AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 21, 1997
REGISTRATION NO. 333-31617
================================================================================
SECURITIES AND EXCHANGE COMMISSION
------------------------
AMENDMENT NO. 3
TO
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
------------------------
INNOVATIVE VALVE TECHNOLOGIES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
5085, 7699
(PRIMARY STANDARD INDUSTRIAL
CLASSIFICATION CODE NUMBERS)
DELAWARE 76-0530346
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
14900 WOODHAM DRIVE, SUITE A-125
HOUSTON, TEXAS 77073
(281) 821-9407
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
WILLIAM E. HAYNES
CHAIRMAN OF THE BOARD, PRESIDENT AND CHIEF EXECUTIVE OFFICER
INNOVATIVE VALVE TECHNOLOGIES, INC.
14900 WOODHAM DRIVE, SUITE A-125
HOUSTON, TEXAS 77073
(281) 821-9407
FAX: (281) 821-1123
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE
NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE)
------------------------
COPIES TO:
JAMES L. LEADER, ESQ. STEPHEN P. FARRELL, ESQ.
BAKER & BOTTS, L.L.P. MORGAN, LEWIS & BOCKIUS LLP
3000 ONE SHELL PLAZA 101 PARK AVENUE
HOUSTON, TEXAS 77002-4995 NEW YORK, NEW YORK 10178-0060
(713) 229-1234 (212) 309-6000
FAX: (713) 229-1522 FAX: (212) 309-6273
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon
as practicable after the Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
================================================================================
<PAGE>
******************************************************************************
* *
* INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A *
* REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED *
* WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT *
* BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE *
* REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT *
* CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR *
* SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH *
* OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR *
* QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. *
* *
******************************************************************************
SUBJECT TO COMPLETION, DATED OCTOBER 21, 1997
3,350,000 SHARES
INVATEC
COMMON STOCK
------------------
ALL OF THE SHARES OF COMMON STOCK, $.001 PAR VALUE PER SHARE ("COMMON
STOCK"), OFFERED HEREBY ARE BEING SOLD BY INNOVATIVE VALVE TECHNOLOGIES, INC.
("INVATEC").
PRIOR TO THIS OFFERING (THIS "OFFERING"), THERE HAS BEEN NO PUBLIC MARKET
FOR THE COMMON STOCK. IT IS CURRENTLY ESTIMATED THAT THE INITIAL PUBLIC OFFERING
PRICE WILL BE BETWEEN $11.00 AND $13.00 PER SHARE. SEE "UNDERWRITING" FOR A
DISCUSSION OF THE FACTORS INVATEC AND THE UNDERWRITERS WILL CONSIDER IN
DETERMINING THE INITIAL PUBLIC OFFERING PRICE. THE COMMON STOCK HAS BEEN
APPROVED FOR QUOTATION ON THE NASDAQ NATIONAL MARKET UNDER THE SYMBOL "IVTC."
SEE "RISK FACTORS" BEGINNING ON PAGE 7 OF THIS PROSPECTUS FOR A
DISCUSSION OF CERTAIN FACTORS PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED
HEREBY SHOULD CONSIDER.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
=======================================================================================================
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT(1) COMPANY(2)
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
PER SHARE............................ $ $ $
TOTAL(3)............................. $ $ $
=======================================================================================================
</TABLE>
(1) SEE "UNDERWRITING" FOR INFORMATION CONCERNING INDEMNIFICATION OF THE
UNDERWRITERS AND OTHER MATTERS.
(2) BEFORE DEDUCTING OFFERING EXPENSES PAYABLE BY INVATEC, ESTIMATED AT
$2,000,000.
(3) INVATEC HAS GRANTED THE UNDERWRITERS A 30-DAY OPTION TO PURCHASE UP TO
502,500 ADDITIONAL SHARES OF COMMON STOCK SOLELY TO COVER OVER-ALLOTMENTS,
IF ANY. IF THE UNDERWRITERS EXERCISE THIS OPTION IN FULL, THE TOTAL PRICE
TO PUBLIC, UNDERWRITING DISCOUNT AND PROCEEDS TO COMPANY WILL BE
$ , $ AND $ , RESPECTIVELY. SEE "UNDERWRITING."
------------------------
THE SHARES OF COMMON STOCK ARE OFFERED BY THE SEVERAL UNDERWRITERS NAMED
HEREIN, SUBJECT TO RECEIPT AND ACCEPTANCE BY THEM AND SUBJECT TO THEIR RIGHT TO
REJECT ANY ORDER IN WHOLE OR IN PART. IT IS EXPECTED THAT DELIVERY OF THE
CERTIFICATES REPRESENTING SUCH SHARES WILL BE MADE AGAINST PAYMENT THEREFOR AT
THE OFFICE OF NATIONSBANC MONTGOMERY SECURITIES, INC. ON OR ABOUT ,
1997.
NATIONSBANC MONTGOMERY SECURITIES, INC. FURMAN SELZ
, 1997
<PAGE>
[Invatec Logo]
Invatec was formed in 1997 to create the leading single-source provider of
comprehensive maintenance, repair, replacement and value-added distribution
services for industrial valves and related process-system components throughout
North America. The Company intends to be a leader in the consolidation of the
highly fragmented repair and distribution sectors of the North American
industrial valve industry by continuing to execute its aggressive acquisition
strategy and to implement its national operating program designed to increase
internal growth, market share and profitability. Immediately after this Offering
closes, Invatec will have combined seven businesses with 32 locations whose
revenues totaled approximately $76.2 million on a pro forma combined basis
during fiscal 1996.
[Graphic: Photograph of numerous installed gate valves.]
Certain persons participating in this Offering may engage in transactions
that stabilize, maintain or otherwise affect the price of the Common Stock. Such
transactions may include stabilizing, the purchase of Common Stock to cover
syndicate short positions and the imposition of penalty bids. For a description
of these activities, see "Underwriting."
2
<PAGE>
ON-SITE REPAIR SERVICES
[Graphic: Photograph of a process-system unit in operation.]
Invatec's trained crews are available to perform emergency and scheduled on-site
repair of valves and process-system components. For large-scale plant
turnarounds, Invatec uses its fleet of twenty-eight mobile machine shops to
perform work at customers' facilities.
NEW PRODUCT AND VALUE-ADDED DISTRIBUTION
[Graphic: Photograph of assorted valves and related parts in inventory.
Invatec's facilities maintain inventories of new valves and process-system
components. Many of these products are assembled, tested and certified by
Invatec technicians and can be customized to meet individual customer needs and
application requirements.
ON-LINE REPAIR SERVICES
[Graphic: Photograph of technician using hand-held tools in on-line valve repair
operations with the SafeSeal(TM) system.]
Invatec uses proprietary technology to repair leaking valve packings and
performs other repairs while a process system is on-line, thereby eliminating
the costs associated with product leakage and plant downtime.
IN-SHOP REPAIR SERVICES
[Graphic: Photograph of Invatec technician performing in-shop repair on a
valve.]
Invatec's seventeen repair centers are fully equipped to assemble, repair and
customize valves and related process-system components.
Invatec serves customers in the United States and Canada through 32 sales and
service offices. Its broad geographic presence, along with a comprehensive
offering of repair and value-added distribution services, enables Invatec to
serve large regional and national customers effectively.
[Graphic: Map of North America showing the locations of the Company's
facilities.]
* INVATEC CORPORATE OFFICE
Houston, Texas
* The Safe Seal Company, Inc.
Houston, Texas
Founded in 1991
* Plant Specialties, Inc.
Sulphur, Louisiana
Founded in 1972
* Harley Industries, Inc.
Tulsa, Oklahoma
Founded in 1937
* ICE/VARCO
Pittsburgh, Pennsylvania
Founded in 1981
* GSV, Inc.
Tampa, Florida
Founded in 1921
* Steam Supply/Flickinger Company
Seattle, Washington
Founded in 1915
* Southern Valve Service, Inc.
Mobile, Alabama
Founded in 1984
<PAGE>
PROSPECTUS SUMMARY
THE OFFERING MADE HEREBY (THIS "OFFERING") WILL CLOSE CONCURRENTLY WITH,
AND IS CONDITIONED ON, INVATEC ACQUIRING SOUTHERN VALVE SERVICE, INC. (TOGETHER
WITH A RELATED ENTITY, "SVS") AND INDUSTRIAL CONTROLS & EQUIPMENT, INC.
(TOGETHER WITH THREE RELATED ENTITIES, "ICE/VARCO") AND COMPLETING A MERGER IN
WHICH THE SAFE SEAL COMPANY, INC. ("SSI") WILL BECOME ITS SUBSIDIARY (THE
"SSI MERGER"). DURING 1997, INVATEC HAS PURCHASED STEAM SUPPLY & RUBBER CO.,
INC. (TOGETHER WITH THREE RELATED ENTITIES, "STEAM SUPPLY") (JULY) AND SSI HAS
PURCHASED HARLEY INDUSTRIES, INC. ("HARLEY") (JANUARY), GSV, INC. ("GSV")
(MARCH) AND PLANT SPECIALTIES INC. ("PLANT SPECIALTIES") (JUNE) (COLLECTIVELY
THESE SEVEN ACQUIRED BUSINESSES ARE SOMETIMES REFERRED TO AS THE "ACQUIRED
BUSINESSES"). SSI AND ITS SUBSIDIARIES ARE AFFILIATES OF INVATEC. UNLESS
OTHERWISE INDICATED BY THE CONTEXT, REFERENCES HEREIN TO (I) "INVATEC" MEAN
INNOVATIVE VALVE TECHNOLOGIES, INC., (II) THE "COMPANY" MEAN INVATEC AND THE
ACQUIRED BUSINESSES AND (III) A "FISCAL YEAR" MEAN A YEAR ENDED DECEMBER 31
FOR THE COMPANY AND TWO ACQUIRED BUSINESSES, A YEAR ENDED OCTOBER 31 FOR FOUR
ACQUIRED BUSINESSES AND A YEAR ENDED SEPTEMBER 30 FOR ONE ACQUIRED BUSINESS. THE
FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE DETAILED INFORMATION AND
FINANCIAL STATEMENTS, INCLUDING THE NOTES THERETO, APPEARING ELSEWHERE IN THIS
PROSPECTUS. UNLESS OTHERWISE INDICATED BY THE CONTEXT, THE INFORMATION IN THIS
PROSPECTUS (I) GIVES EFFECT TO (A) THE TRANSACTIONS REFERRED TO ABOVE (THE
"ACQUISITIONS") AND (B) REVERSE STOCK SPLITS OF THE OUTSTANDING COMMON STOCK
AND THE OUTSTANDING SSI COMMON STOCK EFFECTED IN CONNECTION WITH THIS OFFERING
AND (II) ASSUMES THE UNDERWRITERS DO NOT EXERCISE THEIR OVER-ALLOTMENT OPTION.
THE NUMBER OF SHARES OF COMMON STOCK INVATEC WILL ISSUE IN THE ACQUISITION OF
SVS AND THE SSI MERGER AND IN THE REPAYMENT OF CERTAIN INDEBTEDNESS AND FEES
WILL DEPEND ON THE INITIAL PUBLIC OFFERING PRICE OF THE COMMON STOCK IN THIS
OFFERING. ACCORDINGLY, THE DISCLOSURES HEREIN RELATING TO THOSE SHARES ARE
ESTIMATED ON THE BASIS OF AN ASSUMED INITIAL PUBLIC OFFERING PRICE OF $12.00 PER
SHARE (THE MIDPOINT OF THE ESTIMATED INITIAL PUBLIC OFFERING PRICE RANGE).
THE COMPANY
Invatec was formed in March 1997 to create the leading single-source
provider of comprehensive maintenance, repair, replacement and value-added
distribution services for industrial valves and related process-system
components (collectively, "repair and distribution services") throughout North
America. Industrial valves are used in petrochemical and chemical plants,
petroleum refineries, pulp and paper mills, electric and other utilities and
other industrial process facilities to direct and regulate the flow of
feedstocks, intermediates, products and fuels in process systems. The Company
intends to be a leader in the consolidation of the highly fragmented repair and
distribution sectors of the North American industrial valve industry by
continuing to execute its aggressive acquisition strategy and to implement its
national operating program designed to increase internal growth, market share
and profitability. Based on available market data, the Company believes there
are approximately 1,200 independent companies in these sectors, most of which
are small businesses operating in single geographic areas in proximity to their
customers. Immediately after this Offering closes, Invatec will have combined
seven businesses with 32 locations whose revenues totaled approximately $76.2
million on a pro forma combined basis during fiscal 1996.
Three broad sectors comprise the industrial valve industry: (i)
manufacturing; (ii) distribution; and (iii) repair services. Based on
management's knowledge of the industry, the Company believes that the
distribution and repair sectors of the industrial valve industry represent a
current worldwide annual market of approximately $20.6 billion, of which North
America accounts for approximately $9.2 billion, including approximately $3.7
billion attributable to repair services and approximately $5.5 billion
attributable to distribution and related services. On that same basis, the
Company also believes that (i) over 650 million industrial valves currently are
installed in North America, including more than 140 million rising stem valves
("RSVs") in various process industries, (ii) more than 370 million RSVs are in
use worldwide, (iii) substantially every RSV experiences at least one leak
during its operational life and (iv) between approximately 4 million and 7
million of the RSVs installed in North America are leaking at a rate requiring
repair or replacement at any one point in time.
Many of the Company's customers are large Fortune 500 industrial companies
and large utilities, including Amoco, Chevron, Florida Power Corporation, Dow
Chemical, DuPont and Union Carbide. The
3
<PAGE>
Company provides both on-line and off-line repair services for valves and other
process-system components. An on-line repair enables the valve and other
process-system components to continue to operate under pressure while the repair
is performed, and an off-line repair requires the temporary removal of the
damaged valve or other process-system components. The Company performs off-line
repairs both at the customer's plant and in the Company's repair facilities,
depending on the size and nature of the repair. In addition to its repair
business, the Company also engages in value-added distribution services, which
include (i) assembly of new valves, actuators and other components into packaged
systems for sale, (ii) rebuilding of previously used valves (other than safety
relief valves) to their original specifications for sale and (iii) testing and
certification of new and rebuilt valves and systems in accordance with the
specifications of its customers and manufacturers and applicable industry
standards. The Company also distributes a variety of other valves and related
parts and process-system components directly to end users and to other valve
service companies.
The Company believes demand for its products and services is driven by (i)
an overall increase in customer outsourcing of maintenance and repair work for
industrial valves, (ii) more restrictive fugitive emissions standards mandated
by recent changes in government regulations, (iii) the large existing population
of aged valves resulting from many industrial companies lengthening the period
of time between comprehensive maintenance projects (or "turnarounds") and
delaying construction of new plant facilities and other capital improvements and
(iv) a general trend among industrial companies to reduce the number of
distributors and service providers they utilize and are required to monitor. The
Company believes it is well positioned to meet the growing demand of its
customers for outsourced repair and value-added distribution services for
industrial valves and other process-system components. The Company's combination
of its repair and distribution services capabilities will allow it to become a
single-source provider of these services. The Company believes this combination
will (i) promote internal economies of scale, (ii) provide the Company with
valuable information that can be used to expand its future repair services
revenue base and (iii) better equip the Company to respond to problems
associated with the repair and upgrading of its customers' process-system valves
and other components.
The Company believes significant opportunities are available in the repair
and distribution services sectors of its industry to a well capitalized,
national company employing professionally trained service technicians and
machinists and providing a full complement of on-line, on-site and in-shop
repair services and value-added distribution services. It also believes the
fragmented nature of its industry will provide it with significant opportunities
to consolidate the capabilities and resources of a large number of existing
repair and distribution services businesses.
BUSINESS STRATEGY
The Company intends to become the leading North American provider of
comprehensive repair and distribution services by emphasizing growth through
acquisitions of other repair and distribution services businesses and
implementing a national operating strategy aimed at increasing internal growth
and market share and enhancing profitability. The Company's growth strategy will
focus on capitalizing on certain trends in its targeted industries, including
increased outsourcing, increased focus on reducing economic losses attributable
to leaking valves and increasingly more stringent regulatory requirements
applicable to process-system facilities.
GROWTH THROUGH ACQUISITIONS. The Company intends to continue the
aggressive acquisition program initiated by SSI to enter new geographic markets.
The Company also intends to pursue acquisitions within its existing markets as a
primary means of expanding its repair and distribution services capabilities
within those markets and as a means for gaining access to new process-industry
customers, specialized services, new products or other strategic synergies.
IMPLEMENTATION OF A NATIONAL OPERATING STRATEGY. The principal elements of
the Company's operating strategy are:
o CROSS-SELLING REPAIR AND DISTRIBUTION SERVICES. The Acquired
Businesses currently provide their respective customers with differing
levels of repair services and distribution services. By offering a full
line of services through most of its locations, the Company believes it
can capitalize on the
4
<PAGE>
outsourcing trend in its targeted industries and position itself as the
repair services provider and valve and related parts supplier of choice
for its customers.
o INCREASING INTERNAL GROWTH THROUGH TECHNOLOGY ROLL-OUT. The Company
uses its proprietary SafeSeal(TM) system to perform on-line repairs of
RSVs leaking as a result of the deterioration of their stem-packing
materials. The Company believes the SafeSeal(TM) system represents a
significant improvement over traditional valve packing restoration
methods. This technology offers customers the ability to (i)
substantially reduce or eliminate lost feedstock, product and fuel
costs attributable to leaking valve packing, (ii) safely bring leaking
valves into compliance with applicable emission standards without
having to undertake a shutdown and (iii) establish an effective,
on-line means of remediating any further packing-related leaks. The
Company believes the Acquired Businesses and other businesses acquired
in the future will serve as a platform to roll out this technology to
many of their existing and prospective process-industry customers in
existing and new markets.
o CAPITALIZING ON GEOGRAPHIC DIVERSITY. The Company believes it will
enhance its relationships with customers and OEMs and generate
substantial opportunities for new business by providing repair and
distribution services on a comprehensive basis throughout North
America.
o ACHIEVING COST EFFICIENCIES AND STANDARDIZING AND IMPLEMENTING "BEST
PRACTICES." The Company believes it should be able to reduce the
total operating expenses of the Acquired Businesses and other
businesses acquired in the future by eliminating certain duplicative
administrative functions and operating facilities and consolidating
certain functions performed separately by each business prior to its
acquisition. In addition, the Company believes the standardization of
"best practices" to be adopted throughout the Acquired Businesses
will enable the Company to provide superior customer service at a
lower cost to its customers.
THIS OFFERING
Common Stock offered by Invatec...... 3,350,000 shares
Common Stock to be outstanding after
this Offering(1)................... 7,391,139 shares
Use of Proceeds...................... To fund the cash portion of the purchase
price for two Acquired Businesses, to pay
additional consideration in connection
with the acquisition by SSI of one of the
other Acquired Businesses and to repay
outstanding indebtedness of Invatec and
the Acquired Businesses. See "Use of
Proceeds."
Nasdaq National Market symbol........ IVTC
- ------------
(1) The number of shares to be outstanding when this Offering closes will
include (i) 242,839 shares owned by existing stockholders of Invatec on the
date of this Prospectus, (ii) 1,253,962 shares to be issued to subsidiaries
of Philip Services Corp. (collectively with its subsidiaries, "Philip") in
repayment of $8.7 million of indebtedness the Company incurred in connection
with the Acquisitions and this Offering and the redemption of $2.0 million
of SSI preferred stock, (iii) 2,419,338 shares to be issued in the SSI
Merger and (iv) 125,000 shares to be issued as consideration in the SVS
Acquisition. This share number does not include (i) 393,793 shares reserved
for issuance on the conversion of convertible notes issued as part of the
purchase price in two of the Acquisitions or (ii) a total of 1,308,248
shares subject to stock options that will be outstanding when this Offering
closes. See "Management -- Option Grants." The number of shares to be
outstanding when this Offering closes will decrease if the initial public
offering price is higher, and will increase if that price is lower, than
$12.00 per share. For example, 7,317,421 shares would be outstanding if that
price is $13.00, while 7,478,260 shares would be outstanding if that price
is $11.00.
RISK FACTORS
The Common Stock offered hereby involves a high degree of risk. See "Risk
Factors."
------------------------
5
<PAGE>
SUMMARY UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
The following summary unaudited pro forma combined financial information
represents historical information of the Company, as adjusted to give effect to
(i) the Acquisitions on a historical basis, (ii) the other pro forma adjustments
referred to below and (iii) the closing of this Offering and the application of
the estimated net proceeds therefrom. See "Selected Financial Information" and
the Unaudited Pro Forma Combined Financial Statements and the Notes thereto
included herein.
FIRST SIX
MONTHS OF
FISCAL 1996 FISCAL 1997
----------- ------------
Statement of Operations Information(1):
Revenues........................... $76,234 $ 45,276
Gross profit....................... 23,177 13,565
Selling, general and administrative
expenses(2)(3).................... 19,314 11,499
Income from operations............. 3,863 2,066
Interest expense, net.............. (332) (161)
Other income (expense), net........ 56 8
Income from continuing operations
before income taxes............... 3,587 1,913
Net income(4)...................... $ 2,041 $ 1,090
=========== ============
Net income per common share from
continuing operations............. $ .28 $ .15
=========== ============
Shares used in computing pro forma
income per share from continuing
operations(5)..................... 7,391 7,391
=========== ============
AT JUNE 30, 1997(6)
----------------------------
PRO
FORMA(1)
COMBINED AS ADJUSTED(6)
-------- --------------
Balance Sheet Information:
Working capital (deficit).......... $ (9,669) $ 17,799
Total assets....................... 68,462 67,561
Total debt, including current
portion(7)........................ 40,600 6,143
Stockholders' equity............... 14,027 49,083
- ------------
(1) The pro forma combined statement of operations information assumes the
Acquisitions and related financings, the issuance of the presently
outstanding Common Stock, the net incurrence of other indebtedness during
1997, the issuance of 1,253,962 shares of Common Stock in repayment of $8.7
million of indebtedness the Company owes to Philip and redemption of $2.0
million of SSI preferred stock owned by Philip and this Offering all were
closed, and the estimated net proceeds from this Offering were applied, on
January 1, 1996. The pro forma balance sheet information assumes all those
events and transactions (other than (i) SSI's acquisitions of Harley, GSV
and Plant Specialties and related financings and other borrowings prior to
June 30, 1997 and (ii) the closing of this Offering and the application of
the estimated net proceeds therefrom) occurred on June 30, 1997 and also
assumes that the incurrence of indebtedness after that date to pay the costs
and expenses of this Offering occurred on that date. The pro forma combined
financial information (i) is not necessarily indicative of the results of
operations the Company would have obtained had those events and transactions
actually occurred when assumed or of the Company's future financial position
or results of operations, (ii) is based on preliminary estimates, available
information and certain assumptions that management deems appropriate and
(iii) should be read in conjunction with the other financial statements and
notes thereto included herein. The pro forma combined statement of
operations information for fiscal 1996 and the first six months of fiscal
1997 includes: (i) the year ended December 31, 1996 and the six months ended
June 30, 1997 for Invatec, SSI and GSV; (ii) the year ended October 31, 1996
and the six months ended June 30, 1997 for Harley and Plant Specialties;
(iii) the year ended October 31, 1996 and the six months ended April 30,
1997 for Steam Supply and SVS; and (iv) the year ended September 30, 1996
and the six months ended March 31, 1997 for ICE/VARCO. The pro forma
combined balance sheet includes: (i) the balance sheets of Invatec, SSI, and
ICE/VARCO at June 30, 1997; and (ii) the balance sheets of Steam Supply and
SVS at July 31, 1997.
(2) Does not include: (i) salaries and benefits of certain owners and managers
of the Acquired Businesses who were not or will not be employed by the
Company and will not be replaced and certain excess administrative support
service fees charged by ICE/VARCO's former parent company, as follows:
fiscal 1996, $1,674,000; and first six months of fiscal 1997, $937,000; or
(ii) $5.1 million of non-cash, non-recurring special compensation expenses
attributable to stock awards made by SSI in fiscal 1996 and in the first six
months of fiscal 1997 and sales of Common Stock by Invatec in the first six
months of fiscal 1997.
(3) Includes goodwill amortization to be recorded as a result of the
acquisitions of the Acquired Businesses over a 40-year period, as follows:
fiscal 1996, $602,000; and first six months of fiscal 1997, $301,000.
(4) Assumes an effective tax rate of 43%.
(5) Computed on the basis described in the Notes to the Unaudited Pro Forma
Combined Financial Statements.
(6) Reflects the closing of this Offering and Invatec's application of the
estimated net proceeds therefrom as described under "Use of Proceeds."
(7) Pro forma combined total debt includes $4.4 million payable to former owners
of Acquired Businesses.
6
<PAGE>
RISK FACTORS
PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER THE FOLLOWING FACTORS, AS
WELL AS THE OTHER INFORMATION CONTAINED IN THIS PROSPECTUS. THIS PROSPECTUS
CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS. ACTUAL RESULTS COULD DIFFER
MATERIALLY FROM THOSE PROJECTED IN THE FORWARD-LOOKING STATEMENTS AS A RESULT OF
ANY NUMBER OF FACTORS, INCLUDING THE RISK FACTORS SET FORTH BELOW AND ELSEWHERE
IN THIS PROSPECTUS.
HISTORY OF LOSSES
Invatec, incorporated in Delaware in March 1997, has conducted no
operations to date other than in connection with this Offering and its
acquisitions in separate transactions (the "Acquisitions") of seven businesses
(the "Acquired Businesses"), four of which (The Safe Seal Company, Inc.
("SSI") and its three significant subsidiaries) are affiliates of Invatec. SSI
did not acquire its significant subsidiaries until 1997. SSI incurred net losses
of $281,000, $1,505,000 and $415,000 during fiscal 1994, 1995 and 1996,
respectively, and a net loss of $1,766,000 in the six months ended June 30,
1997. The losses incurred in the six months ended June 30, 1997 reflect special
non-cash, non-recurring compensation expenses totaling $2,393,000, but no
assurance can be given the Company will not continue to incur losses in future
periods. In the quarter ended September 30, 1997, the Company will record a
special non-cash, non-recurring compensation expense (presently estimated at
approximately $2.0 million) as a result of its grant to certain officers of
Invatec of options to purchase 202,589 shares of Common Stock at an exercise
price of $1.00 per share. When this Offering closes, the Company will pay a
total of approximately $1.3 million of non-recurring financing charges to a
subsidiary of Philip Services Corp. (collectively with its subsidiaries,
"Philip") with shares of Common Stock, valued for this purpose at the initial
per share price to the public in this Offering, and will pay an aggregate of
$330,000 of cash bonuses to William E. Haynes, its chief executive officer
($300,000), and two of its other executive officers ($15,000 each).
ABSENCE OF COMBINED OPERATING HISTORY
Because the Company is consolidating the operations of the Acquired
Businesses and recording the Acquisitions in accordance with the purchase method
of accounting, the pro forma information herein may not be indicative of the
Company's future operating results and financial condition. Until the Company
establishes centralized accounting and other administrative systems, it will
rely primarily on the separate systems of the Acquired Businesses. The success
of the Company will depend, in part, on the extent to which it is able to
centralize these functions and otherwise integrate the Acquired Businesses and
such additional businesses as it may hereafter acquire into a cohesive,
efficient enterprise. The Company's executive officers have only limited
experience working together, and no assurance can be given they will be able to
manage the Company effectively or successfully execute the Company's acquisition
and operating strategies.
DEPENDENCE ON ACQUISITIONS FOR GROWTH
The Company's business strategy for growth focuses primarily on acquiring
additional businesses providing industrial valve and other process-system
component repair and distribution services. The acquisition strategy of the
Company presents risks that, singly or in any combination, could materially
adversely affect its business and financial performance. These risks include (i)
the adverse effects on existing operations which could result from the diversion
of management attention and resources to acquisitions, (ii) the possible loss of
acquired customer or supplier bases and key personnel, including service
technicians and machinists, and (iii) the contingent and latent risks (including
environmental risks) associated with the past operations of and other
unanticipated problems arising in the acquired businesses. The success of the
Company's acquisition strategy will depend on the extent to which the Company is
able to acquire, successfully integrate and profitably manage additional
businesses, and no assurance can be given this strategy will succeed. In this
connection, if competition for acquisition candidates develops, the cost of
acquiring businesses could increase materially. Acquisitions accounted for as
purchases may result in substantial annual non-cash amortization charges for
goodwill and other intangible assets in the Company's statements of operations.
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CAPITAL REQUIREMENTS
The Company's acquisition strategy will require substantial capital. The
Company intends to finance future acquisitions with future free cash flow and
through issuances of shares of Common Stock or debt securities, including
convertible debt securities. Using internally generated cash or debt to complete
acquisitions could substantially limit the Company's operational and financial
flexibility. The extent to which the Company will be able or willing to use
shares of Common Stock to consummate acquisitions will depend on its market
value from time to time and the willingness of potential sellers to accept it as
full or partial payment. Using shares of Common Stock for this purpose may
result in significant dilution to then existing stockholders. The Company has
obtained a commitment from Chase Securities Inc. ("Chase Securities") to
structure, arrange and syndicate a new credit facility, which will be a secured
revolving credit facility of up to $60.0 million to be used for acquisitions and
general corporate purposes (the "New Credit Facility"). No assurance can be
given the Company will be able to obtain the capital it would need to finance a
successful acquisition program and its other cash needs. If the Company is
unable to obtain additional capital on acceptable terms, it may be required to
reduce the scope of its presently anticipated expansion, which could materially
adversely affect its business and the value of the Common Stock. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Supplemental Unaudited Pro Forma Combined Financial
Information -- Liquidity and Capital Resources."
FACTORS AFFECTING INTERNAL GROWTH
The factors affecting the Company's ability to generate internal growth
will include the extent to which it is able to: (i) integrate SSI's
SafeSealEtechnology into the operations of the other Acquired Businesses and
other businesses it may acquire and otherwise expand the range of repair
services offered by these businesses; (ii) leverage its relationships with
customers in existing markets into work for those customers in other markets
where they currently use the services of competitors; and (iii) reduce overhead
costs of acquired businesses. No assurance can be given the Company will be able
to market its SafeSeal(TM) technology successfully as being safer, more
effective and more cost-efficient than other available on-line valve repair
methods. Factors affecting the Company's ability to expand services will include
the extent to which it is able to attract and retain qualified operating
management, service technicians and machinists in existing and new areas of
operation and train its technicians to use the SafeSeal technology and other new
technologies that become available.
BENEFITS OF OFFERING TO EXISTING STOCKHOLDERS
The Company will use approximately $11.8 million of its net proceeds from
this Offering to repay indebtedness guaranteed by Philip and to repay the entire
$3.2 million of indebtedness it owes to Philip (after giving effect to the
issuance of 1,253,962 shares of Common Stock to Philip (i) in repayment of $8.7
million of indebtedness owed by the Company to Philip and (ii) for the
redemption of $2.0 million of SSI preferred stock owned by Philip, as described
in "Certain Transactions -- Financing Arrangements" and "-- The SSI
Merger"), and also will pay cash bonuses totaling $330,000 to three of
Invatec's executive officers, including $300,000 to be paid to William E.
Haynes, its Chairman of the Board, President and Chief Executive Officer. Mr.
Haynes is also a director of Philip. See "Use of Proceeds." This Offering will
benefit the existing stockholders of Invatec and SSI by creating a public market
for the Common Stock.
CONCENTRATION OF OWNERSHIP
Concurrently with the closing of this Offering, The Roger L. Miller Family
Trust, Roger L. Miller and Computerized Accounting & Tax Services, Inc.
("CATS"), a corporation Mr. Miller owns (collectively, the "Miller
Interests"), will sell to Philip 300,000 shares of the Common Stock they then
own for a cash purchase price of $11.58 per share. When this Offering closes,
Philip will own approximately 32.5% of the outstanding Common Stock.
RELIANCE ON CUSTOMERS IN HISTORICALLY CYCLICAL INDUSTRIES
The businesses of most of the Company's industrial customers, particularly
refineries and chemical, power and pulp and paper plants, tend to be cyclical.
Margins in those industries are highly sensitive to demand cycles, and the
Company's customers in those industries historically have tended to delay large
capital projects, including expensive turnarounds, during down cycles. As a
result, the Company's business and results of operations may reflect the
cyclical nature of the various industries it serves.
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OPERATING HAZARDS
The Company performs a significant portion of its repair services in
refineries, chemical plants and other industrial facilities that process,
produce, store, transport or handle potentially hazardous substances, including
highly corrosive, flammable or explosive substances kept at extremes of
temperature and pressure. These services (i) include sealing leaks and repairing
valves on process units operating under pressure, (ii) typically involve a
combination of individuals and machinery operating in restricted work areas and
(iii) are subject to the usual hazards associated with providing on-site
services in these types of facilities, such as pipeline leaks and ruptures,
explosions, fires, oil and chemical spills, discharges or releases of toxic
substances or gases. These hazards can cause personal injury and loss of life,
severe damage to or destruction of property and equipment and environmental
damage and may result in suspension of operations of all or part of the facility
being serviced. If a catastrophic event occurs at a plant to which the Company
provides services, the Company may have to defend itself against large claims.
It maintains insurance coverage in the amounts and against the risks it believes
accord with industry practice, but this insurance does not cover all types or
amounts of liabilities. No assurance can be given either (i) this insurance will
be adequate to cover all losses or liabilities the Company may incur in its
operations or (ii) the Company will be able to maintain insurance of the types
or at levels it deems necessary or adequate or at rates it considers reasonable.
COMPETITION
The markets for the Company's repair and distribution services generally
are highly competitive. The Company believes the principal competitive factors
in a distributor's sale of new valves and other process-system components
directly to industries in the distributor's market include price and the ability
of the distributor to offer on a timely basis a wide selection of the new,
better-performing valves and other components the original equipment
manufacturers ("OEMs") have designed to meet the needs of these industries.
Factors affecting delivery time include inventory size and whether, in the case
of pressure safety, relief and safety-relief valves (collectively, "PRVs") and
certain other valves, the OEM or the distributor assembles, sets, tests and
seals, or otherwise customizes, the valve. In the case of repair services, the
Company believes the principal competitive factors are quality and availability
of service (including emergency service and documentation of valve histories),
price, use of OEM-approved replacement parts, familiarity with the OEMs'
products and local brand equity of the repair business.
In its distribution operations, the Company competes with the direct sales
forces and distribution networks of OEMs offering the same or comparable lines
of products. It competes for repair services business with other repair services
businesses, OEMs and customers' in-house maintenance crews. Some of its
competitors may have lower overhead cost structures and, consequently, may be
able to provide their services at lower rates than the Company. The Company's
competitors for on-line leak sealing services include two national competitors
and several regional competitors. See "Business -- Competition."
The Company believes the industrial valve repair and distribution sectors
of the industrial valve industry are subject to consolidation, and that a number
of competitors may attempt to consolidate these sectors. Some of these
competitors may have greater resources than the Company to finance acquisition
and internal growth opportunities and may be willing to pay higher prices than
the Company for the same opportunities. Consequently, the Company may encounter
significant competition in its efforts to achieve its growth objectives,
particularly through its acquisition strategy.
RELIANCE ON PATENTS AND PROPRIETARY TECHNOLOGIES
The success of the Company will depend in part on its ability to obtain and
protect patents and other intellectual property rights covering its products and
services. The Company, through subsidiaries, owns three United States patents
and has two United States patent applications pending which relate primarily to
the SafeSeal(TM) system. The process of seeking patent protection can be long
and expensive, and no assurance can be given patents will issue from the
Company's currently pending applications or future applications or that, if
patents are issued, they will be of sufficient scope or strength to provide
meaningful protection or any commercial advantage to the Company. In addition,
the laws of certain foreign countries may not protect the Company's intellectual
property rights to the same extent as the laws of the United States. Litigation,
which could demand significant financial and management resources, may be
necessary
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to enforce patents or other intellectual property rights of the Company. One of
the Company's customers has a license to certain of the Company's technology
under certain of its patents pertaining to the SafeSeal(TM) system. Although, to
the knowledge of the Company, that customer has not pursued the development of
technology that would compete with the SafeSeal(TM) system (and instead has
opted to continue outsourcing on-line valve repair service work to the Company),
there can be no assurance it will not elect to do so in the future. Moreover,
there can be no assurance others will not independently develop substantially
equivalent or better technology that would be free of the Company's patents and
other intellectual property rights. See "Business -- Intellectual Property."
FLUCTUATIONS IN OPERATING RESULTS
The Company's results of operations may fluctuate significantly from
quarter to quarter or year to year because of a number of factors, including the
timing of future acquisitions, seasonal fluctuations in the demand for repair
and distribution services (particularly the demand attributable to scheduled
turnarounds in the power industry, which typically are scheduled for
mild-weather months) and competitive factors. Accordingly, quarterly comparisons
of the Company's revenues and operating results should not be relied on as an
indication of future performance, and the results of any quarterly period may
not be indicative of results to be expected for a full year. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
GOVERNMENTAL REGULATION
A wide range of federal, state and local regulations relating to health,
safety and environmental matters applies to the Company's business. The
Company's in-shop reconditioning and remanufacturing of used valves frequently
involves the use, handling, storage and contracting for the disposal or
recycling of a variety of substances or wastes considered hazardous or toxic.
Environmental laws are complex and subject to frequent change. These laws impose
liability in some cases without regard to negligence or fault and expose the
Company to liability for the conduct of or conditions caused by others, or for
acts of the Company which complied with all applicable laws when performed. No
assurance can be given the Company's compliance with amended, new or more
stringent laws or regulations, stricter interpretations of existing laws or the
future discovery of environmental conditions will not require additional,
material expenditures by the Company. Regulations of the Occupational Safety and
Health Administration ("OSHA") also apply to the Company's business, including
requirements the Company's training programs must meet respecting, among other
matters, release detection procedures, appropriate work practices, emergency
procedures and other methods the Company's technicians can use to protect
themselves and the environment. See "Business -- Governmental Regulation and
Environmental Matters." Future acquisitions by the Company also may be subject
to regulation, including antitrust reviews. The Company believes it
substantially complies with all currently applicable laws relating to its
business.
DEPENDENCE ON KEY PERSONNEL
The success of the Company's operations will depend on the continuing
efforts of its executive officers and the senior management of the Acquired
Businesses and likely will depend on the senior management of any significant
businesses the Company acquires in the future. The business or prospects of the
Company could be affected adversely if any of these persons do not continue in
their respective management roles after joining the Company and the Company is
unable to attract and retain qualified replacements. The ability of the Acquired
Businesses (other than SSI) and any additional repair services companies the
Company may acquire to include the SafeSeal(TM) system in their services will
require the training of their service technicians in the use of the technology,
and the success of the Company's growth strategy generally, as well as the
Company's current operations, will depend on the extent to which it is able to
retain, recruit and train qualified sales personnel, service technicians and
machinists who meet the Company's standards of service to customers.
DEPENDENCE ON MANUFACTURERS
The success of the Company as a value-added distributor of new valves and
other process-system components depends on its relationships with the OEMs for
which it distributes products. In these relationships, the Company acts either
as a sales representative on a commission basis for direct sales by the
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OEM to the end user or purchases products on a discount basis for resale,
generally on a value-added basis. OEMs typically exercise a great deal of
control over their distributors. An OEM may assign a territory to a distributor
on an exclusive or nonexclusive basis, refuse to assign additional territories
to its distributors and reserve the right to sell directly to customers in an
assigned territory. The distribution agreement typically is terminable at will
on relatively short prior notice and restricts the ability of the distributor to
offer similar products made by another OEM. The Company's business strategy has
caused concern by some OEMs and could conflict with existing or future OEM
distributor policies or programs. Actions taken by OEMs to exploit their
bargaining positions with the Company could materially adversely affect the
Company's ability to implement its growth strategies and maintain its existing
distribution services business. See "Business -- Suppliers -- Relationships
With OEMs."
The success of the Company as a value-added distributor also depends on the
extent to which its OEMs are able to create demand for their products in the
markets the Company serves. Factors affecting this demand include, in addition
to price, product quality and performance (including durability and safety) and
delivery time, the relative strengths of the brand names and the marketing
abilities of the OEMs. See "Business -- Competition."
POTENTIAL EFFECT OF SHARES ELIGIBLE FOR FUTURE SALE ON PRICE OF COMMON STOCK
When this Offering closes, 7,391,139 shares of Common Stock will be
outstanding (without giving effect to the potential conversion of convertible
subordinated notes issued in two Acquisitions (the "Convertible Notes") into
up to 393,793 shares of Common Stock). The 3,350,000 shares sold in this
Offering (other than shares purchased by affiliates of the Company) will be
freely tradable. The remaining shares outstanding may be resold publicly only
following their effective registration under the Securities Act of 1933, as
amended (the "Securities Act"), or pursuant to an available exemption from the
registration requirements of the Securities Act, such as provided by Securities
Act Rule 144. Under Rule 144, all those shares will be eligible for Rule 144
sales, subject to certain volume limitations and other requirements, on the day
following the first anniversary of the date this Offering closes. In addition,
the holders of a substantial number of those remaining shares have certain
rights to cause the shares of Common Stock held by or issuable to them to be
registered in connection with certain future offerings pursuant to a
registration statement filed by Invatec with the Securities and Exchange
Commission (the "SEC").
When this Offering closes, Invatec also will have outstanding options to
purchase up to a total of 1,308,248 shares of Common Stock, of which options to
purchase 533,874 shares then will be exercisable. Invatec intends to file a
registration statement on Form S-8 to register those shares and the other shares
reserved or to be available for issuance pursuant to its 1997 Incentive Plan
(see "Management -- 1997 Incentive Plan"). After that registration statement
becomes effective, the shares registered thereby generally will become available
for sale in the open market by holders who are not affiliates of the Company
and, subject to the volume and other limitations of Rule 144, by holders who are
affiliates of the Company.
Invatec, its directors and executive officers, Philip, the Miller Interests
and the holders of the Convertible Notes issued in connection with two of the
Acquisitions have agreed not to offer or sell any shares for a period of 180
days following the date of this Prospectus (the "Lockup Period") without the
prior written consent of NationsBanc Montgomery Securities, Inc.; however,
Invatec may issue shares of Common Stock in connection with acquisitions,
pursuant to its 1997 Incentive Plan and pursuant to the conversion of the
Convertible Notes and the exercise of options outstanding when this Offering
closes. For information respecting additional restrictions on sales by Philip,
the Miller Interests, Invatec's management and others, see "Shares Eligible for
Future Sale."
Invatec intends to register 5,000,000 additional shares of Common Stock
under the Securities Act in the fourth quarter of 1997 or the first quarter of
1998 for its use in connection with future acquisitions. Pursuant to Securities
Act Rule 145, the volume limitations and certain other requirements of Rule 144
will apply to resales of these shares by affiliates of the businesses the
Company acquires for a period of one year from the date of their acquisition (or
such shorter period as the SEC may prescribe), but otherwise these shares will
be freely tradable by persons not affiliated with Invatec unless Invatec
restricts their resale by contract, and sales of these shares during the Lockup
Period would require the prior written consent of NationsBanc Montgomery
Securities, Inc.
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The availability for sale, or sale, of the shares of Common Stock eligible
for future sale could adversely affect the market price of the Common Stock
prevailing from time to time. See "Shares Eligible for Future Sale."
NO PRIOR MARKET; POSSIBLE VOLATILITY OF STOCK PRICE
Prior to this Offering, no public market for the Common Stock has existed,
and the initial public offering price, which Invatec and representatives of the
Underwriters will negotiate, may not be indicative of the price at which the
Common Stock will trade after this Offering. See "Underwriting" for the
factors they will consider in determining the initial public offering price. The
Common Stock has been approved for quotation on the Nasdaq National Market, but
no assurance can be given an active trading market for the Common Stock will
develop or, if developed, will continue after this Offering. The market price of
the Common Stock after this Offering may fluctuate significantly from time to
time in response to numerous factors, including variations in the reported
financial results of the Company and changing conditions in the economy in
general or in the Company's industry in particular. In addition, the stock
markets experience significant price and volume volatility from time to time
which may affect the market price of the Common Stock for reasons unrelated to
the Company's performance.
IMMEDIATE, SUBSTANTIAL DILUTION
Purchasers of Common Stock in this Offering (i) will experience immediate,
substantial dilution in the net tangible book value of their stock of $8.62 per
share (see "Dilution") and (ii) may experience further dilution in that value
from issuances of shares of Common Stock in the future.
POTENTIAL ADVERSE EFFECTS OF AUTHORIZED PREFERRED STOCK
Invatec's Certificate of Incorporation (the "Charter") authorizes Invatec
to issue, without stockholder approval, one or more classes or series of
preferred stock having such preferences, powers and relative, participating,
optional and other rights (including preferences over the Common Stock
respecting dividends and distributions) as the Board of Directors of Invatec may
determine. The terms of one or more classes or series of preferred stock could
adversely impact the rights of holders of shares of Common Stock or could have
anti-takeover effects. See "-- Potential Anti-takeover Effects" and
"Description of Capital Stock."
POTENTIAL ANTI-TAKEOVER EFFECTS
Invatec has adopted a stockholder rights plan. This plan and provisions of
the Charter, Invatec's Bylaws and the Delaware General Corporation Law (the
"DGCL") may delay, discourage, inhibit, prevent or render more difficult an
attempt to obtain control of Invatec, whether by means of a tender offer,
business combination, proxy contest or otherwise. These provisions include the
authorization of "blank check" preferred stock, classification of the Board of
Directors, a prohibition of stockholder action by less than unanimous written
consent and DGCL restrictions on business combinations with certain interested
parties. See "Description of Capital Stock."
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THE COMPANY
Invatec was formed in March 1997 to create the leading single-source
provider of comprehensive maintenance, repair, replacement and value-added
distribution services for industrial valves and related process-system
components (collectively, "repair and distribution services") throughout North
America. Petrochemical and other chemical plants, petroleum refineries, pulp and
paper mills, electric and other utilities and other industrial process
facilities use industrial valves to direct and regulate the flow of feedstocks,
intermediates, products and fuels in their process systems. The Company intends
to be a leader in the consolidation of the highly fragmented repair and
distribution sectors of the North American industrial valve industry by
continuing to execute its aggressive acquisition strategy and to implement its
national operating strategy, which is designed to increase internal growth,
market share and profitability. When this Offering closes, Invatec will have
combined seven businesses with 32 locations whose revenues totaled approximately
$76.2 million on a pro forma combined basis during fiscal 1996. Invatec will
conduct its business through its principal operating subsidiaries -- Harley
Industries, Inc., Steam Supply & Rubber Co., Inc., Industrial Controls &
Equipment, Inc., GSV, Inc., Plant Specialties, Inc., Southern Valve Service,
Inc. and SSI.
Harley Industries, Inc. ("Harley"), the successor to a business founded
in 1937 and acquired by SSI in January 1997, provides repair and distribution
services to electric utilities, petroleum refineries, petrochemical and other
chemical plants, pulp and paper mills and other process industries in the
markets it serves from its 13 sales and service facilities in Arkansas, Florida,
Georgia, Indiana, Louisiana, Oklahoma, South Carolina, Texas, Virginia and
Washington. Harley has grown both internally and through its acquisition of
regional repair businesses, including the acquisition in June 1996 of five
operating locations and related assets from Henze Services, Inc. Harley performs
most of its repair services at on-site locations in connection with its
customers' scheduled shutdowns and turnarounds, and on-line repair services have
not been a material part of its business in recent years. The Company intends to
use Harley's network of service locations as a platform for introducing its
proprietary on-line valve restoration technology nationally. During fiscal 1996,
Harley's revenues from its continuing operations totaled approximately $21.4
million.
Steam Supply & Rubber Co., Inc. (together with three affiliated companies
having common ownership and management, "Steam Supply"), the successor to a
business established in 1915 and acquired by Invatec in July 1997, provides
repair and distribution services to petrochemical plants, petroleum refineries,
electric utilities, pulp and paper mills and oil producers in the western half
of the continental United States and Alaska from its six locations in
Washington, Oregon, California, Colorado and Alaska. Conducting business under
the names "Steam Supply" and the "Flickinger Company," it provides a
comprehensive variety of valve repair services for its customers both on-site at
the customer's location during shutdowns and turnarounds and in-house at its
facilities. During fiscal 1996, Steam Supply's combined revenues totaled
approximately $15.1 million.
Industrial Controls & Equipment, Inc. (together with three affiliated
companies having common ownership and management, "ICE/VARCO"), founded in
1981, will be acquired by Invatec when this Offering closes. From its
distribution and assembly and repair service facility near Parkersburg, West
Virginia, it provides repair and distribution services in Pennsylvania and West
Virginia. ICE/VARCO also provides value-added industrial valve and engineered
product distribution services and in-house repair services to a customer base
consisting principally of chemical plants. During fiscal 1996, its revenues
totaled $12.7 million.
GSV, Inc. ("GSV"), the successor to a business established in 1921 and
acquired by SSI in March 1997, provides repair and distribution services,
principally for high-pressure steam lines, valves, traps and other equipment, to
electric power plants and phosphate chemical plants in the Florida peninsula.
GSV markets its services and products under the names "Southern Valve Co." and
"Gould Machine and Fabrication." Its Southern Valve facility in Lakeland,
Florida distributes a wide variety of valves and valve packages, including
actuated valve packages it assembles, tests and calibrates, and provides in-shop
and on-site repair services. Its Gould Machine and Fabrication facility in
Tampa, Florida fabricates large process-
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system equipment for its customers. During fiscal 1996, GSV's revenues totaled
approximately $10.2 million.
Plant Specialties, Inc. ("Plant Specialties"), founded in 1972 and
acquired by SSI in June 1997, is located in Sulphur, Louisiana, a significant
center for petroleum refining and chemical production. Plant Specialties
provides comprehensive industrial valve repair services to petroleum refineries,
petrochemical plants and other process industries in southwestern Louisiana and
the Texas Golden Triangle (Beaumont, Orange and Port Arthur). Plant Specialties
operates one of the largest valve repair facilities in its area and routinely
services customer needs at customer locations throughout the southern United
States. It is an innovator in shop automation and work-in-process control and
documentation and quality and safety processes. Management believes the Company
can use many of the quality control processes and other productivity
enhancements developed by Plant Specialties throughout its operations. The
revenues of Plant Specialties totaled approximately $8.5 million during fiscal
1996.
Southern Valve Service, Inc. (together with an affiliate under common
management, "SVS"), founded in 1984 and located near Mobile, Alabama, will be
acquired by Invatec when this Offering closes. SVS provides comprehensive
industrial valve repair services to the pulp and paper, petrochemical and
electric power industries in Alabama, Mississippi and Georgia. It performs a
significant portion of its repair service at on-site locations in connection
with scheduled shutdowns and turnarounds of its customers. During fiscal 1996,
its revenues totaled approximately $4.4 million.
SSI, an on-line repair services company founded in 1991 and engaged in
research and development of new technologies for repairing valves and other
process-system equipment, will become a subsidiary of Invatec when this Offering
closes. SSI provides on-line leak sealing and valve-packing restoration services
for petrochemical plants, refineries and other process industries from service
facilities located along the Texas Gulf Coast (Beaumont, Freeport and LaPorte)
and in Baton Rouge, Louisiana, Pensacola, Florida and Sarnia, Ontario. SSI uses
its proprietary SafeSeal(TM) system to repair leaking rising stem valves
("RSVs") on-line and under pressure by restoring the packing around their stems.
The Company believes this technology, which has proved to be successful in its
limited repair applications to date, is capable of wide commercialization
through an aggressive marketing program. During fiscal 1996, SSI's revenues
totaled approximately $3.9 million, of which conventional sealing of leaking
pipes and flanges accounted for approximately 92%.
SSI purchased Harley, GSV and Plant Specialties for a total consideration
of $28.8 million, consisting of (i) approximately $24.6 million in cash
(including $3.3 million aggregate principal amount of subordinated notes issued
by Philip) and assumed debt (including $1.0 million to be paid when this
Offering closes), (ii) $3.3 million aggregate principal amount of SSI's
five-year 5.0% convertible subordinated notes due 2002 and (iii) $0.9 million
principal amount of SSI's 9% secured note due 2002, which is secured by a
mortgage on a part of Plant Specialties' plant and land. Invatec has assumed all
SSI's obligations with respect to these notes, and the convertible notes will be
convertible at the holder's option into shares of Common Stock at a conversion
price per share equal to 130% of the initial per share price to the public in
this Offering.
Invatec purchased Steam Supply for total consideration of $10.6 million
consisting of $2.7 million in cash, $2.8 million aggregate principal amount of
Invatec's 5.5% convertible subordinated notes due 2004 and the assumption of
$5.1 million of debt and other long-term liabilities. The convertible notes are
convertible at the holder's option into shares of Common Stock at an initial
conversion price per share equal to 130% of the initial per share price to the
public in this Offering.
Invatec will acquire ICE/VARCO and SVS for a total consideration of $11.1
million consisting of $5.2 million in cash, $4.4 million in assumed debt and
shares of Common Stock having a calculated total value of $1.5 million using the
initial price to the public in this Offering, subject in each case to an
increase contingent on the operating results the Acquired Business achieves in
the first 12 months after its acquisition. The contingent payment for ICE/VARCO
would consist of options to acquire 40,000 shares of Common Stock at an exercise
price per share equal to the initial per share price to the public in this
Offering, while the contingent payment for SVS would be payable in a combination
of Common Stock
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(valued on the basis of then recent trading prices) and cash in the amount equal
to the product of (i) four multiplied by (ii) the amount, if any, by which the
earnings before interest, income taxes and extraordinary items of SVS during
that 12-month period exceeds $880,000. The actual amount, if any, of this
payment is not presently determinable.
When this Offering closes, SSI will become a subsidiary of Invatec by means
of a merger (the "SSI Merger") in which the outstanding SSI preferred stock
will be redeemed for approximately 166,667 shares of Common Stock (based on the
midpoint of the estimated initial public offering price range) and the
outstanding SSI common stock will be converted into 2,419,338 shares of Common
Stock. See "Certain Transactions -- The SSI Merger."
Invatec's executive offices are located at 14900 Woodham Drive, Suite
A-125, Houston, Texas 77073, and its telephone number at that address is (281)
821-9407.
15
<PAGE>
USE OF PROCEEDS
Invatec estimates its proceeds from this Offering, net of the underwriting
discount and $1.0 million of estimated offering expenses paid and payable by
Invatec (excluding approximately $1.0 million of offering expenses paid with
advances by Philip constituting part of the indebtedness referred to below which
will be repaid through the issuance of shares of Common Stock to Philip on the
closing of this Offering), will be approximately $36.4 million (approximately
$42.0 million if the Underwriters exercise their over-allotment option in full),
assuming an initial public offering price of $12.00 per share (the midpoint of
the estimated initial public offering price range). The Company will use these
net proceeds to (i) pay the cash portion of the purchase price for ICE/VARCO and
SVS and the remaining purchase price for Harley (an aggregate of $6.3 million)
and (ii) repay $26.0 million of its existing indebtedness owed to third parties,
including $11.8 million guaranteed by Philip, and the remaining $3.2 million
owed to Philip (after giving effect to the issuance of 1,087,295 shares of
Common Stock to Philip in repayment of $8.7 million of indebtedness owed by the
Company to Philip, as described in "Certain Transactions -- Financing
Arrangements"). When this Offering closes, Invatec also will pay cash bonuses
totaling $330,000 to its chief executive officer (William E. Haynes), who is
also a director of Philip, and two of its other executive officers (John L. King
and Douglas R. Harrington, Jr.).
The indebtedness to be repaid from the proceeds of this Offering, which was
incurred in connection with the Acquisitions, bears interest at rates ranging
from 5.0% to 18.0%. That indebtedness would otherwise mature at various dates
through 2004. On a pro forma combined basis at June 30, 1997, after giving
effect to this Offering and the application of the estimated net proceeds
therefrom, the Company would have had approximately $6.1 million of long-term
debt (consisting of the Convertible Notes) and no short-term debt outstanding.
See the Unaudited Pro Forma Combined Financial Statements and the Notes thereto
included herein.
DIVIDEND POLICY
Invatec currently intends to retain earnings to finance its business
strategy. Any future dividends will be at the discretion of its Board of
Directors after taking into account various factors, including the Company's
financial condition and performance, cash needs and expansion plans, income tax
consequences and the restrictions Delaware and other applicable laws and its
credit facilities then impose. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Supplemental Unaudited Pro
Forma Combined Financial Information -- Liquidity and Capital Resources."
16
<PAGE>
CAPITALIZATION
The following table sets forth the short-term debt and current maturities
of long-term obligations and capitalization as of June 30, 1997 of: (i) the
Company on a pro forma combined basis after giving effect to the Acquisitions
and the financings thereof, the net incurrence of other indebtedness since June
30, 1997 and the issuance of 1,253,962 shares of Common Stock to Philip in
repayment of $8.7 million of indebtedness the Company owes to Philip and
redemption of $2.0 million of SSI preferred stock owned by Philip; and (ii) the
Company, on that pro forma basis, as adjusted to give effect to this Offering
and the application of the estimated net proceeds therefrom. See "Use of
Proceeds" and the Unaudited Pro Forma Combined Financial Statements and the
Notes thereto included herein.
JUNE 30, 1997(1)
--------------------------
PRO FORMA
COMBINED AS ADJUSTED
--------- -----------
(IN THOUSANDS)
Short-term debt and current maturities
of long-term obligations(2)........... $26,869 $--
========= ===========
Long-term debt, net of current
maturities............................ 7,588 --
Convertible subordinated notes.......... 6,143 6,143
Other long-term obligations............. 711 711
Stockholders' equity:
Preferred stock: $0.001 par value,
5,000,000 shares authorized; none
issued or outstanding............. -- --
Common stock: $0.001 par value,
30,000,000 shares authorized;
4,041,139 shares issued and
outstanding, pro forma; and
7,391,139 shares issued and
outstanding, pro forma, as
adjusted(3)....................... 4 7
Additional paid-in capital......... 22,779 58,162
Retained earnings (deficit)........ (8,756) (9,086)
--------- -----------
Total stockholders' equity.... 14,027 49,083
--------- -----------
Total capitalization..... $28,469 $55,937
========= ===========
- ------------
(1) Reflects: (i) the balance sheets of Invatec, SSI and ICE/VARCO at June 30,
1997; and (ii) the balance sheets of Steam Supply and SVS at July 31, 1997.
(2) The pro forma combined balance includes $4.4 million of cash consideration
due to former owners of Acquired Businesses.
(3) Excludes (i) an aggregate of 393,793 shares of Common Stock issuable on the
conversion of convertible subordinated notes that are convertible at an
initial conversion price equal to 130% of the initial per share price to the
public in this Offering (a) at the option of the holder in whole at any time
and (b) at the option of Invatec in whole at any time after the closing sale
prices of the Common Stock for a period of 20 consecutive trading days
beginning in 1999 exceed 150% of that initial per share price and (ii) an
aggregate of 1,308,248 shares of Common Stock subject to stock options that
will be outstanding when this Offering closes. See "Management -- Option
Grants."
17
<PAGE>
DILUTION
The pro forma net tangible book deficit of the Company as of June 30, 1997
was approximately $10.1 million, or approximately $2.49 per share of Common
Stock, after giving effect to the following events and transactions (the
"Transactions"): (i) the Acquisitions; (ii) the net indebtedness incurred by
the Company since June 30, 1997; (iii) the reverse stock splits of the Common
Stock and the SSI common stock effected in connection with this Offering; and
(iv) the issuance of 1,253,962 shares of Common Stock in repayment of $8.7
million of indebtedness the Company owes to Philip and redemption of $2.0
million of SSI preferred stock owned by Philip. The pro forma net tangible book
deficit per share represents the amount by which the Company's pro forma total
liabilities exceed the Company's pro forma tangible assets as of June 30, 1997,
divided by the number of shares of Common Stock to be outstanding after giving
effect to the Transactions. After giving effect to the sale of the 3,350,000
shares offered hereby and the estimated underwriting discount and estimated
offering expenses payable by the Company, the Company's pro forma net tangible
book value as of June 30, 1997 would have been approximately $25.0 million, or
approximately $3.38 per share of Common Stock, based on an assumed initial
public offering price of $12.00 (the midpoint of the estimated initial public
offering price range). This represents an immediate increase in pro forma net
tangible book value of approximately $5.87 per share to existing stockholders
and an immediate dilution of approximately $8.62 per share to new investors
purchasing shares in this Offering. The following table illustrates this pro
forma dilution:
Assumed initial public offering price
per share.......................... $ 12.00
Pro forma net tangible book value
(deficit) per share before this
Offering........................... $ (2.49)
Increase in pro forma net tangible
value per share attributable to new
investors.......................... 5.87
---------
Pro forma net tangible book value per
share after this Offering.......... 3.38
---------
Dilution per share to new
investors.......................... $ 8.62
=========
The dilution to new investors purchasing shares in this Offering will
increase if the initial public offering price is higher, and will decrease if
that price is lower, than $12.00 per share.
The following table sets forth, on a pro forma basis to give effect to the
Transactions and the closing of this Offering and the application of the
estimated net proceeds therefrom as of June 30, 1997, the number of shares of
Common Stock purchased from Invatec, the total consideration to Invatec and the
average price per share paid to Invatec by existing stockholders (including
persons who will acquire Common Stock in the Transactions) and the new investors
purchasing shares from Invatec in this Offering (before deducting the
underwriting discount and estimated offering expenses):
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION(1) AVERAGE
-------------------- ------------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- --------------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders... 4,041,139 55% $ (10,060,000) (33)% $ (2.49)
New investors........... 3,350,000 45 40,200,000 133 12.00
--------- ------- --------------- -------
7,391,139 100% $ 30,140,000 100%
========= ======= =============== =======
</TABLE>
- ------------
(1) Total consideration paid by existing stockholders represents the pro forma
stockholders' equity less pro forma goodwill, in each case before giving
effect to the post-merger adjustments set forth in the Unaudited Pro Forma
Combined Balance Sheet of the Company and the Acquired Businesses included
herein.
18
<PAGE>
SELECTED FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
SSI has been identified as the "accounting acquirer" for financial
statement presentation purposes. The following selected historical consolidated
financial information of the accounting acquirer has been derived from (i) the
audited financial statements of SSI included herein for the years ended December
31, 1994, 1995 and 1996 and as of December 31, 1995 and 1996 and (ii) the
unaudited financial statements of SSI for the years ended December 31, 1992 and
1993 and for the six months ended June 30, 1996 and 1997 and as of December 31,
1992, 1993 and 1994 and June 30, 1997 which have been prepared on the same basis
as the audited statements and, in the opinion of SSI, reflect all adjustments,
consisting of normal recurring adjustments, necessary for a fair presentation of
that information. The following summary unaudited pro forma combined financial
information represents historical information of the Company, as adjusted to
give effect to (i) the Acquisitions on a historical basis, (ii) the other pro
forma adjustments described below and (iii) the closing of this Offering and the
application of the estimated net proceeds therefrom. See the Unaudited Pro Forma
Combined Financial Statements and the Notes thereto included herein.
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31 ENDED JUNE 30
----------------------------------------------------- --------------------
1992 1993 1994 1995 1996 1996 1997
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
HISTORICAL STATEMENT OF OPERATIONS
INFORMATION FOR THE ACCOUNTING
ACQUIRER:
Revenues......................... $ 1,006 $ 1,787 $ 2,547 $ 2,852 $ 3,888 $ 1,606 $ 19,760
Gross profit..................... 544 959 1,276 1,268 1,512 706 6,265
Selling, general and
administrative expenses(1)..... 384 1,221 1,268 1,853 1,955 886 7,311
Income (loss) from operations.... 160 (262) 8 (585) (443) (180) (1,046)
Interest income (expense), net... -- (1) (7) 10 28 -- (998)
Other income (expense), net...... 2 -- (282) (930) -- -- 2
Income (loss) before income
taxes.......................... 162 (263) (281) (1,505) (415) (180) (2,042)
Net income (loss)................ $ 118 $ (263) $ (281) $ (1,505) $ (415) $ (180) $ (1,766)
========= ========= ========= ========= ========= ========= =========
<CAPTION>
FIRST SIX
MONTHS OF
FISCAL 1996 FISCAL 1997
------------ ------------
<S> <C> <C>
PRO FORMA COMBINED STATEMENT OF
OPERATIONS INFORMATION(2):
Revenues......................... $ 76,234 $ 45,276
Gross profit..................... 23,177 13,565
Selling, general and
administrative
expenses(3)(4)................. 19,314 11,499
Income from operations........... 3,863 2,066
Interest expense, net............ (332) (161)
Other income (expense), net...... 56 8
Income from continuing operations
before income taxes............ 3,587 1,913
Net income(5).................... $ 2,041 $ 1,090
============ ============
Net income per common share from
continuing operations.......... $ .28 $ .15
============ ============
Shares used in computing pro
forma net income per share from
continuing operations(6)....... 7,391 7,391
============ ============
<CAPTION>
JUNE 30, 1997
----------------------------
DECEMBER 31 PRO
----------------------------------------------------- FORMA
1992 1993 1994 1995 1996 ACTUAL COMBINED(2)
--------- --------- --------- --------- --------- -------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET INFORMATION:
Working capital (deficit)........ $ 318 $ 163 $ (127) $ 823 $ (13) $ (9,046) $ (9,669)
Total assets..................... 490 623 812 2,109 2,288 43,430 68,462
Total debt, including current
portion(8)..................... -- 25 93 -- 589 22,725 40,600
Stockholders' equity (deficit)... 267 (121) (348) (1,075) (1,394) 3,740 14,027
</TABLE>
AS
ADJUSTED(7)
-----------
BALANCE SHEET INFORMATION:
Working capital (deficit)........ $17,799
Total assets..................... 67,561
Total debt, including current
portion(8)..................... 6,143
Stockholders' equity (deficit)... 49,083
(FOOTNOTES ON NEXT PAGE)
19
<PAGE>
- ------------
(1) Selling, general and administrative expenses in the first six months of
fiscal 1997 reflect a non-cash, non-recurring special compensation expense
of $2.4 million attributable to stock awards made by SSI as described under
"Management -- Executive Compensation" and "Certain Transactions -- The
SSI Merger."
(2) The pro forma combined statement of operations information assumes the
Transactions (see "Dilution") and this Offering all were closed, and the
estimated net proceeds from this Offering were applied, on January 1, 1996.
The pro forma balance sheet information assumes all the Transactions (other
than (i) SSI's acquisitions of Harley, GSV and Plant Specialties and related
financings and other borrowings prior to June 30, 1997 and (ii) the closing
of this Offering and the application of the estimated net proceeds
therefrom) occurred on June 30, 1997. The pro forma combined financial
information (i) is not necessarily indicative of the results of operations
the Company would have obtained had the Transactions and this Offering and
the application of the estimated net proceeds therefrom actually occurred
when assumed or of the Company's future financial position or results of
operations, (ii) is based on preliminary estimates, available information
and certain assumptions that management deems appropriate and (iii) should
be read in conjunction with the other financial statements and notes thereto
included herein. The pro forma combined statement of operations information
for fiscal 1996 and the first six months of fiscal 1997 includes: (i) the
year ended December 31, 1996 and the six months ended June 30, 1997 for
Invatec, SSI and GSV; (ii) the year ended October 31, 1996 and the six
months ended June 30, 1997 for Harley and Plant Specialties; (iii) the year
ended October 31, 1996 and the six months ended April 30, 1997 for Steam
Supply and SVS; and (iv) the year ended September 30, 1996 and the six
months ended March 31, 1997 for ICE/VARCO. The pro forma combined balance
sheet includes: (i) the balance sheets of Invatec, SSI and ICE/VARCO at June
30, 1997; and (ii) the balance sheets of Steam Supply and SVS at July 31,
1997.
(3) Does not include: (i) salaries and benefits of certain owners and managers
of the Acquired Businesses who were not or will not be employed by the
Company and will not be replaced and certain excess administrative support
service fees charged by ICE/VARCO's former parent company, as follows:
fiscal 1996, $1,674,000; and first six months of fiscal 1997, $937,000; or
(ii) $5.1 million of non-cash, non-recurring special compensation expenses
attributable to stock awards made by SSI in fiscal 1996 and in the first six
months of fiscal 1997 and sales of Common Stock by Invatec in the first six
months of fiscal 1997.
(4) Includes goodwill amortization to be recorded as a result of the
Acquisitions over a 40-year period, as follows: fiscal 1996, $602,000; and
first six months of fiscal 1997, $301,000.
(5) Assumes an effective tax rate of 43%.
(6) Computed on the basis described in the Notes to the Unaudited Pro Forma
Combined Financial Statements.
(7) Reflects the closing of this Offering and Invatec's application of the
estimated net proceeds therefrom as described under "Use of Proceeds."
(8) Pro forma combined total debt includes $4.4 million payable to former owners
of Acquired Businesses.
20
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the financial
statements and the notes thereto and "Selected Financial Information" included
in this Prospectus.
OVERVIEW
The Company derives its revenues principally from (i) sales of industrial
valves and other process-system components to its process-industry customers and
commissions paid by the OEMs of these products in connection with their direct
sales of these products and (ii) performance of comprehensive, maintenance,
repair, replacement and value-added distribution services of industrial valves
and process-system components for these customers. Cost of operations consists
principally of direct costs of valves and components sold, coupled with labor
and overhead costs connected with the performance of repair services. Selling,
general and administrative expenses consist principally of compensation and
benefits payable to owners and to sales, management and administrative personnel
and insurance, depreciation and amortization and other related expenses.
The pro forma combined statements of operations include pro forma
adjustments to selling, general and administrative expenses to reflect (i) the
decrease in salaries and benefits associated with certain owners and managers of
the Acquired Businesses who were not or will not be employed by the Company
after the acquisition of their Acquired Businesses and will not be replaced and
(ii) the elimination of certain excess administrative support service fees
charged by ICE/VARCO's former parent company. The integration of the Acquired
Businesses may present opportunities to reduce other costs through the
elimination of duplicative functions and operating locations and the development
of economies of scale, particularly as a result of the Company's ability to (i)
consolidate insurance programs, (ii) borrow at lower interest rates than the
Acquired Businesses, (iii) obtain greater discounts from suppliers and (iv)
generate savings in other general and administrative areas. The Company cannot
currently quantify these anticipated savings and expects these savings will be
partially offset by incremental costs that the Company expects to incur, but
also cannot currently quantify accurately. These costs include those associated
with corporate management and administration, being a public company, systems
integration and facilities expansions and consolidations. The pro forma combined
financial information herein reflects neither unquantifiable expected savings
nor unquantifiable expected incremental costs.
In connection with certain issuances of SSI common stock and sales of
Common Stock by Invatec during 1996 and the six months ended June 30, 1997, the
Company recorded a non-cash, non-recurring compensation charge of $5.1 million,
representing the difference between the amount paid for the shares and the fair
value of the shares on the date of issuance or sale. This compensation charge is
not included in the pro forma combined financial statements. In the quarter
ended September 30, 1997, the Company will record a special non-cash,
non-recurring compensation expense (presently estimated at approximately $2.0
million) as a result of its grant to certain executive officers of Invatec of
options to purchase 202,589 shares of Common Stock at an exercise price of $1.00
per share.
SSI has been identified as the "accounting acquirer" for financial
statement presentation purposes.
SUPPLEMENTAL UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
The following supplemental unaudited pro forma combined financial
information gives effect to the Transactions (as defined in "Dilution") as if
they had taken place on January 1, 1996 and as restated to convert the results
of operations of the Acquired Businesses whose historical fiscal periods were
not on a calendar year basis to a calendar year basis.
21
<PAGE>
The combined results of operations for the interim periods presented below
do not purport to be comparable to and may not be indicative of the Company's
post-combination results of operations because (i) SSI and the other Acquired
Businesses were not under common control or management and (ii) the Company
established a new basis of accounting to record the purchase of the Acquired
Businesses under the purchase method of accounting. See "Selected Financial
Information" and the Unaudited Pro Forma Combined Financial Statements and the
Notes thereto included herein.
SIX MONTHS ENDED
JUNE 30
--------------------------------------
1996 1997
------------------- -----------------
(UNAUDITED AND IN THOUSANDS)
Revenues................................ $ 36,603 100% $ 46,701 100%
Cost of operations...................... 25,116 69 32,191 69
--------- --- --------- ---
Gross profit............................ 11,487 31 14,510 31
Selling, general and administrative
expenses.............................. 9,334 26 11,707 25
--------- --- --------- ---
Income from operations.................. $ 2,153 5 $ 2,803 6
========= === ========= ===
UNAUDITED INTERIM RESULTS
REVENUES -- Revenues increased $10.1 million, or 28%, from $36.6 million in
the six months ended June 30, 1996 to $46.7 million in the six months ended June
30, 1997. This increase was primarily attributable to the following: (i) a $4.5
million increase in the revenues of Harley resulting from its acquisition of a
business in June 1996 and from strong sales of existing and new product lines,
(ii) a $1.6 million increase in ICE/VARCO's revenues associated with the
acquisition of a business in August 1996 and the continued penetration of
existing markets and (iii) a $1.3 million increase in Plant Specialties'
revenues attributable to a shift in management's emphasis to more aggressive
sales and marketing programs in 1997 and the performance of previously deferred
turnaround work.
GROSS PROFIT -- Gross profit increased $3.0 million, or 26%, from $11.5
million in the six months ended June 30, 1996 to $14.5 million in the six months
ended June 30, 1997. As a percentage of revenues, gross profit remained
consistent at 31% for both periods.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES -- Selling, general and
administrative expenses increased $2.4 million, or 26%, from $9.3 million in the
six months ended June 30, 1996 to $11.7 million in the six months ended June 30,
1997. This increase primarily reflected expenses attributable to the business
Harley acquired in June 1996 and the building of the Company's corporate
management team in the first half of 1997. As a percentage of revenues, these
expenses decreased from 26% in the six months ended June 30, 1996 to 25% in the
six months ended June 30, 1997 as a result of being spread over a larger revenue
base.
LIQUIDITY AND CAPITAL RESOURCES
The Company expects to enter into the New Credit Facility effective
concurrently with the closing of this Offering. Chase Securities has agreed to
structure, arrange and syndicate the New Credit Facility subject to the terms
and conditions of a commitment letter. According to these terms, the New Credit
Facility will be a three-year revolving credit facility of up to $60.0 million
to be used for acquisitions and general corporate purposes. Invatec's present
and future subsidiaries will guarantee the repayment of all amounts due under
the facility, and the facility will be secured by the capital stock of those
subsidiaries and the Company's accounts receivable and inventories. The Company
expects that the New Credit Facility will require the consent of the lenders for
acquisitions exceeding a certain level of cash consideration, prohibit the
payment of cash dividends by Invatec, restrict the ability of the Company to
incur other indebtedness and require the Company to comply with certain
financial covenants.
The Company anticipates that its cash flow from operations will provide
cash in excess of the Company's normal working capital needs, debt service
requirements and planned capital expenditures for property and equipment for at
least the next several years. On a combined basis, Invatec and the Acquired
22
<PAGE>
Businesses made capital expenditures of $1.9 million in fiscal 1996 and $0.5
million during the first six months of fiscal 1997. Invatec presently expects
that the Company's capital expenditures during the balance of fiscal 1997 will
total approximately $0.5 million (excluding acquisitions of businesses).
The Company intends to pursue attractive acquisition opportunities after
this Offering closes. The timing, size or success of any acquisition effort and
the associated potential capital commitments are unpredictable. The Company
expects to fund future acquisitions through the issuance of additional equity as
well as through a combination of cash flow from operations and borrowings,
including borrowings under the New Credit Facility.
FLUCTUATIONS IN OPERATING RESULTS
The Company's results of operations may fluctuate significantly from
quarter to quarter or year to year because of a number of factors, including the
timing of future acquisitions, seasonal fluctuations in the demand for repair
and distribution services (particularly the demand attributable to scheduled
turnarounds in the power industry, which typically are scheduled for
mild-weather months) and competitive factors. Accordingly, quarterly comparisons
of the Company's revenues and operating results should not be relied on as an
indication of future performance, and the results of any quarterly period may
not be indicative of results to be expected for a full year.
