AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 22, 1997
REGISTRATION NO. 333-31617
================================================================================
SECURITIES AND EXCHANGE COMMISSION
------------------------
AMENDMENT NO. 1
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)
<TABLE>
<CAPTION>
<S> <C> <C> <C>
DELAWARE 5085, 7699 76-0530346
(STATE OR OTHER JURISDICTION (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBERS) IDENTIFICATION NUMBER)
</TABLE>
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 SEPTEMBER 22, 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. INVATEC HAS APPLIED TO HAVE THE
COMMON STOCK 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>
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- ----------------------------------------------------------------------------------------------------------
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 45-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 MONTGOMERY SECURITIES ON OR ABOUT _____________, 1997.
MONTGOMERY SECURITIES FURMAN SELZ
, 1997
<PAGE>
INVATEC
Innovative Valve Technologies, Inc.
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 plant turnarounds,
Invatec uses its fleet of twenty-eight mobile machine shops to perform work
directly at the customer's facility.
NEW PRODUCT AND VALUE-ADDED DISTRIBUTION
[Graphic: Description of Photograph -- To Come]
Invatec's facilities maintain a large inventory of new valves and process system
components. Many of these products are assembled, tested and certified by the
Company and can be customized to meet individual customer and application
requirements.
ON-LINE REPAIR SERVICES
[Graphic: Photograph of hand-held tools used in on-line valve repair operations
using the SafeSeal System.]
Invatec uses proprietary technology to repair leaking valve packings and
performs other repairs while a process system is on-line, thereby eliminating
costs associated with leakage to the atmosphere and downtime.
IN-SHOP REPAIR SERVICES
[Graphic: Photograph of Invatec technician performing in-shop repair on a
valve.]
Invatec's regional repair centers are equipped to assemble, repair and customize
and re-manufacture valves and related process-system components.
Invatec serves customers in the United States and Canada through its 32 sales
and service offices. Its broad geographic presence, along with a comprehensive
offering of repair and value-added distribution services, position 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
_ BRANCH OFFICES
* 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. The Company
believes, on the basis of industry studies commissioned by the Company, that the
distribution and repair sectors of the industrial valve industry represent a
current worldwide annual market in excess of $20.6 billion, of which North
America accounts for approximately $9.2 billion, including approximately $3.7
billion attributable to repair services and $5.5 billion attributable to
distribution and related services. A recent industry study estimates that over
650 million industrial valves currently are installed in North America,
including more than 140 million rising steam valves ("RSVs") in various process
industries. This study also estimates that more than 370 million RSVs are in use
worldwide. The Company believes substantially every RSV experiences at least one
leak during its operational life and estimates that between 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, Invatec 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, such as the Clean Air Act, as
amended in 1990, (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 increased 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 (Trademark) 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 (Trademark)
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."
Proposed 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 1,296,088
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).................... 19,305 11,499
Income from operations............. 3,872 2,066
Interest expense, net.............. (332) (166)
Other income (expense), net........ 56 8
Income from continuing operations
before income taxes............... 3,596 1,908
Net income(4)...................... $ 2,050 $ 1,088
=========== =============
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).......... $ (9,522) $ 17,915
Total assets....................... 69,179 68,278
Total debt, including current
portion(8)........................ 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 and SSI
at June 30, 1997; (ii) the balance sheets of Steam Supply and SVS at April
30, 1997; and (iii) the balance sheet of ICE/VARCO at March 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 management 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) $3.2 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, $593,000; and first six months of fiscal 1997, $297,000.
(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 $4.1 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 $682,000 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 $1,309,000, 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 $1.4 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 noncash 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 $50.0 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 SafeSeal
(Trademark) technology 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 (Trademark) 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 its executive
officers. 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 (Trademark) 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 (Trademark)
system. Although, to the knowledge of the Company, that customer has not pursued
the development of technology that would compete with the SafeSeal (Trademark)
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 (Trademark) 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 anticipates its business
strategy will raise issues for some OEMs. In particular, the Company's strategy
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 1,296,088 shares of Common Stock, of which options to
purchase 521,714 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 Montgomery Securities; 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 Montgomery Securities.
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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.
Invatec has applied to have the Common Stock 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 $8.57 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 (Trademark)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 $6.2 million)
and (ii) repay $26.1 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) and two of
its other executive officers (John L. King and Douglas R. Harrington, Jr.).
The Company expects to enter into the New Credit Facility concurrently with
the closing of this Offering. Chase Securities has agreed to structure, arrange
and syndicate the New Credit Facility, and the Company has obtained commitments
from lenders that will participate in the New Credit Facility. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Supplemental Unaudited Pro Forma Combined Financial
Information -- Liquidity and Capital Resources."
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)........... $26,838 $--
========= ===========
Long-term debt, net of current
maturities............................ 7,619 --
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......... 20,965 56,348
Retained earnings (deficit)........ (6,942) (7,272)
--------- -----------
Total stockholders' equity.... 14,027 49,083
--------- -----------
Total capitalization..... $28,500 $55,937
========= ===========
- ------------
(1) Reflects: (i) the balance sheets of Invatec and SSI at June 30, 1997; (ii)
the balance sheets of Steam Supply and SVS at April 30, 1997; and (iii) the
balance sheet of ICE/VARCO at March 31, 1997.
(2) The pro forma combined balance includes $4.1 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 1,296,088 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 $9.7 million, or approximately $2.40 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 $25.4 million, or
approximately $3.43 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 $5.83 per share to existing stockholders
and an immediate dilution of approximately $8.57 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........................... $ (2.40)
Increase in pro forma net tangible
value per share attributable to new
investors.......................... 5.83
---------
Pro forma net tangible book value per
share after this Offering.......... 3.43
---------
Dilution per share to new
investors.......................... $ 8.57
=========
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% $ (9,703,000) (32)% $ (2.40)
New investors........................ 3,350,000 45 40,200,000 132 12.00
--------- ------- -------------- -------
7,391,139 100 $ 30,497,000 100%
========= ======= ============== =======
</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 6,227
Income (loss) from operations.... 160 (262) 8 (585) (443) (180) 38
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) (958)
Net income (loss)................ $ 118 $ (263) $ (281) $ (1,505) $ (415) $ (180) $ (683)
========= ========= ========= ========= ========= ========= =========
<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)................. 19,305 11,499
Income from operations........... 3,872 2,066
Interest expense, net............ (332) (166)
Other income (expense), net...... 56 8
Income from continuing operations
before income taxes............ 3,596 1,908
Net income(5).................... $ 2,050 $ 1,088
============ ============
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) $ (9,522)
Total assets..................... 490 623 812 2,109 2,288 43,430 69,179
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)........ $17,915
Total assets..................... 68,278
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 $1.3 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 and SSI at June 30, 1997;
(ii) the balance sheets of Steam Supply and SVS at April 30, 1997; and (iii)
the balance sheet of ICE/VARCO at March 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 management 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) $3.2 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, $593,000; and
first six months of fiscal 1997, 297,000.
(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 $4.1 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 management 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 Invatec 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 the six months ended June 30, 1997, the Company
recorded a non-cash, non-recurring compensation charge of $3.2 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 $1.4
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 conform the results
of operations of the Acquired Businesses whose historical fiscal years were not
calendar years to calendar years.
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.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30
------------------------------------------
1996 1997
-------------------- --------------------
(UNAUDITED AND IN THOUSANDS)
<S> <C> <C> <C> <C>
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
========= === ========= ===
</TABLE>
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 $50.0 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>
SIX MONTHS ENDED
JUNE 30
--------------------
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.............. 1,309 7
--------- ---
Income (loss) from operations........ $ 38 --
========= ===
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 $1.3 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 (Trademark) 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.
A recent industry study commissioned by the Company estimates that over 650
million industrial valves currently are installed in North America, including
more than 140 million RSVs in various process industries in North America. This
study also estimates that more than 370 million RSVs are in use worldwide. The
Company believes substantially every RSV experiences at least one leak during
its operational life and estimates that between 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"). The Company believes, on the basis
of industry studies commissioned by the Company, that the distribution and
repair sectors of the industrial valve industry represent a current worldwide
annual market in excess of $20.6 billion, of which North America accounts for
approximately $9.2 billion, including approximately $3.7 billion attributable to
repair services and $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
28
<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
(Trademark) system and other repair and distribution services it provides on a
national basis, it is well positioned to address these needs. The SafeSeal
(Trademark) 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 (Trademark) 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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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 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.
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.
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 (Trademark) system
through the operations of the other Acquired Businesses and other businesses
acquired 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 increased 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 instance,
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 (Trademark) 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 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. 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 (Trademark) 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 its 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 looking at 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 on-line repair services
and off-line repair services (including both on-site and in-shop 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 (Trademark) 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 (Trademark) 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 (Trademark) 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 SafeSeal
(Trademark) 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 (Trademark) 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 (Trademark) 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 manufacturers; 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 the manufacturers furnish to trace all materials they use in making
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
34
<PAGE>
management and other human resource services, legal and tax services and
management information systems design and implementation.
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 manufacturers 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 which 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 which targets large multi-location industrial customers.
Many of the Company's customers are regional and national companies in the
petroleum refining, chemical, pulp and paper and power 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 Corp.
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.
35
<PAGE>
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 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 anticipates that its business strategy will raise issues for
some OEMs. For example, 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
36
<PAGE>
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
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 technicans 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. See "Business -- Competition." 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
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<PAGE>
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.
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 (Trademark) system. This technology is designed to
eliminate a common source of fugitive emissions when using the SafeSeal
(Trademark) 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
(Trademark) 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 (Trademark) system will
be commercially successful, the Company believes this system will be a
significant enhancement to the SafeSeal (Trademark) system. The Company also
believes that the SafeWeld (Trademark) system may have additional potential
commercial uses.
In addition to the development of the SafeWeld (Trademark) 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 (Trademark) 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
(Trademark) system. Although, to the knowledge of the Company, that customer has
not pursued the development of technology that would compete with the SafeSeal
(Trademark) 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 August 31, 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.
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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, 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
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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 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
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.
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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> <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
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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 June 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 has been President of SSI since February 1997. Prior to that
time, he 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 Directors
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 and for his services
during that period. 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 and Schugart 144,398 shares and 34,000 shares,
respectively, of SSI common stock in connection with their becoming employees of
SSI. For federal income tax purposes these awards have been treated as taxable
compensation income to Messrs. Haynes and Schugart in the amounts of $424,696
and $100,000, respectively. In August 1997, Invatec awarded Messrs. Haynes,
Schugart and Rigas options to purchase 97,966 shares, 38,608 shares and 22,710
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 730-day period 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 1,296,088 shares of Common Stock. SSI
originally granted the options with grant dates prior to March 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 26.8% (1)
August 15, 1997 97,966 $ 1.00
Charles F. Schugart..................... January 27, 1997 100,000 10.7 (1)
August 15, 1997 38,608 $ 1.00
Denny A. Rigas.......................... May 6, 1997 100,000 9.5 (1)
August 15, 1997 22,710 $ 1.00
Certain other officers and employees.... January-March 1997 305,000 26.9 (1)
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 58,299 4.5 $10.00
All other officers, employees
and Nonemployee Directors
as a group............................ June 1997(3) 272,500 21.0 (2)
</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 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.
(3) 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 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
80,999 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 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.
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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. 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 one 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 150,000 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 $3.0 million was
outstanding under this note on August 31, 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 August 31, 1997, this guarantee fee
would have been $0.9 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 for services rendered 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 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 25,840 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 August 31, 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, except
as noted in the footnotes below, 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).................. 76,228 1.0
John L. King(3)...................... 40,856 *
Douglas R. Harrington, Jr.(3)........ 40,856 *
Timothy M. LeFevre................... 11,000 *
T. Wayne Wren, Jr.(3)................ 15,000 *
Executive officers and directors as a
group
(8 persons)(3)..................... 694,000 6.5
Certain key employees as a
group(3)........................... 79,926 1.1
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 -- 160,166; Mr.
Schugart -- 63,608; Mr. Rigas -- 47,710; Mr. Lombard -- 45,423; Mr.
King -- 23,856; Mr. Harrington -- 23,856; Mr. LeFevre -- 11,000; Mr.
Wren -- 15,000; all executive officers and directors as a group -- 339,249;
and certain key employees as a group -- 79,130.
(2) Shares shown are directly owned by wholly owned subsidiaries of Philip
Services Corp., 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., disclaims
"beneficial ownership" of the shares of which Philip Services Corp. is the
"beneficial owner."
(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 -- 41,742 shares (including 25,840 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 -- 248,441 shares (including 153,340
shares subject to exercisable options); 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
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<PAGE>
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 Montgomery Securities, 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 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 Montgomery Securities).
