal 2003 compared to the first quarter of fiscal 2002. The decrease is the result of the severely depressed conditions in the semiconductor markets and weakness in the worldwide market for electronics and other markets in the U.S. This has resulted in many companies reducing capital expenditures. Operating loss increased $2.0 million to $3.1 million for the first quarter of fiscal 2003 compared to the fist quarter of fiscal 2002. The increase in the operating loss was comprised of: (i) a decrease in gross margin primarily due to lower sales volume; (ii) a decrease in affiliate income; (iii) offset by reduced severance costs and; (iv) lower operating expenses due to lower headcount and lower goodwill amortization costs related to the adoption of SFAS No. 142. The Company is continuing to implementing cost reduction plans that have resulted in reduced headcount, greater focus on the semiconductor industry, outsourcing of certain subassemblies and reduction of certain variable costs helping to offset the reduced gross margin. 18 The Customized Monitoring Instrumentation Segment reported net sales of $13.6 million during the first quarter of fiscal 2003, which was an increase of $0.4 million or 3.1% compared to the first quarter of fiscal 2002. This segment continues to experience weakness in its OEM and distribution channels in all major markets. New product introductions such as the digital tachometer combination tachometer/speedometer and instrument clusters partially offset the weakness in traditional product sales. The focus for turnaround and growth is in development of new electronic products for distribution and OEM markets and the attainment of new programs from major OEM customers. Operating income increased $0.6 million to $1.2 million during the first quarter of fiscal 2003 as compared to the first quarter of fiscal 2002. The increase in the operating income is primarily the result of cost containment in the areas of headcount and material cost. Maxima has made major investments during fiscal 2002 to position itself for the coming years. These investments include a Surface Mount Technology (SMT) based production line for assembly of electronic circuits (screen printer, component pick and place, axial component insertion, re-flowoven, wave solder and in-circuit test system). In addition, Maxima has invested in "pockets of automation" for mistake-proofing and productivity improvements. Liquidity and Capital Resources The Company's liquidity needs are primarily for working capital, capital expenditures and debt service. The Company's primary sources of liquidity have been funds provided by operations, proceeds from the sale of discontinued operations and asset sales, and proceeds from financing activities. The Company has made significant acquisitions, which are inherently subject to risk. The successful integration of the acquired operations and the substantial demands on the attention of senior management may adversely impact their ability to manage the Company's existing businesses. The ability of the Company to satisfy its obligations under existing indebtedness and preferred stock will be primarily dependent upon the future financial and operating performance of its operating units and upon the Company's ability to renew or refinance borrowings, to sell assets or to raise additional equity capital as necessary. The Company expects it will be able to refinance any principal payment obligations that are scheduled to mature prior to maturity of the 1998 Senior Notes. From time to time, the Company achieves liquidity through receivables purchase arrangements with HV-FC, a limited purpose subsidiary of the Company. Under these arrangements, the domestic subsidiaries of the Company sell a defined pool of trade accounts receivables, and the related rights inherited from the Company and its domestic subsidiaries to HV-FC. HV-FC then sells participating interests in such assets to one or more third parties which, in turn, purchases and receives ownership and security interests in those assets. Under the Company's Senior Notes Indenture, the Company is limited to making investments in HV-FC of up to $25.0 million. While the Company is not currently utilizing these receivables purchase arrangements, the Company has retained the right to reinitiate these arrangements with HV-FC or another limited purpose subsidiary at any time. On June 14, 2002, the Company sold a former manufacturing facility located in Brighton, Massachusetts for $9.2 million of gross proceeds. Net proceeds of $8.0 million from the asset sale were deposited in a restricted account pursuant to the New Revolving Credit Facility Agreement for the purpose of applying the proceeds to the semi-annual interest payment due under the Company's Senior Notes. In connection with the above the Company recorded a gain on the asset sale of $5.7 million. The Company maintains a $25.0 million revolving credit facility ("New Revolving Credit Facility"). At July 27, 2002, $25.0 million was outstanding under the New Revolving Credit Facility Agreement. The Company also maintains certain foreign receivables facilities. Borrowings under these facilities are limited to the amount of certain foreign receivables. At July, 27, 2002, the Company had outstanding $11.1 million under its foreign receivables facilities. 