SSI
RESULTS OF OPERATIONS
The following table sets forth for SSI, the accounting acquirer, certain
selected financial data and data as a percentage of revenues for the periods
indicated (dollars in thousands):
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31 JUNE 30
---------------------------------------------------------------- --------------------
1994 1995 1996 1996
-------------------- -------------------- -------------------- --------------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues............................. $ 2,547 100% $ 2,852 100% $ 3,888 100% $ 1,606 100%
Cost of operations................... 1,271 50 1,584 56 2,376 61 900 56
--------- --- --------- --- --------- --- --------- ---
Gross profit......................... 1,276 50 1,268 44 1,512 39 706 44
Selling, general and administrative
expenses........................... 1,268 50 1,853 65 1,917 49 886 55
Special compensation expense on
common stock issuance.............. -- -- -- -- 38 1 -- --
--------- --- --------- --- --------- --- --------- ---
Income (loss) from operations........ $ 8 -- $ (585) (21) $ (443) (11) $ (180) (11)
========= === ========= === ========= === ========= ===
</TABLE>
1997
--------------------
Revenues............................. $ 19,760 100%
Cost of operations................... 13,495 68
--------- ---
Gross profit......................... 6,265 32
Selling, general and administrative
expenses........................... 4,918 25
Special compensation expense on
common stock issuance.............. 2,393 12
--------- ---
Income (loss) from operations........ $ (1,046) (5)
========= ===
UNAUDITED INTERIM RESULTS
REVENUES -- Revenues increased $18.2 million, or 1,138%, from $1.6 million
in the first six months of 1996 to $19.8 million in the first six months of
1997. This increase resulted from the inclusion of the results of Harley, GSV
and Plant Specialties from their respective dates of acquisition, February 1,
March 1, and June 1, 1997.
GROSS PROFIT -- Gross profit increased $5.6 million, or 800%, from $0.7
million in the first six months of 1996 to $6.3 million in the first six months
of 1997, principally as a result of the incremental gross margin generated by
Harley, GSV and Plant Specialties. As a percentage of revenues, gross profit
decreased from 44% in the first six months of 1996 to 32% in the first six
months of 1997. This decrease reflects the expansion of SSI's consolidated
operations to include the distribution and related services operations of Harley
and the on-site and in-shop repair services operations of Harley, GSV and Plant
Specialties, which historically generated lower gross margins than SSI's gross
margins attributable to its on-line repair services operations.
23
<PAGE>
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES -- Selling, general and
administrative expenses increased $4.0 million, or 444%, from $0.9 million in
the first six months of fiscal 1996 to $4.9 million in the first six months of
1997. This increase reflects the building of SSI's corporate management team and
the incremental selling, general and administrative expenses of Harley, GSV and
Plant Specialties. As a percentage of revenues, these expenses decreased from
55% in the first six months of 1996 to 25% in the first six months of 1997 as a
result of being spread over a larger revenue base.
SPECIAL COMPENSATION EXPENSE ON COMMON STOCK ISSUANCE -- In connection with
the issuance of common stock to certain members of management and a management
services provider, SSI recorded a $2.4 million non-cash, non-recurring charge in
the six months ended June 30, 1997 as described under "Management -- Executive
Compensation" and "Certain Transactions -- The SSI Merger."
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
REVENUES -- Revenues increased $1.0 million, or 34%, from $2.9 million in
1995 to $3.9 million in 1996. This increase resulted primarily from SSI
obtaining, in early 1996, sole-source contracts to provide leak sealing and
related services to two significant petrochemical companies located in the
United States Gulf Coast region. An expansion of SSI's sales force during 1996
also contributed to the increase in revenues in fiscal 1996.
GROSS PROFIT -- Gross profit increased $0.2 million, or 15%, from $1.3
million in 1995 to $1.5 million in 1996. As a percentage of revenues, gross
profits decreased from 44% in 1995 to 39% in 1996, principally as a result of:
(i) aggressive pricing offered by SSI to obtain the sole-source contracts
referred to above; (ii) a marginal increase in the cost of certain raw materials
utilized in its leak sealing business; and (iii) increases in staffing levels in
1996 in preparation for higher future levels of business activity.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES -- Selling, general and
administrative expenses remained consistent at $1.9 million in both 1995 and
1996. As a percentage of revenues, these expenses decreased from 65% in 1995 to
49% in 1996 as a result of being spread over a larger revenue base.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
REVENUES -- Revenues increased $0.4 million, or 16%, from $2.5 million in
1994 to $2.9 million in 1995. This increase resulted primarily from increased
volumes of business resulting from an expansion of SSI's customer base which was
generated principally by three facilities opened in new geographic markets in
1993.
GROSS PROFIT -- Gross profit remained flat between 1994 and 1995, but
decreased as a percentage of revenues from 50% in 1994 to 44% in 1995. This
decrease resulted from an increase in the cost of raw materials utilized in the
leak sealing process and lower pricing offered by SSI in an effort to expand its
customer base.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES -- Selling, general and
administrative expenses increased $0.6 million, or 46%, from $1.3 million in
1994 to $1.9 million in 1995. As a percentage of revenues, these expenses
increased from 50% in 1994 to 65% in 1995. This increase was principally the
result of significant legal costs incurred in securing various patents and
related agreements related to the SafeSeal(TM) system.
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LIQUIDITY AND CAPITAL RESOURCES
The following table sets forth selected information from SSI's statements
of cash flows (in millions):
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31 ENDED JUNE 30
------------------------------- --------------------
1994 1995 1996 1996 1997
--------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net cash used in operating
activities......................... $ -- $ (1.1) $ (0.9) $ (0.7) $ (0.9)
Net cash used in investing
activities......................... -- -- (0.2) -- (19.4)
Net cash provided by (used in)
financing activities............... 0.1 2.5 -- (0.1) 20.3
--------- --------- --------- --------- ---------
Net change in cash................... $ 0.1 $ 1.4 $ (1.1) $ (0.8) $ --
========= ========= ========= ========= =========
</TABLE>
For the period from January 1, 1994 through June 30, 1997, SSI's operations
used $2.9 million of cash primarily as a result of its losses during that
period. Cash used in investing activities of $19.6 million in the same period
consisted primarily of $19.1 million used to acquire Harley, GSV and Plant
Specialties. Cash provided from financing activities in the same period of $22.9
million reflects net borrowings under credit facilities ($19.4 million) and
sales of SSI equity securities to Philip in 1995 and the first six months of
1997 ($3.8 million), less $0.2 million of dividends paid on preferred stock.
In the six months ended June 30, 1997, SSI utilized two credit facilities
(the "Facilities") to fund the acquisitions of Harley and GSV. One of the
Facilities provides for loans of approximately $17.5 million, comprised of $7.5
million of fixed-term loans, $4.8 million of which are guaranteed by Philip, and
up to $10.0 million of loans keyed to a borrowing base of, and secured by,
accounts receivable and inventories. The other Facility is a $7.0 million
advancing line of credit guaranteed by Philip.
FLUCTUATIONS IN OPERATING RESULTS
SSI's results of operations may fluctuate significantly from quarter to
quarter or year to year because of a number of factors, including seasonal
fluctuations in the demand for repair and distribution services (particularly
the demand attributable to scheduled turnarounds in the power industry, which
typically are scheduled for mild-weather months) and competitive factors.
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THE INDUSTRIAL VALVE INDUSTRY
OVERVIEW
Petrochemical and other chemical plants, petroleum refineries, pulp and
paper mills, electric and other utilities and other industrial process
facilities use industrial valves to direct and regulate the flow of feedstocks,
intermediates, products and fuels in their process systems. Industrial valves,
ranging in diameter from less than 1/2 3/4 to over 20 feet, serve as mechanical
control, blocking and pressure-relief devices in piping applications involving a
myriad of liquids, gases, dry materials, slurries and other substances. The
service environments for industrial valves range from relatively benign to
severe, and the useful life of an industrial valve can range from several hours
to 30 years or more depending on the severity of its service and other factors.
These factors include the materials comprising the valve, the quality of its
manufacture and the frequency and quality of its repair. Classified by how they
are powered, industrial valves may be divided into two broad categories: (i)
those powered manually ("standard" valves); and (ii) those operated by
actuators using electric, hydraulic or pneumatic power ("actuated" valves).
Actuated valves include those originally installed as such and standard valves
that have been upgraded. Valves of both types include rising stem valves
("RSVs"), such as globe, gate and diaphragm valves, and pressure safety,
relief and safety-relief valves ("PRVs"). Process industries use PRVs to
relieve excess pressure in process equipment, pressure vessels, boilers and
pipelines in order to prevent explosions or other system damage. PRVs typically
are designed to contain pressure up to a predetermined level (which is
individually set for each valve) and then to open and relieve excess pressure in
a controlled manner. Standard PRVs are self-operating and typically are spring
loaded, while actuated PRVs typically are operated by a pilot controller that
actuates the valve.
Based on management's knowledge of the industry, the Company believes that
(i) over 650 million industrial valves currently are installed in North America,
including more than 140 million RSVs in various process industries, (ii) more
than 370 million RSVs are in use worldwide, (iii) substantially every RSV
experiences at least one leak during its operational life and (iv) between
approximately 4 million and 7 million of the RSVs installed in North America are
leaking at a rate requiring repair or replacement at any one point in time.
Process systems consist of discrete units or trains of units which
generally operate continuously under pressure. In many process industries, these
systems handle corrosive substances and are subject to high cycling rates and
extremes of pressure and temperature. Leaks occur as a result, and a principal
source of leaks are valves using rising stems to direct their opening and
closing. OEMs use various packing materials to seal the stem area in RSVs, but
these seals are vulnerable to the effects of friction and pressure and, in many
cases, normal packing shrinkage and deterioration.
The process systems in the industries the Company serves generally require
emergency work and comprehensive scheduled periodic off-line repairs (called
"turnarounds"). Emergency work is performed, if practicable, while the
affected unit remains in operation and under pressure. On-line repairs
historically have consisted of sealing leaking pipes and flanges with various
enclosures and clamps and repacking leaking valves as interim measures pending
the next scheduled turnaround. Turnarounds typically involve the shutdown of an
entire process unit or trains of process units to permit the disassembly, repair
and/or replacement and reassembly of component parts (including industrial
valves), a process that can take from a few days to several months.
Three broad sectors comprise the industrial valve industry: (i)
manufacturing; (ii) distribution; and (iii) maintenance, repair and replacement
services (collectively, "repair services"). Based on management's knowledge of
the industry, the Company believes that the distribution and repair sectors of
the industrial valve industry represent a current worldwide annual market of
approximately $20.6 billion, of which North America accounts for approximately
$9.2 billion, including approximately $3.7 billion attributable to repair
services and approximately $5.5 billion attributable to distribution and related
services.
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<PAGE>
MANUFACTURING
Because many types of industrial valves are commodity-like products,
designers and OEMs of these valves generally must offer favorable pricing and a
consistent selection of new, better-performing valves to gain or retain market
share, and many target individual markets, product segments and speciality
niches to obtain brand identity. More than 500 companies design and manufacture
industrial valves in the United States, and this sector is undergoing some
consolidation.
DISTRIBUTION AND REPAIR
OEMs of industrial valves generally sell their products through various
independent distribution channels. The Company believes independent distributors
and independent sales representatives selling directly to small retailers or to
end users account for approximately 75% of new industrial valve sales in the
United States, while direct sales by OEMs account for the balance. The types of
distributors include (i) wholesalers selling commodity-type valves primarily to
retailers, (ii) valve and pipefitting stocking distributors selling standard
RSVs and quarter-turn valves, (iii) speciality flow control distributors selling
actuated valves packaged with other control products as complete systems and
(iv) full-line distributors selling all types of valves and valve-control
systems. Value-added distribution services include the assembly, testing,
sealing and certification of PRVs and customizing original equipment to meet the
customer's specifications.
Repair services include "on-line" repairs of valves and other
process-system components that continue to operate under pressure while the
repair is made and "off-line" repairs involving the repair of valves and other
process-system components that have been temporarily removed from a process
system. Off-line repairs are made either at the customer's facility (an
"on-site" repair) or in the repair service company's facility (an "in-shop"
repair).
In the United States, end users, distributors and repair companies perform
most repair and distribution services, while OEMs generally offer these services
only on a limited basis. The Company believes, on the basis of available market
data, that (i) the independent repair and distribution services sectors include
approximately 1,200 companies, consisting predominantly of small businesses
operating in single geographic areas in proximity to their customers, and (ii)
most of these companies have limited access to capital for modernization and
expansion and limited exit strategies for their owners. The Company also
believes that, as part of an overall emphasis on reducing operating costs, many
end users are increasing their outsourcing of various non-revenue-producing
activities, such as plant maintenance (including outsourcing of entire valve
maintenance and management programs).
The Company believes significant opportunities are available in the repair
and distribution services sectors of its industry to a well-capitalized national
company employing professionally trained service technicians and machinists and
providing a full complement of on-line, on-site and in-shop repair services. It
also believes the fragmented nature of its industry will provide it with
significant opportunities to consolidate the capabilities and resources of a
large number of existing repair services businesses.
MARKET ENVIRONMENT AND TRENDS
The Company has targeted selected groups of end users in three categories
of process industries in the United States, Canada and Mexico as its initial
primary market for the expansion of its repair and distribution services: (i)
petrochemical and other chemical plants, petroleum refineries and pulp and paper
mills (process manufacturers); (ii) conventional and nuclear electric power
plants and cogenerators and water and wastewater utilities (utilities); and
(iii) crude oil and natural gas producers, gas processing plants and oil, gas
and products pipelines (resource industries). The Company believes these
targeted groups account for substantially all the approximately 140 million RSVs
the Company believes currently are in service in North America and are heavy
users of PRVs and other valves. These groups also are characterized by severe
service applications in their processes which require valves that can endure
corrosive substances, flammable and explosive materials, high cycling rates and
extremes of pressure and
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<PAGE>
temperature. The Company believes economic conditions (generally and in these
targeted groups), technological developments and health, safety and
environmental concerns drive the markets for repair services and value-added
distribution services in these groups.
The Company's targeted industries use industrial valves currently ranging
in cost from less than $10 to more than $100,000. Historically, the demand for
new industrial valves has been determined by the extent to which general and
specific industry economic conditions or forecasts spurred the construction of
new plants or expansions of existing plant capacities. The Company believes that
(i) for a number of years, many companies in these industries lengthened the
period of time between turnarounds to minimize the economic costs associated
with turnarounds and delayed construction of new plant facilities and outlays of
capital expenditures for improvements of existing facilities and, as a result,
(ii) they are using a large population of aged valves which will require
increasing levels of repair and replacement. In recent years, various factors
have led companies in these industries to undertake capital expenditure programs
to retool their existing process operations with new or improved labor-, time-
and other cost-reducing devices. The Company believes this trend has
strengthened both the replacement market for industrial valves and the market
for independent, comprehensive repair services.
Because the Company's targeted industries generally manufacture or produce
commodities, they compete generally on the basis of price with each other and,
in many cases, with overseas companies having lower-cost labor pools or raw
material or other competitive advantages. The downward pressure this competition
places on prices has led to the trend in these industries to attempt to achieve
operating efficiencies as a means of preserving or enhancing operating margins
while remaining competitive in their markets. Also contributing to this trend
are various technological developments that enable these industries to reduce
operating costs by modernizing existing process systems and other plant
operations or replacing existing process systems with new, more efficient
systems. For example, some industries have developed new process technologies
requiring equipment to operate under higher pressures and thus entailing the
replacement or pressure-resetting of installed PRVs. Similarly, automation of
valve and other process control devices and computerized information management
systems enable these industries to use a smaller work force to perform essential
non-revenue-producing services, while the emergence of reliable independent
service providers using new technologies in areas such as valve repair service,
inventory management and turnaround planning enables these industries
increasingly to outsource these services, typically at a net savings. The
Company believes that many companies in these industries have eliminated or
severely reduced the size of their own repair crews and engineering staffs. In
addition, in order to reduce the size of their purchasing departments and the
costs of contract administration, these companies are trending towards using
fewer in-house administrators overseeing a reduced number of vendors performing
an increasing amount of services.
The efforts of the Company's targeted industries to reduce their costs have
led OEMs to design and tool for the manufacture of more energy-efficient and
reliable valves. Because valve design and manufacture is capital intensive and
price is a primary competitive factor in the sale of new valves, the Company
believes that valve OEMs are under pressure to reduce their own costs and
increasingly will evaluate the potential cost savings from outsourcing their
assembly, sales and other functions and reducing the number of distributors they
utilize and are required to monitor.
Another factor driving certain of the Company's targeted industries towards
spending for new valves and related products and new valve repair service
technologies is the mandate of the federal Clean Air Act, as amended in 1990,
that various process industries, including most of those the Company serves, use
the maximum achievable control technology ("MACT") available (i) to minimize
the occurrences of fugitive emissions from their process systems of certain
volatile organic compounds ("VOCs") or other hazardous air pollutants and (ii)
to control the emissions that do occur. Regulations promulgated by the United
States Environmental Protection Agency currently require the phase-in (first in
newly constructed, reconstructed or modified process systems and then in
existing unmodified systems) of MACT performance standards for all major source
categories of hazardous air pollutants. Under these standards, a "leak," which
formerly was a measured reading of 10,000 parts per million ("ppm") or
greater, is being reduced to a measured
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<PAGE>
reading of 500 ppm or greater. For certain synthetic organic chemical plants,
the change to a 500 ppm leak definition became effective in 1996. Other
industries have later phase-in dates. For example, existing petroleum refineries
must comply with the 500 ppm threshold beginning August 18, 1999. To achieve
compliance with the applicable performance standards, federal and state
regulations require the process industries covered thereby to establish leak
detection and repair programs incorporating specified protocols. For example,
pursuant to these regulations, a process plant that contains valves in gas,
vapor or light liquid service generally must use a portable VOC-monitoring
instrument at specified intervals (monthly, quarterly or yearly) to test each
valve subject to the regulations for fugitive VOC emissions. The regulations
generally require the plant to repair any leaking valve within 15 days, and to
make its first attempt at repair within five days, after the leak is detected,
unless the plant can show immediate repair is technically infeasible without a
"process unit shutdown" (as defined) or otherwise establish that delaying the
repair is justified. Under these regulations, an unscheduled practice or
procedure that stops production from a process unit or part of a process unit
for less than 24 hours while a valve is removed, repaired on site and
reinstalled is not a process unit shutdown. A first attempt at repair typically
involves tightening various bolts or nuts. The plant also can use the monitoring
instrument to determine whether a valve leak has been repaired. To encourage
plants to reduce their number of leaking valves, federal and state regulations
generally afford those plants that do so with longer intervals between required
monitorings. If businesses fail to adhere to these requirements, they may be
subject to stiff penalties. The Clean Air Act authorizes civil penalties up to
$25,000 per day per violation, administrative penalties up to $200,000 and field
citations up to $5,000 per violation.
The Company believes that increasingly stringent federal and state
regulations and performance standards will increase demand for the Company's
products and services. For example, industries subject to these standards now
can monitor valves to quantify the amount of feedstock, intermediates, products
or fuel which is being lost attributable to leaking valves and quantify the
costs associated with these leaks. The Company believes these industries
increasingly will seek to prevent and remedy leaking valves as efficiently and
expeditiously as possible. The Company believes that, with its SafeSeal(TM)
system and other repair and distribution services it provides on a national
basis, it is well positioned to address these needs. The SafeSeal(TM) system can
provide an efficient and expeditious means to perform on-line valve restoration
and is an attractive alternative to both on-line interim measures and off-line
repairs because it restores valves on line in conjunction with their required
monitoring, thereby reducing or eliminating shutdown time. The Company intends
to market the SafeSeal(TM) system as the feasible on-line repair alternative for
those leaking RSVs whose immediate repair otherwise either could be effected off
line and on site within 24 hours or would be technically infeasible.
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<PAGE>
BUSINESS
GENERAL
Invatec was formed in March 1997 to create the leading single-source
provider of comprehensive maintenance, repair, replacement and value-added
distribution services for industrial valves and related process-system
components (collectively, "repair and distribution services") throughout North
America. The Company intends to be a leader in the consolidation of the highly
fragmented repair and distribution sectors of the North American industrial
valve industry by continuing to execute its aggressive acquisition strategy and
to implement its national operating program designed to increase internal
growth, market share and profitability. When this Offering closes, Invatec will
have combined seven businesses with 32 locations whose revenues totaled
approximately $76.2 million on a pro forma combined basis during fiscal 1996.
The Company believes it is positioned to meet the growing demand for
outsourced management and maintenance programs for industrial valves and other
process-system components because the combination of its distribution and repair
services capabilities will allow it to become a single-source provider of these
services for many of its targeted customers. The Company also believes this
combination will (i) promote internal economies of scale, (ii) provide the
Company with valuable information that can be used to expand its future repair
services revenue base and (iii) better equip the Company to respond to problems
associated with the repair and upgrading of its customers' process-system valves
and other components.
Many of the Company's customers are large Fortune 500 industrial companies
and large utilities. The Company provides them with both on-line and off-line
repair services. It believes its approach to making on-line repairs of leaking
RSVs that were manufactured with compressible packing material distinguishes it
from other on-line repair companies and is safer, more effective and more
cost-efficient than conventional on-line repair methods. An important part of
the Company's business strategy will be to roll out SSI's proprietary
SafeSeal(TM) system through the operations of the other Acquired Businesses and
other businesses it acquires in the future. The Company performs both on-site
and in-shop off-line repairs. It also uses its facilities to (i) assemble, set,
test, seal and certify new PRVs, (ii) assemble other new valves, actuators and
other components into packaged systems for sale, rebuild previously used valves
(other than PRVs) to their original specifications for sale and fabricate other
process-system components for sale and (iii) test and certify new and rebuilt
valves and systems as meeting the specifications of its customers and OEMs and
applicable industry standards.
BUSINESS STRATEGY
The Company intends to become the leading North American provider of
comprehensive valve repair and distribution services by emphasizing growth
through acquisitions of other repair and distribution services businesses and
implementing a national operating strategy aimed at increasing internal growth
and market share and enhancing profitability. The Company's growth strategy will
focus on capitalizing on certain trends in its targeted industries, including
increased outsourcing, increased focus on reducing economic losses attributable
to leaking valves and increasingly more stringent regulatory requirements
applicable to process-system facilities.
GROWTH THROUGH ACQUISITIONS. The Company intends to implement an
aggressive acquisition program targeting opportunities to enter new geographic
markets and expand within its existing markets.
o ENTERING NEW GEOGRAPHIC MARKETS. The Company currently conducts
operations through 32 facilities located in 17 states in the United
States and in Canada. It plans to broaden its base of operations by
seeking acquisitions in new markets throughout North America in order
to expand the Company's repair and distribution services capabilities.
In each new market, the Company initially will target companies with
historically successful operating results, superior operating
management and established customer relationships and brand
identities. The Company will generally seek to establish itself as a
provider of both repair and distribution services in each of its new
markets.
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o EXPANDING WITHIN EXISTING MARKETS. The Company intends to pursue
acquisitions within its existing markets as a primary means of
expanding its repair and distribution services capabilities within
those markets and as a means for gaining access to new
process-industry customers, specialized services, new products or
other strategic synergies.
IMPLEMENTATION OF A NATIONAL OPERATING STRATEGY. The principal elements of
the Company's operating strategy are:
o CROSS-SELLING REPAIR AND DISTRIBUTION SERVICES. The Acquired
Businesses currently provide their respective customers with differing
levels of repair services and distribution services. For example,
Plant Specialties provides extensive repair and remanufacturing
services and limited distribution services, while ICE/VARCO provides
extensive distribution services of both valves and related process
equipment and a growing valve repair service. In an effort to become a
single-source provider of repair and distribution services to its
customers, the Company plans to offer a full line of services through
most of its locations. The Company believes that this single-source
capability will allow it to become the repair services provider and
valve and related parts supplier of choice for its current and
prospective customers.
o INCREASING INTERNAL GROWTH THROUGH TECHNOLOGY ROLL-OUT. The Company
believes the SafeSeal(TM) system represents a significant improvement
over traditional valve packing restoration methods. This technology
offers customers the ability to (i) substantially reduce or eliminate
lost feedstock, product and fuel costs attributable to leaking valve
packing, (ii) safely bring leaking valves into compliance with
applicable emission standards without having to endure a shutdown and
(iii) establish an effective, on-line means of remediating any further
packing-related leaks. Because of the value-added nature of this
proprietary technology, the Company, through SSI, has been able to
achieve higher gross margins through the provision of this service
compared to most other services it provides. The Company believes the
Acquired Businesses will serve as a platform to aggressively market
this technology to many of their existing process-industry customers
in their respective markets. The Company's future acquisition efforts
will focus on additional opportunities to expand this service into new
geographic markets and to new segments of the process-industry market
within its existing geographic areas.
o CAPITALIZING ON GEOGRAPHIC DIVERSITY TO DEVELOP NATIONAL AND REGIONAL
CUSTOMER AND OEM RELATIONSHIPS. The Company's customers include many
large petrochemical and other chemical companies, petroleum refiners,
pulp and paper companies and power and other utilities, many of which
operate in numerous locations throughout North America. The Company
believes its ability to provide repair and distribution services on a
comprehensive basis throughout North America will enhance its
relationships with these customers and with OEMs and afford it greater
opportunities for new business. As the Company expands its regional
and North American presence, it will seek to capitalize on its
existing, and establish new, "national account," "blanket
approval" and "consolidated supply" relationships and expand
existing "regional" contracts with its large process-system
customers.
o ACHIEVING COST EFFICIENCIES AND STANDARDIZING AND IMPLEMENTING "BEST
PRACTICES." The Company believes it should be able to reduce the
total operating expenses of the Acquired Businesses and other
businesses it acquires in the future by eliminating certain
duplicative administrative functions and operating facilities and
consolidating certain functions performed separately by each business
prior to its acquisition. The Company also believes that, as a large
national company, it should experience reduced costs (as a percentage
of revenues) in such areas as: purchasing, financing arrangements,
employee benefits, information management, insurance and other risk
management and inventory control. In addition, the Acquired Businesses
have significant knowledge and experience in operating industrial
valve repair and distribution services businesses and providing
products and services ancillary to those operations. They have
continually refined their operating procedures in order to improve
customer service and operating efficiency. The Company intends to
formalize this approach of identifying "best practices" it will
adopt as Company
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<PAGE>
standards and implement throughout its operations. Management believes
the standardization of best practices will enable the Company to
provide superior customer service and be a low-cost operator in each
of its markets.
ACQUISITION STRATEGY
The Company intends to continue the aggressive acquisition program
initiated by SSI to expand into additional markets and enhance its position in
existing markets. Given the large size and fragmentation of the valve repair and
distribution services industry, the Company believes there are numerous
potential acquisition candidates both within the markets currently served by the
Company and in new markets. The Company currently has no binding agreements to
effect any such acquisition (other than the acquisitions of ICE/VARCO and SVS).
The timing, size and success of the Company's acquisition efforts and the
associated potential capital commitments cannot be readily predicted.
The Company's initial strategy will be to acquire well established repair
and distribution services companies in significant centers of its targeted
process industries in North American markets. The Company also intends to make
tuck-in acquisitions that provide access to additional customers, specialized
services, new products or other strategic synergies. The Company presently does
not intend to acquire any valve manufacturing operations.
The Company plans to acquire a leading company in each new geographical
market it enters. Each of the Company's acquisition candidates will be expected
to demonstrate the potential for substantial revenue and earnings growth when
combined with the Company's existing operations. The Company will evaluate not
only the equipment and facilities of each acquisition candidate, but also
certain subjective characteristics of each acquisition candidate, including its
reputation, customer base, quality of operating management and technical staff.
An important criterion for the Company's acquisition candidates
(particularly candidates in new markets) will be high-quality operating
management and the desire of those persons to remain in place and continue
running the acquired operations for an extended period of time. The Company will
employ a stock-based compensation program designed to help the Company retain
its operating management personnel and develop a sense of proprietorship of
those persons in the Company and align the interests of those persons with those
of the Company's stockholders generally. See "Management -- 1997 Incentive
Plan."
The Company believes it will be well positioned to implement its
acquisition strategy because of: (i) its ability to provide access to the
SafeSeal(TM) system, which is not otherwise available in the marketplace; (ii)
its decentralized operating strategy; (iii) its increased visibility and access
to financial resources as a public company; and (iv) its ability to provide
acquired companies and their shareholders with both liquidity and the
opportunity to participate in the Company's growth and expansion.
As consideration for future acquisitions, the Company intends to use
various combinations of Common Stock, cash and notes. The consideration for each
future acquisition will vary on a case-by-case basis, with the major factors
being historical operating results, the future prospects of the business to be
acquired and the ability of that business to complement the services offered by
the Company. The Company intends to register 5,000,000 additional shares of
Common Stock under the Securities Act for use in connection with future
acquisitions. See "Risk Factors -- Dependence on Acquisitions for Growth,"
" -- Capital Requirements" and " -- Potential Effect of Shares Eligible for
Future Sale on Price of Common Stock."
SERVICES PROVIDED
The Company believes that, in evaluating potential providers of outsourced
repair services, industrial corporations and plant managers are increasingly
emphasizing the ability of a service provider to implement comprehensive
management and maintenance programs for their valves and other process-system
components. With its recently expanded repair and distribution services
capabilities and as part of its operating strategy, the Company is developing
programs to meet this demand.
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REPAIR SERVICES. The Company provides a variety of off-line repair
services (including both on-site and in-shop repair services) and on-line repair
services for valves and other process-system components. These services vary by
industry and by process applications within each industry.
OFF-LINE SERVICES. The Company's off-line services include: diagnosis and
testing of valve performance, including nondestructive examination using dye
penetrants and mag-particle testing; repair, rebuilding and replacement of RSVs,
PRVs and other valves; custom-designing, machining and plating of pressure-
sealed gaskets; repair and upgrading of standard valves of various types; repair
and replacement of actuators and positioners used with actuated valves; and
cleaning of valves used in chlorine, oxygen and other service applications.
Valve repair services include replacing broken stems and other components with
OEMs' parts or equivalent parts that the Company machines and fabricates,
blasting valve interiors with metal shot to remove process residue and corroded
material, welding overlays to refinish valve seats and other worn areas,
upgrading standard valves with actuators and related parts and modifying
existing components to meet OEMs' specifications for repacking with new, pliable
packing materials. In some locations, the Company also reconditions its
customers' used valves, and remanufactures used valves (other than PRVs) it has
purchased, typically at scrap metal value, to equal or exceed the original OEMs'
specifications. It typically sells its remanufactured valves under a one-year
warranty at a discount from the price of a comparable new valve. The Company
intends to expand those services throughout its operations. As part of the
repair process, the Company uses high-pressure air, steam and liquid lines and
related instrumentation to test and certify the performance capabilities of the
valves and other equipment it repairs.
An important part of the Company's repair services is providing detailed
documentation of the sources and types of the materials and components used to
make repairs, the repair methods applied, the design specifications adhered to
and test results. Customers can use this information in connection with their
planning for future turnarounds and repairs. In addition, customers subject to
federal and state fugitive emissions control regulations are required to
maintain this information in their corrective action files.
ON-LINE SERVICES. The Company's on-line services include (i) in the case of
RSVs leaking as a result of the deterioration of their stem-packing materials,
using the SafeSeal(TM) system to restore the packing materials generally to
their original performance capabilities, and (ii) using conventional
technologies to seal leaking pipes, flanges and valves as interim measures
pending the affected system's next scheduled shutdown and turnaround.
In SafeSeal(TM) valve restorations, the Company uses a valveless injection
fitting, which is a miniaturized, permanent injection port it attaches to the
leaking valve at or near an emission site, and a combination of specialized
emissionless injection tools to inject the appropriate pliable (or
"nonhardening") compound, usually one of the proprietary compounds the Company
has developed for use in the system, through the port and into the valve's
packing gland. The compound, by acting as a filler and lubricant, supplements
the existing packing to stop the leak and restore the sealing capability of the
packing. The injection port is left on the valve as a maintenance platform for
future servicing of the valve packing. Except in severe operating conditions, a
trained technician using the SafeSeal(TM) system can complete an on-line
restoration in less than one hour. In certain limited cases, two fittings and
injections are required to seal the leak. The Company believes the SafeSealE
system is safer, more effective and more cost-efficient than conventional
on-line valve-repacking methods.
The Company believes the following chart provides a useful comparison of
the SafeSeal(TM) system to other on-line valve repacking methods and
conventional off-line repacking:
<TABLE>
<CAPTION>
REPAIR
CONSIDERED REPAIR PERFORMED REPAIR PERFORMED REPAIR INCORPORATED
PROVIDES "PERMANENT" IN A CONTROLLED ON LINE WHILE IN LONG-TERM VALVE
IMMEDIATE REPAIR BY END USERS ENVIRONMENT UNDER PRESSURE MANAGEMENT PROGRAMS
---------------- ------------ ---------------- ---------------- -------------------
<S> <C> <C> <C> <C> <C>
SafeSeal(TM) system.................. x x x x x
Other on-line methods................ x x
Off-line repacking................... x x x
</TABLE>
33
<PAGE>
In performing interim on-line repairs, the Company designs line enclosures
and flange clamps to meet customer-specific technical and engineering objectives
and applicable industry and regulatory code requirements. SSI, which currently
performs substantially all the Company's on-line repair services, has used
independent contractors to fabricate its enclosures and clamps, and one element
of the Company's growth strategy is to use the existing machining and
fabrication facilities of the other Acquired Businesses as a platform for
increasing on-line repair services on a Company-wide basis.
DISTRIBUTION SERVICES. The Company currently sells new valves and related
instrumentation and other process-system components directly to its
process-industry customers from 17 of its 32 sales and service locations. In
addition to purchasing valves from OEMs for resale, the Company also acts as a
sales representative for a number of OEMs. In this capacity, it typically
promotes the sale and distribution of the OEMs' products in designated
territories for direct factory shipment to the customer and is compensated by
the OEMs on a commission basis.
At each sales location, the Company maintains inventories of valves and
other equipment typically used by the process industries it serves from that
location. GSV, for example, offers a complete line of high-and low-pressure
valves and related equipment designed specifically for use in severe service
steam-line applications and remote-controlled electric power generation. Because
customers place many of their orders in connection with new construction or
planned turnarounds, the Company often is able to arrange for just-in-time
deliveries of the original equipment required to fill these orders.
The Company's value-added valve distribution services primarily involve the
assembly, setting, testing and sealing of spring-loaded and pilot-operated PRVs
and also include: assembling other original valves with optional components
supplied by the same or different OEMs; customizing the original equipment for
installation in the customer's process unit; combining two or more valves in
configurations designed for specific process applications; and testing and
calibrating, as applicable, individual components and accessories and complete
equipment packages. As a part of its standard quality assurance program, the
Company supplements the positive material identification information OEMs
furnish to trace all materials they use in manufacturing their valves and other
equipment with its own material certifications, testing certificates and
full-assembly and test reports. Compiling this information (i) enables customers
to comply with applicable internal and regulatory recordkeeping requirements and
to demonstrate compliance with applicable industry and regulatory performance
standards, (ii) facilitates the repair or replacement of component parts, and
the reconditioning of entire valve assemblies, to the original design
specifications and (iii) provides the initial step in a predictive valve
maintenance program that uses actual operating histories to plan turnarounds
and, by isolating the reasons for equipment failures, spurs the use of different
or new materials and technologies.
OPERATIONS
The Company intends to operate on a decentralized basis, giving the
management of each operating company or each regional operating group (which
will include "tuck-in" acquisitions) the responsibility for day-to-day
operations, growth and profitability. It will centralize its accounting,
auditing and internal control, cash management, employee benefits, financing,
financial reporting, risk management and business acquisition activities and
coordinate the sharing among its operating locations of financial resources for
improved systems and expansion of services, training programs, financial
controls, purchasing information and operating expertise. The Company's
executive management team will direct the development of the Company's marketing
strategies and programs and be responsible for key national supplier and
customer relationships, and it intends to establish a management information
system to enhance its ability to monitor each local or regional operation,
assimilate acquired businesses through standard reporting mechanisms and
implement performance-based incentive plans keyed to defined operational and
productivity measurements and benchmarks. It currently is reviewing the
operations of the Company and other repair and distribution services businesses
in order to identify the "best practices" the Company will implement
throughout its operations. In order to reduce traditional corporate headquarters
expenses (as a percentage of revenues) and increase efficiencies, the Company
intends to outsource various functions, including various personnel management
and other human resource services, legal and tax services and management
information systems design and implementation.
34
<PAGE>
The Company conducts its repair and distribution services operations
through its local sales and service centers. It typically staffs its service
centers with customer service and order entry personnel, repair coordinators and
inventory, shipping and receiving and office personnel. The Company currently
performs in-shop valve and other equipment assembly, testing and certification
at 17 of its 32 operating facilities. Sixteen of these locations are authorized
by various OEMs as centers for the assembly, sale and repair of their valves and
other products and maintain various professional certifications by organizations
such as the American Society of Mechanical Engineers ("ASME") and the National
Board of Boiler & Professional Vessel Inspectors.
The Company performs most of its on-site repair services on a scheduled
basis in response to the customer's call. The Company also offers 24-hour
emergency on-line and on-site repair services from 30 of its service locations.
The Company operates approximately 28 mobile machine shops that allow its
technicians to perform repair and installation functions at the facilities of
its customers. These shops typically are self-contained trucks or trailers
ranging in size from 10 feet to 48 feet in length which the Company equips with
various combinations of lathes, milling machines, grinders, welding equipment,
drill presses, test stands, work benches and hand tools. The Company maintains
its mobile shops at various locations, and from time to time it will maintain a
shop indefinitely at a customer's facility if the work so warrants.
The Company utilizes its repair and maintenance personnel to remanufacture
valves for sale at times of decreased demand for repair and maintenance
activities. This incremental activity enables the Company to maintain sufficient
staff to meet the high level of activity associated with turnarounds and to
produce a valuable product in times of decreased activity. The Company has no
significant new manufacturing operations.
SALES AND MARKETING
The Company employs approximately 110 direct salespersons to conduct its
marketing and sales activities. Most product and service orders are awarded by
plant maintenance managers to a small number of pre-approved vendors, with
little direct bidding for each job. More recently, plant owners have begun
establishing sole-source relationships with large, well-insured vendors with
reputations for efficient response, safe technicians and comprehensive service.
The Company's sales and marketing efforts typically focus on one-on-one
relationships with plant maintenance managers and turnaround planners and
include regular visits to customer plants to ensure client satisfaction. Initial
visits also typically involve demonstration of the Company's technical abilities
at the plant or the Company's shop facilities. The Company regularly advertises
in trade journals, participates in trade shows and conducts customer
appreciation functions. The Company also has an organized national accounts
program that targets large multi-location industrial customers.
Many of the Company's customers are regional and national companies in the
petroleum refining, chemical and pulp and paper industries and utilities. The
following is a list (in alphabetical order) of the Company's 10 largest
customers during fiscal 1996, based on pro forma combined revenues:
Advanced Separation Technologies, Inc. E. I. Du Pont de Nemours & Co.
Amoco Corporation Florida Power Corporation
Chevron Corporation Florida Power & Light Company
Citgo Petroleum Corporation Union Carbide Corporation
Dow Chemical Company Valero Energy Corporation
For fiscal 1996, none of the Company's customers accounted for 5% or more
of the Company's pro forma combined revenues. While the Company is not dependent
on any one customer, the loss of one of its significant customers could, at
least on a short-term basis, have an adverse effect on the Company's results of
operations.
The Company generally seeks to enter into national or regional "blanket"
contracts with its large customers. These contracts function to designate the
Company as an approved service provider for a
35
<PAGE>
customer and establish certain standard terms and conditions for providing
service to plants or other facilities owned or operated by that customer.
Although these blanket contracts generally do not establish the Company as an
exclusive provider of repair and distribution services, the Company believes
they are an important consideration for plant managers and other decision makers
in the usual process of selecting a vendor for the services the Company
provides.
SUPPLIERS
VALVES, PARTS AND FITTINGS. The Company purchases substantially all the
new valves and other process-system components it distributes from OEMs. Its
principal suppliers are Crosby Valve & Gauge Co., a unit of FMC Corporation, and
units of Dresser Industries, Inc. Other suppliers of valves and process-system
components to the Company include Anderson, Greenwood & Co. and Penberthy, Inc.
The success of the Company as a provider of value-added distribution services
depends on the extent to which the OEMs with which it has distribution
arrangements are able to create a demand for their products in the territories
they assign the Company. Factors affecting this demand include, in addition to
price, product quality and performance (including durability and safety),
delivery time and the relative strengths of the brand name and marketing ability
of the OEM.
RELATIONSHIPS WITH OEMS. The success of the Company as a value-added
distributor of new valves and other process-system components and as a
factory-authorized repair service provider depends on its relationships with the
OEMs of these products. Except for its distribution agreements with OEMs, the
Company generally has no contractual repair-services contracts with OEMs.
The typical distribution agreement in the Company's industry specifies the
territory or territories in which the distributor has the right and obligation
to sell the OEM's products and the services (sales, assembly or repair) the
distributor is authorized to, or must, perform. An OEM may (i) assign a
territory on an exclusive or a nonexclusive basis, (ii) limit the range of the
OEM's products the distributor may sell or service, (iii) authorize or restrict
sales or services by the distributor outside the assigned territory, (iv) refuse
to assign the distributor additional territories and (v) reserve to itself the
right to deal exclusively with specified customers or classes of customers (for
example, national accounts or engineering and construction companies) in the
assigned territory. The Company believes the current fragmentation of the
distribution sector of its industry reflects the traditional assignment by OEMs
of territories on generally a local basis to distributors operating from a
single facility.
The distribution agreement may limit the distributor's role to that of
sales representative acting on a commission basis or provide for purchases by
the distributor for resales to end users. It also may impose requirements on the
distributor concerning such matters as (i) minimum individual or annual purchase
orders, (ii) maintenance of minimum inventories, (iii) establishment and
maintenance of facilities and equipment to perform specified services and (iv)
training of sales personnel and service technicians. Many OEMs closely monitor
compliance with these requirements. The distribution agreement also typically
(i) grants the distributor the nonexclusive right to use and display the OEM's
trademarks and service marks in the form and manner approved by the OEM and (ii)
prohibits the distributor from offering products that compete with the OEM's
products the distibutor is authorized to sell.
The Company's distribution agreements generally have indefinite terms and
are subject to termination by either party on prior notice generally ranging
from 30 to 90 days.
The Company's business strategy has caused concern by some OEMs. Some of
the Acquired Businesses offer competitive product lines of major OEMs in certain
areas. As a result, the Company's strategy could conflict with existing or
future OEM distributor policies or programs. The Company believes, however,
that, as a national provider of repair and distribution services, it will offer
attractive benefits to OEMs. For large OEMs, it will offer a cost-effective
distribution alternative that promotes consistent quality and possesses
significant financial and human resources. For small and mid-sized OEMs, it will
offer access to broader markets and expertise in marketing. In addition, the
Company will offer to all OEMs (i) a central source of market and usage data,
including complete life histories of valves and other products, and (ii) a means
of reducing their own selling costs through additional outsourcing of their
36
<PAGE>
assembly, testing, repair and certification services, reducing the number of
distributors they are required to monitor and eliminating transition problems
associated with local owner-operated distributorships. Although no assurance can
be given that OEMs will not take actions that could materially adversely affect
the Company's ability to implement its growth strategies and maintain its
existing distribution services business, the Company believes that the
combination of (i) the advantages it will offer to OEMs and (ii) the desire of
end users to reduce the number of their vendors should result in these issues
being resolved on a mutually satisfactory basis.
HIRING, TRAINING AND SAFETY
The Company will seek to ensure through its hiring procedures and
continuous training programs and the training programs offered by its OEMs that
(i) its product-assembly and service technicians and machinists meet the
performance and safety standards established by the Company and its OEMs,
professional and industry codes and federal, state and local laws and
regulations and possess the required ASME, factory or other certifications and
(ii) its sales personnel are trained thoroughly in the selection, applications
and adaptations and customizations of the products it distributes and types of
repair services it offers.
Because on-line and on-site repair services often are performed in
emergency situations under dangerous circumstances (see "Risk
Factors -- Operating Hazards"), the Company intends to provide its technicians
with extensive classroom and field training and supervision and to establish and
enforce strict safety and competency requirements, including physical exams and
periodic drug testing in some cases. The Company's training programs for its
on-site repair technicians must meet OSHA requirements respecting, among other
matters, release detection procedures, appropriate work practices, emergency
procedures and other measures these technicians can take to protect themselves
and the environment.
COMPETITION
The markets for the Company's repair and distribution services generally
are highly competitive. The Company believes the principal competitive factors
in a distributor's sale of new valves and other process-system parts directly to
industries in the distributor's market include price and the ability of the
distributor to offer on a timely basis a wide selection of the new,
better-performing valves and parts OEMs have designed to meet the needs of these
industries. Factors affecting delivery time include inventory size and
accessibility and whether, in the case of PRVs and certain other valves, the OEM
or the distributor assembles, sets, tests and seals, or otherwise customizes,
the valve. The Company believes its assembly and testing facilities enable it
generally to deliver valves ready for installation faster than the relevant OEM.
In the case of repair services, the Company believes the principal competitive
factors are quality and availability of service (including emergency service),
price, use of OEM-approved replacement parts, familiarity with the OEMs'
products and local brand equity of the repair business.
In its distribution operations, the Company competes with the direct sales
forces and distribution networks of OEMs offering the same or comparable lines
of products. It competes for repair services businesses with other repair
service businesses and, to a lesser extent, with OEMs. Some of its competitors
may have lower overhead cost structures and, consequently, may be able to
provide their services at lower rates than the Company. The Company's
competitors for on-line repairs include two national competitors (the Furmanite
Division of Kaneb Services, Inc. and Team, Inc.) and several regional
competitors. Competition in the market for off-line repair services is highly
fragmented, although certain competitors may have dominant positions in some of
the local markets they serve.
RESEARCH AND DEVELOPMENT
The Company conducts research and development to improve the quality and
efficiency of its services. Research and development activities include both
in-house and extensive field testing of new technology to be used in conjunction
with the Company's repair service operations, as well as assisting the Company's
sales organization and customers with special projects.
37
<PAGE>
Through its research and development efforts, the Company is developing an
air-driven friction welding device and related processes which it intends to
market as the SafeWeld(TM) system. This technology is designed to eliminate a
common source of fugitive emissions when using the SafeSeal(TM) system by making
attachments to bodies having contents under high pressure through a fusion or
friction weld. Currently, the industry standard is to make the attachment by
drill and tap or a threaded fitting. The SafeWeld(TM) system is in the final
stages of development, but the Company believes it will be available to deliver
high-quality fusion welds of different metals. Although there can be no
assurance the SafeWeld(TM) system will be commercially successful, the Company
believes this system will be a significant enhancement to the SafeSeal(TM)
system. The Company also believes that the SafeWeld(TM) system may have
additional potential commercial uses.
In addition to the development of the SafeWeld(TM) system, the Company's
research and development efforts are currently aimed at developing technology
for permanent repair of leaking flanges and developing new leak sealing
compounds.
INTELLECTUAL PROPERTY
The Company, through subsidiaries, owns three United States patents and has
two United States patent applications pending which relate primarily to the
SafeSeal(TM) system. The patents grant the Company the right to exclude others
from making, using, offering for sale and selling the inventions in the United
States. Foreign counterparts to one or more of these patents have issued
providing rights in Australia, Austria, Belgium, Denmark, France, Germany,
Greece, Italy, Luxembourg, the Netherlands, Spain, Sweden, Switzerland and the
United Kingdom. Additional foreign counterpart patent applications are pending
in Canada, India and Japan. An application is also pending under the Patent
Cooperation Treaty. The process of seeking patent protection can be long and
expensive, and no assurance can be given a patent will issue from the Company's
currently pending applications or future applications or that, if patents are
issued, they will be of sufficient scope or strength to provide meaningful
protection or any commercial advantage to the Company. In addition, the laws of
certain foreign countries may not protect the Company's intellectual property
rights to the same extent as the laws of the United States. Litigation, which
could demand significant financial and management resources, may be necessary to
enforce patents or other intellectual property rights of the Company.
In October 1996, the Company settled litigation with Team Environmental
Services, Inc., one of the Company's competitors, relating to certain of the
Company's patents. One of the Company's customers has a license to certain of
the Company's technology under certain of its patents pertaining to the
SafeSeal(TM) system. Although, to the knowledge of the Company, that customer
has not pursued the development of technology that would compete with the
SafeSeal(TM) system (and instead has opted to continue outsourcing on-line valve
repair service work to the Company), there can be no assurance it will not elect
to do so in the future. Moreover, there can be no assurance others will not
independently develop substantially equivalent or better technology that would
be free of the Company's patents and other intellectual property rights.
Although in the aggregate the Company's patents are material to its
operations, the Company believes its future success will depend more on its
technological capabilities and the application of know-how (rather than on any
particular patent) in the conduct of its business. It enjoys service and product
name recognition, principally through various common law trademarks.
EMPLOYEES
At September 30, 1997, the Company had approximately 700 full-time
employees. Approximately 12 are members of the United Steelworkers of America,
AFL/CIO union. None of the Company's other employees are represented by a union.
Management believes the Company's relations with its employees are satisfactory.
The Company's future success will depend, in part, on its ability to attract,
retain and motivate highly qualified technical, marketing, engineering and
management personnel.
The repair services business is characterized by high turnover rates among
field service technicians. Although the Company believes its turnover rate for
field service technicians is below the industry average,
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<PAGE>
the Company's turnover rate for these employees is high relative to the
Company's other employees. The Company seeks to attract and retain qualified
service technicians and other technical field personnel by providing competitive
compensation packages. It has never experienced a prolonged shortage of
qualified personnel in any of its operations (and does not currently anticipate
any such shortage), but if demand for repair services were to increase rapidly,
retention of qualified field personnel might become more difficult without
significant increases in compensation.
FACILITIES
The Company owns or leases 32 sales and service facilities located in 17
states and Canada, as follows.
NO. OF NO. OF
STATE FACILITIES STATE FACILITIES
- ----------------------------------- -----------------------------------
Alabama.................. 1 Oklahoma................. 1
Alaska................... 1 Oregon................... 1
Arkansas................. 1 Pennsylvania............. 1
California............... 2 South Carolina........... 2
Colorado................. 1 Texas.................... 5
Florida.................. 4 Virginia................. 1
Georgia.................. 1 Washington............... 3
Indiana.................. 1 West Virginia............ 2
Louisiana................ 3 Ontario.................. 1
The Company owns seven of these facilities (totaling approximately 195,200
square feet) and leases the remainder (totaling approximately 278,300 square
feet) under leases having terms of up to 25 years on terms the Company believes
to be commercially reasonable. During fiscal 1996, total lease rentals were
approximately $1.1 million. The facilities consist principally of sales and
services, remanufacturing and administrative facilities, and the Company offers
in-house repair or assembly services at 17 of the facilities. Its principal
facilities include (i) an 82,000 square foot assembly, repair and
remanufacturing facility owned by Plant Specialties, (ii) a 46,000 square foot
machining and fabrication facility leased by GSV, (iii) 35,100 and 30,000 square
foot assembly and repair facilities leased by Harley, (iv) a 26,200 square foot
sales, service and administrative facility owned by Steam Supply and (v) a
25,000 square foot repair and remanufacturing facility owned by SVS. The Company
believes its facilities are adequately maintained and sufficient for its planned
operations at each location.
The Company's principal executive and administrative offices are located in
Houston, Texas.
GOVERNMENTAL REGULATION AND ENVIRONMENTAL MATTERS
A wide range of federal, state and local regulations relating to health,
safety and environmental matters applies to the Company's business. The
Company's in-shop reconditioning and remanufacturing of used valves frequently
involves the use, handling, storage and contracting for the disposal or
recycling of a variety of substances or wastes considered hazardous or toxic.
Environmental laws are complex and subject to frequent change. These laws impose
"strict liability" in some cases without regard to negligence or fault.
Sanctions for noncompliance may include revocation of permits, corrective action
orders, administrative or civil penalties and criminal prosecution. Certain
environmental laws provide for joint and several strict liability for
remediation of spills and releases of hazardous substances. In addition,
businesses may be subject to claims alleging personal injury or property damage
as a result of alleged exposure to hazardous substances, as well as damage to
natural resources. These laws and regulations also may expose the Company to
liability for the conduct of or conditions caused by others, or for acts of the
Company which complied with all applicable laws when performed. The Company
conducted Phase I (and, in two cases, Phase II) investigations to assess
environmental conditions on substantially all the real properties owned or
leased by the Acquired Businesses and engaged an independent environmental
consulting firm in that connection. It has not identified any environmental
concerns it believes are likely to have a material adverse effect on the
Company's financial condition or results of operations, although no assurance
can be given
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<PAGE>
material liabilities will not occur. No assurance can be given the Company's
compliance with amended, new or more stringent laws or regulations, stricter
interpretations of existing laws or the future discovery of environmental
conditions will not require additional, material expenditures by the Company.
OSHA regulations establish requirements the Company's training programs must
meet. See "-- Hiring, Training and Safety."
The Company believes it has all material permits and licenses required to
conduct its operations and is in substantial compliance with applicable
regulatory requirements relating to its operations. The Company's capital
expenditures relating to environmental matters were not material on a pro forma
combined basis in fiscal 1996. The Company does not currently anticipate any
material adverse effect on its business or financial position as a result of its
future compliance with existing environmental laws and regulations controlling
the discharge of materials into the environment.
LITIGATION AND INSURANCE
Steam Supply and a Mobil Corp. unit are named defendants in a proceeding
initiated by the City of Long Beach, California in October 1997 in a Long Beach
municipal court. The complaint arises from an in-shop repair Steam Supply
performed in February 1997, alleges the repair involved a release of hydrogen
sulfide gas into the atmosphere in violation of the California Health & Safety
Code and seeks monetary sanctions. Management of the Company believes this
proceeding will not have any material adverse effect on its financial condition
or operating results.
The Company is, from time to time, a party to litigation arising in the
normal course of its business, most of which involves claims for personal injury
and property damage incurred in connection with its operations. It currently is
not involved in any litigation it believes will have a material adverse effect
on its financial condition or results of operations.
The Company maintains insurance in such amounts and against such risks as
it deems prudent, although no assurance can be given that such insurance will be
sufficient under all circumstances to protect the Company against significant
claims for damages. The occurrence of a significant event not fully insured
against could materially and adversely affect the Company's financial condition
and results of operations. Moreover, no assurance can be given that the Company
will be able to maintain adequate insurance in the future at commercially
reasonable rates or on acceptable terms.
40
<PAGE>
MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES
When this Offering closes, Invatec's directors, executive officers and key
employees (ages are as of August 31, 1997) will be as follows:
<TABLE>
<CAPTION>
DIRECTOR
NAME AGE POSITION CLASS
- ------------------------------------ --- ---------------------------------------- --------
<S> <C> <C>
William E. Haynes(1)(2)(3).......... 54 Director, Chairman of the Board, I
President and Chief Executive Officer
Charles F. Schugart................. 37 Chief Financial Officer, Senior Vice
President -- Corporate Development,
Treasurer and Secretary
Denny A. Rigas...................... 53 Senior Vice President -- Technology and
Marketing
Frank L. Lombard.................... 55 Vice President -- Corporate Development
John L. King........................ 27 Vice President -- Corporate Development
Douglas R. Harrington, Jr........... 32 Vice President and Corporate Controller
Timothy M. LeFevre.................. 35 Vice President -- Corporate Marketing
Programs
Curry B. Walker..................... 61 Vice President -- Quality, Safety and
Engineering, President of Plant
Specialties
Michael A. Baker(4)(5).............. 51 Director (6) III
Robert M. Chiste(1)(2)(5)........... 50 Director (6) III
Arthur L. French(2)(3)(4)........... 57 Director (6) I
Tommy E. Knight(1)(5)............... 58 Director (6) II
Dr. Pierre R. Latour(3)(4).......... 57 Director (6) II
T. Wayne Wren, Jr.(1)............... 48 Director (6) III
Joe Cheatham(7)..................... 40 President and Chief Operating Officer of
Harley
Lee Roy Jordan(7)................... 56 President of SVS
Pliney Olivier(7)................... 51 President of GSV
Ed S. Ries(7)....................... 54 President of Steam Supply
Thomas Santacroce(7)................ 50 President of ICE/VARCO
Kevin M. Stern(7)................... 32 President of SSI
</TABLE>
- ------------
(1) Member of Board Executive Committee.
(2) Member of Board Nominating Committee.
(3) Member of Board Technology Committee.
(4) Member of Board Audit Committee.
(5) Member of Board Compensation Committee.
(6) Appointment as a director will become effective when this Offering closes.
(7) Key employee.
WILLIAM E. HAYNES has been Chairman of the Board of Invatec since May 1997
and President and Chief Executive Officer of Invatec since March 1997. He also
has served as President and Chief Executive Officer of SSI since November 1996
and as a director of SSI since May 1997. From July 1992 through December 1995,
Mr. Haynes served as President and Chief Executive Officer of LYONDELL-CITGO
Refining Company Ltd. He served in various executive capacities for Lyondell
Petrochemical Company from 1985 to 1993 and in various technical, management and
executive positions with Atlantic Richfield commencing in 1967. Mr. Haynes is
also a director of Philip Services Corp., an industrial and environmental
services company.
CHARLES F. SCHUGART has been Chief Financial Officer of Invatec since March
1997 and has served in the same capacity for SSI since February 1997. He has
been Senior Vice President -- Corporate Development of Invatec since July 1997.
Prior to February 1997, he served for over 12 years in a variety of
41
<PAGE>
capacities with Arthur Andersen LLP, including most recently as Senior Manager.
Mr. Schugart is a Certified Public Accountant.
DENNY A. RIGAS has been Senior Vice President -- Technology and Marketing
of Invatec since May 1997. From 1993 to May 1997, Mr. Rigas served as an
executive vice president and general manager of the Triconex Corporation, a
manufacturer of integrated safety systems for process-system industries. Mr.
Rigas has a total of 30 years of domestic and international experience in the
oil and gas hydrocarbon processing, process, pipeline, power, marine and other
industries. He has served in executive and sales/marketing management positions
in the last 18 years with, among others, a subsidiary of Rockwell International
Corporation, Lummus Crest and Foster Wheeler. Mr. Rigas is a registered
professional engineer in the State of Texas.
FRANK L. LOMBARD has been Vice President -- Corporate Development of
Invatec since March 1997 and has served in the same capacity for SSI since
August 1993. From 1982 until joining SSI in 1993, he served as President of
Westheimer Financial Group, Inc., a privately held investment banking and
corporate finance advisory firm in Houston, Texas.
JOHN L. KING has been Vice President -- Corporate Development of Invatec
since March 1997. Prior to March 1997, he served for over five years in a
variety of capacities with Arthur Andersen LLP, including most recently as an
audit manager. Mr. King is a Certified Public Accountant.
DOUGLAS R. HARRINGTON, JR. has been Vice President and Corporate Controller
of Invatec since March 1997 and has served in the same capacities for SSI since
February 1997. Prior to February 1997, he served in various capacities,
including most recently as Controller -- U.S. Operations for Gundle/SLT
Environmental, Inc. from March 1992 through May 1995 and from January 1996 until
February 1997. From May 1995 through December 1995, Mr. Harrington served as
Senior Manager -- Accounting for BSG Consulting, Inc. Prior to March 1992, he
served for more than five years in a variety of capacities with Arthur Andersen
LLP, including most recently an an audit manager. Mr. Harrington is a Certified
Public Accountant.
TIMOTHY M. LEFEVRE has been Vice President -- Corporate Marketing Programs
of Invatec since June 1997. From 1994 through June 1997, he served as Vice
President -- Corporate Marketing of Triconex Corporation. From 1992 through
1994, Mr. LeFevre served in a variety of technical and marketing capacities for
Allen-Bradley Company, a subsidiary of Rockwell International Corporation.
CURRY B. WALKER has been Vice President -- Quality, Safety and Engineering
of Invatec since July 1997 and has been President of Plant Specialties for over
10 years.
MICHAEL A. BAKER was a founder of American Medical Response, Inc., a
Boston-based company engaged in the provision of a national ambulance service
network, and served on its board of directors from February 1992 until it was
acquired in February 1996.
ROBERT M. CHISTE has been President, Industrial Services Group, of Philip
Services Corp. since July 1997. He served as Vice Chairman of Allwaste, Inc.
("Allwaste"), a provider of industrial and environmental services, from May
1997 through July 1997, President and Chief Executive Officer of Allwaste from
October 1994 through July 1997 and a director of Allwaste from January 1995
through August 1997. Philip Services Corp. acquired Allwaste effective July 31,
1997. Mr. Chiste served as Chief Executive Officer and President of American
National Power, Inc., a successor company of Transco Energy Ventures Company,
from its creation in 1986 until October 1994. During the same period, he served
as Senior Vice President of Transco Energy Company. Mr. Chiste also serves as a
director of Franklin Credit Management Corp., a New York-based financial
services company.
ARTHUR L. FRENCH has served as Chairman of the Board, Chief Executive
Officer and President of Metals USA, Inc., a metals processor and manufacturer
of metal components, since December 1996. From 1989 through 1996, Mr. French
served as Executive Vice President and a director of Keystone International,
Inc. ("Keystone"), a manufacturer of industrial valves and controls, with
responsibility for domestic and international operations. From 1966 to 1989, Mr.
French held various positions with Fisher Controls
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International, Inc., a control valve and instrumentation manufacturer, and
served as its President and Chief Operating Officer and a director prior to
joining Keystone.
TOMMY E. KNIGHT was President and Chief Executive Officer of Brown & Root,
Inc., a subsidiary of Halliburton Company and one of the largest international
construction firms in the world, from June 1992 until his retirement in
September 1996. Prior to that time and since 1964, he served in a variety of
other capacities with Brown & Root, Inc. Mr. Knight is a director of Metals USA,
Inc.
PIERRE R. LATOUR, PH.D. is an independent consulting chemical engineer. Dr.
Latour co-founded Setpoint, Inc. and served as a director and a vice president
of consulting, oil refining, central marketing and business development until he
retired in January 1995. He then served as a vice president of business
development for Dynamic Matrix Control Corp. ("Dynamic") and then Aspen
Technology, Inc. after it acquired both Setpoint, Inc. and Dynamic in January
1996. He retired from Aspen Technology, Inc. in January 1997.
T. WAYNE WREN, JR. has served as Senior Vice President of PSC Enterprises,
Inc., a subsidiary of Philip Services Corp., since July 1997 and served as
Senior Vice President -- Chief Financial Officer and Treasurer of Allwaste from
March 1996 through July 1997, having served as its Vice President -- Chief
Financial Officer since November 1995. From January 1994 to November 1995, Mr.
Wren was an independent financial consultant. He previously served as Allwaste's
Vice President -- Chief Financial Officer from August 1991 to December 1993. He
also provided financial consulting services to Allwaste pursuant to a consulting
agreement from January 1994 to June 1994.
JOE CHEATHAM has been President and Chief Operating Officer of Harley since
August 1996. Prior to that time and since April 1993, he was Harley's Regional
Manager-Southeast. Mr. Cheatham joined Harley in 1990 as the Manager of its
Columbia, South Carolina operations.
LEE ROY JORDAN has been President of SVS since its inception in 1984. In
addition, Mr. Jordan serves on the board of directors of Cavalier Homes, Inc., a
publicly traded company.
PLINEY OLIVIER has been President of GSV since 1985 and was Chief Executive
Officer of GSV from 1985 until February 1997. Prior to 1985, he held positions
as plant manager with Farmland Industries and as a vice president of marketing
with a subsidiary of Raytheon Corp.
ED S. RIES has been President of Steam Supply since July 1997. Mr. Ries has
been employed by Steam Supply since 1972 and has served in numerous senior-level
management, marketing and administrative positions with Steam Supply.
THOMAS SANTACROCE will become President of ICE/VARCO when this Offering
closes. Mr. Santacroce has been employed by ICE/VARCO since 1982 and has served
in various management, marketing and administrative positions with ICE/VARCO.
KEVIN M. STERN will become President of SSI when this Offering closes. Mr.
Stern has served in various management capacities for SSI since 1992.
When this Offering closes, the Board of Directors (the "Board") will have
three director classes, each of which, following a transitional period, will
have a three-year term, with one class being elected each year at that year's
annual stockholders' meeting. The initial terms of the Class I directors, the
Class II directors and the Class III directors will expire at the 1998 meeting,
the 1999 meeting and the 2000 meeting, respectively.
DIRECTOR COMPENSATION
Invatec initially will pay each director who is not a Company employee (a
"Nonemployee Director") fees of $1,000 for each Board and each Board committee
meeting attended (except for committee meetings held on the same day as Board
meetings) and will periodically grant Nonemployee Directors options to purchase
shares of Common Stock pursuant to the Company's 1997 Incentive Plan (the
"Incentive Plan"). See " -- 1997 Incentive Plan -- Nonemployee Director
Awards." It will not pay any additional compensation to its employees for
serving as directors, but will reimburse all directors for out-of-pocket
expenses
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they incur in connection with attending Board or Board committee meetings or
otherwise in their capacity as directors.
EXECUTIVE COMPENSATION
Invatec anticipates that during 1997 its most highly compensated executive
officers and their annualized base salaries will be: William E.
Haynes -- $200,000; Charles F. Schugart -- $175,000; Denny A. Rigas -- $175,000;
and Curry B. Walker --$150,000. Each of these executive officers is eligible to
earn additional performance-based incentive compensation for 1997. See
" -- 1997 Incentive Plan." The Company did not pay Mr. Haynes any salary from
his employment by SSI in December 1996 through mid-May 1997. When this Offering
closes, the Company will pay him $300,000 as a hiring bonus. His base salary
began accruing on May 16, 1997. SSI paid a $50,000 hiring bonus to Mr. Schugart
earlier this year. In January 1997, SSI awarded Messrs. Haynes, Schugart and
Frank L. Lombard 144,398 shares, 34,000 shares and 31,804 shares, respectively,
of SSI common stock. For federal income tax purposes, these awards have been
treated as taxable compensation income to Messrs. Haynes, Schugart and Lombard
in the amounts of $424,700, $100,000 and $93,500, respectively. In August 1997,
Invatec awarded Messrs. Haynes, Schugart, Rigas and Lombard options to purchase
97,966 shares, 38,608 shares, 22,710 shares and 19,593 shares, respectively, of
Common Stock at an exercise price of $1.00 per share.
EMPLOYMENT AGREEMENTS
When this Offering closes, Invatec will assume the employment agreements
SSI presently has with Messrs. Haynes and Schugart. Each of these agreements and
Invatec's employment agreement with Mr. Rigas (i) provides for an annual minimum
base salary, (ii) entitles the employee to participate in all the Company's
compensation plans (as defined) in which executive officers of Invatec
participate and (iii) has a continuous term of three (Mr. Haynes) or two
(Messrs. Schugart and Rigas) years, subject to the right of either party to
terminate the employee's employment at any time. If the employee's employment is
terminated by reason of the employee's death or disability (as defined), by the
Company without cause (as defined) or by the employee for good cause (as
defined), the employee or his estate will be entitled to a lump-sum payment
equal to a multiple (three for Mr. Haynes and two for Messrs. Schugart and
Rigas) of his highest annual salary and incentive bonuses. If a change of
control (as defined) of the Company occurs, the employee may terminate his
employment at any time during the 460-day period beginning 211 days following
that event and receive the same lump-sum payment together with such amount as
may be necessary to hold him harmless from the consequences of any resulting
excise or other similar purpose tax relating to "parachute payments" under the
Internal Revenue Code of 1986, as amended (the "Code"). Each agreement
contains a covenant limiting competition with the Company for two years
following termination of employment. Copies of these agreements are included as
exhibits to the Registration Statement of which this Prospectus is a part (the
"Registration Statement").
In accordance with the employment agreements with Messrs. Haynes and
Schugart, the Company will make interest-free loans to Messrs. Haynes and
Schugart in the amounts of $174,338 and $41,050, respectively, to pay the
federal taxes they owe as a result of the awards of SSI stock to them in January
1997. See "-- Executive Compensation." These loans will mature three years
from the initial funding and may be repaid, at the borrower's option, in cash or
shares of Common Stock valued at its then market value. As provided in Mr.
Rigas' employment agreement, Invatec will make a $100,000 interest-free loan to
Mr. Rigas that will mature on May 6, 1999, will pay up to $130,000 of the actual
relocation costs and expenses Mr. Rigas incurs in relocating his household from
California to the Houston metropolitan area and will pay other compensation to
Mr. Rigas in 1997 of up to $30,000.
The Company also has entered into employment agreements with other
executive officers and key employees of the Company.
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OPTION GRANTS
When this Offering closes, the Company will have outstanding under the
Incentive Plan options to purchase 1,308,248 shares of Common Stock. SSI
originally granted most of the options with grant dates prior to August 1997,
and these options will convert into Incentive Plan options pursuant to the terms
of the SSI Merger. The following table sets forth certain information concerning
the Incentive Plan options:
<TABLE>
<CAPTION>
NUMBER OF PERCENTAGE OF
SHARES UNDERLYING TOTAL OPTIONS
NAME DATE OF GRANT OPTIONS OUTSTANDING EXERCISE PRICE
- ---------------------------------------- -------------------- ----------------- --------------- --------------
<S> <C> <C> <C> <C>
William E. Haynes....................... January 27, 1997 250,000 26.6% (1)
August 15, 1997 97,966 $ 1.00
Charles F. Schugart..................... January 27, 1997 100,000 10.6 (1)
August 15, 1997 38,608 $ 1.00
Denny A. Rigas.......................... June 15, 1997 100,000 9.4 (1)
August 15, 1997 22,710 $ 1.00
Certain other officers and employees.... January-June 1997 305,000 26.6 (2)
August 15, 1997 43,305 $ 1.00
SSI officers and employees.............. January-March 1997 7,700 0.6 $10.00
SSI officers and present or former
employees............................. 1995-1996 70,459 5.4 $10.00
All other officers, employees
and Nonemployee Directors
as a group............................ June-August 1997(4) 272,500 20.8 (3)
</TABLE>
- ------------
(1) The exercise price per share for options to purchase 50% of the shares shown
is the initial per share price to the public in this Offering (the "IPO
Price") and the exercise price per share for the options to purchase 50% of
the shares shown is the lesser of the IPO Price and $9.00.
(2) Includes options to purchase 165,000 shares at the IPO Price and options to
purchase 140,000 shares at the lesser of the IPO Price and $9.00.
(3) Includes options to purchase 193,750 shares at the IPO Price, options to
purchase 63,750 shares at the lesser of the IPO Price and $9.00 and an
option to purchase 15,000 shares at $10.00 which will be exchanged for a
warrant granted in 1995.
(4) Except for options to purchase 60,000 shares at the IPO price to be granted
to Nonemployee Directors when this Offering closes.
The Incentive Plan options granted in August 1997 to purchase a total of
202,589 shares at an exercise price of $1.00 per share have terms extending
seven years from the date this Offering closes and will become fully exercisable
on that date. The other Incentive Plan options granted to Messrs. Haynes,
Schugart, Rigas and others to purchase a total of 952,500 shares have terms
extending seven years from the date this Offering closes and will become
exercisable in 25% increments on that date and the first three anniversaries of
that date. Options to purchase a total of 60,000 shares have seven-year terms
and will become exercisable in 33 1/3% increments on the first three
anniversaries of that date. Options to purchase 93,159 shares have terms
extending until mid-2001 and are fully exercisable.
1997 INCENTIVE PLAN
The following summarizes the principal provisions of the Incentive Plan, a
copy of which is an exhibit to the Registration Statement.
GENERAL. The Incentive Plan, which has been approved by the Board and
Invatec's existing stockholders, aims to (i) attract and retain the services of
key employees and qualified independent directors and contractors and (ii)
encourage and stimulate in those persons the sense of proprietorship and self-
interest in the development and financial success of the Company by making
performance-based awards ("Awards") tied to the growth and performance of the
Company.
Invatec has reserved 1,500,000 shares of Common Stock for use under the
Plan. Beginning with the Company's first fiscal quarter after the closing of
this Offering and continuing each fiscal quarter thereafter, the number of
shares available for that use will be the greater of 1,500,000 shares or 15% of
the number of
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shares of Common Stock outstanding on the last day of the preceding fiscal
quarter. Awarded shares that are not issued again will become available for
Awards.
Persons eligible for Awards are (i) employees holding positions of
responsibility with the Company or any of its subsidiaries and whose performance
can have a significant effect on the success of the Company as well as
individuals who have agreed to become employees within six months of the date of
grant ("Employees"), (ii) Nonemployee Directors and (iii) nonemployee
consultants and other independent contractors providing, or who will provide,
services to the Company or any of its subsidiaries ("Independent
Contractors"). Awards to Employees ("Employee Awards") and Awards to
Independent Contractors ("Independent Contractor Awards") generally are
treated alike under the Incentive Plan, and the following discussion of Employee
Awards applies, except as noted, equally to Independent Contractor Awards. For
purposes of Section 16(b) of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), which could impose so-called short-swing trading
liabilities on the directors and executive officers of Invatec in connection
with their purchases and sales of Common Stock within any six-month period, the
Incentive Plan is intended to qualify for the exemptions from that Section which
are provided by Exchange Act Rule 16b-3 ("Rule 16b-3").
The Compensation Committee of the Board (the "Committee") administers the
Incentive Plan, except as it applies to Nonemployee Directors, and, to the
extent required for the Rule 16b-3 exemptions, the Committee will at all times
consist of at least two Nonemployee Directors after this Offering closes. The
Committee has the exclusive power to administer the Incentive Plan and take all
actions specifically contemplated thereby or necessary or appropriate in
connection with the administration thereof. Except insofar as the Incentive Plan
relates to Nonemployee Directors, the Committee also has the exclusive power to
interpret the Incentive Plan and to adopt such rules, regulations and guidelines
for carrying out its purposes as the Committee may deem necessary or proper in
keeping with the objectives thereof. The Committee may, in its discretion,
extend or accelerate the exercisability of, accelerate the vesting of or
eliminate or make less restrictive any restrictions contained in any Employee
Award, waive any restriction or other provision of the Incentive Plan or in any
Employee Award or otherwise amend or modify any Employee Award in any manner
that is either (i) not adverse to that Employee holding the Employee Award or
(ii) consented to by that Employee. The Committee also may delegate to the chief
executive officer and other senior officers of the Company its duties under the
Incentive Plan, except that no such delegation may be made in the case of
actions respecting participants subject to Section 16 of the Exchange Act.
EMPLOYEE AWARDS. Employee Awards may be in the form of (i) rights to
purchase a specified number of shares of Common Stock at a specified price
("Options") which may be denominated in either or both of Common Stock or
units denominated in Common Stock, (ii) rights to receive a payment, in cash or
Common Stock, equal to the fair market value or other specified value of a
number of shares of Common Stock on the rights exercise date over a specified
strike price ("SARs"), (iii) restricted or unrestricted grants of Common Stock
or units denominated in Common Stock ("Stock Awards"), (iv) grants denominated
in cash ("Cash Awards") and (v) grants denominated in cash, Common Stock,
units denominated in Common Stock or any other property which are made subject
to the attainment of one or more performance goals ("Performance Awards").
Subject to the limitations described below, the Committee will determine the
recipients of Employee Awards and the terms, conditions and limitations
applicable to each Employee Award, which conditions may, but need not, include
continuous service with the Company, achievement of specific business objectives
or goals, increases in specified indices or other comparable measures of
performance. The Committee may grant Employee Awards (i) singly, (ii) in
combination or tandem with other Employee Awards, (iii) in replacement of or as
alternatives to prior Employee Awards or (iv) in combination or tandem with, in
replacement of or as alternatives to rights under any other employee plan of the
Company or any acquired entity. The exercise price of an Option may be paid with
cash or, according to methods determined by the Committee, with Common Stock or
any other Employee Award the exerciser has owned for at least six months.