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<PAGE>
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 Montgomery Securities.
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 Montgomery
Securities.
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 August 31, 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 1,689,881 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
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<PAGE>
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 commencement of a tender offer or
exchange offer that would result in a person's becoming an Acquiring Person.
Notwithstanding the foregoing, so long as the Miller Trust or Philip, together
with all respective affiliates and associates thereof, remains the beneficial
owner of 15% or more of the outstanding shares of Common Stock, the Miller
Trust, or Philip, as the case may be, shall not be or become an Acquiring Person
unless and until it, together with all affiliates and associates thereof,
becomes the beneficial owner of additional shares of Common Stock constituting
1% or more of the then-outstanding shares of Common Stock or any other person
who is the beneficial owner of at least 1% of the then-outstanding shares of
Common Stock shall become an affiliate or associate of the Miller Trust or
Philip, as the case may be. 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.
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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 Purchase Price payable, and the number of Fractional Shares of Junior
Participating Preferred Stock or other securities or property issuable, on
exercise of the Rights are subject to adjustment from time to time to prevent
dilution (i) in the event of a stock dividend on, or a subdivision, combination
or reclassification of, the Junior Participating Preferred Stock, (ii) if
holders of the Junior Participating Preferred Stock are granted certain rights
or warrants to subscribe for Junior Participating Preferred Stock or certain
convertible securities at less than the current market price of the Junior
Participating Preferred Stock or (iii) on the distribution to holders of the
Junior Participating Preferred Stock of evidences of indebtedness or assets
(excluding regular quarterly cash dividends) or of subscription rights or
warrants (other than those referred to above).
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 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, 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
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<PAGE>
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 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 are accountable to 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
58
<PAGE>
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 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.
59
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UNDERWRITING
The Underwriters named below (the "Underwriters"), represented by
Montgomery Securities 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
- ---------------------------------------- ---------
Montgomery Securities...................
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
45-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 Montgomery Securities, 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."
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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.
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ADDITIONAL INFORMATION
Invatec has not previously been subject to the reporting requirements of
the Securities Exchange Act of 1934, as amended. 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 and schedules 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 and
schedules 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.
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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 management 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 Invatec 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 $1.4 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 $ -- $ 106 $ 34 $ -- $ 531 $ 621
Accounts receivable, net ............... -- 9,616 2,254 2,262 1,083 -- 15,215 --
Inventories ............................ -- 6,314 1,992 1,283 1,520 615 11,724 --
Other current assets ................... 3,522 1,762 286 22 82 (2,000) 3,674 (1,522)
------- -------- ------- ------- ------ -------- -------- --------
Total current assets ................. 3,522 18,083 4,532 3,673 2,719 (1,385) 31,144 (901)
PROPERTY AND EQUIPMENT, net .............. 31 6,399 1,080 1,003 1,003 -- 9,516 --
GOODWILL, net ............................ -- 14,596 -- 234 -- 8,900 23,730 --
OTHER NONCURRENT ASSETS .................. 5,323 4,352 830 -- -- (5,716) 4,789 --
------- -------- ------- ------- ------ -------- -------- --------
Total assets ......................... $ 8,876 $ 43,430 $ 6,442 $ 4,910 $3,722 $ 1,799 $ 69,179 $ (901)
======= ======== ======= ======= ====== ======== ======== ========
LIABILITIES AND
STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable and accrued
expenses ............................. $ 1,463 $ 9,039 $ 1,484 $ 1,203 $ 519 $ (483) $ 13,225 $ (1,500)
Short-term debt ........................ 4,129 16,117 2,083 1,400 200 (3,340) 20,589 (20,589)
Current maturities of long-term
debt ................................. 141 1,371 329 162 516 (329) 2,190 (2,190)
Cash consideration due to former
owners of Acquired Businesses ........ -- -- -- -- -- 4,059 4,059 (4,059)
Other current liabilities .............. -- 603 -- -- -- -- 603 --
------- -------- ------- ------- ------ -------- -------- --------
Total current liabilities ............ 5,733 27,130 3,896 2,765 1,235 (93) 40,666 (28,338)
LONG-TERM DEBT, net of current
maturities ............................. 711 5,237 1,927 389 1,675 (2,320) 7,619 (7,619)
CONVERTIBLE NOTES ........................ 3,295 -- -- -- -- 2,848 6,143 --
OTHER NONCURRENT LIABILITIES ............. -- 5,323 -- 1,988 -- (6,600) 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 ............. 1,894 7,115 18 -- 6 11,932 20,965 35,383
Retained earnings (deficit) ............ (2,757) (3,423) (110) (232) 783 (1,203) (6,942) (330)
------- -------- ------- ------- ------ -------- -------- --------
Total stockholders' equity
(deficit) .......................... (863) 3,740 (92) (232) 799 10,675 14,027 35,056
------- -------- ------- ------- ------ -------- -------- --------
Total liabilities and
stockholders' equity ............... $ 8,876 $ 43,430 $ 6,442 $ 4,910 $3,722 $ 1,799 $ 69,179 $ (901)
======= ======== ======= ======= ====== ======== ======== ========
</TABLE>
AS ADJUSTED
-----------
ASSETS
CURRENT ASSETS:
Cash............................... $ 1,152
Accounts receivable, net........... 15,215
Inventories........................ 11,724
Other current assets............... 2,152
-----------
Total current assets............. 30,243
PROPERTY AND EQUIPMENT, net.......... 9,516
GOODWILL, net........................ 23,730
OTHER NONCURRENT ASSETS.............. 4,789
-----------
Total assets..................... $68,278
===========
LIABILITIES AND
STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable and accrued
expenses......................... $11,725
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........ 12,328
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......... 56,348
Retained earnings (deficit)........ (7,272)
-----------
Total stockholders' equity
(deficit)...................... 49,083
-----------
Total liabilities and
stockholders' equity........... $68,278
===========
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) 19,305
593 (cc)
SPECIAL COMPENSATION EXPENSE ON
COMMON STOCK ISSUANCE .......................... (38)(ee) --
------- --------
Income (loss) from operations ................ 1,183 3,872
OTHER INCOME (EXPENSE):
Interest, net ................................ 1,025 (dd) (332)
Other ........................................ -- 56
------- --------
INCOME (LOSS) FROM CONTINUING
OPERATIONS BEFORE INCOME TAXES ................. 2,208 3,596
PROVISION (BENEFIT) FOR INCOME
TAXES .......................................... 1,279 (ff) 1,546
------- --------
INCOME (LOSS) FROM CONTINUING
OPERATIONS ..................................... $ 929 $ 2,050
======= ========
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 .................... 1,894 1,309 -- -- -- (3,203)(ee) --
------- -------- ------- ------- ------- -------- --------
Income (loss) from operations .......... (2,746) 872 48 (198) 118 3,972 2,066
OTHER INCOME (EXPENSE):
Interest, net .......................... (11) (1,177) (167) (63) (74) 1,326(dd) (166)
Other .................................. -- 11 (35) 32 8
------- -------- ------- ------- ------- -------- --------
INCOME (LOSS) FROM CONTINUING
OPERATIONS BEFORE INCOME TAXES ........... (2,757) (294) (154) (229) 44 5,298 1,908
PROVISION (BENEFIT) FOR INCOME
TAXES .................................... -- (72) (60) (103) 9 1,046(ff) 820
------- -------- ------- ------- ------- -------- --------
INCOME (LOSS) FROM CONTINUING
OPERATIONS ............................... (2,757) $ (222) $ (94) $ (126) $ 35 $ 4,252 $ 1,088
======= ======== ======= ======= ======= ======== ========
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........................ 1,309 -- -- -- 1,309
--------- ----------- ----------- ----------- ---------
Income (loss) from operations...... 38 (125) 136 823 872
OTHER INCOME (EXPENSE):
Interest, net...................... (998) (52) (17) (110) (1,177)
Other.............................. 2 -- (3) 12 11
--------- ----------- ----------- ----------- ---------
INCOME (LOSS) FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES................... (958) (177) 116 725 (294)
PROVISION (BENEFIT) FOR INCOME TAXES.... (275) (69) -- 272 (72)
--------- ----------- ----------- ----------- ---------
INCOME (LOSS) FROM CONTINUING
OPERATIONS............................ $ (683) $ (108) $ 116 $ 453 $ (222)
========= =========== =========== =========== =========
</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 provider of comprehensive valve
maintenance, repair and distribution services in 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 and SSI as of June 30, 1997; (ii)
the balance sheets of Steam Supply and SVS as of April 30, 1997; and (iii) the
balance sheet of ICE/VARCO as of March 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 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.
F-8
<PAGE>
INNOVATIVE VALVE TECHNOLOGIES, INC. AND ACQUIRED BUSINESSES
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
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: $7.9 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 $9.4 million of
assumed debt, including $711,000 of Steam Supply preferred stock)
resulting in goodwill of $8.9 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 are
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 purchase agreement, which payment is contingent on the successful
completion of the Offering.
(i) Records the repayment of $3.2 million of the $6.7 million short-term
debt owed to Philip.
F-9
<PAGE>
INNOVATIVE VALVE TECHNOLOGIES, INC. AND ACQUIRED BUSINESSES
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(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........................ 8,900 8,900
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...... (5,930) 1,871 (4,059)
Long-term debt, net of current
maturities........................... 393 1,927 2,320
Convertible notes.................... (2,848) (2,848)
Other noncurrent liabilities......... 1,277 5,323 6,600
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).......... 441 142 620 1,203
--------- --------- --------- --------- --------- -----------
$ 0 $ 0 $ 0 $ 0 $ 0 $ 0
========= ========= ========= ========= ========= ===========
<CAPTION>
POST MERGER
(F) (G) (H) (I) (J) ADJUSTMENTS
--------- --------- --------- --------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
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...................... 17,356 3,233 20,589
Current maturities of long-term
debt............................... 2,190 2,190
Cash consideration due to former
owners of Acquired Businesses...... 4,059 4,059
Long-term debt, net of current
maturities......................... 7,619 7,619
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 a LIFO basis, at Plant Specialties and Steam
Supply.
(bb) Adjusts selling, general and administrative expenses to reflect the
decrease in salaries and benefits associated with certain owners and
managers of the Acquired Businesses who were not or will not be
employed subsequent to the acquisition of their Acquired Businesses
and
F-10
<PAGE>
INNOVATIVE VALVE TECHNOLOGIES, INC. AND ACQUIRED BUSINESSES
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
who will not be replaced. Additionally, records the reversal of
certain excess management fees charged by ICE/VARCO's former parent
company. The amount of such excess management fees represents the
difference between the historical management fees charged by
ICE/VARCO's former parent company and the future costs of the
services which were provided by the former parent company prior to
ICE/VARCO's acquisition by Invatec, as determined through
arm's-length negotiated agreements which will be in effect at the
closing of the ICE/VARCO transaction.
(cc) Records pro forma goodwill amortization expense over 40 years.
(dd) Records the elimination of interest expense resultant 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 existent 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 1,296,088 shares subject to options that will be
outstanding when the Offering closes under Invatec's 1997 Incentive
Plan, as the number of shares subject to those options is less than
three percent of the total number of shares 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......... 1,893,901
Retained deficit................... (2,757,693)
--------------
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.............. 1,893,787
--------------
LOSS FROM OPERATIONS................. (2,745,992)
INTEREST EXPENSE..................... 11,701
--------------
LOSS FROM OPERATIONS BEFORE INCOME
TAXES.............................. (2,757,693)
PROVISION FOR INCOME TAXES........... --
--------------
NET LOSS............................. $ (2,757,693)
==============
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 1,893,901 -- 1,894,144
Net loss........................ -- -- -- (2,757,693) (2,757,693)
------- ------- ----------- ----------- -----------
BALANCE, June 30, 1997............... 242,839 $ 243 $ 1,893,901 $(2,757,693) $ (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........................ $ (2,757,693)
Special compensation expense on
common stock issuance.......... 1,893,787
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 provider of comprehensive maintenance, repair and
value-added distribution services for industrial valves and other process-system
components in 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 $1.8 million related to the issuance of 242,839 shares of Common
Stock to six members of executive management to attract such individuals to
effect the Offering (see Note 1). For financial statement presentation purposes,
these shares were valued at approximately $7.80 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.
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-17
<PAGE>
INNOVATIVE VALVE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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 $7.80 per
share, resulting in a special non-cash compensation expense of $1,893,787.