19 As of July 27, 2002, the Company had total indebtedness (including redeemable put warrants and foreign receivables facilities) of $248.4 million and mandatory redeemable preferred stock with an aggregate liquidation preference of $57.9 million. The change in total indebtedness of $3.4 million as compared to $244.9 million at April 27, 2002 is the result of an net increase of $0.1 million in unrestricted subsidiary borrowings and $3.3 million net increase in restricted subsidiary borrowings. The Company's working capital was $53.4 million at July 27, 2002. The Company's cash flows provided by continuing operations were $82,000 during the first quarter of fiscal 2003 which includes $1.2 million cash interest payments and $0.8 million in state and foreign income tax payments, as compared to cash used in continuing operations of $24.8 million in the first quarter of fiscal 2002. The Company's principal source of liquidity is operating cash flows, including improvements in working capital turns, the refinancing of existing indebtedness and occasional asset sales. If there was further decrease in demand for the Company's products and services due to either economic or competitive conditions, there could be a reduction in liquidity due to (i) lower margins, since the Company might not be able to cut costs in the full amount of revenue decreases, (ii) lower working capital turns due to a longer inventory-to- receivables cycle time, or reduced customer advance progress payments, or slower receivable payments from customers, during such economic conditions, or (iii) reduced collateral available for financing due to lower, or overall older receivables held during such economic conditions or a period of reduced sales. The Company invested $2.9 million in capital expenditures during the first quarter of fiscal 2003 including $1.0 million at PHI for a planned new product Introduction and $0.9 million at ASI for facility improvements and investment in information technology. Critical Accounting Policies and Significant Judgments and Estimates The Company's discussion and analysis of its financial condition and results of operations are based on the Company's consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported revenues and expenses during the reporting periods. On an ongoing basis, management evaluates its estimates and judgments, including those related to revenue recognition, receivable reserves, inventory reserves, warranty reserves, goodwill and intangible assets and income taxes. Management bases its estimates on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. The significant accounting policies that management believes are most critical to aid in fully understanding and evaluating the Company's reported financial results include the following: Revenue Recognition Sales of goods that are not part of long-term contracts are generally recognized upon shipment of products, in accordance with SEC Staff Accounting Bulletin No. 101, Revenue Recognition. Service revenue is recognized when the service is performed and accepted by the customer. Product revenue is recognized when there is persuasive evidence of an arrangement, the fee is fixed or determinable, delivery of the product to the customer has occurred and the Company has determined that collection of the fee is probable. Title to the product generally passes upon shipment of the product as the products are shipped FOB shipping point, except for certain foreign shipments. If the product requires significant installation to be performed by the Company that is not perfunctory and inconsequential, such revenue related to the product is deferred and recognized upon the completion of the installation. The Company provides for a warranty reserve at the time the product's revenue is recognized. 20 The Company follows both the completed-contract method and the percentage-of completion methods of accounting for contract revenue. Contracts are considered complete upon completion of all essential contract work, including support for integrated testing and customer acceptance. Under the completed-contract method, revenue and costs of individual contracts are included in operations in the year during which they are completed. Losses expected to be incurred on contracts in progress are charged to operations in the period such losses are determined. The aggregate of costs of uncompleted contracts in excess of related billings is shown as a current asset, and the aggregate of billings on uncompleted contracts in excess of related costs is shown as a current liability. Under the percentage-of-completion method, income is recognized on contracts as work progresses based on the relationship between total contract revenues and total estimated contract costs. The percentage of work completed is determined by comparing the accumulated costs incurred to date with management's current estimate of total costs to be incurred at contract completion. Revenue is recognized on the basis of actual costs incurred plus the portion of income earned. Contract costs include all direct material, subcontractor costs, and labor costs and those indirect costs related to contract performance. Revisions in profit estimates during the period of a contract are reflected in the accounting period in which the revised estimates are made on the basis of the stage of completion at the time. If estimated total costs on a contract indicate a loss, the entire amount of the estimated loss is provided for currently. Costs and estimated earnings in excess of billings on uncompleted contracts represent revenue recognized in excess of amounts billed to customers. These amounts are not yet billable under the terms of the contracts and are recoverable from customers upon various measures of performance. Billings in excess of costs and estimated earnings on uncompleted contracts represents billings to customers in excess of earned revenue and advances on contracts. Accounts Receivable The Company reviews the financial condition of all new customers prior to granting credit. After completing the credit review, the Company establishes a credit line for each customer. Periodically, the Company reviews the credit line for all major customers and adjusts the credit limit based upon an updated financial condition of the customer, historical sales and payment information and expected future sales. The Company has a large number of customers; therefore, material credit risk is limited to only a small number of customers. The Company periodically reviews the collectibility of its accounts receivable. Provisions are established for accounts that are