Performance Awards may include more than one performance goal, and a performance
goal may be based on one or more business criteria applicable to the grantee,
the Company as a whole or one or more of the Company's business units and may
include any of the following: increased revenue, net income, stock price, market
share, earnings per share, return on equity or assets or decreased costs or
other liabilities.
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The Incentive Plan parameters respecting Employee Awards include the
following:
(i) an Option may be either an incentive stock option ("ISO") that
meets, or a nonqualified stock option ("NSO") that does not meet, the
requirements of Section 422 of the Code, and, unless the Committee
specifies otherwise, must have an exercise price of not less than the fair
market value of a Common Stock share on the date of grant;
(ii) the Committee must establish the performance goal or goals for
each Performance Award prior to the earlier to occur of (a) 90 days after
the commencement of the performance measurement period for that Award and
(b) the lapse of 25% of that period, and in any event while it is
substantially uncertain whether the goal or goals will be met; and
(iii) the Committee may not grant any employee: (a) during any
one-year period, (1) Options or SARs covering more than 300,000 shares of
Common Stock or (2) Stock Awards covering or relating to more than 10,000
shares of Common Stock (the limitations referred to in this clause (a)
being the "Stock-based Awards Limitations"); or (b) Cash Awards
(including Performance Awards denominated in cash) having a value
determined on the date of grant in excess of $1 million.
Only the limitations described in clause (i) above apply to Independent
Contractor Awards. The limitations described in clause (iii)(a)(1) above do not
apply to Options into which SSI options will be converted as a result of the SSI
Merger.
Invatec currently is developing a performance-based annual cash bonus
program under the Incentive Plan the participants in which would be eligible to
earn bonuses equal to specified percentages of their annual base salaries
(actual base salaries for 1997).
NONEMPLOYEE DIRECTOR AWARDS. Nonemployee Director Awards will be granted
either automatically or at the option of Nonemployee Directors in lieu of
director's fees. When this Offering closes, each Nonemployee Director
automatically will be granted NSOs to purchase 10,000 shares of Common Stock. In
addition, on the first business day of the month following the date on which
each annual meeting of the Company's stockholders is held (each an "Annual
Director Award Date"), each Nonemployee Director automatically will be granted
NSOs to purchase 5,000 shares of Common Stock. The Board may increase subsequent
annual Director Awards to not more than 15,000 shares. Any person who first
becomes a Nonemployee Director after the date this Offering closes otherwise
than by election at an annual meeting of stockholders automatically will be
granted, on the date of his or her election, NSOs to purchase the number of
shares of Common Stock equal to the product of (i) 10,000 and (ii) a fraction,
the numerator of which is the number of days between the election of that
Nonemployee Director and the next scheduled Annual Director Award Date (or, if
that date then has not been scheduled, the date that is the first anniversary of
the then immediately preceding Annual Director Award Date, if any) and the
denominator of which is 365. For purposes of any Director Awards granted prior
to the scheduling of the 1998 annual meeting of stockholders, June 1, 1998 will
be deemed the initial Annual Director Award Date. Each NSO granted to
Nonemployee Directors will (i) have a seven-year term, (ii) have an exercise
price per share equal to the fair market value of a Common Stock share on the
date of grant (the initial public offering price in the case of NSOs granted on
the closing of this Offering) which must be paid in full in cash at the time of
exercise to the extent exercised and (iii) become exercisable in increments of
one-third of the total number of shares of Common Stock subject thereto on the
first, second and third anniversaries of the date of grant. If a Nonemployee
Director resigns from the Board without the consent of a majority of the other
directors, his or her NSOs may be exercised only to the extent they were
exercisable on the resignation date.
A Nonemployee Director may make an annual election to receive, in lieu of
all or any portion of the director's fees he or she would otherwise receive in
the next year (including both annual retainer fees, if any, and meeting fees), a
restricted Stock Award covering a number of shares of Common Stock having a fair
market value equal to the quotient obtained by dividing (i) the dollar amount of
fees the Nonemployee Director elects to forego in the next year in exchange for
restricted Stock Awards by (ii) the fair market value of a Common Stock share on
the date of the election.
OTHER PROVISIONS. If the Committee approves, payments in respect of
Employee Awards may be deferred, either in the form of installments or a future
lump-sum payment, by any Employee. At the discretion of the Committee, an
Employee may be offered an election to substitute an Award for another Award or
Awards of the same or different type.
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<PAGE>
The Company will have the right to deduct applicable taxes from any
Employee Award payment and withhold, at the time of delivery or vesting of cash
or shares of Common Stock under the Incentive Plan, an appropriate amount of
cash or number of shares of Common Stock, or combination thereof, for the
payment of taxes. The Committee may (i) permit withholding to be satisfied by
the transfer to the Company of shares of Common Stock previously owned by the
holder of the Employee Award for which withholding is required and (ii) cause
the Company to make a short-term or demand loan to any Employee or Independent
Contractor to permit the payment of taxes required by law.
The Board may amend, modify, suspend or terminate the Incentive Plan for
the purpose of addressing any changes in legal requirements or for any other
lawful purpose, except that (i) no change that would impair the rights of any
holder of an Award with respect to that Award may be made without the consent of
that holder and (ii) no change requiring stockholder approval to maintain the
Rule 16b-3 exemptions will be effective until that approval has been obtained.
If any subdivision, split or consolidation of outstanding shares of Common
Stock, or any declaration of a stock dividend payable in shares of Common Stock,
occurs, the Board will make appropriate adjustments to (i) the number of shares
of Common Stock reserved under the Incentive Plan, (ii) the number of shares of
Common Stock covered by outstanding Awards in the form of Common Stock or units
denominated in Common Stock, (iii) the exercise or other price in respect of
such Awards, (iv) the appropriate fair market value and other price
determinations for Awards in order to reflect such transactions, (v) the number
of shares of Common Stock covered by Options automatically granted to
Nonemployee Directors, (vi) the number of shares covered by restricted Stock
Awards automatically granted to Nonemployee Directors and (vii) the Stock-based
Awards Limitations.
If any recapitalization or capital reorganization of Invatec, any
consolidation or merger of Invatec with another corporation or entity, any
adoption by Invatec of any plan of exchange affecting the Common Stock or any
distribution to holders of Common Stock of securities or property (other than
normal cash dividends) occurs, the Board will make appropriate adjustments to
the amounts or other items referred to in clauses (ii), (iii), (iv), (v), (vi)
and (vii) above to give effect to such transactions, but only to the extent
necessary to maintain the proportionate interest of the holders of the Awards
and to preserve, without exceeding, the value thereof.
TAX IMPLICATIONS OF AWARDS. The following summarizes the United States
federal income tax consequences to Employees, Nonemployee Directors and the
Company as a result of the grant and exercise of Awards under the Incentive
Plan. It does not address the consequences of the Incentive Plan under any other
tax laws.
No grant of any Option or SAR will constitute realized taxable income to
the grantee. Each exerciser of an SAR or NSO will (i) recognize ordinary income
in an amount equal to the excess of (a) the amount of cash and the fair market
value of the Common Stock received over (b) the exercise price (if any) paid
therefor and (ii) generally have a tax basis in any shares of Common Stock
received pursuant to the exercise of an SAR or the cash exercise of an NSO which
equals the fair market value of those shares on the date of exercise.
An Employee will not have taxable income as a result of exercising an ISO,
but the excess of the fair market value of the shares of Common Stock received
on that exercise ("ISO Stock") over the exercise price may cause the Employee
to incur alternative minimum tax ("AMT"). The payment of AMT by an Employee
attributable to an ISO exercise would be allowed as a credit against his regular
tax liability in a later year to the extent his regular tax liability exceeds
his AMT for that year.
On the disposition of ISO Stock that has been held for the requisite
holding period (generally, at least two years from the date of grant and one
year from the date of exercise of the ISO), the Employee generally will
recognize capital gain (or loss) equal to the difference between the amount
received in the disposition and the exercise price paid by the Employee for the
ISO Stock. If an Employee disposes of ISO Stock he has not held for the
requisite holding period (a "disqualifying disposition"), he will (i)
recognize ordinary income to the extent that the fair market value of the ISO
Stock at the time of exercise of the ISO (or, if less, the amount realized in
the case of an arm's-length disqualifying disposition to an unrelated party)
exceeds the exercise price paid by the Employee for such ISO Stock and (ii)
recognize capital gain to the extent the amount realized in the disqualifying
disposition exceeds the fair market value of the ISO Stock on the
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exercise date. If the exercise price paid for the ISO Stock exceeds the amount
realized in the disqualifying disposition (in the case of an arm's-length
disposition to an unrelated party), that excess generally would constitute a
capital loss.
Under current rulings, if an Option holder uses shares of Common Stock he
already owns (other than ISO Stock he has not held for the requisite holding
period) to pay all or any part of the exercise price of that Option, (i) he will
recognize income respecting the Common Stock he receives as described above,
(ii) no additional gain will be recognized as a result of the transfer of shares
used as payment and (iii) shares so received, up to the number of shares so
used, will have a tax basis that equals, and a holding period that includes, the
tax basis and holding period of the shares of Common Stock surrendered in
satisfaction of that exercise price. Any additional shares of Common Stock
received on exercise will have a tax basis that equals the amount of cash (if
any) paid by the exerciser.
When cash is paid or first made available to the recipient of a Cash Award
or Performance Award, that cash will constitute ordinary compensation income to
the recipient which is taxable at that time. When Common Stock is delivered
pursuant to a Stock Award or a Performance Award, or when Common Stock or cash
is delivered pursuant to a Stock Award denominated in units of Common Stock, the
recipient generally will recognize ordinary compensation income at that time
which is equal to the amount received (that amount being, in the case of Common
Stock, its fair market value when received), except that: if an Incentive Plan
participant receives Common Stock pursuant to a Stock Award or Performance Award
and that stock then is both nontransferable and subject to a substantial risk of
forfeiture, the participant may elect to recognize ordinary compensation income
equal to the then fair market value of the stock received or to defer such
recognition until such time, if ever, as the stock received first becomes both
transferable and no longer subject to a substantial risk of forfeiture, at which
time the participant would recognize ordinary compensation income equal to the
fair market value at that time of the stock previously received. If dividends
are paid or accrued on Common Stock included in a Stock Award or Performance
Award prior to the time the recipient of that Award recognizes ordinary
compensation income in respect of that stock, those dividends will be taxable as
compensation income rather than as dividend income. The tax basis of Common
Stock received by an Incentive Plan participant pursuant to a Stock Award or
Performance Award will be the amount the participant recognizes as compensation
income in respect of that stock, and the holding period of that stock will begin
on the date of that recognition.
When an Employee recognizes compensation income from the exercise of an SAR
or NSO or in respect of Common Stock, cash or other property received pursuant
to a Cash Award, Performance Award or Stock Award, he will be subject to
withholding by the Company for federal (and generally for state and local)
income tax at that time.
Subject to the Code limitations described below, the Company (or a
subsidiary) generally will be entitled to a deduction for federal income tax
purposes which corresponds as to amount and timing with the compensation income
realized by Incentive Plan participants in respect of Awards made to them. The
Code limits deductions to amounts constituting both reasonable compensation for
services rendered or to be rendered and ordinary, necessary business expenses.
Code Section 280G, which disallows deductions of amounts constituting excess
parachute payments made or deemed made in connection with a change in control of
an employer, and Code Section 162(m), which generally limits to $1 million the
deductibility of compensation paid to certain employees of the Company in any
one taxable year, could limit the ability of the Company (or a subsidiary) to
deduct amounts taxable as compensation income to Incentive Plan participants. In
the case of performance-based compensation, exceptions to Code Section 162(m)
currently apply if certain requirements are met. The Company intends generally
to satisfy these requirements in connection with the grant and payment of
performance-based Awards (including certain Options and SARs), but no assurance
can be given the Company will be able to satisfy these requirements in all cases
and the Company may, in its sole discretion, determine in one or more cases that
it is in its best interests not to satisfy these requirements even if it is able
to do so.
OTHER PLANS
The Company intends to adopt deferred compensation, supplemental
disability, supplemental life and retirement or other benefit or welfare plans
in which executive officers of the Company will be eligible to participate.
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CERTAIN TRANSACTIONS
FINANCING ARRANGEMENTS
Invatec was initially capitalized in March 1997 with $216.12 provided by
Messrs. Haynes, Schugart, and Lombard and CATS in exchange for 146,959 shares of
Common Stock. In June 1997, Messrs. Haynes, Schugart, Rigas, Lombard, King and
Harrington and CATS purchased an additional 95,880 shares of Common Stock for a
total purchase price of $141.00. Philip has advanced funds to Invatec pursuant
to a $6.0 million commitment to enable Invatec to pay various expenses incurred
in connection with its efforts to create the Company and effect this Offering. A
note (the "Philip Note") evidences these advances, and $3.2 million was
outstanding under this note on September 30, 1997. As part of its funding
arrangements with Invatec, Philip also has guaranteed the payment of the $6.1
million principal amount of Convertible Notes and provided $3.8 million of cash
to pay for Acquisitions.
Beginning in October 1995 and continuing through June 30, 1997, Philip
advanced funds to SSI, in the form of equity investments ($6.9 million,
including the Philip subordinated notes described below), loans ($2.5 million,
of which $0.4 million has been repaid and an additional $2.1 million of which is
evidenced by the Philip Note) and credit support for SSI's bank borrowings, to
pay costs related to the acquisitions of Harley, GSV and Plant Specialties and
this Offering. Invatec will owe Philip a guarantee fee that will equal the
amount accrued at the following rates per annum on the aggregate principal
amount guaranteed by Philip while its guarantees are outstanding: (i) 2% on the
aggregate principal amount guaranteed up to $4.8 million; and (ii) 10% on any
additional principal amounts guaranteed. At September 30, 1997, this guarantee
fee would have been $0.8 million. Concurrently with the closing of this
Offering, the Company will issue to Philip as payment of $8.7 million of
indebtedness it owes Philip (including the Philip Note) 1,087,295 shares of
Common Stock.
Philip entered into its funding arrangements with Invatec pursuant to a May
1997 agreement (as subsequently modified, the "1997 Agreement") among SSI,
Philip and the Miller Interests. Mr. Miller, who founded SSI in 1991 and was its
President until December 1996, was then Chairman of the Board of SSI and, as the
trustee of the Miller Trust and the owner of CATS, controlled approximately
47.3% of SSI's outstanding common stock. In the 1997 Agreement, (i) the parties
modified or superseded prior agreements pursuant to which Philip had been
providing financing and credit support for the expansion of SSI's business and
(ii) the Miller Interests agreed to (a) transfer the voting power of their SSI
common stock to a voting trustee (currently Mr. Haynes) pursuant to a voting
trust agreement, (b) cooperate with Invatec and SSI in facilitating the
completion of this Offering and (c) sell to Philip when this Offering closes at
least 25% of the shares of Common Stock they will own immediately following the
SSI Merger. As provided in the 1997 Agreement: (i) Mr. Miller will remain a
member of the three-member SSI board of directors until this Offering closes,
but has resigned from all other positions he held with SSI and has ceased to
participate in all SSI compensation and other benefit arrangements; (ii) CATS
has terminated all its arrangements with SSI, including a management services
agreement under which it would have been paid $225,000 during the three-year
period ending December 31, 1999; and (iii) SSI has paid $300,000 in cash to CATS
in complete satisfaction of all claims CATS or Mr. Miller had or otherwise might
have for any services rendered or to be rendered for SSI or Invatec.
THE SSI MERGER
Before this Offering closes, Invatec will acquire all the outstanding
capital stock of SSI (consisting of 20,000 shares of preferred stock and
4,838,669 shares of common stock) by means of the SSI Merger and SSI will become
a wholly owned subsidiary of Invatec. As a result of the SSI Merger: (i) the
shares of SSI preferred stock will convert into the right to receive shares of
Common Stock having a total calculated value at the initial price to the public
in this Offering equal to the sum of $2.0 million plus dividends accrued since
June 30, 1997 on that amount at the rate of $190,000 per annum; and (ii) each
share of SSI common stock will convert into the right to receive 1/2 of a share
of Common Stock. In addition, presently outstanding options and a warrant to
purchase SSI common stock will be converted into 1997 Incentive Plan options.
See "Management -- Option Grants."
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At the date of this Prospectus, the Miller Interests owned 2,289,881 shares
of SSI common stock (47.3% of the total shares then outstanding), including
235,097 shares awarded to CATS in January 1997 and 14,784 shares purchased by
CATS in connection with the June 1997 exercise of an option granted in 1992 to a
former SSI employee to purchase 68,001 shares of SSI common stock at an exercise
price of $3.68 per share, for which the Miller Interests will receive a total of
1,144,941 shares of Common Stock as a result of the SSI Merger.
Also at the date of this Prospectus, Philip owned all the outstanding SSI
preferred stock (20,000 shares), for which it paid $2.0 million ($100 per share)
in October 1995, and 1,701,713 shares of SSI common stock, which it acquired as
follows: (i) in October 1995 it purchased 286,960 shares from SSI for $500,000
(approximately $1.74 per share); (ii) in January 1997 it exercised warrants it
had received in October 1995 and July 1996 to purchase 1,361,536 shares; and
(iii) in June 1997 it purchased 53,217 shares in connection with the exercise of
the 1992 employee stock option referred to above. It had purchased the 1995
warrant for $100,000 and guaranteed the repayment of a $2.0 million revolving
line of credit to SSI in exchange for the 1996 warrant. Together, the warrants
entitled Philip to purchase at $3.68 per share such number of shares as would be
necessary to afford it ownership, on a fully diluted basis, of 36.5% of the SSI
common stock outstanding after their exercise. To facilitate SSI's acquisition
of Harley, Philip and SSI agreed in September 1996 that Philip would exercise
the warrants at an exercise price of $3.16 per share. The total exercise price
consisted of (i) $3.3 million aggregate principal amount of subordinated 8%
promissory notes issued by Philip and paid as partial consideration in the
Harley acquisition and (ii) approximately $1.0 million in cash.
As a result of the SSI Merger, Philip will receive: (i) for the SSI
preferred stock it owns, shares of Common Stock having a total calculated value
at the initial price to the public in this Offering equal to the sum of $2.0
million plus dividends accrued on that stock since June 30, 1997 at the rate of
$9.50 per share per annum ($190,000 per annum on all shares); and (ii) for the
SSI common stock it owns, 850,857 shares of Common Stock.
Individuals who are or will become directors or executive officers of
Invatec will receive the following number of shares of Common Stock in the SSI
Merger for their shares of SSI common stock: Mr. Haynes -- 72,199; Mr.
Schugart -- 17,000; and Mr. Lombard -- 15,902. In addition, Messrs. Haynes and
Schugart will receive the 1997 Incentive Plan options shown for them in the
table under "Management -- Option Grants," Mr. Lombard will receive a 1997
Incentive Plan option to purchase 38,000 shares of Common Stock at an exercise
price of $10.00 per share and T. Wayne Wren, Jr., who will become a director of
Invatec, will receive a 1997 Incentive Plan option to purchase 15,000 shares of
Common Stock at an exercise price of $10.00 per share in exchange for a warrant
he acquired in 1995 to purchase SSI common stock.
CERTAIN MANAGEMENT FEES
The Company paid management fees of $119,000, $120,000 and $108,000 during
each of the years ended December 31, 1994, 1995 and 1996, respectively, to CATS.
CONSULTING AGREEMENT
On March 27, 1997, Invatec entered into a consulting agreement with Wasatch
Capital Corporation, an affiliate of Michael A. Baker, who will become a
director of Invatec when this Offering closes. The consulting agreement,
effective on September 1, 1997, provides for an initial three-year term (which
may be extended for successive one-year periods), during which acquisition
consulting and related services are to be provided by or under the direction of
Mr. Baker. The consulting agreement provides for annual consulting fees (payable
pro rata on a monthly basis) of $100,000 for the first year of the term, $80,000
for the second year of the term and $60,000 for the third year and any extension
year. The consulting agreement also provides for bonuses that may be granted at
the discretion of Invatec's President (subject to the approval of the Executive
Committee of the Board) and reimbursement of ordinary and necessary expenses
incurred in the performance of the consulting services.
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COMPANY POLICY
In the future, any transactions with directors, officers, employees or
affiliates of the Company are anticipated to be minimal, and will, in all cases,
be approved in advance by a majority of the disinterested members of the
Company's Board of Directors.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table shows, as of September 30, 1997, the then "beneficial
owners" (as defined by the SEC) of the outstanding shares of Common Stock. This
table does not include any shares of Common Stock to which the persons named
will become entitled as a result of the SSI Merger.
SHARES BENEFICIALLY
OWNED
--------------------
NAME NUMBER PERCENT
- ------------------------------------- --------- -------
William E. Haynes (1)................ 242,839 100.0%
Roger L. Miller (2).................. 44,680 18.4%
Computerized Accounting & Tax
Services, Inc.(2).................. 44,680 18.4%
P.O. Box 572843
Houston, Texas 77257
Charles F. Schugart.................. 40,800 16.8%
Denny A. Rigas....................... 34,000 14.0%
John L. King......................... 17,000 7.0%
Douglas R. Harrington, Jr............ 17,000 7.0%
Frank L. Lombard..................... 14,893 6.1%
- ------------
(1) Mr. Haynes owns 74,466 of the shares shown (30.7% of the outstanding shares)
and, pursuant to voting trusts of which he is the voting trustee, has sole
voting power over (but no economic interest in) the remaining outstanding
shares, the beneficial owners of which are named in the above table. The
trusts will terminate when this Offering closes.
(2) Roger L. Miller owns CATS and is also the "beneficial owner" of the shares
CATS owns. He and CATS share the same address.
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The following table shows, after giving effect to the pending Acquisitions,
the beneficial ownership of the Common Stock immediately after this Offering
closes of: (i) Philip; (ii) each executive officer of Invatec; (iii) each person
who will be an Invatec director when this Offering closes; (iv) all directors
and officers of the Company as a group; and (v) certain key employees of the
Company as a group. The table assumes (i) the persons it lists will not acquire
shares directly from the Underwriters in connection with this Offering and (ii)
no other person will acquire beneficial ownership of more than 5% of the
outstanding Common Stock as a result of this Offering.
SHARES BENEFICIALLY
OWNED AFTER
THIS OFFERING
-----------------------
BENEFICIAL OWNER(1) NUMBER PERCENT
- ------------------------------------- --------- ----------
Philip Services Corp.(2)(3).......... 2,404,819 32.5%
100 King Street
P.O. Box 2440, LCD 1
Hamilton, Ontario Canada L8N 4J6
William E. Haynes(3)(4).............. 307,131 4.1
Charles F. Schugart(3)............... 121,408 1.6
Denny A. Rigas....................... 81,710 1.1
Frank L. Lombard(3).................. 88,388 1.2
John L. King(3)...................... 40,856 *
Douglas R. Harrington, Jr.(3)........ 40,856 *
Timothy M. LeFevre................... 11,000 *
Curry B. Walker...................... 5,000 *
T. Wayne Wren, Jr.(3)................ 15,000 *
Executive officers and directors as a
group
(9 persons)(3)..................... 711,349 9.1
Certain key employees as a
group(3)........................... 74,926 1.0
Roger L. Miller(3)(5)................ 889,621 12.0
The Roger L. Miller Family
Trust(3)(5)........................ 694,000 9.4
Computerized Accounting & Tax
Services, Inc.(3)(5)............... 144,621 2.0
- ------------
* Less than 1%.
(1) Shares shown include shares subject to options that will be exercisable when
this Offering closes, as follows: Mr. Haynes -- 160,466; Mr.
Schugart -- 63,608; Mr. Rigas -- 47,710; Mr. Lombard -- 57,593; Mr.
King -- 23,856; Mr. Harrington -- 23,856; Mr. LeFevre -- 11,000; Mr.
Walker -- 5,000; Mr. Wren -- 15,000; all executive officers and directors as
a group -- 407,789; and certain key employees as a group -- 79,130.
(2) Shares shown are directly owned by wholly owned subsidiaries of Philip
Services Corp., a public company, as follows: Allwaste, Inc. -- 1,553,962
shares; and Allwaste Environmental Services, Inc. -- 850,858 shares. The
shares directly owned by Allwaste, Inc. include the 300,000 shares it will
purchase from The Roger L. Miller Family Trust (275,000 shares) and CATS
(25,000 shares) when this Offering closes at a cash purchase price per share
equal to 96.5% of the initial per share price to the public in this Offering
(the "Philip Per Share Price"). The address of both Philip Services Corp.
subsidiaries is 5151 San Felipe, Suite 1600, Houston, Texas 77056-3609.
Allen Fracassi, the president and chief executive officer of Philip Services
Corp., has sole voting and investment power respecting the shares of which
Philip Services Corp. is the "beneficial owner," subject to the direction
of that corporation's board of directors. Mr. Fracassi disclaims
"beneficial ownership" of those shares.
(3) Shares shown include shares to be received as a result of the SSI Merger, as
follows: Philip -- 850,858 shares; Mr. Haynes -- 134,699 shares (including
62,500 shares subject to exercisable options); Mr. Schugart -- 42,000 shares
(including 25,000 shares subject to exercisable options); Mr.
Lombard -- 53,902 shares (including 38,000 shares subject to exercisable
options); Mr. King -- 12,500 shares (all subject to exercisable options);
Mr. Harrington -- 12,500 shares (all subject to exercisable options); Mr.
Wren -- 15,000 shares (all subject to exercisable options); executive
officers and directors as a group -- 270,601 shares (including 165,500
shares subject to exercisable options);
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certain key employees as a group -- 64,926 shares (including 64,130 shares
subject to exercisable options); Mr. Miller -- 51,000 shares; The Roger L.
Miller Family Trust -- 694,000 shares (excluding 275,000 shares to be sold
to Philip); and CATS -- 99,941 shares (excluding 25,000 shares to be sold to
Philip).
(4) Does not include shares subject to voting trusts of which Mr. Haynes is
voting trustee and which will terminate when this Offering closes.
(5) Mr. Miller is the direct beneficial owner of 51,000 shares and, as the
trustee of The Miller Trust and the owner of CATS, is the "beneficial
owner" of the shares they own. The address of the Miller Interests is P.O.
Box 572843, Houston, Texas 77257.
Except as otherwise indicated, the address of each person listed in each of
the above tables is c/o Innovative Valve Technologies, Inc., 14900 Woodham
Drive, Suite A-125, Houston, Texas 77073. All persons listed have sole voting
and investment power with respect to their shares unless otherwise indicated.
SHARES ELIGIBLE FOR FUTURE SALE
When this Offering closes, 7,391,139 shares of Common Stock will be
outstanding. The shares sold in this Offering (other than to affiliates of the
Company) will be freely tradable by the public. The remaining outstanding shares
of Common Stock (collectively, the "Restricted Shares") have not been
registered under the Securities Act and may be resold publicly only following
their effective registration under that act or pursuant to an available
exemption from the registration requirements of that act (such as Rule 144
thereunder).
Invatec intends to file a registration statement on Form S-8 under the
Securities Act to register the shares of Common Stock reserved or to be
available for issuance pursuant to the Incentive Plan. Shares of Common Stock
issued pursuant to the Incentive Plan after the effective date of that
registration statement generally will be available for sale in the open market
by holders who are not affiliates of the Company and, subject to the volume and
other limitations of Rule 144, by holders who are affiliates of the Company.
In general, under Rule 144 if a minimum of one year has elapsed since the
later of the date of acquisition of the restricted securities from the issuer or
from an affiliate of the issuer, a person (or persons whose shares of Common
Stock are aggregated), including persons who may be deemed "affiliates" of the
Company, would be entitled to sell within any three-month period a number of
shares of Common Stock that does not exceed the greater of (i) 1% of the then
outstanding shares of Common Stock (I.E., 73,911 shares immediately on closing
of this Offering) and (ii) the average weekly trading volume during a preceding
period of four calendar weeks. Sales under Rule 144 are also subject to certain
provisions as to the manner of sale, notice requirements and the availability of
current public information about the Company. In addition, under Rule 144(k), if
a period of at least two years has elapsed since the later of the date
restricted securities were acquired from the Company or the date they were
acquired from an affiliate of the Company, a stockholder who is not an affiliate
of the Company at the time of sale and has not been an affiliate for at least
three months prior to the sale would be entitled to sell shares of Common Stock
in the public market immediately without compliance with the foregoing
requirements under Rule 144. Rule 144 does not require the same person to have
held the securities for the applicable periods. The foregoing summary of Rule
144 is not intended to be a complete description thereof. The SEC has proposed
certain amendments to Rule 144 that would, among other things, eliminate the
manner of sale requirements and revise the notice provisions of that rule. The
SEC has also solicited comments on other possible changes to Rule 144, including
possible revisions to the one- and two-year holding periods and the volume
limitations referred to above.
Invatec has agreed not to offer or sell any shares of Common Stock for a
period of 180 days (the "Lockup Period") following the date of this Prospectus
without the prior written consent of NationsBanc Montgomery Securities, Inc.,
except that Invatec may issue shares of Common Stock in connection with
acquisitions or pursuant to the conversion of the Convertible Notes and the
exercise of options outstanding when this Offering closes. Philip and the Miller
Interests will be contractually prohibited from selling the shares of Common
Stock they own when this Offering closes for a period of two years following
that
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<PAGE>
closing (provided that the Miller Interests will be permitted to sell shares of
Common Stock owned by them after the expiration of 180 days following that
closing with the prior written consent of NationsBanc Montgomery Securities,
Inc.). In addition, the stockholders of SVS and the directors and executive
officers of Invatec will be contractually prohibited from selling the shares of
Common Stock they own when this Offering closes for a period of one year
following that closing. Invatec has agreed that it will not waive any of those
contractual prohibitions without the prior written consent of NationsBanc
Montgomery Securities, Inc.
Invatec has granted "piggyback" registration rights to Philip, Messrs.
Haynes, Schugart, Rigas and Wren and the holders of the Convertible Notes such
that, following the applicable restricted period (generally two years following
the closing of the IPO), they may include any shares of Common Stock owned by
them in certain types of registrations by Invatec under the Securities Act of
any Common Stock for its own account for cash, subject to certain exceptions.
Invatec is generally required to pay the costs associated with any such offering
other than underwriting discounts and commissions and transfer taxes
attributable to the shares sold on behalf of the selling stockholders. The
registration rights agreements provide that the number of shares of Common Stock
that must be registered on behalf of the selling stockholders is subject to
limitation if the managing underwriter or Invatec's financial advisor, as the
case may be, determines that market conditions so require. Invatec will
indemnify the selling stockholders thereunder, and those stockholders will
indemnify Invatec, against certain liabilities in respect of any registration
statement or offering that includes shares pursuant to the registration rights
agreements.
Invatec intends to register 5,000,000 shares of Common Stock under the
Securities Act in the fourth quarter of 1997 or the first quarter of 1998 for
its use in connection with future acquisitions. Pursuant to Securities Act Rule
145, the volume limitations and certain other requirements of Rule 144 will
apply to resales of these shares by affiliates of the businesses the Company
acquires for a period of one year from the date of their acquisition (or such
shorter period as the SEC may prescribe), but otherwise these shares will be
freely tradable after their issuance by persons not affiliated with the Company
unless the Company contractually restricts their sale, and sales of these shares
during the Lockup Period would require the prior written consent of NationsBanc
Montgomery Securities, Inc.
55
<PAGE>
DESCRIPTION OF CAPITAL STOCK
Invatec's Charter authorizes Invatec to issue 30,000,000 shares of Common
Stock and 5,000,000 shares of preferred stock, par value $.001 per share (the
"Preferred Stock"). At September 30, 1997, 242,839 shares of Common Stock were
issued and outstanding. When this Offering closes, 7,391,139 shares of Common
Stock will be issued, outstanding and nonassessable and 1,702,041 shares of
Common Stock then will be reserved for issuance pursuant to all then outstanding
options, warrants and other rights (consisting only of Incentive Plan options
and the Convertible Notes issued as part of the purchase price in two of the
Acquisitions). See "Prospectus Summary -- This Offering." No shares of
Preferred Stock will have been issued when this Offering closes. The Board does
not presently intend to seek stockholder approval prior to any issuance by
Invatec of its currently authorized stock, unless otherwise required by law or
the applicable rules of any stock exchange or market. The following summary is
qualified in its entirety by reference to the Charter, which is an exhibit to
the Registration Statement.
COMMON STOCK
Each share of Common Stock (i) has one vote in the election of each
director and on other corporate matters, (ii) affords no cumulative voting or
preemptive rights and (iii) is not convertible, redeemable, assessable or
entitled to the benefits of any sinking fund. Holders of Common Stock are
entitled to dividends in such amounts and at such times as the Board may in its
discretion declare out of funds legally available therefor.
PREFERRED STOCK
The Board may direct Invatec to issue shares of Preferred Stock from time
to time. Subject to certain Charter provisions and applicable law, it may,
without any action by holders of the Common Stock, (i) adopt resolutions to
issue the shares in one or more classes or series, (ii) fix the number of shares
and change the number of shares constituting any class or series and (iii)
provide for or change the voting powers, designations, preferences and relative,
participating, optional or other special rights, and qualifications, limitations
or restrictions thereof, including dividend rights and rates, redemption terms
and prices, repurchase obligations, conversion rights and liquidation
preferences, of the shares constituting any class or series.
The Board could cause Invatec to issue shares of, or rights to purchase,
Preferred Stock the terms of which might (i) discourage an unsolicited proposal
to acquire the Company, (ii) facilitate a particular business combination
involving the Company or (iii) adversely affect the voting power of holders of
the Common Stock. Any such action could discourage a transaction that some or a
majority of the stockholders might believe to be in their best interests or in
which stockholders might receive a premium for their stock over its then market
price.
STOCKHOLDER RIGHTS PLAN
Each share of Common Stock offered hereby includes one right ("Right") to
purchase from Invatec a unit consisting of one one-hundredth of a share (a
"Fractional Share") of Series A Junior Participating Preferred Stock, par
value $.001 per share of Invatec (the "Junior Participating Preferred Stock"),
at a purchase price of $48.00 per Fractional Share, subject to adjustment in
certain events (the "Purchase Price"). The following summary description of
the Rights is qualified in its entirety by reference to the Rights Agreement
between Invatec and a Rights Agent (the "Rights Agreement"), the form of which
is filed as an exhibit to the Registration Statement.
Initially, the Rights will attach to all certificates representing
outstanding shares of Common Stock, including the shares of Common Stock offered
hereby, and no separate certificates for the Rights ("Rights Certificates")
will be distributed. The Rights will separate from the Common Stock and a
"Distribution Date" will, with certain exceptions, occur on the earlier of (i)
10 days following a public announcement that a person or group of affiliated or
associated persons (an "Acquiring Person") has acquired, or obtained the right
to acquire, beneficial ownership of 15% or more of the outstanding shares of
Common Stock (the date of the announcement being the "Stock Acquisition Date")
or (ii) 10 business days following the
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<PAGE>
commencement of a tender or exchange offer that would result in a person's
becoming an Acquiring Person. Notwithstanding the foregoing, so long as Philip
(including, for purposes of the Rights Agreement, its wholly owned
subsidiaries), together with all its affiliates and associates, remains the
beneficial owner of 15% or more of the outstanding shares of Common Stock,
Philip shall not be or become an Acquiring Person. In certain circumstances, the
Distribution Date may be deferred by the Board. Certain inadvertent acquisitions
will not result in a person's becoming an Acquiring Person if the person
promptly divests itself of sufficient Common Stock. Until the Distribution Date,
(i) the Rights will be evidenced by the Common Stock certificates and will be
transferred with and only with those certificates, (ii) Common Stock
certificates will contain a notation incorporating the Rights Agreement by
reference and (iii) the surrender for transfer of any certificate for Common
Stock also will constitute the transfer of the Rights associated with the stock
represented by such certificate.
The Rights are not exercisable until the Distribution Date and will expire
at the close of business on September 30, 2007, unless earlier redeemed or
exchanged by Invatec as described below.
As soon as practicable after the Distribution Date, Rights Certificates
will be mailed to holders of record of Common Stock as of the close of business
on the Distribution Date and, from and after the Distribution Date, the separate
Rights Certificates alone will represent the Rights. All shares of Common Stock
issued prior to the Distribution Date will be issued with Rights. Shares of
Common Stock issued after the Distribution Date in connection with certain
employee benefit plans or upon conversion of certain securities will be issued
with Rights. Except as otherwise determined by the Board, no other shares of
Common Stock issued after the Distribution Date will be issued with Rights.
In the event (a "Flip-In Event") that a person becomes an Acquiring
Person (except pursuant to a tender or exchange offer for all outstanding shares
of Common Stock at a price and on terms that a majority of the independent
members of the Board determines to be fair to and otherwise in the best
interests of Invatec and its stockholders (a "Permitted Offer")), each holder
of a Right will thereafter have the right to receive, on exercise of that Right,
a number of shares of Common Stock (or, in certain circumstances, cash, property
or other securities of Invatec) having a Current Market Price (as defined in the
Rights Agreement) equal to two times the exercise price of the Right.
Notwithstanding the foregoing, following the occurrence of any Triggering Event
(as defined below), all Rights that are, or (under certain circumstances
specified in the Rights Agreement) were, beneficially owned by an Acquiring
Person (or by certain related parties) will be null and void in the
circumstances set forth in the Rights Agreement. Rights are not exercisable
following the occurrence of any Flip-In Event until such time as the Rights are
no longer redeemable by Invatec as set forth below.
In the event (a "Flip-Over Event") that, at any time from and after the
time an Acquiring Person becomes such, (i) Invatec is acquired in a merger or
other business combination transaction (other than certain mergers that follow a
Permitted Offer) or (ii) 50% or more of the Company's assets or earning power is
sold or transferred, each holder of a Right (except Rights that previously have
been voided as set forth above) shall thereafter have the right to receive, on
exercise of such Right, a number of shares of common stock of the acquiring
company having a Current Market Price equal to two times the exercise price of
the Right. Flip-In Events and Flip-Over Events are collectively referred to as
"Triggering Events."
The number of outstanding Rights associated with a share of Common Stock,
or the number of Fractional Shares of Junior Participating Preferred Stock
issuable upon exercise of a Right and the Purchase Price, are subject to
adjustment in the event of a stock dividend on, or a subdivision, combination or
reclassification of, the Common Stock occurring prior to the Distribution Date.
The Purchase Price payable, and the number of Fractional Shares of Junior
Participating Preferred Stock or other securities or property issuable, upon
exercise of the Rights are subject to adjustment from time to time to prevent
dilution in the event of certain transactions affecting the Junior Participating
Preferred Stock.
With certain exceptions, no adjustment in the Purchase Price will be
required until cumulative adjustments amount to at least 1% of the Purchase
Price. No fractional shares of Junior Participating Preferred Stock that are not
integral multiples of a Fractional Share are required to be issued and, in lieu
thereof, an adjustment in cash will be made based on the market price of the
Junior Participating Preferred
57
<PAGE>
Stock on the last trading date prior to the date of exercise. Pursuant to the
Rights Agreement, Invatec reserves the right to require prior to the occurrence
of a Triggering Event that, on any exercise of Rights, a number of Rights be
exercised so that only whole shares of Junior Participating Preferred Stock will
be issued.
At any time until 10 days following the first date of public announcement
of the occurrence of a Flip-In Event, Invatec may redeem the Rights in whole,
but not in part, at a price of $.01 per Right, payable, at the option of
Invatec, in cash, shares of the Common Stock or such other consideration as the
Board may determine. Immediately on the effectiveness of the action of the Board
ordering redemption of the Rights, the Rights will terminate and the only right
of the holders of Rights will be to receive the $.01 redemption price.
At any time after the occurrence of a Flip-In Event and prior to a person's
becoming the beneficial owner of 50% or more of the shares of Common Stock then
outstanding or the occurrence of a Flip-Over Event, Invatec may, at its option,
exchange the Rights (other than Rights owned by an Acquiring Person or an
affiliate or an associate of an Acquiring Person, which will have become void),
in whole or in part, at an exchange ratio of one share of Common Stock, and/or
other equity securities deemed to have the same value as one share of Common
Stock, per Right, subject to adjustment.
Other than the redemption price, any of the provisions of the Rights
Agreement may be amended by the Board as long as the Rights are redeemable.
Thereafter, the provisions of the Rights Agreement other than the redemption
price may be amended by the Board only in order to cure any ambiguity, defect or
inconsistency, to make changes that do not materially adversely affect the
interests of holders of Rights (excluding the interests of any Acquiring
Person), or to shorten or lengthen any time period under the Rights Agreement;
provided, however, that no amendment to lengthen the time period governing
redemption shall be made at such time as the Rights are not redeemable. Until a
Right is exercised, the holder thereof, as such, will have no rights to vote or
receive dividends or any other rights as a stockholder of Invatec.
The Rights will have certain antitakeover effects. They will cause
substantial dilution to any person or group that attempts to acquire the Company
without the approval of the Board. As a result, the overall effect of the Rights
may be to render more difficult or discourage any attempt to acquire the
Company, even if such acquisition may be favorable to the interests of the
Company's stockholders. Because the Board can redeem the Rights or approve a
Permitted Offer, the Rights should not interfere with a merger or other business
combination approved by the Board. The Rights are being issued to protect
Invatec's stockholders from coercive or abusive takeover tactics and to afford
the Board more negotiating leverage in dealing with prospective acquirers.
STATUTORY BUSINESS COMBINATION PROVISION
As a Delaware corporation, Invatec is subject to Section 203 of the DGCL.
In general, Section 203 prevents an "interested stockholder" (defined
generally as a person owning 15% or more of a Delaware corporation's outstanding
voting stock) from engaging in a "business combination" (as defined) with the
corporation for three years following the date such person became an interested
stockholder unless: (i) before such person became an interested stockholder, the
board of directors of the corporation approved the transaction in which the
interested stockholder became an interested stockholder or approved the business
combination; (ii) on consummation of the transaction that resulted in the
interested stockholder's becoming an interested stockholder, the interested
stockholder owned at least 85% of the voting stock of the corporation
outstanding at the time the transaction commenced (excluding stock held by
directors who are also officers of the corporation and by employee stock plans
that do not provide employees with the right to determine confidentially whether
shares held subject to the plan will be tendered in a tender or exchange offer);
or (iii) following the transaction in which such person became an interested
stockholder, the business combination was approved by the board of directors of
the corporation and authorized at a meeting of stockholders by the affirmative
vote of the holders of 66 2/3% of the outstanding voting stock of the
corporation not owned by the interested stockholder. Under Section 203, the
restrictions described above
58
<PAGE>
also do not apply to certain business combinations proposed by an interested
stockholder following the announcement or notification of one of certain
extraordinary transactions involving the corporation and a person who had not
been an interested stockholder during the previous three years or who became an
interested stockholder with the approval of a majority of the corporation's
directors, if such extraordinary transaction is approved or not opposed by a
majority of the directors who were directors prior to any person becoming an
interested stockholder during the previous three years or were recommended for
election or elected to succeed such directors by a majority of such directors.
OTHER MATTERS
Delaware law authorizes Delaware corporations to limit or eliminate the
personal liability of their directors to them and their stockholders for
monetary damages for breach of a director's fiduciary duty of care. The duty of
care requires that, when acting on behalf of the corporation, directors must
exercise an informed business judgment based on all material information
reasonably available to them. Absent the limitations authorized by Delaware law,
directors of Delaware corporations are accountable to those corporations and
their stockholders for monetary damages for conduct constituting gross
negligence in the exercise of their duty of care. Delaware law enables Delaware
corporations to limit available relief to equitable remedies such as injunction
or rescission. The Charter limits the liability of directors of Invatec to
Invatec or its stockholders to the fullest extent permitted by Delaware law.
Specifically, no member of the Board will be personally liable for monetary
damages for breach of the member's fiduciary duty as a director, except for
liability (i) for any breach of the member's duty of loyalty to Invatec or its
stockholders, (ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) for unlawful
payments of dividends or unlawful stock repurchases or redemptions as provided
in Section 174 of the DGCL or (iv) for any transaction from which the member
derived an improper personal benefit. This Charter provision could have the
effect of reducing the likelihood of derivative litigation against directors and
may discourage or deter stockholders or management from bringing a lawsuit
against directors for breach of their duty of care, even though such an action,
if successful, might otherwise have benefited Invatec and its stockholders.
Invatec's Bylaws (the "Bylaws") provide indemnification to Invatec's officers
and directors and certain other persons with respect to certain matters, and
Invatec has entered into agreements with each of its directors and executive
officers providing for indemnification with respect to certain matters.
The Charter provides that stockholders may act only at an annual or special
meeting of stockholders and may not act by written consent. The Bylaws provide
that only the Chairman of the Board, the President or a majority of the Board
may call a special meeting of stockholders.
The Charter provides that the Board will consist of three classes of
directors serving for staggered terms, and Invatec currently contemplates that
approximately one-third of the Board will be elected each year. This Charter
provision could prevent a party who acquires control of a majority of the
outstanding voting stock of Invatec from obtaining control of the Board until
the second annual stockholders' meeting following the date that party obtains
that control.
The Charter provides that the number of directors will be as determined by
the Board from time to time, but will not be less than three. It also provides
that directors may be removed only for cause, and then only by the affirmative
vote of the holders of at least a majority of all outstanding voting stock
entitled to vote. This provision, in conjunction with the Charter provisions
authorizing the Board to fill vacant directorships, will prevent stockholders
from removing incumbent directors without cause and filling the resulting
vacancies with their own nominees.
STOCKHOLDER PROPOSALS
The Bylaws contain advance-notice and other procedural requirements that
apply to stockholder nominations of persons for election to the Board at any
annual or special meeting of stockholders and to stockholder proposals that any
other action be taken at any annual meeting. In the case of any annual meeting,
a stockholder proposing to nominate a person for election to the Board or
proposing that any other action be taken must give the Secretary of Invatec
written notice of the proposal not less than 90 days before
59
<PAGE>
the anniversary date of the immediately preceding annual meeting (subject to
certain exceptions if the pending annual meeting date differs by more than
specified periods from that anniversary date). If a special meeting is called
for the election of directors, a stockholder proposing to nominate a person for
that election must give the Secretary of Invatec written notice of the proposal
no later than the close of business on the 10th day following the first to occur
of (i) the day on which notice of the date of the special meeting was mailed to
stockholders or (ii) the day public disclosure of the date of the special
meeting was made. The Bylaws prescribe the specific information any advance
written stockholder notice must contain. The foregoing summary is qualified in
its entirety by reference to the Bylaws, which are an exhibit to the
Registration Statement.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is Chase-Mellon
Shareholder Services L.L.C.
60
<PAGE>
UNDERWRITING
The Underwriters named below (the "Underwriters"), represented by
NationsBanc Montgomery Securities, Inc. and Furman Selz LLC (the
"Representatives"), have severally agreed, subject to the terms and conditions
in the underwriting agreement (the "Underwriting Agreement") by and between
Invatec and the Underwriters, to purchase from Invatec the aggregate number of
shares of Common Stock indicated below, opposite their respective names, at the
initial public offering price less the underwriting discount set forth on the
cover page of this Prospectus. The Underwriting Agreement provides that the
obligations of the Underwriters are subject to certain conditions precedent, and
that the Underwriters are committed to purchase all the shares of Common Stock,
if they purchase any.
NUMBER OF
UNDERWRITERS SHARES
- ---------------------------------------- ---------
NationsBanc Montgomery Securities,
Inc. .................................
Furman Selz LLC.........................
---------
Total.............................. 3,350,000
=========
The Representatives have advised Invatec that the Underwriters propose
initially to offer the Common Stock to the public on the terms set forth on the
cover page of this Prospectus. The Underwriters may allow selected dealers a
concession of not more than $ per share; and the Underwriters may allow, and
such dealers may reallow, a concession of not more than $ per share to
certain other dealers. After the initial public offering, the public offering
price and other selling terms may be changed by the Representatives. The Common
Stock is offered subject to receipt and acceptance by the Underwriters, and to
certain other conditions, including the right to reject orders in whole or in
part.
Invatec has granted an option to the Underwriters, exercisable during the
30-day period after the date of this Prospectus, to purchase up to a maximum of
502,500 additional shares of Common Stock to cover over-allotments, if any, at
the same price per share as the initial 3,350,000 shares to be purchased by the
Underwriters. To the extent that the Underwriters exercise such over-allotment
option, each of the Underwriters will be committed, subject to certain
conditions, to purchase such additional shares in approximately the same
proportion as set forth in the above table. The Underwriters may purchase such
shares only to cover over-allotments made in connection with this Offering.
The Underwriting Agreement provides that Invatec will indemnify the
Underwriters against certain liabilities, including civil liabilities under the
Securities Act, or will contribute to payments the Underwriters may be required
to make in respect thereof.
Invatec, its officers and directors and certain other stockholders of
Invatec designated by the Representatives have agreed that, for a period of 180
days from the date of this Prospectus, they will not, without the prior written
consent of NationsBanc Montgomery Securities, Inc., offer, sell, contract to
sell or otherwise dispose of any shares of Common Stock or any securities
convertible into, or exercisable or exchangeable for, Common Stock, except that
Invatec may issue shares of Common Stock (i) in connection with acquisitions and
(ii) pursuant to the conversion of the Convertible Notes and the exercise of
options outstanding as of the closing of this Offering. For information
respecting additional restrictions on sales by Philip, the Miller Interests,
Invatec's management and others, see "Shares Eligible for Future Sale."
61
<PAGE>
The Representatives have informed Invatec that the Underwriters do not
expect to make sales of Common Stock offered by this Prospectus to accounts over
which they exercise discretionary authority in excess of 5% of the number of
shares of Common Stock offered hereby.
Prior to this Offering, there has been no public trading market for the
Common Stock. Consequently, the initial public offering price of the Common
Stock will be determined by negotiations between Invatec and the
Representatives. Among the factors they will consider in such negotiations are
the history of, and the prospects for, the Company and the industry in which the
Company competes, an assessment of the Company's management, its financial
condition, its past and present earnings and the trend of such earnings, the
prospects for future earnings of the Company, the present state of the Company's
development, the general condition of the economy and the securities markets at
the time of this Offering and the market prices of and demand for publicly
traded common stock of comparable companies in recent periods.
Until the distribution of the Common Stock is completed, rules of the SEC
may limit the ability of the Underwriters and certain selling group members to
bid for and purchase the Common Stock. As an exception to these rules, the
Representatives are permitted to engage in certain transactions that stabilize
the price of the Common Stock. Such transactions consist of bids or purchases
for the purpose of pegging, fixing or maintaining the price of the Common Stock.
If the Underwriters create a short position in the Common Stock in connection
with this Offering, I.E., if they sell more shares of Common Stock than are set
forth on the cover page of this Prospectus, the Representatives may reduce that
short position by purchasing Common Stock in the open market. The
Representatives may also elect to reduce any short position by exercising all or
part of the over-allotment option described above. The Representatives may also
impose a penalty bid on certain Underwriters and selling group members. This
means that if the Representatives purchase shares of Common Stock in the open
market to reduce the Underwriters' short position or to stabilize the price of
the Common Stock, they may reclaim the amount of the selling concession from the
Underwriters and selling group members who sold those shares as part of this
Offering.
In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher than
it might be in the absence of such purchases. The imposition of a penalty bid
might also have an effect on the price of a security to the extent that it were
to discourage resales of the security. Neither Invatec nor any of the
Underwriters makes any representation or predictions as to the direction or
magnitude of any effect that the transactions described above may have on the
price of the Common Stock. In addition, neither Invatec nor any of the
Underwriters makes any representation that the Underwriters will engage in such
transactions or that such transactions, once commenced, will not be discontinued
without notice.
LEGAL MATTERS
Certain legal matters in connection with the sale of the Common Stock
offered hereby are being passed on for Invatec by Baker & Botts, L.L.P.,
Houston, Texas, and for the Underwriters by Morgan, Lewis & Bockius LLP, New
York, New York.
EXPERTS
The audited financial statements of Invatec and each of the Acquired
Businesses (other than Harley and GSV) included in this Prospectus have been
audited by Arthur Andersen LLP, independent public accountants, as indicated in
their reports with respect thereto, and are included herein in reliance on the
authority of said firm as experts in giving said reports.
The consolidated financial statements of Harley as of October 31, 1995 and
1996 and for each of the three years in the period ended October 31, 1996 and
the financial statements of GSV as of December 31, 1995 and 1996 and for each of
the three years in the period ended December 31, 1996 included in this
Prospectus have been audited by Deloitte & Touche LLP, independent auditors, as
stated in their reports appearing herein, and have been so included in reliance
upon the reports of such firm given upon their authority as experts in
accounting and auditing.
62
<PAGE>
ADDITIONAL INFORMATION
Invatec has not previously been subject to the reporting requirements of
the Exchange Act. It has filed the Registration Statement on Form S-1 under the
Securities Act with the SEC with respect to this Offering. This Prospectus does
not contain all the information set forth in the Registration Statement, or the
exhibits thereto, in accordance with the rules and regulations of the SEC, and
reference is hereby made to that omitted information. The statements made in
this Prospectus concerning documents filed as exhibits to the Registration
Statement accurately describe the material provisions of those documents and are
qualified in their entirety by reference to those exhibits for complete
statements of their provisions. Interested persons may (i) inspect the
Registration Statement and the exhibits thereto, without charge, at the public
reference facilities of the SEC at its principal office at Judiciary Plaza, 450
Fifth Street, N.W., Room 1024, Washington, D.C. 20549, and at its regional
offices at Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661, and 7 World Trade Center, 13th Floor, New York, New York 10048
and (ii) obtain copies of all or any portion of the Registration Statement at
prescribed rates from the Public Reference Section of the SEC at its principal
office at Judiciary Plaza, 450 Fifth Street, N.W., Room 1024, Washington, D.C.
20549. The SEC maintains an Internet web site that contains reports, proxy and
information statements and other information regarding issuers that file
electronically with the SEC. The address of that site is http://www.sec.gov.
63
<PAGE>
INDEX TO FINANCIAL STATEMENTS
PAGE
----
Unaudited Pro Forma Combined Financial Statements
Basis of Presentation .............................................. F-3
Unaudited Pro Forma Combined Balance Sheet as of June 30, 1997 ..... F-4
Unaudited Pro Forma Combined Statement of Operations for Fiscal 1996 F-5
Unaudited Pro Forma Combined Statement of Operations for the First
Six Months of Fiscal 1997 ........................................ F-6
Unaudited Pro Forma Consolidated Statement of Operations of The
Safe Seal Company, Inc. and Subsidiaries for the Six Months
Ended June 30, 1997 .............................................. F-7
Notes to Unaudited Pro Forma Combined Financial Statements ......... F-8
Historical Financial Statements
Innovative Valve Technologies, Inc. ................................
Report of Independent Public Accountants ...................... F-12
Balance Sheet ................................................. F-13
Statement of Operations ....................................... F-14
Statement of Stockholders' Deficit ............................ F-15
Statement of Cash Flows ....................................... F-16
Notes to Financial Statements ................................. F-17
The Safe Seal Company, Inc. and Subsidiaries
Report of Independent Public Accountants ...................... F-20
Consolidated Balance Sheets ................................... F-21
Consolidated Statements of Operations ......................... F-22
Consolidated Statements of Stockholders' Equity (Deficit) ..... F-23
Consolidated Statements of Cash Flows ......................... F-24
Notes to Consolidated Financial Statements .................... F-25
Harley Industries, Inc. and Subsidiaries
Independent Auditors' Report .................................. F-33
Consolidated Balance Sheets ................................... F-34
Consolidated Statements of Operations ......................... F-35
Consolidated Statements of Stockholders' Equity ............... F-36
Consolidated Statements of Cash Flows ......................... F-37
Notes to Consolidated Financial Statements .................... F-38
Steam Supply Group
Report of Independent Public Accountants ...................... F-47
Combined Balance Sheets ....................................... F-48
Combined Statements of Operations ............................. F-49
Combined Statements of Stockholders' Equity (Deficit) ......... F-50
Combined Statements of Cash Flows ............................. F-51
Notes to Combined Financial Statements ........................ F-52
F-1
<PAGE>
PAGE
----
ICE/VARCO Group
Report of Independent Public Accountants ...................... F-59
Combined Balance Sheets ....................................... F-60
Combined Statements of Operations ............................. F-61
Combined Statements of Stockholders' Deficit .................. F-62
Combined Statements of Cash Flows ............................. F-63
Notes to Combined Financial Statements ........................ F-64
GSV, Inc. ..........................................................
Independent Auditors' Report .................................. F-70
Balance Sheets ................................................ F-71
Statements of Operations ...................................... F-72
Statements of Stockholders' Equity ............................ F-73
Statements of Cash Flows ...................................... F-74
Notes to Financial Statements ................................. F-75
Plant Specialties, Inc. ............................................
Report of Independent Public Accountants ...................... F-79
Balance Sheets ................................................ F-80
Statements of Operations ...................................... F-81
Statements of Stockholders' Equity ............................ F-82
Statements of Cash Flows ...................................... F-83
Notes to Financial Statements ................................. F-84
Southern Valve Group
Report of Independent Public Accountants ...................... F-89
Combined Balance Sheets ....................................... F-90
Combined Statements of Operations ............................. F-91
Combined Statements of Stockholders' Equity ................... F-92
Combined Statements of Cash Flows ............................. F-93
Notes to Combined Financial Statements ........................ F-94
F-2
<PAGE>
INNOVATIVE VALVE TECHNOLOGIES, INC. AND ACQUIRED BUSINESSES
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
BASIS OF PRESENTATION
The following unaudited pro forma combined financial statements give effect
to the following events and transactions (the "Transactions"): (i) the
formation and organizational financing of Innovative Valve Technologies, Inc.
("Invatec"); (ii) the merger by means of which The Safe Seal Company, Inc.
("SSI"), which had previously acquired (a) Harley Industries, Inc.
("Harley"), (b) Plant Specialties, Inc. ("Plant Specialties") and (c) GSV,
Inc. ("GSV"), will become a subsidiary of Invatec; and (iii) Invatec's
acquisition of Steam Supply & Rubber Co., Inc. (together with three related
entities, "Steam Supply"), Industrial Controls & Equipment, Inc. (together
with three related entities, "ICE/VARCO") and Southern Valve Service, Inc.
(together with a related entity, "SVS") (collectively referred to, together
with SSI, Harley, Plant Specialties, GSV, Steam Supply and ICE/VARCO, as the
"Acquired Businesses"); (iv) the financing of the purchase prices paid for the
Acquired Businesses; (v) reverse stock splits of the outstanding shares of
common stock of Invatec ("Common Stock") and the SSI common stock effected in
connection with this initial public offering of Common Stock (the "Offering");
and (vi) the issuance of shares of Common Stock to repay indebtedness owed by
the Company to subsidiaries of Philip Services Corp. (collectively with its
subsidiaries, "Philip") and redeem SSI preferred stock owned by Philip.
Invatec and the Acquired Businesses are hereinafter referred to as the Company.
These statements are based on the historical financial statements of Invatec and
the Acquired Businesses included elsewhere in this Prospectus and the estimates
and assumptions set forth below and in the notes to the unaudited pro forma
combined financial statements.
The unaudited pro forma combined balance sheet gives effect to the
Transactions and the closing of the Offering and the application of the
estimated net proceeds therefrom, as if they had occurred on June 30, 1997. The
unaudited pro forma combined statements of operations give effect to the
Transactions and the closing of the Offering and the application of the
estimated net proceeds therefrom as if they had occurred on January 1, 1996. The
unaudited pro forma combined financial statements assume that the initial price
to the public in the Offering will be $12.00 per share of Common Stock.
The pro forma combined statements of operations include preliminary pro
forma adjustments to selling, general and administrative expenses to reflect (i)
the decrease in salaries and benefits associated with certain owners and
managers of the Acquired Businesses who were not or will not be employed by the
Company after the acquisition of their Acquired Businesses and will not be
replaced and (ii) the elimination of certain excess administrative support
service fees charged by ICE/VARCO's former parent company. The integration of
the Acquired Businesses may present opportunities to reduce other costs through
the elimination of duplicative functions and operating locations and the
development of economies of scale, particularly as a result of the Company's
ability to (i) consolidate insurance programs, (ii) borrow at lower interest
rates than the Acquired Businesses, (iii) obtain greater discounts from
suppliers and (iv) generate savings in other general and administrative areas.
The Company cannot currently quantify these anticipated savings and expects
these savings will be partially offset by incremental costs that the Company
expects to incur, but also cannot currently quantify accurately. These costs
include those associated with corporate management and administration, being a
public company, systems integration and facilities expansions and
consolidations. The pro forma financial information herein reflects neither
unquantifiable expected savings nor unquantifiable expected incremental costs.
SSI has been identified as the "accounting acquirer" for financial
statement presentation purposes.
The pro forma adjustments are based on preliminary estimates, available
information and certain assumptions that management deems appropriate. The pro
forma adjustments do not reflect amounts related to certain post-closing
adjustments, which may affect goodwill and debt. In addition, the pro forma
combined statements of operations do not include adjustments for non-recurring
charges of approximately $2.0 million as a result of Invatec's grant, in August
1997, to certain executive officers of options to purchase 202,589 shares of
Common Stock at an exercise price of $1.00 per share, $330,000 of bonuses to be
paid to three executive officers of Invatec on completion of the Offering and
$620,000 of financing charges due to Philip to be recorded subsequent to June
30, 1997.
The unaudited pro forma combined financial statements should be read in
conjunction with the historical financial statements of Invatec and the Acquired
Businesses and related notes thereto included elsewhere in this Prospectus.
F-3
<PAGE>
INNOVATIVE VALVE TECHNOLOGIES, INC. AND ACQUIRED BUSINESSES
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
JUNE 30, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
POST
STEAM ICE/ PRO FORMA PRO FORMA MERGER
INVATEC SSI SUPPLY VARCO SVS ADJUSTMENTS COMBINED ADJUSTMENTS
------- -------- ------- ------- ------ -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash ........................... $ -- $ 391 $ -- $ 164 $ 121 $ -- $ 676 $ 621
Accounts receivable, net ....... -- 9,616 1,846 2,213 780 -- 14,455 --
Inventories .................... -- 6,314 1,612 1,370 1,517 615 11,428 --
Other current assets ........... 3,522 1,762 359 11 98 (2,000) 3,752 (1,522)
------- -------- ------- ------- ------ -------- -------- --------
Total current assets ......... 3,522 18,083 3,817 3,758 2,516 (1,385) 30,311 (901)
PROPERTY AND EQUIPMENT, net ...... 31 6,399 1,066 853 861 -- 9,210 --
GOODWILL, net .................... -- 14,596 -- 226 -- 9,265 24,087 --
OTHER NONCURRENT ASSETS .......... 5,323 4,352 895 -- -- (5,716) 4,854 --
------- -------- ------- ------- ------ -------- -------- --------
Total assets ................. $ 8,876 $ 43,430 $ 5,778 $ 4,837 $3,377 $ 2,164 $ 68,462 $ (901)
======= ======== ======= ======= ====== ======== ======== ========
LIABILITIES AND
STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable and accrued
expenses ..................... $ 1,463 $ 9,039 $ 1,012 $ 1,236 $ 241 $ (483) $ 12,508 $ (1,500)
Short-term debt ................ 4,129 16,117 1,989 1,310 232 (3,340) 20,437 (20,437)
Current maturities of long-term
debt ......................... 141 1,371 238 162 429 (329) 2,012 (2,012)
Cash consideration due to former
owners of Acquired Businesses -- -- -- -- -- 4,420 4,420 (4,420)
Other current liabilities ...... -- 603 -- -- -- -- 603 --
------- -------- ------- ------- ------ -------- -------- --------
Total current liabilities .... 5,733 27,130 3,239 2,708 902 268 39,980 (28,369)
LONG-TERM DEBT, net of current
maturities ..................... 711 5,237 1,964 351 1,645 (2,320) 7,588 (7,588)
CONVERTIBLE NOTES ................ 3,295 -- -- -- -- 2,848 6,143 --
OTHER NONCURRENT LIABILITIES ..... -- 5,323 -- 1,981 -- (6,593) 711 --
DEFERRED INCOME TAXES ............ -- -- -- -- 13 -- 13 --
REDEEMABLE PREFERRED STOCK ....... -- 2,000 711 -- -- (2,711) -- --
STOCKHOLDERS' EQUITY
Common stock ................... -- 48 -- -- 10 (54) 4 3
Additional paid-in capital ..... 2,623 8,200 18 -- 6 11,932 22,779 35,383
Retained earnings (deficit) .... (3,486) (4,508) (154) (203) 801 (1,206) (8,756) (330)
------- -------- ------- ------- ------ -------- -------- --------
Total stockholders' equity
(deficit) .................. (863) 3,740 (136) (203) 817 10,672 14,027 35,056
------- -------- ------- ------- ------ -------- -------- --------
Total liabilities and
stockholders' equity ....... $ 8,876 $ 43,430 $ 5,778 $ 4,837 $3,377 $ 2,164 $ 68,462 $ (901)
======= ======== ======= ======= ====== ======== ======== ========
</TABLE>
AS ADJUSTED
-----------
ASSETS
CURRENT ASSETS:
Cash............................... $ 1,297
Accounts receivable, net........... 14,455
Inventories........................ 11,428
Other current assets............... 2,230
-----------
Total current assets............. 29,410
PROPERTY AND EQUIPMENT, net.......... 9,210
GOODWILL, net........................ 24,087
OTHER NONCURRENT ASSETS.............. 4,854
-----------
Total assets..................... $67,561
===========
LIABILITIES AND
STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable and accrued
expenses......................... $11,008
Short-term debt.................... --
Current maturities of long-term
debt............................. --
Cash consideration due to former
owners of Acquired Businesses.... --
Other current liabilities.......... 603
-----------
Total current liabilities........ 11,611
LONG-TERM DEBT, net of current
maturities......................... --
CONVERTIBLE NOTES.................... 6,143
OTHER NONCURRENT LIABILITIES......... 711
DEFERRED INCOME TAXES................ 13
REDEEMABLE PREFERRED STOCK........... --
STOCKHOLDERS' EQUITY
Common stock....................... 7
Additional paid-in capital......... 58,162
Retained earnings (deficit)........ (9,086)
-----------
Total stockholders' equity
(deficit)...................... 49,083
-----------
Total liabilities and
stockholders' equity........... $67,561
===========
See accompanying notes to unaudited pro forma combined financial statements.
F-4
<PAGE>
INNOVATIVE VALVE TECHNOLOGIES, INC. AND ACQUIRED BUSINESSES
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR FISCAL 1996
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
STEAM ICE/ PLANT
INVATEC SSI HARLEY SUPPLY VARCO GSV SPECIALTIES SVS
------ ------- -------- -------- -------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
REVENUES .......................... $ -- $ 3,888 $ 21,391 $ 15,079 $ 12,744 $ 10,227 $ 8,501 $ 4,404
COST OF OPERATIONS ................ -- 2,376 15,448 9,574 9,453 7,688 5,620 2,962
------ ------- -------- -------- -------- -------- ------- -------
Gross profit .................. -- 1,512 5,943 5,505 3,291 2,539 2,881 1,442
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES ........................ -- 1,917 5,563 5,107 2,859 1,276 2,489 1,175
SPECIAL COMPENSATION EXPENSE ON
COMMON STOCK ISSUANCE ........... -- 38 -- -- -- -- -- --
------ ------- -------- -------- -------- -------- ------- -------
Income (loss) from operations . -- (443) 380 398 432 1,263 392 267
OTHER INCOME (EXPENSE):
Interest, net ................. -- 28 (527) (303) (112) (78) (188) (177)
Other ......................... -- -- -- (10) (14) 6 29 45
------ ------- -------- -------- -------- -------- ------- -------
INCOME (LOSS) FROM CONTINUING
OPERATIONS BEFORE INCOME TAXES .. -- (415) (147) 85 306 1,191 233 135
PROVISION (BENEFIT) FOR INCOME
TAXES ........................... -- -- (57) 33 138 -- 124 29
------ ------- -------- -------- -------- -------- ------- -------
INCOME (LOSS) FROM CONTINUING
OPERATIONS ...................... $ -- $ (415) $ (90) $ 52 $ 168 $ 1,191 $ 109 $ 106
====== ======= ======== ======== ======== ======== ======= =======
PRO FORMA INCOME PER SHARE FROM
CONTINUING
OPERATIONS.........................
SHARES USED IN COMPUTING
PRO FORMA INCOME PER
SHARE FROM CONTINUING
OPERATIONS.........................
</TABLE>
PRO FORMA PRO FORMA
ADJUSTMENTS COMBINED
----------- ---------
REVENUES............................. $-- $76,234
COST OF OPERATIONS................... (64)(aa) 53,057
----------- ---------
Gross profit..................... 64 23,177
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES........................... (1,674)(bb) 19,314
602(cc)
SPECIAL COMPENSATION EXPENSE ON
COMMON STOCK ISSUANCE.............. (38)(ee) --
----------- ---------
Income (loss) from operations.... 1,174 3,863
OTHER INCOME (EXPENSE):
Interest, net.................... 1,025(dd) (332)
Other............................ -- 56
----------- ---------
INCOME (LOSS) FROM CONTINUING
OPERATIONS BEFORE INCOME TAXES..... 2,199 3,587
PROVISION (BENEFIT) FOR INCOME
TAXES.............................. 1,279(ff) 1,546
----------- ---------
INCOME (LOSS) FROM CONTINUING
OPERATIONS......................... $ 920 $ 2,041
=========== =========
PRO FORMA INCOME PER SHARE FROM
CONTINUING
OPERATIONS......................... $ .28
=========
SHARES USED IN COMPUTING
PRO FORMA INCOME PER
SHARE FROM CONTINUING
OPERATIONS......................... 7,391(gg)
=========
See accompanying notes to unaudited pro forma combined financial statements.
F-5
<PAGE>
INNOVATIVE VALVE TECHNOLOGIES, INC. AND ACQUIRED BUSINESSES
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE FIRST SIX MONTHS OF FISCAL 1997
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PRO
PRO FORMA STEAM ICE/ PRO FORMA FORMA
INVATEC SSI(1) SUPPLY VARCO SVS ADJUSTMENTS COMBINED
------- --------- ------- ------- ------ ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
REVENUES............................. $ -- $ 28,337 $ 7,737 $7,104 $2,098 $-- $45,276
COST OF OPERATIONS................... -- 19,152 5,414 5,747 1,398 -- 31,711
------- --------- ------- ------- ------ ----------- --------
Gross profit..................... 9,185 2,323 1,357 700 -- 13,565
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES........................... 852 7,004 2,275 1,555 582 (937)(bb) 11,499
168 (cc)
SPECIAL COMPENSATION EXPENSE ON
COMMON STOCK ISSUANCE.............. 2,623 2,393 -- -- -- (5,016)(ee) --
------- --------- ------- ------- ------ ----------- --------
Income (loss) from operations.... (3,475) (212) 48 (198) 118 5,785 2,066
OTHER INCOME (EXPENSE):
Interest, net.................... (11) (1,177) (167) (63) (74) 1,331(dd) (161 )
Other............................ -- 11 (35) 32 -- -- 8
------- --------- ------- ------- ------ ----------- --------
INCOME (LOSS) FROM CONTINUING
OPERATIONS BEFORE INCOME TAXES..... (3,486) (1,378) (154) (229) 44 7,116 1,913
PROVISION (BENEFIT) FOR INCOME
TAXES.............................. -- (72) (60) (103) 9 1,049(ff) 823
------- --------- ------- ------- ------ ----------- --------
INCOME (LOSS) FROM CONTINUING
OPERATIONS......................... $(3,486) $ (1,306) $ (94) $ (126) $ 35 $ 6,067 $ 1,090
======= ========= ======= ======= ====== =========== ========
PRO FORMA INCOME PER SHARE FROM
CONTINUING OPERATIONS.............. $ .15
========
SHARES USED IN COMPUTING PRO FORMA
INCOME PER SHARE FROM CONTINUING
OPERATIONS......................... 7,391 (gg)
========
</TABLE>
- ------------
(1) SSI is presented on a pro forma basis on page F-7 to include Harley, GSV and
Plant Specialties from January 1, 1997 through their dates of acquisition by
SSI.
See accompanying notes to unaudited pro forma combined financial statements.
F-6
<PAGE>
INNOVATIVE VALVE TECHNOLOGIES, INC. AND ACQUIRED BUSINESSES
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
OF THE SAFE SEAL COMPANY, INC. AND SUBSIDIARIES
FOR THE SIX MONTHS ENDED JUNE 30, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
PLANT
HARLEY GSV SPECIALTIES
JANUARY 1- JANUARY 1- JANUARY 1- PRO FORMA
SSI JANUARY 31 FEBRUARY 28 MAY 31 SSI
--------- ----------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C>
REVENUES................................ $ 19,760 $ 1,853 $ 1,637 $ 5,087 $28,337
COST OF OPERATIONS...................... 13,495 1,338 1,258 3,061 19,152
--------- ----------- ----------- ----------- ---------
Gross Profit....................... 6,265 515 379 2,026 9,185
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES.............................. 4,918 640 243 1,203 7,004
SPECIAL COMPENSATION EXPENSE ON COMMON
STOCK ISSUANCE........................ 2,393 -- -- -- 2,393
--------- ----------- ----------- ----------- ---------
Income (loss) from operations...... (1,046) (125) 136 823 (212)
OTHER INCOME (EXPENSE):
Interest, net...................... (998) (52) (17) (110) (1,177)
Other.............................. 2 -- (3) 12 11
--------- ----------- ----------- ----------- ---------
INCOME (LOSS) FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES................... (2,042) (177) 116 725 (1,378)
PROVISION (BENEFIT) FOR INCOME TAXES.... (275) (69) -- 272 (72)
--------- ----------- ----------- ----------- ---------
INCOME (LOSS) FROM CONTINUING
OPERATIONS............................ $ (1,767) $ (108) $ 116 $ 453 $(1,306)
========= =========== =========== =========== =========
</TABLE>
See accompanying notes to unaudited pro forma combined financial statements.
F-7
<PAGE>
INNOVATIVE VALVE TECHNOLOGIES, INC. AND ACQUIRED BUSINESSES
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
(UNAUDITED)
1. INNOVATIVE VALVE TECHNOLOGIES, INC. BACKGROUND:
Invatec was formed to create the leading single-source provider of
comprehensive maintenance, repair, replacement and value-added distribution
services for industrial valves and related process-system components throughout
North America. Before the Offering closes, Invatec will become the sole
stockholder of SSI by means of a merger in which each outstanding share of SSI
common stock will be converted into 1/2 a share of Invatec common stock.
2. HISTORICAL FINANCIAL STATEMENTS:
The historical financial statements represent the financial position and
results of operations of Invatec and the Acquired Businesses and were derived
from the respective financial statements where indicated. SSI and GSV had
December 31 fiscal year-ends, Harley, Plant Specialties, Steam Supply and SVS
had October 31 fiscal year-ends and ICE/VARCO had a September 30 fiscal
year-end. The interim 1997 information includes results of operations as
follows: Invatec and Pro Forma SSI, for the six months ended June 30, 1997;
Steam Supply and SVS, for the six months ended April 30, 1997; and ICE/VARCO,
for the six months ended March 31, 1997. The pro forma combined balance sheet
includes: (i) the balance sheets of Invatec, SSI and ICE/VARCO as of June 30,
1997; and (ii) the balance sheets of Steam Supply and SVS as of July 31, 1997.
3. ACQUISITION OF ACQUIRED BUSINESSES:
Invatec and the Acquired Businesses are engaged in the industrial valve
repair, maintenance and distribution services business. The acquisition of the
Acquired Businesses has been accounted for under the purchase method of
accounting with SSI being treated as the accounting acquirer.
The following table sets forth the consideration paid for each of the
Acquired Businesses (in thousands).