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 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 $1.4
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 Opinion
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 price to the public 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 September 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 7,115,218
Retained deficit................... (2,087,346) (2,693,699) (3,423,070)
-------------- -------------- -----------
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 -- 1,308,796
----------- ------------ ----------- ----------- ------------
Income (loss) from
operations................... 8,673 (584,479) (442,595) (180,177) 38,902
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) (956,966)
PROVISION (BENEFIT) FOR INCOME TAXES.... -- -- -- -- (275,095)
----------- ------------ ----------- ----------- ------------
NET LOSS................................ $ (280,715) $ (1,504,492) $ (414,499) $ (180,177) $ (681,871)
=========== ============ =========== =========== ============
</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 1,304,343 -- 1,308,796
Exercise of common stock
warrants (unaudited).......... 1,429,531 14,295 4,540,560 -- 4,554,855
Net loss (unaudited)............ -- -- -- (681,871) (681,871)
--------- ------- ----------- ----------- --------------
BALANCE, June 30, 1997 (unaudited)... 4,838,669 $48,386 $ 7,115,218 $(3,423,070) $ 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) $ (681,871)
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 -- 1,308,796
(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 (repayments) of debt,
net.............................. 68,333 (93,333) 265,000 -- 19,093,379
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 $1.3 million on common stock
issuance related to the issuance of 443,190 shares of Common Stock to three
members of executive management to attract such individuals to effect the
Offering (see Note 13) and to Computerized Accounting & Tax Services, Inc.
("CATS"), a related party (see Note 11), for services rendered. For financial
statement presentation purposes, these shares were valued at approximately $2.94
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 have 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 SealE 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 272,000 shares of Common Stock for
issuance in this program. During 1996, the Company granted 9,026 shares of
Common Stock and options to purchase 97,738 shares of Common Stock. The options
had an exercise price of $7.35 per share. The options are exercisable through
July 1, 2001. In 1996, the Company recorded non-cash compensation expense of
$26,548 related to this program. Prior to 1996, the Company had, from time to
time, granted options to key employees at or above the market value of the
Common Stock. The options granted had exercise prices ranging from $3.68 to
$14.71 per share. All but 68,000 options expired in 1996. The remaining options
were exercised in June 1997.
F-28
<PAGE>
THE SAFE SEAL COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.......................... $7.35/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......... 18,360 $ 14.71
Granted......................... 146,200 9.06
-------------
Balance at December 31, 1994......... 164,560 9.69
Granted......................... -- --
Exercised....................... -- --
-------------
Balance at December 31, 1995......... 164,560 9.69
Granted......................... 97,783 7.35
Exercised....................... -- --
Cancelled....................... (96,560) 13.93
-------------
Balance at December 31, 1996......... 165,783 5.84
=============
Available for grant at December 31,
1996................................. 174,217
=============
Shares exercisable at December 31,
1996................................. 165,783 5.84
=============
The options outstanding at December 31, 1996 have exercise prices from
$3.68 to $7.35 per share, with a weighted average exercise price of $5.84 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. 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.
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.
F-29
<PAGE>
THE SAFE SEAL COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
STOCK REPURCHASES
In April and 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 Industries, Inc. ("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 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
F-30
<PAGE>
THE SAFE SEAL COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 September 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
that would have resulted had the Acquisitions taken effect on January 1, 1996,
that have resulted since the date of acquisition or that may result 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 closing by Invatec of an
initial public offering (the "Offering") of its common stock (the "Invatec
F-31
<PAGE>
THE SAFE SEAL COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 financial 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 conform the results of
operations of Acquired Businesses whose historical fiscal years were not
calendar years to calendar years. 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 into 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:
<TABLE>
<CAPTION>
YEAR ENDING LONG-TERM NON-COMPETE
OCTOBER 31 DEBT OBLIGATIONS TOTAL
- ------------------------------------- ---------- ------------- ------------
<S> <C> <C> <C>
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
========== ============= ============
</TABLE>
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
============ ============ ===========
<CAPTION>
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 (repayments) of short-
and long-term debt............. (28,937) (240,734) 917,213 736,980 (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% 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)
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C> <C>
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 (repayments) of long-term
debt, net.......................... 505,219 (194,288) 500,798 392,267
------------ ------------ ------------ ------------
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%
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 (repayments) of short- and
long-term debt, net................. 509,369 334,061 (94,984) (202,767) 660,177
------------ ------------- ------------ ---------- ----------
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:
<TABLE>
<CAPTION>
ESTIMATED OCTOBER 31
USEFUL ------------------------------
LIVES 1995 1996
----------- -------------- --------------
<S> <C> <C> <C>
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
============== ==============
</TABLE>
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
YEAR
ENDED NINE MONTHS
OCTOBER ENDED JULY 31
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:
Increase (decrease) in net
borrowings......................... (14,121) 98,680 393,183
--------- ------------ ----------
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 in North America.
PROCESS MANUFACTURING
UTILITY AND POWER 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 Assembly, Calibration and Testing
Repair Design and Customization
Valve Packing Re-Conditioning
Restoration Delivery and Installation
Process-System
Leak Repair
- -------------------------------------------------------------------------------
OFF-LINE REPAIR NEW PRODUCT DISTRIBUTION
SERVICES
Diagnosis and New Valve Sales
Testing Process System Component Sales
Comprehensive
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 ......................................................... 15
DIVIDEND POLICY ......................................................... 15
CAPITALIZATION .......................................................... 16
DILUTION ................................................................ 17
SELECTED FINANCIAL INFORMATION .......................................... 18
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 ............................................ 55
UNDERWRITING ............................................................ 60
LEGAL MATTERS ........................................................... 61
EXPERTS ................................................................. 61
ADDITIONAL INFORMATION .................................................. 62
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
------------------------
MONTGOMERY SECURITIES
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... *
Blue Sky Fees and Expenses........... *
Printing and Engraving Costs......... *
Legal Fees and Expenses.............. *
Accounting Fees and Expenses......... *
Transfer Agent and Registrar Fees and
Expenses............................. *
Miscellaneous........................ *
----------
Total...................... $ *
==========
- ------------
* 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
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<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 $3.0 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.
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------------------------ ------------------------------------------------------------------------------------------
<S> <C>
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 June , 1997 by and among the
Company and the holders listed on the signature pages thereto.
4.5* -- Form of Convertible Subordinated Promissory Note dated as of June 12, 1997 and issued in
the acquisition of PSI.
4.6* -- Form of Convertible Subordinated Promissory Note dated as of July , 1997 and issued in
the acquisition of Steam Supply.
4.7+ -- Loan Agreement dated , 1997, among the Company and The Chase Manhattan Bank
and the other parties designated therein.
4.8+ -- Loan Agreement dated , 1997, among the Company and Texas Commerce Bank, N.A.
and the other parties designated therein.
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 Services Corp.
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+ -- Innovative Valve Technologies, Inc. 1997 Incentive Plan.
10.2 -- Employment Agreement dated as of January 27, 1997, between SSI and William E. Haynes.
10.3 -- Employment Agreement dated as of January 27, 1997, between SSI and Charles F. Schugart.
10.4 -- Employment Agreement dated as of May 6, 1997, between the Company and Denny A. Rigas.
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.
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------------------------ ------------------------------------------------------------------------------------------
<S> <C>
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 (included on the signature page hereof).
27.1 -- Financial Data Schedule.
</TABLE>
- ------------
* Previously filed.
+ To be filed by amendment.
(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.
II-6
<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 SEPTEMBER 22, 1997.
INNOVATIVE VALVE TECHNOLOGIES, INC.
By: /s/ WILLIAM E. HAYNES
WILLIAM E. HAYNES
PRESIDENT AND CHIEF EXECUTIVE
OFFICER
EACH PERSON WHOSE SIGNATURE APPEARS BELOW HEREBY APPOINTS WILLIAM E. HAYNES
AND CHARLES F. SCHUGART, AND BOTH OF THEM, EITHER OF WHOM MAY ACT WITHOUT THE
JOINDER OF THE OTHER, AS HIS TRUE AND LAWFUL ATTORNEYS-IN-FACT AND AGENTS, WITH
FULL POWER OF SUBSTITUTION AND RESUBSTITUTION, FOR HIM AND IN HIS NAME, PLACE
AND STEAD, IN ANY AND ALL CAPACITIES, TO SIGN ANY AND ALL AMENDMENTS (INCLUDING
POST-EFFECTIVE AMENDMENTS) TO THIS REGISTRATION STATEMENT AND ANY REGISTRATION
STATEMENT FOR THE SAME OFFERING FILED PURSUANT TO RULE 462 UNDER THE SECURITIES
ACT OF 1933, AND TO FILE THE SAME, WITH ALL EXHIBITS THERETO AND ALL OTHER
DOCUMENTS IN CONNECTION THEREWITH, WITH THE COMMISSION, GRANTING UNTO SAID
ATTORNEYS-IN-FACT AND AGENTS FULL POWER AND AUTHORITY TO DO AND PERFORM EACH AND
EVERY ACT AND THING APPROPRIATE OR NECESSARY TO BE DONE, AS FULLY AND FOR ALL
INTENTS AND PURPOSES AS HE MIGHT OR COULD DO IN PERSON, HEREBY RATIFYING AND
CONFIRMING ALL THAT SAID ATTORNEYS-IN-FACT AND AGENTS OR THEIR SUBSTITUTE OR
SUBSTITUTES MAY LAWFULLY DO OR CAUSE TO BE DONE BY VIRTUE HEREOF.
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.
SIGNATURES CAPACITY IN WHICH SIGNED DATE
- ------------------------- ------------------------------- -------------------
/s/WILLIAM E. HAYNES Chairman of the Board, September 22, 1997
WILLIAM E. HAYNES President, Chief Executive
Officer and Sole Director
(Principal Executive Officer)
/s/CHARLES F. SCHUGART Senior Vice President -- Chief September 22, 1997
CHARLES F. SCHUGART Financial Officer (Principal
Financial and Accounting
Officer)
II-7
EXHIBIT 2.9
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER (this "Agreement") is made as of
June 27, 1997, by and among Innovative Valve Technologies, Inc., a Delaware
corporation ("IVT"), IVT Acquisition, Inc., a Delaware corporation and a wholly
owned subsidiary of IVT ("IVT Sub"), and The Safe Seal Company, Inc., a Texas
corporation (the "Company").
PRELIMINARY STATEMENT
The parties to this Agreement have determined it is in their best
long-term interests to effect a business combination by means of a merger
pursuant to which IVT Sub will merge into the Company on the terms and subject
to the conditions set forth herein (the "Merger").
NOW, THEREFORE, in consideration of the premises and the mutual
agreements, representations and undertakings contained herein, the parties
hereto hereby agree as follows:
Paragraph 1. CERTAIN DEFINED TERMS. As used in this Agreement, the
following terms have the meanings assigned to them below in this
Paragraph 1.
"ACQUISITION CONSIDERATION" means for the Company Common Stock and
the Company Preferred Stock the consideration specified in Paragraph 2.
"CERTIFICATE OF MERGER" means the articles or certificate of merger
respecting the Merger and containing the information required by the laws
of Texas and Delaware to effect the Merger.
"CHARTER DOCUMENTS" of any specified corporation means the articles
or certificate of incorporation and bylaws of that corporation.
"CLOSING" has the meaning specified in Paragraph 3.
"COMPANY CAPITAL STOCK" means the Company Common Stock or the
Company Preferred Stock.
"COMPANY COMMON STOCK" means the Common Stock, par value $.01 per
share, of the Company.
"COMPANY PREFERRED STOCK" means the Preferred Stock, par value $.01
per share, Class A of the Company.
"DGCL" means the General Corporation Law of the State of Delaware.
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<PAGE>
"EFFECTIVE TIME" has the meaning specified in Paragraph 2.
"ENTITY" means any sole proprietorship, corporation, partnership of
any kind having a separate legal status, limited liability company,
business trust, unincorporated organization or association, mutual
company, joint stock company or joint venture.
"FINAL PROSPECTUS" means the prospectus included in the Registration
Statement at the time it becomes effective, except that if the prospectus
first furnished to the Underwriter after the Registration Statement
becomes effective for use in connection with the IPO differs from the
prospectus included in the Registration Statement at the time it becomes
effective (whether or not that prospectus so furnished is required to be
filed with the SEC pursuant to Securities Act Rule 424(b)), the prospectus
so first furnished is the "Final Prospectus."
"IPO" means the first time a registration statement filed under the
Securities Act and respecting a primary offering by IVT to the public of
shares of IVT Common Stock is declared effective under the Securities Act
and the shares registered by that registration statement are issued and
sold by IVT (otherwise than pursuant to the exercise by the Underwriter of
any over-allotment option).
"IPO CLOSING DATE" means the date on which IVT first receives
payment for the shares of IVT Common Stock it sells to the Underwriter in
the IPO.