potentially uncollectible. Determining adequate reserves for accounts receivable requires management's judgments. Conditions impacting the collectibility of the Company's receivables could cause actual asset write-offs to be materially different than the reserved balances as of July 27, 2002. Inventory Obsolescence Inventories are primarily stated at the lower of cost (first-in, first-out method) or market. Certain inventories are stated at the lower of cost or market determined by the last-in, first-out (LIFO) method. The amount by which the replacement cost exceeds the LIFO value was not material at July 27, 2002. The Company's management is responsible for evaluating the historical and forecasted demand for the Company's products to determine if the carrying value of finished goods and raw materials is recoverable through future sales. The Company's management also estimates the impact of increased revenues for new products versus the potential obsolescence of older products on a case-by-case basis. Goodwill and Intangible Assets Purchase accounting requires extensive use of accounting estimates and judgments to allocate the purchase price to the fair market value of the assets purchased and liabilities assumed. The Company has accounted for its acquisitions using the purchase method of accounting. Values were assigned to goodwill and intangible assets based on third-party independent valuations, as well as management's forecasts and projections that include assumptions related to future revenues and cash flows generated from the acquired assets. 21 Effective April 28, 2002, the Company adopted the provisions of SFAS No. 142, Goodwill and Other Intangible Assets. This statement affects the Company's treatment of goodwill and other intangible assets. The statements require that goodwill existing at the date of adoption be reviewed for possible impairment and that impairment tests be periodically repeated, with impaired assets written down to fair value. Additionally, existing goodwill and intangible assets must be assessed and classified within the statement's criteria. Intangible assets with finite useful lives will continue to be amortized over those periods. Amortization of goodwill and intangible assets with indeterminable lives will cease. The Company is in the process of completing the first step of the transitional goodwill impairment test and will have it completed during the three months and quarter ended October 26, 2002 based on the amount of goodwill as of the beginning of the fiscal year, as required by SFAS No. 142. The Company is utilizing a third party independent valuation to determine the fair value of each of the reporting units based on a discounted cash flow income approach. Based on the results of the first step of the transitional goodwill impairment test, the Company will determine if the fair value of each of the reporting units exceeded their carrying amounts. The Company ceased in recording the amortization of goodwill on April 28, 2002 as required by SFAS No. 142. Goodwill amortization during the first quarter of fiscal 2002 was $0.7 million. Accounting for Income Taxes The preparation of the Company's consolidated financial statements requires it to estimate its income taxes in each of the jurisdictions in which it operates, including those outside the United States which may be subject to certain risks that ordinarily would not be expected in the United States. The income tax accounting process involves estimating its actual current exposure together with assessing temporary differences resulting from differing treatment of items, such as deferred revenue, for tax and accounting purposes. These differences result in the recognition of deferred tax assets and liabilities. The Company must then record a valuation allowance to reduce its deferred tax assets to the amount that is more likely than not to be realized. Significant management judgment is required in determining its provision for income taxes, its deferred tax assets and liabilities and any valuation allowance recorded against deferred tax assets. The Company had recorded a full valuation allowance against its deferred tax assets as of July 27, 2002, due to uncertainties related to its ability to utilize these assets. The valuation allowance is based on its estimates of taxable income by jurisdiction in which it operates and the period over which its deferred tax assets will be recoverable. In the event that actual results differ from these estimates or the Company adjusts these estimates in future periods it may need to adjust its valuation allowance which could materially impact its financial position and results of operations. 22 New Accounting Pronouncements In July 2002, FASB issued SFAS No. 146 "Accounting for Costs Associated with Exit or Disposal Activities", which becomes effective January 2003. SFAS No. 146 requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at he date of commitment. Adoption of SFAS No. 146 is not expected to have a material impact on the Company's financial statements. In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB 13, and Technical Corrections", which is effective for fiscal years beginning after May 15, 2002. Upon adoption of SFAS No. 145, companies will be required to apply the criteria in APB Opinion No. 30, "Reporting the Results Operations - Reporting the Effects of Disposal of a Segment of a Business and Extraordinary, Unusual and Infrequently Occurring Events and Transactions" in determining the classification of gains/losses resulting from the extinguishment of debt shall be classified under the criteria in APB Opinion No. 30. Adoption of SFAS No. 145 is not expected to have a material impact on the Company's financial statements. In August 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS No. 144"), Accounting for the Impairment or Disposal of Long-Lived Assets, which supersedes SFAS No. 121. SFAS No. 