CASH(4) DEBT ISSUED(5) STOCK ISSUED
--------- --------------- -------------
Harley(1)(2).......... $ 13,982 $-- $--
Steam Supply(3)....... 7,762 2,848 --
ICE/VARCO............. 5,250 -- --
GSV................... 7,272 -- --
Plant Specialties..... 3,361 4,147 --
SVS................... 4,310 -- 1,500
--------- --------------- -------------
$ 41,937 $ 6,995 $ 1,500
========= =============== =============
- ------------
(1) The cash consideration paid for Harley is net of approximately $3.8 million
in cash and notes received from the sale of Harley Equipment, Inc., subject
to adjustment, which was reflected as a discontinued operation in the
historical Harley financial statements included elsewhere herein.
Additionally, such amount includes the $1.0 million cash payment due to the
former owners of Harley on completion of the Offering. See Note 2 to the
Consolidated Financial Statements of Harley Industries, Inc. and
Subsidiaries included herein.
(2) Includes $3.3 million aggregate principal amount of notes issued by Philip.
(3) Cash includes $0.7 million of Steam Supply preferred stock that remains
outstanding.
(4) Cash includes cash paid to owners and debt assumed by Invatec from the
Acquired Businesses.
(5) Includes (i) the issuance of convertible subordinated notes of $3.3 million
to the former owners of Plant Specialties and $2.8 million to the former
owners of Steam Supply that on completion of the Offering may be converted
into Common Stock at 130% of the initial price per share to the public in
the Offering
F-8
<PAGE>
INNOVATIVE VALVE TECHNOLOGIES, INC. AND ACQUIRED BUSINESSES
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
at the option of the note holders and (ii) a $0.9 million SSI Note issued to
the former owners of Plant Specialties, which is secured by real property.
Of the total purchase price paid and to be paid for the Acquisitions, $26.7
million has been allocated to net assets acquired, and the remaining $23.7
million has been recorded as goodwill. Based on management's preliminary
analysis, Invatec anticipates that the historical carrying values of the
Acquired Businesses' assets and liabilities will approximate fair value, but
this analysis is subject to revision as more information regarding asset and
liability valuations becomes available.
4. UNAUDITED PRO FORMA COMBINED BALANCE SHEET ADJUSTMENTS:
The following descriptions (a) through (j) correspond to the tables set
forth below which summarize the pro forma and post-merger adjustments presented
on page F-4.
(a) Records (i) the consideration for the acquisitions of Steam Supply,
ICE/VARCO and SVS consisting of: $8.3 million in cash (including the
application of a $2.0 million escrow deposit), $2.8 million in
convertible notes and $1.5 million in Common Stock for a total
estimated purchase price of $21.6 million (including $9.0 million of
assumed debt, including $711,000 of Steam Supply preferred stock)
resulting in goodwill of $9.3 million, (ii) a $615,000 increase in
inventory representing the conversion of Steam Supply from the LIFO
basis to FIFO basis of accounting, (iii) the elimination of $393,000
of offsetting notes receivable from and payable to the former owners
of Steam Supply and (iv) the reclassification of the Steam Supply
preferred stock to other non-current liabilities.
(b) Records the elimination of the SSI common stock that will convert
into Common Stock in the SSI Merger and the elimination of an SSI
payable to Invatec of $5,323,000.
(c) Records the repayment of Steam Supply debt (including $2.1 million of
short-term debt) outstanding when Steam Supply was acquired with
other short-term debt.
(d) Records $1.9 million of additional utilization of a $6.0 million
Philip facility evidenced by an Invatec convertible note (the
"Philip Note") and the accrual of interest thereon. Through June
30, 1997, Invatec had received advances on the Philip Note totalling
$2.1 million. Management anticipates that approximately $4.0 million
of the Philip Note will be utilized through the closing of the
Offering.
(e) Records the conversion of $500,000 of the Philip Note and accrued
interest thereon into 420,629 shares of Common Stock and the
conversion of $10.0 million of indebtedness and other obligations
owed by the Company to Philip into 833,333 shares of Common Stock.
The $10.0 million of indebtedness and other obligations to Philip
includes $2.0 million of SSI preferred stock, $3.5 million of the
Philip Note, $3.5 million of other advances from Philip and $1.0
million of guaranty fees payable to Philip ($620,000 of which is
anticipated to be accrued between June 30, 1997 and the date on which
the Offering closes).
(f) Records the assumed proceeds to Invatec from the Offering of $40.2
million, net of estimated offering costs of $3.8 million ($4.8
million less $1.0 million of expenses paid with advances by Philip
constituting part of the indebtedness to Philip), assuming an initial
public offering price of $12.00 per share. Offering costs primarily
consist of the underwriting discount, accounting and legal fees and
printing expenses.
(g) Records the application of the net proceeds of the Offering to repay
outstanding indebtedness and pay cash consideration due to former
owners of Acquired Businesses.
(h) Records the payment of $1.0 million of additional purchase
consideration to the former owners of Harley pursuant to the terms of
the Harley purchase agreement, which payment is contingent on the
successful completion of the Offering.
F-9
<PAGE>
INNOVATIVE VALVE TECHNOLOGIES, INC. AND ACQUIRED BUSINESSES
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(i) Records the repayment of $3.2 million of the $6.7 million short-term
debt owed to Philip.
(j) Records the payment of $330,000 of bonuses to three members of
executive management on the completion of the Offering.
The following tables summarize the unaudited pro forma and post merger
combined balance sheet adjustments (in thousands).
<TABLE>
<CAPTION>
PRO FORMA
(A) (B) (C) (D) (E) ADJUSTMENTS
--------- --------- --------- --------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Inventories.......................... $ 615 $ $ $ $ $ 615
Other current assets................. (2,000) (2,000)
Goodwill, net........................ 9,265 9,265
Other noncurrent assets.............. (393) (5,323) (5,716)
Accounts payable and accrued
expenses........................... (142) 625 483
Short-term debt...................... (2,256) (1,871) 7,467 3,340
Current maturities of long-term
debt................................. 329 329
Cash consideration due to former
owners of Acquired Businesses...... (6,291) 1,871 (4,420)
Long-term debt, net of current
maturities........................... 393 1,927 2,320
Convertible notes.................... (2,848) (2,848)
Other noncurrent liabilities......... 1,270 5,323 6,593
Redeemable preferred stock........... 711 2,000 2,711
Common stock......................... 10 45 (1) 54
Additional paid-in capital........... (1,176) (45) (10,711) (11,932)
Retained earnings (deficit).......... 444 142 620 1,206
--------- --------- --------- --------- --------- -----------
$ 0 $ 0 $ 0 $ 0 $ 0 $ 0
========= ========= ========= ========= ========= ===========
<CAPTION>
POST MERGER
(F) (G) (H) (I) (J) ADJUSTMENTS
--------- --------- --------- --------- --------- -----------
Cash................................. $ 36,408 $ (31,224) $ (1,000) $ (3,233) $ (330) $ 621
Other current assets................. (1,522) (1,522)
Accounts payable and accrued
expenses........................... 500 1,000 1,500
Short-term debt...................... 17,204 3,233 20,437
Current maturities of long-term
debt............................... 2,012 2,012
Cash consideration due to former
owners of Acquired Businesses...... 4,420 4,420
Long-term debt, net of current
maturities......................... 7,588 7,588
Common stock......................... (3) (3)
Additional paid-in capital........... (35,383) (35,383)
Retained earnings (deficit).......... 330 330
--------- --------- --------- --------- --------- -----------
$ 0 $ 0 $ 0 $ 0 $ 0 $ 0
========= ========= ========= ========= ========= ===========
</TABLE>
5. UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS ADJUSTMENTS:
(aa) Records the income statement effect of recording inventories on a
FIFO basis, rather than on a LIFO basis, at Plant Specialties and
Steam Supply.
(bb) Adjusts selling, general and administrative expenses to reflect (i)
the decrease in salaries and benefits associated with certain owners
and managers of the Acquired Businesses who were
F-10
<PAGE>
INNOVATIVE VALVE TECHNOLOGIES, INC. AND ACQUIRED BUSINESSES
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
not or will not be employed subsequent to the acquisition of their
Acquired Businesses and who will not be replaced and (ii) the
reduction in certain administrative support service fees ICE/VARCO's
current parent company charges ICE/VARCO to which the parent has
prospectively agreed for periods following the ICE/VARCO
Acquisition.
(cc) Records pro forma goodwill amortization expense over 40 years.
(dd) Records the elimination of interest expense resulting from the
application of the net proceeds of the Offering to retire
outstanding indebtedness.
(ee) Records the elimination of the special non-cash, non-recurring
compensation expense attributable to stock awards made by SSI and
sales of Common Stock. See "Management -- Executive Compensation"
and "Certain Transactions -- The SSI Merger."
(ff) Records the incremental provision for federal and state income
taxes relating to S corporation income and other pro forma
adjustments to reflect an effective tax rate of 43%. In its
assumption of the effective tax rate, management has not considered
the utilization of net operating losses or other tax attributes
previously generated by or existing at certain of the Acquired
Businesses.
(gg) The number of shares of Common Stock estimated to be outstanding on
completion of the Offering includes the following, but excludes an
aggregate of 1,308,248 shares subject to options that will be
outstanding when the Offering closes under Invatec's 1997 Incentive
Plan, as the number of common stock equivalents determined using the
treasury stock method is less than three percent of the total number
of shares estimated to be outstanding.
Issued prior to Offering............. 242,839
Issued in Offering................... 3,350,000
Issued in the SSI Merger............. 2,419,338
Conversion of SSI redeemable
preferred stock, Philip Note,
Philip advances and Philip finance
charges............................ 1,253,962
Issued to acquire SVS................ 125,000
-----------
Shares estimated to be outstanding... 7,391,139
===========
F-11
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Innovative Valve Technologies, Inc.:
We have audited the accompanying balance sheet of Innovative Valve
Technologies, Inc. (a Delaware corporation), as of June 30, 1997, and the
related statements of operations, stockholders' deficit and cash flows for the
period from inception (March 16, 1997) through June 30, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Innovative Valve
Technologies, Inc., as of June 30, 1997, and the results of its operations and
its cash flows for the period from inception (March 16, 1997) through June 30,
1997, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
August 29, 1997
F-12
<PAGE>
INNOVATIVE VALVE TECHNOLOGIES, INC.
BALANCE SHEET -- JUNE 30, 1997
ASSETS
CURRENT ASSETS:
Escrow deposit..................... $ 2,000,000
Deferred offering costs............ 1,522,616
--------------
Total current assets.......... 3,522,616
PROPERTY AND EQUIPMENT, net............. 30,717
RECEIVABLE FROM THE SAFE SEAL COMPANY,
INC................................... 5,323,351
--------------
$ 8,876,684
==============
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Short-term debt.................... $ 4,128,935
Current maturities of long-term
debt.............................. 141,478
Accounts payable and accrued
expenses.......................... 1,462,985
--------------
Total current liabilities..... 5,733,398
LONG TERM DEBT, net of current
maturities............................ 711,708
CONVERTIBLE SUBORDINATED NOTES
PAYABLE............................... 3,295,127
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIT:
Common stock, $0.001 par value,
30,000,000 shares authorized,
242,839 shares issued and
outstanding....................... 243
Additional paid-in capital......... 2,622,418
Retained deficit................... (3,486,210)
--------------
Total stockholders' deficit... (863,549)
--------------
$ 8,876,684
==============
The accompanying notes are an integral part of this financial statement.
F-13
<PAGE>
INNOVATIVE VALVE TECHNOLOGIES, INC.
STATEMENT OF OPERATIONS
FOR THE PERIOD FROM INCEPTION (MARCH 16, 1997)
THROUGH JUNE 30, 1997
REVENUES............................. $ --
COST OF OPERATIONS................... --
--------------
Gross profit.................... --
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES........................... 852,205
SPECIAL COMPENSATION EXPENSE ON
COMMON STOCK ISSUANCE.............. 2,622,304
--------------
LOSS FROM OPERATIONS................. (3,474,509)
INTEREST EXPENSE..................... 11,701
--------------
LOSS FROM OPERATIONS BEFORE INCOME
TAXES.............................. (3,486,210)
PROVISION FOR INCOME TAXES........... --
--------------
NET LOSS............................. $ (3,486,210)
==============
The accompanying notes are an integral part of this financial statement.
F-14
<PAGE>
INNOVATIVE VALVE TECHNOLOGIES, INC.
STATEMENT OF STOCKHOLDERS' DEFICIT
FOR THE PERIOD FROM INCEPTION (MARCH 16, 1997)
THROUGH JUNE 30, 1997
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
------------------ PAID-IN RETAINED
SHARES AMOUNT CAPITAL DEFICIT TOTAL
------- ------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
BALANCE, March 16, 1997.............. -- $ -- $ -- $ -- $ --
Issuance of Common Stock........ 242,839 243 2,622,418 -- 2,622,661
Net loss........................ -- -- -- (3,486,210) (3,486,210)
------- ------- ----------- ----------- -----------
BALANCE, June 30, 1997............... 242,839 $ 243 $ 2,622,418 $(3,486,210) $ (863,549)
======= ======= =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of this financial statement.
F-15
<PAGE>
INNOVATIVE VALVE TECHNOLOGIES, INC.
STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM INCEPTION (MARCH 16, 1997)
THROUGH JUNE 30, 1997
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss........................ $ (3,486,210)
Special compensation expense on
common stock issuance.......... 2,622,304
Decrease in receivable from The
Safe Seal Company, Inc. ....... 1,453,897
Increase in escrow deposit...... (2,000,000)
Increase in accounts payable and
accrued expenses............... 962,985
--------------
Net cash provided by
operating activities...... (447,024)
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and
equipment...................... (30,717)
--------------
Net cash used in investing
activities................ (30,717)
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings of short-term debt... 2,000,000
Proceeds from the issuance of
common stock................... 357
Funding of deferred offering
costs.......................... (1,522,616)
--------------
Net cash provided by
financing activities...... 477,741
--------------
NET INCREASE IN CASH................. --
CASH, beginning of period............ --
--------------
CASH, end of period.................. $ --
==============
The accompanying notes are an integral part of this financial statement.
F-16
<PAGE>
INNOVATIVE VALVE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION:
BACKGROUND
Innovative Valve Technologies, Inc. (the "Company" or "Invatec") was
established as a Delaware corporation on March 16, 1997, for the purpose of
creating the leading single-source provider of comprehensive maintenance, repair
and value-added distribution services for industrial valves and related
process-system components throughout North America. Pursuant to a May 1997
agreement among The Safe Seal Company, Inc. ("SSI"), subsidiaries of Philip
Service Corp. (collectively, "Philip") and a SSI shareholder and his
affiliates, voting control of SSI and the Company was transferred to a voting
trustee who has approved a reorganization of the capital structure of SSI and
the Company such that Invatec will become the sole stockholder of SSI by means
of a merger (the "SSI Merger") pursuant to which each outstanding share of SSI
common stock will be converted into 1/2 of a share of Invatec common stock
("Common Stock") and the outstanding shares of SSI preferred stock, which are
redeemable for a total of $2.0 million plus accrued dividends, will be redeemed
for shares of Common Stock valued for this purpose at the initial offering price
to the public in the Company's initial public offering of Common Stock (the
"Offering"). As discussed in Note 9, Invatec has signed definitive agreements
to acquire two valve repair and distribution services companies concurrently
with the closing of the Offering.
INITIAL PUBLIC OFFERING
On July 18, 1997, Invatec filed a registration statement on Form S-1 with
the Securities and Exchange Commission relating to the Offering. An investment
in shares of Common Stock involves a high degree of risk, including, among
others, history of losses, absence of combined operating history, risks relating
to the Company's acquisition strategy and financing, reliance on customers in
cyclical industries, operating hazards and dependence on manufacturers.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost, and depreciation is computed
using the straight-line method over the estimated useful lives of 3 to 5 years.
The costs of major improvements are capitalized. Expenditures for maintenance,
repairs and minor improvements are expensed as incurred. When property and
equipment are sold or retired, the cost and related accumulated depreciation are
removed and the resulting gain or loss is included in results of operations.
INCOME TAXES
Invatec follows the liability method of accounting for income taxes in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 109.
Under this method, deferred income taxes are recorded based upon differences
between the financial reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates and laws that will be in effect when the
underlying assets or liabilities are recovered or settled. Invatec has recorded
a full valuation allowance against all deferred tax assets due to the
uncertainty of ultimate realizability. Accordingly, no income tax benefit has
been recorded for current year losses.
SPECIAL COMPENSATION EXPENSE ON COMMON STOCK ISSUANCE
The Company recorded a special non-cash compensation expense of
approximately $2.6 million related to the issuance of 242,839 shares of Common
Stock to six members of executive management and a related party to attract such
individuals and that party to effect the Offering (see Note 1). For financial
statement presentation purposes, these shares were valued at approximately
$10.80 per share.
SUPPLEMENTAL CASH FLOW INFORMATION
During the period from inception (March 16, 1997) through June 30, 1997,
the Company had non-cash activities consisting of the assumption of
approximately $6,777,000 of notes issued by SSI in connection with SSI's
acquisition of Plant Specialties, Inc. ("Plant Specialties") and assumption of
the indebtedness (including accrued interest) owed to Philip.
The Company did not pay taxes or interest during the period from inception
through June 30, 1997.
F-17
<PAGE>
INNOVATIVE VALVE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
3. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:
Accounts payable and accrued expenses at June 30, 1997 consist of the
following:
Accrued offering costs............... $ 500,000
Accrued interest..................... 484,000
Accounts payable, trade.............. 246,854
Accrued compensation and benefits.... 150,000
Accrued insurance.................... 54,787
Other accrued expenses............... 27,344
------------
$ 1,462,985
============
4. DEBT:
In June 1997, Invatec entered into a funding arrangement with Philip
pursuant to which Philip has advanced funds to Invatec (the "Philip Advances")
to pay costs related to the Offering and Invatec has assumed SSI's obligation to
repay the Philip Advances and the related deferred offering costs funded with
the Philip Advances. Pursuant to this arrangement, $2,128,935 of short-term debt
and $484,000 of accrued financing charges incurred by SSI prior to the funding
arrangement were transferred to Invatec. The Philip Advances have been included
in short-term debt and bear interest at 8% per annum and may be converted into
Common Stock. The Philip Advances are due at the earliest of the closing of the
Offering, the abandonment of the Offering or May 31, 1998.
Long-term debt consists of a $853,186 note payable to a former stockholder
of Plant Specialties issued in connection with SSI's acquisition of Plant
Specialties. The note was assumed from SSI by Invatec in June 1997. The note
bears interest at 9.0% per annum and is secured by real estate. Principal and
interest is payable monthly and the note matures June 13, 2002.
5. CONVERTIBLE SUBORDINATED NOTES PAYABLE:
In June 1997, Invatec assumed the obligations of SSI respecting unsecured
convertible subordinated notes issued to former stockholders of Plant
Specialties in connection with SSI's acquisition of Plant Specialties. The notes
bear interest at 5.0% per annum and interest is payable quarterly. The principal
and any unpaid interest will mature and become due and payable on March 31,
2002. At the option of the holders, the notes may be converted into shares of
Common Stock at a price equal to 130% of the initial public offering price per
share in the Offering. The notes also are convertible into shares of Common
Stock at the option of the Company at the same price if the closing sale prices
of the Common Stock for a period of time beginning in 1999 exceed 150% of the
Offering per share price. The convertible subordinated notes issued by the
Company in the acquisition described in Note 7 have the same conversion terms.
6. CAPITAL STOCK AND STOCK OPTIONS:
COMMON STOCK
In connection with the organization and initial capitalization of Invatec,
Invatec issued and sold 242,839 shares of Common Stock in March and June 1997 to
certain members of its management and a related party for $357. For financial
statement presentation purposes, this Common Stock was valued at $10.80 per
share, resulting in a special non-cash compensation expense of $2,622,304.
PREFERRED STOCK
Invatec's charter authorizes the issuance of up to 5,000,000 shares of
preferred stock. As of June 30, 1997, no shares of preferred stock had been
issued.
F-18
<PAGE>
INNOVATIVE VALVE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
1997 INCENTIVE PLAN
The Company has adopted an incentive plan (the "Plan") that provides for
the granting or awarding of stock options and other performance-based awards to
key employees, nonemployee directors and independent contractors of the Company
and its subsidiaries. In general, the terms of the options awards (including
vesting schedules) granted after the Offering will be established by the
Compensation Committee of the Company's board of directors. In August 1997,
options to purchase 202,589 shares of Common Stock were granted to certain
members of management at an exercise price of $1.00 per share. The Company will
record a special non-cash non-recurring charge (presently estimated at
approximately $2.0 million) in the fiscal quarter ended September 30, 1997. As
of the Offering date, the Company anticipates that options to purchase
approximately 1.3 million shares of Common Stock will then be outstanding.
7. ACQUISITION OF STEAM SUPPLY:
In July 1997, Invatec acquired Steam Supply & Rubber Co., Inc. and three of
its affiliated companies (collectively, "Steam Supply") for total
consideration of $10.6 million, comprised of $2.7 million of cash, $2.8 million
aggregate principal amount of Invatec's seven-year 5.5% convertible subordinated
notes and the assumption of $5.1 million of debt and other non-current
liabilities.
On June 29, 1997, in connection with the acquisition of Steam Supply, the
Company borrowed $2.0 million from Philip and paid the proceeds into escrow
pursuant to the definitive agreement to purchase Steam Supply. The $2.0 million
is recorded as a current asset in the balance sheet as of June 30, 1997. The
note due to Philip bears interest at Philip's borrowing rate plus 10.0%
(approximately 18% at June 30, 1997) and is due at the date the Offering closes
or by May 31, 1998 if the Offering does not close earlier.
8. NEW ACCOUNTING PRONOUNCEMENT :
SFAS No. 123, "Accounting for Stock-Based Compensation," allows entities
to choose between a new fair-value-based method of accounting for employee stock
options or similar equity instruments and the current intrinsic-value-based
method of accounting prescribed by Accounting Principles Board Opinion No. 25
("APB No. 25"). Entities electing to remain with the accounting in APB No. 25
must make pro forma disclosures of net income and earnings per share as if the
fair value method of accounting had been applied. The Company will provide pro
forma disclosure of net income and earnings per share, as applicable, in the
notes to future consolidated financial statements.
9. ACQUISITIONS:
The Company has signed definitive agreements to acquire Industrial Controls
& Equipment, Inc. and three affiliated companies (collectively, "ICE/VARCO")
and Southern Valve Service, Inc. and one affiliated company (collectively,
"SVS"). The aggregate consideration the Company will pay in these acquisitions
is $11.1 million, comprised of $9.6 million in cash and assumed debt and $1.5
million in Common Stock valued for this purpose at the initial public offering
price per share in the Offering. The closings of these acquisitions are
conditioned on the completion of the Offering. The total consideration payable
in each acquisition is subject to an increase in total consideration contingent
on the operating results achieved in the first 12 months after acquisition. The
contingent payment for ICE/VARCO would consist of options to purchase 40,000
shares of Common Stock at an exercise price per share equal to the initial
public offering price in the Offering, while the contingent payment for SVS
would be payable in a combination of Common Stock and cash in an amount that is
not presently determinable.
10. SUBSEQUENT EVENT (UNAUDITED):
REVERSE STOCK SPLIT
In October 1997, Invatec effected a 0.68-for-one reverse stock split of
each share of Common Stock then outstanding. The accompanying financial
statements have been prepared as if such reverse split had been effected at
inception (March 16, 1997).
F-19
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To The Safe Seal Company, Inc. and Subsidiaries:
We have audited the accompanying consolidated balance sheets of The Safe
Seal Company, Inc. (a Texas corporation) and subsidiaries, as of December 31,
1995 and 1996, and the related consolidated statements of operations,
stockholders' equity (deficit) and cash flows for each of the three years in the
period ended December 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
The Safe Seal Company, Inc. and subsidiaries, as of December 31, 1995 and 1996,
and the results of their operations and their cash flows for each of the three
years in the period ended December 31, 1996, in conformity with generally
accepted accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
February 14, 1997
F-20
<PAGE>
THE SAFE SEAL COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31
------------------------------ JUNE 30,
1995 1996 1997
-------------- -------------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash............................... $ 1,458,096 $ 396,637 $ 391,292
Accounts receivable, net of
allowance of $25,000, $25,000 and
$380,000......................... 485,911 535,647 9,616,538
Inventories........................ 17,480 36,140 6,313,959
Prepaid expenses and other current
assets........................... 45,477 111,638 1,761,186
-------------- -------------- -----------
Total current assets..... 2,006,964 1,080,062 18,082,975
PROPERTY AND EQUIPMENT, net............. 32,502 140,449 6,398,926
GOODWILL, net........................... -- -- 14,595,993
PATENT COSTS, net....................... 56,833 741,611 711,255
OTHER NONCURRENT ASSETS, net............ 12,346 325,993 3,640,605
-------------- -------------- -----------
$ 2,108,645 $ 2,288,115 $43,429,754
============== ============== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
(DEFICIT)
CURRENT LIABILITIES:
Short-term debt.................... $ -- $ -- $16,116,620
Current maturities of long-term
debt............................. -- -- 1,371,170
Accounts payable and accrued
expenses......................... 1,184,086 1,092,891 9,037,858
Other current liabilities.......... -- -- 602,959
-------------- -------------- -----------
Total current
liabilities........... 1,184,086 1,092,891 27,128,607
LONG TERM DEBT, net of current
maturities............................ -- 588,970 5,237,262
PAYABLE TO INNOVATIVE VALVE
TECHNOLOGIES, INC..................... -- -- 5,323,351
COMMITMENTS AND CONTINGENCIES
REDEEMABLE PREFERRED STOCK.............. 2,000,000 2,000,000 2,000,000
STOCKHOLDERS' EQUITY (DEFICIT):
Common stock, $0.01 par value,
10,000,000 shares authorized,
2,865,902 shares, 2,963,838
shares and 4,838,669 issued and
outstanding...................... 28,659 29,638 48,386
Additional paid-in capital......... 983,246 1,270,315 8,199,643
Retained deficit................... (2,087,346) (2,693,699) (4,507,495)
-------------- -------------- -----------
Total stockholders'
equity (deficit)...... (1,075,441) (1,393,746) 3,740,534
-------------- -------------- -----------
$ 2,108,645 $ 2,288,115 $43,429,754
============== ============== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-21
<PAGE>
THE SAFE SEAL COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31 ENDED JUNE 30
-------------------------------------- -------------------------
1994 1995 1996 1996 1997
----------- ------------ ----------- ----------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES................................ $ 2,547,360 $ 2,852,356 $ 3,887,761 $ 1,606,068 $ 19,759,635
COST OF OPERATIONS...................... 1,270,788 1,583,940 2,375,245 900,546 13,494,613
----------- ------------ ----------- ----------- ------------
Gross profit................... 1,276,572 1,268,416 1,512,516 705,522 6,265,022
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES.............................. 1,267,899 1,852,895 1,917,063 885,699 4,917,324
SPECIAL COMPENSATION EXPENSE ON COMMON
STOCK ISSUANCE........................ -- -- 38,048 -- 2,393,221
----------- ------------ ----------- ----------- ------------
Income (loss) from
operations................... 8,673 (584,479) (442,595) (180,177) (1,045,523)
OTHER INCOME (EXPENSE):
Patent defense costs................ (168,705) (880,068) -- -- --
Interest income (expense), net...... (7,048) 10,181 27,703 -- (998,111)
Other............................... (113,635) (50,126) 393 -- 2,243
----------- ------------ ----------- ----------- ------------
(289,388) (920,013) 28,096 -- (995,868)
----------- ------------ ----------- ----------- ------------
LOSS BEFORE INCOME TAXES................ (280,715) (1,504,492) (414,499) (180,177) (2,041,391)
PROVISION (BENEFIT) FOR INCOME TAXES.... -- -- -- -- (275,095)
----------- ------------ ----------- ----------- ------------
NET LOSS................................ $ (280,715) $ (1,504,492) $ (414,499) $ (180,177) $ (1,766,296)
=========== ============ =========== =========== ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-22
<PAGE>
THE SAFE SEAL COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
-------------------- PAID-IN RETAINED
SHARES AMOUNT CAPITAL DEFICIT TOTAL
--------- ------- ----------- ----------- --------------
<S> <C> <C> <C> <C> <C>
BALANCE, December 31, 1993........... 2,463,424 $24,634 $ 268,801 $ (249,016) $ 44,419
Preferred stock dividends....... -- -- -- (12,000) (12,000)
Issuance of common stock........ 62,478 625 22,345 -- 22,970
Conversion of redeemable
preferred stock to common
stock......................... 51,000 510 149,490 -- 150,000
Net loss........................ -- -- -- (280,715) (280,715)
--------- ------- ----------- ----------- --------------
BALANCE, December 31, 1994........... 2,576,902 25,769 440,636 (541,731) (75,326)
Preferred stock dividends....... -- -- -- (41,123) (41,123)
Sale of common stock warrant.... -- -- 100,000 -- 100,000
Issuance of common stock........ 289,000 2,890 442,610 -- 445,500
Net loss........................ -- -- -- (1,504,492) (1,504,492)
--------- ------- ----------- ----------- --------------
BALANCE, December 31, 1995........... 2,865,902 28,659 983,246 (2,087,346) (1,075,441)
Preferred stock dividends....... -- -- -- (191,854) (191,854)
Issuances of common stock....... 121,736 1,217 356,831 -- 358,048
Retirement of stock............. (23,800) (238) (69,762) -- (70,000)
Net loss........................ -- -- -- (414,499) (414,499)
--------- ------- ----------- ----------- --------------
BALANCE, December 31, 1996........... 2,963,838 29,638 1,270,315 (2,693,699) (1,393,746)
Preferred stock dividend
(unaudited)................... -- -- -- (47,500) (47,500)
Issuances of common stock
(unaudited)................... 445,300 4,453 2,388,768 -- 2,393,221
Exercise of common stock
warrants (unaudited).......... 1,429,531 14,295 4,540,560 -- 4,554,855
Net loss (unaudited)............ -- -- -- (1,766,296) (1,766,296)
--------- ------- ----------- ----------- --------------
BALANCE, June 30, 1997 (unaudited)... 4,838,669 $48,386 $ 8,199,643 $(4,507,495) $ 3,740,534
========= ======= =========== =========== ==============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-23
<PAGE>
THE SAFE SEAL COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 SIX MONTHS ENDED JUNE 30
-------------------------------------- -------------------------
1994 1995 1996 1996 1997
----------- ------------ ----------- ----------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss........................... $ (280,715) $ (1,504,492) $ (414,499) $ (180,177) $ (1,766,296)
Adjustments to reconcile net loss
to net cash
provided by (used in) operating
activities --
Depreciation and
amortization................ 27,179 28,525 31,183 22,364 469,200
Special compensation expense on
issuance of common stock.... -- -- 38,048 -- 2,393,221
(Gain) loss on sale of property
and equipment............... 13,196 (1,879) -- -- --
(Increase) decrease in --
Accounts receivable......... (87,683) (145,835) (49,736) (114,648) (1,741,839)
Inventories................. -- -- (13,660) 3,240 (761,987)
Prepaid expenses and other
current assets............ (23,767) 35,402 (66,161) (1,129) 1,186,376
Other noncurrent assets..... (39,544) -- (324,246) (1,773) (2,667,005)
Increase (decrease) --
Accounts payable and accrued
expenses.................. 399,318 493,084 (91,195) (437,293) 3,458,788
Payable to Innovative Valve
Technologies, Inc......... -- -- -- -- (1,453,897)
----------- ------------ ----------- ----------- ------------
Net cash provided by (used
in) operating
activities.............. 7,984 (1,095,195) (890,266) (709,416) (883,439)
----------- ------------ ----------- ----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and
equipment........................ (28,593) (7,530) (128,309) (18,430) (275,161)
Additions to patent costs.......... (75,570) (3,384) (46,030) -- --
Proceeds from sale of property and
equipment........................ 40,000 10,500 -- -- --
Proceeds from sale of
investments...................... 53,107 -- -- -- --
Business acquisitions, net of cash
acquired of $135,109............. -- -- -- -- (19,109,479)
----------- ------------ ----------- ----------- ------------
Net cash used in investing
activities.............. (11,056) (414) (174,339) (18,430) (19,384,640)
----------- ------------ ----------- ----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings of debt................. 100,000 -- 265,000 -- 19,598,566
Repayments of debt................. (31,667) (93,333) -- -- (505,187)
Proceeds from sale/exercise of
common stock warrant............. -- 100,000 -- -- 1,216,855
Proceeds from sale of common
stock............................ -- 445,500 -- -- --
Stock repurchases.................. -- -- (70,000) -- --
Proceeds from sale of redeemable
preferred stock.................. -- 2,000,000 -- -- --
Preferred stock dividends.......... (12,000) -- (191,854) (49,300) (47,500)
----------- ------------ ----------- ----------- ------------
Net cash provided by (used
in) financing
activities.............. 56,333 2,452,167 3,146 (49,300) 20,262,734
----------- ------------ ----------- ----------- ------------
NET INCREASE (DECREASE) IN CASH...... 53,261 1,356,558 (1,061,459) (777,146) (5,345)
CASH, beginning of period............ 48,277 101,538 1,458,096 1,458,096 396,637
----------- ------------ ----------- ----------- ------------
CASH, end of period.................. $ 101,538 $ 1,458,096 $ 396,637 $ 680,950 $ 391,292
=========== ============ =========== =========== ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-24
<PAGE>
THE SAFE SEAL COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION:
The Safe Seal Company, Inc. (the "Company" or "SSI") was incorporated
in the State of Texas in January 1991 and is principally engaged in the business
of providing on-line leak sealing and valve maintenance and repair services to
industrial customers in the Gulf Coast area of the United States.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF PRESENTATION
The financial statements include the accounts of the Company and its wholly
owned subsidiaries. All significant intercompany accounts and transactions have
been eliminated in consolidation.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost, and depreciation is computed
using the straight-line method over the estimated useful lives of the assets.
The costs of major improvements are capitalized. Expenditures for maintenance,
repairs and minor improvements are expensed as incurred. When property and
equipment are sold or retired, the cost and related accumulated depreciation are
removed and the resulting gain or loss is included in results of operations.
INCOME TAXES
The Company follows the liability method of accounting for income taxes in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 109.
Under this method, deferred income taxes are recorded based upon differences
between the financial reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates and laws that will be in effect when the
underlying assets or liabilities are recovered or settled.
REVENUE RECOGNITION
Revenue is recognized as products are sold and as services are performed.
CASH
Cash payments for interest during 1994, 1995 and 1996 were approximately
$7,000, $8,000 and $4,000, respectively.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
UNAUDITED INTERIM INFORMATION
The financial information for the six months ended June 30, 1996 and 1997
has not been audited by independent accountants. Certain information and
footnote disclosures normally included in the financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted from the unaudited interim financial information. In the opinion of
management of the Company, the unaudited interim financial information includes
all adjustments, consisting only of normal recurring adjustments, necessary for
a fair presentation. Results of operations for the interim periods are not
necessarily indicative of the results of operations for the respective full
fiscal years.
F-25
<PAGE>
THE SAFE SEAL COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SPECIAL COMPENSATION EXPENSE ON COMMON STOCK ISSUANCE
In 1996, the Company recorded a special compensation expense of $38,048
related to the issuance of its common stock, $0.01 par value (the "Common
Stock"), and options to purchase Common Stock under employee benefit programs.
See Note 8 for further discussion.
In the six months ended June 30, 1997, the Company recorded a special
non-cash compensation expense of approximately $2.4 million on common stock
issuance related to the issuance of 443,190 shares of Common Stock to three
members of executive management and to Computerized Accounting & Tax Services,
Inc. ("CATS"), a related party owned by Roger L Miller (see Note 11), to
attract such individuals and CATS to effect the Offering (see Note 13). For
financial statement presentation purposes, these shares were valued at
approximately $5.40 per share.
NEW ACCOUNTING PRONOUNCEMENT
Effective January 1, 1995, the Company adopted SFAS No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of." Accordingly, in the event that facts and circumstances indicate that
property and equipment, and intangible or other assets, may be impaired, an
evaluation of recoverability would be performed. If an evaluation is required,
the estimated future undiscounted cash flows associated with the asset are
compared to the asset's carrying amount to determine if a write-down to market
value or discounted cash flow value is necessary. Adoption of this standard did
not h
ave a material effect on the financial position or results of operations of
the Company.
3. ACQUISITION OF THE SPIN SAFE CORPORATION, INC.:
In November 1996, the Company acquired The Spin Safe Corporation, Inc.
("Spin Safe") in exchange for 108,800 shares of Common Stock, valued at $2.94
per share, and noninterest-bearing notes payable of $400,000. The notes are due
in four equal annual installments beginning January 15, 1998. Additionally, the
Company entered into an agreement with the former stockholders of Spin Safe,
pursuant to which the Company will make royalty payments to them based on the
number of times in excess of a specified base the Safe Seal(TM) system is used
by the Company through 2011. The cost of this acquisition is recorded as patent
costs.
4. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following:
DECEMBER 31
ESTIMATED ----------------------
USEFUL LIVES 1995 1996
------------ ---------- ----------
Vehicles............................. 5 years $ -- $ 5,904
Furniture and fixtures............... 3-5 years 41,423 126,262
Machinery and equipment.............. 5 years 17,180 54,746
---------- ----------
58,603 186,912
Less -- Accumulated
depreciation.................. (26,101) (46,463)
---------- ----------
Property and equipment, net..... $ 32,502 $ 140,449
========== ==========
F-26
<PAGE>
THE SAFE SEAL COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:
Activity in the Company's allowance for doubtful accounts consists of the
following:
DECEMBER 31
-------------------------------
1994 1995 1996
--------- --------- ---------
Balance, at beginning of year........ $ 25,000 $ 25,000 $ 25,000
Additions............................ -- -- --
Deductions........................... -- -- --
--------- --------- ---------
Balance, at end of year.............. $ 25,000 $ 25,000 $ 25,000
========= ========= =========
Accounts payable and accrued expenses consist of the following:
DECEMBER 31
--------------------------
1995 1996
------------ ------------
Accounts payable, trade.............. $ 278,457 $ 287,165
Accrued compensation and benefits.... 74,583 120,567
Accrued legal fees................... 593,311 170,696
Accrued dividends.................... 65,123 47,500
Accrued royalties.................... 56,833 70,117
Due to Philip Services Corp.
subsidiary ........................ -- 287,195
Other accrued expenses............... 115,779 109,651
------------ ------------
$ 1,184,086 $ 1,092,891
============ ============
6. LONG-TERM DEBT:
Long-term debt consists of the following at December 31, 1996:
Revolving line of credit payable to a
bank, due June 30, 2002, with
interest due monthly at 1.25% over
cost (as defined) (6.75% at
December 31, 1996), secured by
assignment of all assets. The
available borrowing capacity at
December 31, 1996 was
$1,735,000......................... $ 265,000
Notes payable to former stockholders
of Spin Safe, with annual
installments of $100,000 beginning
January 15, 1998, non-interest
bearing, due January 15, 2001,
unsecured.......................... 323,970
----------
$ 588,970
==========
7. INCOME TAXES:
Actual income tax expense differs from income tax expense computed by
applying the U.S. federal statutory corporate tax rate to income before income
taxes as follows:
YEAR ENDED DECEMBER 31
-------------------------------------
1994 1995 1996
----------- ----------- -----------
Statutory federal income tax
benefit............................ (34)% (34)% (34)%
Valuation allowance.................. 34 34 34
--- --- ---
Effective income tax rate............ 0% 0% 0%
=== === ===
F-27
<PAGE>
THE SAFE SEAL COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Net deferred tax assets consist of the following:
DECEMBER 31
--------------------------
1995 1996
------------ ------------
Current deferred tax assets.......... $ 135,741 $ 160,910
Noncurrent deferred tax assets....... 581,536 686,316
Valuation allowance.................. (717,277) (847,226)
------------ ------------
Total deferred tax
assets.................. $ -- $ --
============ ============
The Company records a valuation allowance for deferred tax assets when
management believes it is more likely than not the asset will not be realized.
Because of the Company's history of generating significant taxable losses, a
valuation allowance equal to its deferred tax assets has been established.
Deferred income tax provisions result from temporary differences in the
recognition of income and expenses for financial reporting purposes and for tax
purposes. The tax effects of these temporary differences representing deferred
tax assets and liabilities result principally from the following:
YEAR ENDED DECEMBER 31
--------------------------------------
1994 1995 1996
---------- ------------ ------------
Depreciation and amortization........ $ (15,235) $ 53,093 $ (2,520)
Net operating loss................... 74,051 304,600 107,301
Accrued expenses not deducted for
tax................................ -- 95,065 25,168
Change in valuation allowance........ (58,816) (452,758) (129,949)
---------- ------------ ------------
$ -- $ -- $ --
========== ============ ============
8. STOCKHOLDERS' EQUITY:
COMMON STOCK
In 1995, the Company implemented an employee benefit award program. Under
this program, the Company awarded 9,452 shares of Common Stock to employees. The
shares vested 50 percent at December 31, 1996, and the remainder were to become
fully vested on December 31, 1997. The Company recorded compensation expense,
equal to the fair value of the shares, on the date the shares vested. During
1996, 1,632 shares were forfeited by employees. In 1996, the Company recorded
non-cash compensation expense of $11,500 for the 3,910 shares that vested
related to this program, which was discontinued in 1997, and all remaining
unvested shares were cancelled.
STOCK OPTIONS
In 1996, the Company began a management stock option program that was
discontinued in 1997. Under this program, the Company granted both shares of
Common Stock and options to purchase shares of Common Stock to certain members
of management. The options vested monthly and were exercisable at any time
following the six-month period ending June 30 or December 31 in which the
options were earned. The Company had reserved 400,000 shares of Common Stock for
issuance in this program. During 1996, the Company granted 9,026 shares of
Common Stock and options to purchase 143,798 shares of Common Stock. The options
had an exercise price of $5.00 per share and are exercisable through July 1,
2001. In 1996, the Company recorded non-cash compensation expense of $26,548 for
the 9,026 shares issued with a fair market value of $2.94 per share. No
compensation expense was recorded for the options granted in 1996 because their
exercise price exceeded the fair market value of the underlying shares ($2.94
per share). Prior to 1996, the Company had, from time to time, granted options
to key employees at or above the
F-28
<PAGE>
THE SAFE SEAL COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
market value of the Common Stock. The options granted had exercise prices
ranging from $2.50 to $10.00 per share. All but 100,000 options expired in 1996.
The remaining options were exercised in June 1997.
The Company accounts for options by applying APB Opinion No. 25, under
which no compensation expense has been recognized. The Company's pro forma
compensation expense is zero as options were determined to be without value
under SFAS No. 123, "Accounting for Stock-Based Compensation," using the
minimum value option method with the following assumptions, as prescribed by
SFAS No. 123:
Remaining life.......................... 4.5 years
Exercise price.......................... $5.00/share
Risk-free rate of return................ 7%
A summary of the stock options at December 31, 1996 and changes during the
three years then ended is presented in the table and narrative below:
WEIGHTED-
SHARES UNDER AVERAGE
OPTION EXERCISE PRICE
------------- ---------------
Balance at December 31, 1993......... 27,000 $ 10.00
Granted......................... 215,000 6.16
-------------
Balance at December 31, 1994......... 242,000 6.59
Granted......................... -- --
Exercised....................... -- --
-------------
Balance at December 31, 1995......... 242,000 6.59
Granted......................... 143,798 5.00
Exercised....................... -- --
Cancelled....................... (142,000) 9.47
-------------
Balance at December 31, 1996......... 243,798 3.97
=============
Available for grant at December 31,
1996................................. 256,202
=============
Shares exercisable at December 31,
1996................................. 243,798 3.97
=============
The options outstanding at December 31, 1996 have exercise prices from
$2.50 to $5.00 per share, with a weighted average exercise price of $3.97 and a
weighted average remaining contractual life of three years. All these options
are exercisable.
WARRANTS
In 1995, the Company sold to a subsidiary of Philip Services Corp.
(collectively with its subsidiaries, "Philip") a warrant entitling Philip to
purchase newly issued shares of Common Stock in such number as would equal 35
percent of the outstanding Common Stock, on a fully diluted basis, at $3.68 per
share. During 1996, the Company granted Philip a warrant to purchase additional
newly issued shares of Common Stock in such number as would equal 1.5 percent of
outstanding Common Stock, on a fully diluted basis, at $3.68 per share. The
warrants were exercisable, at Philip's discretion, through January 8, 1999. In
September 1996, the Company agreed to adjust the warrants' exercise price to
$3.16 in return for accelerated exercise and on January 31, 1997, Philip
exercised the warrants. Consideration for the exercise of the warrants consisted
of the issuance of approximately $3.3 million of promissory notes issued by
Philip (the "Philip Notes") and cash of approximately $1,216,855 paid during
the six months ended June 30, 1997. The exercise of these warrants and issuance
of the promissory notes occurred concurrently with the Company's purchase of
Harley Industries, Inc. ("Harley") (see Note 12), in connection with which the
Company assigned the Philip Notes to the sellers of Harley.
F-29
<PAGE>
THE SAFE SEAL COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In 1995, the Company granted a consultant a warrant entitling its holder to
purchase 15,000 shares of Common Stock at $10.00 per share. The warrant is
exercisable, at the option of its holder, through the year 2000. The consultant
subsequently became an officer of Philip and a director of the Company.
STOCK REPURCHASES
In December 1996, the Company purchased 23,800 shares of Common Stock from
certain stockholders for total cash consideration of $70,000 ($2.94 per share).
The shares repurchased by the Company were subsequently canceled.
9. REDEEMABLE PREFERRED STOCK:
In 1995, the Company authorized the issuance of 1,000,000 shares of
preferred stock with a par value of $0.01 per share. Of the authorized shares,
20,000 were designated as Class A redeemable preferred stock (the "Class A
Preferred Stock"). Holders of Class A Preferred Stock are entitled to receive
preferential dividends, in cash or Common Stock (with an agreed value of $1.84
per common share), at an annual rate of $9.50 per share. The Company is required
to redeem the Class A Preferred Stock at $100 per share by October 12, 1999. The
Company sold the Class A Preferred Stock in 1995 for $2,000,000 to Philip.
10. COMMITMENTS AND CONTINGENCIES:
OPERATING LEASES
The Company leases warehouse space, office facilities and vehicles under
noncancelable leases. Rental expense for 1994, 1995 and 1996 was approximately
$91,700, $90,300 and $162,400, respectively. The following represents future
minimum rental payments under noncancelable operating leases:
Year ending December 31 --
1997............................... $ 133,900
1998............................... 102,300
1999............................... 52,400
2000............................... 28,800
2001............................... 24,000
Thereafter......................... --
----------
$ 341,400
==========
LITIGATION
In the ordinary course of its business, the Company has become involved in
various legal actions. Management does not believe that the outcome of these
legal actions will have a material effect on the Company's financial position or
results of operations.
11. CERTAIN TRANSACTIONS:
The Company has had a management agreement with CATS, an entity related by
common ownership. Management fee expense for 1994, 1995 and 1996 was
approximately $119,000, $120,000 and $108,000, respectively. This agreement was
terminated in 1997.
12. ACQUISITION OF HARLEY:
Effective January 31, 1997, the Company acquired all the outstanding stock
of Harley in a purchase transaction. Concurrent with the purchase of Harley, the
Company sold a division of Harley ("Harley Equipment") for $1.9 million in
cash and a receivable of $1.9 million, subject to final adjustment. The total
purchase price for Harley was $14.0 million of cash and assumed debt, including
a contingent cash payment of $1.0 million due upon the completion of the
Offering and $3.3 million of notes issued by Philip (see
F-30
<PAGE>
THE SAFE SEAL COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Note 8) and excluding $3.8 million in cash and notes received from the sale of
Harley Equipment. Harley is principally engaged in the repair and distribution
of valves, gauges, measurement instruments and related parts for chemical
manufacturing and power industries located primarily in the midwestern and
southeastern United States.
13. SUBSEQUENT EVENTS (UNAUDITED):
REVERSE STOCK SPLIT
In October 1997, the Company effected a 0.68-for-one reverse stock split of
the outstanding Common Stock. The accompanying financial statements have been
prepared as if such reverse split had been effected as of the beginning of the
earliest period presented.
ACQUISITIONS
Effective February 28, 1997, SSI acquired all the outstanding stock of GSV,
Inc. ("GSV") in a purchase transaction for approximately $7.3 million of cash
and debt assumed. GSV machines, repairs and sells valves and valve components in
Florida.
Effective May 31, 1997, SSI acquired all the outstanding stock of Plant
Specialties, Inc. ("Plant Specialties") and certain assets and real estate
owned by a former stockholder of Plant Specialties in a purchase transaction for
total consideration of $7.6 million, which consisted of $3.4 million in cash and
assumed debt, the issuance of $3.3 million of convertible notes and the issuance
of a $0.9 million note secured by real property. In June 1997, Innovative Valve
Technologies, Inc. ("Invatec"), a related party (see below), assumed the
Company's obligations on these notes. Plant Specialties sells and repairs valves
and instrumentation and provides engineering services to petrochemical and
oilfield industries in Louisiana and the Gulf Coast area.
The following table reflects, on an unaudited pro forma basis, the combined
operations of SSI, Harley, GSV and Plant Specialties, as if the acquisition of
these companies (the "Acquisitions") had taken place on January 1, 1996.
Adjustments have been made to reflect the accounting basis used in recording the
Acquisitions. These pro forma results have been prepared for comparative
purposes only and do not purport to be indicative of the results of operations
the Company would have obtained had the Acquisitions taken effect on January 1,
1996, has obtained since the date of acquisition or may obtain in the future.
YEAR ENDED SIX MONTHS
DECEMBER 31, ENDED JUNE 30,
1996 1997
------------ --------------
(UNAUDITED AND IN THOUSANDS)
Revenues............................. $ 45,670 $ 28,337
Income before income taxes........... 2,551 1,884
Net income........................... 1,036 1,074
To partially fund the Acquisitions, the Company entered into two separate
credit facilities (the "Facilities"). One of the Facilities provides for loans
of approximately $17.5 million, consisting of $7.5 million of fixed-term loans
($4.8 million of which have been guaranteed by Philip) and up to $10.0 million
of revolving credit loans keyed to a borrowing base of, and secured by, accounts
receivable and inventories. The other Facility is a $7.0 million advancing line
of credit which has been guaranteed by Philip. As of June 30, 1997,
approximately $19.1 million was outstanding under the Facilities, including
approximately $1.4 million of current maturities. The Company anticipates that
the Facilities will be replaced with a new credit facility after the Merger and
Offering described below.
RELATIONSHIP WITH INVATEC
In March 1997, certain holders of the outstanding Common Stock organized
Invatec to become the Company's parent corporation by means of a merger (the
"Merger") to be effected concurrently with the
F-31
<PAGE>
THE SAFE SEAL COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
closing by Invatec of an initial public offering (the "Offering") of its
common stock (the "Invatec Common Stock"). As a result of the Merger, the
outstanding Class A Preferred Stock and Common Stock will be converted into the
right to receive shares of Invatec Common Stock.
Since May 1997, the Company and Invatec have been under the common control
of a voting trustee pursuant to voting trust agreements covering a majority of
the outstanding Common Stock and most outstanding shares of Invatec Common
Stock.
RELATIONSHIP WITH PHILIP
In 1996, Philip agreed to make certain advances (the "Philip Advances")
to the Company to enable the Company, or its successors, to pursue a possible
initial public offering. At December 31, 1996, the Company owed Philip $287,195
under this agreement, and the Company's other noncurrent assets included
$259,929 representing deferred offering costs funded with the Philip Advances.
As a result of Philip's financial support of the Company's acquisition of
Harley, Philip became a related party of the Company for financial statement
presentation purposes effective January 31, 1997.
In June 1997, Invatec entered into a funding arrangement with Philip
pursuant to which Philip has advanced funds to Invatec to pay costs related to
the Offering and Invatec has assumed the Company's obligation to repay the
Philip Advances and the related deferred offering costs funded with the Philip
Advances. Pursuant to that agreement, $2,128,935 of short-term debt and $484,000
of accrued financing charges were transferred to Invatec.
14. SUPPLEMENTAL UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION:
Concurrently with the Merger and the closing of the Offering, Invatec will
acquire in separate purchase transactions (i) Industrial Controls & Equipment,
Inc. and three affiliated companies (collectively, "ICE/VARCO") and (ii)
Southern Valve Service, Inc. and one affiliated company (collectively, "SVS").
In July 1997, Invatec acquired in a purchase transaction Steam Supply & Rubber
Co., Inc. and three of its affiliates (collectively, "Steam Supply" and,
together with ICE/VARCO, SVS, Harley, GSV and Plant Specialties, the "Acquired
Businesses"). For financial statement presentation purposes, the Company will
be the "accounting acquirer" of the Acquired Businesses, and the following
supplemental unaudited pro forma combined financial information gives effect to
the Transactions (as defined in "Basis of Presentation" in the Unaudited Pro
Forma Combined Financial Statements elsewhere in this Prospectus) as if they had
taken place on January 1, 1996 and as restated to convert the results of
operations of Acquired Businesses whose historical fiscal periods were not on a
calendar year basis to a calendar year basis. The combined results of operations
for the periods presented below do not purport to be comparable to and may not
be indicative of the Company's post-combination results of operations because
(i) SSI and the Acquired Businesses were not under common control or management
and (ii) a new basis of accounting was established to record the purchase of the
Acquired Businesses under the purchase method of accounting.
SIX MONTHS ENDED
JUNE 30
YEAR ENDED --------------------
DECEMBER 31, 1996 1996 1997
----------------- --------- ---------
(UNAUDITED AND IN THOUSANDS)
Revenues............................. $77,508 $ 36,603 $ 46,701
Cost of operations................... 54,613 25,116 32,191
----------------- --------- ---------
Gross profit......................... 22,895 11,487 14,510
Selling, general and administrative
expenses........................... 19,307 9,334 11,707
----------------- --------- ---------
Income from operations............... $ 3,588 $ 2,153 $ 2,803
================= ========= =========
F-32
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of Harley Industries, Inc.:
We have audited the accompanying consolidated balance sheets of Harley
Industries, Inc. and subsidiaries as of October 31, 1995 and 1996, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the three years in the period ended October 31, 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Harley Industries, Inc. and
subsidiaries as of October 31, 1995 and 1996, and the results of their
operations and their cash flows for each of the three years in the period ended
October 31, 1996 in conformity with generally accepted accounting principles.
As discussed in Note 2, in December 1996 the Company's stockholders entered
into agreements for the sale of the Company's outstanding common stock.
Deloitte & Touche LLP
Tulsa, Oklahoma
January 17, 1997
(January 31, 1997 as to Notes 2 and 7)
F-33
<PAGE>
HARLEY INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
OCTOBER 31
------------------------------ JANUARY 31
1995 1996 1997
-------------- -------------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash............................... $ 21,738 $ 37,250 $ 39,250
Accounts receivable, less allowance
for doubtful accounts of
$100,000, $117,000 and
$172,000......................... 3,394,506 4,391,442 3,487,283
Inventories........................ 3,612,653 3,258,243 3,602,686
Prepaid expenses and other current
assets........................... 40,141 33,358 172,266
Deferred income tax assets......... 151,000 315,000 314,000
-------------- -------------- -----------
Total current assets.......... 7,220,038 8,035,293 7,615,485
NET ASSETS OF DISCONTINUED OPERATIONS... 3,876,294 3,114,979 3,832,303
PROPERTY, PLANT AND EQUIPMENT -- Net.... 1,731,368 2,630,489 2,511,864
OTHER ASSETS............................ 1,710,279 1,825,809 1,823,937
-------------- -------------- -----------
$ 14,537,979 $ 15,606,570 $15,783,589
============== ============== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued
expenses......................... $ 1,731,291 $ 2,424,408 $ 1,556,354
Current portion of long-term
debt............................. 445,528 477,309 480,166
Current portion of non-compete
obligations...................... 142,617 151,504 141,650
-------------- -------------- -----------
Total current liabilities..... 2,319,436 3,053,221 2,178,170
LONG-TERM DEBT.......................... 7,653,798 8,245,087 9,597,179
OBLIGATIONS UNDER NON-COMPETE
AGREEMENTS............................ 267,490 112,809 84,969
-------------- -------------- -----------
Total liabilities............. 10,240,724 11,411,117 11,860,318
-------------- -------------- -----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, $.01 stated value:
Authorized, 3,000,000 shares;
issued and outstanding,
780,428 shares................ 7,804 7,804 7,804
Additional paid-in capital......... 5,555,273 5,555,273 5,555,273
Accumulated deficit................ (1,265,822) (1,367,624) (1,639,806)
-------------- -------------- -----------
Total stockholders' equity.... 4,297,255 4,195,453 3,923,271
-------------- -------------- -----------
$ 14,537,979 $ 15,606,570 $15,783,589
============== ============== ===========
</TABLE>
See notes to consolidated financial statements.
F-34
<PAGE>
HARLEY INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED OCTOBER 31 JANUARY 31
---------------------------------------- ------------------------
1994 1995 1996 1996 1997
------------ ------------ ------------ ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES................................ $ 16,621,198 $ 18,990,013 $ 21,391,102 $ 4,245,384 $ 5,987,992
COST OF OPERATIONS...................... 12,325,705 14,024,693 15,447,669 3,246,598 4,415,807
------------ ------------ ------------ ----------- -----------
Gross profit........................ 4,295,493 4,965,320 5,943,433 998,786 1,572,185
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES.............................. 4,530,176 4,383,840 5,563,334 1,138,037 1,857,531
------------ ------------ ------------ ----------- -----------
Income (loss) from operations....... (234,683) 581,480 380,099 (139,251) (285,346)
INTEREST EXPENSE........................ 408,518 539,215 527,188 127,464 152,660
------------ ------------ ------------ ----------- -----------
INCOME (LOSS) FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES................... (643,201) 42,265 (147,089) (266,715) (438,006)
PROVISION (CREDIT) FOR INCOME TAXES..... (270,000) 15,000 (57,000) (104,000) (170,800)
------------ ------------ ------------ ----------- -----------
INCOME (LOSS) FROM CONTINUING
OPERATIONS............................ (373,201) 27,265 (90,089) (162,715) (267,206)
INCOME (LOSS) FROM DISCONTINUED
OPERATIONS, NET OF PROVISION (BENEFIT)
FOR TAXES OF $180,800, $35,000,
$(9,000), $4,145 and $(3,181)......... 265,044 58,719 (11,713) 5,495 (4,976)
------------ ------------ ------------ ----------- -----------
NET INCOME (LOSS)....................... $ (108,157) $ 85,984 $ (101,802) $ (157,220) $ (272,182)
============ ============ ============ =========== ===========
</TABLE>
See notes to consolidated financial statements.
F-35
<PAGE>
HARLEY INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
------------------ PAID-IN ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT EQUITY
--------- ------ ------------ -------------- -------------
<S> <C> <C> <C> <C> <C>
BALANCE, OCTOBER 31, 1993............ 786,428 $7,864 $ 5,781,034 $ (1,243,649) $ 4,545,249
Purchase and retirement of
treasury stock................ (6,000) (60) (30,761) -- (30,821)
Capital distributions........... -- -- (60,000) -- (60,000)
Net loss........................ -- -- -- (108,157) (108,157)
--------- ------ ------------ -------------- -------------
BALANCE, OCTOBER 31, 1994............ 780,428 7,804 5,690,273 (1,351,806) 4,346,271
Capital distributions........... -- -- (135,000) -- (135,000)
Net income...................... -- -- -- 85,984 85,984
--------- ------ ------------ -------------- -------------
BALANCE, OCTOBER 31, 1995............ 780,428 7,804 5,555,273 (1,265,822) 4,297,255
Net loss........................ -- -- -- (101,802) (101,802)
--------- ------ ------------ -------------- -------------
BALANCE, OCTOBER 31, 1996............ 780,428 7,804 5,555,273 (1,367,624) 4,195,453
Net loss (Unaudited)............ -- -- -- (272,182) (272,182)
--------- ------ ------------ -------------- -------------
BALANCE, JANUARY 31, 1997
(Unaudited)........................ 780,428 $7,804 $ 5,555,273 $ (1,639,806) $ 3,923,271
========= ====== ============ ============== =============
</TABLE>
See notes to consolidated financial statements.
F-36
<PAGE>
HARLEY INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED OCTOBER 31 JANUARY 31
------------------------------------------ --------------------------
1994 1995 1996 1996 1997
------------ ------------- ------------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)................... $ (108,157) $ 85,984 $ (101,802) $ (157,220) $ (272,182)
Reconciliation of net income (loss)
to net cash provided by (used in)
operating activities:
Discontinued operations........... (265,044) (58,719) 11,713 (5,495) 4,976
Depreciation and amortization..... 493,708 519,793 535,212 119,042 156,135
(Gain) loss on sale of property,
plant and equipment............ -- 610 (15,187) -- --
Deferred taxes.................... (214,000) 15,000 (166,000) -- 1,000
Changes in operating assets and
liabilities:
Accounts receivable............ (558,983) (465,426) (996,936) 1,176,760 904,159
Inventories.................... (80,862) 120,375 322,954 182,579 (344,443)
Prepaid expenses and other
current assets............... 35,680 31,060 6,783 (100,565) (138,908)
Other non-current assets....... -- (22,620) 7,870 1,166 (37,961)
Accounts payable and accrued
expenses..................... 44,271 237,673 693,117 (918,162) (868,054)
------------ ------------- ------------- ------------ ------------
Net cash provided by (used
in) operating activities
of:
Continuing operations...... (653,387) 463,730 297,724 298,105 (595,278)
Discontinued operations.... (150,395) (264,084) 669,702 (11,007) (722,301)
------------ ------------- ------------- ------------ ------------
Net cash provided by
(used in) operating
activities............ (803,782) 199,646 967,426 287,098 (1,317,579)
------------ ------------- ------------- ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of business................ -- -- (1,382,470) -- --
Capital expenditures................ (488,195) (156,373) (73,694) (6,894) (1,275)
Proceeds from sale of property,
plant, and equipment.............. -- 23,952 26,974 4,871 3,599
------------ ------------- ------------- ------------ ------------
Net cash used in investing
activities................... (488,195) (132,421) (1,429,190) (2,023) 2,324
------------ ------------- ------------- ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (repayments) under
revolving credit agreements....... 1,126,050 168,233 1,071,827 (250,000) 1,354,949
Principal payments on other
long-term debt.................... (1,595,682) (363,045) (448,757) -- --
Borrowings under term loan
agreements........................ 1,988,573 400,000 -- -- --
Principal payments on non-compete
obligations....................... (131,001) (138,175) (145,794) (35,656) (37,694)
Purchase and retirement of treasury
stock............................. (30,821) -- -- -- --
Capital distributions............... (60,000) (135,000) -- -- --
------------ ------------- ------------- ------------ ------------
Net cash provided by (used in)
financing activities......... 1,297,119 (67,987) 477,276 (285,656) 1,317,255
------------ ------------- ------------- ------------ ------------
INCREASE (DECREASE) IN CASH............. 5,142 (762) 15,512 (581) 2,000
CASH, BEGINNING OF PERIOD............... 17,358 22,500 21,738 21,738 37,250
------------ ------------- ------------- ------------ ------------
CASH, END OF PERIOD..................... $ 22,500 $ 21,738 $ 37,250 $ 21,157 $ 39,250
============ ============= ============= ============ ============
</TABLE>
See notes to consolidated financial statements.
F-37
<PAGE>
HARLEY INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED OCTOBER 31, 1994, 1995, AND 1996
1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Harley
Industries, Inc. (the "Company") and its operative divisions, Harley Equipment
and Harley Valve and Instrument Company ("Harley Valve"), and other minor
subsidiaries. All material intercompany profits, transactions and balances have
been eliminated.
DESCRIPTION OF BUSINESS
The Company conducts its business activities through two operating
divisions, Harley Equipment and Harley Valve. Harley Equipment sells, customizes
and repairs engines, industrial vehicles, pumps and related parts. Harley Valve
customizes, repairs, tests and sells valves, gauges, measurement instruments and
related parts. The Company's principal customers are in the aircraft, chemical
manufacturing and power industries located primarily in the midwestern and
southeastern United States. The majority of sales of products and service
billings are made on account to customers based on pre-approved unsecured credit
terms determined by the Company. Allowances for uncollectible accounts are
established based on several factors which include, but are not limited to,
analysis of specific customers, historical trends, current economic conditions
and other information.
BASIS OF PRESENTATION
Due to the transactions described in Note 2, the accompanying consolidated
financial statements reflect the Company's Harley Equipment division as a
discontinued operation.
CASH
Cash consists of cash on hand and on deposit in banks.
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out method) or
market. Inventories not expected to be sold or utilized within one year are
recorded at estimated net realizable values and are included in the financial
statements as non-current assets.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are reported at cost, net of accumulated
depreciation. Depreciation is computed using the straight-line method based on
the estimated useful lives of the related assets, which are 15 to 30 years for
buildings, 7 years for machinery and equipment, 3 to 5 years for furniture and
fixtures and 3 years for other assets. During 1996 the Company determined the
estimated useful lives of certain of its buildings should be extended from 15
years to 30 years. The effect of this change in estimate was to decrease
depreciation expense and the net loss for the year ended October 31, 1996 by
approximately $52,000 and $31,200, respectively.
INTANGIBLE ASSETS
Intangible assets are reported at cost, net of accumulated amortization.
The costs of non-compete agreements entered into in connection with acquisitions
of businesses are amortized on the straight-line basis over their ten- and
five-year terms. Other intangible assets consist of the excess of cost over the
fair value of the net assets of acquired businesses, which is amortized on the
straight-line basis over 40 years. Management periodically evaluates the
recoverability of intangible asset carrying values based on projected operations
and other relevant factors of the acquired businesses. No valuation reserves
have been provided as a result of these evaluations. Amortization expense was
$171,720, $179,220, and $172,426 for the years ended October 31, 1994, 1995, and
1996, respectively.
F-38
<PAGE>
HARLEY INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NEW ACCOUNTING STANDARD
The Company has adopted, effective November 1, 1995, the provisions of
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of".
Accordingly, in the event that facts and circumstances indicate that property
and equipment, and intangible or other assets, may be impaired, an evaluation of
recoverability would be performed. If an evaluation is required, the estimated
future undiscounted cash flows associated with the asset are compared to the
asset's carrying amount to determine if a write-down to market value or
discounted cash flow value is necessary. Adoption of this standard did not have
a material effect on the financial position or results of operations of the
Company.
REVENUE RECOGNITION
Revenue on sales of products is recognized upon shipment to customers.
Revenue on service work is recognized upon completion of the service.
INCOME TAXES
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("FAS
109"). Under FAS 109, deferred income taxes reflect the net tax effects of (a)
temporary differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes, and
(b) operating loss and tax credit carryforwards.
MANAGEMENT ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the balance sheet date and
the reported amounts of revenue and expenses during the reporting period. Actual
results will be determined based on the outcome of future events and could
differ from the estimates.
UNAUDITED INTERIM FINANCIAL INFORMATION
The financial information for the three months ended January 31, 1996 and
1997 has not been audited by independent auditors. Certain information and note
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
from the unaudited interim financial information. In the opinion of management
of the Company, the unaudited interim financial information includes all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair presentation. Results of operations for the interim periods are not
necessarily indicative of the results of operations for the respective full
fiscal years.
2. SUBSEQUENT EVENTS AND DISCONTINUED OPERATIONS
In December 1996, the Company's stockholders entered into agreements with
The Safe Seal Company, Inc. ("Safe Seal") under which Safe Seal acquired 100%
of the outstanding common stock of the Company effective January 31, 1997 for
cash and notes of approximately $8,600,000, including a $1,000,000 cash payment
due upon the successful completion of a public stock offering by Safe Seal or
its successor company. Concurrent with the acquisition, Safe Seal entered into
an agreement to transfer certain assets and certain liabilities to Harley
Equipment and sell the stock of Harley Equipment for cash and notes to an
employee/minority stockholder of the Company. The Company's primary bank debt,
which was recorded on the records of Harley Equipment, was transferred to Harley
Valve and refinanced by Safe Seal (Note 7) in conjunction with the sale and
purchase transactions described above. The ultimate Harley Equipment purchase
price, estimated to be $3,100,000 to $3,800,000, will be based on the historical
carrying values of such assets and liabilities as of January 31, 1997 and is
subject to adjustment by the parties. For financial
F-39
<PAGE>
HARLEY INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
reporting purposes, the net assets, results of operations and cash flows of
Harley Equipment are included in the Company's consolidated financial statements
as discontinued operations. Harley Equipment had revenues of $10,240,000,
$10,318,000, and $11,301,000 for the years ended October 31, 1994, 1995, and
1996, respectively. Net assets of these discontinued operations at October 31,
1995 and 1996 are as follows:
OCTOBER 31
--------------------------
1995 1996
------------ ------------
Current assets.......................... $ 3,245,417 $ 3,581,497
Property, plant and equipment -- net.... 630,563 583,052
Other assets............................ 751,241 635,227
------------ ------------
Total assets.................. 4,627,221 4,799,776
Current liabilities..................... 750,927 1,684,797
------------ ------------
Net assets.................... $ 3,876,294 $ 3,114,979
============ ============
This historical financial information may not necessarily be indicative of
the conditions that would have existed if Harley Equipment had been operated as
an unaffiliated entity.
Interest expense has been allocated to discontinued operations based on the
ratio of net assets of discontinued operations to consolidated net assets.
Interest expense of $163,431, $245,057, and $208,491 has been allocated to
discontinued operations in 1994, 1995, and 1996, respectively. Interest payments
for the Company were $552,095, $787,795, and $735,632 in 1994, 1995, and 1996,
respectively. In addition, certain additional compensation of $475,000 (Note
13), which will be paid from the assets of Harley Equipment, has been allocated
to discontinued operations.
The Company's stockholders have indemnified Safe Seal for various
contingencies, including environmental and income tax matters. The stockholders
have also entered into agreements not-to-compete with Safe Seal.
3. PURCHASE OF VALVE BUSINESS
Effective June 4, 1996, the Company acquired certain assets of Henze
Services, Inc. for cash and direct acquisition costs of $1,382,470. The assets
acquired consisted of six branches primarily engaged in repair and servicing of
used valves and related products. Management subsequently consolidated two
locations into the operations of existing Harley Valve facilities. The
acquisition was accounted for using purchase accounting. The purchase price was
allocated to equipment acquired based on independent appraisals. In conjunction
with the acquisition, an escrow fund of $150,000 has been established pending
resolution of certain matters. The escrow fund is included in other noncurrent
assets pending its resolution. The results of operations of the Henze locations
are included in the accompanying consolidated statement of operations from the
acquisition date. The following pro forma information has been prepared assuming
that this acquisition had taken place as of November 1, 1994. The pro forma
information includes adjustments for interest expense that would have been
incurred to finance the purchase, depreciation based on the purchase price
allocation, and related income tax effects. The pro forma financial information
is not necessarily indicative of the results of operations that would have been
reported had the transaction been effected on November 1, 1994 (000's omitted).
YEAR ENDED OCTOBER 31
---------------------
1995 1996
--------- ---------
Revenues................................ $ 33,557 $ 27,382
Loss from continuing operations......... (396) (381)
Net loss................................ (337) (393)
F-40
<PAGE>
HARLEY INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. INVENTORIES
Inventories consist of the following:
OCTOBER 31
--------------------------
1995 1996
------------ ------------
Gauges, valves, measurement instruments
and related parts..................... $ 3,883,361 $ 3,461,662
Work in process......................... -- 98,745
------------ ------------
3,883,361 3,560,407
Less: amount classified as non-current
assets................................ 270,708 302,164
------------ ------------
Inventories classified as current
assets................................ $ 3,612,653 $ 3,258,243
============ ============
Inventories are stated net of valuation reserves of $295,000 and $374,000
at October 31, 1995 and 1996, respectively. Management estimates that
inventories of $270,708 and $302,164 at October 31, 1995 and 1996, respectively,
are in excess of Harley Valve's current sales and service work requirements.
Such inventories include used valves, replacement parts and other items which
are reported as non-current assets. Management has developed programs to reduce
these inventories to desired levels over the near term and believes the carrying
values of such inventories, net of valuation reserves, will ultimately be
recovered.
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following:
OCTOBER 31
------------------------------
1995 1996
-------------- --------------
Land.................................... $ 347,625 $ 347,625
Buildings............................... 1,027,956 1,008,375
Machinery and equipment................. 1,726,616 3,017,651
Furniture and fixtures.................. 361,957 328,169
Other................................... 282,398 282,264
-------------- --------------
3,746,552 4,984,084
Less accumulated depreciation........... (2,015,184) (2,353,595)
-------------- --------------
$ 1,731,368 $ 2,630,489
============== ==============
Depreciation expense was $321,988, $340,573, and $362,786 for the years
ended October 31, 1994, 1995, and 1996, respectively.
F-41
<PAGE>
HARLEY INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. OTHER ASSETS
Other assets consist of the following:
OCTOBER 31
--------------------------
1995 1996
------------ ------------
Non-current inventories, net............ $ 270,708 $ 302,164
Non-compete agreements, net of
accumulated amortization of $389,097
and $542,510.......................... 385,918 232,505
Other intangible assets, net of
accumulated amortization of $192,398
and $211,411.......................... 733,033 714,020
Escrow fund............................. -- 150,000
Other non-current assets................ 22,620 47,120
Deferred income tax assets.............. 298,000 380,000
------------ ------------
$ 1,710,279 $ 1,825,809
============ ============
7. DEBT
Debt consists of the following:
OCTOBER 31
--------------------------
1995 1996
------------ ------------
Revolving credit agreement.............. $ 5,889,000 $ 6,960,827
Term note agreement; interest at New
York prime rate plus .75% (9% at
October 31, 1996), payable in monthly
installments of $40,821 through April
1, 2000 when the remaining balance is
due................................... 1,493,806 1,127,719
Term note agreement; interest at New
York prime rate plus .75% (9% at
October 31, 1996), payable in monthly
installments of $7,734 through June 1,
1996 and $5,067 through April 1, 2000
when the remaining balance is due..... 447,566 407,695
Note payable to bank; interest at the
bank's base rate plus 1.5% (9.75% at
October 31, 1996), payable in monthly
installments of $2,020 through October
2000 when the remaining balance is
due; secured by first mortgage on land
and building with a carrying value of
$316,000.............................. 186,380 154,452
Note payable to individual; interest at
9%, payable in monthly installments
through October 2001; secured by real
estate with a carrying value of
$177,000.............................. 82,574 71,703
------------ ------------
8,099,326 8,722,396
Less current portion of long-term
debt.................................. (445,528) (477,309)
------------ ------------
Long-term debt.......................... $ 7,653,798 $ 8,245,087
============ ============
REVOLVING CREDIT AND TERM NOTE AGREEMENT
In May 1995, the Company restructured its borrowing facilities and executed
an amendment to its revolving credit and term note agreement (the "Agreement")
with a bank. The amended Agreement provides for two term notes, original
principal amounts totaling $2,102,356, and borrowings under a revolving facility
to the lesser of $7,000,000 or the Company's borrowing base (as defined) of
qualified accounts receivable and inventories. In July 1996, the Company
increased the borrowings under the revolving facility up to the lesser of
$7,500,000 or the Company's borrowing base. At October 31, 1996, remaining
borrowing capacity under the revolving facility was $539,000. The revolving
facility provides for
F-42
<PAGE>
HARLEY INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
interest at the New York prime rate plus .625% (8.875% at October 31, 1996), and
is due for renewal on March 1, 1997. The assets of the Company and 681,506
shares of Company common stock are pledged as collateral under the Agreement.
The Agreement contains various restrictive financial covenants including
maintaining net worth of $4.1 million, working capital of $3 million, a current
ratio of 1.25 to 1.0, maximum liabilities to tangible net worth of 3.25 to 1.0,
and minimum cash flow, as defined, of 1.4 to 1.0. In addition, the agreement
prohibits dividends, limits salaries and bonuses and requires bank consent on
ownership changes. As of October 31, 1996, the Company was not in compliance
with the working capital, current ratio, liabilities to net worth or cash flow
financial covenants, exceeded the salary and bonus limits and had entered into
agreements for ownership changes as described in Note 2. The bank has
temporarily waived these covenant violations contingent upon the transfer of
ownership.