"IPO PRICE" means the price per share of IVT Common Stock which is
set forth as the "price to public" on the cover page of the Final
Prospectus.
"IPO PRICING DATE" means the date, if any, on which IVT and the
Underwriter agree in the Underwriting Agreement to the price per share of
IVT Common Stock at which the Underwriter, subject to the terms and
conditions of the Underwriting Agreement, will purchase newly issued
shares of IVT Common Stock from IVT on the IPO Closing Date.
"IVT COMMON STOCK" means the common stock, par value $.001 per
share, of IVT.
"REGISTRATION STATEMENT" means the registration statement, including
(a) each preliminary prospectus included therein prior to the date on
which that registration statement is declared effective under the
Securities Act (including any prospectus filed with the SEC pursuant to
Securities Act Rule 424(b)), (b) the Final Prospectus and (c) any
amendments thereof and all supplements and exhibits thereto, filed by IVT
with the SEC to register shares of IVT Common Stock under the Securities
Act for public offering and sale in the IPO.
"SEC" means the Securities and Exchange Commission.
"SECURITIES ACT" means the Securities Act of 1933.
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<PAGE>
"STOCKHOLDER" means any holder of Company Capital Stock issued and
outstanding immediately prior to the Effective Time.
"SURVIVING CORPORATION" means the Company, which is to be designated
in the Certificate of Merger as the surviving corporation of the Merger.
"TBCA" means the Texas Business Corporation Act.
"UNDERWRITER" means collectively (a) the investment banking firms
that prospectively may enter into the Underwriting Agreement and (b) from
and after the IPO Pricing Date, the investment banking firms parties to
the Underwriting Agreement.
"UNDERWRITING AGREEMENT" means the written agreement of the
Underwriter to purchase on a firm commitment basis shares of IVT Common
Stock from IVT for resale to the public initially at the IPO Price.
Paragraph 2. (A) CERTIFICATES OF MERGER. Subject to the terms and
conditions hereof, the Company will cause Certificates of Merger to be duly
executed and delivered on or promptly after the Closing Date and filed with the
Secretary of State of the State of Texas and the Secretary of State of the State
of Delaware.
(B) THE EFFECTIVE TIME. The effective time of the Merger (the
"Effective Time") will be the time on the IPO Closing Date which the
Certificates of Merger specify or, if the Certificates of Merger do not specify
another time, 8:00 a.m., New York City time, on the IPO Closing Date.
(C) CERTAIN EFFECTS OF THE MERGER. At and as of the Effective Time,
(1) IVT Sub will be merged with and into the Company in accordance with the
provisions of the TBCA and the DGCL, (2) IVT Sub will cease to exist as a
separate legal entity, (3) the articles of incorporation of the Company will be
amended to change the Company's authorized shares of capital stock to 1,000
shares, par value $1.00 per share, of Common Stock, (4) the Company will be the
Surviving Corporation and, as such, will, all with the effect provided by the
TBCA and the DGCL, (a) possess all the properties and rights, and be subject to
all the restrictions and duties, of the Company and IVT Sub and (b) be governed
by the laws of the State of Texas, (5) the Charter Documents of the Company then
in effect (after giving effect to the amendment to the Company's articles of
incorporation specified in clause (3) of this sentence) will become and
thereafter remain (until changed in accordance with (a) applicable law (in the
case of the articles of incorporation) or (b) their terms (in the case of the
bylaws)) the Charter Documents of the Surviving Corporation, (6) the initial
board of directors of the Surviving Corporation will be the persons named in
Schedule 2(C), and those persons will hold the office of director of the
Surviving Corporation, subject to the provisions of the applicable laws of the
State of Texas and the Charter Documents of the Surviving Corporation, and (7)
the initial officers of the Surviving Corporation will be as set forth in
Schedule 2(C), and each of those persons will serve in each office specified for
that person in Schedule 2(C),
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<PAGE>
subject to the provisions of the Charter Documents of the Surviving Corporation,
until that person's successor is duly elected to, and, if necessary, qualified
for, that office.
(D) EFFECT OF THE MERGER ON CAPITAL STOCK. As of the Effective Time,
as a result of the Merger and without any action on the part of any holder
thereof:
(1) (a) each share of Company Common Stock issued and outstanding
immediately prior to the Effective Time will be converted into the right
to receive, subject to the provisions of Paragraph 2(E), without interest,
on surrender of the certificate evidencing that share, one-half (1/2) of a
share of IVT Common Stock; (b) each share of Company Preferred Stock
issued and outstanding immediately prior to the Effective Time will be
converted into the right to receive, subject to the provisions of
Paragraph 2(E), without interest, on surrender of the certificate
evidencing that share, cash in the amount equal to $100 plus dividends
accrued through the day preceding the day on which the Effective Time
occurs at the rate of $9.50 per annum and which remain unpaid; and (c)
each share of Company Capital Stock issued and outstanding immediately
prior to the Effective Time will (i) cease to be outstanding and to exist
and (ii) be canceled and retired;
(2) each share of Company Capital Stock held in the treasury of the
Company or any Company Subsidiary will (a) cease to be outstanding and to
exist and (b) be canceled and retired;
(3) each option and warrant to purchase Company Common Stock which
is issued and outstanding immediately prior to the Effective Time will be
converted into an option to purchase such number of shares of IVT Common
Stock at such initial exercise prices as are specified in Schedule 2(D);
and
(4) each share of the common stock, par value $.01 per share, of IVT
Sub issued and outstanding immediately prior to the Effective Time will be
converted into one share of common stock, par value $.01 per share, of the
Surviving Corporation, and the shares of common stock of the Surviving
Corporation issued on that conversion will constitute all the issued and
outstanding shares of capital stock of the Surviving Corporation.
Each holder of a certificate representing shares of Company Capital Stock
immediately prior to the Effective Time will, as of the Effective Time and
thereafter, cease to have any rights respecting those shares other than the
right to receive, subject to the provisions of Paragraph 2(E), without interest,
the Acquisition Consideration and the additional cash, if any, owing with
respect to those shares as provided in Paragraph 2(F). Notwithstanding the
foregoing, the right to receive any Acquisition Consideration will not apply to
any shares of Company Capital Stock which shall have statutory appraisal rights
perfected with respect thereto ("Dissenting Shares") pursuant to the provisions
of Articles 5.11, 5.12 and 5.13 of the TBCA, it being intended and agreed that
any holder of Dissenting Shares shall have in consideration of the cancellation
thereof only the rights, if any, afforded to that holder under Articles 5.11,
5.12 and 5.13 of the TBCA.
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<PAGE>
(E) DELIVERY, EXCHANGE AND PAYMENT. (1) At or after the Effective
Time: (a) the Stockholders, as holders of certificates representing shares of
Company Common Stock or Company Preferred Stock, will, on surrender of those
certificates to IVT (or any agent that may be appointed by IVT for purposes of
this Paragraph 2(E)), receive, subject to the provisions of this Paragraph 2(E)
and Paragraph 2(F), the Acquisition Consideration provided for those shares in
Paragraph 2(D); and (b) until any certificate representing Company Common Stock
has been surrendered and replaced pursuant to this Paragraph 2(E), that
certificate will, for all purposes, be deemed to evidence ownership of the
number of whole shares of IVT Common Stock included in the Acquisition
Consideration payable in respect of that certificate pursuant to Paragraph 2(D).
All shares of IVT Common Stock issuable in the Merger will be deemed for all
purposes to have been issued by IVT at the Effective Time.
(2) Each Stockholder will deliver to IVT (or any agent that may be
appointed by IVT for purposes of this Paragraph 2(E)) on or before the IPO
Closing Date the certificates representing all the Company Capital Stock owned
by that Stockholder, duly endorsed in blank, or accompanied by stock powers in
blank duly executed, by that Person, and with all necessary transfer tax and
other revenue stamps, acquired at that Person's expense, affixed and canceled.
Each Stockholder shall cure any deficiencies in the endorsement of the
certificates or other documents of conveyance respecting, or in the stock powers
accompanying, the certificates representing Company Capital Stock delivered by
that Person.
(3) No dividends (or interest) or other distributions declared or
earned after the Effective Time with respect to IVT Common Stock and payable to
the holders of record thereof after the Effective Time will be paid to the
holder of any unsurrendered certificates representing shares of Company Common
Stock for which shares of IVT Common Stock have been issued in the Merger until
those certificates are surrendered as provided herein, but (a) on that surrender
IVT will cause to be paid, to the Person in whose name the certificates
representing such shares of IVT Common Stock shall then be issued, the amount of
dividends or other distributions previously paid with respect to such whole
shares of IVT Common Stock with a record date, or which have accrued, subsequent
to the Effective Time, but prior to surrender, and the amount of any cash
payable to such Person for and in lieu of fractional shares pursuant to
Paragraph 2(F) and (b) at the appropriate payment date or as soon as practicable
thereafter, IVT will cause to be paid to that Person the amount of dividends or
other distributions with a record date, or which have been accrued, subsequent
to the Effective Time, but which are not payable until a date subsequent to
surrender, which are payable with respect to such whole shares of IVT Common
Stock, subject in all cases to any applicable escheat laws. No interest will be
payable with respect to the payment of such dividends or other distributions or
cash for and in lieu of fractional shares on surrender of outstanding
certificates.
(F) Notwithstanding any other provision herein, no fractional shares
of IVT Common Stock will be issued, and if any Stockholder would be entitled
hereunder to receive a fractional share of IVT Common Stock but for this
Paragraph 2(F), that Stockholder will be entitled hereunder to receive a cash
payment for and in lieu thereof in the amount (rounded upward to the
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<PAGE>
nearest whole cent) equal to that Stockholder's fractional interest in a share
of IVT Common Stock multiplied by the IPO Price.
Paragraph 3. THE CLOSING. On or before the IPO Closing Date, the
parties hereto will take all actions necessary to (A) effect the Merger
(including, as permitted by the TBCA and the DGCL, (i) the execution of
Certificates of Merger (a) meeting the requirements of the TBCA and the DGCL and
(b) providing that the Merger will become effective on the Effective Date and
(ii) the filing of those Certificates of Merger with the Secretary of State of
the State of Texas and the Secretary of State of the State of Delaware) and (B)
verify the existence and ownership of the certificates evidencing the Company
Capital Stock to be exchanged for the Acquisition Consideration pursuant to
Paragraph 2(E) (all those actions collectively being the "Closing"). The Closing
will take place at the offices of Baker & Botts, L.L.P., 910 Louisiana, Houston,
Texas at 8:00 a.m., New York time, or at such later time on the IPO Pricing Date
as IVT shall specify.
Paragraph 4. MISCELLANEOUS. (A) ENTIRE AGREEMENT; AMENDMENT;
WAIVERS. This Agreement and the documents delivered pursuant hereto constitute
the entire agreement and understanding among the Company, IVT and IVT Sub and
supersede all prior agreements and understandings, both written and oral,
relating to the subject matter of this Agreement. This Agreement may be amended,
modified or supplemented, and any right hereunder may be waived, if, but only
if, that amendment, modification, supplement or waiver is in writing and signed
by the Company and IVT; provided, however, that no such amendment, modification,
supplement or waiver will be effective unless it is signed by each Stockholder
affected thereby to the extent that it (1) reduces the amount, or changes the
components, of the Acquisition Consideration that Stockholder is entitled to
receive pursuant to Paragraph 2 or (2) amends or waives this sentence. The
waiver of any of the terms and conditions hereof shall not be construed or
interpreted as, or deemed to be, a waiver of any other term or condition hereof.
(B) GOVERNING LAW. THIS AGREEMENT AND THE RIGHTS AND OBLIGATIONS OF
THE PARTIES HERETO SHALL BE GOVERNED BY AND CONSTRUED AND ENFORCED IN ACCORDANCE
WITH THE SUBSTANTIVE LAWS OF THE STATE OF TEXAS WITHOUT REGARD TO THE CONFLICTS
OF LAW PROVISIONS THEREOF.
(C) EXERCISE OF RIGHTS AND REMEDIES. Except as otherwise provided
herein, no delay or omission in the exercise of any right, power or remedy
accruing to any party hereto as a result of any breach or default hereunder by
any other party hereto shall impair any such right, power or remedy, nor shall
it be construed, deemed or interpreted as a waiver of or acquiescence in any
such breach or default, or of any similar breach or default occurring later; nor
shall any waiver of any single breach or default be construed, deemed or
interpreted as a waiver of any other breach or default hereunder occurring
before or after that waiver.
(D) TIME. Time is of the essence in the performance of this
Agreement in all respects.