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets and is effective for fiscal years beginning after December 15, 2001. Effective April 28, 2002, the Company adopted the provisions of SFAS No. 144. Adoption is not expected to have a material impact on the Company's financial statements. In June 2001, the FASB issued SFAS No. 141, Business Combinations, and SFAS No. 142, Goodwill and Intangible Assets. SFAS No. 141 is effective for all business combinations completed after June 30, 2001. SFAS No. 142 is effective for fiscal years beginning after December 15, 2001; however, certain provisions of this statement apply to goodwill and other intangible assets acquired between July 1, 2001 and the effective date of SFAS No. 142. Major provisions of these statements and their effective dates for the Company are as follows: (i) all business combinations initiated after June 30, 2001 must use the purchase method of accounting; (ii) under certain conditions intangible assets acquired in a business combination must be recorded separately from goodwill; (iii) goodwill and intangible assets with indefinite lives acquired after June 30, 2001, will not be amortized. Effective April 28, 2002, the Company adopted the provisions of SFAS No. 141 and SFAS No. 142. Adoption is not expected to have a material impact on the Company's financial statements. 23 ITEM 3.--QUANTATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The primary market risks for the Company is interest rate risk and foreign currency risk. Other risks dealing with contingencies are described in Note Q to the Company's consolidated financial statements included under Item 8. Interest Rate Risk The Company's exposure to interest rate risk is limited to the Company's borrowing arrangements under the New Revolving Credit Facility, Term Loans and certain foreign bank and loan facilities. The interest rates on the Company's other long-term debt are fixed and primarily matures in 2004. The Company has not, to date, engaged in derivative transactions, such as interest rate swaps, caps or collars, in order to reduce it risk, nor does the Company have any plans to do so in the future. A 100 basis point increase in interest rates would have approximately a $350,000 negative impact on the earnings of the Company. Foreign Currency Risk The Company manufactures product in the U.S., Italy, The Netherlands, Spain Germany, France, England and Mexico and sells products worldwide. Therefore the Company's operating results are subject to fluctuations in foreign currency exchange rates, as well as the translation of its foreign operations into U.S. dollars. The risks associated with operating in foreign currencies could adversely affect the Company's future operating results. Additionally, currency fluctuations could improve the competitive position of the Company's foreign competition if the value of the U.S. Dollar rises in relation to the local currencies of such competition. The Company sometimes enters into forward exchange contracts to manage exposure related to certain foreign currency commitments, certain foreign currency denominated balance sheet positions and anticipated foreign currency denominated expenditures. All forward exchange contracts are designated as and effective as a hedge and are highly inversely correlated to the hedged item. If a derivative contract terminates prior to maturity, the investment is shown at its fair value with the resulting gain or loss reflected in operating results. Gains and losses on contracts to hedge identifiable foreign currency commitments are deferred and accounted for as part of the related foreign currency transaction. Gains and losses on all other forward exchange contracts are included in current income. PART II OTHER INFORMATION ITEM 1. - LEGAL PROCEEDINGS In March 1998, the Company's Robicon Corporation subsidiary initiated litigation against Toshiba International Corporation ("Toshiba") in the U.S. District Court for the Western District of Pennsylvania alleging infringement of one of Robicon's Perfect Harmony patents. In June 1998, Toshiba filed suit against Robicon and several other defendants in the U.S. District Court for the Southern District of Texas alleging, among other things, that Robicon is infringing a patent held by Toshiba and requested a declaratory judgment that Robicon's patent, which is the subject of the Pennsylvania action, is invalid. In March 1999, the Texas District Court dismissed without prejudice all claims except the alleged patent Infringement by Robicon and the request for declaratory judgment. These claims were then transferred to the Western District of Pennsylvania. On November 29, 1999, the Pennsylvania district court granted Robicon's Motion to dismiss Toshiba's patent infringement claim against Robicon. The only remaining transferred claim is Toshiba's request for declaratory judgment. There has been no substantive change in the status of this litigation. Certain other claims, suits and complaints have been filed or are pending against the Company. In the opinion of the Company, all such matters are without merit or are of such kind, or involve such amounts, as would not have a material effect on the consolidated financial position or the results of operations of the Company if resolved unfavorably to the Company. If estimates change, there is no assurances these items will not require additional accruals by the Company. 24 ITEM 2. - CHANGES IN SECURITIES None. ITEM 3. - DEFAULTS UPON SENIOR SECURITIES None. ITEM 4. - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. ITEM 5. - OTHER INFORMATION None. ITEM 6. - EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits None. (b) Reports on Form 8-K None. 25 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereto duly authorized. HIGH VOLTAGE ENGINEERING CORPORATION Dated: September 16, 2002 By: /s/ Joseph W. McHugh, Jr. ---------------------------------------- Joseph W. McHugh, Jr. Chief Financial Officer and Principal Accounting Officer 26

HIGH VOLTAGE ENGINEERING CORP 10-Q