The borrowings under the Company's revolving credit agreement and term
notes were repaid on January 31, 1997 in conjunction with the transfer of
ownership and replaced with bank debt issued by The Safe Seal Company, Inc. (See
Note 2). The borrowings under the Company's revolving credit agreement and term
notes have been classified based on their original maturities as of October 31,
1996 in the accompanying consolidated financial statements.
Principal payments on long-term debt (based on the original maturities) and
non-compete obligations (Note 8) are as follows:
YEAR ENDING LONG-TERM NON-COMPETE
OCTOBER 31 DEBT OBLIGATIONS TOTAL
- --------------------------------- ---------- ------------- ------------
1997........................... $ 477,309 $ 151,504 $ 628,813
1998........................... 7,482,904 86,537 7,569,441
1999........................... 366,957 15,255 382,212
2000........................... 379,872 11,017 390,889
2001........................... 15,354 -- 15,354
---------- ------------- ------------
$8,722,396 $ 264,313 $ 8,986,709
========== ============= ============
8. OBLIGATIONS UNDER NON-COMPETE AGREEMENTS
In connection with the acquisitions of businesses, Harley Valve assumed
certain obligations under non-compete agreements and entered into additional
agreements whereby the former owners agreed not to compete with Harley Valve for
a five-year period. The agreements require monthly payments totaling $13,508 at
various maturities through 2000. At October 31, 1995 and 1996, the obligations
consist of the following:
1995 1996
------------ ------------
Total obligations, net of imputed
interest of $22,608 and $13,577
at 6% at October 31, 1995 and 1996,
respectively.......................... $ 410,107 $ 264,313
Current portion......................... (142,617) (151,504)
------------ ------------
Long-term portion....................... $ 267,490 $ 112,809
============ ============
F-43
<PAGE>
HARLEY INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. INCOME TAXES
The provision (benefit) for income taxes associated with continuing
operations consists of the following:
YEAR ENDED OCTOBER 31
-----------------------------------
1994 1995 1996
------------ --------- ----------
Current:
Federal............................ $ (42,000) $ -- $ 29,000
State.............................. (14,000) -- 7,000
------------ --------- ----------
(56,000) -- 36,000
Deferred expense (benefit).............. (214,000) 15,000 (93,000)
------------ --------- ----------
Provision (benefit) for income taxes.... $ (270,000) $ 15,000 $ (57,000)
============ ========= ==========
The provisions (benefits) for income taxes vary from federal statutory
rates on earnings before income taxes due to the following:
YEAR ENDED OCTOBER 31
-------------------------------
1994 1995 1996
--------- --------- ---------
Income tax provision (benefit) at U.S.
Federal statutory rate, considering
surtax exemptions..................... (34.0)% 34.0% (34.0)%
State taxes, net of Federal tax
benefit............................... (5.0)% 5.0% (5.0)%
Amortization of goodwill................ 1.0% -- --
Other, net.............................. (4.0)% (3.5)% --
------- ------- -------
Effective tax rate...................... (42.0)% 35.5% (39.0)%
======= ======= =======
The sources of deferred income tax assets consist of available net
operating loss carryforwards and temporary differences between the financial and
tax bases of assets and liabilities, as follows:
OCTOBER 31
----------------------
1995 1996
---------- ----------
Loss carryforwards................... $ 72,000 $ --
Accounts receivable reserves......... 39,000 46,000
Inventories.......................... 100,000 170,000
Property, plant and equipment........ 78,000 80,000
Intangible assets.................... 126,000 155,000
Accrued expenses and other........... 34,000 244,000
---------- ----------
Deferred tax assets.................. $ 449,000 $ 695,000
========== ==========
Classified as:
Current......................... $ 151,000 $ 315,000
Non-current..................... 298,000 380,000
---------- ----------
$ 449,000 $ 695,000
========== ==========
At October 31, 1995 and 1996, there are no material deferred tax
liabilities. Realization of the deferred tax assets is dependent on generating
sufficient taxable income in the future. Although realization is not assured,
management believes it is more likely than not that all of the deferred tax
assets will be realized. The amount of the deferred tax assets considered
realizable, however, could be reduced in the near term if estimates of future
taxable income during the carryforward period are reduced or should tax
authorities disallow tax deductions.
F-44
<PAGE>
HARLEY INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company utilized $326,000, $326,000, and $254,000 of net operating loss
carryforwards in 1994, 1995, and 1996, respectively, to reduce taxable income
and current income tax liabilities. Utilization of net operating loss
carryforwards was limited to $326,000 annually due to the purchase of the
Company's preferred stock in 1991. The Company made income tax payments of
$31,840, $3,531, and $16,488 in 1994, 1995, and 1996, respectively.
The Company's 1993 and 1994 Federal income tax returns are currently being
examined by the Internal Revenue Service (the "IRS"). The Company and the IRS
are disputing certain purchase price allocations related to a 1993 acquisition.
The Company believes its positions are sustainable and additional taxes,
penalties or interest, if any, should not be material.
10. STOCKHOLDERS' EQUITY
The Company has authorized 1,950,000 shares of preferred stock, none of
which is issued or outstanding.
Options for the purchase of 20,000 shares of common stock at $4.45 have
been granted to a key employee. As of October 31, 1996, none of these options
have been exercised. The effects of these options are not material. These
options were terminated in conjunction with the transfers of ownership described
in Note 2.
In 1994, the Company purchased 6,000 shares of the Company's common stock
from an officer for approximately $31,000 and retired the shares.
11. RETIREMENT PLAN
The Company has a defined contribution retirement savings plan (the
"Retirement Plan") covering substantially all employees who meet certain
eligibility requirements as to age and length of service. The Retirement Plan
incorporates the salary reduction provisions of Section 401(k) of the Internal
Revenue Code and employees may contribute up to 15% of their compensation. The
Company may elect to match a percentage of the employees' contributions. There
were no Company contributions for the years ended October 31, 1996 and 1994.
Contributions charged to operations were $8,180 for the year ended October 31,
1995.
12. SERVICE AND DISTRIBUTION AGREEMENTS
Harley Valve purchases, sells and services various products under service
and distribution agreements with its major suppliers. The agreement with one key
supplier has a five-year term through April 1998. Approximately 50% of revenues
during each of the years ended October 31, 1994, 1995, and 1996 were derived
from sales of products purchased or services rendered under the agreement with
this supplier. Other agreements with major suppliers are generally cancelable by
the suppliers upon thirty to sixty days' notice. Management does not anticipate
cancellation of these agreements.
13. RELATED PARTY TRANSACTIONS
At October 31, 1995 and 1996, other assets of Harley Equipment include
notes receivable of $150,000 from the Company's president/majority stockholder.
The President's notes bear interest at the statutory rate required by the
Internal Revenue Service and are payable on demand. Interest income on the
President's notes totaled $9,375, $10,200, and $10,200 for the years ended
October 31, 1994, 1995, and 1996, respectively.
In conjunction with the sale of the Company described in Note 2, additional
compensation totaling approximately $475,000 for various employees and fees
related to the sale of $150,000 charged to the Company by a stockholder were
incurred. The additional compensation is to be paid from the assets of Harley
Equipment and has been allocated to discontinued operations. In November 1996,
certain assets of
F-45
<PAGE>
HARLEY INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Harley Equipment were sold to a stockholder for $150,000, which represented
their carrying values at October 31, 1996.
The Company has also entered into a contingent incentive award agreement
with a key Harley Valve employee which provides for a $50,000 payment upon
consummation of the sale of the Company and $50,000 payable ratably over the
following six months. No amounts related to this agreement were recorded by the
Company as of October 31, 1996.
14. LEASES
Harley Valve leases certain equipment and office and warehouse facilities.
Minimum rental commitments for Harley Valve under all operating leases with
noncancelable terms in excess of one year at October 31, 1996 were payable as
follows:
YEAR ENDING OCTOBER 31,
- -----------------------
1997............................... $ 450,564
1998............................... 140,528
1999............................... 56,756
2000............................... 51,286
2001............................... 36,000
----------
$ 735,134
==========
Commencing in the year ended October 31, 1996, Harley Valve subleased
certain of its facilities to a third party under short-term leases.
Total rental expense amounted to approximately $281,000, $216,000, and
$274,000 for the years ended October 31, 1994, 1995, and 1996, respectively.
Sublease income was approximately $44,000 for the year ended October 31, 1996.
15. ENVIRONMENTAL CONTINGENCIES
The Company is investigating various of its facilities for potential
environmental contamination and remediation, including an underground storage
tank at its Norfolk, Virginia location. Based on soil samples completed through
January 10, 1997, minimal contamination is indicated. Management believes costs,
if any, for environmental remediation at the Norfolk or other facilities will
not be material.
* * * * * *
F-46
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Steam Supply Group:
We have audited the accompanying combined balance sheets of Steam Supply
Group (as defined in Note 1) as of October 31, 1995 and 1996, and the related
combined statements of operations, stockholders' equity (deficit) and cash flows
for each of the three years in the period ended October 31, 1996. These
financial statements are the responsibility of the Group's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the combined financial position of Steam
Supply Group as of October 31, 1995 and 1996, and the combined results of their
operations and their combined cash flows for each of the three years in the
period ended October 31, 1996, in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Houston, Texas
June 3, 1997
F-47
<PAGE>
STEAM SUPPLY GROUP
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
OCTOBER 31
-------------------------- JULY 31,
1995 1996 1997
------------ ------------ -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash............................... $ -- $ -- $ --
Accounts receivable, net of
allowance of $15,000, $9,080 and
$0, respectively................. 1,854,097 2,007,558 1,846,046
Inventories........................ 1,843,530 2,083,181 1,611,782
Prepaid expenses................... 241,574 277,174 337,800
Current portion of related-party
notes receivable................. 22,266 25,500 21,141
------------ ------------ -----------
Total current assets.......... 3,961,467 4,393,413 3,816,769
PROPERTY AND EQUIPMENT, net............. 787,592 1,123,146 1,066,604
RELATED-PARTY NOTES RECEIVABLE, net of
current portion....................... 587,731 647,871 580,164
OTHER NONCURRENT ASSETS, net............ 329,465 379,490 314,631
------------ ------------ -----------
$ 5,666,255 $ 6,543,920 $ 5,778,168
============ ============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term debt.................... $ 2,432,000 $ 2,062,683 $ 1,988,582
Current maturities of long-term
debt............................. 148,000 245,400 237,841
Accounts payable and accrued
expenses......................... 1,409,478 1,341,730 1,012,247
------------ ------------ -----------
Total current liabilities..... 3,989,478 3,649,813 3,238,670
LONG-TERM DEBT, net of current
maturities............................ 916,160 2,131,891 1,964,370
COMMITMENTS AND CONTINGENCIES
REDEEMABLE PREFERRED STOCK.............. 710,528 710,528 710,528
STOCKHOLDERS' EQUITY (DEFICIT):
Common stock....................... 173 173 173
Additional paid-in capital......... 17,958 17,958 17,958
Retained earnings (deficit)........ 31,958 33,557 (153,531)
------------ ------------ -----------
Total stockholders' equity
(deficit).................. 50,089 51,688 (135,400)
------------ ------------ -----------
$ 5,666,255 $ 6,543,920 $ 5,778,168
============ ============ ===========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-48
<PAGE>
STEAM SUPPLY GROUP
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED OCTOBER 31 ENDED JULY 31
---------------------------------------------- ------------------------------
1994 1995 1996 1996 1997
-------------- -------------- -------------- -------------- --------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES............................. $ 14,777,360 $ 15,407,681 $ 15,078,741 $ 11,255,661 $ 11,790,649
COST OF OPERATIONS................... 9,702,561 10,092,443 9,573,560 7,707,689 8,218,844
-------------- -------------- -------------- -------------- --------------
Gross profit.................... 5,074,799 5,315,238 5,505,181 3,547,972 3,571,805
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES........................... 5,022,066 4,825,535 5,107,379 3,135,828 3,475,888
-------------- -------------- -------------- -------------- --------------
Income from operations.......... 52,733 489,703 397,802 412,144 95,917
OTHER INCOME (EXPENSE):
Interest, net................... (244,611) (282,004) (303,482) (219,823) (245,997)
Other........................... (52,512) 7,121 (9,881) (54,198) (72,982)
-------------- -------------- -------------- -------------- --------------
(297,123) (274,883) (313,363) (274,021) (318,979)
-------------- -------------- -------------- -------------- --------------
INCOME (LOSS) BEFORE INCOME TAXES.... (244,390) 214,820 84,439 138,123 (223,062)
PROVISION (BENEFIT) FOR INCOME
TAXES.............................. 2,185 97,900 33,100 53,868 (85,711)
-------------- -------------- -------------- -------------- --------------
NET INCOME (LOSS).................... $ (246,575) $ 116,920 $ 51,339 $ 84,255 $ (137,351)
============== ============== ============== ============== ==============
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-49
<PAGE>
STEAM SUPPLY GROUP
COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
COMMON PAID-IN RETAINED
STOCK CAPITAL EARNINGS (DEFICIT) TOTAL
------ --------- ------------------- ------------
<S> <C> <C> <C> <C>
BALANCE, October 31, 1993............... $ 173 $ 17,958 $ 261,167 $ 279,298
Preferred dividends................ -- -- (49,817) (49,817)
Net loss........................... -- -- (246,575) (246,575)
------ --------- ------------------- ------------
BALANCE, October 31, 1994............... 173 17,958 (35,225) (17,094)
Preferred dividends................ -- -- (49,737) (49,737)
Net income......................... -- -- 116,920 116,920
------ --------- ------------------- ------------
BALANCE, October 31, 1995............... 173 17,958 31,958 50,089
Preferred dividends................ -- -- (49,740) (49,740)
Net income......................... -- -- 51,339 51,339
------ --------- ------------------- ------------
BALANCE, October 31, 1996............... 173 17,958 33,557 51,688
Preferred dividends (unaudited).... -- -- (49,737) (49,737)
Net loss (unaudited)............... -- -- (137,351) (137,351)
------ --------- ------------------- ------------
BALANCE, July 31, 1997 (unaudited)...... $ 173 $ 17,958 $(153,531) $ (135,400)
====== ========= =================== ============
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-50
<PAGE>
STEAM SUPPLY GROUP
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED OCTOBER 31 ENDED JULY 31
------------------------------------ ----------------------
1994 1995 1996 1996 1997
---------- ------------ ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)................ $ (246,575) $ 116,920 $ 51,339 $ 84,255 $ (137,351)
Adjustments to reconcile net
income (loss) to net cash
provided by (used in) operating
activities --
Depreciation and
amortization.............. 278,954 270,111 208,304 113,752 125,448
(Increase) decrease in --
Accounts receivable....... (173,560) (138,995) (153,461) 125,825 161,512
Inventories............... 175,605 56,528 (239,651) (156,843) 471,399
Prepaid expenses and other
assets.................. (79,395) 81,422 (85,625) (284,203) 4,233
Accounts payable and accrued
expenses.................. 165,685 123,792 (67,748) (145,263) (329,483)
---------- ------------ ---------- ---------- ----------
Net cash provided by
(used in) operating
activities......... 120,714 509,778 (286,842) (262,477) 295,758
---------- ------------ ---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and
equipment...................... (133,067) (117,445) (543,852) (435,162) (68,906)
Advances on notes receivable..... (16,044) (138,334) (60,000) -- --
Collections on notes
receivable..................... 119,416 24,207 23,221 10,398 72,066
---------- ------------ ---------- ---------- ----------
Net cash provided by
(used in) investing
activities......... (29,695) (231,572) (580,631) (424,764) 3,160
---------- ------------ ---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings of debt............... 819,633 831,681 1,215,683 976,000 --
Repayments of debt............... (848,570) (1,072,415) (298,470) (239,020) (249,181)
Preferred dividends paid......... (49,817) (49,737) (49,740) (49,739) (49,737)
---------- ------------ ---------- ---------- ----------
Net cash provided by
(used in) financing
activities......... (78,754) (290,471) 867,473 687,241 (298,918)
---------- ------------ ---------- ---------- ----------
NET CHANGE IN CASH................... 12,265 (12,265) -- -- --
CASH, beginning of period............ -- 12,265 -- -- --
---------- ------------ ---------- ---------- ----------
CASH, end of period.................. $ 12,265 $ -- $ -- $ -- $ --
========== ============ ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-51
<PAGE>
STEAM SUPPLY GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS
1. BUSINESS, ORGANIZATION AND BASIS OF PRESENTATION:
The accompanying combined balance sheets and related combined statements of
operations, stockholders' equity and cash flows include Puget Investments, Inc.
("Puget"), Steam Supply & Rubber Co., Inc. ("Steam Supply"), Flickinger
Company and Flickinger-Benicia, Inc. ("Benicia"). Steam Supply and Flickinger
Company are wholly owned subsidiaries of Puget and are consolidated with the
accounts of Puget. Benicia is owned directly by the stockholders of Puget. As
Puget and Benicia (together, "Steam Supply Group" or the "Company") have
common ownership and management, the financial statements of each entity have
been combined for financial reporting reasons. All intercompany balances and
transactions have been eliminated.
Steam Supply Group services, repairs, sells and distributes industrial
valves and instruments. Steam Supply Group's customers primarily are
petrochemical, electric power and pulp and paper industries located in the
western continental United States and Alaska.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
CASH
Cash payments for interest during fiscal 1994, 1995 and 1996 were
approximately $272,878, $312,643 and $336,432, respectively. Cash payments for
taxes during fiscal 1995 and 1996 were approximately $65,286 and $107,310,
respectively. During fiscal 1994, the Company received $86,157 in income tax
refunds.
INVENTORIES
Inventories are valued at the lower of cost or market utilizing the
last-in, first-out method ("LIFO") and primarily consist of industrial valves,
valve parts and instrumentation. The excess of current costs determined using
the first-in, first-out method basis over the carrying values of LIFO
inventories was approximately $559,963 and $614,769 at October 31, 1995 and
1996, respectively.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost, and depreciation is computed
using the straight-line method over the estimated useful lives of the assets.
The costs of major improvements are capitalized. Expenditures for maintenance,
repairs and minor improvements are expensed as incurred. When property and
equipment are sold or retired, the cost and related accumulated depreciation are
removed and the resulting gain or loss is included in results of operations.
OTHER NONCURRENT ASSETS
Other noncurrent assets primarily consist of a noncompete covenant with a
former stockholder, which is being amortized on a straight-line basis over 10
years. Accumulated amortization as of October 31, 1995 and 1996 was $130,625 and
$159,125, respectively.
REVENUE RECOGNITION
Service revenue is recognized upon performance of the service, and product
sales revenue is recognized as products are shipped or delivered.
INCOME TAXES
Puget files a consolidated income tax return and follows the liability
method of accounting for income taxes in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 109. Under this method, deferred income
taxes are recorded based upon differences between the financial reporting and
tax bases of assets and liabilities and are measured using the enacted tax rates
and laws that will be in effect when the underlying assets or liabilities are
recovered or settled. Benicia is an S Corporation for federal
F-52
<PAGE>
STEAM SUPPLY GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
income tax purposes and, in accordance with the S Corporation provisions of the
Internal Revenue Code, the earnings of Benicia are included in the personal tax
returns of its stockholders. Accordingly, no federal income tax expense is
recorded in the financial statements relative to Benicia. Benicia does record
California state income tax expense.
STOCKHOLDERS' EQUITY
The common stock ownership of the Company as of October 31, 1995 and 1996
includes the following:
PAR VALUE SHARES SHARES
PER SHARE AUTHORIZED OUTSTANDING
---------- ---------- -----------
Puget................................ $ 1.00 500 173
Benicia.............................. -- 50,000 20,000
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
UNAUDITED INTERIM FINANCIAL INFORMATION
The financial information for the nine months ended July 31, 1996 and 1997
has not been audited by independent accountants. Certain information and note
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
from the unaudited interim financial information. In the opinion of management
of the Company, the unaudited interim financial information includes all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair presentation. Results of operations for the interim periods are not
necessarily indicative of the results of operations for the respective full
fiscal years.
NEW ACCOUNTING PRONOUNCEMENT
Effective November 1, 1995, the Company adopted SFAS No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of." Accordingly, in the event that facts and circumstances indicate that
property and equipment, and intangible or other assets, may be impaired, an
evaluation of recoverability would be performed. If an evaluation of an asset is
required, the estimated future undiscounted cash flows associated with the asset
are compared to the asset's carrying amount to determine if a writedown to
market value or discounted cash flow value is necessary. Adoption of this
standard did not have a material effect on the combined financial position or
results of operations of the Company.
F-53
<PAGE>
STEAM SUPPLY GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
3. PROPERTY AND EQUIPMENT:
Property and equipment consists of the following:
OCTOBER 31
ESTIMATED --------------------------
USEFUL LIVES 1995 1996
------------ ------------ ------------
Land............................... $ 167,095 $ 167,095
Buildings.......................... 30 years 609,949 609,949
Office and shop equipment.......... 7 years 1,105,165 1,128,581
Computer equipment................. 5 years 338,578 698,583
Vehicles........................... 5 years 301,212 384,970
Furniture and fixtures............. 7 years 185,340 186,572
Leasehold improvements............. 20 years 10,410 50,481
------------ ------------
2,717,749 3,226,231
Less -- Accumulated depreciation... 1,930,157 2,103,085
------------ ------------
Property and equipment, net........ $ 787,592 $ 1,123,146
============ ============
4. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:
Activity in the Company's allowance for doubtful accounts for fiscal 1994,
1995 and 1996 consists of the following:
1994 1995 1996
--------- --------- ---------
Balance at beginning of fiscal
year................................. $ 15,000 $ 15,000 $ 15,000
Amounts charged (credited) to results
of operations...................... -- -- (5,920)
--------- --------- ---------
Balance at end of fiscal year........ $ 15,000 $ 15,000 $ 9,080
========= ========= =========
Accounts payable and accrued expenses as of October 31, 1995 and 1996
consist of the following:
1995 1996
------------ ------------
Accounts payable..................... $ 1,167,042 $ 1,170,774
Bank overdraft....................... 167,710 106,332
Accrued expenses..................... 74,726 64,624
------------ ------------
$ 1,409,478 $ 1,341,730
============ ============
F-54
<PAGE>
STEAM SUPPLY GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
5. RELATED-PARTY NOTES RECEIVABLE:
The Company's related-party notes receivable consist of the following:
OCTOBER 31
----------------------
1995 1996
---------- ----------
Unsecured notes receivable from
stockholders, balloon payment,
including accrued interest at prime
(8.25% at October 31, 1996), due
October 1999.......................... $ 306,842 $ 393,440
Note receivable from King-Ries
Partnership ("KRP"), an affiliate
related through common ownership, due
in monthly installments of $2,800
including interest at 12.5%,
collateralized by a second mortgage on
certain real estate, due November
1998.................................. 209,822 202,012
Unsecured note receivable from KRP, due
in monthly installments of $1,370
including interest at prime, due April
2002.................................. 81,876 72,019
Unsecured note receivable from KRP due
in monthly installments of $508
including interest at 6%, due October
1997.................................. 11,457 5,900
---------- ----------
609,997 673,371
Less -- Current portion................. 22,266 25,500
---------- ----------
$ 587,731 $ 647,871
========== ==========
Interest income on these related-party notes totaled $44,000, $54,000 and
$60,000 for fiscal 1994, 1995 and 1996, respectively.
6. PREFERRED STOCK:
Puget has 896 shares of $793 par value cumulative preferred stock
outstanding. The preferred shares yield a 7 percent dividend. The shares are
callable and redeemable at a 10 percent premium over par value. The shares can
be called or redeemed at any time by Puget. The preferred shares have no voting
rights, except in the event of nonpayment of dividends for two years, in which
case the preferred stock shall vote with the common stock on a one share, one
vote basis.
7. DEBT:
SHORT-TERM DEBT
The Company's short-term debt consists of the following:
OCTOBER 31
--------------------------
1995 1996
------------ ------------
Revolving line of credit with Union Bank
of California, N.A. ("Union Bank"),
bearing interest at prime plus 0.50%
(8.75% at October 31, 1996), $2.2
million facility, collateralized by
substantially all the Company's assets
and guaranteed by stockholders,
expired April 1997 (See Note 11)...... $ 1,532,000 $ 2,062,683
Note payable to Union Bank with interest
payable monthly at prime plus 0.75%
(9.00% at October 31, 1996),
collateralized
by real estate and guaranteed by
stockholders, refinanced as
long-term debt during 1996............ 900,000 --
------------ ------------
$ 2,432,000 $ 2,062,683
============ ============
F-55
<PAGE>
STEAM SUPPLY GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The Company's long-term debt consists of the following:
OCTOBER 31
--------------------------
1995 1996
------------ ------------
Note payable to Union Bank in monthly
installments of $9,640 including
interest at prime plus 0.75% (9.00% at
October 31, 1996), collateralized by
real estate and guaranteed by
stockholders, due May 2003............ $ -- $ 1,094,907
Note payable to Union Bank in monthly
installments of $8,860 plus interest
at prime plus 0.75% (9.00% at October
31, 1996), collateralized by computer
equipment and guaranteed by
stockholders, due July 1, 2000........ -- 398,420
Note payable to Union Bank in monthly
installments of $4,200 plus interest
at prime plus 0.50% (8.75% at October
31, 1996), collateralized by
substantially all assets and
guaranteed by stockholders, due April
1998.................................. 124,800 74,400
Note payable to West One Bank, due in
monthly installments of $3,425
including interest at 9.25%,
collateralized by real estate,
refinanced with Union Bank during
1996.................................. 148,204 --
Note payable to former stockholder in
monthly installments of $9,463
including interest at 10%,
collateralized by common stock,
subordinated to notes payable to Union
Bank, due June 2001................... 484,314 416,124
Unsecured notes payable to stockholders,
subordinated to notes payable to Union
Bank, balloon payment including
interest at prime, due October 1999... 306,842 393,440
------------ ------------
1,064,160 2,377,291
Less -- Current portion................. 148,000 245,400
------------ ------------
$ 916,160 $ 2,131,891
============ ============
Maturities of the Company's long-term debt are as follows:
Year ending October 31 --
1997............................... $ 245,400
1998............................... 228,200
1999............................... 607,800
2000............................... 197,840
2001............................... 84,300
Thereafter......................... 1,013,751
------------
$ 2,377,291
============
Interest expense totaled $288,922, $336,041 and $363,030 in fiscal 1994,
1995 and 1996, respectively. Management estimates that the fair value of its
debt obligations approximates the carrying value at October 31, 1996.
At October 31, 1996, the Company's debt with Union Bank was subject to a
credit agreement that included certain restrictive covenants relating to such
matters as dividends and capital expenditures. This credit agreement also
required the Company to maintain minimum levels of profitability, net worth and
working capital ratios. At October 31, 1996, the Company was in compliance with
or had received waivers of noncompliance with respect to all restrictive
covenants.
F-56
<PAGE>
STEAM SUPPLY GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
On May 1, 1997, the Company and Union Bank entered into an amended and
restated credit agreement. The amended and restated credit agreement modified
the repayment terms and covenants of the Company's debt. See Note 11 for
additional information respecting the amended and restated credit agreement.
8. INCOME TAXES:
The Company's income tax provision included the following:
YEAR ENDED OCTOBER 31
---------------------------------
1994 1995 1996
---------- ---------- ---------
Federal, current........................ $ -- $ 88,100 $ 25,900
State, current.......................... 2,185 9,800 7,200
---------- ---------- ---------
$ 2,185 $ 97,900 $ 33,100
========== ========== =========
Actual income tax expense differs from income tax expense computed by
applying the U.S. federal statutory corporate tax rate to income before income
taxes as follows:
YEAR ENDED OCTOBER 31
------------------------
1994 1995 1996
---- ---- ----
Statutory federal income tax rate....... (34)% 34 % 34 %
Valuation allowance..................... 34 -- --
Effect of federal graduated tax rate.... -- (5) (5)
State and local taxes................... (1) 3 5
Effect of nondeductible meals and
entertainment......................... -- 4 11
Effect of excluding S Corporation....... -- 11 (8)
Other................................... -- (1) 2
---- ---- ----
Effective income tax rate............... (1)% 46 % 39 %
==== ==== ====
Deferred income taxes consist of the following:
OCTOBER 31
----------------------
1995 1996
---------- ----------
Current deferred tax assets.......... $ 24,400 $ 29,600
Noncurrent deferred tax assets....... 36,800 33,800
Valuation allowance.................. (52,200) (52,200)
---------- ----------
Total deferred tax
assets.................. 9,000 11,200
---------- ----------
Current deferred tax liabilities..... -- (3,100)
Noncurrent deferred tax
liabilities.......................... (9,000) (8,100)
---------- ----------
Total deferred tax
liabilities............. (9,000) (11,200)
---------- ----------
Net deferred tax
liabilities............. $ -- $ --
========== ==========
F-57
<PAGE>
STEAM SUPPLY GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
9. COMMITMENTS AND CONTINGENCIES:
OPERATING LEASES
The Company leases warehouse space, office facilities and vehicles under
noncancelable operating leases which expire at various dates. Future minimum
lease payments at October 31, 1996 are as follows:
1997................................. $ 247,200
1998................................. 214,700
1999................................. 121,600
2000................................. 114,000
2001................................. 114,000
Rent expense for fiscal 1994, 1995 and 1996 was $247,600, $240,300 and
$259,200, respectively.
The Company leases certain facilities from stockholders and KRP under
operating leases. Rental expense related to these leases was $138,800 for fiscal
1994 and 1995 and $139,200 for fiscal 1996.
EMPLOYEE BENEFIT PLANS
The Company sponsors a 401(k) profit-sharing plan covering all eligible
employees. The plan allows employee contributions, whereby eligible employees
may elect to defer a portion of their annual compensation. The Company matches
50 percent of each employee's contribution up to 4 percent of employee
compensation. Additional contributions by the Company are discretionary. The
Company contributed approximately $50,600, $28,400 and $28,800 for fiscal 1994,
1995 and 1996, respectively.
LITIGATION
In the ordinary course of its business, the Company has become involved in
various legal matters. Management does not believe that the outcome of these
legal matters will have a material effect on the Company's combined financial
position or results of operations.
10. DISTRIBUTION AGREEMENTS:
The Company purchases, sells and services various products under service
and distribution agreements with its major suppliers. Approximately 39 percent
of revenues during each of fiscal 1994, 1995 and 1996 was derived from sales of
products purchased or services rendered under the agreement with one supplier.
The agreements with major suppliers are generally cancelable by the suppliers
upon 30 to 60 days' notice. Management does not anticipate cancellation of these
agreements.
11. SUBSEQUENT EVENTS:
DEBT REFINANCING
On May 1, 1997, the Company entered an agreement to amend and restate its
credit agreement with Union Bank. This new credit facility provides a line of
credit due November 1, 1997, which is subject to a borrowing base with maximum
borrowings of $2,500,000. Interest accrues at Union Bank's reference rate. This
new credit facility has certain restrictive covenants similar to the previous
credit facility.
SALE OF COMMON SHARES
Effective August 1, 1997, the stockholders of the Company sold the common
equity ownership of the Company to Innovative Valve Technologies, Inc. for total
consideration in excess of the recorded amounts of the Company's net assets.
F-58
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To ICE/VARCO Group:
We have audited the accompanying combined balance sheets of ICE/VARCO Group
(as defined in Note 1) as of September 30, 1995 and 1996 and the related
combined statements of operations, stockholder's deficit and cash flows for the
years then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the combined financial position of ICE/VARCO
Group as of September 30, 1995 and 1996, and the combined results of their
operations and their combined cash flows for the years then ended in conformity
with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
May 9, 1997
(except as discussed
in Note 6, as to which
the date is July 10, 1997)
F-59
<PAGE>
ICE/VARCO GROUP
COMBINED BALANCE SHEETS
SEPTEMBER 30
-------------------------- JUNE 30,
1995 1996 1997
------------ ------------ -----------
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash............................ $ 19,561 $ 46,117 $ 164,008
Accounts receivable, net of
allowance of $40,000, $47,713
and $33,995................... 1,653,485 1,747,859 2,213,041
Inventories..................... 1,062,951 1,275,325 1,370,165
Prepaid expenses and other
current assets.................. 28,336 16,350 10,691
------------ ------------ -----------
Total current assets....... 2,764,333 3,085,651 3,757,905
PROPERTY AND EQUIPMENT, net.......... 850,485 979,926 852,458
INTANGIBLES AND OTHER NONCURRENT
ASSETS, net........................ 24,817 238,450 226,396
------------ ------------ -----------
$ 3,639,635 $ 4,304,027 $ 4,836,759
============ ============ ===========
LIABILITIES AND STOCKHOLDER'S DEFICIT
CURRENT LIABILITIES:
Short-term debt................. $ 733,440 $ 769,300 $ 1,309,808
Current maturities of long-term
debt............................ 116,155 203,961 162,349
Accounts payable and accrued
expenses........................ 1,577,570 1,695,637 1,235,717
------------ ------------ -----------
Total current
liabilities................ 2,427,165 2,668,898 2,707,874
AMOUNTS DUE TO AFFILIATES, net....... 1,031,958 1,284,288 1,981,066
LONG-TERM DEBT, net of current
maturities......................... 455,355 457,229 350,600
STOCKHOLDER'S DEFICIT................ (274,843) (106,388) (202,781)
------------ ------------ -----------
$ 3,639,635 $ 4,304,027 $ 4,836,759
============ ============ ===========
The accompanying notes are an integral part of these combined financial
statements.
F-60
<PAGE>
ICE/VARCO GROUP
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS
SEPTEMBER 30 ENDED JUNE 30
---------------------------- ----------------------------
1995 1996 1996 1997
------------ -------------- ------------ --------------
(UNAUDITED)
<S> <C> <C> <C> <C>
REVENUES................................ $ 9,128,032 $ 12,744,465 $ 8,717,315 $ 10,902,367
COST OF OPERATIONS...................... 6,517,438 9,452,991 6,421,795 8,704,715
------------ -------------- ------------ --------------
Gross profit....................... 2,610,594 3,291,474 2,295,520 2,197,652
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES.............................. 2,346,117 2,858,694 2,112,745 2,352,838
------------ -------------- ------------ --------------
Income (loss) from operations...... 264,477 432,780 182,775 (155,186)
OTHER INCOME (EXPENSE):
Interest, net...................... (117,886) (112,105) (75,546) (96,686)
Other.............................. 11,123 (13,861) (16,918) 78,457
------------ -------------- ------------ --------------
(106,763) (125,966) (92,464) (18,229)
------------ -------------- ------------ --------------
INCOME (LOSS) BEFORE INCOME TAXES....... 157,714 306,814 90,311 (173,415)
PROVISION (BENEFIT) FOR INCOME TAXES.... 70,100 138,359 22,093 (77,022)
------------ -------------- ------------ --------------
NET INCOME (LOSS)....................... $ 87,614 $ 168,455 $ 68,218 $ (96,393)
============ ============== ============ ==============
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-61
<PAGE>
ICE/VARCO GROUP
COMBINED STATEMENTS OF STOCKHOLDER'S DEFICIT
BALANCE, September 30, 1994............. $ (362,457)
Net income......................... 87,614
------------
BALANCE, September 30, 1995............. (274,843)
Net income......................... 168,455
------------
BALANCE, September 30, 1996............. (106,388)
Net loss (unaudited)............... (96,393)
------------
BALANCE, June 30, 1997 (unaudited)...... $ (202,781)
============
The accompanying notes are an integral part of these combined financial
statements.
F-62
<PAGE>
ICE/VARCO GROUP
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS
SEPTEMBER 30 ENDED JUNE 30
-------------------------- --------------------------
1995 1996 1996 1997
------------ ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)..................... $ 87,614 $ 168,455 $ 68,218 $ (96,393)
Adjustments to reconcile net income
(loss) to net cash provided by
(used in) operating activities --
Depreciation and amortization.... 131,635 147,011 108,203 152,859
(Increase) decrease in --
Accounts receivable........... (376,087) 60,629 299,659 (465,182)
Inventories................... (433,685) (212,374) (368,986) (94,840)
Prepaid expenses and other
assets..................... (29,490) 2,435 (17,655) 3,459
Increase (decrease) in --
Accounts payable and accrued
expenses................... 446,100 (35,671) (222,080) (459,920)
Amounts due to affiliates,
net........................ (254,719) 259,758 (165,526) 696,778
------------ ------------ ------------ ------------
Net cash provided by (used
in) operating
activities............... (428,632) 390,243 (298,167) (263,239)
------------ ------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment... (99,181) (214,915) (221,172) (11,137)
Business acquisition, net of cash
acquired........................... -- 45,516 -- --
------------ ------------ ------------ ------------
Net cash used in investing
activities............... (99,181) (169,399) (221,172) (11,137)
------------ ------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings of debt.................... 552,940 3,856 1,384,238 540,508
Repayments of debt.................... (47,721) (198,144) (883,440) (148,241)
------------ ------------ ------------ ------------
Net cash provided by (used
in) financing
activities............... 505,219 (194,288) 500,798 392,267
------------ ------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH......... (22,594) 26,556 (18,541) 117,891
CASH, beginning of period............... 42,155 19,561 19,561 46,117
------------ ------------ ------------ ------------
CASH, end of period..................... $ 19,561 $ 46,117 $ 1,020 $ 164,008
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-63
<PAGE>
ICE/VARCO GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS
1. BUSINESS, ORGANIZATION AND BASIS OF PRESENTATION:
The accompanying combined balance sheets and related combined statements of
operations, stockholder's deficit and cash flows include Industrial Controls &
Equipment, Inc. ("ICE"), Valve Actuation & Repair Company, Inc. ("VARCO")
and BAS Technical Services Inc. ("BAS"). ICE, VARCO and BAS (collectively,
"ICE/VARCO Group" or the "Company") are wholly owned subsidiaries of
Synergistic Partners Inc. ("SPI"), a Pennsylvania corporation. As ICE/VARCO
Group has common ownership and management, the financial statements of these
entities have been combined for financial reporting purposes. All significant
intercompany transactions and balances have been eliminated in combination.
ICE (a Pennsylvania corporation) and VARCO (a West Virginia corporation)
are principally engaged in the business of repairing, testing and distributing
manual, control and safety relief valves, related parts and instrumentation to
the pulp and paper, chemical, power generation and petrochemical industries in
Pennsylvania and West Virginia. BAS (a West Virginia corporation), acquired in
August 1996 in a purchase transaction, provides value-added electrical and
mechanical engineering services and electrical panel construction, primarily to
the same customer base served by ICE and VARCO.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
CASH
Cash payments for interest during fiscal 1995 and 1996 were approximately
$108,000 and $96,000, respectively.
INVENTORIES
Inventories are valued at the lower of cost or market utilizing the
average-cost method applied on a first-in, first-out ("FIFO") basis and
primarily consist of valves, valve parts and related instrumentation.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost, and depreciation is computed
using the straight-line method over the estimated useful lives of the assets.
The costs of major improvements are capitalized. Expenditures for maintenance,
repairs and minor improvements are expensed as incurred. When property and
equipment are sold or retired, the cost and related accumulated depreciation are
removed and the resulting gain or loss is included in results of operations.
INCOME TAXES
The Company was included in SPI's consolidated federal income tax returns
for fiscal 1995 and 1996. The Company follows the liability method of accounting
for income taxes in accordance with Statement of Financial Accounting Standards
("SFAS") No. 109, "Accounting for Income Taxes." Under this method, deferred
income taxes are recorded based upon differences between the financial reporting
and tax bases of assets and liabilities and are measured using the enacted tax
rates and laws that will be in effect when the underlying assets or liabilities
are recovered or settled.
INTANGIBLES AND OTHER NONCURRENT ASSETS
Intangibles and other noncurrent assets primarily consists of goodwill and
is amortized using the straight-line method over 15 years. Accumulated
amortization at September 30, 1996 was $7,883. There was no accumulated
amortization at September 30, 1995.
REVENUE RECOGNITION
Service revenue is recognized upon performance, and sales revenue is
recognized as products are shipped or delivered.
F-64
<PAGE>
ICE/VARCO GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
UNAUDITED INTERIM FINANCIAL INFORMATION
The financial information for the nine months ended June 30, 1996 and 1997
has not been audited by independent accountants. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted from the unaudited interim financial information. In the opinion of
management of the Company, the unaudited interim financial information includes
all adjustments, consisting only of normal recurring adjustments, necessary for
a fair presentation. Results of operations for the interim periods are not
necessarily indicative of the results of operations for the respective full
fiscal years.
NEW ACCOUNTING PRONOUNCEMENT
Effective October 1, 1995, the Company adopted SFAS No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of." Accordingly, in the event that facts and circumstances indicate that
property and equipment, and intangible or other noncurrent assets, may be
impaired, an evaluation of recoverability would be performed. If an evaluation
is required, the estimated future undiscounted cash flows associated with the
asset are compared to the asset's carrying amount to determine if a write-down
to market value or discounted cash flow value is necessary. Adoption of this
standard did not have a material effect on the combined financial position or
results of operations of the Company.
3. ACQUISITION OF BAS:
In August 1996, SPI acquired BAS in a purchase transaction. The financial
results of the acquisition have been included in the combined financial
statements of the Company from the date of acquisition. The pro forma effect of
the acquisition was not material to the results of operations or financial
position of the Company. The fair value of assets acquired is summarized as
follows:
Cash.................................... $ 45,516
Accounts receivable..................... 144,869
Property and equipment.................. 57,593
Intangible assets....................... 223,926
Accounts payable........................ (67,707)
Accrued liabilities..................... (86,031)
Debt assumed............................ (218,166)
------------
Net assets acquired................ 100,000
Less -- Debt issued..................... (100,000)
------------
Cash paid for acquisition.......... $ --
============
F-65
<PAGE>
ICE/VARCO GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
4. PROPERTY AND EQUIPMENT:
Property and equipment consists of the following:
SEPTEMBER 30
ESTIMATED --------------------------
USEFUL LIVES 1995 1996
------------ ------------ ------------
Buildings.......................... 31 years $ 193,047 $ 193,047
Vehicles........................... 3-5 years 129,295 162,797
Furniture and fixtures............. 5-7 years 129,573 148,007
Office equipment................... 5-7 years 237,757 344,993
Machinery and equipment............ 5-7 years 299,163 325,798
Leasehold improvements............. 7-31 years 317,456 385,900
------------ ------------
1,306,291 1,560,542
Less -- Accumulated depreciation... (455,806) (580,616)
------------ ------------
Property and equipment, net........ $ 850,485 $ 979,926
============ ============
5. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:
Activity in the Company's allowance for doubtful accounts for the years
ended September 30, 1995 and 1996 consists of the following:
1995 1996
--------- ---------
Balance at beginning of year......... $ 17,000 $ 40,000
Additions charged to results of
operations......................... 23,000 7,713
--------- ---------
Balance at end of year............... $ 40,000 $ 47,713
========= =========
Accounts payable and accrued expenses as of September 30, 1995 and 1996
consist of the following:
1995 1996
------------ ------------
Accounts payable..................... $ 1,243,559 $ 1,252,390
Accrued salaries, bonuses and
profit-sharing..................... 297,344 335,292
Income and other taxes payable....... 36,667 107,955
------------ ------------
$ 1,577,570 $ 1,695,637
============ ============
6. SHORT-TERM DEBT:
The Company had three revolving credit arrangements. ICE and VARCO had
revolving credit facilities with a bank which was secured by accounts receivable
and inventory. These facilities bore interest, payable monthly, at a rate of
prime plus 0.50% (9.25% at September 30, 1996). A total of approximately
$733,000 and $594,000 was drawn for the two facilities at September 30, 1995 and
1996, respectively. BAS was party to a $200,000 commercial revolving note
agreement, which was secured by accounts receivable and bore interest, due
monthly, at prime plus 1.50% (9.75% at September 30, 1996). At September 30,
1996, approximately $175,000 was drawn on the line.
In July 1997, SPI refinanced its revolving credit arrangements, including
the Company's revolving facilities. The new facilities have terms similar to the
previous revolving credit agreements. The new facilities mature in July 1999,
bear interest at prime plus 0.25% (8.75% at July 10, 1997) and are secured by
accounts receivable and inventory.
F-66
<PAGE>
ICE/VARCO GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
7. LONG-TERM DEBT:
Long-term debt consists of the following:
SEPTEMBER 30
--------------------------
1995 1996
------------ ------------
Note payable to former SPI
stockholder, monthly installments
of principal and interest in the
amount of $4,805, bearing interest
at 9.50%, secured by general
Company assets..................... $ 150,000 $ 127,861
Note payable to a bank, monthly
principal installments of $3,300,
bearing interest at 7.75% secured
by general Company assets.......... 192,500 152,900
Note payable to a government agency,
monthly installments of principal
and interest of $1,592, bearing
interest at 5.01% secured by
general Company assets............. 139,702 128,643
Notes payable, due in monthly
installments, bearing interest from
8.00% to 9.50%, secured by certain
vehicles and certain equipment..... 89,308 146,786
Unsecured note payable to
employee-consultant and former
owner of BAS, annual installments
of principal and interest in the
amount of $13,011, bearing interest
at 8.00%........................... -- 75,000
Unsecured note payable to former
employee, noninterest-bearing...... -- 30,000
------------ ------------
571,510 661,190
Less -- Current maturities........... (116,155) (203,961)
------------ ------------
Total long-term debt............ $ 455,355 $ 457,229
============ ============
Management estimates that the fair value of its debt obligations
approximates the historical value at September 30, 1996 and 1995.
Maturities of long-term debt are as follows:
Year ending September 30 --
1997............................ $ 203,961
1998............................ 221,681
1999............................ 82,184
2000............................ 38,409
2001............................ 25,452
Thereafter...................... 89,503
----------
$ 661,190
==========
8. INCOME TAXES:
The Company is included in the consolidated federal income tax return of
SPI. SPI pays the federal income tax liability for all its subsidiaries for any
period in which an amount is due. Each subsidiary, including each company within
ICE/VARCO Group, pays to SPI the amount of federal income tax liability it would
have owed on a stand-alone basis, and SPI pays to each subsidiary the amount of
any federal income tax benefit attributable to each such subsidiary.
F-67
<PAGE>
ICE/VARCO GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Federal and state income tax provision (benefit) are as follows:
YEAR ENDED SEPTEMBER 30
-----------------------
1995 1996
---------- ----------
Federal --
Current............................ $ 69,500 $ 108,592
Deferred........................... (13,200) 3,157
State --
Current............................ 16,600 26,053
Deferred........................... (2,800) 557
---------- ----------
$ 70,100 $ 138,359
========== ==========
Actual income tax provision differs from income tax provision computed by
applying the U.S. federal statutory corporate tax rate to income before income
taxes as follows:
YEAR ENDED
SEPTEMBER 30
--------------------
1995 1996
--------- ---------
Statutory federal income tax rate....... 34% 34%
State and local taxes................... 6 6
Effect of nondeductible meals and
entertainment......................... 4 5
--------- ---------
Effective income tax rate............... 44% 45%
========= =========
Deferred income taxes consist of the following:
YEAR ENDED SEPTEMBER 30
-----------------------
1995 1996
---------- ----------
Current deferred tax assets............. $ 16,000 $ 12,286
Noncurrent deferred tax assets.......... -- --
---------- ----------
Net deferred tax assets............ $ 16,000 $ 12,286
========== ==========
9. COMMITMENTS AND CONTINGENCIES:
LITIGATION
In the ordinary course of its business, the Company has become involved in
various legal matters. Management does not believe that the outcome of these
legal matters will have a material effect on the Company's combined financial
position or results of operations.
GUARANTEES OF AFFILIATED COMPANIES' DEBT
The Company's assets are pledged as collateral under certain credit
arrangements entered into by SPI and certain of its other subsidiaries, and the
Company is jointly and severally liable for any defaults under those
arrangements. SPI's new credit facilities include covenants requiring that
certain financial ratios be maintained. Management does not believe, if the
Company were required to perform under such guarantees, any losses from these
agreements would be material. To date, the Company has not been required to
perform under these guarantees. See Note 12 for further discussion.
F-68
<PAGE>
ICE/VARCO GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
LEASES
Aggregate minimum rental commitments under significant noncancelable
operating leases with lease terms in excess of one year as of September 30, 1996
are as follows:
Year ending September 30 --
1997............................... $ 88,818
1998............................... 87,144
1999............................... 87,144
2000............................... 87,144
2001............................... 87,144
Thereafter......................... 429,010
----------
$ 866,404
==========
The Company incurred total rental expense of approximately $132,000 and
$131,000 for fiscal 1995 and 1996, respectively.
EMPLOYEE BENEFITS
The Company participates in a profit sharing plan offered by SPI to all
salaried employees who have met certain length-of-service requirements.
Employees can contribute up to 4 percent of their salary, which is matched 100
percent by the Company. For fiscal 1995 and 1996, the Company also made
discretionary contributions. The Company's total contributions for fiscal 1995
and 1996 were $92,000 and $133,000, respectively.
10. RELATED-PARTY TRANSACTIONS:
As described in Note 1, the Company is a wholly owned part of an affiliated
group of companies owned by SPI operating in the valve repair and distribution
services business. Certain selling, general and administrative expenses incurred
by SPI have been allocated to the Company for fiscal 1995 and 1996 in the
amounts of approximately $228,000 and $263,000, respectively. The Company also
purchases and sells valve and valve repair parts, materials and services from
other subsidiaries of SPI. During fiscal 1996, its total purchases from the
other SPI subsidiaries approximated $311,000 and its total sales by the Company
to the other SPI subsidiaries approximated $1,527,000.
11. SIGNIFICANT CUSTOMER:
During fiscal 1995 and 1996, the Company had one customer that accounted
for approximately 13% and 19%, respectively, of the Company's combined revenues.
12. SUBSEQUENT EVENT:
SALE OF COMMON SHARES
In July 1997, pursuant to a definitive agreement, SPI agreed to sell the
entire equity ownership of the Company to Innovative Valve Technologies, Inc.
("Invatec"), for total consideration in excess of the recorded amounts of the
Company's net assets. Among other customary matters, the definitive agreement
provides for the removal of the Company's guarantees of debt obligations of SPI,
its affiliates and subsidiaries. The closing of the transaction is conditioned
on the successful consummation of Invatec's initial public offering.
F-69
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Stockholders of
GSV, Inc.:
We have audited the accompanying balance sheets of GSV, Inc. (the Company)
as of December 31, 1995 and 1996, and the related statements of operations,
stockholders' equity, and cash flows for each of the three years in the period
ended December 31, 1996. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of the Company as of December
31, 1995 and 1996, and the results of its operations and its cash flows for each
of the three years in the period ended December 31, 1996 in conformity with
generally accepted accounting principles.
Deloitte & Touche LLP
Orlando, Florida
April 11, 1997
F-70
<PAGE>
GSV, INC.
BALANCE SHEETS
DECEMBER 31
-------------------------- FEBRUARY 28,
1995 1996 1997
------------ ------------ ------------
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash........................... $ 11,059 $ 10,084 $ 3,347
Accounts receivable............ 1,509,218 1,612,693 1,345,555
Inventories.................... 833,332 1,079,493 1,472,916
Prepaid expenses and other
current assets............... 27,883 32,213 78,881
------------ ------------ ------------
Total current assets...... 2,381,492 2,734,483 2,900,699
------------ ------------ ------------
PROPERTY AND EQUIPMENT -- Net....... 1,058,170 1,177,044 1,192,977
------------ ------------ ------------
OTHER NONCURRENT ASSETS............. 43,976 27,869 28,970
------------ ------------ ------------
$ 3,483,638 $ 3,939,396 $ 4,122,646
============ ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Note payable to bank........... $ 362,000 $ 426,000 $ 340,000
Accounts payable............... 615,484 494,688 988,158
Accrued expenses and other
current liabilities.......... 402,669 253,444 195,203
Stockholders' distributions
payable...................... -- 200,500 --
Current maturities of
long-term debt............... 183,378 193,372 183,340
------------ ------------ ------------
Total current
liabilities............. 1,563,531 1,568,004 1,706,701
------------ ------------ ------------
LONG-TERM DEBT -- Less current
portion............................. 384,214 267,899 241,905
------------ ------------ ------------
Total liabilities......... 1,947,745 1,835,903 1,948,606
------------ ------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, $.10 par value,
5,000,000 shares authorized,
3,865,489 shares issued...... 386,549 386,549 386,549
Additional paid-in capital..... 765,211 765,211 765,211
Retained earnings.............. 384,133 951,733 1,042,280
Treasury stock -- at cost,
10,000 shares................ -- -- (20,000)
------------ ------------ ------------
Total stockholders'
equity.................. 1,535,893 2,103,493 2,174,040
------------ ------------ ------------
$ 3,483,638 $ 3,939,396 $ 4,122,646
============ ============ ============
See notes to financial statements.
F-71
<PAGE>
GSV, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
TWO MONTHS ENDED
YEAR ENDED DECEMBER 31 FEBRUARY 28
------------------------------------------ --------------------------
1994 1995 1996 1996 1997
------------ ------------ -------------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES............................. $ 8,922,688 $ 8,653,737 $ 10,227,117 $ 1,412,628 $ 1,636,716
COST OF OPERATIONS................... 7,190,890 6,661,559 7,688,077 1,105,993 1,258,288
------------ ------------ -------------- ------------ ------------
Gross profit............... 1,731,798 1,992,178 2,539,040 306,635 378,428
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES........................... 1,521,956 1,481,704 1,276,112 206,575 243,132
------------ ------------ -------------- ------------ ------------
INCOME FROM OPERATIONS............... 209,842 510,474 1,262,928 100,060 135,296
OTHER INCOME (EXPENSES):
Interest expense................ (92,558) (98,073) (78,365) (10,194) (17,040)
Other, net...................... 9,740 (31,130) 5,817 192 (3,209)
------------ ------------ -------------- ------------ ------------
Other income (expenses),
net...................... (82,818) (129,203) (72,548) (10,002) (20,249)
------------ ------------ -------------- ------------ ------------
NET INCOME........................... $ 127,024 $ 381,271 $ 1,190,380 $ 90,058 $ 115,047
============ ============ ============== ============ ============
</TABLE>
See notes to financial statements.
F-72
<PAGE>
GSV, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
ADDITIONAL TOTAL
COMMON PAID-IN RETAINED TREASURY STOCKHOLDERS'
STOCK CAPITAL EARNINGS STOCK EQUITY
---------- ---------- ------------ -------- -------------
<S> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1994................ $ 386,549 $ 765,211 $ 1,162 $ -- $ 1,152,922
Net income......................... -- -- 127,024 -- 127,024
Distributions to stockholders...... -- -- (125,324) -- (125,324)
---------- ---------- ------------ -------- -------------
BALANCE, DECEMBER 31, 1994.............. 386,549 765,211 2,862 -- 1,154,622
Net income......................... -- -- 381,271 -- 381,271
---------- ---------- ------------ -------- -------------
BALANCE, DECEMBER 31, 1995.............. 386,549 765,211 384,133 -- 1,535,893
Net income......................... -- -- 1,190,380 -- 1,190,380
Distributions to stockholders...... -- -- (622,780) -- (622,780)
---------- ---------- ------------ -------- -------------
BALANCE, DECEMBER 31, 1996.............. $ 386,549 $ 765,211 $ 951,733 -- 2,103,493
Net income (unaudited)............. -- -- 115,047 -- 115,047
Distributions to stockholders
(unaudited)...................... -- -- (24,500) -- (24,500)
Purchase of treasury stock
(unaudited)...................... -- -- -- (20,000) (20,000)
---------- ---------- ------------ -------- -------------
BALANCE, FEBRUARY 28, 1997
(unaudited)........................... $ 386,549 $ 765,211 $ 1,042,280 $(20,000) $ 2,174,040
========== ========== ============ ======== =============
</TABLE>
See notes to financial statements.
F-73
<PAGE>
GSV, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
TWO MONTHS
ENDED
YEAR ENDED DECEMBER 31 FEBRUARY 28
----------------------------------- ----------------------
1994 1995 1996 1996 1997
---------- ---------- ----------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income....................... $ 127,024 $ 381,271 $ 1,190,380 $ 90,058 $ 115,047
Adjustments to reconcile net
income to net cash provided by
operating activities:
Depreciation and
amortization................ 419,723 433,441 186,986 30,206 34,106
(Gain) loss on sale of property
and equipment............... 3,504 -- (789) -- 4,873
(Increase) decrease in accounts
receivable.................. (287,517) 136,231 (103,475) 494,271 267,138
(Increase) decrease in
inventories................. 65,160 (58,546) (246,161) (131,860) (393,423)
(Increase) decrease in prepaid
expenses and other current
assets...................... 9,770 10,700 (4,330) 19,184 (46,668)
Increase (decrease) in accounts
payable..................... 422,422 (351,578) (2,539) 78,100 328,227
Increase (decrease) in accrued
expenses and other current
liabilities................. 85,247 (26,427) 68 (6,323) 24,703
---------- ---------- ----------- ---------- ----------
Net cash provided by
operating activities...... 845,333 525,092 1,020,140 573,636 334,003
---------- ---------- ----------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and
equipment...................... (616,772) (143,234) (292,414) (14,574) (53,003)
Proceeds from sale of property
and equipment.................. 3,596 -- 3,450 -- --
Purchase of intangible assets.... (32,062) -- -- -- (3,010)
---------- ---------- ----------- ---------- ----------
Net cash used in investing
activities................ (645,238) (143,234) (288,964) (14,574) (56,013)
---------- ---------- ----------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in cash
overdrafts..................... (255,355) 232,375 (118,257) (316,907) 165,243
Loan proceeds.................... 463,115 -- 83,704 -- --
Principal payments on long-term
debt........................... (165,263) (201,776) (190,025) (32,794) (36,026)
Payments under covenant
obligations.................... (348,354) (116,118) (149,293) (116,118) (82,944)
Net change in demand note payable
to bank........................ 181,000 (164,000) 64,000 (84,000) (86,000)
Stockholder distributions........ (75,194) (125,324) (422,280) -- (225,000)
Purchase of treasury stock....... -- -- -- -- (20,000)
---------- ---------- ----------- ---------- ----------
Net cash used in financing
activities................ (200,051) (374,843) (732,151) (549,819) (284,727)
---------- ---------- ----------- ---------- ----------
NET INCREASE (DECREASE) IN CASH...... 44 7,015 (975) 9,243 (6,737)
CASH, BEGINNING OF PERIOD............ 4,000 4,044 11,059 11,059 10,084
---------- ---------- ----------- ---------- ----------
CASH, END OF PERIOD.................. $ 4,044 $ 11,059 $ 10,084 $ 20,302 $ 3,347
========== ========== =========== ========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION -- Cash paid during the
period for interest................ $ 87,465 $ 102,711 $ 78,573 $ 10,789 $ 15,008
========== ========== =========== ========== ==========
SUPPLEMENTAL DISCLOSURE OF NONCASH
FINANCING AND INVESTING
ACTIVITIES -- Accrual of
distributions payable to
stockholders....................... $ 125,324 $ -- $ 200,500 $ -- $ --
========== ========== =========== ========== ==========
</TABLE>
See notes to financial statements.
F-74
<PAGE>
GSV, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1994, 1995, AND 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND OPERATIONS
GSV, Inc. (the "Company") is incorporated in the State of Florida and is
comprised of three operating divisions: Gould Machine, Southern Valve, and Ash
Tool. Gould Machine provides contract machining, Southern Valve repairs and
sells valves, and Ash Tool sells certain parts primarily associated with the
industries serviced by the other divisions. All interdivisional transactions and
balances have been eliminated from the financial statements. The Company's main
office is located in Tampa, Florida. On April 26, 1994, the Company purchased a
new facility and moved the Southern Valve Division to this facility in September
of 1994. Costs incurred in moving this division were charged to operations and
amounted to $60,931 for the year ended December 31, 1994. Each division's
business activity is primarily in the State of Florida.
ACCOUNTS RECEIVABLE
There is no allowance for doubtful accounts at December 31, 1995 or 1996.
INVENTORIES
Inventories at December 31, 1995 and 1996 consist of the following:
1995 1996
---------- ------------
Raw materials........................... $ 691,950 $ 791,056
Work-in-process......................... 51,792 206,206
Tool division supplies.................. 89,590 82,231
---------- ------------
Total.............................. $ 833,332 $ 1,079,493
========== ============
Inventories are valued at the lower of cost (first-in, first-out) or
market. Work-in-process inventories are comprised of direct materials, direct
labor, and manufacturing overhead.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is computed using
both accelerated and straight-line methods, using useful lives ranging from 3 to
40 years.
CASH OVERDRAFTS
Accounts payable in the accompanying balance sheets are inclusive of cash
overdrafts of approximately $316,900, $198,700 and $363,900 as of December 31,
1995, December 31, 1996 and February 28, 1997, respectively.
REVENUE RECOGNITION
Revenue is recognized as services are performed and products are shipped.
INCOME TAXES
The stockholders of the Company elected in 1990 to be taxed under the
Subchapter S provisions of the Internal Revenue Code. Under this section,
taxable income and applicable tax credits are deemed to flow to the individual
stockholders, and no state or federal income taxes are imposed on the Company.
Accordingly, no provision has been made for income taxes.
Under current tax law, whenever an enterprise converts from a taxable C
corporation status to S status, the enterprise may be subject to a corporate
level tax if certain built-in gains present at the date of conversion are
realized within a ten-year period following the conversion elections. The
built-in gain remaining as of December 31, 1996 from the Company's conversion to
S status was approximately $907,000. Management does not presently anticipate
that the assets subject to built-in gains tax will be sold or disposed of within
the ten-year period.
F-75
<PAGE>
GSV, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FAIR VALUE OF FINANCIAL INSTRUMENTS
Management of the Company believes that the carrying value of its financial
instruments is a reasonable estimate of their fair value.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
UNAUDITED INTERIM FINANCIAL INFORMATION
The financial information for the two months ended February 28, 1996 and
1997 has not been audited by independent auditors. Certain information and note
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
from the unaudited interim financial information. In the opinion of management
of the Company, the unaudited interim financial information includes all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair presentation. Results of operations for the interim periods are not
necessarily indicative of the results of operations for the respective full
fiscal years.
NEW ACCOUNTING PRONOUNCEMENT
Effective January 1, 1995, the Company adopted Statement of Financial
Accounting Standards No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS
AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF. Accordingly, in the event that
facts and circumstances indicate that property and equipment, and intangible or
other assets, may be impaired, an evaluation of recoverability would be
performed. If an evaluation is required, the estimated future undisclosed cash
flows associated with the asset are compared to the asset's carrying amount to
determine if a write-down to market value or discounted cash flow value is
necessary. Adoption of Statement 121 did not have an effect on the financial
position or results of operations of the Company.
2. PROPERTY AND EQUIPMENT
Property and equipment consist of the following at December 31, 1995 and
1996:
1995 1996
-------------- --------------
Land and building.................... $ 384,634 $ 521,918
Machinery and equipment.............. 2,105,916 2,160,202
Vehicles............................. 505,767 536,012
Leasehold improvements............... 349,976 349,976
Office furniture and equipment....... 168,705 175,735
-------------- --------------
Total cost........................... 3,514,998 3,743,843
Less accumulated depreciation........ (2,456,828) (2,566,799)
-------------- --------------
Total........................... $ 1,058,170 $ 1,177,044
============== ==============
Property and equipment depreciation and amortization expense for the years
ended December 31, 1994, 1995 and 1996 amounted to $164,631, $180,311 and
$170,879, respectively.
3. OTHER ASSETS
COVENANTS NOT-TO-COMPETE
On December 19, 1990, the Company entered into four covenants
not-to-compete with four former shareholders, who are also current employees.
Under the terms of the agreements, total noncompete
F-76
<PAGE>
GSV, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
payments amounting to $1,161,181 are payable to the employees under a cash
available formula. Each agreement was for a sixty-month period which expired
December 31, 1995. Amortization of the covenants, which is included in selling,
general, and administrative expenses in the statements of operations, is
computed on the straight-line method over the covenant period, and amounted to
$232,236, $232,237 and $-0- for December 31, 1994, 1995 and 1996, respectively.
4. NOTE PAYABLE TO BANK
The Company has available two lines of credit from a financial institution
in the total maximum amount of $600,000, payable on demand and renewable
annually. Draws under the lines are limited to the lesser of 75% of accounts
receivable with balances outstanding less than 90 days or $600,000. The lines
bear interest at the prime rate plus 1% (9.25% at December 31, 1996), with
interest payable monthly. The lines are collateralized by accounts receivable,
inventory, and an unconditional guarantee from the Company's president. The
balances outstanding at December 31, 1995 and 1996 amounted to $362,000 and
$426,000, respectively.
5. LONG-TERM DEBT
Long-term debt at December 31, 1995 and 1996 consists of the following:
1995 1996
---------- ----------
Note payable in the original amount
of $535,000, interest at prime plus
.5% (8.75% at December 31, 1996),
collateralized by all equipment,
inventory, a life insurance policy,
and a cross-collateralization which
was secured in favor of the line of
credit, payable in monthly
principal installments of $8,925
plus interest, final principal
payment due in full on or before
February 15, 1999.................. $ 339,150 $ 232,050
Mortgage note payable in the original
amount of $168,000, interest at 7%,
collateralized by land and
buildings with a carrying amount of
approximately $503,000 at December
31, 1996, payable in monthly
installments of principal and
interest of $3,327 through May
1999............................... 120,994 88,516
Installment loans, interest at
varying rates of 7.5% to 11.3%
collateralized by vehicles with a
carrying amount of approximately
$159,000 at December 31, 1996,
payable in monthly installments of
principal and interest totaling
$7,891 through October 2000, when
final payment is due on the last
instalment note.................... 107,448 140,705
---------- ----------
567,592 461,271
Less current maturities.............. 183,378 193,372
---------- ----------
$ 384,214 $ 267,899
========== ==========
Maturities of long-term debt are as follows:
1997............................ $ 193,372
1998............................ 193,033
1999............................ 64,158
2000............................ 10,708
----------
Total........................... $ 461,271
==========
F-77
<PAGE>
GSV, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
6. OPERATING LEASE COMMITMENTS
The Company is obligated under an operating lease agreement for its
facility in Tampa which expires in June 2001. The Company is obligated on
various equipment leases which expire from 1997 to 2000. At December 31, 1996,
the future minimum rental payments required under the leases are as follows:
YEAR ENDING
DECEMBER 31,
---------------
1997.................................. $ 67,711
1998.................................. 68,028
1999.................................. 69,433
2000.................................. 70,006
2001.................................. 34,000
----------
$ 309,178
==========
Total rent expense charged to operations under these agreements amounted to
$64,172, $61,786 and $62,634 during 1994, 1995 and 1996, respectively.
7. EMPLOYEE BENEFIT PLANS
401(K) SAVINGS PLAN
The Company sponsors a participant directed cash deferred 401(k) plan (the
Plan). Employees who are employed for one full year and complete 1,000 hours of
service may elect to participate in the Plan. The Company elected to match
employee deferrals at a rate of 40% on the first 6% during 1994, 33 1/3% on the
first 6% during 1995 and 50% on the first 6% deferred during 1996, which
amounted to $38,553, $27,046 and $45,288 during 1994, 1995 and 1996,
respectively.
HEALTH INSURANCE PLAN
On November 1, 1995, the Company began providing certain benefits to
employees under a health insurance plan. Prior to November 1, 1995, the Company
provided healthcare benefits under a plan that was primarily self-funded except
for two reinsurance policies. Healthcare expenses incurred under these plans
amounted to $173,254, $234,019 and $116,175 during 1994, 1995 and 1996,
respectively.
8. COMMITMENTS AND CONTINGENCIES
On November 20, 1992, the Company was notified by the EPA of its potential
liability for the generation of potentially hazardous waste under the Bay Drum
Superfund Site. Management believes that the Company is a de micromis potential
responsible party at the site, and any liability of the Company related to this
matter is insignificant. The Company is one of hundreds of parties which have
been identified with the site. The Company received no correspondence from any
parties regarding this matter during 1994, 1995 or 1996.
9. SIGNIFICANT CUSTOMERS
No customers generated greater than 10% of the Company's revenue for the
years ended December 31, 1994 and 1995. Two customers generated revenue to the
Company representing 11% and 10%, respectively, of total revenues for the year
ended December 31, 1996.
10. SUBSEQUENT EVENT
Effective March 1, 1997, the entire equity ownership of the Company was
acquired by The Safe Seal Company for total consideration in excess of the
recorded amounts of the Company's net assets.
* * * * * *
F-78
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Plant Specialties, Inc.:
We have audited the accompanying balance sheets of Plant Specialties, Inc.
(a Louisiana corporation), as of October 31, 1995 and 1996, and the related
statements of operations, stockholders' equity and cash flows for each of the
three years in the period ended October 31, 1996. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Plant Specialties, Inc., as
of October 31, 1995 and 1996, and the results of its operations and its cash
flows for each of the three years in the period ended October 31, 1996, in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
February 5, 1997
F-79
<PAGE>
PLANT SPECIALTIES, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
OCTOBER 31
-------------------------- MAY 31,
1995 1996 1997
------------ ------------ -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash............................... $ 6,019 $ 18,811 $ 135,109
Accounts receivable, net of
allowance of $24,924, $21,168 and
$27,873.......................... 2,484,846 2,111,448 2,765,473
Inventories........................ 1,485,546 1,681,887 1,890,224
Prepaid expenses and other current
assets........................... 76,220 87,291 289,246
------------ ------------ -----------
Total current assets.......... 4,052,631 3,899,437 5,080,052
PROPERTY AND EQUIPMENT, net............. 2,102,708 2,003,345 1,931,753
OTHER NONCURRENT ASSETS................. 147,917 160,960 148,051
------------ ------------ -----------
$ 6,303,256 $ 6,063,742 $ 7,159,856
============ ============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued
expenses......................... $ 1,300,821 $ 1,061,771 $ 941,872
Short-term debt.................... 1,809,984 1,428,453 2,081,859
Current maturities of long-term
debt............................. 163,230 112,392 137,231
------------ ------------ -----------
Total current liabilities..... 3,274,035 2,602,616 3,160,962
LONG-TERM DEBT, net of current
maturities............................ 579,149 916,332 898,264
DEFERRED INCOME TAXES................... 102,830 89,233 115,460
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, no par value,
2,000,000 shares authorized,
1,000,000 shares issued and
outstanding...................... 8,500 8,500 8,500
Retained earnings.................. 2,338,742 2,447,061 2,976,670
------------ ------------ -----------
Total stockholders' equity.... 2,347,242 2,455,561 2,985,170
------------ ------------ -----------
$ 6,303,256 $ 6,063,742 $ 7,159,856
============ ============ ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-80
<PAGE>
PLANT SPECIALTIES, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
SEVEN MONTHS ENDED
YEAR ENDED OCTOBER 31 MAY 31
-------------------------------------- ------------------------
1994 1995 1996 1996 1997
----------- ------------ ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES................................ $ 9,687,963 $ 11,526,424 $ 8,500,741 $ 4,576,570 $ 6,699,460
COST OF OPERATIONS...................... 6,429,080 7,377,424 5,620,159 3,142,500 4,058,814
----------- ------------ ----------- ----------- -----------
Gross profit................... 3,258,883 4,149,000 2,880,582 1,434,070 2,640,646
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES.............................. 2,590,125 2,991,155 2,489,494 1,480,100 1,659,679
----------- ------------ ----------- ----------- -----------
Income (loss) from
operations................... 668,758 1,157,845 391,088 (46,030) 980,967
OTHER INCOME (EXPENSE):
Interest, net....................... (149,556) (186,706) (188,116) (117,608) (143,638)
Other............................... 22,010 23,768 29,622 17,004 13,892
----------- ------------ ----------- ----------- -----------
(127,546) (162,938) (158,494) (100,604) (129,746)
----------- ------------ ----------- ----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES....... 541,212 994,907 232,594 (146,634) 851,221
PROVISION FOR INCOME TAXES.............. 202,590 374,605 124,275 63,496 321,612
----------- ------------ ----------- ----------- -----------
NET INCOME (LOSS)....................... $ 338,622 $ 620,302 $ 108,319 $ (210,130) $ 529,609
=========== ============ =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-81
<PAGE>
PLANT SPECIALTIES, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK
----------------- RETAINED
SHARES AMOUNT EARNINGS TOTAL
------ ------ ---------- ------------
<S> <C> <C> <C> <C>
BALANCE, October 31, 1993............... 1,000 $8,500 $1,379,818 $ 1,388,318
Net income......................... -- -- 338,622 338,622
------ ------ ---------- ------------
BALANCE, October 31, 1994............... 1,000 8,500 1,718,440 1,726,940
Net income......................... -- -- 620,302 620,302
------ ------ ---------- ------------
BALANCE, October 31, 1995............... 1,000 8,500 2,338,742 2,347,242
Net income......................... -- -- 108,319 108,319
------ ------ ---------- ------------
BALANCE, October 31, 1996............... 1,000 8,500 2,447,061 2,455,561
Net income (unaudited)............. -- -- 529,609 529,609
------ ------ ---------- ------------
BALANCE, May 31, 1997 (unaudited)....... 1,000 $8,500 $2,976,670 $ 2,985,170
====== ====== ========== ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-82
<PAGE>
PLANT SPECIALTIES, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE
SEVEN MONTHS ENDED
YEAR ENDED OCTOBER 31 MAY 31
----------------------------------------- ----------------------
1994 1995 1996 1996 1997
------------ ------------- ------------ ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)..................... $ 338,622 $ 620,302 $ 108,319 $ (210,130) $ 529,609
Adjustments to reconcile net income
(loss) to net cash provided by (used
in) operating activities --
Depreciation and amortization..... 351,000 384,430 412,725 213,097 237,721
(Increase) decrease in --
Accounts receivable, net....... (438,502) (453,231) 373,398 906,665 (654,025)
Inventories.................... 3,142 (222,584) (196,341) (358,075) (208,337)
Prepaid expenses and other
assets....................... (151,791) 141,405 (24,114) 64,889 (189,046)
Increase (decrease) in accounts
payable, accrued expenses and
deferred income taxes.......... (42,259) 190,620 (252,647) (194,063) (93,672)
------------ ------------- ------------ ---------- ----------
Net cash provided by (used in)
operating activities......... 60,212 660,942 421,340 422,383 (377,750)
------------ ------------- ------------ ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment... (571,036) (993,985) (313,564) (225,635) (166,129)
------------ ------------- ------------ ---------- ----------
Net cash used in investing
activities................... (571,036) (993,985) (313,564) (225,635) (166,129)
------------ ------------- ------------ ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings of debt.................... 220,618 651,231 947,966 347,465 660,177
Repayments of debt.................... (278,202) (424,756) (661,620) (550,232) --
Borrowings (repayments) on line of
credit facility..................... 566,953 107,586 (381,330) -- --
------------ ------------- ------------ ---------- ----------
Net cash provided by (used in)
financing activities......... 509,369 334,061 (94,984) (202,767) 660,177
------------ ------------- ------------ ---------- ----------
NET INCREASE (DECREASE) IN CASH......... (1,455) 1,018 12,792 (6,019) 116,298
CASH, beginning of period............... 6,456 5,001 6,019 6,019 18,811
------------ ------------- ------------ ---------- ----------
CASH, end of period..................... $ 5,001 $ 6,019 $ 18,811 $ -- $ 135,109
============ ============= ============ ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-83
<PAGE>
PLANT SPECIALTIES, INC.
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION:
Plant Specialties, Inc. (the "Company"), was incorporated in the State of
Louisiana in 1972 and is principally engaged in the business of selling new
valves, instrumentation automation, engineering services and repair services for
valves and instrumentation to the petrochemical and oil field industries. The
Company's fiscal year-end is October 31.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost, and depreciation is computed
using the straight-line method over the estimated useful lives of the assets.