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<PAGE>
(E) REFORMATION AND SEVERABILITY. If any provision of this Agreement
is invalid, illegal or unenforceable, that provision shall, to the extent
possible, be modified in such manner as to be valid, legal and enforceable but
so as to most nearly retain the intent of the parties hereto as expressed
herein, and if such a modification is not possible, that provision shall be
severed from this Agreement, and in either case the validity, legality and
enforceability of the remaining provisions of this Agreement shall not in any
way be affected or impaired thereby.
(F) REMEDIES CUMULATIVE. No right, remedy or election given by any
term of this Agreement shall be deemed exclusive, but each shall be cumulative
with all other rights, remedies and elections available at law or in equity.
Paragraph 5. TERMINATION. (A) TERMINATION OF THIS AGREEMENT.
(1) This Agreement may be terminated at any time prior to the Closing solely:
(a) by the mutual written consent of IVT and the Company; or
(b) unless the IPO has occurred, automatically on the first to occur
of (i) the Abandonment Date or (ii) January 1, 1998; provided, however,
that if January 1, 1998 is the first of those dates to occur, but IVT
theretofore has filed the Registration Statement and is then pursuing the
IPO, this Agreement will continue in full force and effect until the first
to occur of (i) the Abandonment Date, (ii) the date IVT withdraws the
Registration Statement pursuant to Rule 477 under the Securities Act,
(iii) the date the Registration Statement is abandoned pursuant to Rule
479 under the Securities Act or (iv) May 31, 1998 (as used herein,
"Abandonment Date" means the date The Roger L. Miller Family Trust and
Allwaste, Inc. jointly direct IVT to abandon the IPO).
(2) This Agreement may be terminated after the Closing solely:
(a) by IVT or the Company if the Underwriting Agreement is
terminated pursuant to its terms after the Closing and prior to the
consummation of the IPO; or
(b) automatically and without action on the part of any party hereto
if the IPO is not consummated within 15 New York City business days after
the date of the Closing.
(B) LIABILITIES IN EVENT OF TERMINATION. If this Agreement is
terminated pursuant to Paragraph 5(A), there shall be no liability or obligation
on the part of any party hereto.
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement
as of the date first above written.
INNOVATIVE VALVE TECHNOLOGIES, INC.
By: /s/ CHARLES F. SCHUGART
Charles F. Schugart
Senior Vice President
IVT ACQUISITION, INC.
By: /s/ CHARLES F. SCHUGART
Charles F. Schugart
Vice President
THE SAFE SEAL COMPANY, INC.
By: /s/ CHARLES F. SCHUGART
Charles F. Schugart
Senior Vice President
-8-
<PAGE>
SCHEDULE 2(C)
to the
Agreement and Plan of Merger
to which
Innovative Valve Technologies, Inc.
and
The Safe Seal Company, Inc.
are parties
A. Words and terms used in this Schedule which are defined in the
captioned Agreement are used herein as therein defined.
B. The directors of the Surviving Corporation immediately after the
Effective Time are as follows: William E. Haynes.
C. The officers of the Surviving Corporation immediately after the
Effective Time are as follows:
Chief Executive Officer........................... William E. Haynes
President......................................... Kevin M. Stern
Senior Vice President, Treasurer and Secretary.... Charles F. Schugart
Vice President and Corporate Controller........... Douglas R. Harrington, Jr.
End of Schedule
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<PAGE>
SCHEDULE 2(D)
to the
Agreement and Plan of Merger
to which
Innovative Valve Technologies, Inc.
and
The Safe Seal Company, Inc.
are parties
A. Words and terms used in this Schedule which are defined in the
captioned Agreement are used herein as therein defined.
B. The following options and warrant to purchase Company Common
Stock from the Company at an exercise price of $5.00 per share which are
outstanding immediately prior to the Effective Time will be converted as a
result of the Merger into options to purchase shares of IVT Common Stock
following the Merger at an initial exercise price of $10.00 per share as
follows:
POST-MERGER
NO. OF SHARES OF NO. OF SHARES OF
OPTION OR WARRANT COMPANY COMMON STOCK IVT COMMON STOCK
HOLDER SUBJECT TO OPTION SUBJECT TO OPTION
- ----------------- -------------------- -----------------
Frank L. Lombard 76,000 38,000
T. Wayne Wren, Jr. 30,000 15,000
Kevin M. Stern 45,760 22,880
John Misitigh 8,078 4,039
Johnny Butler 6,000 3,000
Kevin Carmody 5,760 2,880
William Bigbee 5,040 2,520
Richard McDonald 5,040 2,520
Tom Hemker 4,640 2,320
C. All other options to purchase Company Common Stock from the
Company which are outstanding immediately prior to the Effective Time will be
converted as a result of the Merger into options to purchase the same number of
shares of IVT Common Stock at the same initial exercise prices.
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<PAGE>
D. All options to purchase IVT Common Stock will be evidenced by
award agreements subject to the 1997 Incentive Plan of IVT.
End of Schedule
-11-
<PAGE>
AMENDMENT TO AGREEMENT AND PLAN OF MERGER
THIS AMENDMENT TO AGREEMENT AND PLAN OF MERGER (this
"Amendment") is made as of August 15, 1997 by and among Innovative Valve
Technologies, Inc., a Delaware corporation ("IVT"), IVT Acquisition, Inc., a
Delaware corporation and a wholly owned subsidiary of IVT ("IVT Sub"), and The
Safe Seal Company, a Texas corporation (the "Company").
PRELIMINARY STATEMENT
IVT, IVT Sub and the Company are parties to that certain Agreement
and Plan of Merger dated as of June 27, 1997 (the "Agreement"). Words and terms
used in this Amendment which are defined in the Agreement are used herein as
therein defined.
With the consent of Allwaste Environmental Services, Inc., a
Delaware corporation and the owner of record of all the outstanding shares of
the Company Preferred Stock, the parties hereto hereby are amending this
Agreement to change the Acquisition Consideration for the Company Preferred
Stock.
NOW, THEREFORE, in consideration of the premises and the mutual
agreements and undertakings contained herein, the parties hereto agree as
follows:
Paragraph 1. Clause (1)(b) of Paragraph 2(D) of the Agreement hereby
is amended to read in its entirety as follows:
(b) the shares of Company Preferred Stock issued and outstanding
immediately prior to the Effective Time will be converted collectively
into the right to receive, subject to the provisions of Paragraph 2(E),
without interest, on surrender of the certificate or certificates
representing those shares, such number of whole shares of IVT Common Stock
as shall most nearly equal, but not exceed, the quotient obtained by
dividing (i) the sum of $2,000,000 plus dividends accrued on the Company
Preferred Stock through the day preceding the day on which the Effective
Time occurs at the rate of $190,000 per annum and which remain unpaid
divided by (ii) the IPO Price;
Paragraph 2. This Amendment shall inure to the benefit of and be
binding upon the heirs, executors, administrators, successors and assigns of
each of the parties.
Paragraph 3. This Amendment may be executed in any number of
counterparts and by the parties hereto in separate counterparts, each of which
when so executed shall be deemed to be an original and all of which taken
together shall constitute one and the same agreement.
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<PAGE>
Paragraph 4. THIS AMENDMENT SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS APPLICABLE TO CONTRACTS MADE AND
TO BE PERFORMED WHOLLY WITHIN THAT STATE.
Paragraph 5. In the event that any one or more of the provisions
contained herein, or the application thereof in any circumstances, is held
invalid, illegal or unenforceable in any respect for any reason, the validity,
legality and enforceability of any such provision in every other respect and of
the remaining provisions contained herein shall not be in any way impaired
thereby.
Paragraph 6. This Amendment is intended by the parties as a final
expression of their agreement and a complete and exclusive statement of the
agreement and understanding of the parties hereto in respect of the subject
matter contained herein.
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Amendment
as of the date first above written.
INNOVATIVE VALVE TECHNOLOGIES, INC.
By: /s/ CHARLES F. SCHUGART
Charles F. Schugart
Senior Vice President
IVT ACQUISITION, INC.
By: /s/ CHARLES F. SCHUGART
Charles F. Schugart
Senior Vice President
THE SAFE SEAL COMPANY, INC.
By: /s/ CHARLES F. SCHUGART
Charles F. Schugart
Senior Vice President
The undersigned hereby consents to the amendment to the Agreement
being effected by this Amendment.
ALLWASTE ENVIRONMENTAL SERVICES, INC.
By: /s/ Robert M. Chiste
Name: Robert M. Chiste
Title:
-3-
EXHIBIT 2.10
Annex 1
INNOVATIVE VALVE TECHNOLOGIES, INC.
UNIFORM PROVISIONS
FOR
BUSINESS COMBINATIONS
<PAGE>
TABLE OF CONTENTS
Page
ARTICLE I REPRESENTATIONS AND WARRANTIES OF EACH STOCKHOLDER
Section 1.01. Ownership and Status of Company Capital Stock...........1
Section 1.02. Power of the Stockholder; Approval of the Acquisition...1
Section 1.03. No Conflicts or Litigation..............................2
Section 1.04. No Brokers..............................................2
Section 1.05. Preemptive and Other Rights; Waiver.....................2
Section 1.06. Control of Related Businesses...........................2
ARTICLE II REPRESENTATIONS AND WARRANTIES OF THE COMPANY
AND THE STOCKHOLDERS
Section 2.01. Organization............................................3
Section 2.02. Qualification...........................................3
Section 2.03. Authorization; Enforceability; Absence of Conflicts;
Required Consents.......................................3
Section 2.04. Charter Documents and Records; No Violation.............4
Section 2.05. No Defaults.............................................5
Section 2.06. Company Subsidiaries....................................5
Section 2.07. Controlling Affiliates..................................5
Section 2.08. Capital Stock of the Company
and the Company Subsidiaries............................6
Section 2.09. Transactions in Capital Stock...........................6
Section 2.10. No Bonus Shares.........................................6
Section 2.11. Predecessor Status; etc.................................6
Section 2.12. Related Party Agreements................................6
Section 2.13. Litigation..............................................7
Section 2.14. Financial Statements; Disclosure........................7
Section 2.15. Compliance With Laws....................................7
Section 2.16. Certain Environmental Matters...........................8
Section 2.17. Liabilities and Obligations.............................9
Section 2.18. Receivables.............................................9
Section 2.19. Owned and Leased Real Properties........................9
Section 2.20. Other Tangible Assets..................................10
Section 2.21. Proprietary Rights.....................................11
Section 2.22. Relations With Governments, etc........................11
Section 2.23. Commitments............................................11
Section 2.24. Capital Expenditures...................................13
Section 2.25. Inventories............................................13
Section 2.26. Insurance..............................................13
Section 2.27. Employee Matters.......................................13
Section 2.28. Compliance With ERISA, etc.............................16
Section 2.29. Taxes..................................................18
Section 2.30. Government Contracts...................................19
Section 2.31. Absence of Changes.....................................20
Section 2.32. Bank Relations; Powers of Attorney.....................21
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ARTICLE III REPRESENTATIONS AND WARRANTIES OF INVATEC AND NEWCO
Section 3.01. Organization; Power....................................22
Section 3.02. Authorization; Enforceability; Absence of Conflicts;
Required Consents......................................22
Section 3.03. Charter Documents......................................23
Section 3.04. Capital Stock of INVATEC and Newco.....................23
Section 3.05. Subsidiaries...........................................24
Section 3.06. Compliance With Laws; No Litigation....................24
Section 3.07. No Brokers.............................................24
ARTICLE IV COVENANTS EXTENDING TO THE EFFECTIVE TIME
Section 4.01. Access and Cooperation; Due Diligence..................24
Section 4.02. Conduct of Business Pending the Effective Time.........25
Section 4.03. Prohibited Activities..................................26
Section 4.04. No Shop; Release of Directors..........................28
Section 4.05. Notice to Bargaining Agents............................28
Section 4.06. Notification of Certain Matters........................28
Section 4.07. Supplemental Information...............................29
Section 4.08. Cooperation in Connection With the IPO.................30
Section 4.09. Additional Financial Statements........................30
Section 4.10. Termination of Plans...................................30
Section 4.11. Disposition of Unwanted Assets.........................30
Section 4.12. HSR Act Matters........................................31
ARTICLE V THE CLOSING AND CONDITIONS TO CLOSING AND CONSUMMATION
Section 5.01. Conditions to the Obligations of Each Party............31
Section 5.02. Conditions to the Obligations
of the Company and the Stockholders....................32
Section 5.03. Conditions to the Obligations of INVATEC and Newco.....34
ARTICLE VI COVENANTS FOLLOWING THE EFFECTIVE TIME
Section 6.01. Disclosure.............................................35
Section 6.02. Preparation and Filing of Tax Returns..................35
Section 6.03. Directors..............................................35
Section 6.04. Removal of Guaranties..................................36
Section 6.05. Survival of Representations and Warranties.............36
Section 6.06. Limitations on Damage Claims...........................36
ARTICLE VII INDEMNIFICATION
Section 7.01. In Respect of Representations and Warranties...........37
Section 7.02. Indemnification of INVATEC Indemnified Parties.........38
Section 7.03. Indemnification of Stockholder Indemnified Parties.....39
Section 7.04. Conditions of Indemnification..........................39
Section 7.05. Remedies Not Exclusive.................................41
Section 7.06. Limitations on Indemnification.........................41
ARTICLE VIII LIMITATIONS ON COMPETITION
Section 8.01. Prohibited Activities...................................42
Section 8.02. Damages.................................................43
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<PAGE>
Section 8.03. Reasonable Restraint....................................43
Section 8.04. Severability; Reformation...............................43
Section 8.05. Independent Covenant....................................43
Section 8.06. Materiality.............................................44
ARTICLE IX DEFINITIONS
Section 9.01. Defined Terms..........................................44
Section 9.02. Other Defined Terms....................................58
Section 9.03. Other Definitional Provisions..........................58
Section 9.04. Captions...............................................59
ARTICLE X GENERAL PROVISIONS
Section 10.01. Treatment of Confidential Information.................59
Section 10.02. Brokers and Agents....................................60
Section 10.03. Assignment; No Third Party Beneficiaries..............60
Section 10.04. Entire Agreement; Amendment; Waivers..................60
Section 10.05. Expenses..............................................61
Section 10.06. Notices...............................................61
Section 10.07. Governing Law.........................................61
Section 10.08. Exercise of Rights and Remedies.......................62
Section 10.09. Time..................................................62
Section 10.10. Reformation and Severability..........................62
Section 10.11. Remedies Cumulative...................................62
Section 10.12. Release...............................................62
Section 10.13. Respecting the IPO....................................63
ARTICLE XI TERMINATION
Section 11.01. Termination of This Agreement.........................64
Section 11.02. Liabilities in Event of Termination...................64
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ARTICLE I
REPRESENTATIONS AND WARRANTIES OF EACH STOCKHOLDER
Each of the Stockholders represents and warrants to INVATEC that, as
applied solely to himself, all the following representations and warranties in
this Article I are as of the date of this Agreement, and will be, as amended or
supplemented pursuant to Section 4.07, on the Closing Date and immediately prior
to the Effective Time, true and correct:
Section 1.01. OWNERSHIP AND STATUS OF COMPANY CAPITAL STOCK. The
Stockholder is the record and beneficial owner (or, if the Stockholder is a
trust or the estate of a deceased natural person, the legal owner) of the number
of shares of Company Capital Stock set forth, by each class, and by each series
in each class, thereof, opposite the Stockholder's name in Section 1.01 of the
Disclosure Statement, free and clear of all Liens, except for the Liens set
forth in Section 1.01 of the Disclosure Statement, all of which will be released
at or before the Effective Time.