The costs of major improvements are capitalized. Expenditures for maintenance,
repairs and minor improvements are expensed as incurred. When property and
equipment are sold or retired, the cost and related accumulated depreciation are
removed and the resulting gain or loss is included in results of operations. The
Company capitalized interest related to construction-in-progress projects which
amounted to approximately $39,000 and $21,000 in fiscal 1995 and 1996,
respectively.
INCOME TAXES
The Company follows the liability method of accounting for income taxes in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 109.
Under this method, deferred income taxes are recorded based upon differences
between the financial reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates and laws that will be in effect when the
underlying assets or liabilities are realized or settled.
REVENUE RECOGNITION
Revenue is recognized as services are completed and products are shipped.
INVENTORIES
Inventories are valued at the lower of cost or market utilizing the
last-in, first-out method and primarily consist of raw materials and finished
goods. If the first-in, first-out method had been used for costing inventories,
the valuation assigned to inventories would have been approximately $1,700,000
and $1,902,000 as of October 31, 1995 and 1996, respectively.
CASH
Cash payments for interest during fiscal 1994, 1995 and 1996 were
approximately $155,000, $231,000 and $208,000, respectively. Cash payments for
taxes during fiscal 1994, 1995 and 1996 were approximately $172,000, $206,000
and $159,000, respectively.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
UNAUDITED INTERIM RESULTS
The financial information for the seven months ended May 31, 1996 and 1997,
has not been audited by independent accountants. Certain information and
footnote disclosures normally included in the financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted from the unaudited interim financial information. In the opinion of
management of the Company,
F-84
<PAGE>
PLANT SPECIALTIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
the unaudited interim financial information includes all adjustments, consisting
only of normal recurring adjustments, necessary for a fair presentation. Results
of operations for the interim periods are not necessarily indicative of the
results of operations for the respective full fiscal years.
NEW ACCOUNTING PRONOUNCEMENT
Effective November 1, 1995, the Company adopted SFAS No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of." Accordingly, in the event that facts and circumstances indicate that
property and equipment, and intangible or other assets, may be impaired, an
evaluation of recoverability would be performed. If an evaluation is required,
the estimated future undiscounted cash flows associated with the asset are
compared to the asset's carrying amount to determine if a write-down to market
value or discounted cash flow value is necessary. Adoption of this standard did
not have a material effect on the financial position or results of operations of
the Company.
3. PROPERTY AND EQUIPMENT:
Property and equipment consists of the following:
ESTIMATED OCTOBER 31
USEFUL ------------------------------
LIVES 1995 1996
----------- -------------- --------------
Buildings........................ 15-30 years $ 381,056 $ 896,422
Vehicles......................... 5 years 405,073 411,527
Furniture and fixtures........... 3-5 years 22,957 22,957
Machinery and equipment.......... 5 years 1,872,871 2,554,336
Leasehold improvements........... 20 years 614,615 649,508
Construction in progress......... -- 925,114 --
-------------- --------------
4,221,686 4,534,750
Less -- Accumulated depreciation. (2,118,978) (2,531,405)
-------------- --------------
Property and equipment, net...... $ 2,102,708 $ 2,003,345
============== ==============
4. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:
Activity in the Company's allowance for doubtful accounts consists of the
following:
OCTOBER 31
--------------------------------
1994 1995 1996
--------- ---------- ---------
Balance at beginning of year............ $ 16,022 $ 19,728 $ 24,924
Additions (recovery) charged (credited)
to results of operations.............. 3,706 89,654 (1,019)
Deductions for uncollectible accounts
written off........................... -- (84,458) (2,737)
--------- ---------- ---------
$ 19,728 $ 24,924 $ 21,168
========= ========== =========
Inventories at LIFO consist of the following:
OCTOBER 31
--------------------------
1995 1996
------------ ------------
Raw material and work in process........ $ 1,422,617 $ 850,733
Finished goods.......................... 62,929 831,154
------------ ------------
$ 1,485,546 $ 1,681,887
============ ============
F-85
<PAGE>
PLANT SPECIALTIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Accounts payable and accrued expenses consist of the following:
OCTOBER 31
--------------------------
1995 1996
------------ ------------
Accounts payable, trade................. $ 603,877 $ 484,945
Accrued compensation and benefits....... 137,575 69,329
Accrued insurance....................... 49,963 56,463
Income taxes............................ 262,210 195,410
Other accrued expenses.................. 247,196 255,624
------------ ------------
$ 1,300,821 $ 1,061,771
============ ============
5. SHORT- AND LONG-TERM DEBT:
Short-term debt consists of a revolving credit facility with a bank, due
May 20, 1997, with interest due monthly at prime (8.25% at October 31, 1996).
The revolving debt is secured by accounts receivable and inventory. The
available borrowing capacity at October 31, 1996 was $2,000,000.
Long-term debt consists of the following:
OCTOBER 31
--------------------------
1995 1996
------------ ------------
Notes payable, monthly installments of
principal and interest of $34,000,
bearing interest at 7.50% to 11.00%,
collateralized by land, vehicles and
equipment............................. $ 742,379 $ 1,028,724
Less -- Current maturities......... (163,230) (112,392)
------------ ------------
Long-term debt.......................... $ 579,149 $ 916,332
============ ============
Pursuant to the revolving credit facility agreement, the Company is subject
to financial covenants relating to net worth, leverage ratios and debt service
coverage. At October 31, 1995 and 1996, the Company was in compliance with these
covenants.
The aggregate maturities of the long-term debt as of October 31, 1996 are
as follows:
1997................................. $ 112,392
1998................................. 108,358
1999................................. 110,997
2000................................. 86,527
2001................................. 610,450
Thereafter........................... --
------------
$ 1,028,724
============
Interest expense recorded pursuant to these debt agreements totaled
approximately $155,000, $192,000 and $213,000 in fiscal 1994, 1995 and 1996,
respectively. Management estimates that the fair value of its debt obligations
approximates historical value at October 31, 1996.
F-86
<PAGE>
PLANT SPECIALTIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
6. INCOME TAXES:
The Company's provision (benefit) for income taxes is as follows:
YEAR ENDED OCTOBER 31
----------------------------------
1994 1995 1996
---------- ---------- ----------
Federal --
Current......................... $ 190,004 $ 362,993 $ 112,912
Deferred........................ (1,810) (15,138) (11,252)
State --
Current......................... 14,534 27,758 23,679
Deferred........................ (138) (1,008) (1,064)
---------- ---------- ----------
$ 202,590 $ 374,605 $ 124,275
========== ========== ==========
Actual income tax expense differs from income tax expense computed by
applying the U.S. federal statutory corporate tax rate to income before income
tax as follows:
YEAR ENDED OCTOBER 31
-------------------------------
1994 1995 1996
--- --- ---
Statutory federal income tax rate.... 34% 34% 34%
State and local taxes................ 3 3 3
Effect of nondeductible meals and
entertainment...................... -- -- 10
Other................................ -- 1 6
--- --- ---
Effective income tax rate............ 37% 38% 53%
=== === ===
Deferred income taxes consist of the following:
OCTOBER 31
---------------------
1995 1996
---------- ---------
Current deferred tax assets............. $ 8,000 $ 6,403
Noncurrent deferred tax assets.......... -- --
---------- ---------
Total deferred tax assets..... 8,000 6,403
---------- ---------
Current deferred tax liabilities........ -- --
Noncurrent deferred tax liabilities..... 102,830 89,233
---------- ---------
Total deferred tax
liabilities................ 102,830 89,233
---------- ---------
Net deferred tax
liabilities................ $ 94,830 $ 82,830
========== =========
7. EMPLOYEE BENEFIT PLANS:
The Company sponsors a 401(k) profit-sharing plan covering all eligible
employees. The plan allows employee contributions under Section 401(k) of the
Internal Revenue Code. Eligible employees may elect to contribute up to 20
percent of eligible compensation on a pretax basis, subject to IRS limits. The
Company provides matching contributions of 50 percent of employee contributions
up to 6 percent of employee compensation. The Company contributed approximately
$36,000, $39,000 and $38,000 for fiscal 1994, 1995 and 1996, respectively.
F-87
<PAGE>
PLANT SPECIALTIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
8. COMMITMENTS AND CONTINGENCIES:
OPERATING LEASES
The Company leases warehouse, office facilities and vehicles under
operating leases which expire at various dates through 1999. Future minimum
lease payments at October 31, 1996 are as follows:
1997.................................... $ 140,943
1998.................................... 42,535
1999.................................... 24,813
Rent expense for fiscal 1994, 1995 and 1996 was approximately $289,000,
$361,000 and $240,000, respectively.
The Company leases its facilities from its president and majority
stockholder under an operating lease requiring monthly payments of approximately
$16,000 expiring April 30, 1997. The Company is responsible for all taxes,
insurance and maintenance. Rent expense pursuant to this lease for fiscal 1994,
1995 and 1996 was $191,000, $197,000 and $197,000, respectively.
LITIGATION
In the ordinary course of its business, the Company has become involved in
various legal matters. Management does not believe that the outcome of these
legal matters will have a material effect on the Company's financial position or
results of operations.
9. RELATED-PARTY TRANSACTIONS:
As of October 31, 1995 and 1996, the Company had a note receivable from the
president and majority stockholder of the Company in the amount of $80,080 and
$82,237, respectively. The note bears interest at 7 percent, payable in monthly
installments of $1,000.
10. REVENUES FROM SIGNIFICANT CUSTOMERS:
During fiscal 1996, five customers accounted for approximately 54 percent
of the Company's revenues. During fiscal 1995, five customers accounted for
approximately 67 percent of the Company's revenues. During fiscal 1994, four
customers accounted for approximately 77 percent of the Company's revenues.
11. SUBSEQUENT EVENT:
SALE OF COMMON SHARES
On June 16, 1997, the stockholders of the Company sold the entire equity
ownership of the Company to Innovative Valve Technologies, Inc. for total
consideration in excess of the recorded amounts of the Company's net assets.
F-88
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Southern Valve Group:
We have audited the accompanying combined balance sheet of Southern Valve
Group (as defined in Note 1) as of October 31, 1996, and the related combined
statements of operations, stockholders' equity and cash flows for the year then
ended. These combined financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the combined financial position of Southern
Valve Group as of October 31, 1996, and the results of their operations and
their cash flows for the year then ended in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
April 18, 1997
F-89
<PAGE>
SOUTHERN VALVE GROUP
COMBINED BALANCE SHEETS
OCTOBER 31, JULY 31,
1996 1997
----------- -----------
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash............................... $ 21,874 $ 121,104
Accounts receivable, net of
allowance of $11,861 and
$27,850........................... 473,581 780,264
Inventories........................ 1,301,987 1,516,294
Notes receivable................... 168,779 50,048
Prepaid expenses and other current
assets............................ 22,362 47,953
----------- -----------
Total current assets.......... 1,988,583 2,515,663
PROPERTY AND EQUIPMENT, net............. 1,055,716 861,304
----------- -----------
$ 3,044,299 $ 3,376,967
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term
debt.............................. $ 517,105 $ 428,657
Accounts payable and accrued
expenses.......................... 309,570 241,315
Note payable to stockholder........ 76,994 231,994
----------- -----------
Total current liabilities..... 903,669 901,966
LONG-TERM DEBT, net of current
maturities............................ 1,363,166 1,644,797
DEFERRED INCOME TAXES................... 12,913 12,913
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, $10.00 par value,
1,000 shares authorized, 1,000
shares issued and outstanding..... 10,000 10,000
Additional paid-in capital......... 5,860 5,860
Retained earnings.................. 748,691 801,431
----------- -----------
Total stockholders' equity.... 764,551 817,291
----------- -----------
$ 3,044,299 $ 3,376,967
=========== ===========
The accompanying notes are an integral part of these combined financial
statements.
F-90
<PAGE>
SOUTHERN VALVE GROUP
COMBINED STATEMENTS OF OPERATIONS
NINE MONTHS
YEAR ENDED ENDED JULY 31
OCTOBER 31, --------------------------
1996 1996 1997
------------ ------------ ------------
(UNAUDITED)
REVENUES............................. $ 4,404,717 $ 3,595,578 $ 3,326,927
COST OF OPERATIONS................... 2,962,337 2,326,946 2,186,737
------------ ------------ ------------
Gross profit.................... 1,442,380 1,268,632 1,140,190
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES........................... 1,175,487 882,795 915,643
------------ ------------ ------------
Income from operations.......... 266,893 385,837 224,547
OTHER INCOME (EXPENSE), net:
Interest........................... (177,123) (121,473) (119,288)
Other.............................. 45,571 -- (38,500)
------------ ------------ ------------
(131,552) (121,473) (157,788)
------------ ------------ ------------
INCOME BEFORE INCOME TAXES........... 135,341 264,364 66,759
PROVISION FOR INCOME TAXES........... 29,056 55,517 14,019
------------ ------------ ------------
NET INCOME........................... $ 106,285 $ 208,847 $ 52,740
============ ============ ============
The accompanying notes are an integral part of these combined financial
statements.
F-91
<PAGE>
SOUTHERN VALVE GROUP
COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
----------------- PAID-IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS TOTAL
------ ------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C>
BALANCE, October 31, 1995............ 1,000 $10,000 $5,860 $ 642,406 $ 658,266
Net income...................... -- -- -- 106,285 106,285
------ ------- ---------- --------- ----------
BALANCE, October 31, 1996............ 1,000 10,000 5,860 748,691 764,551
Net income (unaudited).......... -- -- -- 52,740 52,740
------ ------- ---------- --------- ----------
BALANCE, July 31, 1997 (unaudited)... 1,000 $10,000 $5,860 $ 801,431 $ 817,291
====== ======= ========== ========= ==========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-92
<PAGE>
SOUTHERN VALVE GROUP
COMBINED STATEMENTS OF CASH FLOWS
NINE MONTHS
YEAR ENDED ENDED JULY 31
OCTOBER 31, ------------------------
1996 1996 1997
--------- ------------ ----------
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................ $ 106,285 $ 208,847 $ 52,740
Adjustments to reconcile net income to
net cash provided by (used in)
operating activities --
Depreciation and amortization.... 155,874 117,000 116,900
Loss on disposal of assets....... -- -- 38,500
Change in deferred income
taxes......................... 2,589 -- --
(Increase) decrease in --
Accounts receivable........... (188,676) (534,069) (306,683)
Inventories................... 60,920 96,679 (214,307)
Notes receivable.............. (10,957) (1,207) 118,731
Prepaid expenses and other
current assets............. 17,094 21,483 (25,591)
Increase (decrease) in --
Accounts payable and accrued
expenses................... 96,166 134,016 (68,255)
--------- ------------ ----------
Net cash provided by (used in)
operating activities.......... 239,295 42,749 (287,965)
--------- ------------ ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment... (308,362) (189,777) (5,988)
--------- ------------ ----------
Net cash used in investing
activities.................... (308,362) (189,777) (5,988)
--------- ------------ ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings of debt.................... 182,549 182,720 481,631
Repayments of debt.................... (196,670) (84,040) (88,448)
--------- ------------ ----------
Net cash provided by (used in)
financing activities.......... (14,121) 98,680 393,183
--------- ------------ ----------
NET INCREASE (DECREASE) IN CASH......... (83,188) (48,348) 99,230
CASH, beginning of period............... 105,062 105,062 21,874
--------- ------------ ----------
CASH, end of period..................... $ 21,874 $ 56,714 $ 121,104
========= ============ ==========
The accompanying notes are an integral part of these combined financial
statements.
F-93
<PAGE>
SOUTHERN VALVE GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION:
The accompanying combined balance sheets and related combined statements of
operations, stockholders' equity and cash flows include Southern Valve Service,
Inc. ("Southern Valve") and 55 Leasing and Sales Company, Inc. ("55
Leasing"). As Southern Valve and 55 Leasing (together, "Southern Valve Group"
or the "Company") have common ownership and management, the financial
statements of each entity have been consolidated for financial reporting
purposes. All intercompany transactions and balances have been eliminated.
Southern Valve was incorporated in the State of Alabama in 1984 and is
principally engaged in the business of repairing, testing and selling manual,
control and safety relief valves to customers in the pulp and paper, chemical,
power generation and petrochemical industries in Alabama, Mississippi and
Georgia.
55 Leasing is an Alabama S Corporation organized in 1995 primarily to lease
equipment to Southern Valve.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
PROPERTY AND EQUIPMENT
Property and equipment is recorded at cost, and depreciation is computed
using the straight-line method over the estimated useful lives of the assets.
The costs of major improvements are capitalized. Expenditures for maintenance,
repairs and minor improvements are expensed as incurred. When property and
equipment is sold or retired, the cost and related accumulated depreciation is
removed and the resulting gain or loss is included in results of operations.
INCOME TAXES
The Company follows the liability method of accounting for income taxes in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 109.
Under this method, deferred income taxes are recorded based upon differences
between the financial reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates and laws that will be in effect when the
underlying assets or liabilities are recovered or settled. 55 Leasing is an S
Corporation for federal income tax purposes and, in accordance with the S
Corporation provisions of the Internal Revenue Code, the earnings of 55 Leasing
are included in the personal tax returns of its stockholders. Accordingly, no
federal or state income tax expense is recorded in the accompanying consolidated
financial statements for 55 Leasing.
REVENUE RECOGNITION
Service revenue is recognized upon completion of the service, and product
sales revenue is recognized as products are shipped or delivered.
CASH
Cash payments for interest during fiscal 1996 were approximately $178,000.
Cash payments for taxes during fiscal 1996 were approximately $15,000.
INVENTORIES
Inventories are valued at the lower of cost or market utilizing the
first-in, first-out method and primarily consist of valves and valve parts.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the
F-94
<PAGE>
SOUTHERN VALVE GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
UNAUDITED INTERIM INFORMATION
The financial information for the nine months ended July 31, 1996 and 1997,
has not been audited by independent accountants. Certain information and
footnote disclosures normally included in the financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted from the unaudited interim financial information. In the opinion of
management of the Company, the unaudited interim financial information includes
all adjustments, consisting only of normal recurring adjustments, necessary for
a fair presentation. Results of operations for the interim periods are not
necessarily indicative of the results of operations for the respective full
fiscal years.
NEW ACCOUNTING PRONOUNCEMENT
Effective November 1, 1995, the Company adopted SFAS No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of." Accordingly, in the event that facts and circumstances indicate that
property and equipment, and intangible or other assets, may be impaired, an
evaluation of recoverability would be performed. If an evaluation is required,
the estimated future undiscounted cash flows associated with the asset are
compared to the asset's carrying amount to determine if a writedown to market
value or discounted cash flow value is necessary. Adoption of this standard did
not have a material effect on the financial position or results of operations of
the Company.
3. PROPERTY AND EQUIPMENT:
Property and equipment consists of the following:
ESTIMATED OCTOBER 31,
USEFUL LIVES 1996
------------ -----------
Land.................................... -- $ 171,682
Buildings and improvements.............. 18-40 years 533,015
Vehicles................................ 5 years 433,900
Furniture and fixtures.................. 5-10 years 180,782
Machinery and equipment................. 5-10 years 688,398
-----------
2,007,777
Less -- Accumulated depreciation........ (952,061)
-----------
$ 1,055,716
===========
4. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:
Activity in the Company's allowance for doubtful accounts for the year
ended October 31, 1996, consists of the following:
Balance at beginning of year....... $ 8,759
Additions charged to results of
operations........................ 3,102
---------
Balance at end of year............. $ 11,861
=========
F-95
<PAGE>
SOUTHERN VALVE GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Accounts payable and accrued expenses as of October 31, 1996, consist of
the following:
Accounts payable................... $ 177,383
Customer deposits.................. 30,943
Accrued employee compensation and
benefits......................... 27,447
Other accrued expenses............. 73,797
----------
$ 309,570
==========
5. DEBT:
As of October 31, 1996, debt consists of the following:
Lines of credit, aggregate borrowing
capacity of $350,000 with a commercial
bank, bearing interest at prime plus
1.00% (9.25% at October 31, 1996),
collateralized by inventory and
accounts receivable................... $ 190,000
Notes payable to banks, monthly
installments of principal and interest
in the amount of $34,264, bearing
interest at 7.00% to 10.00%,
collateralized by accounts receivable,
inventory, land, equipment and
vehicles.............................. 1,690,271
Unsecured demand note, payable to
stockholder, bearing interest at
8.00%................................. 76,994
------------
1,957,265
Less -- Current maturities.............. (594,099)
------------
Total long-term debt, net of
current maturities................ $ 1,363,166
============
In January 1997, the Company refinanced its notes payable to banks. The
refinanced debt is payable to one bank, bearing interest of 8.50% with monthly
installments of principal and interest. There was no significant change in
amount of the debt financed and no gain or loss on debt extinguishment to be
recognized. In addition, the Company's lines of credit have been replaced by a
$300,000 line of credit; as of April 18, 1997, there was no outstanding balance
due under the line of credit.
The aggregate maturities of the refinanced debt and unsecured demand note
are as follows:
For the Year Ending October 31 --
1997............................... $ 105,064
1998............................... 151,856
1999............................... 993,226
2000............................... 92,545
2001............................... 46,637
Thereafter......................... 465,145
------------
$ 1,854,473
============
Interest expense recorded pursuant to these debt agreements totaled
approximately $177,000 in fiscal 1996. Management estimates that the fair value
of its debt obligations approximates the historical value at October 31, 1996.
F-96
<PAGE>
SOUTHERN VALVE GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
6. INCOME TAXES:
The income tax provision for fiscal 1996 is as follows:
Federal --
Current............................ $ 22,366
Deferred........................... 2,243
State --
Current............................ 4,101
Deferred........................... 346
---------
$ 29,056
=========
Actual income tax expense differs from income tax expense computed by
applying the U.S. federal statutory corporate tax rate to income before income
taxes for fiscal 1996, as follows:
Statutory federal income tax rate....... 34%
Effect of federal graduated tax rate.... (12)
State and local taxes................... 3
Effect of S Corporation election........ (7)
Effect of nondeductible meals and
entertainment......................... 2
Other................................... 2
---
Effective income tax rate............... 22%
===
Deferred income taxes as of October 31, 1996, consist of the following:
Current deferred tax assets.......... $ 7,143
----------
Total deferred tax
assets.............. 7,143
----------
Noncurrent deferred tax
liabilities.......................... (12,913)
----------
Total deferred tax
liabilities......... (12,913)
----------
Net deferred tax
liabilities......... $ (5,770)
==========
7. COMMITMENTS AND CONTINGENCIES:
LITIGATION
In the ordinary course of its business, the Company has become involved in
various legal matters. Management does not believe that the outcome of these
legal matters will have a material effect on the Company's consolidated
financial position or results of operations.
8. RELATED-PARTY TRANSACTIONS:
As of October 31, 1996, the Company had a note receivable from a
stockholder in the amount of $161,279. The note receivable bears interest
equivalent to the short-term federal treasury rate and is payable on demand.
9. SIGNIFICANT CUSTOMERS:
For fiscal 1996, the Company had two customers that comprised approximately
19% and 12%, respectively, of total revenues.
F-97
<PAGE>
SOUTHERN VALVE GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
10. SUBSEQUENT EVENT:
SALE OF COMMON SHARES
In June 1997, pursuant to a definitive agreement, the stockholders of the
Company agreed to sell the entire equity ownership of the Company to Innovative
Valve Technologies, Inc. (Invatec), for total consideration in excess of the
recorded amounts of the Company's net assets. The closing of the transaction is
conditioned on the successful consummation of Invatec's initial public offering.
F-98
<PAGE>
Invatec provides industrial valve repair and value-added distribution
services to a variety of process industries throughout North America, including
the hydrocarbon processing (refining, petrochemical, chemical, oil and gas
production, pipeline and storage), power and utility, and pulp and paper
industries.
HYDROCARBON PROCESSING
POWER AND UTILITY PULP AND PAPER
[Graphic: Three blended photographs of process
manufacturing facility, electric power plant and a segment of a paper mill.]
SINGLE-SOURCE PROVIDER OF
REPAIR AND VALUE-ADDED DISTRIBUTION SERVICES FOR INDUSTRIAL VALVES
ON-LINE REPAIR VALUE-ADDED DISTRIBUTION SERVICES
SERVICES
Valve Component Inspection and Diagnosis
Repair Design and Customization
Valve Packing Re-Conditioning, Assembly and Calibration
Restoration
Process-System
Leak Repair
- -------------------------------------------------------------------------------
OFF-LINE REPAIR NEW PRODUCT DISTRIBUTION
SERVICES
Diagnosis and New Valve Sales
Testing Process-System Component Sales
Comprehensive Delivery and Installation
Valve Repair
Plant Turnaround
Maintenance
<PAGE>
================================================================================
NO DEALER, SALES REPRESENTATIVE OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS
OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR ANY OF THE UNDERWRITERS. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES
OTHER THAN THE SHARES OF COMMON STOCK TO WHICH IT RELATES, OR AN OFFER TO, OR A
SOLICITATION OF, ANY PERSON IN ANY JURISDICTION WHERE SUCH AN OFFER OR
SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY
SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT
THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY, OR THAT THE INFORMATION
CONTAINED HEREIN IS CORRECT AS OF ANY TIME, SUBSEQUENT TO THE DATE HEREOF.
----------------------------
TABLE OF CONTENTS
----------------------------
PAGE
----
PROSPECTUS SUMMARY................... 3
RISK FACTORS......................... 7
THE COMPANY.......................... 13
USE OF PROCEEDS...................... 16
DIVIDEND POLICY...................... 16
CAPITALIZATION....................... 17
DILUTION............................. 18
SELECTED FINANCIAL INFORMATION....... 19
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS...................... 21
THE INDUSTRIAL VALVE INDUSTRY........ 26
BUSINESS............................. 30
MANAGEMENT........................... 41
CERTAIN TRANSACTIONS................. 50
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT... 52
SHARES ELIGIBLE FOR FUTURE SALE...... 54
DESCRIPTION OF CAPITAL STOCK......... 56
UNDERWRITING......................... 61
LEGAL MATTERS........................ 62
EXPERTS.............................. 62
ADDITIONAL INFORMATION............... 63
INDEX TO FINANCIAL STATEMENTS........ F-1
----------------------------
UNTIL , 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING IN THIS
DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DELIVERY REQUIREMENT
IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING
AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
3,350,000 SHARES
INVATEC
COMMON STOCK
------------------------
PROSPECTUS
------------------------
NATIONSBANC
MONTGOMERY
SECURITIES, INC.
FURMAN SELZ
, 1997
================================================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the expenses (other than underwriting
discounts and commissions) in connection with the offering described in this
Registration Statement, all of which shall be paid by Innovative Valve
Technologies, Inc. (the " Company"). All these amounts (except the SEC
Registration Fee, the NASD Filing Fee and the Nasdaq National Market Listing
Fee) are estimated.
SEC Registration Fee................. $ 17,996
NASD Filing Fee...................... 6,439
Nasdaq National Market Listing Fee... 36,000
Blue Sky Fees and Expenses........... 10,000
Printing and Engraving Costs......... 250,000
Legal Fees and Expenses.............. 600,000
Accounting Fees and Expenses......... 1,000,000
Transfer Agent and Registrar Fees and
Expenses............................. 50,000
Miscellaneous........................ 29,565
------------
Total...................... $ 2,000,000
============
- ------------
* To be provided by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
DELAWARE GENERAL CORPORATION LAW
Section 145(a) of the General Corporation Law of the State of Delaware (the
" DGCL") provides that a corporation may indemnify any person who was or is a
party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the corporation) by
reason of the fact that he is or was a director, officer, employee or agent of
the corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by him in connection with such action, suit or proceeding if he acted
in good faith and in a manner he reasonably believed to be in or not opposed to
the best interests of the corporation, and, with respect to any criminal action
or proceeding, had no reasonable cause to believe his conduct was unlawful. The
termination of any action, suit or proceeding by judgment, order, settlement,
conviction, or upon a plea of NOLO CONTENDERE or its equivalent, shall not, of
itself, create a presumption that the person did not act in good faith and in a
manner which he reasonably believed to be in or not opposed to the best
interests of the corporation, and, with respect to any criminal action or
proceeding, had reasonable cause to believe that his conduct was unlawful.
Section 145(b) of the DGCL states that a corporation may indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action or suit by or in the right of the
corporation to procure a judgment in its favor by reason of the fact that he is
or was a director, officer, employee or agent of the corporation, or is or was
serving at the request of the corporation as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise against expenses (including attorneys' fees) actually and reasonably
incurred by him in connection with the defense or settlement of such action or
suit if he acted in good faith and in a manner he reasonably believed to be in
or not opposed to the best interests of the corporation and except that no
indemnification shall be made in respect of any claim, issue or matter as to
which such person shall have been adjudged to be liable to the corporation
unless and only to the extent that the Court of Chancery or the court in which
such action or suit was brought shall determine upon application that, despite
the
II-1
<PAGE>
adjudication of liability but in view of all the circumstances of the case, such
person is fairly and reasonably entitled to indemnity for such expenses which
the Court of Chancery or such other court shall deem proper.
Section 145(c) of the DGCL provides that to the extent that a director,
officer, employee or agent of a corporation has been successful on the merits or
otherwise in defense of any action, suit or proceeding referred to in
subsections (a) and (b) of Section 145, or in defense of any claim, issue or
matter therein, he shall be indemnified against expenses (including attorneys'
fees) actually and reasonably incurred by him in connection therewith.
Section 145(d) of the DGCL states that any indemnification under
subsections (a) and (b) of Section 145 (unless ordered by a court) shall be made
by the corporation only as authorized in the specific case upon a determination
that indemnification of the director, officer, employee or agent is proper in
the circumstances because he has met the applicable standard of conduct set
forth in subsections (a) and (b). Such determination shall be made (1) by a
majority vote of the directors who were not parties to such action, suit or
proceeding, even though less than a quorum, or (2) if there are no such
directors, or if such directors so direct, by independent legal counsel in a
written opinion, or (3) by the stockholders.
Section 145(e) of the DGCL provides that expenses (including attorneys'
fees) incurred by an officer or director in defending any civil, criminal,
administrative or investigative action, suit or proceeding may be paid by the
corporation in advance of the final disposition of such action, suit or
proceeding upon receipt of an undertaking by or on behalf of such director or
officer to repay such amount if it shall ultimately be determined that he is not
entitled to be indemnified by the corporation as authorized in Section 145. Such
expenses (including attorneys' fees) incurred by other employees and agents may
be so paid upon such terms and conditions, if any, as the board of directors
deems appropriate.
Section 145(f) of the DGCL states that the indemnification and advancement
of expenses provided by, or granted pursuant to, the other subsections of
Section 145 shall not be deemed exclusive of any other rights to which those
seeking indemnification or advancement of expenses may be entitled under any
bylaw, agreement, vote of stockholders or disinterested directors or otherwise,
both as to action in his official capacity and as to action in another capacity
while holding such office.
Section 145(g) of the DGCL provides that a corporation shall have the power
to purchase and maintain insurance on behalf of any person who is or was a
director, officer, employee or agent of the corporation, or is or was serving at
the request of the corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise,
against any liability asserted against him and incurred by him in any such
capacity, or arising out of his status as such, whether or not the corporation
would have the power to indemnify him against such liability under the
provisions of Section 145.
Section 145(j) of the DGCL states that the indemnification and advancement
of expenses provided by, or granted pursuant to, Section 145 shall, unless
otherwise provided when authorized or ratified, continue as to a person who has
ceased to be a director, officer, employee or agent, and shall inure to the
benefit of the heirs, executors and administrators of such a person.
CERTIFICATE OF INCORPORATION
The Restated Certificate of Incorporation of the Company provides that a
director of the Company shall not be personally liable to the Company or its
stockholders for monetary damages for breach of fiduciary duty as a director,
except for liability (i) for any breach of the director's duty of loyalty to the
Company or its stockholders, (ii) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, (iii) under
Section 174 of the DGCL or (iv) for any transaction from which the director
derived an improper personal benefit. If the DGCL is amended to authorize the
further elimination or limitation of the liability of directors, then the
liability of a director of the Company, in addition to the limitation on
personal liability described above, shall be limited to the fullest extent
permitted by the amended DGCL. Further, any repeal or modification of such
provision of the Restated Certificate of Incorporation by the stockholders of
the Company shall be prospective only, and shall not adversely affect any
limitation on the personal liability of a director of the Company existing at
the time of such repeal or modification.
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<PAGE>
BYLAWS
The Bylaws of the Company provide that the Company will indemnify and hold
harmless any director or officer of the Company to the fullest extent permitted
by applicable law, as in effect as of the date of the adoption of the Bylaws or
to such greater extent as applicable law may thereafter permit, from and against
all losses, liabilities, claims, damages, judgments, penalties, fines, amounts
paid in settlement and expenses (including attorneys' fees) whatsoever arising
out of any event or occurrence related to the fact that such person is or was a
director or officer of the Company and further provide that the Company may, but
is not required to, indemnify and hold harmless any employee or agent of the
Company or a director, officer, employee or agent of any other corporation,
partnership, joint venture, trust, employee benefit plan or other enterprise who
is or was serving in such capacity at the written request of the Company;
provided, however, that the Company is only required to indemnify persons
serving as directors, officers, employees or agents of the Company for the
expenses incurred in a proceeding if such person is a party to and is
successful, on the merits or otherwise, in such proceeding, or if unsuccessful
in the proceeding, but successful as to a matter in such proceeding, the
expenses attributable to such matter and provided further that the Company may,
but is not required to, indemnify such persons who are serving as a director,
officer, employee or agent of any other corporation, partnership, joint venture,
trust, employee benefit plan or other enterprise at the written request of the
Company for the expenses incurred in a proceeding if such person is a party to
and is successful, on the merits or otherwise, in such proceeding. The Bylaws
further provide that, in the event of any threatened, or pending action, suit or
proceeding in which any of the persons referred to above is a party or is
involved and that may give rise to a right of indemnification under the Bylaws,
following written request by such person, the Company will promptly pay to such
person amounts to cover expenses reasonably incurred by such person in such
proceeding in advance of its final disposition upon the receipt by the Company
of (i) a written undertaking executed by or on behalf of such person providing
that such person will repay the advance if it is ultimately determined that such
person is not entitled to be indemnified by the Company as provided in the
Bylaws and (ii) satisfactory evidence as to the amount of such expenses.
INDEMNIFICATION AGREEMENTS
The Company has entered into Indemnification Agreements with each of its
directors and executive officers. The Indemnification Agreements generally are
to the same effect as the Bylaw provisions described above.
The Underwriting Agreement provides for the indemnification of the
directors and officers of the Company in certain circumstances.
The Company intends to maintain liability insurance for the benefit of its
directors and officers.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
In March 1997, the Company sold a total of 146,959 shares of its Common
Stock to certain of its executive officers (William E. Haynes, Charles F.
Schugart and Frank L. Lombard) and Computerized Accounting and Tax Services,
Inc. ("CATS"), a related party, for a total purchase price of $216.12. In June
1997, the Company sold a total of 95,880 shares of its Common Stock to its
executive officers (Messrs. Haynes, Schugart, Denny A. Rigas, Lombard, John L.
King and Douglas R. Harrington, Jr.) and CATS for a total purchase price of
$141.00. These sales were exempt from the registration requirements of the
Securities Act by virtue of Section 4(2) thereof as transactions not involving
any public offering. The share figures in this paragraph give effect to a
reverse stock split of the Common Stock.
In June 1997, The Safe Seal Company, Inc. ("SSI") issued $3.3 million
aggregate principal amount of its 5.0% convertible subordinated notes to the
former owners of Plant Specialties, Inc. ("PSI") as partial payment of the
purchase price for the stock of PSI. When the offering made by this Registration
Statement (the "Offering") closes, the Company will succeed SSI as the obligor
on these notes and these notes will be convertible into shares of the Company's
Common Stock at an initial conversion price equal to 130% of the initial price
to the public in the Offering (the "IPO Price"). The sale of these notes (and
the underlying rights to shares of the Company's Common Stock) was exempt, and
the Company's succession as the
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<PAGE>
obligor thereon will be exempt, from the registration requirements of the
Securities Act by virtue of Section 4(2) thereof as transactions not involving
any public offering. The issuance of the Company's Common Stock on conversion of
these notes will be exempt from those requirements pursuant to Section 3(a)(9)
of the Securities Act.
In July 1997, the Company issued $2.8 million aggregate principal amount of
its 5.5% convertible subordinated notes to the former owners of Steam Supply &
Rubber Co., Inc. and affiliated companies ("Steam Supply") as partial payment
of the purchase price for the stock of Steam Supply. When the Offering closes,
these notes will be convertible into shares of the Company's Common Stock at an
initial conversion price equal to 130% of the IPO Price. The sale of these notes
(and the underlying rights to shares of the Company's Common Stock) was exempt
from the registration requirements of the Securities Act by virtue of Section
4(2) thereof as transactions not involving any public offering. The issuance of
the Company's Common Stock on conversion of these notes will be exempt from
those requirements pursuant to Section 3(a)(9) of the Securities Act.
Concurrently with the closing of the Offering, the Company will issue to
subsidiaries of Philip Services Corp. (collectively with its subsidiaries,
"Philip") (i) an aggregate of 1,087,294 shares of its Common Stock in
repayment of an aggregate of $8.0 million of indebtedness owed by the Company to
Philip and (ii) 166,667 shares of its Common Stock in redemption of 20,000
shares of SSI preferred stock issued by SSI to Philip. These conversions will be
(and the initial issuances of the securities evidencing these obligations were)
exempt from the registration requirements of the Securities Act by virtue of
Section 4(2) thereof as transactions not involving any public offering.
Before the completion of the Offering, the Company will issue shares of its
Common Stock in connection with the merger transaction in which SSI will become
a subsidiary of the Company. Concurrently with the completion of the Offering,
the Company will issue such number of shares of its Common Stock as shall equal
$1,500,000 divided by the IPO Price in connection with its acquisition of
Southern Valve Service, Inc. and an affiliated company. These transactions will
be exempt from the registration requirements of the Securities Act by virtue of
Section 4(2) thereof as not involving any public offering.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------------------------ ------------------------------------------------------------------------------------------
<S> <C>
1.1* -- Form of Underwriting Agreement.
2.1* -- Stock Purchase Agreement dated as of December 28, 1996 by and among The Safe Seal Company,
Inc. ("SSI"), certain stockholders of Harley Industries, Inc. and Harley Industries,
Inc.
2.2* -- Stock Transfer Agreement dated as of January 24, 1997 by and among SSI, an individual
stockholder of Harley Industries, Inc., Harley Industries, Inc. and Harley Equipment
Corporation.
2.3* -- Stock Purchase Agreement entered into on June 23, 1997 by and among the Company, Puget
Investments, Inc., Flickinger-Benicia Inc. (collectively, "Steam Supply"), and the
stockholders named therein.
2.4* -- Stock Purchase Agreement dated as of July 15, 1997 by and among the Company, Industrial
Controls & Equipment, Inc., Valve Actuation & Repair Co., Rickco Acquisition, Inc., BAS
Technical Employment Placement Company and the stockholders named therein.
2.5* -- Stock Purchase Agreement dated as of February 26, 1997 by and among SSI and the
stockholders of GSV, Inc.
2.6* -- Stock and Real Estate Purchase Agreement dated as of May 22, 1997 by and among SSI, Plant
Specialties, Inc. ("PSI"), and the stockholders named therein.
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<PAGE>
EXHIBIT
NUMBER DESCRIPTION
- ------------------------ ------------------------------------------------------------------------------------------
2.7* -- Agreement and Plan of Reorganization dated as of June 27, 1997 by and among the Company,
SVSI Acquisition, Inc., Southern Valve Service, Inc. and the stockholders named therein.
2.8* -- Stock Redemption and Purchase Agreement dated as of June 27, 1997 by and among the
Company, Lee Roy Jordan, Ralph Buffkin and 55 Leasing and Sales, Inc.
2.9* -- Agreement and Plan of Merger dated as of June 27, 1997 by and among the Company, IVT
Acquisition, Inc. and SSI and the amendment thereto dated as of August 15, 1997.
2.10* -- Uniform Provisions for Acquisitions (incorporated into the agreements filed as Exhibits
2.3, 2.4 and 2.7 hereto).
3.1* -- Certificate of Incorporation of the Company.
3.2* -- Bylaws of the Company.
4.1* -- Form of Certificate representing Common Stock.
4.2* -- Registration Rights Agreement dated as of June 9, 1997 by and among the Company and the
stockholders listed on the signature pages thereto.
4.3* -- Registration Rights Agreement dated as of June 12, 1997 by and among the Company and the
persons listed on the signature pages thereto.
4.4* -- Addendum to Registration Rights Agreement dated as of July 28, 1997 by and among the
Company and the holders listed on the signature pages thereto.
4.5* -- Form of Convertible Subordinated Promissory Note issued in the acquisition of PSI.
4.6* -- Form of Convertible Subordinated Promissory Note issued in the acquisition of Steam
Supply.
4.7* -- Second Amended and Restated Credit Agreement dated as of July 28, 1997 among SSI and The
Chase Manhattan Bank and the other parties designated therein.
4.8* -- Credit Agreement dated as of March 6, 1997 among SSI and Texas Commerce Bank, National
Association and the other parties designated therein and the amendment thereto dated as of
August 8, 1997.
4.9* -- Funding Agreement dated as of June 9, 1997, as amended and restated as of August 15, 1997,
by and between the Company and Philip.
4.10* -- Form of Rights Agreement by and between the Company and ChaseMellon Shareholder Services,
L.L.C., including form of Rights Certificate attached as Exhibit B thereto.
4.11 -- Form of Loan Agreement among the Company, Texas Commerce Bank National Association, as
Agent and as a lender, and the other lenders referred to therein.
The Company and certain of its subsidiaries are parties to certain debt instruments under
which the total amount of securities authorized does not exceed 10% of the total assets of
the Company and its subsidiaries on a consolidated basis. Pursuant to paragraph 4(iii)(A)
of Item 601(b) of Regulation S-K, the Company agrees to furnish a copy of such instruments
to the Commission on request.
5.1* -- Opinion of Baker & Botts, L.L.P.
10.1* -- 1997 Incentive Plan of Innovative Valve Technologies, Inc.
10.2* -- Form of Employment Agreement dated as of January 27, 1997, between SSI and William E.
Haynes.
10.3* -- Form of Employment Agreement dated as of January 27, 1997, between SSI and Charles F.
Schugart.
10.4* -- Form of Employment Agreement dated as of May 6, 1997, between the Company and Denny A.
Rigas.
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<PAGE>
EXHIBIT
NUMBER DESCRIPTION
- ------------------------ ------------------------------------------------------------------------------------------
10.5* -- Consulting Agreement dated as of March 27, 1997 by and between Wasatch Capital Corporation
and the Company.
10.6* -- Form of Indemnification Agreement between the Company and each of its directors and
officers.
21.1* -- Subsidiaries of the Company.
23.1 -- Consent of Arthur Andersen LLP.
23.2 -- Consents of Deloitte & Touche LLP.
23.3* -- Consent of Baker & Botts, L.L.P. (contained in Exhibit 5.1 hereto).
23.4* -- Consent of Michael A. Baker, as a nominee for directorship.
23.5* -- Consent of Arthur L. French, as a nominee for directorship.
23.6* -- Consent of Tommy E. Knight, as a nominee for directorship.
23.7* -- Consent of Pierre R. Latour, as a nominee for directorship.
23.8* -- Consent of T. Wayne Wren, Jr., as a nominee for directorship.
23.9* -- Consent of Robert M. Chiste, as a nominee for directorship.
24.1* -- Power of Attorney.
27.1* -- Financial Data Schedule.
</TABLE>
- ------------
* Previously filed.
(b) Financial Statement Schedules.
All schedules are omitted because they are not applicable or because the
required information is contained in the Financial Statements or Notes thereto.
ITEM 17. UNDERTAKINGS.
The undersigned registrant hereby undertakes to provide to the
Underwriters, at the closing specified in the Purchase Agreement, certificates
representing the shares of Common Stock offered hereby in such denominations and
registered in such names as required by the Underwriters to permit prompt
delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
The undersigned registrant hereby undertakes that:
(1) For the purposes of determining any liability under the
Securities Act of 1933, the information omitted from the form of prospectus
filed as a part of this registration statement in reliance upon Rule 430A
and contained in a form of prospectus filed by the registrant pursuant to
Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to
be part of this registration statement as of the time it was declared
effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
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<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS AMENDMENT TO REGISTRATION STATEMENT TO BE SIGNED ON ITS
BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF HOUSTON,
STATE OF TEXAS, ON OCTOBER 21, 1997.
INNOVATIVE VALVE TECHNOLOGIES, INC.
By: /s/ WILLIAM E. HAYNES
WILLIAM E. HAYNES
PRESIDENT AND CHIEF EXECUTIVE
OFFICER
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS AMENDMENT
TO REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<CAPTION>
SIGNATURES CAPACITY IN WHICH SIGNED DATE
- ------------------------------------------------------ ----------------------------------- -----------------
<C> <S> <C>
/s/WILLIAM E. HAYNES Chairman of the Board, October 21, 1997
WILLIAM E. HAYNES President, Chief Executive Officer
and Sole Director (Principal
Executive Officer)
/s/CHARLES F. SCHUGART Senior Vice President -- Chief October 21, 1997
CHARLES F. SCHUGART Financial Officer (Principal
Financial and Accounting Officer)
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</TABLE>
EXHIBIT 4.11
LOAN AGREEMENT
($60,000,000 REVOLVING LOAN FACILITY)
DATED AS OF OCTOBER _____, 1997
AMONG
INNOVATIVE VALVE TECHNOLOGIES, INC.,
AS BORROWER,
TEXAS COMMERCE BANK NATIONAL ASSOCIATION,
AS AGENT AND AS A LENDER,
AND
THE OTHER LENDERS NOW OR HEREAFTER
PARTIES HERETO
<PAGE>
TABLE OF CONTENTS
1. DEFINITIONS.................................................................1
1.1 CERTAIN DEFINED TERMS.................................................1
1.2 MISCELLANEOUS........................................................18
2. COMMITMENTS AND LOANS......................................................18
2.1 LOANS................................................................18
2.2 LETTERS OF CREDIT....................................................19
2.3 TERMINATIONS OR REDUCTIONS OF COMMITMENTS............................22
2.4 COMMITMENT FEES......................................................23
2.5 SEVERAL OBLIGATIONS..................................................23
2.6 NOTES................................................................23
2.7 USE OF PROCEEDS......................................................24
3. BORROWINGS, PAYMENTS, PREPAYMENTS AND INTEREST OPTIONS.....................24
3.1 BORROWINGS...........................................................24
3.2 PREPAYMENTS..........................................................24
3.3 INTEREST OPTIONS.....................................................25
3.4 CAPITAL ADEQUACY.....................................................29
3.5 LIMITATION ON CHARGES; SUBSTITUTE LENDERS; NON-DISCRIMINATION........29
4. PAYMENTS; PRO RATA TREATMENT; COMPUTATIONS, ETC............................30
4.1 PAYMENTS.............................................................30
4.2 PRO RATA TREATMENT...................................................32
4.3 CERTAIN ACTIONS, NOTICES, ETC........................................32
4.4 NON-RECEIPT OF FUNDS BY AGENT........................................33
4.5 SHARING OF PAYMENTS, ETC.............................................33
5. CONDITIONS PRECEDENT.......................................................34
5.1 INITIAL LOANS AND LETTERS OF CREDIT..................................34
5.2 ALL LOANS AND LETTERS OF CREDIT......................................35
6. REPRESENTATIONS AND WARRANTIES.............................................36
6.1 ORGANIZATION.........................................................36
6.2 FINANCIAL STATEMENTS.................................................36
6.3 ENFORCEABLE OBLIGATIONS; AUTHORIZATION...............................37
6.4 OTHER DEBT...........................................................37
6.5 LITIGATION...........................................................37
6.6 TITLE................................................................37
<PAGE>
6.7 TAXES................................................................37
6.8 REGULATIONS G, U AND X...............................................38
6.9 SUBSIDIARIES.........................................................38
6.10 NO UNTRUE OR MISLEADING STATEMENTS...................................38
6.11 ERISA................................................................38
6.12 INVESTMENT COMPANY ACT...............................................38
6.13 PUBLIC UTILITY HOLDING COMPANY ACT...................................38
6.14 SOLVENCY.............................................................38
6.15 FISCAL YEAR..........................................................39
6.16 COMPLIANCE...........................................................39
6.17 ENVIRONMENTAL MATTERS................................................39
7. AFFIRMATIVE COVENANTS......................................................39
7.1 TAXES, EXISTENCE, REGULATIONS, PROPERTY, ETC.........................39
7.2 FINANCIAL STATEMENTS AND INFORMATION.................................40
7.3 FINANCIAL TESTS......................................................41
7.4 INSPECTION...........................................................41
7.5 FURTHER ASSURANCES...................................................41
7.6 BOOKS AND RECORDS....................................................41
7.7 INSURANCE............................................................41
7.8 NOTICE OF CERTAIN MATTERS............................................42
7.9 ERISA INFORMATION AND COMPLIANCE.....................................42
8. NEGATIVE COVENANTS.........................................................43
8.1 BORROWED MONEY INDEBTEDNESS..........................................43
8.2 LIENS................................................................44
8.3 CONTINGENT LIABILITIES...............................................45
8.4 MERGERS AND CONSOLIDATIONS...........................................46
8.5 DISPOSITION OF ASSETS................................................46
8.6 REDEMPTION, DIVIDENDS AND DISTRIBUTIONS..............................46
8.7 NATURE OF BUSINESS...................................................46
8.8 TRANSACTIONS WITH RELATED PARTIES....................................46
8.9 LOANS AND INVESTMENTS................................................46
8.10 ORGANIZATIONAL DOCUMENTS.............................................47
8.11 UNFUNDED LIABILITIES.................................................47
8.12 CAPITAL EXPENDITURES.................................................47
8.13 ACQUISITIONS.........................................................47
8.14 SUBORDINATED INDEBTEDNESS............................................47
8.15 SUBSIDIARIES.........................................................48
9. DEFAULTS...................................................................48
9.1 EVENTS OF DEFAULT....................................................48
ii
<PAGE>
9.2 RIGHT OF SETOFF......................................................50
9.3 COLLATERAL ACCOUNT...................................................51
9.4 PRESERVATION OF SECURITY FOR UNMATURED REIMBURSEMENT OBLIGATIONS.....51
9.5 REMEDIES CUMULATIVE..................................................51
10. AGENT.....................................................................52
10.1 APPOINTMENT, POWERS AND IMMUNITIES..................................52
10.2 RELIANCE............................................................53
10.3 DEFAULTS............................................................53
10.4 MATERIAL WRITTEN NOTICES............................................53
10.5 RIGHTS AS A LENDER..................................................54
10.6 INDEMNIFICATION.....................................................54
10.7 NON-RELIANCE ON AGENT AND OTHER LENDERS.............................54
10.8 FAILURE TO ACT......................................................55
10.9 RESIGNATION OR REMOVAL OF AGENT.....................................55
10.10 NO PARTNERSHIP......................................................55
11. MISCELLANEOUS.............................................................56
11.1 WAIVER..............................................................56
11.2 NOTICES.............................................................56
11.3 EXPENSES, ETC.......................................................56
11.4 INDEMNIFICATION.....................................................57
11.5 AMENDMENTS, ETC.....................................................57
11.6 SUCCESSORS AND ASSIGNS..............................................58
11.7 LIMITATION OF INTEREST..............................................60
11.8 SURVIVAL............................................................61
11.9 CAPTIONS............................................................61
11.10 COUNTERPARTS........................................................61
11.11 GOVERNING LAW.......................................................61
11.12 SEVERABILITY........................................................62
11.13 TAX FORMS...........................................................62
11.14 CONFLICTS BETWEEN THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS.......62
11.15 DISCLOSURE TO OTHER PERSONS; CONFIDENTIALITY........................62
iii
<PAGE>
EXHIBITS
A -- Request for Extension of Credit
B -- Rate Designation Notice
C -- Note
D -- Assignment and Acceptance
E -- Compliance Certificate
F -- Subsidiaries as of the Effective Date
G -- Existing Borrowed Money Indebtedness
H -- Existing Liens
I -- Existing Investments
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<PAGE>
LOAN AGREEMENT
THIS LOAN AGREEMENT is made and entered into as of October _____, 1997
(the "EFFECTIVE DATE"), by and among INNOVATIVE VALVE TECHNOLOGIES, INC., a
Delaware corporation (together with its permitted successors, herein called the
"BORROWER"); each of the lenders which is or may from time to time become a
party hereto (individually, a "LENDER" and, collectively, the "LENDERS"), and
TEXAS COMMERCE BANK NATIONAL ASSOCIATION ("TCB"), a national banking
association, as agent for the Lenders (in such capacity, together with its
successors in such capacity, the "AGENT").
The parties hereto agree as follows:
1. DEFINITIONS.
1.1 CERTAIN DEFINED TERMS.
Unless a particular term, word or phrase is otherwise defined or the
context otherwise requires, capitalized terms, words and phrases used herein or
in the Loan Documents (as hereinafter defined) have the following meanings (all
definitions that are defined in this Agreement in the singular have the same
meanings when used in the plural and VICE VERSA):
ACCOUNTS, GENERAL INTANGIBLES, INVENTORY and EQUIPMENT shall have the
respective meanings assigned to them in the Uniform Commercial Code enacted in
the State of Texas in force on the Effective Date.
ADDITIONAL INTEREST means the aggregate of all amounts accrued or paid
pursuant to the Notes or any of the other Loan Documents (other than interest on
the Notes at the Stated Rate) which, under applicable laws, are or may be deemed
to constitute interest on the indebtedness evidenced by the Notes.
ADJUSTED LIBOR means, with respect to each Interest Period applicable
to a LIBOR Borrowing, a rate per annum equal to the quotient, expressed as a
percentage, of (a) LIBOR with respect to such Interest Period divided by (b)
1.0000 minus the Eurodollar Reserve Requirement in effect on the first day of
such Interest Period.
AFFILIATE means any Person controlling, controlled by or under common
control with any other Person. For purposes of this definition, "CONTROL"
(including "CONTROLLED BY" and "UNDER COMMON CONTROL WITH") means the
possession, directly or indirectly, of the power to direct or cause the
direction of the management and policies of such Person, whether through the
ownership of voting securities or otherwise.
AGREEMENT means this Loan Agreement, as it may from time to time be
amended, modified, restated or supplemented.
1
<PAGE>
ANNUAL FINANCIAL STATEMENTS means the annual financial statements of a
Person, including all notes thereto, which statements shall include a balance
sheet as of the end of such fiscal year and an income statement and a statement
of cash flows for such fiscal year, all setting forth in comparative form the
corresponding figures from the previous fiscal year, all prepared in conformity
with GAAP in all material respects, and accompanied by the opinion of
independent certified public accountants of recognized national standing, which
shall state that such financial statements present fairly in all material
respects the financial position of such Person and, if such Person has any
Subsidiaries, its consolidated Subsidiaries as of the date thereof and the
results of its operations for the period covered thereby in conformity with
GAAP. Such annual financial statements of Borrower shall be accompanied by a
certificate of such accountants that in making the appropriate audit and/or
investigation in connection with such report and opinion, such accountants did
not become aware of any Default relating to the financial tests set forth in
SECTION 7.3 hereof that had not been waived by Lenders or, if in the opinion of
such accountants any such Default exists, a description of the nature and status
thereof. To the extent required by Agent or the Majority Lenders, Annual
Financial Statements shall also include an unaudited consolidating balance sheet
and income statement for the applicable Person, in Proper Form, certified by the
chief financial officer or other authorized officer of such Person as true,
correct and complete in all material respects.
APPLICATIONS means all applications and agreements for Letters of Credit,
or similar instruments or agreements, in Proper Form, now or hereafter executed
by any Person in connection with any Letter of Credit now or hereafter issued or
to be issued under the terms hereof at the request of any Person. To the extent
that any Application contains provisions granting liens or security interests
not granted in the Loan Agreement or contains events of default waivers, and
cure periods (or fails to provide cure periods as provided in the Loan
Agreement) which are more restrictive than those contained in the Loan
Agreement, the provisions of the Loan Agreement shall control.
ASSIGNMENT AND ACCEPTANCE shall have the meaning ascribed to such term in
SECTION 11.6 hereof.
BANKRUPTCY CODE means the United States Bankruptcy Code, as amended, and
any successor statute.
BASE RATE means for any day a rate per annum equal to the lesser of (a)
the applicable Margin Percentage from time to time in effect plus the greater of
(1) the Prime Rate for that day or (2) the Federal Funds Rate for that day plus
1/2 of 1% or (b) the Ceiling Rate. If for any reason Agent shall have determined
(which determination shall create a rebuttable presumption as to the accuracy
thereof) that it is unable to ascertain the Federal Funds Rate for any reason,
including, without limitation, the inability or failure of Agent to obtain
sufficient quotations in accordance with the terms hereof (and in such event,
Agent shall furnish written evidence to Borrower showing how Agent made such
determination), the Base Rate shall, until the circumstances giving rise to such
inability no longer exist, be the lesser of (a) the applicable Margin Percentage
from time to time in effect plus the Prime Rate or (b) the Ceiling Rate.
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BASE RATE BORROWING means that portion of the principal balance of the
Loans at any time bearing interest at the Base Rate.
BORROWED MONEY INDEBTEDNESS means, with respect to any Person, without
duplication, (i) all obligations of such Person for borrowed money, (ii) all
obligations of such Person evidenced by bonds, debentures, notes or similar
instruments, (iii) all obligations of such Person under conditional sale or
other title retention agreements relating to Property purchased by such Person,
(iv) all obligations of such Person issued or assumed as the deferred purchase
price of property or services (excluding obligations of such Person to creditors
for raw materials, inventory, services and supplies and deferred payments for
services to employees and former employees incurred in the ordinary course of
such Person's business), (v) all capital lease obligations of such Person, (vi)
all obligations of others secured by any lien on property or assets owned or
acquired by such Person, whether or not the obligations secured thereby have
been assumed, (vii) Interest Rate Risk Indebtedness of such Person (to the
extent treated as Indebtedness under GAAP), (viii) all obligations of such
Person in respect of outstanding letters of credit issued for the account of
such Person and (ix) all guarantees of such Person of any of the foregoing.
BUSINESS DAY means any day other than a day on which commercial banks are
authorized or required to close in Houston, Texas.
CAPITAL EXPENDITURES means, with respect to any Person for any period,
expenditures in respect of fixed or capital assets by such Person, including
capital lease obligations incurred during such period (to the extent not already
included), which would be reflected as additions to Property, plant or equipment
on a balance sheet of such Person and its consolidated Subsidiaries, if any,
prepared in accordance with GAAP; but EXCLUDING expenditures during such period
for the repair or replacement of any fixed or capital asset which was destroyed
or damaged, in whole or in part, to the extent financed by the proceeds of an
insurance policy maintained by such Person. Capital Expenditures shall not
include Permitted Investments or the assets owned by any Person acquired by way
of a Permitted Investment or assets comprising substantially all of an entire
business which is acquired by the applicable Person.
CEILING RATE means, on any day, the maximum nonusurious rate of interest
permitted for that day by whichever of applicable federal or Texas (or any
jurisdiction whose usury laws are deemed to apply to the Notes or any other Loan
Documents despite the intention and desire of the parties to apply the usury
laws of the State of Texas) laws permits the higher interest rate, stated as a
rate per annum. On each day, if any, that Chapter 1D establishes the Ceiling
Rate, the Ceiling Rate shall be the "weekly rate ceiling" (as defined in ss.303
of the Texas Finance Code ) for that day. Agent may from time to time, as to
current and future balances, implement any other ceiling under Texas Finance
Code or Chapter 1D by notice to Borrower, if and to the extent permitted by
Texas Finance Code or Chapter 1D. Without notice to Borrower or any other person
or entity, the Ceiling Rate shall automatically fluctuate upward and downward as
and in the amount by which such maximum nonusurious rate of interest permitted
by applicable law fluctuates.
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CHANGE OF CONTROL means a change resulting when any Unrelated Person or
any Unrelated Persons (other than Philip Services Corp. or its Affiliates)
acting together which would constitute a Group together with any Affiliates or
Related Persons thereof (in each case also constituting Unrelated Persons) shall
at any time either (i) Beneficially Own more than 50% of the aggregate voting
power of all classes of Voting Stock of Borrower or (ii) succeed in having
sufficient of its or their nominees elected to the Board of Directors of
Borrower such that such nominees, when added to any existing directors remaining
on the Board of Directors of Borrower after such election who is an Affiliate or
Related Person of such Person or Group, shall constitute a majority of the Board
of Directors of Borrower. As used herein (a) "BENEFICIALLY OWN" means
"beneficially own" as defined in Rule 13d-3 of the Securities Exchange Act of
1934, as amended, or any successor provision thereto; PROVIDED, HOWEVER, that,
for purposes of this definition, a Person shall not be deemed to Beneficially
Own securities tendered pursuant to a tender or exchange offer made by or on
behalf of such Person or any of such Person's Affiliates until such tendered
securities are accepted for purchase or exchange; (b) "GROUP" means a "group"
for purposes of Section 13(d) of the Securities Exchange Act of 1934, as
amended; (c) "UNRELATED PERSON" means at any time any Person other than Borrower
or any Subsidiary of Borrower and other than any trust for any employee benefit
plan of Borrower or any Subsidiary of Borrower; (d) "RELATED PERSON" of any
Person shall mean any other Person owning (1) 5% or more of the outstanding
common stock of such Person or (2) 5% or more of the Voting Stock of such
Person; and (e) "VOTING STOCK" of any Person shall mean capital stock of such
Person which ordinarily has voting power for the election of directors (or
persons performing similar functions) of such Person, whether at all times or
only so long as no senior class of securities has such voting power by reason of
any contingency.
CHAPTER 1D means Chapter 1D of Title 79, Texas Rev. Civ. Stats. 1925, as
amended.
CODE means the Internal Revenue Code of 1986, as amended, as now or
hereafter in effect, together with all regulations, rulings and interpretations
thereof or thereunder by the Internal Revenue Service.
COLLATERAL means all Property, tangible or intangible, real, personal or
mixed, now or hereafter subject to the Security Documents.
COMMITMENT FEE PERCENTAGE means (i) on any day prior to January 1, 1998,
0.30% and (ii) on and after January 1, 1998, the applicable per annum percentage
set forth at the appropriate intersection in the table shown below, based on the
Debt to Pro Forma Consolidated EBITDA Ratio as of the last day of the most
recently ended fiscal quarter of Borrower calculated by Agent as soon as
practicable after receipt by Agent of all financial reports required under this
Agreement with respect to such fiscal quarter (including a Compliance
Certificate) (provided, however, that if the Commitment Fee Percentage is
increased as a result of the reported Debt to Pro Forma Consolidated EBITDA
Ratio, such increase shall be retroactive to the date that Borrower was
obligated to deliver such financial reports to Agent pursuant to the terms of
this Agreement and provided further, however, that if the Commitment Fee
Percentage is decreased as a result of the
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reported Debt to Pro Forma Consolidated EBITDA Ratio, and such financial reports
are delivered to Agent not more than ten (10) calendar days after the date
required to be delivered pursuant to the terms of this Agreement, such decrease
shall be retroactive to the date that Borrower was obligated to deliver such
financial reports to Agent pursuant to the terms of this Agreement):
DEBT TO PRO FORMA COMMITMENT
CONSOLIDATED EBITDA RATIO FEE PERCENTAGE
--------------------------- --------------
Greater than 2.50 0.40
Greater than 2.00 but
less than or equal to 2.50 0.375
Greater than 1.50 but
less than or equal to 2.00 0.35
Greater than 1.00 but
less than or equal to 1.50 0.30
Less than or equal to 1.00 0.25
COMPLIANCE CERTIFICATE shall have the meaning given to it in SECTION 7.2
hereof.
CONSOLIDATED EBITDA means, without duplication, for any period the
Consolidated Net Income of Borrower PLUS, to the extent deducted in calculating
Consolidated Net Income, depreciation, amortization, other non-cash items
(including special non-cash compensation expenses associated with the issuance
of stock to certain members of executive management), Interest Expense,
provisions for income taxes, management fees paid to Computerized Accounting &
Tax Services, Inc. for the fiscal 1997 year in an aggregate amount not to exceed
$360,000 and excess management fees charged to Subsidiaries of Borrower by
Synergistic Partners, Inc. for the calendar 1997 year (in an aggregate amount
not to exceed $500,000) as described in the Form S-1 for Borrower filed with the
Securities and Exchange Commission in October, 1997.
CONSOLIDATED NET INCOME means for any period for which the amount thereof
is to be determined the net income (or net losses) of Borrower and its
Subsidiaries on a consolidated basis as determined in accordance with GAAP after
deducting, to the extent included in computing said net income and without
duplication, (i) the income (or deficit) of any Person (other than a Subsidiary)
in which Borrower or any of its Subsidiaries has any ownership interest, except
to the extent that any such income has been actually received by Borrower or
such Subsidiary in the form of cash dividends or similar cash distribution, (ii)
any income (or deficit) of any other Person accrued prior to the date it becomes
a Subsidiary of Borrower or merges into or consolidates with Borrower or a
Subsidiary of Borrower, (iii) the gain or loss (net of any tax effect) resulting
from the sale of any capital assets (other than sales in the ordinary course of
business), (iv) any gains or losses or other income which is non-recurring or
extraordinary, (v) income resulting from the
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write-up of any assets, and (vi) any portion of the net income of any
Subsidiaries of Borrower which is not available for distribution.
CONTROLLED GROUP means all members of a controlled group of corporations
and all trades or businesses (whether or not incorporated) under common control
which, together with Borrower, are treated as a single employer under Section
414 of the Code.
CORPORATION means any corporation, limited liability company, partnership,
joint venture, joint stock association, business trust and other business
entity.
COVER for Letter of Credit Liabilities shall be effected by paying to
Agent immediately available funds, to be held by Agent in a collateral account
maintained by Agent at its Principal Office and collaterally assigned as
security for the financial accommodations extended pursuant to this Agreement
using documentation reasonably satisfactory to Agent, in the amount required by
any applicable provision hereof. Such amount shall be retained by Agent in such
collateral account until such time as in the case of the Cover being provided
pursuant to SECTIONS 2.2(A) or 9.3 hereof, the applicable Letter of Credit shall
have expired and the Reimbursement Obligations, if any, with respect thereto
shall have been fully satisfied; PROVIDED, HOWEVER, that at such time if a
Default or Event of Default has occurred and is continuing, Agent shall not be
required to release such amount in such collateral account until such Default or
Event of Default shall have been cured or waived.
DEBT TO PRO FORMA CONSOLIDATED EBITDA RATIO means, as of the end of any
fiscal quarter, the ratio of (a) Indebtedness as of such date to (b) Pro Forma
Consolidated EBITDA for the 12 months ending on such date.
DEFAULT means an Event of Default or an event which with notice or lapse
of time or both would, unless cured or waived, become an Event of Default.
DOLLARS and $ means lawful money of the United States of America.
ENVIRONMENTAL CLAIM means any third party (including Governmental
Authorities and employees) action, lawsuit, claim or proceeding (including
claims or proceedings at common law or under the Occupational Safety and Health
Act or similar laws relating to safety of employees) which seeks to impose
liability for (i) noise; (ii) pollution or contamination of the air, surface
water, ground water or land or the clean-up of such pollution or contamination;
(iii) solid, gaseous or liquid waste generation, handling, treatment, storage,
disposal or transportation; (iv) exposure to Hazardous Substances; (v) the
safety or health of employees or (vi) the manufacture, processing, distribution
in commerce or use of Hazardous Substances. An "ENVIRONMENTAL CLAIM" includes,
but is not limited to, a common law action, as well as a proceeding to issue,
modify or terminate an Environmental Permit, or to adopt or amend a regulation
to the extent that such a proceeding attempts to redress violations of an
applicable permit, license, or regulation as alleged by any Governmental
Authority.
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ENVIRONMENTAL LIABILITIES includes all liabilities arising from any
Environmental Claim, Environmental Permit or Requirement of Environmental Law
under any theory of recovery, at law or in equity, and whether based on
negligence, strict liability or otherwise, including but not limited to:
remedial, removal, response, abatement, investigative, monitoring, personal
injury and damage to property or injuries to persons, and any other related
costs, expenses, losses, damages, penalties, fines, liabilities and obligations,
and all costs and expenses necessary to cause the issuance, reissuance or
renewal of any Environmental Permit including reasonable attorneys' fees and
court costs.
ENVIRONMENTAL PERMIT means any permit, license, approval or other
authorization under any applicable Legal Requirement relating to pollution or
protection of health or the environment, including laws, regulations or other
requirements relating to emissions, discharges, releases or threatened releases
of pollutants, contaminants or hazardous substances or toxic materials or wastes
into ambient air, surface water, ground water or land, or otherwise relating to
the manufacture, processing, distribution, use, treatment, storage, disposal,
transport, or handling of pollutants, contaminants or Hazardous Substances.
ERISA means the Employee Retirement Income Security Act of 1974, as
amended from time to time, and all rules, regulations, rulings and
interpretations adopted by the Internal Revenue Service or the U.S. Department
of Labor thereunder.
EURODOLLAR RATE means for any day during an Interest Period for a LIBOR
Borrowing a rate per annum equal to the lesser of (a) the sum of (1) the
Adjusted LIBOR in effect on the first day of such Interest Period plus (2) the
applicable Margin Percentage in effect from time to time or (b) the Ceiling
Rate. Each Eurodollar Rate is subject to adjustments for reserves, insurance
assessments and other matters as provided for in SECTION 3.3 hereof.
EURODOLLAR RESERVE REQUIREMENT means, on any day, that percentage
(expressed as a decimal fraction and rounded, if necessary, to the next highest
one ten thousandth [.0001]) which is in effect on such day for determining all
reserve requirements (including, without limitation, basic, supplemental,
marginal and emergency reserves) applicable to "Eurocurrency liabilities," as
currently defined in Regulation D. Each determination of the Eurodollar Reserve
Requirement by Agent shall create a rebuttable presumption as to the accuracy
thereof, and may be computed using any reasonable averaging and attribution
method.
EVENT OF DEFAULT shall have the meaning assigned to it in SECTION 9
hereof.
FEDERAL FUNDS RATE means, for any day, a fluctuating interest rate per
annum equal for such day to the weighted average of the rates on overnight
Federal funds transactions with members of the Federal Reserve System arranged
by Federal funds brokers, as published for such day (or, if such day is not a
Business Day, for the next preceding Business Day) by the Federal Reserve Bank
of New York, or, if such rate is not so published for any such day which is a
Business Day, the average of the quotations for such day on such transactions
received by Agent
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from three Federal funds brokers of recognized standing selected by Agent in its
sole and absolute discretion.
FINANCING STATEMENTS means all such Uniform Commercial Code financing
statements as Agent shall reasonably require, in Proper Form, duly executed by
Borrower (or any other applicable Obligor) to give notice of and to perfect or
continue perfection of Agent's Liens in any applicable Collateral, as any of the
foregoing may from time to time be amended, modified, supplemented or restated.
FIXED CHARGE COVERAGE RATIO means, as of the end of any fiscal quarter,
the ratio of (a) Consolidated EBITDA for the 12 months ending on such day LESS
provisions for income taxes to (b) Fixed Charges for such 12-month period. To
the extent any applicable Subsidiary of Borrower shall have been acquired during
such 12-month period, the components of the Fixed Charge Coverage Ratio
attributable to such Subsidiary shall be determined on an annualized basis,
using the financial information available for such Subsidiary since its
acquisition by the Borrower.
FIXED CHARGES means, for any period for which the amount thereof is to be
determined, the sum of current maturities of long term debt as of the date that
"Fixed Charges" are required to be calculated, Interest Expenses and Capital
Expenditures.
FOUNDING COMPANIES means The Safe Seal Company, Inc., a Texas corporation,
Harley Industries, Inc., a California corporation, Valve Repair of South
Carolina, Inc., a South Carolina corporation, Spinsafe Corporation, a Texas
corporation, The Safe Seal Company (Canada), Inc., a corporation organized under
the laws of the Province of Ontario, Canada, Plant Specialties, Inc., a
Louisiana corporation, GSV, Inc., a Florida corporation, Puget Investments,
Inc., a Washington corporation, Steam Supply & Rubber Co., Inc., a Washington
corporation, Flickinger Company, a Washington corporation, Flickinger-Benecia,
Inc., a Washington corporation, Industrial Controls & Equipment, Inc., a
Pennsylvania corporation, Valve Actuation & Repair Company, Inc., a West
Virginia corporation, Rickco Acquisition, Inc. d/b/a BAS Technical Services
Inc., a West Virginia corporation, BAS Technical Employment Placement Company, a
West Virginia corporation, Southern Valve Service, Inc., an Alabama corporation,
and 55 Leasing and Sales Company, Inc., an Alabama corporation.
FUNDING LOSS means, with respect to (a) Borrower's payment of principal of
a LIBOR Borrowing on a day other than the last day of the applicable Interest
Period; (b) Borrower's failure to borrow a LIBOR Borrowing on the date specified
by Borrower; (c) Borrower's failure to make any prepayment of the Loans (other
than Base Rate Borrowings) on the date specified by Borrower, or (d) any
cessation of a Eurodollar Rate to apply to the Loans or any part thereof
pursuant to SECTION 3.3, in each case whether voluntary or involuntary, any
loss, expense, penalty, premium or liability actually incurred by any Lender
(including but not limited to any loss or expense incurred by reason of the
liquidation or reemployment of deposits or other funds acquired by any Lender to
fund or maintain a Loan), but excluding loss of margin or profit for the period
after such payment or failure to borrow or prepay and excluding losses resulting
from the gross negligence or willful misconduct of the applicable Lender.
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GAAP means, as to a particular Person, such accounting practice as, in the
opinion of independent certified public accountants of recognized national
standing regularly retained by such Person, conforms at the time to generally
accepted accounting principles, consistently applied for all periods after the
Effective Date so as to present fairly the financial condition, and results of
operations and cash flows, of such Person. If any change in any accounting
principle or practice is required by the Financial Accounting Standards Board,
all reports and financial statements required hereunder may be prepared in
accordance with such change so long as Borrower provides to Agent such
disclosures of the impact of such change as Agent may reasonably require. No
such change in any accounting principle or practice shall, in itself, cause a
Default or Event of Default hereunder (but Borrower, Agent and Lenders shall
negotiate in good faith to replace any financial covenants hereunder to the
extent such financial covenants are affected by such change in accounting
principle or practice).
GOVERNMENTAL AUTHORITY means any foreign governmental authority, the
United States of America, any State of the United States, and any political
subdivision of any of the foregoing, and any central bank, agency, department,
commission, board, bureau, court or other tribunal having jurisdiction over
Agent, any Lender, any Obligor or their respective Property.
GUARANTIES means, collectively, (i) the Guaranties dated concurrently
herewith executed by each of the current Subsidiaries of Borrower in favor of
Agent, for the benefit of Lenders, and (ii) any and all other guaranties
hereafter executed in favor of Agent, for the benefit of Lenders, relating to
the Obligations, as any of them may from time to time be amended, modified,
restated or supplemented.
HAZARDOUS SUBSTANCE means petroleum products, and any hazardous or toxic
waste or substance defined or regulated as such from time to time by any law,
rule, regulation or order described in the definition of "Requirements of
Environmental Law".
INDEBTEDNESS means, for any Person, (i) all obligations of such Person for
Borrowed Money Indebtedness or which has been incurred in connection with the
acquisition of property and (ii) preferred stock having a mandatory redemption
prior to the maturity of the Obligations. Earnouts shall not be treated as
Indebtedness except to the extent required under GAAP.
INTEREST COVERAGE RATIO means, as of any day, the ratio of (a)
Consolidated EBITDA for the 12 months ending on the last day of the immediately
preceding calendar month to (b) Interest Expense for such period. To the extent
any applicable Subsidiary of Borrower shall have been acquired during such
12-month period, the components of the Interest Coverage Ratio attributable to
such Subsidiary shall be determined on an annualized basis, using the financial
information available for such Subsidiary since its acquisition by the Borrower.