Section 1.02. POWER OF THE STOCKHOLDER; APPROVAL OF THE ACQUISITION.
(a) The Stockholder has the full power, legal capacity and authority to execute
and deliver this Agreement and each other Transaction Document to which the
Stockholder is a party and to perform the Stockholder's obligations in this
Agreement and in all other Transaction Documents to which the Stockholder is a
party. This Agreement constitutes, and each such other Transaction Document,
when executed in the Stockholder's individual capacity and delivered by the
Stockholder, will constitute, the legal, valid and binding obligation of the
Stockholder, enforceable against the Stockholder in accordance with its terms,
except as that enforceability may be (i) limited by any applicable bankruptcy,
insolvency, reorganization, moratorium or similar laws affecting the enforcement
of creditors' rights generally and (ii) subject to general principles of equity
(regardless of whether that enforceability is considered in a proceeding in
equity or at law). If the Stockholder is an Entity, the Stockholder has
obtained, in accordance with all applicable Governmental Requirements and its
Charter Documents, all approvals and the taking of all actions necessary for the
authorization, execution, delivery and performance by the Stockholder of this
Agreement and the other Transaction Documents to which the Stockholder is a
party. If the Stockholder is acting otherwise than in his individual capacity
(whether as an executor or a guardian or in any other fiduciary or
representative capacity), all actions on the part of the Stockholder and all
other Persons (including any court) necessary for the authorization, execution,
delivery and performance by the Stockholder of this Agreement and the other
Transaction Documents to which the Stockholder is a party have been duly taken.
(b) The Stockholder, acting in each capacity in which he is
entitled, by reason of the Company's Charter Documents or the Governmental
Requirements of the Company's Organization State or for any other reason, to
vote to approve or disapprove the consummation of the Acquisition, has voted all
the shares of Company Capital Stock owned by him and entitled to a vote or votes
on that matter, in any one or more of the manners prescribed or permitted by the
Company's Charter Documents or the Governmental Requirements of the Company's
Organization State, whichever are controlling, to approve this Agreement and the
consummation of the Acquisition and the other transactions contemplated hereby.
Section 1.03. NO CONFLICTS OR LITIGATION. The execution, delivery
and performance in accordance with their respective terms by the Stockholder of
this Agreement and the other
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<PAGE>
Transaction Documents to which the Stockholder is a party do not and will not
(a) violate or conflict with any Governmental Requirement, (b) breach or
constitute a default under any agreement or instrument to which the Stockholder
is a party or by which the Stockholder or any of the shares of Company Capital
Stock owned by the Stockholder is bound, (c) result in the creation or
imposition of, or afford any Person the right to obtain, any Lien upon any of
the shares of Company Capital Stock owned by the Stockholder (or upon any
revenues, income or profits of the Stockholder therefrom) or (d) if the
Stockholder is an Entity, violate the Stockholder's Charter Documents. No
Litigation is pending or, to the knowledge of the Stockholder, threatened to
which the Stockholder is or may become a party which (a) questions or involves
the validity or enforceability of any of the Stockholder's obligations under any
Transaction Document or (b) seeks (or reasonably may be expected to seek) (i) to
prevent or delay the consummation by the Stockholder of the transactions
contemplated by this Agreement to be consummated by the Stockholder or (ii)
damages in connection with any consummation by the Stockholder of the
transactions contemplated by this Agreement.
Section 1.04. NO BROKERS. The Stockholder has not, directly or
indirectly, in connection with this Agreement or the transactions contemplated
hereby (a) employed any broker, finder or agent or (b) agreed to pay or incurred
any obligation to pay any broker's or finder's fee, any sales commission or any
similar form of compensation.
Section 1.05. PREEMPTIVE AND OTHER RIGHTS; WAIVER. Except for the
right of the Stockholder to receive shares of INVATEC Common Stock as a result
of the Acquisition or to acquire INVATEC Common Stock pursuant to any written
option granted by INVATEC to the Stockholder, the Stockholder either (a) does
not own or otherwise have any statutory or contractual preemptive or other right
of any kind (including any right of first offer or refusal) to acquire any
shares of Company Capital Stock or INVATEC Common Stock or (b) hereby
irrevocably waives each right of that type the Stockholder does own or otherwise
has.
Section 1.06. CONTROL OF RELATED BUSINESSES. Except as set forth in
Section 1.06 of the Disclosure Statement, the Stockholder is not, alone or with
one or more other Persons, the controlling Affiliate of any Entity, business or
trade (other than the Company and the Company Subsidiaries, if the Stockholder
is an Affiliate of the Company) that (a) is engaged in any line of business
which is the same as or similar to any line of business in which the Company or
any Company Subsidiary is engaged or (b) is, or has within the three-year period
ending on the date of this Agreement, engaged in any transaction with the
Company or any Company Subsidiary, except for transactions in the ordinary
course of business of the Company or that Company Subsidiary.
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<PAGE>
ARTICLE II
REPRESENTATIONS AND WARRANTIES
OF
THE COMPANY AND THE STOCKHOLDERS
The Company and each Stockholder jointly and severally represent and
warrant to, and agree with, INVATEC that all the following representations and
warranties in this Article II are as of the date of this Agreement, and will be,
as amended or supplemented pursuant to Section 4.07, on the Closing Date and
immediately prior to the Effective Time, true and correct:
Section 2.01. ORGANIZATION. Section 2.01 of the Disclosure Statement
sets forth the Organization State of each of the Company and the Company
Subsidiaries. Each of the Company and the Company Subsidiaries (a) is a
corporation duly organized, validly existing and in good standing under the laws
of its Organization State, (b) has all requisite corporate power and authority
under those laws and its Charter Documents to own or lease and to operate its
properties and to carry on its business as now conducted and (c) is duly
qualified and in good standing as a foreign corporation in all jurisdictions in
which it owns or leases property or in which the carrying on of its business as
now conducted so requires except where the failure to be so qualified, singly or
in the aggregate, would not have a Material Adverse Effect.
Section 2.02. QUALIFICATION. Section 2.02 of the Disclosure
Statement lists all the jurisdictions in which each of the Company and the
Company Subsidiaries is authorized or qualified to own or lease and to operate
its properties or to carry on its business as now conducted, and neither the
Company nor any Company Subsidiary owns, leases or operates any properties, or
carries on any business, that is Material to the Acquired Business in any
jurisdiction not listed in that Section.
Section 2.03. AUTHORIZATION; ENFORCEABILITY; ABSENCE OF CONFLICTS;
REQUIRED CONSENTS. (a) The execution, delivery and performance by the Company of
this Agreement and each other Transaction Document to which it is a party, and
the effectuation of the Acquisition and the other transactions contemplated
hereby and thereby, are within its corporate or other power under its Charter
Documents and the applicable Governmental Requirements of its Organization State
and have been duly authorized by all proceedings, including actions permitted to
be taken in lieu of proceedings, required under its Charter Documents and those
Governmental Requirements.
(b) This Agreement has been, and each of the other Transaction
Documents to which the Company is a party, when executed and delivered to
INVATEC (or, in the case of the Certificates of Merger, if any, the applicable
Governmental Authorities) will have been, duly executed and delivered by the
Company and is, or when so executed and delivered will be, the legal, valid and
binding obligation of the Company, enforceable against the Company in accordance
with its terms, except as that enforceability may be (i) limited by any
applicable bankruptcy, insolvency, reorganization, moratorium or similar laws
affecting the enforcement of creditors' rights generally and (ii) subject to
general principles of equity (regardless of whether that enforceability is
considered in a proceeding in equity or at law).
(c) The execution, delivery and performance in accordance with their
respective terms by the Company of the Transaction Documents to which it is a
party have not and will not (i) violate, breach or constitute a default under
(A) the Charter Documents of any of the Company
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and the Company Subsidiaries, (B) any Governmental Requirement applicable to any
of the Company and the Company Subsidiaries or (C) any Material Agreement of the
Company (except as set forth in Section 2.03 of the Disclosure Statement), (ii)
result in the acceleration or mandatory prepayment of any Indebtedness, or any
Guaranty not constituting Indebtedness, of any of the Company and the Company
Subsidiaries or afford any holder of any of that Indebtedness, or any
beneficiary of any of those Guaranties, the right to require any of the Company
and the Company Subsidiaries to redeem, purchase or otherwise acquire, reacquire
or repay any of that Indebtedness, or to perform any of those Guaranties, (iii)
cause or result in the imposition of, or afford any Person the right to obtain,
any Lien upon any property or assets of any of the Company and the Company
Subsidiaries (or upon revenues, income or profits of any of the Company and the
Company Subsidiaries therefrom) or (iv) except as set forth in Section 2.03 of
the Disclosure Statement, result in the revocation, cancellation, suspension or
material modification, in any single case or in the aggregate, of any
Governmental Approval possessed by any of the Company and the Company
Subsidiaries at the date hereof and necessary for the ownership or lease or the
operation of its properties or the carrying on of its business as now conducted,
including any necessary Governmental Approval under each applicable
Environmental Law.
(d) Except for (i) the filing of the Certificates of Merger, if any,
with the applicable Governmental Authorities, (ii) filings of the Registration
Statement under the Securities Act and the SEC order declaring the Registration
Statement effective under the Securities Act and (iii) as may be required by the
HSR Act or the applicable state securities or blue sky laws, no Governmental
Approvals are required to be obtained, and no reports or notices to or filings
with any Governmental Authority are required to be made, by any of the Company
and the Company Subsidiaries for the execution, delivery or performance by the
Company of the Transaction Documents to which it is a party, the enforcement
against the Company of its obligations thereunder or the effectuation of the
Acquisition and the other transactions contemplated thereby.
Section 2.04. CHARTER DOCUMENTS AND RECORDS; NO VIOLATION. The
Company has caused true, complete and correct copies of the Charter Documents,
each as in effect on the date hereof, and the minute books and similar corporate
or other Entity records of each of the Company and the Company Subsidiaries to
be delivered or otherwise made available to INVATEC. No breach or violation of
any Charter Document of any of the Company and the Company Subsidiaries has
occurred and is continuing.
Section 2.05. NO DEFAULTS. Except as disclosed in Section 2.05 of
the Disclosure Statement, no condition or state of facts exists, or, with the
giving of notice or the lapse of time or both, would exist, which (a) entitles
any holder of any outstanding Indebtedness, or any Guaranty not constituting
Indebtedness, of any of the Company and the Company Subsidiaries, or a
representative of that holder, to accelerate the maturity, or require a
mandatory prepayment, of that Indebtedness or Guaranty, or affords that holder
or its representative, or any beneficiary of that Guaranty, the right to require
any of the Company and the Company Subsidiaries to redeem, purchase or otherwise
acquire, reacquire or repay any of that Indebtedness, or to perform that
Guaranty in whole or in part, (b) entitles any Person to obtain any Lien (other
than a Permitted Lien) upon any properties or assets constituting any part of
the Acquired Business (or upon any revenues, income or profits of any of the
Company and the Company Subsidiaries therefrom) or (c) constitutes a violation
or breach of, or a default under, any Material Agreement of the Company by any
of the Company and the Company Subsidiaries.
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Section 2.06. COMPANY SUBSIDIARIES. Section 2.01 of the Disclosure
Statement either (a) sets forth the form of organization, legal name, each
assumed name and Organization State of each Company Subsidiary or (b) correctly
states no Entity is a Company Subsidiary. Except as disclosed in Section 2.06 of
the Disclosure Statement, each Company Subsidiary is a Wholly Owned Subsidiary.
In the case of any Company Subsidiary that is not a Wholly Owned Subsidiary,
Section 2.06 of the Disclosure Statement sets forth, by each class and each
series within each class, the number of outstanding shares (or other percentage
ownership interests) of Capital Stock of the Company Subsidiary, (a) the
Company's aggregate direct and indirect ownership of those shares (or interests)
and (b) the name and address of record and percentage ownership of those shares
(or interests) of each holder of record thereof other than the Company or a
Company Subsidiary. No Lien exists on any outstanding share of Capital Stock of
any Company Subsidiary which is owned directly or indirectly by the Company
other than (a) the Liens, if any, described in Section 2.06 of the Disclosure
Statement, all of which will be released at or before the Effective Time, and
(b) Permitted Liens. Except as set forth in Section 2.06 of the Disclosure
Statement, the Company does not own, of record or beneficially, directly or
indirectly through any Person, and does not control, directly or indirectly
through any Person or otherwise, any Capital Stock or Derivative Securities of
any Entity other than a Company Subsidiary.
Section 2.07. CONTROLLING AFFILIATES. Section 2.07 of the Disclosure
Statement sets forth the name of each Person who at the time the Acquisition was
submitted for vote or consent to the Stockholders, is, was or will be an
Affiliate of the Company by reason of that Person's control of the Company.
Section 2.08. CAPITAL STOCK OF THE COMPANY AND THE COMPANY
SUBSIDIARIES. Section 2.08 of the Disclosure Statement sets forth, by each class
and by each series within each class, the total number of shares of authorized
Company Capital Stock and the total number of such shares that have been issued
and are now outstanding. Except as set forth in Section 2.08 of the Disclosure
Statement: (a) no shares of Company Capital Stock are held by the Company or any
Company Subsidiary as treasury shares; and (b) no outstanding options, warrants
or rights to acquire Capital Stock of the Company or any Company Subsidiary
exist. All the issued and outstanding shares of Capital Stock of each of the
Company and the Company Subsidiaries (a) have been duly authorized and validly
issued in accordance with the applicable Governmental Requirements of their
issuer's Organization State and Charter Documents and (b) are fully paid and
nonassessable. Neither the Company nor any Company Subsidiary has issued or sold
any shares of its outstanding Capital Stock in breach or violation of (a) any
applicable statutory or contractual preemptive rights, or any other rights of
any kind (including any rights of first offer or refusal), of any Person or (b)
the terms of any of its Derivative Securities which then were outstanding. No
Person has, otherwise than solely by reason of that Person's right, if any, to
vote shares of the Capital Stock of the Company or any Company Subsidiary it
holds (to the extent those shares afford the holder thereof any voting rights)
any right to vote on any matter with the holders of Capital Stock of the Company
or any Company Subsidiary.
Section 2.09. TRANSACTIONS IN CAPITAL STOCK. Except as set forth in
Section 2.09 of the Disclosure Statement: (a) the Company has no obligation
(contingent or otherwise) to purchase, redeem or otherwise acquire or reacquire
any of its equity securities or any interests therein or to pay any dividend or
make any distribution in respect thereof; and (b) no transaction has been
effected, and no action in contemplation of the transactions described in this
Agreement has been taken, respecting the equity ownership of either the Company
or any Company Subsidiary.
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Section 2.10. NO BONUS SHARES. Except as set forth in Section 2.10
of the Disclosure Statement, no outstanding share of Capital Stock of the
Company was issued for less than the fair market value thereof at the time of
issuance or was issued in exchange for any consideration other than cash.
Section 2.11. PREDECESSOR STATUS; ETC. Except as disclosed in
Section 2.11 of the Disclosure Statement, the Company has not been a Subsidiary
or division of another corporation during the past five years.
Section 2.12. RELATED PARTY AGREEMENTS. Except as set forth in
Section 2.12 of the Disclosure Statement, each Related Party Agreement in effect
on the date hereof will have been terminated as of the Closing Date, and no
Related Party Agreement will exist then or thereafter to and including the
Effective Time.
Section 2.13. LITIGATION. Except as disclosed in Section 2.13 of the
Disclosure Statement, no Litigation is pending or, to the knowledge of the
Company or any Stockholder, threatened to which the Company or any Company
Subsidiary is or may become a party.
Section 2.14. FINANCIAL STATEMENTS; DISCLOSURE. (a) FINANCIAL
STATEMENTS. (i) The Financial Statements (including in each case the related
schedules and notes) delivered to INVATEC present fairly, in all material
respects, the financial position of the Acquired Business at the respective
dates of the balance sheets included therein and the results of operations and
cash flows of the Acquired Business and stockholders' or other owners' equity
for the respective periods set forth therein and have been prepared in
accordance with GAAP. As of the date of any balance sheet included in those
Financial Statements, neither the Company nor any Company Subsidiary then had
any outstanding Indebtedness to any Person or any liabilities of any kind
(including contingent obligations, tax assessments or unusual forward or
long-term commitments), or any unrealized or anticipated loss, which in the
aggregate then were Material to the Acquired Business and required to be
reflected in those Financial Statements or in the notes related thereto in
accordance with GAAP which were not so reflected.
(ii) Since the Current Balance Sheet Date, no change has occurred in
the business, operations, properties or assets, liabilities, condition
(financial or other) or results of operations of the Company or any Company
Subsidiary that could reasonably be expected, either alone or together with all
other such changes, to have a Material Adverse Effect.
(b) DISCLOSURE. (i) As of the date hereof, all Information that has
been furnished to INVATEC by or on behalf of the Company prior to the date of
this Agreement in connection with the transactions contemplated hereby is, taken
together, true and correct in all material respects and does not contain any
untrue statement of a material fact or omit to state a material fact necessary
in order to make the statements contained therein not materially misleading in
light of the circumstances under which those statements were made.
(ii) All Information that is furnished to INVATEC after the date
hereof from time to time prior to the Effective Time by or on behalf of the
Company in connection with or pursuant to this Agreement, any other Transaction
Document or the transactions contemplated hereby or thereby will be, when made
available and taken together, true and correct in all material respects (other
than financial budgets and projections) and will not contain any untrue
statement of a material
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fact or omit to state a material fact necessary in order to make the statements
contained therein not materially misleading in light of the circumstances under
which those statements are made.
Section 2.15. COMPLIANCE WITH LAWS. (a) Except as disclosed in
Section 2.15 of the Disclosure Statement: (i) each of the Company and the
Company Subsidiaries possesses, or, if required by the applicable Environmental
Laws (including those relating to the maintenance, repair or servicing of
industrial valves or other process-system components or equipment containing
volatile organic compounds, hazardous air pollutants or Solid Wastes, Hazardous
Wastes or Hazardous Substances), one or more of its employees as required by
those Environmental Laws possesses, all necessary certifications and licenses
and similar Governmental Approvals required for the conduct of its business; and
(ii) each of the Company and the Company Subsidiaries and such one or more of
its employees are in compliance in all material respects with the terms and
conditions of all Governmental Approvals necessary for the ownership or lease
and the operation of its properties (including all the facilities and sites it
owns or holds under any lease) and the carrying on of its business as now
conducted. The Company has provided INVATEC with a complete written list of all
the Governmental Approvals so possessed (other than permits for particular jobs
for customers at their facilities). All the Governmental Approvals so listed are
valid and in full force and effect, and, except as disclosed in Section 2.15 of
the Disclosure Statement, neither the Company nor any Company Subsidiary has
received, nor to the knowledge of any Stockholder has any employee of either
received, any notice from any Governmental Authority of its intention to cancel,
terminate or not renew any of those Governmental Approvals.
(b) Except as disclosed in Section 2.15 of the Disclosure Statement,
each of the Company and the Company Subsidiaries: (i) has been and continues to
be in compliance in all material respects with all Governmental Requirements
applicable to it or any of its presently or previously owned or operated
properties (including all the facilities and sites now or previously owned or
held by it under any lease), businesses or operations, including all applicable
Governmental Requirements under ERISA and Environmental Laws; and (ii)(A)
neither the Company nor any Company Subsidiary has received, nor to the
knowledge of the Company has any employee of either received, any notice from
any Governmental Authority which asserts, or raises the possibility of assertion
of, any noncompliance with any of those Governmental Requirements and, (B) to
the knowledge of each of the Company, the Company Subsidiaries and the
Stockholders, no condition or state of facts exists which would provide a valid
basis for any such assertion.
Section 2.16. CERTAIN ENVIRONMENTAL MATTERS. Except as disclosed in
Section 2.16 of the Disclosure Statement: (a) to the knowledge of the Company,
the Company and each Company Subsidiary have complied, and remain in compliance,
in all material respects with the provisions of all Environmental Laws
applicable to any of them or any of their respective presently owned or operated
facilities, sites or other properties, businesses and operations and which
relate to the reporting by the Company and each Company Subsidiary of all sites
presently owned or operated by any of them where Solid Wastes, Hazardous Wastes
or Hazardous Substances have been treated, stored, disposed of or otherwise
handled; (b) no release (as defined in those Environmental Laws) at, from, in or
on any site owned or operated by the Company or any Company Subsidiary has
occurred which, if all relevant facts were known to the relevant Governmental
Authorities, reasonably could be expected to require remediation to avoid deed
record notices, restrictions, liabilities or other consequences that would not
be applicable if that release had not occurred; (c) neither the Company nor any
Company Subsidiary (or any agent or contractor of either) has transported or
arranged for the transportation of any Solid Wastes, Hazardous Wastes or
Hazardous
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Substances to, or disposed or arranged for the disposition of any Solid Wastes,
Hazardous Wastes or Hazardous Substances at, any off-site location that could
lead to any claim against the Company, any Company Subsidiary, INVATEC or any
Subsidiary of INVATEC, as a potentially responsible party or otherwise, for any
clean-up costs, remedial work, damage to natural resources, personal injury or
property damage, including any claim under CERCLA; and (d) no storage tanks
exist on or under any of the properties owned or operated by the Company or any
Company Subsidiary from which any Solid Wastes, Hazardous Wastes or Hazardous
Substances have been released into the surrounding environment. The Company has
provided INVATEC with copies (or if not available, accurate written summaries)
of all environmental investigations, studies, audits, reviews and other analyses
conducted by or on behalf, or which otherwise are in the actual or constructive
possession, of the Company or any Company Subsidiary respecting any facility,
site or other property presently owned or operated by the Company and each
Company Subsidiary.