INTEREST EXPENSE means, for any Person, the sum of (i) all interest on
Indebtedness paid or payable (including the portion of rents payable under
capital leases allocable to interest) plus (ii) all debt discount and expense
amortized or required to be amortized during such period. "Interest Expense"
shall not include fees paid to Philip Services Corp. (or its predecessors) as
consideration
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for guaranties provided with respect to Indebtedness of Borrower or any of its
Subsidiaries (or their respective predecessors).
INTEREST OPTIONS means the Base Rate and each Eurodollar Rate, and
"INTEREST OPTION" means any of them.
INTEREST PAYMENT DATES means (a) FOR BASE RATE BORROWINGS, January 1, 1998
and the first Business Day following each March 31, June 30, September 30 and
December 31 thereafter prior to the Revolving Loan Maturity Date and the
Revolving Loan Maturity Date; and (b) FOR LIBOR BORROWINGS, the end of the
applicable Interest Period (and if such Interest Period exceeds three months'
duration, quarterly, commencing on the first quarterly anniversary of the first
day of such Interest Period) and the Revolving Loan Maturity Date.
INTEREST PERIOD means, for each LIBOR Borrowing, a period commencing on
the date such LIBOR Borrowing began and ending on the numerically corresponding
day which is, subject to availability as set forth in SECTION 3.3(C)(III), 1, 2,
3 or 6 months thereafter, as Borrower shall elect in accordance herewith;
PROVIDED, (1) unless Agent shall otherwise consent, no Interest Period with
respect to a LIBOR Borrowing shall commence on a date earlier than three (3)
Business Days after this Agreement shall have been fully executed; (2) any
Interest Period with respect to a LIBOR Borrowing which would otherwise end on a
day which is not a LIBOR Business Day shall be extended to the next succeeding
LIBOR Business Day, unless such LIBOR Business Day falls in another calendar
month, in which case such Interest Period shall end on the next preceding LIBOR
Business Day; (3) any Interest Period with respect to a LIBOR Borrowing which
begins on the last LIBOR Business Day of a calendar month (or on a day for which
there is no numerically corresponding day in the calendar month at the end of
such Interest Period) shall end on the last LIBOR Business Day of the
appropriate calendar month; (4) no Interest Period for a Loan shall ever extend
beyond the Revolving Loan Maturity Date, and (5) Interest Periods shall be
selected by Borrower in such a manner that the Interest Period with respect to
any portion of the Loans which shall become due shall not extend beyond such due
date.
INTEREST RATE RISK AGREEMENT means an interest rate swap agreement,
interest rate cap agreement, interest rate collar agreement or similar
arrangement entered into by Borrower for the purpose of reducing Borrower's
exposure to interest rate fluctuations and not for speculative purposes,
approved in writing by Agent (such approval not to be unreasonably withheld), as
it may from time to time be amended, modified, restated or supplemented.
INTEREST RATE RISK INDEBTEDNESS means all obligations and Indebtedness of
Borrower with respect to the program for the hedging of interest rate risk
provided for in any Interest Rate Risk Agreement.
INVESTMENT means the purchase or other acquisition of any securities or
Indebtedness of, or the making of any loan, advance, transfer of Property (other
than transfers in the ordinary course of business) or capital contribution to,
or the incurring of any liability (other than trade accounts payable arising in
the ordinary course of business), contingently or otherwise, in respect
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of the Indebtedness of, any Person; PROVIDED, HOWEVER, that the purchase by
Borrower or any of its Subsidiaries of any Indebtedness of Borrower or any of
its Subsidiaries for the purpose of retiring such Indebtedness shall not be
deemed to be an Investment.
ISSUER means the issuer (or, where applicable, each issuer) of a Letter of
Credit under this Agreement.
LEGAL REQUIREMENT means any law, statute, ordinance, decree, requirement,
order, judgment, rule, or regulation (or interpretation of any of the foregoing)
of, and the terms of any license or permit issued by, any Governmental
Authority, whether presently existing or arising in the future.
LETTER OF CREDIT shall have the meaning assigned to such term in SECTION
2.2 hereof.
LETTER OF CREDIT LIABILITIES means, at any time and in respect of any
Letter of Credit, the sum of (i) the amount available for drawings under such
Letter of Credit PLUS (ii) the aggregate unpaid amount of all Reimbursement
Obligations at the time due and payable in respect of previous drawings made
under such Letter of Credit. For the purpose of determining at any time the
amount described in clause (i), in the case of any Letter of Credit payable in a
currency other than Dollars, such amount shall be converted by Agent to Dollars
by any reasonable method, and such converted amount shall be conclusive and
binding, absent manifest error.
LIBOR means, for each Interest Period for any LIBOR Borrowing, the rate
per annum (rounded upwards, if necessary, to the nearest 1/100th of 1%)
appearing on Telerate Page 3750 (or if such Telerate Page shall not be
available, any successor or similar service as may be selected by Agent and
Borrower as the London interbank rate for deposits in United States dollars) as
of 10:00 a.m., Houston, Texas time (or as soon thereafter as practicable) on the
day two LIBOR Business Days prior to the first day of such Interest Period for
deposits in United States dollars having a term comparable to such Interest
Period and in an amount comparable to the principal amount of the LIBOR
Borrowing to which such Interest Period relates. If none of such Telerate Page
3750 nor any successor or similar service is available, then "LIBOR" shall mean,
with respect to any Interest Period for any applicable LIBOR Borrowing, the rate
of interest per annum, rounded upwards, if necessary, to the nearest 1/100th of
1%, quoted by Agent at or before 10:00 a.m., Houston, Texas time (or as soon
thereafter as practicable), on the date two LIBOR Business Days before the first
day of such Interest Period, to be the arithmetic average of the prevailing
rates per annum at the time of determination and in accordance with the then
existing practice in the applicable market, for the offering to Agent by one or
more prime banks selected by Agent in its sole discretion, in the London
interbank market, of deposits in United States dollars for delivery on the first
day of such Interest Period and having a maturity equal to the length of such
Interest Period and in an amount equal (or as nearly equal as may be) to the
LIBOR Borrowing to which such Interest Period relates. Each determination by
Agent of LIBOR shall create a rebuttable presumption as to the accuracy thereof,
and may be computed using any reasonable averaging and attribution method.
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LIBOR BORROWING means each portion of the principal balance of the Loans
at any time bearing interest at a Eurodollar Rate.
LIBOR BUSINESS DAY means a Business Day on which transactions in United
States dollar deposits between lenders may be carried on in the London interbank
market.
LIEN means any mortgage, pledge, charge, encumbrance, security interest,
collateral assignment or other lien or restriction of any kind, whether based on
common law, constitutional provision, statute or contract, and shall include
reservations, exceptions, encroachments, easements, rights of way, covenants,
conditions, restrictions and other title exceptions.
LOANS means the loans provided for by SECTION 2.1 hereof.
LOAN DOCUMENTS means, collectively, this Agreement, the Notes, the
Guaranties, all Applications, the Notice of Entire Agreement, all instruments,
certificates and agreements now or hereafter executed or delivered by any
Obligor to Agent or any Lender pursuant to any of the foregoing or in connection
with the Obligations or any commitment regarding the Obligations, and all
amendments, modifications, renewals, extensions, increases and rearrangements
of, and substitutions for, any of the foregoing.
MAJORITY LENDERS means Lenders having greater than 60% of the Revolving
Loan Commitments or, if the Revolving Loan Commitments are terminated, Lenders
having greater than 60% of the outstanding Loans.
MARGIN PERCENTAGE means, on any day prior to January 1, 1998, 0% with
respect to Base Rate Borrowings and 1.25% with respect to LIBOR Borrowings and
on and after January 1, 1998, the applicable per annum percentage set forth at
the appropriate intersection in the table shown below, based on the Debt to Pro
Forma Consolidated EBITDA Ratio as of the last day of the most recently ended
fiscal quarter of Borrower calculated by Agent as soon as practicable after
receipt by Agent of all financial reports required under this Agreement with
respect to such fiscal quarter (including a Compliance Certificate) (provided,
however, that if the Margin Percentage is increased as a result of the reported
Debt to Pro Forma Consolidated EBITDA Ratio, such increase shall be retroactive
to the date that Borrower was obligated to deliver such financial reports to
Agent pursuant to the terms of this Agreement and provided further, however,
that if the Margin Percentage is decreased as a result of the reported Debt to
Pro Forma Consolidated EBITDA Ratio, and such financial reports are delivered to
Agent not more than ten (10) calendar days after the date required to be
delivered pursuant to the terms of this Agreement, such decrease shall be
retroactive to the date that Borrower was obligated to deliver such financial
reports to Agent pursuant to the terms of this Agreement):
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DEBT TO PRO FORMA
CONSOLIDATED EBITDA RATIO LIBOR BORROWINGS BASE RATE BORROWINGS
PERCENTAGE MARGIN PERCENTAGE MARGIN
------------------------- ----------------- --------------------
Greater than 2.50 2.00 0.50
Greater than 2.00 but
less than or equal to 2.50 1.75 0.25
Greater than 1.50 but
less than or equal to 2.00 1.50 0.00
Greater than 1.00 but
less than or equal to 1.50 1.25 0.00
Less than or equal to 1.00 1.00 0.00
MATERIAL ADVERSE EFFECT means relative to any occurrence of whatever
nature (including any adverse determination in any litigation, arbitration or
governmental investigation or proceeding), resulting in (i) a material adverse
effect on the financial condition, business, operations, or assets of Borrower
and its Subsidiaries, on a consolidated basis, from those reflected in the
financial statements furnished to Agent referred to in SECTION 6.2 hereof or
from the facts represented or warranted in this Agreement or any other Loan
Document, (ii) a material impairment of the ability of Borrower and its
Subsidiaries, on a consolidated basis, to perform their obligations under the
Loan Documents or (iii) a material impairment of the validity or enforceability
of the Loan Documents the result of which is a material adverse effect on the
ability of Lenders to collect the Obligations when due.
MONTHLY FINANCIAL STATEMENTS means the monthly financial statements of a
Person, which statements shall include a balance sheet as of the end of such
fiscal month, an income statement for the period ended on such fiscal month and
for the fiscal year to date and a statement of cash flows for the fiscal year to
date, subject to normal year-end adjustments, prepared in accordance with GAAP
in all material respects except that such statements are condensed and exclude
detailed footnote disclosures and certified by the chief financial officer or
other authorized officer of such Person as fairly presenting, in all material
respects, the financial position of such person as of such date. Monthly
Financial Statements prepared as of the last day of a March, June or September
shall set forth in comparative form the corresponding figures as of the end of
and for the corresponding fiscal quarter of the preceding year (except for cash
flow statements, which will be year to date comparisons). To the extent required
by Agent or the Majority Lenders, Monthly Financial Statements shall also
include an unaudited consolidating balance sheet and income statement for the
applicable Person, in Proper Form, certified by the chief financial officer or
other authorized officer of such Person as true, correct and complete in all
material respects.
NOTES shall have the meaning assigned to such term in SECTION 2.6 hereof.
NOTICE OF ENTIRE AGREEMENT means a notice of entire agreement, in Proper
Form, executed by Borrower, each other Obligor and Agent, as the same may from
time to time be amended, modified, supplemented or restated.
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OBLIGATIONS means, as at any date of determination thereof, the sum of the
following: (i) the aggregate principal amount of Loans outstanding hereunder on
such date, PLUS (ii) the aggregate amount of the outstanding Letter of Credit
Liabilities hereunder on such date, PLUS (iii) all other outstanding
liabilities, obligations and indebtedness of any Obligor under any Loan Document
on such date.
OBLIGORS means Borrower, each Person (other than Agent or a Lender) now or
hereafter executing a Guaranty and each Subsidiary of Borrower.
ORGANIZATIONAL DOCUMENTS means, with respect to a corporation, the
certificate of incorporation, articles of incorporation and bylaws of such
corporation; with respect to a partnership, the partnership agreement
establishing such partnership and with respect to a trust, the instrument
establishing such trust; in each case including any and all modifications
thereof as of the date of the Loan Document referring to such Organizational
Document and any and all future modifications thereof.
PAST DUE RATE means, on any day, a rate per annum equal to the lesser of
(i) the Ceiling Rate for that day or (ii) the Base Rate plus five percent (5%).
PBGC means the Pension Benefit Guaranty Corporation or any entity
succeeding to any or all of its functions under ERISA.
PERMITTED INVESTMENT means Investments permitted under the terms of
SECTION 8.9 hereof.
PERMITTED LIENS means Liens permitted under the provisions of SECTION 8.2
hereof.
PERSON means any individual, Corporation, trust, unincorporated
organization, Governmental Authority or any other form of entity.
PLAN means an employee pension benefit plan which is covered by Title IV
of ERISA or subject to the minimum funding standards under Section 412 of the
Code and is either (a) maintained by Borrower or any member of the Controlled
Group for employees of Borrower or any member of the Controlled Group or (b)
maintained pursuant to a collective bargaining agreement or any other
arrangement under which more than one employer makes contributions and to which
Borrower or any member of the Controlled Group is then making or accruing an
obligation to make contributions or has within the preceding five plan years
made contributions.
PRIME RATE means, on any day, the prime rate for that day as determined
from time to time by TCB. The Prime Rate is a reference rate and does not
necessarily represent the lowest or best rate or a favored rate, and TCB, Agent
and each Lender disclaims any statement, representation or warranty to the
contrary. TCB, Agent or any Lender may make commercial loans or other loans at
rates of interest at, above or below the Prime Rate.
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PRINCIPAL OFFICE means the principal office of Agent, presently located at
712 Main Street, Houston, Harris County, Texas 77002.
PRO FORMA CONSOLIDATED EBITDA means, for any period for which the amount
thereof is to be determined, Consolidated EBITDA of Borrower plus (or minus),
without duplication, the allocable share of Consolidated EBITDA, including (i)
such adjustments, on a pooling-of-interest basis, necessary to present on a pro
forma basis, for such period of any Person acquired during such period
(calculated as if such Person had been a Subsidiary for all of such period) and
with respect to which Agent and Lenders have been provided with Annual Financial
Statements for the most recently ended fiscal year of such Person, (ii)
adjustments approved by Agent and the Majority Lenders for compensation of
former owners of any Person acquired during such period in excess of
compensation that will be paid for similar management following the applicable
acquisition and (iii) other pro forma adjustments in accordance with rules and
regulations of the Securities and Exchange Commission approved by Agent and the
Majority Lenders. Borrower shall furnish to Agent supporting calculations for
Pro Forma Consolidated EBITDA and such other information as Agent may reasonably
request to determine the accuracy of such calculation.
PROPER FORM means in form reasonably satisfactory to Agent.
PROPERTY means any interest in any kind of property or asset, whether
real, personal or mixed, tangible or intangible.
QUARTERLY DATES means the last day of each March, June, September and
December, PROVIDED that if any such date is not a Business Day, then the
relevant Quarterly Date shall be the next succeeding Business Day.
RATE DESIGNATION DATE means that Business Day which is (a) in the case of
Base Rate Borrowings, 11:00 a.m., Houston, Texas time, on the date of such
borrowing and (b) in the case of LIBOR Borrowings, 11:00 a.m., Houston, Texas
time, on the date three LIBOR Business Days preceding the first day of any
proposed Interest Period.
RATE DESIGNATION NOTICE means a written notice substantially in the form
of EXHIBIT B.
REGULATION D means Regulation D of the Board of Governors of the Federal
Reserve System from time to time in effect and includes any successor or other
regulation relating to reserve requirements applicable to member banks of the
Federal Reserve System.
REGULATORY CHANGE means with respect to any Lender, any change on or after
the date of this Agreement in any Legal Requirement (including, without
limitation, Regulation D) or the adoption or making on or after such date of any
interpretation, directive or request applying to a class of lenders including
such Lender under any Legal Requirements (whether or not having the force of
law) by any Governmental Authority.
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REIMBURSEMENT OBLIGATIONS means, as at any date, the obligations of
Borrower then outstanding, or which may thereafter arise, in respect of Letters
of Credit under this Agreement, to reimburse the applicable Issuers for the
amount paid by such Issuers in respect of any drawing under such Letters of
Credit, which obligations shall at all times be payable in Dollars
notwithstanding any such Letter of Credit being payable in a currency other than
Dollars.
REQUEST FOR EXTENSION OF CREDIT means a request for extension of credit
duly executed by the chief executive officer, chief financial officer, any vice
president or treasurer of Borrower or any other officer of Borrower duly
authorized in writing by Borrower, appropriately completed and substantially in
the form of EXHIBIT A attached hereto.
REQUIREMENTS OF ENVIRONMENTAL LAW means all requirements imposed by any
law (including for example and without limitation The Resource Conservation and
Recovery Act and The Comprehensive Environmental Response, Compensation, and
Liability Act), rule, regulation, or order of any federal, state or local
executive, legislative, judicial, regulatory or administrative agency, board or
authority in effect at the applicable time which relate to (i) noise; (ii)
pollution, protection or clean-up of the air, surface water, ground water or
land; (iii) solid, gaseous or liquid waste generation, treatment, storage,
disposal or transportation; (iv) exposure to Hazardous Substances; (v) the
safety or health of employees or (vi) regulation of the manufacture, processing,
distribution in commerce, use, discharge or storage of Hazardous Substances.
REVOLVING LOAN AVAILABILITY PERIOD means, for each Revolving Loan Lender,
the period from and including the Effective Date to (but not including) the
Revolving Loan Termination Date.
REVOLVING LOAN LENDER means each Lender with (i) prior to the Revolving
Loan Termination Date, a Revolving Loan Commitment and (ii) on and after the
Revolving Loan Termination Date, any outstanding Revolving Loan Obligations.
REVOLVING LOAN COMMITMENT means, as to any Lender, the obligation, if any,
of such Lender to make Loans and incur or participate in Letter of Credit
Liabilities in an aggregate principal amount at any one time outstanding up to
(but not exceeding) the amount, if any, set forth opposite such Lender's name on
the signature pages hereof under the caption "Revolving Loan Commitment", or
otherwise provided for in an Assignment and Acceptance Agreement (as the same
may be reduced from time to time pursuant to SECTION 2.3 hereof).
REVOLVING LOAN COMMITMENT PERCENTAGE means, as to any Revolving Loan
Lender, the percentage equivalent of a fraction the numerator of which is the
amount of such Lender's Revolving Loan Commitment and the denominator of which
is the aggregate amount of the Revolving Loan Commitments of all Lenders.
REVOLVING LOAN MATURITY DATE means the maturity of the Notes, September
30, 2000. Upon written request from Borrower at any time after February 28, 1999
but prior to May 31, 2000 (and thereafter annually within the same three month
period), Agent shall make request on
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the Lenders for approval to a one (1) year extension of the Revolving Loan
Maturity Date; PROVIDED, HOWEVER, that no such extension shall be effective
without the unanimous written consent of the Lenders, which may be given or
denied in their sole discretion, with or without cause.
REVOLVING LOAN OBLIGATIONS means, as at any date of determination thereof,
the sum of the following (determined without duplication): (i) the aggregate
principal amount of Loans outstanding hereunder PLUS (ii) the aggregate amount
of the Letter of Credit Liabilities hereunder.
REVOLVING LOAN TERMINATION DATE means the earlier of (a) the Revolving
Loan Maturity Date or (b) the date specified by Agent in accordance with SECTION
9.1 hereof.
SECRETARY'S CERTIFICATE means a certificate, in Proper Form, of the
Secretary or an Assistant Secretary of a corporation as to (a) the resolutions
of the Board of Directors of such corporation authorizing the execution,
delivery and performance of the documents to be executed by such corporation;
(b) the incumbency and signature of the officer of such corporation executing
such documents on behalf of such corporation, and (c) the Organizational
Documents of such corporation.
SECURITY AGREEMENTS means (i) security agreements, each in Proper Form,
executed or to be executed in favor of Agent, securing the Obligations, covering
all of the issued and outstanding equity interests in any Subsidiary of Borrower
(other than non-voting preferred stock of Puget Investments, Inc. outstanding as
of the Effective Date) and (ii) security agreements, each in Proper Form,
executed in favor of Agent, securing the Obligations, covering all of the
Accounts and Inventory of Borrower and its Subsidiaries, as the same may from
time to time be amended, modified, restated or supplemented.
SECURITY DOCUMENTS means, collectively, the Security Agreements and any
and all security documents now or hereafter executed and delivered by any
Obligor to secure all or any part of the Obligations, as any of them may from
time to time be amended, modified, restated or supplemented.
STATED RATE means the effective weighted per annum rate of interest
applicable to the Loans; PROVIDED, that if on any day such rate shall exceed the
Ceiling Rate for that day, the Stated Rate shall be fixed at the Ceiling Rate on
that day and on each day thereafter until the total amount of interest accrued
at the Stated Rate on the unpaid principal balances of the Notes plus the
Additional Interest equals the total amount of interest which would have accrued
if there had been no Ceiling Rate. If the Notes mature (or are prepaid) before
such equality is achieved, then, in addition to the unpaid principal and accrued
interest then owing pursuant to the other provisions of the Loan Documents,
Borrower promises to pay on demand to the order of the holder of each Note
interest in an amount equal to the excess (if any) of (a) the lesser of (i) the
total interest which would have accrued on such Note if the Stated Rate had been
defined as equal to the Ceiling Rate from time to time in effect and (ii) the
total interest which would have accrued on such Note if the Stated Rate were not
so prohibited from exceeding the Ceiling Rate, over (b) the total
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interest actually accrued on such Note to such maturity (or prepayment) date.
Without notice to Borrower or any other Person, the Stated Rate shall
automatically fluctuate upward and downward in accordance with the provisions of
this definition.
STOCKHOLDERS' EQUITY means the consolidated stockholders' equity of
Borrower and its Subsidiaries determined in accordance with GAAP.
SUBORDINATED INDEBTEDNESS means all Indebtedness of a Person which has
been subordinated on terms and conditions satisfactory to the Majority Lenders,
in their sole discretion, to all Indebtedness of such Person to Lenders, whether
now existing or hereafter incurred. Indebtedness shall not be considered as
"Subordinated Indebtedness" unless and until Agent shall have received copies of
the documentation evidencing or relating to such Indebtedness together with a
subordination agreement, in Proper Form, duly executed by the holder or holders
of such Indebtedness and evidencing the terms and conditions of subordination
required by the Majority Lenders.
SUBSIDIARY means, as to a particular parent Corporation, any Corporation
of which more than 50% of the indicia of equity rights (whether outstanding
capital stock or otherwise) is at the time directly or indirectly owned by, such
parent Corporation.
TAXES shall have the meaning ascribed to it in SECTION 4.1(D).
TEXAS CREDIT CODE means Title 79, Texas Revised Civil Statutes, 1925, as
amended.
UNFUNDED LIABILITIES means, with respect to any Plan, at any time, the
amount (if any) by which (a) the present value of all benefits under such Plan
exceeds (b) the fair market value of all Plan assets allocable to such benefits,
all determined as of the then most recent actuarial valuation report for such
Plan, but only to the extent that such excess represents a potential liability
of any member of the Controlled Group to the PBGC or a Plan under Title IV of
ERISA. With respect to multi-employer Plans, the term "Unfunded Liabilities"
shall also include asserted withdrawal liability under Section 4201 of ERISA to
all multi-employer Plans to which Borrower or any member of a Controlled Group
for employees of Borrower contributes in the event of complete withdrawal from
such plans.
1.2 MISCELLANEOUS. The words "HEREOF," "HEREIN," and "HEREUNDER" and words
of similar import when used in this Agreement shall refer to this Agreement as a
whole and not any particular provision of this Agreement. The term "ANNUALIZED"
as used herein shall mean the multiplication of the applicable amount for any
given period by a fraction, the numerator of which is 365 and the denominator of
which is the number of days elapsed in such period.
2. COMMITMENTS AND LOANS.
2.1 LOANS. Each Lender severally agrees, subject to all of the terms and
conditions of this Agreement (including, without limitation, SECTIONS 5.1 AND
5.2 hereof), to make Loans to
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Borrower, from time to time on or after the Effective Date and during the
Revolving Loan Availability Period, in an aggregate principal amount at any one
time outstanding (including its Revolving Loan Commitment Percentage of all
Letter of Credit Liabilities at such time) up to but not exceeding such Lender's
Revolving Loan Commitment Percentage of the aggregate of the Revolving Loan
Commitments. Subject to the conditions in this Agreement, any such Loan repaid
prior to the Revolving Loan Termination Date may be reborrowed pursuant to the
terms of this Agreement; PROVIDED, that any and all such Loans shall be due and
payable in full at the end of the Revolving Loan Availability Period. Borrower,
Agent and the Lenders agree pursuant to Chapter 346 ("CHAPTER 346") of the Texas
Finance Code, that Chapter 346 (which relates to open-end line of credit
revolving loan accounts) shall not apply to this Agreement, the Revolving Notes
or any Revolving Loan Obligation and that neither the Revolving Notes nor any
revolving Loan Obligation shall be governed by Chapter 346 or subject to its
provisions in any manner whatsoever. The aggregate of all Loans to be made by
the Lenders in connection with a particular borrowing shall be equal to an
integral multiple of $250,000.
2.2 LETTERS OF CREDIT.
(a) LETTERS OF CREDIT. Subject to the terms and conditions of this
Agreement, and on the condition that aggregate Letter of Credit Liabilities
shall never exceed $5,000,000, (i) Borrower shall have the right to, in addition
to Loans provided for in SECTION 2.1 hereof, utilize the Revolving Loan
Commitments from time to time during the Revolving Loan Availability Period by
obtaining the issuance of standby letters of credit for the account of Borrower
if Borrower shall so request in the notice referred to in SECTION 2.2(B)(I)
hereof (such standby letters of credit as any of them may be amended,
supplemented, extended or confirmed from time to time, being herein collectively
called the "LETTERS OF CREDIT)" and (ii) TCB agrees to issue such Letters of
Credit. Upon the date of the issuance of a Letter of Credit, the applicable
Issuer shall be deemed, without further action by any party hereto, to have sold
to each Revolving Loan Lender, and each such Lender shall be deemed, without
further action by any party hereto, to have purchased from the applicable
Issuer, a participation, to the extent of such Lender's Revolving Loan
Commitment Percentage, in such Letter of Credit and the related Letter of Credit
Liabilities, which participation shall terminate on the earlier of the
expiration date of such Letter of Credit or the Revolving Loan Termination Date.
No Letter of Credit shall have an expiration date later than one year from date
of issuance. Any Letter of Credit that shall have an expiration date after the
end of the Revolving Loan Availability Period shall be subject to Cover or
backed by a standby letter of credit in form and substance, and issued by a
Person, acceptable to Agent in its sole discretion. TCB or, with the prior
approval of Borrower, Agent and the applicable Lender, another Lender shall be
the Issuer of each Letter of Credit.
(b) ADDITIONAL PROVISIONS. The following additional provisions shall apply
to each Letter of Credit:
(i) Borrower shall give Agent notice requesting each issuance of a
Letter of Credit hereunder as provided in SECTION 4.3 hereof and shall
furnish such additional information regarding such transaction as Agent
may reasonably request. Upon receipt
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of such notice, Agent shall promptly notify each Revolving Loan Lender of
the contents thereof and of such Lender's Revolving Loan Commitment
Percentage of the amount of such proposed Letter of Credit.
(ii) No Letter of Credit may be issued if after giving effect
thereto the sum of (A) the aggregate outstanding principal amount of Loans
plus (B) the aggregate Letter of Credit Liabilities would exceed the
aggregate of the Revolving Loan Commitments. On each day during the period
commencing with the issuance of any Letter of Credit and until such Letter
of Credit shall have expired or been terminated, the Revolving Loan
Commitment of each Revolving Loan Lender shall be deemed to be utilized
for all purposes hereof in an amount equal to such Lender's Revolving Loan
Commitment Percentage of the amount then available for drawings under such
Letter of Credit (or any unreimbursed drawings under such Letter of
Credit).
(iii) Upon receipt from the beneficiary of any Letter of Credit of
any demand for payment thereunder, Agent shall promptly notify Borrower
and each Lender as to the amount to be paid as a result of such demand and
the payment date therefor. If at any time prior to the earlier of the
expiration date of a Letter of Credit or the Revolving Loan Termination
Date any Issuer shall have made a payment to a beneficiary of a Letter of
Credit in respect of a drawing under such Letter of Credit, each Revolving
Loan Lender will pay to Agent immediately upon demand by such Issuer at
any time during the period commencing after such payment until
reimbursement thereof in full by Borrower, an amount equal to such
Lender's Revolving Loan Commitment Percentage of such payment, together
with interest on such amount for each day from the date of demand for such
payment (or, if such demand is made after 11:00 a.m. Houston time on such
date, from the next succeeding Business Day) to the date of payment by
such Lender of such amount at a rate of interest per annum equal to the
Federal Funds Rate for such period. To the extent that it is ultimately
determined that the Borrower is relieved of its obligation to reimburse
the applicable Issuer because of such Issuer's gross negligence or willful
misconduct in determining that documents received under any applicable
Letter of Credit comply with the terms thereof, the applicable Issuer
shall be obligated to refund to the paying Lenders all amounts paid to
such Issuer to reimburse Issuer for the applicable drawing under such
Letter of Credit.
(iv) Borrower shall be irrevocably and unconditionally obligated
forthwith to reimburse Agent, on the date on which the Agent notifies
Borrower of the date and amount of any payment by the Issuer of any
drawing under a Letter of Credit, for the amount paid by any Issuer upon
such drawing, without presentment, demand, protest or other formalities of
any kind, all of which are hereby waived. Such reimbursement may, subject
to satisfaction of the conditions in SECTIONS 5.1 and 5.2 hereof and to
the aggregate of the Revolving Loan Commitments (after adjustment in the
same to reflect the elimination of the corresponding Letter of Credit
Liability), be made by the borrowing of Loans. Agent will pay to each
Revolving Loan Lender such Lender's Revolving Loan Commitment Percentage
of all amounts received from Borrower for application in payment, in whole
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or in part, of the Reimbursement Obligation in respect of any Letter of
Credit, but only to the extent such Lender has made payment to Agent in
respect of such Letter of Credit pursuant to CLAUSE (III) above.
(v) Borrower will pay to Agent at the Principal Office for the
account of each Revolving Loan Lender a letter of credit fee with respect
to each Letter of Credit equal to the greater of (x) $500 or (y) the then
current Margin Percentage for LIBOR Borrowings multiplied by the face
amount of such Letter of Credit (and computed on the basis of the actual
number of days elapsed in a year composed of 360 days), in each case for
the period from and including the date of issuance of such Letter of
Credit to and including the date of expiration or termination thereof,
such fee to be due and payable in advance. Agent will pay to each
Revolving Loan Lender, promptly after receiving any payment in respect of
letter of credit fees referred to in this CLAUSE (V), an amount equal to
the product of such Lender's Revolving Loan Commitment Percentage TIMES
the amount of such fees. In addition to and cumulative of the above
described fees, Borrower shall pay to Agent, for the account of the
applicable Issuer, in advance on the date of the issuance of the
applicable Letter of Credit, a fronting fee in an amount equal to 1/8% of
the face amount of the applicable Letter of Credit (such fronting fee to
be retained by the applicable Issuer for its own account).
(vi) The issuance by the applicable Issuer of each Letter of Credit
shall, in addition to the conditions precedent set forth in SECTION 5
hereof, be subject to the conditions precedent (A) that such Letter of
Credit shall be in such form and contain such terms as shall be reasonably
satisfactory to Agent, and (B) that Borrower shall have executed and
delivered such Applications and other instruments and agreements relating
to such Letter of Credit as Agent shall have reasonably requested and are
not inconsistent with the terms of this Agreement. In the event of a
conflict between the terms of this Agreement and the terms of any
Application, the terms hereof shall control.
(vii) Issuer will send to the Borrower and each Lender, immediately
upon issuance of any Letter of Credit issued by Issuer or any amendment
thereto, a true and correct copy of such Letter of Credit or amendment.
(c) INDEMNIFICATION; RELEASE. Borrower hereby indemnifies and holds
harmless Agent, each Revolving Loan Lender and each Issuer from and against any
and all claims and damages, losses, liabilities, costs or expenses which Agent,
such Lender or such Issuer may incur (or which may be claimed against Agent,
such Lender or such Issuer by any Person whatsoever), REGARDLESS OF WHETHER
CAUSED IN WHOLE OR IN PART BY THE NEGLIGENCE OF ANY OF THE INDEMNIFIED PARTIES,
in connection with the execution and delivery of any Letter of Credit or
transfer of or payment or failure to pay under any Letter of Credit; PROVIDED
that Borrower shall not be required to indemnify any party seeking
indemnification for any claims, damages, losses, liabilities, costs or expenses
to the extent, but only to the extent, caused by (i) the willful misconduct or
gross negligence of the party seeking indemnification, or (ii) the failure by
the party seeking indemnification to pay under any Letter
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of Credit after the presentation to it of a request required to be paid under
applicable law. Borrower hereby releases, waives and discharges Agent, each
Revolving Loan Lender and each Issuer from any claims, causes of action,
damages, losses, liabilities, reasonable costs or expenses which may now exist
or may hereafter arise, REGARDLESS OF WHETHER CAUSED IN WHOLE OR IN PART BY THE
NEGLIGENCE OF ANY OF THE INDEMNIFIED PARTIES, by reason of or in connection with
the failure of any other Revolving Loan Lender to fulfill or comply with its
obligations to Agent, such Lender or such Issuer, as the case may be, hereunder
(but nothing herein contained shall affect any rights Borrower may have against
such defaulting Lender); PROVIDED that Borrower shall not be required to
indemnify any party seeking indemnification for any claims, damages, losses,
liabilities, costs or expenses to the extent, but only to the extent, caused by
(i) the willful misconduct or gross negligence of the party seeking
indemnification, or (ii) the failure by the party seeking indemnification to pay
under any Letter of Credit after the presentation to it of a request required to
be paid under applicable law or (iii) disputes between or among any and all of
Agent, Lenders and Issuers. Nothing in this SECTION 2.2(C) is intended to limit
the obligations of Borrower under any other provision of this Agreement.
(d) ADDITIONAL COSTS IN RESPECT OF LETTERS OF CREDIT. If as a result of
any Regulatory Change there shall be imposed, modified or deemed applicable any
tax (other than any tax based on or measured by net income), reserve, special
deposit or similar requirement against or with respect to or measured by
reference to Letters of Credit issued or to be issued hereunder or
participations in such Letters of Credit, and the result shall be to increase
the cost to any Revolving Loan Lender of issuing or maintaining any Letter of
Credit or any participation therein, or materially reduce any amount receivable
by any Revolving Loan Lender hereunder in respect of any Letter of Credit or any
participation therein (which increase in cost, or reduction in amount
receivable, shall be the result of such Lender's reasonable allocation of the
aggregate of such increases or reductions resulting from such event), then such
Lender shall notify Borrower through Agent (which notice shall be accompanied by
a statement setting forth in reasonable detail the basis for the determination
of the amount due), and within 15 Business Days after demand therefor by such
Lender through Agent, Borrower shall pay to such Lender, from time to time as
specified by such Lender, such additional amounts as shall be sufficient to
compensate such Lender for such increased costs or reductions in amount. Such
statement as to such increased costs or reductions in amount incurred by such
Lender, submitted by such Lender to Borrower, shall create a rebuttable
presumption as to the accuracy thereof, and may be computed using any reasonable
averaging and attribution method. Each Lender will notify Borrower through Agent
of any event occurring after the date of this Agreement which will entitle such
Lender to compensation pursuant to this Section as promptly as practicable after
any executive officer of such Lender obtains knowledge thereof and determines to
request such compensation, and (if so requested by Borrower through Agent) will
designate a different lending office of such Lender for the issuance or
maintenance of Letters of Credit by such Lender or will take such other action
as Borrower may reasonably request if such designation or action is consistent
with the internal policy of such Lender and legal and regulatory restrictions,
can be undertaken at no additional cost, will avoid the need for, or reduce the
amount of, such compensation and will not, in the sole opinion of such Lender,
be disadvantageous to such Lender (PROVIDED that such Lender shall have
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no obligation so to designate a different lending office which is not located in
the United States of America).
2.3 TERMINATIONS OR REDUCTIONS OF COMMITMENTS.
(a) MANDATORY. On the Revolving Loan Termination Date, all Revolving Loan
Commitments shall be terminated in their entirety.
(b) OPTIONAL. Borrower shall have the right to terminate or reduce the
unused portion of the Revolving Loan Commitments at any time or from time to
time, PROVIDED that (i) Borrower shall give notice of each such termination or
reduction to Agent as provided in SECTION 4.3 hereof and (ii) each such partial
reduction shall be in an integral multiple of $5,000,000.
(c) NO REINSTATEMENT. No termination or reduction of the Revolving Loan
Commitments may be reinstated without the written approval of Agent and the
Lenders.
2.4 COMMITMENT FEES.
(a) Borrower shall pay to Agent for the account of each Revolving Loan
Lender revolving loan commitment fees for the period from the earlier of the
initial Loan hereunder or October 31, 1997 to and including the Revolving Loan
Termination Date at a rate per annum equal to the Commitment Fee Percentage.
Such revolving loan commitment fees shall be computed (on the basis of the
actual number of days elapsed in a year composed of 360 days) on each day and
shall be based on the excess of (x) the aggregate amount of each Revolving Loan
Lender's Revolving Loan Commitment for such day over (y) the sum of (i) the
aggregate unpaid principal balance of such Lender's Revolving Note on such day
PLUS (ii) the aggregate Letter of Credit Liabilities as to such Lender for such
day. Accrued revolving loan commitment fees shall be payable in arrears on the
Quarterly Dates prior to the Revolving Loan Termination Date and on the
Revolving Loan Termination Date.
(b) All past due fees payable under this Section shall bear interest at
the Past Due Rate.
2.5 SEVERAL OBLIGATIONS. The failure of any Lender to make any Loan to be
made by it on the date specified therefor shall not relieve any other Lender of
its obligation to make its Loan on such date, but neither Agent nor any Lender
shall be responsible or liable for the failure of any other Lender to make a
Loan to be made by such other Lender or to participate in, or co-issue, any
Letter of Credit. Notwithstanding anything contained herein to the contrary, (a)
no Lender shall be required to make or maintain Loans at any time outstanding if
as a result the total Revolving Loan Obligations held by such Lender shall
exceed the lesser of (1) such Lender's Revolving Loan Commitment Percentage of
all Revolving Loan Obligations and (2) such Lender's Revolving Loan Commitment
Percentage of the aggregate of the Revolving Loan Commitments and (b) if a
Revolving Loan Lender fails to make a Loan as and when required hereunder, then
upon each subsequent event which would otherwise result in funds being paid to
the defaulting Lender, the amount which would have been paid to the defaulting
Lender shall be divided among
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the non-defaulting Lenders ratably according to their respective shares of the
outstanding Revolving Loan Commitment Percentages until the Revolving Loan
Obligations of each Revolving Loan Lender (including the defaulting Lender) are
equal to such Lender's Revolving Loan Commitment Percentage of the total
Revolving Loan Obligations.
2.6 NOTES. The Loans made by each Lender shall be evidenced by a single
promissory note of Borrower in substantially the form of EXHIBIT C hereto
payable to the order of such Lender in a principal amount equal to the Revolving
Loan Commitment of such Lender, and otherwise duly completed. The promissory
notes described in this Section are each, together with all renewals,
extensions, modifications, amendments, increases and/or and replacements thereof
and substitutions therefor, called a "NOTE" and collectively called the "NOTES".
Each Lender is hereby authorized by Borrower to endorse on the schedule (or a
continuation thereof) that may be attached to each Note of such Lender, to the
extent applicable, the date, amount, type of and the applicable period of
interest for each Loan made by such Lender to Borrower hereunder, and the amount
of each payment or prepayment of principal of such Loan received by such Lender,
PROVIDED, that any failure by such Lender to make any such endorsement shall not
affect the obligations of Borrower under such Note or hereunder in respect of
such Loan.
2.7 USE OF PROCEEDS. The proceeds of the Loans shall be used to refinance
existing Borrowed Money Indebtedness of Borrower, to finance acquisitions and
for other working capital and general corporate purposes. Neither Agent nor any
Lender shall have any responsibility as to the use of any proceeds of the Loans.
3. BORROWINGS, PAYMENTS, PREPAYMENTS AND INTEREST OPTIONS.
3.1 BORROWINGS. Borrower shall give Agent notice of each borrowing to be
made hereunder as provided in SECTION 4.3 hereof and Agent shall promptly notify
each Lender of such request. Not later than 2:00 p.m. Houston time on the date
specified for each such borrowing hereunder, each Lender shall make available
the amount of the Loan, if any, to be made by it on such date to Agent at its
Principal Office, in immediately available funds, for the account of Borrower.
Such amounts received by Agent will be held in an account maintained by Borrower
with Agent. The amounts so received by Agent shall, subject to the terms and
conditions of this Agreement, be made available to Borrower by wiring or
otherwise transferring, in immediately available funds, such amount to an
account designated by Borrower.
3.2 PREPAYMENTS.
(a) OPTIONAL PREPAYMENTS. Except as provided in SECTION 3.3 hereof,
Borrower shall have the right to prepay, on any Business Day, in whole or in
part, without the payment of any penalty or fee, any Loans at any time or from
time to time, PROVIDED that Borrower shall give Agent notice of each such
prepayment as provided in SECTION 4.3 hereof. Each optional prepayment on a Loan
shall be in an amount equal to an integral multiple of $250,000.
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(b) INTEREST PAYMENTS. Accrued and unpaid interest on the unpaid principal
balance of the Loans shall be due and payable on the Interest Payment Dates.
(c) PAYMENTS AND INTEREST ON REIMBURSEMENT OBLIGATIONS. Borrower will pay
to Agent for the account of each Lender the amount of each Reimbursement
Obligation on the date on which the Agent notifies Borrower of the date and
amount of the applicable payment by the Issuer of any drawing under a Letter of
Credit. The amount of any Reimbursement Obligation may, if the applicable
conditions precedent specified in SECTIONS 5.1 and 5.2 hereof have been
satisfied, be paid with the proceeds of Loans. Subject to SECTION 11.7 hereof,
Borrower will pay to Agent for the account of each Lender interest on any
Reimbursement Obligation (i) at the Base Rate plus the applicable Margin
Percentage from the date such Reimbursement Obligation arises until the date
five (5) Business Days thereafter and (ii) at the Past Due Rate thereafter until
the same is paid in full.
3.3 INTEREST OPTIONS
(a) OPTIONS AVAILABLE. The outstanding principal balance of the Notes
shall bear interest at the Base Rate; PROVIDED, that (1) all past due amounts,
both principal and accrued interest, shall bear interest at the Past Due Rate,
and (2) subject to the provisions hereof, Borrower shall have the option of
having all or any portion of the principal balances of the Notes from time to
time outstanding bear interest at a Eurodollar Rate. The records of Agent and
each of the Lenders with respect to Interest Options, Interest Periods and the
amounts of Loans to which they are applicable shall create a rebuttable
presumption as to the accuracy thereof, and Agent and Lenders agree to furnish
written evidence to Borrower upon request of Borrower with respect to such
matters. Interest on the Loans shall be calculated at the Base Rate except where
it is expressly provided pursuant to this Agreement that a Eurodollar Rate is to
apply. Interest on the amount of each advance against the Notes shall be
computed on the amount of that advance and from the date it is made.
Notwithstanding anything in this Agreement to the contrary, for the full term of
the Notes the interest rate produced by the aggregate of all sums paid or agreed
to be paid to the holders of the Notes for the use, forbearance or detention of
the debt evidenced thereby (including all interest on the Notes at the Stated
Rate plus the Additional Interest) shall not exceed the Ceiling Rate.
(b) DESIGNATION AND CONVERSION. Borrower shall have the right to designate
or convert its Interest Options in accordance with the provisions hereof.
PROVIDED no Event of Default has occurred and is continuing and subject to the
last sentence of SECTION 3.3(A) and the provisions of SECTION 3.3(C), Borrower
may elect to have a Eurodollar Rate apply or continue to apply to all or any
portion of the principal balance of the Notes. Each change in Interest Options
shall be a conversion of the rate of interest applicable to the specified
portion of the Loans, but such conversion shall not change the respective
outstanding principal balances of the Notes. The Interest Options shall be
designated or converted in the manner provided below:
(i) Borrower shall give Agent telephonic notice, promptly confirmed by a
Rate Designation Notice (and Agent shall promptly inform each Lender
thereof). Each such telephonic and written notice shall specify the
amount of the Loan which is
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the subject of the designation, if any; the amount of borrowings
into which such borrowings are to be converted or for which an
Interest Option is designated; the proposed date for the designation
or conversion and the Interest Period or Periods, if any, selected
by Borrower. Such telephonic notice shall be irrevocable and shall
be given to Agent no later than the applicable Rate Designation
Date.
(ii) No more than eight (8) LIBOR Borrowings shall be in effect with
respect to the Loans at any time.
(iii) Each designation or conversion of a LIBOR Borrowing shall occur on a
LIBOR Business Day.
(iv) Each request for a LIBOR Borrowing shall be in the amount equal to
an integral multiple of $250,000.
(v) Each designation of an Interest Option with respect to the Revolving
Notes shall apply to all of the Revolving Notes ratably in
accordance with their respective outstanding principal balances. If
any Lender assigns an interest in any of its Notes when any LIBOR
Borrowing is outstanding with respect thereto, then such assignee
shall have its ratable interest in such LIBOR Borrowing.
(c) SPECIAL PROVISIONS APPLICABLE TO LIBOR BORROWINGS.
(i) OPTIONS UNLAWFUL. If the adoption of any applicable Legal Requirement
after the Effective Date or any change after the Effective Date in any
applicable Legal Requirement or in the interpretation or administration thereof
by any Governmental Authority or compliance by any Lender with any request or
directive (whether or not having the force of law) issued after the Effective
Date by any central bank or other Governmental Authority shall at any time make
it unlawful or impossible for any Lender to permit the establishment of or to
maintain any LIBOR Borrowing, the commitment of such Lender to establish or
maintain such LIBOR Borrowing shall forthwith be canceled and Borrower shall
forthwith, upon demand by Agent to Borrower, (1) convert the LIBOR Borrowing of
such Lender with respect to which such demand was made to a Base Rate Borrowing;
(2) pay all accrued and unpaid interest to date on the amount so converted; and
(3) pay any amounts required to compensate each Lender for any additional cost
or expense which any Lender may incur as a result of such adoption of or change
in such Legal Requirement or in the interpretation or administration thereof and
any Funding Loss which any Lender may incur as a result of such conversion. If,
when Agent so notifies Borrower, Borrower has given a Rate Designation Notice
specifying a LIBOR Borrowing but the selected Interest Period has not yet begun,
as to the applicable Lender such Rate Designation Notice shall be deemed to be
of no force and effect, as if never made, and the balance of the Loans made by
such Lender specified in such Rate Designation Notice shall bear interest at the
Base Rate until a different available Interest Option shall be designated in
accordance herewith.
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(ii) INCREASED COST OF BORROWINGS. If the adoption after the Effective
Date of any applicable Legal Requirement or any change after the Effective Date
in any applicable Legal Requirement or in the interpretation or administration
thereof by any Governmental Authority or compliance by any Lender with any
request or directive (whether or not having the force of law) issued after the
Effective Date by any central bank or Governmental Authority shall at any time
as a result of any portion of the principal balances of the Notes being
maintained on the basis of a Eurodollar Rate:
(1) subject any Lender to any Taxes, or any deduction or
withholding for any Taxes, on or from any payment due under
any LIBOR Borrowing or other amount due hereunder, other than
income and franchise taxes of the United States or its
political subdivisions or such other jurisdiction in which the
applicable Lender has its principal office or applicable
lending office; or
(2) change the basis of taxation of payments due from Borrower to
any Lender under any LIBOR Borrowing (other than by a change
in the rate of taxation of the overall net income of such
Lender); or
(3) impose, modify, increase or deem applicable any reserve
requirement (excluding that portion of any reserve requirement
included in the calculation of the applicable Eurodollar
Rate), special deposit requirement or similar requirement
(including, but not limited to, state law requirements and
Regulation D) against assets of any Lender, or against
deposits with any Lender, or against loans made by any Lender,
or against any other funds, obligations or other property
owned or held by any Lender; or
(4) impose on any Lender any other condition regarding any LIBOR
Borrowing;
and the result of any of the foregoing is to increase the cost to any Lender of
agreeing to make or of making, renewing or maintaining such LIBOR Borrowing, or
reduce the amount of principal or interest received by any Lender, then, within
15 Business Days after demand by the applicable Lender (accompanied by a
statement setting forth in reasonable detail the applicable Lender's basis
therefor), Borrower shall pay to Agent additional amounts which shall compensate
each Lender for such increased cost or reduced amount. The determination by any
Lender of the amount of any such increased cost, increased reserve requirement
or reduced amount shall create a rebuttable presumption as to the accuracy
thereof. Borrower shall have the right, if it receives from Agent any notice
referred to in this paragraph, upon three Business Days' notice to Agent (which
shall notify each affected Lender), either (i) to repay in full (but not in
part) any borrowing with respect to which such notice was given, together with
any accrued interest thereon, or (ii) to convert the LIBOR Borrowing which is
the subject of the notice to a Base Rate Borrowing; PROVIDED, that any such
repayment or conversion shall be accompanied by payment of (x) the amount
required to compensate each Lender for the increased cost or reduced amount
referred to in the preceding paragraph; (y) all accrued and unpaid interest to
date on the amount so repaid or converted, and
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(z) any Funding Loss which any Lender may incur as a result of such repayment or
conversion. Each Lender will notify Borrower through Agent of any event
occurring after the date of this Agreement which will entitle such Lender to
compensation pursuant to this Section as promptly as practicable after it
obtains knowledge thereof and determines to request such compensation, and (if
so requested by Borrower through Agent) will designate a different lending
office of such Lender for the applicable LIBOR Borrowing or will take such other
action as Borrower may reasonably request if such designation or action is
consistent with the internal policy of such Lender and legal and regulatory
restrictions, will avoid the need for, or reduce the amount of, such
compensation and will not, in the sole opinion of such Lender, be
disadvantageous to such Lender (PROVIDED that such Lender shall have no
obligation so to designate a different lending office which is located in the
United States of America).
(iii) INADEQUACY OF PRICING AND RATE DETERMINATION. If, for any reason
with respect to any Interest Period, Agent (or, in the case of CLAUSE 3 below,
the applicable Lender) shall have determined (which determination shall create a
rebuttable presumption as to the accuracy thereof) that:
(1) Agent is unable through its customary general practices to
determine any applicable Eurodollar Rate, or
(2) by reason of circumstances affecting the applicable market,
generally, Agent is not being offered deposits in United
States dollars in such market, for the applicable Interest
Period and in an amount equal to the amount of any applicable
LIBOR Borrowing requested by Borrower, or
(3) any applicable Eurodollar Rate will not adequately and fairly
reflect the cost to any Lender of making and maintaining such
LIBOR Borrowing hereunder for any proposed Interest Period,
then Agent shall give Borrower written notice thereof (accompanied by a
statement setting forth in reasonable detail the applicable Lender's basis
therefor) and thereupon, (A) any Rate Designation Notice previously given by
Borrower designating the applicable LIBOR Borrowing which has not commenced as
of the date of such notice from Agent shall be deemed for all purposes hereof to
be of no force and effect, as if never given, and (B) until Agent shall notify
Borrower that the circumstances giving rise to such notice from Agent no longer
exist, each Rate Designation Notice requesting the applicable Eurodollar Rate
shall be deemed a request for a Base Rate Borrowing, and any applicable LIBOR
Borrowing then outstanding shall be converted, without any notice to or from
Borrower, upon the termination of the Interest Period then in effect with
respect to it, to a Base Rate Borrowing.
(iv) FUNDING LOSSES. Borrower shall indemnify each Lender against and hold
each Lender harmless from any Funding Loss. This indemnity shall survive the
payment of the Notes. A certificate of such Lender (explaining in reasonable
detail the amount and calculation of the
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amount claimed) as to any additional amounts payable pursuant to this paragraph
submitted to Borrower shall create a rebuttable presumption as to the accuracy
thereof.
(d) FUNDING OFFICES; ADJUSTMENTS AUTOMATIC; CALCULATION YEAR. Any Lender
may, if it so elects, fulfill its obligation as to any LIBOR Borrowing by
causing a branch or affiliate of such Lender to make such Loan and may transfer
and carry such Loan at, to or for the account of any branch office or affiliate
of such Lender; PROVIDED, that in such event for the purposes of this Agreement
such Loan shall be deemed to have been made by such Lender and the obligation of
Borrower to repay such Loan shall nevertheless be to such Lender and shall be
deemed held by it for the account of such branch or affiliate. Without notice to
Borrower or any other Person, each rate required to be calculated or determined
under this Agreement shall automatically fluctuate upward and downward in
accordance with the provisions of this Agreement. Interest at the Prime Rate
shall be computed on the basis of the actual number of days elapsed in a year
consisting of 365 or 366 days, as the case may be. All other interest required
to be calculated or determined under this Agreement shall be computed on the
basis of the actual number of days elapsed in a year consisting of 360 days,
unless the Ceiling Rate would thereby be exceeded, in which event, to the extent
necessary to avoid exceeding the Ceiling Rate, the applicable interest shall be
computed on the basis of the actual number of days elapsed in the applicable
calendar year in which accrued.
(e) FUNDING SOURCES. Notwithstanding any provision of this Agreement to
the contrary, each Lender shall be entitled to fund and maintain its funding of
all or any part of the Loans in any manner it sees fit, it being understood,
however, that for the purposes of this Agreement all determinations hereunder
shall be made as if each Lender had actually funded and maintained each LIBOR
Borrowing during each Interest Period through the purchase of deposits having a
maturity corresponding to such Interest Period and bearing an interest rate
equal to the Eurodollar Rate for such Interest Period.
3.4 CAPITAL ADEQUACY. If any Lender shall have determined that the
adoption after the Effective Date or effectiveness after the Effective Date
(whether or not previously announced) of any applicable law, rule, regulation or
treaty regarding capital adequacy, or any change therein after the Effective
Date, or any change in the interpretation or administration thereof after the
Effective Date by any Governmental Authority, central bank or comparable agency
charged with the interpretation or administration thereof, or compliance by any
Lender with any request or directive after the Effective Date regarding capital
adequacy (whether or not having the force of law) of any such Governmental
Authority, central bank or comparable agency has or would have the effect of
reducing the rate of return on such Lender's capital as a consequence of its
obligations hereunder, under the Letters of Credit, the Notes or other
Obligations held by it to a level below that which such Lender could have
achieved but for such adoption, change or compliance (taking into consideration
such Lender's policies with respect to capital adequacy) by an amount deemed by
such Lender to be material, then from time to time, upon satisfaction of the
conditions precedent set forth in this Section, after demand by such Lender
(with a copy to Agent) as provided below, Borrower shall pay (subject to SECTION
11.7 hereof) to such Lender such additional amount or amounts as will compensate
such Lender for such reduction. The certificate
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of any Lender setting forth such amount or amounts as shall be necessary to
compensate it and the basis thereof and reasons therefor shall be delivered as
soon as practicable to Borrower and shall create a rebuttable presumption as to
the accuracy thereof. Borrower shall pay the amount shown as due on any such
certificate within five (5) Business Days after the delivery of such
certificate. In preparing such certificate, a Lender may employ such assumptions
and allocations of costs and expenses as it shall in good faith deem reasonable
and may use any reasonable averaging and attribution method.
3.5 LIMITATION ON CHARGES; SUBSTITUTE LENDERS; NON-DISCRIMINATION.
Anything in SECTIONS 3.3(C) or 3.4 notwithstanding:
(1) Borrower shall not be required to pay to any Lender
reimbursement with regard to any costs or expenses described in such
Sections, unless such Lender notifies Borrower of such costs or expenses
within 90 days after the date paid or incurred;
(2) none of the Lenders shall be permitted to pass through to
Borrower charges and costs under such Sections on a discriminatory basis
(i.e., which are not also passed through by such Lender to other customers
of such Lender similarly situated where such customer is subject to
documents providing for such pass through); and
(3) if any Lender elects to pass through to Borrower any material
charge or cost under such Sections or elects to terminate the availability
of LIBOR Borrowings for any material period of time, Borrower may, within
60 days after the date of such event and so long as no Default shall have
occurred and be continuing, elect to terminate such Lender as a party to
this Agreement; PROVIDED that, concurrently with such termination Borrower
shall (i) if Agent and each of the other Lenders shall consent, pay that
Lender all principal, interest and fees and other amounts owed to such
Lender through such date of termination or (ii) have arranged for another
financial institution approved by Agent (such approval not to be
unreasonably withheld) as of such date, to become a substitute Lender for
all purposes under this Agreement in the manner provided in SECTION 11.6;
PROVIDED FURTHER that, prior to substitution for any Lender, Borrower
shall have given written notice to Agent of such intention and the Lenders
shall have the option, but no obligation, for a period of 60 days after
receipt of such notice, to increase their Revolving Loan Commitments in
order to replace the affected Lender in lieu of such substitution.
4. PAYMENTS; PRO RATA TREATMENT; COMPUTATIONS, ETC.
4.1 PAYMENTS.
(a) Except to the extent otherwise provided herein, all payments of
principal, interest, Reimbursement Obligations and other amounts to be made by
Borrower hereunder, under the Notes and under the other Loan Documents shall be
made in Dollars, in immediately available funds, to Agent at the Principal
Office (or in the case of a successor Agent, at the principal office of such
successor Agent in the United States), not later than 11:00 a.m. Houston time on
the date
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on which such payment shall become due (each such payment made after such time
on such due date to be deemed to have been made on the next succeeding Business
Day).
(b) Borrower shall, at the time of making each payment hereunder, under
any Note or under any other Loan Document, specify to Agent the Loans or other
amounts payable by Borrower hereunder or thereunder to which such payment is to
be applied. Each payment received by Agent hereunder, under any Note or under
any other Loan Document for the account of a Lender shall be paid promptly to
such Lender, in immediately available funds. If Agent fails to send to any
Lender the applicable amount by the close of business on the date any such
payment is received by Agent if such payment is received prior to 11:00 a.m.
Houston time (or on the next succeeding Business Day with respect to payments
which are received after 11:00 a.m. Houston time), Agent shall pay to the
applicable Lender interest on such amount from such date at the Federal Funds
Rate. Borrower, the Lenders and Agent acknowledge and agree that this provision
and each other provision of this Agreement or any of the other Loan Documents
relating to the application of amounts in payment of the Obligations shall be
subject to the provisions of SECTION 4.2(D) regarding PRO RATA application of
amounts after an Event of Default shall have occurred and be continuing.
(c) If the due date of any payment hereunder or under any Note falls on a
day which is not a Business Day, the due date for such payments (except as
otherwise provided in SECTION 3.3 hereof) shall be extended to the next
succeeding Business Day and interest shall be payable for any principal so
extended for the period of such extension.
(d) All payments by the Borrower hereunder or under any other Loan
Document shall be made free and clear of and without deduction for or on account
of any present or future income, stamp, or other taxes, fees, duties,
withholding or other charges of any nature whatsoever imposed by any taxing
authority excluding in the case of each Lender taxes imposed on or measured by
its net income or franchise taxes imposed by the jurisdiction in which it is
organized or through which it acts for purposes of this Agreement (such
non-excluded items being hereinafter referred to as "TAXES"). If as a result of
any change in law (or the interpretation thereof) after the date that the
applicable Lender became a "Lender" under this Agreement any withholding or
deduction from any payment to be made to, or for the account of, a Lender by the
Borrower hereunder or under any other Loan Document is required in respect of
any Taxes pursuant to any applicable law, rule, or regulation, then the Borrower
will (i) pay to the relevant authority the full amount required to be so
withheld or deducted; (ii) to the extent available, promptly forward to the
Agent an official receipt or other documentation reasonably satisfactory to the
Agent evidencing such payment to such authority; and (iii) pay to the Agent, for
the account of each affected Lender, such additional amount or amounts as are
necessary to ensure that the net amount actually received by such Lender will
equal the full amount such Lender would have received had no such withholding or
deduction been required. Each Lender shall determine such additional amount or
amounts payable to it (which determination shall create a rebuttable presumption
as to the accuracy thereof), and in such event, Agent shall furnish written
evidence to Borrower showing how Agent made such determination. If a Lender
becomes aware that any such withholding or deduction from any payment to be made
by the Borrower hereunder or under
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any other Loan Document is required, then such Lender shall promptly notify the
Agent and the Borrower thereof stating the reasons therefor and the additional
amount required to be paid under this Section. Each Lender shall execute and
deliver to the Agent and Borrower such forms as it may be required to execute
and deliver pursuant to SECTION 11.13 hereof. To the extent that any such
withholding or deduction results from the failure of a Lender to provide a form
required by SECTION 11.13 hereof (unless such failure is due to some prohibition
under applicable Legal Requirements), the Borrower shall have no obligation to
pay the additional amount required by CLAUSE (III) above. Anything in this
Section notwithstanding, if any Lender elects to require payment by the Borrower
of any material amount under this Section, the Borrower may, within 60 days
after the date of receiving notice thereof and so long as no Default shall have
occurred and be continuing, elect to terminate such Lender as a party to this
Agreement; PROVIDED that, concurrently with such termination the Borrower shall
(i) if the Agent and each of the other Lenders shall consent, pay that Lender
all principal, interest and fees and other amounts owed to such Lender through
such date of termination or (ii) have arranged for another financial institution
approved by the Agent (such approval not to be unreasonably withheld) as of such
date, to become a substitute Lender for all purposes under this Agreement in the
manner provided in SECTION 11.6; PROVIDED FURTHER that, prior to substitution
for any Lender, the Borrower shall have given written notice to the Agent of
such intention and the Lenders shall have the option, but no obligation, for a
period of 60 days after receipt of such notice, to increase their Commitments in
order to replace the affected Lender in lieu of such substitution.
4.2 PRO RATA TREATMENT. Except to the extent otherwise provided herein:
(a) each borrowing from the Lenders under SECTION 2.1 hereof shall be made
ratably from the Revolving Loan Lenders in accordance with their respective
Revolving Loan Commitments; (b) each payment of revolving loan commitment fees
shall be made for the account of the Revolving Loan Lenders, and each
termination or reduction of the Revolving Loan Commitments of the Revolving Loan
Lenders under SECTION 2.3 hereof shall be applied, PRO RATA, according to the
Revolving Loan Lenders' respective Revolving Loan Commitments; (c) each payment
by Borrower of principal of or interest on the Loans shall be made to Agent for
the account of the Lenders PRO RATA in accordance with the respective unpaid
principal amounts of such Loans held by the Lenders, and (d) the Revolving Loan
Lenders (other than the applicable Issuer) shall purchase from the applicable
Issuer participations in each Letter of Credit to the extent of their respective
Revolving Loan Commitment Percentages.
4.3 CERTAIN ACTIONS, NOTICES, ETC. Notices to Agent of any termination or
reduction of Revolving Loan Commitments and of borrowings and optional
prepayments of Loans and requests for issuances of Letters of Credit shall be
irrevocable and shall be effective only if received by Agent not later than
11:00 a.m. Houston time on the number of Business Days prior to the date of the
relevant termination, reduction, borrowing and/or prepayment specified below:
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NUMBER OF BUSINESS DAYS
PRIOR NOTICE
-----------------------
Borrowing at the Base Rate same day
Repayment of Base Rate Borrowing same day
Borrowing at Eurodollar Rate 3 LIBOR Business Days
Repayment of LIBOR Borrowing
prior to last day of the applicable
Interest Period 1 LIBOR Business day
Letter of Credit issuance 3
Termination or Reduction of
Revolving Loan Commitments 3
Each such notice of termination or reduction shall specify the amount of the
applicable Revolving Loan Commitment to be terminated or reduced. Each such
notice of borrowing or prepayment shall specify the amount of the Loans to be
borrowed or prepaid and the date of borrowing or prepayment (which shall be a
Business Day). Agent shall promptly notify the affected Lenders of the contents
of each such notice. Any selection of a Eurodollar Rate with respect to a Loan
shall be subject to the advance notice requirements set forth in SECTION 3.3
hereof.
4.4 NON-RECEIPT OF FUNDS BY AGENT. Unless Agent shall have been
notified by a Lender or Borrower (the "PAYOR") prior to the date on which such
Lender is to make payment to Agent of the proceeds of a Loan (or funding of a
drawing under a Letter of Credit or reimbursement with respect to any drawing
under a Letter of Credit) to be made by it hereunder or Borrower is to make a
payment to Agent for the account of one or more of the Lenders, as the case may
be (such payment being herein called the "REQUIRED PAYMENT"), which notice shall
be effective upon receipt, that the Payor does not intend to make the Required
Payment to Agent, Agent may assume that the Required Payment has been made and
may, in reliance upon such assumption (but shall not be required to), make the
amount thereof available to the intended recipient on such date and, if the
Payor has not in fact made the Required Payment to Agent, the recipient of such
payment (or, if such recipient is the beneficiary of a Letter of Credit,
Borrower and, if Borrower fails to pay the amount thereof to Agent forthwith
upon demand, the Lenders ratably in proportion to their respective Revolving
Loan Commitment Percentages) shall, on demand, pay to Agent the amount made
available by Agent, together with interest thereon in respect of the period
commencing on the date such amount was so made available by Agent until the date
Agent recovers such amount at a rate per annum equal to the Federal Funds Rate
for such period.
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4.5 SHARING OF PAYMENTS, ETC. If a Lender shall obtain payment of any
principal of or interest on any Loan made by it under this Agreement, on any
Reimbursement Obligation or on any other Obligation then due to such Lender
hereunder, through the exercise of any right of set-off (including, without
limitation, any right of setoff or lien granted under SECTION 9.2 hereof),
banker's lien, counterclaim or similar right, or otherwise, it shall promptly
purchase from the other Lenders participations in the Loans made, or
Reimbursement Obligations or other Obligations held, by the other Lenders in
such amounts, and make such other adjustments from time to time as shall be
equitable to the end that all the Lenders shall share the benefit of such
payment (net of any expenses which may be incurred by such Lender in obtaining
or preserving such benefit) PRO RATA in accordance with the unpaid Obligations
then due to each of them. To such end all the Lenders shall make appropriate
adjustments among themselves (by the resale of participations sold or otherwise)
if such payment is rescinded or must otherwise be restored. Borrower agrees, to
the fullest extent it may effectively do so under applicable law, that any
Lender so purchasing a participation in the Loans made, or Reimbursement
Obligations or other Obligations held, by other Lenders may exercise all rights
of set-off, bankers' lien, counterclaim or similar rights with respect to such
participation as fully as if such Lender were a direct holder of Loans, or
Reimbursement Obligations or other Obligations in the amount of such
participation. Nothing contained herein shall require any Lender to exercise any
such right or shall affect the right of any Lender to exercise, and retain the
benefits of exercising, any such right with respect to any other indebtedness or
obligation of Borrower.
5. CONDITIONS PRECEDENT.
5.1 INITIAL LOANS AND LETTERS OF CREDIT. The obligation of each Lender
or each Issuer to make its initial Loans or issue or participate in a Letter of
Credit (if such Letter of Credit is issued prior to the funding of the initial
Loans) hereunder is subject to the following conditions precedent, each of which
shall have been fulfilled or waived to the satisfaction of Agent:
(a) AUTHORIZATION AND STATUS. Agent shall have received from the
appropriate Governmental Authorities certified copies of the Organizational
Documents (other than by-laws) of each Obligor, and evidence satisfactory to
Agent of all action taken by each Obligor authorizing the execution, delivery
and performance of the Loan Documents and all other documents related to this
Agreement to which it is a party (including, without limitation, a certificate
of the secretary of each such party which is a corporation setting forth the
resolutions of its Board of Directors authorizing the transactions contemplated
thereby and attaching a copy of its bylaws), together with such certificates as
may be appropriate to demonstrate the qualification and good standing of and
payment of taxes by each Obligor in the jurisdiction of its organization and in
each other jurisdiction where the failure in which to qualify would have a
Material Adverse Effect.
(b) INCUMBENCY. Each Obligor shall have delivered to Agent a
certificate in respect of the name and signature of each of the officers (i) who
is authorized to sign on its behalf the applicable Loan Documents related to any
Loan or the issuance of any Letter of Credit and (ii) who will, until replaced
by another officer or officers duly authorized for that purpose, act as its
representative for the purposes of signing documents and giving notices and
other communications
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in connection with any Loan or the issuance of any Letter of Credit. Agent and
each Lender may conclusively rely on such certificates until they receive notice
in writing from the applicable Obligor to the contrary.
(c) NOTES. Agent shall have received the appropriate Notes of Borrower
for each Lender, duly completed and executed.
(d) LOAN DOCUMENTS. Each Obligor shall have duly executed and delivered
the Loan Documents to which it is a party (in such number of copies as Agent
shall have requested). Each such Loan Document shall be in substantially the
form furnished to the Lenders prior to their execution of this Agreement,
together with such changes therein as Agent may approve.
(e) SECURITY MATTERS. All such action as Agent shall have requested to
perfect the Liens created pursuant to the Security Documents shall have been
taken, including, without limitation, where applicable, the filing and recording
of the Security Documents with the appropriate Governmental Authorities. Agent
shall also have received evidence satisfactory to it that the Liens created by
the Security Documents constitute first priority Liens, except for the
exceptions expressly provided for herein, including, without limitation,
delivery of all applicable stock certificates (with stock powers executed in
blank), Uniform Commercial Code search reports, satisfactory title evidence in
form and substance acceptable to Agent, and executed releases of any prior Liens
(except as permitted by SECTION 8.2).
(f) FEES AND EXPENSES. Borrower shall have paid to Agent all unpaid
fees in the amounts previously agreed upon in writing among Borrower and Agent;
and shall have in addition paid to Agent all amounts payable under SECTION 11.3
hereof, on or before the date of this Agreement, except for amounts which Agent,
in its sole discretion, agrees may be paid at a later date.
(g) INSURANCE. Borrower shall have delivered to Agent certificates of
insurance satisfactory to Agent evidencing the existence of all insurance
required to be maintained by each Obligor by this Agreement and the Security
Documents.
(h) OPINIONS OF COUNSEL. Agent shall have received such opinions of
counsel to Obligors as Agent shall reasonably request with respect to Obligors
and the Loan Documents.
(i) CONSENTS. Agent shall have received evidence satisfactory to Agent
that all material consents of each Governmental Authority and of each other
Person, if any, reasonably required in connection with (a) the Loans and the
Letters of Credit and (b) the execution, delivery and performance of this
Agreement and the other Loan Documents have been satisfactorily obtained.
(j) PAYMENT OF CERTAIN OUTSTANDING INDEBTEDNESS. Agent shall have
received evidence satisfactory to Agent that, except for presently existing
Subordinated Indebtedness in an aggregate amount not to exceed $6,500,000 and
except for other Indebtedness permitted under SECTION 8.1 hereof, all existing
Borrowed Money Indebtedness owing by Borrower or any of its Subsidiaries
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shall have been paid in full (or will be paid in full out of the initial advance
hereunder) and that any credit availability under any facility for Borrowed
Money Indebtedness to which Borrower or any of its Subsidiaries are a party as
the borrower shall have been terminated.
(k) EQUITY. Borrower shall have received not less than $32,000,000 in
net proceeds from the sale of equity interests in Borrower.
(l) ACQUISITION OF FOUNDING COMPANIES. The Founding Companies shall
have become wholly-owned Subsidiaries of Borrower.
(m) OTHER DOCUMENTS. Agent shall have received such other documents
consistent with the terms of this Agreement and relating to the transactions
contemplated hereby as Agent may reasonably request.
5.2 ALL LOANS AND LETTERS OF CREDIT. The obligation of each Lender to
make any Loan to be made by it hereunder or to issue or participate in any
Letter of Credit is subject to (a) the accuracy, in all material respects, on
the date of such Loan or such issuance of all representations and warranties of
each Obligor contained in this Agreement and the other Loan Documents; (b) Agent
shall have received the following, all of which shall be duly executed and in
Proper Form: (1) a Request for Extension of Credit as to the Loan or the Letter
of Credit, as the case may be, no later than 11:00 a.m. Houston time on the
Business Day on which such Request for Extension of Credit must be given under
SECTION 4.3 hereof, (2) in the case of a Letter of Credit, an Application, and
(3) such other documents as Agent may reasonably require; (c) prior to the
making of such Loan or the issuance of such Letter of Credit, there shall have
occurred no event having a Material Adverse Effect; (d) no Default or Event of
Default shall have occurred and be continuing; (e) the making of such Loan or
the issuance of such Letter of Credit shall not be illegal or prohibited by any
Legal Requirement, and (f) Borrower shall have paid all fees and expenses of the
type described in SECTION 11.3 hereof and all other fees owed to Agent or any
Lender under the Loan Documents which are due and payable, in each case, prior
to or on the date of such Loan or such issuance (except for amounts which Agent
or the applicable Lender, as the case may be, in their sole discretion, agree
may be paid at a later date). The submission by the Borrower of a Request for
Extension of Credit shall be deemed to be a representation and warranty that the
conditions precedent to the applicable Loan or Letter of Credit have been
satisfied. Selection of a new interest rate at the expiration of an Interest
Period shall not constitute a new Loan hereunder.
6. REPRESENTATIONS AND WARRANTIES.
To induce the Lenders to enter into this Agreement and to make the
Loans and issue or participate in the Letters of Credit, Borrower represents and
warrants (such representations and warranties to survive any investigation and
the making of the Loans and the issuance of any Letters of Credit) to the
Lenders and Agent as follows:
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6.1 ORGANIZATION. Each Obligor (a) is duly incorporated, validly
existing and in good standing under the laws of the jurisdiction of its
organization; (b) has all necessary power and authority to conduct its business
as presently conducted, and (c) is duly qualified to do business and in good
standing in the jurisdiction of its organization and in all jurisdictions in
which the failure to so qualify would reasonably be expected to have a Material
Adverse Effect.
6.2 FINANCIAL STATEMENTS. Borrower has furnished to Agent (i) audited
financial statements (including a balance sheet) as to each Subsidiary of
Borrower which fairly present in all material respects, in accordance with GAAP,
the consolidated financial condition and the results of operations of the
applicable Person as at the end of such Person's fiscal year ending in 1996,
(ii) unaudited pro forma financial statements (including a balance sheet) as to
Borrower which fairly present in all material respects, on a pro forma basis but
otherwise in accordance with GAAP, the combined financial condition and the
results of operations of Borrower as at the end of Borrower's fiscal year ending
December 31, 1996, (ii) an unaudited pro forma balance sheet and income
statement as to Borrower which fairly present in all material respects, on a pro
forma basis but otherwise in accordance with GAAP, the combined financial
position and the results of operations of Borrower as at June 30, 1997 and (iii)
unaudited interim financial statements for each Subsidiary. No events,
conditions or circumstances have occurred from the date that the financial
statements were delivered to Agent through the Effective Date which would cause
said financial statements to be misleading in any material respect. There are no
material instruments or liabilities which should, in accordance with GAAP, be
reflected in such financial statements provided to Agent which are not so
reflected.
6.3 ENFORCEABLE OBLIGATIONS; AUTHORIZATION. The Loan Documents are
legal, valid and binding obligations of each applicable Obligor, enforceable in
accordance with their respective terms, except as may be limited by bankruptcy,
insolvency and other similar laws and judicial decisions affecting creditors'
rights generally and by general equitable principles. The execution, delivery
and performance of the Loan Documents (a) have all been duly authorized by all
necessary action; (b) are within the power and authority of each applicable
Obligor; (c) to the best of Borrower's knowledge, do not and will not contravene
or violate any Legal Requirement applicable to any applicable Obligor or the
Organizational Documents of any applicable Obligor, the contravention or
violation of which would reasonably be expected to have a Material Adverse
Effect; (d) do not and will not result in the breach of, or constitute a default
under, any material agreement or instrument by which any Obligor or any of its
Property may be bound, and (e) do not and will not result in the creation of any
Lien upon any Property of any Obligor. All necessary permits, registrations and
consents for such making and performance have been obtained, except where the
failure to obtain the same would not have a Material Adverse Effect. Except as
otherwise expressly stated in the Security Documents, the Liens of the Security
Documents will constitute valid and perfected first and prior Liens on the
Property described therein, subject to no other Liens whatsoever except
Permitted Liens covering Collateral other than equity interests in the
Subsidiaries of Borrower.
6.4 OTHER DEBT. After giving effect to the initial advance hereunder
(and the payment of certain existing Indebtedness of Borrower and its
Subsidiaries), no Obligor is in default in the
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payment of any other Indebtedness or under any agreement, mortgage, deed of
trust, security agreement or lease to which it is a party and which would
constitute an Event of Default under SECTION 9.1(B).
6.5 LITIGATION. There is no litigation or administrative proceeding, to
the knowledge of any executive officer of Borrower, pending or threatened
against, nor any outstanding judgment, order or decree against, any Obligor
before or by any Governmental Authority which does or would reasonably be
expected to have a Material Adverse Effect. No Obligor is in default with
respect to any judgment, order or decree of any Governmental Authority where
such default would have a Material Adverse Effect.
6.6 TITLE. Each Obligor has good and marketable title to its material
Property, free and clear of all Liens except Permitted Liens.
6.7 TAXES. Each Obligor has filed all tax returns required to have been
filed and paid all taxes shown thereon to be due, except those for which
extensions have been obtained and those which are being contested in good faith.
6.8 REGULATIONS G, U AND X. None of the proceeds of any Loan will be
used for the purpose of purchasing or carrying directly or indirectly any margin
stock or for any other purpose which would constitute this transaction a
"purpose credit" within the meaning of Regulations G, U and X of the Board of
Governors of the Federal Reserve System, as any of them may be amended from time
to time.
6.9 SUBSIDIARIES. As of the Effective Date, Borrower has no
Subsidiaries other than those set forth on EXHIBIT F hereto.
6.10 NO UNTRUE OR MISLEADING STATEMENTS. No representation or warranty
made by Borrower in any Loan Document or in any document, instrument or other
writing furnished to the Lenders by or on behalf of any Obligor in connection
with the transactions contemplated in any Loan Document contains any untrue
material statement of fact or omits to state any such fact (of which any
executive officer of Borrower has knowledge) necessary to make the
representations, warranties and other statements contained herein or in such
other document, instrument or writing not misleading in any material respect on
the date when made or deemed made.
6.11 ERISA. With respect to each Plan, Borrower and each member of the
Controlled Group have fulfilled their obligations, including obligations under
the minimum funding standards of ERISA and the Code and are in compliance in all
material respects with the provisions of ERISA and the Code. No event has
occurred which could result in a liability of Borrower or any member of the
Controlled Group to the PBGC or a Plan (other than to make contributions in the
ordinary course) that would reasonably be expected to have a Material Adverse
Effect. There have not been any nor are there now existing any events or
conditions that would cause the Lien provided under Section 4068 of ERISA to
attach to any Property of Borrower or any member of the Controlled Group.
Unfunded Liabilities as of the date hereof do not exceed $500,000. No
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"prohibited transaction" (for which there is not an exemption) has occurred with
respect to any Plan.
6.12 INVESTMENT COMPANY ACT. No Obligor is an investment company within
the meaning of the Investment Company Act of 1940, as amended, or, directly or
indirectly, controlled by or acting on behalf of any Person which is an
investment company, within the meaning of said Act.
6.13 PUBLIC UTILITY HOLDING COMPANY ACT. No Obligor is an "affiliate"
or a "subsidiary company" of a "public utility company," or a "holding company,"
or an "affiliate" or a "subsidiary company" of a "holding company," as such
terms are defined in the Public Utility Holding Company Act of 1935, as amended.
6.14 SOLVENCY. None of Borrower, any Obligor, or Borrower and its
Subsidiaries, on a consolidated basis, is "insolvent," as such term is used and
defined in (i) the Bankruptcy Code and (ii) the fraudulent conveyance statutes
of the State of Texas or of any other applicable jurisdiction.
6.15 FISCAL YEAR. The fiscal year of each Obligor ends on December 31.
6.16 COMPLIANCE. To the best knowledge of any executive officer of
Borrower, each Obligor is in compliance with all Legal Requirements applicable
to it, except to the extent that the failure to comply therewith would not
reasonably be expected to have a Material Adverse Effect.
6.17 ENVIRONMENTAL MATTERS. Each Obligor has, to the best knowledge of
Borrower's executive officers, obtained and maintained in effect all
Environmental Permits (or the applicable Person has initiated the necessary
steps to transfer the Environmental Permits into its name or obtain such
permits), the failure to obtain which would reasonably be expected to have a
Material Adverse Effect. Each Obligor and its Properties, business and
operations have been and are, to the best knowledge of Borrower's executive
officers, in compliance with all applicable Requirements of Environmental Law
and Environmental Permits, the failure to comply with which would reasonably be
expected to have a Material Adverse Effect. Each Obligor and its Properties,
business and operations are not, to the best knowledge of Borrower's executive
officers (after making reasonable inquiry of the personnel and records of their
respective Corporations), subject to any (a) Environmental Claims or (b)
Environmental Liabilities, in either case direct or contingent, arising from or
based upon any act, omission, event, condition or circumstance occurring or
existing on or prior to the date hereof which would reasonably be expected to
have a Material Adverse Effect. None of the officers of Borrower have received
nor is aware of any Obligor receiving any notice of any violation or alleged
violation of any Requirements of Environmental Law or Environmental Permit or
any Environmental Claim in connection with its Properties, liabilities,
condition (financial or otherwise), business or operations which would
reasonably be expected to have a Material Adverse Effect. Borrower does not know
of any event or condition with respect to currently enacted Requirements of
Environmental Laws presently scheduled to become effective in the future with
respect to any of the Properties of any
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Obligor which would reasonably be expected to have a Material Adverse Effect,
for which the applicable Obligor has not made good faith provisions in its
business plan and projections of financial performance.
7. AFFIRMATIVE COVENANTS.
Borrower covenants and agrees with Agent and the Lenders that prior to
the termination of this Agreement it will do or cause to be done, and cause each
other Obligor (unless limited by the language of the applicable provision to
less than all of the Obligors) to do or cause to be done, each and all of the
following:
7.1 TAXES, EXISTENCE, REGULATIONS, PROPERTY, ETC. At all times (a) pay
when due all taxes and governmental charges of every kind upon it or against its
income, profits or Property, unless and only to the extent that the same shall
be contested diligently in good faith and adequate reserves in accordance with
GAAP have been established therefor; (b) do all things necessary to preserve its
existence, qualifications, rights and franchises in all jurisdictions where such
failure to qualify would reasonably be expected to have a Material Adverse
Effect; (c) comply with all applicable Legal Requirements (including without
limitation Requirements of Environmental Law) in respect of the conduct of its
business and the ownership of its Property, the noncompliance with which would
reasonably be expected to have a Material Adverse Effect; and (d) cause its
Property to be protected, maintained and kept in good repair (ordinary wear and
tear excepted) and make all replacements and additions to such Property as may
be reasonably necessary to conduct its business properly and efficiently except
where the failure to do so would not reasonably be expected to have a Material
Adverse Effect.
7.2 FINANCIAL STATEMENTS AND INFORMATION. Furnish to Agent and each
Lender each of the following: (a) as soon as available and in any event within
120 days after the end of each applicable fiscal year, beginning with the fiscal
year ending on December 31, 1997, Annual Financial Statements of Borrower; (b)
as soon as available and in any event within 45 days after the end of each
fiscal month (other than the March, June, September and December fiscal months),
and as soon as available and in any event within 60 days after the end of each
March, June, September and December fiscal month, Monthly Financial Statements
of Borrower; (c) concurrently with the financial statements provided for in
SUBSECTIONS 7.2(A) and (B) hereof, such schedules, computations and other
information, in reasonable detail, as may be required by Agent to demonstrate
compliance with the covenants set forth herein or reflecting any non-compliance
therewith as of the applicable date, all certified and signed by the president,
chief financial officer or treasurer of Borrower (or other authorized officer
approved by Agent) as true and correct in all material respects to the best
knowledge of such officer and, concurrently with the financial statements
provided for in SUBSECTION 7.2(A) hereof and concurrently with the financial
statements provided for in SUBSECTIONS 7.2(B) prepared as of each March 31, June
30, September 30 and December 31 commencing with the Monthly Financial Statement
prepared as of December 31, 1997, a compliance certificate ("COMPLIANCE
CERTIFICATE") in the form of EXHIBIT E hereto, duly executed by such authorized
officer; (d) promptly upon their becoming publicly available, each financial
statement, report, notice or definitive proxy statements sent by any Obligor to
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shareholders generally and each regular or periodic report and each registration
statement or prospectus filed by any Obligor with any securities exchange or the
Securities and Exchange Commission or any successor agency, and (e) such other
financial projections and other information relating to the condition (financial
or otherwise), operations or business of any Obligor as from time to time may be
reasonably requested by Agent. Each delivery of a financial statement pursuant
to this SECTION 7.2 shall constitute a restatement of the representations
contained in the last two sentences of SECTION 6.2 with respect to the period of
time from the date of such most recently delivered financial statements.
7.3 FINANCIAL TESTS. Borrower will have and maintain (in each case, on
a consolidated basis for Borrower and its Subsidiaries):
(a) MINIMUM NET WORTH - Stockholders' Equity at all times
after October 31, 1997 of not less than Stockholders' Equity as of
October 31, 1997 PLUS 80% of the Consolidated Net Income (if positive)
for the period from and after October 31, 1997 through the date of such
calculation PLUS 100% of the net proceeds (whether cash or non-cash)
realized from the issuance of any equity securities by Borrower or its
Subsidiaries (or other capital contributions made to Borrower) after
October 31, 1997.
(b) INTEREST COVERAGE RATIO - an Interest Coverage Ratio of
not less than 3.00 at all times.
(c) DEBT TO PRO FORMA CONSOLIDATED EBITDA RATIO - a Debt to
Pro Forma Consolidated EBITDA Ratio at the end of each fiscal quarter
of not greater than 3.00.
(d) FIXED CHARGE COVERAGE RATIO - a Fixed Charge Coverage
Ratio at the end of each fiscal quarter of not less than 1.50.
The use of historical financial results for acquired Subsidiaries in connection
with "pooling of interests" accounting shall not serve to cure any default under
the covenants set forth in this Section that would otherwise arise.
7.4 INSPECTION. Permit Agent and each Lender upon 1 day's prior notice
(unless a Default or an Event of Default has occurred which is continuing, in
which case no prior notice is required) to inspect its Property, to examine its
files, books and records, except privileged communication with legal counsel and
classified governmental material, and make and take away copies thereof, and to
discuss its affairs with its officers and accountants, all during normal
business hours and at such intervals and to such extent as Agent may reasonably
desire. Unless an Event of Default has occurred which is continuing, Agent or
the applicable Lender, as the case may be, shall pay its own costs and expenses
relating to the exercise of the rights under this Section.
7.5 FURTHER ASSURANCES. Promptly execute and deliver, at Borrower's
expense, any and all other and further instruments which may be reasonably
requested by Agent to cure any defect
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in the execution and delivery of any Loan Document in order to effectuate the
transactions contemplated by the Loan Documents, and in order to grant,
preserve, protect and perfect the validity and priority of the security
interests created by the Security Documents.
7.6 BOOKS AND RECORDS. Maintain accounting records which permit
financial statements to be prepared in accordance with GAAP.
7.7 INSURANCE. Borrower will (and will cause each of its Subsidiaries
to) maintain insurance with such insurers, on such of its Property, with
responsible companies in such amounts, with such deductibles and against such
risks as are usually carried by owners of similar businesses and properties in
the same general areas in which the applicable Person operates or as Agent may
otherwise reasonably require, and furnish Agent satisfactory evidence thereof
promptly upon request. These insurance provisions are cumulative of the
insurance provisions of the Security Documents. Agent shall be provided with
copies of the policies of insurance and a certificate of the insurer that the
insurance required by this Section may not be canceled, reduced or affected in
any material manner without thirty (30) days' prior written notice to Agent.
Wherever applicable, such insurance shall name Agent as loss payee and/or
mortgagee insured.
7.8 NOTICE OF CERTAIN MATTERS. Give Agent written notice of the
following promptly (and in any event within five Business Days) after any
executive officer of Borrower shall become aware of the same:
(a) the issuance by any court or governmental agency or authority of
any injunction, order or other restraint prohibiting, or having the effect of
prohibiting, the performance of this Agreement, any other Loan Document, or the
making of the Loans or the initiation of any litigation, or any claim or
controversy which would reasonably be expected to result in the initiation of
any litigation, seeking any such injunction, order or other restraint;
(b) the filing or commencement of any action, suit or proceeding,
whether at law or in equity or by or before any court or any Governmental
Authority involving claims in excess of $1,000,000 (exclusive of claims covered
by insurance) or which may reasonably be expected to result in a Default
hereunder;
(c) any Event of Default or Default, specifying the nature and extent
thereof and the action (if any) which is proposed to be taken with respect
thereto;
(d) the incurrence of material burdensome restrictions under contracts
or applicable law which could reasonably be expected to have a Material Adverse
Effect and any other event (including strikes, labor disputes or loss of use of
material patents or trademarks) which could reasonably be expected to have a
Material Adverse Effect; and
Borrower will also notify Agent in writing at least 30 days prior to the date
that any Obligor changes its name or the location of its chief executive office
or principal place of business or the place where it keeps its books and
records.
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7.9 ERISA INFORMATION AND COMPLIANCE. Promptly furnish to Agent (i)
immediately upon receipt, a copy of any notice of complete or partial withdrawal
liability under Title IV of ERISA which could reasonably be expected to have a
Material Adverse Effect and any notice from the PBGC under Title IV of ERISA of
an intent to terminate or appoint a trustee to administer any Plan which could
reasonably be expected to have a Material Adverse Effect, (ii) if requested by
Agent, promptly after the filing thereof with the United States Secretary of
Labor or the PBGC or the Internal Revenue Service, copies of each annual and
other report with respect to each Plan or any trust created thereunder, (iii)
immediately upon becoming aware of the occurrence of any "reportable event," as
such term is defined in Section 4043 of ERISA which could reasonably be expected
to have a Material Adverse Effect, for which the disclosure requirements of
Regulation Section 2615.3 promulgated by the PBGC have not been waived, or of
any "prohibited transaction," as such term is defined in Section 4975 of the
Code, in connection with any Plan or any trust created thereunder which could
reasonably be expected to have a Material Adverse Effect, a written notice
signed by the President or the principal financial officer of Borrower or the
applicable member of the Controlled Group specifying the nature thereof, what
action Borrower or the applicable member of the Controlled Group is taking or
proposes to take with respect thereto, and, when known, any action taken by the
PBGC, the Internal Revenue Service or the Department of Labor with respect
thereto, (iv) promptly after the filing or receiving thereof by Borrower or any
member of the Controlled Group of any notice of the institution of any
proceedings or other actions which may result in the termination of any Plan
which could reasonably be expected to have a Material Adverse Effect, and (v)
each request for waiver of the funding standards or extension of the
amortization periods required by Sections 303 and 304 of ERISA or Section 412 of
the Code promptly after the request is submitted by Borrower or any member of
the Controlled Group to the Secretary of the Treasury, the Department of Labor
or the Internal Revenue Service, as the case may be. To the extent required
under applicable statutory funding requirements, Borrower will fund, or will
cause the applicable member of the Controlled Group to fund, all current service
pension liabilities as they are incurred under the provisions of all Plans from
time to time in effect, and comply with all applicable provisions of ERISA, in
each case, except to the extent that failure to do the same would not reasonably
be expected to have a Material Adverse Effect. Except to the extent that failure
to do the same would not reasonably be expected to have a Material Adverse
Effect, Borrower covenants that it shall and shall cause each member of the
Controlled Group to (1) make contributions to each Plan in accordance with the
time limits imposed by ERISA and in an amount sufficient to comply with the
contribution obligations under such Plan and the minimum funding standards
requirements of ERISA; (2) prepare and file in accordance with the time limits
imposed by ERISA all notices and reports required under the terms of ERISA
including but not limited to annual reports; and (3) pay in accordance with the
time limits imposed by ERISA all required PBGC premiums.
8. NEGATIVE COVENANTS.
Borrower covenants and agrees with Agent and the Lenders that prior to
the termination of this Agreement it will not, and will not suffer or permit any
other Obligor or any Subsidiary of Borrower to, do any of the following without
the prior written consent of the Majority Lenders:
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8.1 BORROWED MONEY INDEBTEDNESS. Create, incur, suffer or permit to
exist, or assume or guarantee, directly or indirectly, or become or remain
liable with respect to any Borrowed Money Indebtedness, whether direct,
indirect, absolute, contingent or otherwise, except the following:
(i) Indebtedness under this Agreement and the other Loan Documents
and Indebtedness secured by Liens permitted by SECTION 8.2
hereof;
(ii) the liabilities existing on the date of this Agreement and
disclosed in the financial statements delivered on or prior to
the Effective Date pursuant to SECTION 6.2 hereof and set
forth on EXHIBIT G hereto, and all renewals, extensions and
replace ments (but not increases) of any of the foregoing;
(iii) the Interest Rate Risk Indebtedness;
(iv) current liabilities incurred in the ordinary course of
business;
(v) so long as no Event of Default has occurred which is
continuing (or would result as a result of the applicable
additional Indebtedness), (i) Subordinated Indebtedness
payable to the applicable sellers in connection with an
acquisition by an Obligor of a new Subsidiary (or the assets
of another Person in lieu of an equity stock acquisition)
providing for payment terms approved by Agent and the Majority
Lenders in writing and (ii) purchase money Indebtedness, in an
aggregate amount not to exceed $1,000,000 at any one time
outstanding, incurred by Subsidiaries acquired after the date
hereof which is assumed in connection with such acquisition;
PROVIDED, HOWEVER, that the Indebtedness permitted under SECTION 8.1(V) hereof
shall be on terms and conditions no more restrictive upon Borrower than the
terms and conditions provided for herein.
8.2 LIENS. Create or suffer to exist any Lien upon any of its Property
now owned or hereafter acquired, or acquire any Property upon any conditional
sale or other title retention device or arrangement or any purchase money
security agreement; or in any manner directly or indirectly sell, assign, pledge
or otherwise transfer any of its Accounts or General Intangibles; PROVIDED,
HOWEVER, that any Obligor may create or suffer to exist the following:
(i) artisans' or mechanics' Liens arising in the ordinary course
of business, and Liens for taxes, but only to the extent that
payment thereof shall not at the time be due or if due, the
payment thereof is being diligently contested in good faith
and adequate reserves computed in accordance with GAAP have
been set aside therefor;
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(ii) normal encumbrances and restrictions on title which do not
secure Borrowed Money Indebtedness and which do not have a
Material Adverse Effect;
(iii) Liens in favor of Agent or any Lender under the Loan
Documents, including, without limitation, Liens securing
Interest Rate Risk Indebtedness owed to one or more of the
Lenders (but not to any Person which is not, at the time the
Interest Rate Risk Indebtedness is incurred, a Lender);
(iv) Liens incurred or deposits made in the ordinary course of
business (1) in connection with workmen's compensation,
unemployment insurance, social security and other like laws,
or (2) to secure insurance in the ordinary course of business,
the performance of bids, tenders, contracts, leases, licenses,
statutory obligations, surety, appeal and performance bonds
and other similar obligations incurred in the ordinary course
of business, not, in any of the cases specified in this clause
(2), incurred in connection with the borrowing of money, the
obtaining of advances or the payment of the deferred purchase
price of Property;
(v) attachments, judgments and other similar Liens arising in
connection with court proceedings, PROVIDED that the execution
and enforcement of such Liens are effectively stayed and the
claims secured thereby are being actively contested in good
faith with adequate reserves made therefor in accordance with
GAAP;
(vi) Liens imposed by law, such as carriers', warehousemen's,
mechanics', materialmen's and vendors' liens, incurred in good
faith in the ordinary course of business and securing
obligations which are not yet due or which are being contested
in good faith by appropriate proceedings if adequate reserves
with respect thereto are maintained in accordance with GAAP;
(vii) zoning restrictions, easements, licenses, reservations,
provisions, covenants, conditions, waivers, and restrictions
on the use of Property, and which do not in any case singly or
in the aggregate materially impair the present use or value of
the Property subject to any such restriction or materially
interfere with the ordinary conduct of the business of any
Obligor or any Subsidiary of Borrower to the extent that it
would cause a Material Adverse Effect;
(viii) capital leases permitted under the other provisions of this
Agreement;
(ix) Liens securing assumed purchase money Indebtedness which is
permitted under SECTION 8.1(V) hereof and which cover only the
applicable Property purchased;
(x) existing Liens as of Effective Date as set forth on EXHIBIT H
hereto; and
(xi) extensions, renewals and replacements of Liens referred to in
CLAUSES (I) through (X) above; PROVIDED that any such
extension, renewal or replacement Lien shall be
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limited to the Property or assets covered by the Lien
extended, renewed or replaced and that the Borrowed Money
Indebtedness secured by any such extension, renewal or
replacement Lien shall be in an amount not greater than the
amount of the Indebtedness secured by the Lien extended,
renewed or replaced.
8.3 CONTINGENT LIABILITIES. Directly or indirectly guarantee the
performance or payment of, or purchase or agree to purchase, or assume or
contingently agree to become or be secondarily liable in respect of, any
obligation or liability of any other Person (other than Subsidiaries) except for
(a) the endorsement of checks or other negotiable instruments in the ordinary
course of business; (b) obligations disclosed to Agent in the financial
statements delivered on or prior to the Effective Date pursuant to SECTION 6.2
hereof (but not increases of such obligations after the Effective Date), (c)
those liabilities permitted under SECTION 8.1 hereof, and (d) earnouts incurred
in connection with acquisitions.
8.4 MERGERS AND CONSOLIDATIONS. In any single transaction or series of
transactions, directly or indirectly: (a) liquidate or dissolve; (b) be a party
to any merger or consolidation unless and so long as (i) no Default or Event of
Default has occurred that is then continuing, (ii) immediately thereafter and
giving effect thereto, no event will occur and be continuing which constitutes a
Default, (iii) the applicable Obligor subject to such merger is the surviving
Person and (iv) Agent is given at least 30 days' prior notice of such merger or
consolidation. The provisions of this Section are subject to the restrictions
set forth in SECTION 8.13 hereof.
8.5 DISPOSITION OF ASSETS. Sell, convey or lease all or any part of its
assets, except for (x) the sale of assets of, or stock owned by, Subsidiaries
acquired after the date hereof within six (6) calendar months following the
acquisition of such Subsidiary, (y) sales of Inventory in the ordinary course of
business and (z) sales of other Property in the ordinary course of business so
long as that portion of the net proceeds realized from such sales in any fiscal
year are, within one (1) year, either reinvested in assets that may be
productively used in the business of the Borrower or the applicable Subsidiary
of Borrower or used to repay Indebtedness of Borrower which has not been
subordinated to the Obligations; PROVIDED, that for purposes of this Agreement,
no sale/leaseback transaction will be deemed to be in the ordinary course of
business.
8.6 REDEMPTION, DIVIDENDS AND DISTRIBUTIONS. At any time: (a) redeem,
retire or otherwise acquire, directly or indirectly, any equity interest in
Borrower or (b) make any distributions of any Property or cash to the owner of
any of the equity interests in any Obligor other than dividends or distributions
by a Subsidiary of Borrower to Borrower.
8.7 NATURE OF BUSINESS. Change the nature of its business or enter into
any business which is substantially different from the business in which it is
presently engaged.
8.8 TRANSACTIONS WITH RELATED PARTIES. Enter into any material
transaction or agreement with any officer, director or holder of any equity
interest in any Obligor (or any Affiliate of any such Person) unless the same is
upon terms substantially similar to those obtainable from wholly unrelated
sources (to the best knowledge of the executive officers of Borrower).
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8.9 LOANS AND INVESTMENTS. Make any loan, advance, extension of credit
or capital contribution to, or make or have any Investment in, any Person, or
make any commitment to make any such extension of credit or Investment, except
(a) normal and reasonable advances in the ordinary course of business to
officers and employees and (b) the following:
(i) obligations, with a maturity of less than two years, with the
full faith and credit of the United States of America;
(ii) direct obligations of any state of the United States, or
municipality therein, rated in one of the two top
classifications by Standard and Poor's Ratings Services or
Moody's Investors Services, Inc. and maturing within two
years;
(iii) certificates of deposit or banker's acceptances, maturing
within two years, issued by US commercial banks having
capital, surplus and undivided profits aggregating not less
than $100 million and whose unsecured long-term debt is rated
in one of the two classifications by Standard and Poor's
Ratings Services or Moody's Investors Services, Inc.;
(iv) commercial paper of any U.S. corporation with a maturity of
less than 270 days and which is rated in one of the two top
classifications by Standard and Poor's Ratings Services or
Moody's Investors Services, Inc.;
(v) Investments by Borrower or any of its Subsidiaries in and to
Borrower or any other Obligor, including Investments in
Persons which after giving effect thereto will become a
wholly-owned Subsidiary of Borrower (subject to compliance
with the provisions of SECTION 8.15 hereof), and
(vi) existing Investments as of Effective Date as set forth on
EXHIBIT I hereto.
8.10 ORGANIZATIONAL DOCUMENTS. Amend, modify, restate or supplement any
of its Organizational Documents if such action would reasonably be expected to
have a Material Adverse Effect, unless such action shall be consented to in
writing by Agent.
8.11 UNFUNDED LIABILITIES. Incur any Unfunded Liabilities after the
Effective Date or allow any Unfunded Liabilities in excess of $500,000, in the
aggregate, to arise or exist.
8.12 CAPITAL EXPENDITURES. Permit Capital Expenditures of Borrower and
its Subsidiaries to exceed $5,000,000, in the aggregate for any period of 12
months.
8.13 ACQUISITIONS. Acquire any real Property or any material personal
Property (including any acquisition of equity interests in another Person) after
the Effective Date with respect to which the aggregate consideration for a
single transaction would exceed $5,000,000.
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8.14 SUBORDINATED INDEBTEDNESS. Except as expressly permitted in
writing by the Majority Lenders, Borrower will not amend, modify or obtain or
grant a waiver of any provision of any document or instrument evidencing any
Subordinated Indebtedness or purchase, redeem, retire or otherwise acquire for
value, deposit any monies with any Person with respect to or make any payment or
prepayment of the principal of or any other amount owing in respect of, any
Subordinated Indebtedness (other than scheduled payments under payment terms
approved by Agent and the Majority Lenders in writing).
8.15 SUBSIDIARIES. Form, create or acquire any Subsidiary, except that
Borrower (or any of its Subsidiaries) may form, create or acquire a wholly-owned
Subsidiary so long as (a) immediately thereafter and giving effect thereto, no
event will occur and be continuing which constitutes a Default; (i) such
Subsidiary shall execute and deliver to Agent a Guaranty in substantially the
same form as the Guaranties executed concurrently herewith; (ii) the applicable
owner(s) of the equity interests in such Subsidiary shall execute and deliver to
Agent such Security Documents as Agent may reasonably require in order to create
a valid, perfected, first priority Lien upon all of the issued and outstanding
equity interests in such Subsidiary, and (iii) the new Subsidiary shall execute
and deliver to Agent such Security Documents as Agent may reasonably require in
order to create a valid, perfected, first priority Lien upon all of the Accounts
and Inventory of such new Subsidiary and (b) Agent is given at least 30 days'
prior written notice of such formation, creation or acquisition.
9. DEFAULTS.
9.1 EVENTS OF DEFAULT. If any one or more of the following events
(herein called "EVENTS OF DEFAULT") shall occur, then Agent may (and at the
direction of the Majority Lenders, shall) do any or all of the following: (1)
without notice to Borrower or any other Person, declare the Revolving Loan
Commitments terminated (whereupon the Revolving Loan Commitments shall be
terminated) and/or accelerate the Revolving Loan Termination Date to a date as
early as the date of termination of the Revolving Loan Commitments; (2)
terminate any Letter of Credit allowing for such termination, by sending a
notice of termination as provided therein and require Borrower to provide Cover
for outstanding Letters of Credit; (3) declare the principal amount then
outstanding of and the unpaid accrued interest on the Loans and Reimbursement
Obligations and all fees and all other amounts payable hereunder, under the
Notes and under the other Loan Documents to be forthwith due and payable,
whereupon such amounts shall be and become immediately due and payable, without
notice (including, without limitation, notice of acceleration and notice of
intent to accelerate), presentment, demand, protest or other formalities of any
kind, all of which are hereby expressly waived by Borrower; PROVIDED that in the
case of the occurrence of an Event of Default with respect to any Obligor
referred to in CLAUSE (F), (G) or (H) of this SECTION 9.1, the Revolving Loan
Commitments shall be automatically terminated and the principal amount then
outstanding of and unpaid accrued interest on the Loans and the Reimbursement
Obligations and all fees and all other amounts payable hereunder, under the
Notes and under the other Loan Documents shall be and become automatically and
immediately due and payable, without notice (including, without limitation,
notice of acceleration and notice of intent to accelerate), presentment, demand,
protest or other formalities of any kind, all of which are hereby
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expressly waived by Borrower, and (4) exercise any or all other rights and
remedies available to Agent or any of the Lenders under the Loan Documents, at
law or in equity:
(a) PAYMENTS - (i) any Obligor shall fail to make any payment
or required prepayment of any installment of principal on the Loans or
any Reimbursement Obligation payable under the Notes, this Agreement or
the other Loan Documents when due or (ii) any Obligor fails to make any
payment or required prepayment of interest with respect to the Loans,
any Reimbursement Obligation or any other fee or amount under the
Notes, this Agreement or the other Loan Documents when due and such
failure to pay continues unremedied for a period of three Business
Days; or
(b) OTHER OBLIGATIONS - any Obligor shall default in the
payment when due of any principal of or interest on any Indebtedness
having an outstanding principal amount of at least $250,000 (other than
the Loans and Reimbursement Obligations) and such default shall
continue beyond any applicable period of grace; or any event or
condition shall occur which results in the acceleration of the maturity
of any Indebtedness having an outstanding principal amount of at least
$250,000 (other than the Loans and Reimbursement Obligations) or
enables (or, with the giving of notice or lapse of time or both, would
enable) the holder of any such Indebtedness or any Person acting on
such holder's behalf to accelerate the maturity thereof and such event
or condition shall not be cured within any applicable period of grace;
or
(c) REPRESENTATIONS AND WARRANTIES - any representation or
warranty made or deemed made by or on behalf of any Obligor in this
Agreement or any other Loan Document or in any certificate furnished or
made by any Obligor to Agent or the Lenders in connection herewith or
therewith shall prove to have been incorrect, false or misleading in
any material respect as of the date thereof or as of the date as of
which the facts therein set forth were stated or certified or deemed
stated or certified; or
(d) AFFIRMATIVE COVENANTS - (i) default shall be made in the
due observance or performance of any of the covenants or agreements
contained in SECTIONS 7.3 or 7.8(C) hereof or (ii) default is made in
the due observance or performance of any of the other covenants and
agreements contained in SECTION 7 hereof or any other affirmative
covenant of any Obligor contained in this Agreement or any other Loan
Document and such default continues unremedied for a period of 30 days
after (x) notice thereof is given by Agent to Borrower or (y) such
default otherwise becomes known to any executive officer of Borrower,
whichever is earlier; or
(e) NEGATIVE COVENANTS - default is made in the due observance
or performance by Borrower of any of the other covenants or agreements
contained in SECTION 8 of this Agreement or of any other negative
covenant of any Obligor contained in this Agreement or any other Loan
Document; or
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(f) INVOLUNTARY BANKRUPTCY OR RECEIVERSHIP PROCEEDINGS - a
receiver, conservator, liquidator or trustee of any Obligor or of any
of its Property is appointed by the order or decree of any court or
agency or supervisory authority having jurisdiction, and such decree or
order remains in effect for more than 60 days; or any Obligor is
adjudicated bankrupt or insolvent; or any of such Person's Property is
sequestered by court order and such order remains in effect for more
than 60 days; or a petition is filed against any Obligor under any
state or federal bankruptcy, reorganization, arrangement, insolvency,
readjustment or debt, dissolution, liquidation or receivership law or
any jurisdiction, whether now or hereafter in effect, and is not
dismissed within 60 days after such filing; or
(g) VOLUNTARY PETITIONS OR CONSENTS - any Obligor commences a
voluntary case or other proceeding or order seeking liquidation,
reorganization, arrangement, insolvency, readjustment of debt,
dissolution, liquidation or other relief with respect to itself or its
debts or other liabilities under any bankruptcy, insolvency or other
similar law now or hereafter in effect or seeking the appointment of a
trustee, receiver, liquidator, custodian or other similar official of
it or any substantial part of its Property, or consents to any such
relief or to the appointment of or taking possession by any such
official in an involuntary case or other proceeding commenced against
it, or fails generally to, or cannot, pay its debts generally as they
become due or takes any corporate action to authorize or effect any of
the foregoing; or
(h) ASSIGNMENTS FOR BENEFIT OF CREDITORS OR ADMISSIONS OF
INSOLVENCY - any Obligor makes an assignment for the benefit of its
creditors, or admits in writing its inability to pay its debts
generally as they become due, or consents to the appointment of a
receiver, trustee, or liquidator of such Obligor or of all or any
substantial part of its Property; or
(i) UNDISCHARGED JUDGMENTS - a final non-appealable judgment
or judgments for the payment of money exceeding, in the aggregate,
$1,000,000 in excess of amounts covered by insurance) is rendered by
any court or other governmental body against any Obligor and such
Obligor does not discharge the same or provide for its discharge in
accordance with its terms, or procure a stay of execution thereof
within 60 days from the date of entry thereof; or
(j) SECURITY DOCUMENTS - any Security Document for any reason
ceases to create a valid and perfected Lien of the first priority
(subject to the Permitted Liens), required thereby on any of the
Collateral purported to be covered thereby and securing that portion of
the Obligations which is therein designated as being secured, or any
Obligor (or any other Person who may have granted or purported to grant
such Lien) will so state in writing; or
(k) CONCEALMENT - any Obligor shall have concealed, removed,
or permitted to be concealed or removed, any part of its Property, with
intent to hinder, delay or defraud
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its creditors or any of them, or shall have made any transfer of its
Property to or for the benefit of a creditor at a time when other
creditors similarly situated have not been paid; or
(l) CHANGE OF CONTROL - there should occur any Change of
Control.
9.2 RIGHT OF SETOFF. Upon the occurrence and during the continuance of
any Event of Default, each Lender (with the approval of the Majority Lenders) is
hereby authorized at any time and from time to time, without notice to any
Obligor (any such notice being expressly waived by Borrower and the other
Obligors), to setoff and apply any and all deposits (general or special, time or
demand, provisional or final (but excluding the funds held in accounts clearly
designated as escrow or trust accounts held by Borrower or any other Obligor for
the benefit of Persons which are not Affiliates of any Obligor, whether or not
such setoff results in any loss of interest or other penalty, and including
without limitation all certificates of deposit) at any time held, and any other
funds or Property at any time held, and other Indebtedness at any time owing by
such Lender to or for the credit or the account of Borrower or any other Obligor
against any and all of the Obligations irrespective of whether or not such
Lender or Agent will have made any demand under this Agreement, the Notes or any
other Loan Document. Should the right of any Lender to realize funds in any
manner set forth hereinabove be challenged and any application of such funds be
reversed, whether by court order or otherwise, the Lenders shall make
restitution or refund to Borrower pro rata in accordance with their Revolving
Loan Commitments. Each Lender agrees to promptly notify Borrower and Agent after
any such setoff and application, provided that the failure to give such notice
will not affect the validity of such setoff and application. The rights of Agent
and the Lenders under this Section are in addition to other rights and remedies
(including without limitation other rights of setoff) which Agent or the Lenders
may have. This Section is subject to the terms and provisions of SECTIONS 4.5
and 11.7 hereof.
9.3 COLLATERAL ACCOUNT. Borrower hereby agrees, in addition to the
provisions of SECTION 9.1 hereof, that upon the occurrence and during the
continuance of any Event of Default, it shall, if requested by Agent or the
Majority Lenders (through Agent), pay to Agent an amount in immediately
available funds equal to the then aggregate amount available for drawings under
all Letters of Credit issued for the account of Borrower, which funds shall be
held by Agent as Cover.
9.4 PRESERVATION OF SECURITY FOR UNMATURED REIMBURSEMENT OBLIGATIONS.
In the event that, following (i) the occurrence of an Event of Default and the
exercise of any rights available to Agent or any Lender under the Loan
Documents, and (ii) payment in full of the principal amount then outstanding of
and the accrued interest on the Loans and Reimbursement Obligations and fees and
all other amounts payable hereunder and under the Notes, any Letters of Credit
shall remain outstanding and undrawn upon, Agent shall be entitled to hold (and
Borrower and each other Obligor hereby grants and conveys to Agent a security
interest in and to) all cash or other Property ("PROCEEDS OF REMEDIES") realized
or arising out of the exercise of any rights available under the Loan Documents,
at law or in equity, including, without limitation, the proceeds of any
foreclosure, as collateral for the payment of any amounts due or to become due
under or in respect
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of such Letters of Credit. Such Proceeds of Remedies shall be held for the
ratable benefit of the Lenders. The rights, titles, benefits, privileges, duties
and obligations of Agent with respect thereto shall be governed by the terms and
provisions of this Agreement. Agent may, but shall have no obligation to, invest
any such Proceeds of Remedies in such manner as Agent, in the exercise of its
sole discretion, deems appropriate. Such Proceeds of Remedies shall be applied
to Reimbursement Obligations arising in respect of any such Letters of Credit
and/or the payment of any Lender's obligations under any such Letter of Credit
when such Letter of Credit is drawn upon. Nothing in this Section shall cause or
permit an increase in the maximum amount of the Revolving Loan Obligations
permitted to be outstanding from time to time under this Agreement.
9.5 REMEDIES CUMULATIVE. No remedy, right or power conferred upon Agent
or any Lender is intended to be exclusive of any other remedy, right or power
given hereunder or now or hereafter existing at law, in equity, or otherwise,
and all such remedies, rights and powers shall be cumulative.
10. AGENT.
10.1 APPOINTMENT, POWERS AND IMMUNITIES. Each Lender hereby irrevocably
appoints and authorizes Agent to act as its agent hereunder, under the Letters
of Credit and under the other Loan Documents with such powers as are
specifically delegated to Agent by the terms hereof and thereof, together with
such other powers as are reasonably incidental thereto. Any Loan Documents
executed in favor of Agent shall be held by Agent for the ratable benefit of the
Lenders. Agent ("Agent" as used in this SECTION 10 shall include reference to
its Affiliates and its own and its Affiliates' respective officers,
shareholders, directors, employees and agents) (a) shall not have any duties or
responsibilities except those expressly set forth in this Agreement, the Letters
of Credit, and the other Loan Documents, and shall not by reason of this
Agreement or any other Loan Document be a trustee or fiduciary for any Lender;
(b) shall not be responsible to any Lender for any recitals, statements,
representations or warranties contained in this Agreement, the Letters of Credit
or any other Loan Document, or in any certificate or other document referred to
or provided for in, or received by any of them under, this Agreement, the
Letters of Credit or any other Loan Document, or for the value, validity,
effectiveness, genuineness, enforceability, execution, filing, registration,
collectibility, recording, perfection, existence or sufficiency of this
Agreement, the Letters of Credit, or any other Loan Document or any other
document referred to or provided for herein or therein or any Property covered
thereby or for any failure by any Obligor or any other Person to perform any of
its obligations hereunder or thereunder, and shall not have any duty to inquire
into or pass upon any of the foregoing matters; (c) shall not be required to
initiate or conduct any litigation or collection proceedings hereunder or under
the Letters of Credit or any other Loan Document except to the extent requested
by the Majority Lenders; (d) shall not be responsible for any mistake of law or
fact or any action taken or omitted to be taken by it hereunder or under the
Letters or Credit or any other Loan Document or any other document or instrument
referred to or provided for herein or therein or in connection herewith or
therewith, including, without limitation, pursuant to its own negligence, except
for its own gross negligence or willful misconduct; (e) shall not be bound by or
obliged to recognize any agreement among or between Borrower and any Lender to
which
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Agent is not a party, regardless of whether Agent has knowledge of the existence
of any such agreement or the terms and provisions thereof; (f) shall not be
charged with notice or knowledge of any fact or information not herein set out
or provided to Agent in accordance with the terms of this Agreement or any other
Loan Document; (g) shall not be responsible for any delay, error, omission or
default of any mail, telegraph, cable or wireless agency or operator, and (h)
shall not be responsible for the acts or edicts of any Governmental Authority.
Agent may employ agents and attorneys-in-fact and shall not be responsible for
the negligence or misconduct of any such agents or attorneys-in-fact selected by
it with reasonable care. Without in any way limiting any of the foregoing, each
Lender acknowledges that Agent shall have no greater responsibility in the
operation of the Letters of Credit than is specified in the Uniform Customs and
Practice for Documentary Credits (1993 Revision, International Chamber of
Commerce Publication No. 500). In any foreclosure proceeding concerning any
Collateral, each holder of an Obligation if bidding for its own account or for
its own account and the accounts of other Lenders is prohibited from including
in the amount of its bid an amount to be applied as a credit against the
Obligations held by it or the Obligations held by the other Lenders; instead,
such holder must bid in cash only. However, in any such foreclosure proceeding,
Agent may (but shall not be obligated to) submit a bid for all Lenders
(including itself) in the form of a credit against the Obligations, and Agent or
its designee may (but shall not be obligated to) accept title to such collateral
for and on behalf of all Lenders.
10.2 RELIANCE. Agent shall be entitled to rely upon any certification,
notice or other communication (including any thereof by telephone, telex,
telegram or cable) believed by it to be genuine and correct and to have been
signed or sent by or on behalf of the proper Person or Persons, and upon advice
and statements of legal counsel (which may be counsel for Borrower), independent
accountants and other experts selected by Agent. Agent shall not be required in
any way to determine the identity or authority of any Person delivering or
executing the same. As to any matters not expressly provided for by this
Agreement, the Letters of Credit, or any other Loan Document, Agent shall in all
cases be fully protected in acting, or in refraining from acting, hereunder and
thereunder in accordance with instructions of the Majority Lenders, and any
action taken or failure to act pursuant thereto shall be binding on all of the
Lenders. Pursuant to instructions of the Majority Lenders, Agent shall have the
authority to execute releases of the Security Documents on behalf of the Lenders
without the joinder of any Lender. If any order, writ, judgment or decree shall
be made or entered by any court affecting the rights, duties and obligations of
Agent under this Agreement or any other Loan Document, then and in any of such
events Agent is authorized, in its sole discretion, to rely upon and comply with
such order, writ, judgment or decree which it is advised by legal counsel of its
own choosing is binding upon it under the terms of this Agreement, the relevant
Loan Document or otherwise; and if Agent complies with any such order, writ,
judgment or decree, then it shall not be liable to any Lender or to any other
Person by reason of such compliance even though such order, writ, judgment or
decree may be subsequently reversed, modified, annulled, set aside or vacated.
10.3 DEFAULTS. Agent shall not be deemed to have knowledge of the
occurrence of a Default (other than the non-payment of principal of or interest
on Loans or Reimbursement Obligations) unless Agent has received notice from a
Lender or Borrower specifying such Default
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and stating that such notice is a "NOTICE OF DEFAULT." In the event that Agent
receives such a Notice of Default, Agent shall give prompt notice thereof to the
Lenders (and shall give each Lender prompt notice of each such non-payment).
Agent shall (subject to SECTION 10.7 hereof) take such action with respect to
such Notice of Default as shall be directed by the Majority Lenders and within
its rights under the Loan Documents and at law or in equity, PROVIDED that,
unless and until Agent shall have received such directions, Agent may (but shall
not be obligated to) take such action, or refrain from taking such action,
permitted hereby with respect to such Notice of Default as it shall deem
advisable in the best interests of the Lenders and within its rights under the
Loan Documents, at law or in equity.
10.4 MATERIAL WRITTEN NOTICES. In the event that Agent receives any
written notice of a material nature from the Borrower or any Obligor under the
Loan Documents, Agent shall promptly inform each of the Lenders thereof.
10.5 RIGHTS AS A LENDER. With respect to its Revolving Loan Commitments
and the Loans made and Letter of Credit Liabilities, TCB in its capacity as a
Lender hereunder shall have the same rights and powers hereunder as any other
Lender and may exercise the same as though it were not acting in its agency
capacity, and the term "LENDER" or "LENDERS" shall, unless the context otherwise
indicates, include Agent in its individual capacity. Agent may (without having
to account therefor to any Lender) accept deposits from, lend money to and
generally engage in any kind of banking, trust, letter of credit, agency or
other business with Borrower (and any of its Affiliates) as if it were not
acting as Agent, and Agent may accept fees and other consideration from Borrower
(in addition to the fees heretofore agreed to between Borrower and Agent) for
services in connection with this Agreement or otherwise without having to
account for the same to the Lenders.
10.6 INDEMNIFICATION. The Lenders agree to indemnify Agent (to the
extent not reimbursed under SECTION 2.2(C), SECTION 11.3 or SECTION 11.4 hereof,
but without limiting the obligations of Borrower under said SECTIONS 2.2(C),
11.3 and 11.4), ratably in accordance with the Lenders' respective Revolving
Loan Commitments, for any and all liabilities, obligations, losses, damages,
penalties, actions, judgments, suits, costs, expenses or disbursements of any
kind and nature whatsoever, REGARDLESS OF WHETHER CAUSED IN WHOLE OR IN PART BY
THE NEGLIGENCE OF ANY INDEMNIFIED PARTIES, which may be imposed on, incurred by
or asserted against Agent in any way relating to or arising out of this
Agreement, the Letters of Credit or any other Loan Document or any other
documents contemplated by or referred to herein or therein or the transactions
contemplated hereby or thereby (including, without limitation, the costs and
expenses which Borrower is obligated to pay under SECTIONS 2.2(C), 11.3 and 11.4
hereof, interest, penalties, attorneys' fees and amounts paid in settlement, but
excluding, unless a Default has occurred and is continuing, normal
administrative costs and expenses incident to the performance of its agency
duties hereunder) or the enforcement of any of the terms hereof or thereof or of
any such other documents; PROVIDED that no Lender shall be liable for any of the
foregoing to the extent they arise from the gross negligence or willful
misconduct of the party to be indemnified. The obligations of the Lenders under
this SECTION 10.6 shall survive the termination of this Agreement and the
repayment of the Obligations.
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10.7 NON-RELIANCE ON AGENT AND OTHER LENDERS. Each Lender agrees that
it has received current financial information with respect to Borrower and each
other Obligor that it has, independently and without reliance on Agent or any
other Lender and based on such documents and information as it has deemed
appropriate, made its own credit analysis of Borrower and each other Obligor and
decision to enter into this Agreement and that it will, independently and
without reliance upon Agent or any other Lender, and based on such documents and
information as it shall deem appropriate at the time, continue to make its own
analysis and decisions in taking or not taking action under this Agreement or
any of the other Loan Documents. Agent shall not be required to keep itself
informed as to the performance or observance by any Obligor of this Agreement,
the Letters of Credit or any of the other Loan Documents or any other document
referred to or provided for herein or therein or to inspect the properties or
books of any Obligor. Except for notices, reports and other documents and
information expressly required to be furnished to the Lenders by Agent
hereunder, under the Letters of Credit or the other Loan Documents, Agent shall
not have any duty or responsibility to provide any Lender with any credit or
other information concerning the affairs, financial condition or business of any
Obligor (or any of their affiliates) which may come into the possession of
Agent.
10.8 FAILURE TO ACT. Except for action expressly required of Agent
hereunder, under the Letters of Credit or under the other Loan Documents, Agent
shall in all cases be fully justified in failing or refusing to act hereunder
and thereunder unless it shall receive further assurances to its satisfaction by
the Lenders of their indemnification obligations under SECTION 10.6 hereof
against any and all liability and expense which may be incurred by it by reason
of taking or continuing to take any such action.
10.9 RESIGNATION OR REMOVAL OF AGENT. Subject to the appointment and
acceptance of a successor Agent as provided below, Agent may resign at any time
by giving notice thereof to the Lenders and Borrower, and Agent may be removed
at any time with or without cause by the Majority Lenders; PROVIDED, that Agent
shall continue as Agent until such time as any successor shall have accepted
appointment as Agent hereunder. Upon any such resignation or removal, (i) the
Majority Lenders without the consent of Borrower shall have the right to appoint
a successor Agent so long as such successor Agent is also a Lender at the time
of such appointment and (ii) the Majority Lenders shall have the right to
appoint a successor Agent that is not a Lender at the time of such appointment
so long as Borrower consents to such appointment (which consent shall not be
unreasonably withheld). If no successor Agent shall have been so appointed by
the Majority Lenders and accepted such appointment within 30 days after the
retiring Agent's giving of notice of resignation or the Majority Lenders'
removal of the retiring Agent, then the retiring Agent may, on behalf of the
Lenders, appoint a successor Agent. Any successor Agent shall be a bank which
has an office in the United States and a combined capital and surplus of at
least $250,000,000. Upon the acceptance of any appointment as Agent hereunder by
a successor Agent, such successor Agent shall thereupon succeed to and become
vested with all the rights, powers, privileges and duties of the retiring Agent
and the retiring Agent shall be discharged from its duties and obligations
hereunder and under any other Loan Documents. Such successor Agent shall
promptly specify by notice to Borrower its Principal Office referred to in
SECTION 3.1 and SECTION 4 hereof. After any retiring Agent's resignation or
removal hereunder as Agent, the
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provisions of this SECTION 10 shall continue in effect for its benefit in
respect of any actions taken or omitted to be taken by it while it was acting as
Agent.
10.10 NO PARTNERSHIP. Neither the execution and delivery of this
Agreement nor any of the other Loan Documents nor any interest the Lenders,
Agent or any of them may now or hereafter have in all or any part of the
Obligations shall create or be construed as creating a partnership, joint
venture or other joint enterprise between the Lenders or among the Lenders and
Agent. The relationship between the Lenders, on the one hand, and Agent, on the
other, is and shall be that of principals and agent only, and nothing in this
Agreement or any of the other Loan Documents shall be construed to constitute
Agent as trustee or other fiduciary for any Lender or to impose on Agent any
duty, responsibility or obligation other than those expressly provided for
herein and therein.
11. MISCELLANEOUS.
11.1 WAIVER. No waiver of any Default or Event of Default shall be a
waiver of any other Default or Event of Default. No failure on the part of Agent
or any Lender to exercise and no delay in exercising, and no course of dealing
with respect to, any right, power or privilege under any Loan Document shall
operate as a waiver thereof, nor shall any single or partial exercise of any
right, power or privilege thereunder preclude any other or further exercise
thereof or the exercise of any other right, power or privilege. The remedies
provided in the Loan Documents are cumulative and not exclusive of any remedies
provided by law or in equity.
11.2 NOTICES. All notices and other communications provided for herein
(including, without limitation, any modifications of, or waivers or consents
under, this Agreement) shall be given or made by telex, telegraph, telecopy
(confirmed by mail), cable or other writing and telexed, telecopied,
telegraphed, cabled, mailed or delivered to the intended recipient at the
"Address for Notices" specified below its name on the signature pages hereof (or
provided for in an Assignment and Acceptance); or, as to any party hereto, at
such other address as shall be designated by such party in a notice (given in
accordance with this Section) (i) as to Borrower, to Agent, (ii) as to Agent, to
Borrower and to each Lender, and (iii) as to any Lender, to Borrower and Agent.
Except as otherwise provided in this Agreement, all such notices or
communications shall be deemed to have been duly given when (i) transmitted by
telex or telecopier or delivered to the telegraph or cable office, (ii)
personally delivered (iii) one Business Day after deposit with an overnight mail
or delivery service, postage prepaid or (iv) three Business Days' after deposit
in a receptacle maintained by the United States Postal Service, postage prepaid,
registered or certified mail, return receipt requested, in each case given or
addressed as aforesaid.
11.3 EXPENSES, ETC. Whether or not any Loan is ever made or any Letter
of Credit ever issued, Borrower shall pay or reimburse within 10 days after
written demand (a) Agent for paying the reasonable fees and expenses of legal
counsel to Agent in connection with the preparation, negotiation, execution and
delivery of this Agreement (including the exhibits and schedules hereto), the
other Loan Documents and the making of the Loans and the issuance of Letters of
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Credit hereunder, and any modification, supplement or waiver of any of the terms
of this Agreement, the Letters of Credit or any other Loan Document; (b) Agent
for any lien search fees; (c) Agent for reasonable out-of-pocket expenses
incurred by Agent in connection with the preparation, documentation,
administration and syndication of the Loans or any of the Loan Documents
(including, without limitation, the marketing, printing, duplicating, mailing
and similar expenses) of the Loans and Letter of Credit Liabilities; (d) Agent
for paying all transfer, stamp, documentary or other similar taxes, assessments
or charges levied by any governmental or revenue authority in respect of this
Agreement, any Letter of Credit or any other Loan Document or any other document
referred to herein or therein; (e) Agent for paying all costs, expenses, taxes,
assessments and other charges incurred in connection with any filing,
registration, recording or perfection of any security interest contemplated by
this Agreement or any document referred to herein and (f) following the
occurrence and during the continuation of an Event of Default, any Lender or
Agent for paying all amounts reasonably expended, advanced or incurred by such
Lender or Agent to satisfy any obligation of any Obligor under this Agreement or
any other Loan Document, to protect Collateral, to collect the Obligations or to
enforce, protect, preserve or defend the rights of the Lenders or Agent under
this Agreement or any other Loan Document, including, without limitation, fees
and expenses incurred in connection with such Lender's or Agent's participation
as a member of a creditor's committee in a case commenced under the Bankruptcy
Code or other similar law, fees and expenses incurred in connection with lifting
the automatic stay prescribed in ss. 362 of the Bankruptcy Code and fees and
expenses incurred in connection with any action pursuant to ss. 1129 of the
Bankruptcy Code and all other customary out-of-pocket expenses incurred by such
Lender or Agent in connection with such matters, together with interest thereon
at the Past Due Rate on each such amount until the date of reimbursement to such
Lender or Agent.
11.4 INDEMNIFICATION. Borrower shall indemnify each of Agent, the
Lenders, and each Affiliate thereof and their respective directors, officers,
employees and agents from, and hold each of them harmless against, any and all
losses, liabilities, claims or damages to which any of them may become subject,
REGARDLESS OF WHETHER CAUSED IN WHOLE OR IN PART BY THE NEGLIGENCE OF ANY
INDEMNIFIED PARTIES, insofar as such losses, liabilities, claims or damages
arise out of or result from any (i) actual or proposed use by Borrower of the
proceeds of any extension of credit (whether a Loan or a Letter of Credit) by
any Lender hereunder; (ii) breach by any Obligor of this Agreement or any other
Loan Document; (iii) violation by any Obligor of any Legal Requirement; (iv)
investigation, litigation or other proceeding relating to any of the foregoing,
and Borrower shall reimburse Agent, each Lender, and each Affiliate thereof and
their respective directors, officers, employees and agents, upon demand for any
reasonable expenses (including reasonable legal fees) incurred in connection
with any such investigation or proceeding, or (v) taxes (excluding income taxes
and franchise taxes) payable or ruled payable by any Governmental Authority in
respect of the Obligations or any Loan Document, together with interest and
penalties, if any; PROVIDED that Borrower shall not be required to indemnify any
party seeking indemnification for any claims, damages, losses, liabilities,
costs or expenses to the extent, but only to the extent, caused by (i) the
willful misconduct or gross negligence of the party seeking indemnification, or
(ii) the failure by the party seeking indemnification to pay under any Letter of
Credit after the presentation to it of a
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request required to be paid under applicable law or (iii) disputes between or
among any and all of Agent, Lenders and Issuers.. Nothing in this Section is
intended to limit the obligations of Borrower under any other provision of this
Agreement. Agent and each Lender, respectively, shall indemnify Borrower and
hold Borrower harmless from and against the gross negligence or willful
misconduct of Agent or such Lender, as the case may be.
11.5 AMENDMENTS, ETC. No amendment or modification of this Agreement,
the Notes or any other Loan Document shall in any event be effective against
Borrower unless the same shall be agreed or consented to in writing by Borrower.
No amendment, modification or waiver of any provision of this Agreement, the
Notes or any other Loan Document, nor any consent to any departure by Borrower
therefrom, shall in any event be effective against the Lenders unless the same
shall be agreed or consented to in writing by the Majority Lenders, and each
such waiver or consent shall be effective only in the specific instance and for
the specific purpose for which given; PROVIDED, that no amendment, modification,
waiver or consent shall, unless in writing and signed by each Lender affected
thereby, do any of the following: (a) increase any Revolving Loan Commitment of
any of the Lenders (or reinstate any termination or reduction of the Revolving
Loan Commitments) or subject any of the Lenders to any additional obligations;
(b) reduce the principal of, or interest on, any Loan, Reimbursement Obligation
or fee hereunder; (c) postpone or extend the Revolving Loan Maturity Date, the
Revolving Loan Termination Date, the Revolving Loan Availability Period or any
scheduled date fixed for any payment of principal of, or interest on, any Loan,
Reimbursement Obligation, fee or other sum to be paid hereunder or waive any
Event of Default described in SECTION 9.1(A) hereof; (d) change the percentage
of any of the Revolving Loan Commitments or of the aggregate unpaid principal
amount of any of the Loans and Letter of Credit Liabilities, or the percentage
of Lenders, which shall be required for the Lenders or any of them to take any
action under this Agreement (including, without linitation, the definition of
"Majority Lenders"); (e) change any provision contained in SECTIONS 2.2(C), 3.4,
11.3 OR 11.4 hereof or this SECTION 11.5; (f) release any Person from liability
under a Guaranty or substantially all of the security for the Obligations or
release Collateral (exclusive of Collateral with respect to which Agent is
obligated to provide a release pursuant to this Agreement or any of the other
Loan Documents or by law) in any one (1) calendar year ascribed an aggregate
value on the most recent financial statements of Borrower delivered to Agent in
excess of $1,000,000, or (g) modify the provisions of SECTIONS 4.1(B) or 4.2
hereof regarding PRO RATA application of amounts after an Event of Default shall
have occurred and be continuing. Notwithstanding anything in this SECTION 11.5
to the contrary, no amendment, modification, waiver or consent shall be made
with respect to SECTION 10 without the consent of Agent to the extent it affects
Agent, as Agent.
11.6 SUCCESSORS AND ASSIGNS.
(a) This Agreement shall be binding upon and inure to the benefit of
Borrower, Agent and the Lenders and their respective successors and assigns;
PROVIDED, HOWEVER, that Borrower may not assign or transfer any of its rights or
obligations hereunder without the prior written con sent of all of the Lenders,
and any such assignment or transfer without such consent shall be null and void.
Each Lender may sell participations to any Person in all or part of any Loan, or
all or
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part of its Notes, Revolving Loan Commitments or interests in Letters of Credit,
in which event, without limiting the foregoing, the provisions of the Loan
Documents shall inure to the benefit of each purchaser of a participation;
PROVIDED, HOWEVER, the PRO RATA treatment of payments, as described in SECTION
4.2 hereof, shall be determined as if such Lender had not sold such
participation. Any Lender that sells one or more participations to any Person
shall not be relieved by virtue of such participation from any of its
obligations to Borrower under this Agreement relating to the Loans. In the event
any Lender shall sell any participation, such Lender shall retain the sole right
and responsibility to enforce the obligations of Borrower relating to the Loans,
including, without limitation, the right to approve any amendment, modification
or waiver of any provision of this Agreement other than amendments,
modifications or waivers with respect to (i) any fees payable hereunder to the
Lenders, (ii) the amount of principal or the rate of interest payable on, or the
dates fixed for the scheduled repayment of principal of, the Loans and (iii) the
release of the Liens on all or substantially all of the Collateral.
(b) Each Lender may assign to one or more Lenders or any other Person
all or a portion of its interests, rights and obligations under this Agreement;
PROVIDED, HOWEVER, that (i) the aggregate amount of the Revolving Loan
Commitments of the assigning Lender subject to each such assignment shall in no
event be less than $5,000,000; (ii) other than in the case of an assignment to
another Lender (that is, at the time of the assignment, a party hereto) or to an
Affiliate of such Lender or to a Federal Reserve Bank, Agent and, so long as no
Event of Default shall have occurred and be continuing, Borrower must each give
its prior written consent, which consents shall not be unreasonably withheld,
and (iii) the parties to each such assignment shall execute and deliver to
Agent, for its acceptance an Assignment and Acceptance in the form of EXHIBIT D
hereto (each an "ASSIGNMENT AND ACCEPTANCE") with blanks appropriately
completed, together with any Note or Notes subject to such assignment and a
processing and recording fee of $3,000 paid by the assignee (for which Borrower
will have no liability). Upon such execution, delivery and acceptance, from and
after the effective date specified in each Assignment and Acceptance, (A) the
assignee thereunder shall be a party hereto and, to the extent provided in such
Assignment and Acceptance, have the rights and obligations of a Lender hereunder
and (B) the Lender thereunder shall, to the extent provided in such Assignment
and Acceptance, be released from its obligations under this Agreement (and, in
the case of an Assignment and Acceptance covering all or the remaining portion
of an assigning Lender's rights and obligations under this Agreement, such
Lender shall cease to be a party hereto except in respect of provisions of this
Agreement which survive payment of the Obligations and termination of the
Commitments). Notwithstanding anything contained in this Agreement to the
contrary, any Lender may at any time assign all or any portion of its rights
under this Agreement and the Notes issued to it as collateral to a Federal
Reserve Bank; provided that no such assignment shall release such Lender from
any of its obligations hereunder.
(c) By executing and delivering an Assignment and Acceptance, the
Lender assignor thereunder and the assignee thereunder confirm to and agree with
each other and the other parties hereto as follows: (i) other than the
representation and warranty that it is the legal and beneficial owner of the
interest being assigned thereby free and clear of any adverse claim, such Lender
assignor makes no representation or warranty and assumes no responsibility with
respect to any
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statements, warranties or representations made in or in connection with this
Agreement or any of the other Loan Documents or the execution, legality,
validity, enforceability, genuineness, sufficiency or value of this Agreement or
any of the other Loan Documents or any other instrument or document furnished
pursuant thereto; (ii) such Lender assignor makes no representation or warranty
and assumes no responsibility with respect to the financial condition of
Borrower or the performance or observance by Borrower of any of its obligations
under this Agreement or any of the other Loan Documents or any other instrument
or document furnished pursuant hereto; (iii) such assignee confirms that it has
received a copy of this Agreement, together with copies of the financial
statements referred to in SECTION 6.2 hereof and such other documents and
information as it has deemed appropriate to make its own credit analysis and
decision to enter into such Assignment and Acceptance; (iv) such assignee will,
independently and without reliance upon Agent, such Lender assignor or any other
Lender and based on such documents and information as it shall deem appropriate
at the time, continue to make its own credit decisions in taking or not taking
action under this Agreement and the other Loan Documents; (v) such assignee
appoints and authorizes Agent to take such action as agent on its behalf and to
exercise such powers under this Agreement and the other Loan Documents as are
delegated to Agent by the terms hereof, together with such powers as are
reasonably incidental thereto; and (vi) such assignee agrees that it will
perform in accordance with their terms all obligations that by the terms of this
Agreement and the other Loan Documents are required to be performed by it as a
Lender.
(d) The entries in the records of Agent as to each Assignment and
Acceptance delivered to it and the names and addresses of the Lenders and the
Revolving Loan Commitments of, and principal amount of the Loans owing to, each
Lender from time to time shall create a rebuttable presumption as to the
accuracy thereof and Borrower, Agent and the Lenders may treat each Person the
name of which is recorded in the books and records of Agent as a Lender
hereunder for all purposes of this Agreement and the other Loan Documents.
(e) Upon Agent's receipt of an Assignment and Acceptance executed by an
assigning Lender and the assignee thereunder, together with any Note or Notes
subject to such assignment and the written consent to such assignment (to the
extent consent is required), Agent shall, if such Assignment and Acceptance has
been completed with blanks appropriately filled, (i) accept such Assignment and
Acceptance, (ii) record the information contained therein in its records and
(iii) give prompt notice thereof to Borrower. Within ten (10) Business Days
after receipt of notice, Borrower, at its own expense, shall execute and deliver
to Agent in exchange for the surrendered Notes new Notes to the order of such
assignee in an amount equal to the Revolving Loan Commitments assumed by it
pursuant to such Assignment and Acceptance and, if the assigning Lender has
retained Revolving Loan Commitments hereunder, new Notes to the order of the
assigning Lender in an amount equal to the Revolving Loan Commitment retained by
it hereunder. Such new Notes shall be in an aggregate principal amount equal to
the aggregate principal amount of such surrendered Notes, shall be dated the
effective date of such Assignment and Acceptance and shall otherwise be in
substantially the form of the respective Note. Thereafter, such surrendered
Notes shall be marked renewed and substituted and the originals thereof
delivered to
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Borrower (with copies, certified by Borrower as true, correct and complete, to
be retained by Agent).
(f) Any Lender may, in connection with any assignment or participation
or proposed assignment or participation pursuant to this SECTION 11.6, disclose
to the assignee or participant or proposed assignee or participant, any
information relating to Borrower furnished to such Lender by or on behalf of
Borrower.
11.7 LIMITATION OF INTEREST. Borrower and the Lenders intend to
strictly comply with all applicable federal and Texas laws, including applicable
usury laws (or the usury laws of any jurisdiction whose usury laws are deemed to
apply to the Notes or any other Loan Documents despite the intention and desire
of the parties to apply the usury laws of the State of Texas). Accordingly, the
provisions of this SECTION 11.7 shall govern and control over every other
provision of this Agreement or any other Loan Document which conflicts or is
inconsistent with this Section, even if such provision declares that it
controls. As used in this Section, the term "interest" includes the aggregate of
all charges, fees, benefits or other compensation which constitute interest
under applicable law, PROVIDED that, to the maximum extent permitted by
applicable law, (a) any non-principal payment shall be characterized as an
expense or as compensation for something other than the use, forbearance or
detention of money and not as interest, and (b) all interest at any time
contracted for, reserved, charged or received shall be amortized, prorated,
allocated and spread, in equal parts during the full term of the Obligations. In
no event shall Borrower or any other Person be obligated to pay, or any Lender
have any right or privilege to reserve, receive or retain, (a) any interest in
excess of the maximum amount of nonusurious interest permitted under the laws of
the State of Texas or the applicable laws (if any) of the United States or of
any other jurisdiction, or (b) total interest in excess of the amount which such
Lender could lawfully have contracted for, reserved, received, retained or
charged had the interest been calculated for the full term of the Obligations at
the Ceiling Rate. The daily interest rates to be used in calculating interest at
the Ceiling Rate shall be determined by dividing the applicable Ceiling Rate per
annum by the number of days in the calendar year for which such calculation is
being made. None of the terms and provisions contained in this Agreement or in
any other Loan Document (including, without limitation, SECTION 9.1 hereof)
which directly or indirectly relate to interest shall ever be construed without
reference to this SECTION 11.7, or be construed to create a contract to pay for
the use, forbearance or detention of money at an interest rate in excess of the
Ceiling Rate. If the term of any Obligation is shortened by reason of
acceleration of maturity as a result of any Default or by any other cause, or by
reason of any required or permitted prepayment, and if for that (or any other)
reason any Lender at any time, including but not limited to, the stated
maturity, is owed or receives (and/or has received) interest in excess of
interest calculated at the Ceiling Rate, then and in any such event all of any
such excess interest shall be canceled automatically as of the date of such
acceleration, prepayment or other event which produces the excess, and, if such
excess interest has been paid to such Lender, it shall be credited PRO TANTO
against the then-outstanding principal balance of Borrower's obligations to such
Lender, effective as of the date or dates when the event occurs which causes it
to be excess interest, until such excess is exhausted or all of such principal
has been fully paid
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and satisfied, whichever occurs first, and any remaining balance of such excess
shall be promptly refunded to its payor.
11.8 SURVIVAL. The obligations of Borrower under SECTIONS 2.2(C),
2.2(D), 3.4, 11.3 AND 11.4 hereof and all other obligations of Borrower in any
other Loan Document (to the extent stated therein), the obligations of each
Issuer under the last sentence of SECTION 2.2(B)(III) and the obligations of the
Lenders under SECTION 10.5 and 11.7 hereof, shall, notwithstanding anything
herein to the contrary, survive the repayment of the Loans and Reimbursement
Obligations and the termination of the Revolving Loan Commitments and the
Letters of Credit.
11.9 CAPTIONS. Captions and section headings appearing herein are
included solely for convenience of reference and are not intended to affect the
interpretation of any provision of this Agreement.
11.10 COUNTERPARTS. This Agreement may be executed in any number of
counterparts, all of which taken together shall constitute one and the same
agreement and any of the parties hereto may execute this Agreement by signing
any such counterpart.
11.11 GOVERNING LAW. THIS AGREEMENT AND (EXCEPT AS THEREIN PROVIDED)
THE OTHER LOAN DOCUMENTS SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH
THE APPLICABLE LAWS OF THE STATE OF TEXAS AND THE UNITED STATES OF AMERICA FROM
TIME TO TIME IN EFFECT.
11.12 SEVERABILITY. Whenever possible, each provision of the Loan
Documents shall be interpreted in such manner as to be effective and valid under
applicable law. If any provision of any Loan Document shall be invalid, illegal
or unenforceable in any respect under any applicable law, the validity, legality
and enforceability of the remaining provisions of such Loan Document shall not
be affected or impaired thereby.
11.13 TAX FORMS. Each Lender which is organized under the laws of a
jurisdiction outside the United States shall, on the day of the initial
borrowing from each such Lender hereunder and from time to time thereafter if
requested by Borrower or Agent, provide Agent and Borrower with the forms
prescribed by the Internal Revenue Service of the United States certifying as to
such Lender's status for purposes of determining exemption from United States
withholding taxes with respect to all payments to be made to such Lender
hereunder or other documents satisfactory to such Lender, Borrower and Agent
indicating that all payments to be made to such Lender hereunder are not subject
to United States withholding tax or are subject to such tax at a rate reduced by
an applicable tax treaty. Unless Borrower and Agent shall have received such
forms or such documents indicating that payments hereunder are not subject to
United States withholding tax or are subject to such tax at a rate reduced by an
applicable tax treaty, Borrower or Agent shall withhold taxes from such payments
at the applicable statutory rate.
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11.14 CONFLICTS BETWEEN THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS. In
the event of any conflict between the terms of this Agreement and the terms of
any of the other Loan Documents, the terms of this Agreement shall control.
11.15 DISCLOSURE TO OTHER PERSONS; CONFIDENTIALITY. Agent and each
Lender agree that it may deliver copies of any financial statements and other
documents or information delivered to it and disclose any other information
disclosed to it by or on behalf of Borrower or any Subsidiary of Borrower in
connection with or pursuant to this Agreement and the other Loan Documents only
to:
(i) its directors, officers, employees and professional
consultants;
(ii) any other Lender;
(iii) any Person to which such Lender offers to sell its Note
or any part thereof, provided that each such Person agrees in writing
to observe the confidentiality standards described in this Section;
(iv) any Person to which such Lender sells or offers to sell a
participation in all or any part of its Note, PROVIDED that each such
Person agrees in writing to observe the confidentiality standards
described in this Section;
(v) any federal or state regulatory authority having
jurisdiction over it;
(vi) any other Person to which such delivery or disclosure may
be necessary or reasonably appropriate in response to any subpoena or
other legal process or investigative demand, and
(vii) any other Person in connection with any litigation
involving any obligation, right or remedy of Agent or any Lender under
the Loan Documents.
Subject to the foregoing, Agent and each Lender hereby agrees to use its best
efforts to hold in confidence and not to disclose any Confidential Information;
PROVIDED, that such Person will be free, after notice to Borrower, to correct
any false or misleading information which may become public concerning its
relationship to Borrower. For the purpose of this Section, the term
"CONFIDENTIAL INFORMATION" shall mean information about Borrower or any
Subsidiary of Borrower furnished by Borrower or any such Subsidiary, but does
not include any information which (i) is publicly known, or otherwise known to
such holder, at the time of disclosure; (ii) subsequently becomes publicly
known, but not through any act or omission by such holder, or (iii) otherwise
becomes known to such holder other than through disclosure by Borrower or any
Subsidiary of Borrower.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the Effective Date.
INNOVATIVE VALVE TECHNOLOGIES, INC.,
63
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a Delaware corporation
By: _____________________________
Charles F. Schugart, Senior Vice
President, Chief Financial Officer,
Treasurer and Secretary
Address for Notices:
14900 Woodham Drive, Suite A-125
Houston, Texas 77073
Attention: Mr.Charles F. Schugart, Senior Vice
President, Chief Financial Officer,
Treasurer and Secretary
Telecopy No.: (281) 821-1123
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TEXAS COMMERCE BANK NATIONAL
ASSOCIATION, as Agent and as a Lender
By: _____________________________
Name: ___________________________
Title: __________________________
Address for Notices:
Revolving Loan Commitment: 712 Main Street
Houston, Texas 77002
$15,000,000 Attention: Manager, Diversified Corporate Group
Telecopy No.: (713) 216-6004
65
<PAGE>
FIRST UNION NATIONAL BANK
By: _____________________________
Name: ___________________________
Title: __________________________
Address for Notices:
Revolving Loan Commitment: One First Union Center
301 South College Street, DC-5
Charlotte, North Carolina 28288
$10,000,000 Attention: Mr. David Hall
Telecopy No.: (704) 374-2802
66
<PAGE>
WELLS FARGO BANK (TEXAS), NATIONAL
ASSOCIATION
By: _____________________________
Name: ___________________________
Title: __________________________
Address for Notices:
Revolving Loan Commitment: Wells Fargo Bank (Texas), National Association
1000 Louisiana, 3rd Floor
$10,000,000 Houston, Texas 77002
Attention: Mr. Christopher King
Telecopy No.: (713) 250-7029
67
<PAGE>
BANK OF AMERICA TEXAS, N.A.
By: _____________________________
Name: ___________________________
Title: __________________________
Address for Notices:
Revolving Loan Commitment: Bank of America Texas, N.A.
333 Clay Street, Suite 3600
$15,000,000 Houston, Texas 77002
Attention: Mr. Victor N. Tekell
Telecopy No.: (713) 652-3619
68
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COMERICA BANK, TEXAS
By: _____________________________
Name: ___________________________
Title: __________________________
Address for Notices:
Revolving Loan Commitment: Comerica Bank, Texas
910 Louisiana
One Shell Plaza
$10,000,000 Houston, Texas 77002
Attention: Mr. Eric Lindquist
Telecopy No.: (713) 722-6550
69
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
reports (and to all references to our Firm) included in this registration
statement.
ARTHUR ANDERSEN LLP
Houston, Texas
October 21, 1997
EXHIBIT 23.2
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Amendment No. 3 to Registration Statement No.
333-31617 of Innovative Valve Technologies, Inc. on Form S-1 of our report dated
January 17, 1997 (January 31, 1997 as to Notes 2 and 7) on the consolidated
financial statements of Harley Industries, Inc. as of October 31, 1995 and 1996
and for each of the three years in the period ended October 31, 1996, appearing
in the Prospectus, which is part of this Registration Statement.
We also consent to the reference to us under the heading "Experts" in
such Prospectus.
Deloitte & Touche LLP
Tulsa, Oklahoma
October 21, 1997
EXHIBIT 23.2
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Amendment No. 3 to Registration Statement
No. 333-31617 of Innovative Valve Technologies, Inc. on Form S-1 of our report
dated April 11, 1997, on the financial statements of GSV, Inc. as of December
31, 1995 and 1996 and for each of the three years in the period ended December
31, 1996 appearing in the Prospectus, which is part of this Registration
Statement.
We also consent to the reference to us under the heading "Experts" in
such Prospectus.
Deloitte & Touche LLP
Orlando, Florida
October 21, 1997