Section 2.17. LIABILITIES AND OBLIGATIONS. Section 2.17 of the
Disclosure Statement lists or describes all present liabilities, of every kind,
character and description and whether accrued, absolute, fixed, contingent or
otherwise, of each of the Company and the Company Subsidiaries which (a) exceed
or reasonably could be expected to exceed $10,000 and (b) (i) had been incurred
prior to the Current Balance Sheet Date, but are not reflected on the Current
Balance Sheet, or (ii) were incurred after the Current Balance Sheet Date
otherwise than in the ordinary course of business, and consistent with the past
practice, of that Entity. That Section also lists and describes, for each of the
Company and the Company Subsidiaries: (a) each of its outstanding secured and
unsecured Guaranties not constituting its Indebtedness and, for each of those
Guaranties, whether any Stockholder or Related Person or Affiliate of any
Stockholder is a Person whose obligation is covered by that Guaranty, and (b)
for each of the items listed under clause (a) of this sentence, (i) if that item
is secured by any property or asset of the Company or any Company Subsidiary,
the nature of that security, and (ii) if that item is covered in whole or in
part by a Guaranty of any Stockholder or any Related Person or Affiliate of any
Stockholder, the name of the guarantor.
Section 2.18. RECEIVABLES. Except as set forth in Section 2.18 of
the Disclosure Statement, all the accounts and notes or other advances
receivable of the Company and the Company Subsidiaries reflected on the Current
Balance Sheet were collected, or are valid and enforceable claims arising in the
ordinary course of business and, in the good faith belief of the Company's
management, collectible, in the aggregate respective amounts so reflected, net
of the reserves, if any, reflected in the Current Balance Sheet.
Section 2.19. OWNED AND LEASED REAL PROPERTIES. (a) Section 2.19 of
the Disclosure Statement lists and correctly describes in all material respects:
(i) all real properties owned by any of the Company and the Company Subsidiaries
and, for each of those properties, the address thereof, the type and approximate
square footage of each structure located thereon and the use thereof in the
business of the Company and the Company Subsidiaries; (ii) all real properties
of which any of the Company and the Company Subsidiaries is the lessee and, for
each of those properties, the address thereof, the type and approximate square
footage of each structure located thereon the Company or a Company Subsidiary is
leasing and the expiration date of its lease and the use thereof in the business
of the Company and the Company Subsidiaries; and (iii) in the case of each real
property listed as being owned, whether it was previously owned, and in the case
of each real property listed as being leased, whether it is presently owned, by
any Stockholder or any of his Related Persons or Affiliates (other than the
Company or the Company Subsidiaries, if the Stockholder is an Affiliate of the
Company).
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(b) The Company has provided INVATEC with true, complete and correct
copies of all title reports and insurance policies relating to any of the real
properties listed as being owned or leased in Section 2.19 of the Disclosure
Statement. Except as set forth in that Section or those reports and policies,
and except for Permitted Liens, the Company or a Company Subsidiary owns in fee,
and has good, valid and marketable title to, free and clear of all Liens, each
property listed in that Section as being owned.
(c) The Company has provided INVATEC with true, correct and complete
copies of all leases under which the Company or a Company Subsidiary is leasing
each of the properties listed in Section 2.19 of the Disclosure Statement as
being leased and, except as set forth in Section 2.19 of the Disclosure
Statement, (i) each of those leases is, to the knowledge of the Company, valid
and binding on the lessor party thereto, and (ii) the lessee party thereto has
not sublet any of the leased space to any Person other than the Company or a
Company Subsidiary.
(d) The fixed assets of each of the Company and the Company
Subsidiaries are affixed only to one or more of the real properties listed in
Section 2.19 of the Disclosure Statement and, except as set forth in that
Section, are well-maintained and adequate for the purposes for which they
presently are being used or held for use, ordinary wear and tear excepted.
Section 2.20. OTHER TANGIBLE ASSETS. (a) Section 2.20 of the
Disclosure Statement discloses all leases, including Capital Leases, that are
Material to the Company under which the Company or a Company Subsidiary is
leasing its property, plant and equipment and other tangible assets other than
real properties. Except as set forth in that Section, (i) each of those leases
is, to the knowledge of the Company, valid and binding on the lessor party
thereto and (ii) the lessee party thereto has not sublet any of the leased
property to any Person other than the Company or a Company Subsidiary.
(b) Except as set forth in Section 2.20 of the Disclosure Statement,
all the property, plant and equipment of the Company and the Company
Subsidiaries are in good working order and condition, ordinary wear and tear
excepted, and adequate for the purposes for which they presently are being used
or held for use.
Section 2.21. PROPRIETARY RIGHTS. Except as set forth in Section
2.21 of the Disclosure Statement, each of the Company and the Company
Subsidiaries owns, free and clear of all Liens other than Permitted Liens, or
has the legal right to use all Proprietary Rights that are necessary to the
conduct of its business as now conducted, in each case free of any claims or
infringements known to the Company or any Stockholder. Section 2.21 of the
Disclosure Statement (a) lists these Proprietary Rights and (b) indicates those
owned by the Company or any Company Subsidiary and, for those not listed as so
owned, the agreement or other arrangement pursuant to which they are possessed.
Except as set forth in that Section, (a) no consent of any Person will be
required for the use of any of these Proprietary Rights by INVATEC or any
Subsidiary of INVATEC following the Effective Time and (b) no governmental
registration of any of these Proprietary Rights has lapsed or expired or been
canceled, abandoned, opposed or the subject of any reexamination request.
Section 2.22. RELATIONS WITH GOVERNMENTS, ETC. Neither the Company
nor any Company Subsidiary has made, offered or agreed to offer anything of
value to any governmental official, political party or candidate for government
office which would cause the Company or any
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Company Subsidiary to be in violation of the Foreign Corrupt Practices Act of
1977 or any Governmental Requirement to a similar effect.
Section 2.23. COMMITMENTS. (a) Except as set forth in Section 2.23
of the Disclosure Statement, the Company has provided INVATEC with a complete
list of, or made available to INVATEC copies of, each of the following (each a
"Company Commitment") to which any of the Company and the Company Subsidiaries
is a party or by which any of its properties is bound and which presently
remains executory in whole or in any part:
(i) each partnership, joint venture or cost sharing agreement;
(ii) each guaranty or suretyship, indemnification or contribution
agreement or performance bond;
(iii) each instrument, agreement or other obligation evidencing or
relating to Indebtedness of any of the Company and the Company
Subsidiaries or to money lent or to be lent to another Person involving
more than $25,000;
(iv) each contract to purchase or sell real property;
(v) each agreement with dealers or sales or commission agents,
public relations or advertising agencies, accountants or attorneys (other
than in connection with this Agreement and the transactions contemplated
hereby) involving total payments within any 12-month period in excess of
$10,000 and which is not terminable without penalty and on no more than 30
days' prior notice;
(vi) each agreement for the acquisition or provision of services,
supplies, equipment, inventory, fixtures or other property involving more
than $25,000 in the aggregate;
(vi) each Related Party Agreement involving total payments within
any 12-month period in excess of $10,000 and which is not terminable
without penalty on no more than 30 days' prior notice;
(vii) each contract containing any noncompetition agreement,
covenant or undertaking;
(viii)each agreement providing for the purchase from a supplier of
all or substantially all the requirements of the Company or any Company
Subsidiary a particular product or service; or
(ix) each other agreement or commitment not made in the ordinary
course of business which is Material to the Acquired Business.
True, correct and complete copies of all written Company Commitments have
heretofore been delivered or made available to INVATEC. Except as set forth in
Section 2.23 of the Disclosure Statement: (i) there are no existing or asserted
defaults, events of default or events, occurrences, acts or omissions that, with
the giving of notice or lapse of time or both, would constitute defaults or
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events of default under any Company Commitment Material to the Company by any of
the Company and the Company Subsidiaries or, to the knowledge of the Company,
any other party thereto; and (ii) no penalties have been incurred, nor are
amendments pending, with respect to the Company Commitments Material to the
Acquired Business. The Company Commitments are in full force and effect and are
valid and enforceable obligations of the Company or the Company Subsidiaries
parties thereto and, to the knowledge of the Company, the other parties thereto
in accordance with their respective terms, except as that enforceability may be
(A) limited by any applicable bankruptcy, insolvency, reorganization, moratorium
or similar laws affecting the enforcement of creditors' rights generally and (B)
subject to general principles of equity (regardless of whether that
enforceability is considered in a proceeding in equity or at law), and no
defenses, off-sets or counterclaims have been asserted or, to the knowledge of
the Company, may be made by any party thereto (other than by the Company or a
Company Subsidiary), nor has the Company or a Company Subsidiary, as the case
may be, waived any rights thereunder, except as described in Section 2.23 of the
Disclosure Statement.
(b) Except as disclosed in Section 2.23 of the Disclosure Statement
or contemplated hereby or by any other Transaction Document to which the Company
or any Company Subsidiary or Stockholder is a party, neither the Company nor any
Company Subsidiary or Stockholder has knowledge of any plan or intention of any
other party to any Company Commitment that is Material to the Acquired Business
to exercise any right to cancel or terminate that Company Commitment, and
neither the Company nor that Company Subsidiary or any Stockholder has knowledge
of any condition or state of facts which would justify the exercise of such a
right.
Section 2.24. CAPITAL EXPENDITURES. Section 2.24 of the Disclosure
Statement sets forth the total amount of capital expenditures currently budgeted
to be incurred by the Company and the Company Subsidiaries in excess of $25,000
in the aggregate during the balance of the Company's current fiscal year.
Section 2.25. INVENTORIES. Except as set forth in Section 2.25 of
the Disclosure Statement: (a) all inventories, net of reserves determined in
accordance with GAAP, of each of the Company and the Company Subsidiaries which
are classified as such on the Current Balance Sheet are, to the knowledge of the
Company, merchantable and salable or usable in the ordinary course of business
of the Acquired Business; and (b) the Acquired Business does not depend on any
single vendor for its inventories the loss of which could have a Material
Adverse Effect.
Section 2.26. INSURANCE. Except as set forth in Section 2.26 of the
Disclosure Statement: (a) the Company has provided INVATEC with: (i) a list as
of the Current Balance Sheet Date of all insurance policies then carried by each
of the Company and the Company Subsidiaries; (ii) a list of all insurance loss
runs and worker's compensation claims received for the most recently ended three
policy years; and (iii) true, complete and correct copies of all insurance
policies carried by each of the Company and the Company Subsidiaries which are
in effect, all of which (A) have been issued by insurers of recognized
responsibility and (B) currently are, and will remain without interruption
through the IPO Closing Date, in full force and effect; (b) no insurance carried
by the Company or any Company Subsidiary has been canceled by the insurer during
the past five years, and neither the Company nor any Company Subsidiary has ever
been denied coverage; and (c) neither the Company nor any Company Subsidiary or
Stockholder has received any notice or other communication from any issuer of
any such insurance policy of any material increase in any deductibles, retained
amounts or the premiums payable thereunder, and, to the knowledge of the
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Company and the Stockholders, no such increase in deductibles, retainages or
premiums is threatened.
Section 2.27. EMPLOYEE MATTERS. (a) CASH COMPENSATION. The Company
has provided INVATEC with a complete written list of the names, titles and rates
of annual Cash Compensation, at the Current Balance Sheet Date (and the portions
thereof attributable to salary or the equivalent, fixed bonuses, discretionary
bonuses and other Cash Compensation, respectively) of key employees (including
all employees who are officers or directors), nonemployee officers, nonemployee
directors and key consultants and independent contractors of each of the Company
and the Company Subsidiaries.
(b) EMPLOYMENT AGREEMENTS. Section 2.27 of the Disclosure Statement
lists all Employment Agreements remaining executory in whole or in part on the
date hereof, and the Company has provided INVATEC with true, complete and
correct copies of all those Employment Agreements. Neither the Company nor any
Company Subsidiary is a party to any oral Employment Agreement.
(c) OTHER COMPENSATION PLANS. Section 2.27 of the Disclosure
Statement lists all Other Compensation Plans either remaining executory at the
date hereof or to become effective after the date hereof. The Company has
provided INVATEC with, or made available to INVATEC, a true, correct and
complete copy of each of those Other Compensation Plans that is in writing and
an accurate written description of each of those Other Compensation Plans that
is not written. Except as set forth in Section 2.27 of the Disclosure Statement,
each of the Other Compensation Plans, including each that is a Welfare Plan, may
be unilaterally amended or terminated by the Company or any Company Subsidiary
without liability to any of them, except as to benefits accrued thereunder prior
to that amendment or termination.
(d) ERISA BENEFIT PLANS. Section 2.27 of the Disclosure Statement
(i) lists each ERISA Pension Benefit Plan (A)(1) the funding requirements of
which (under Section 301 of ERISA or Section 412 of the Code) are, or at any
time during the six-year period ending on the date hereof were, in whole or in
part, the responsibility of the Company or any Company Subsidiary or (2)
respecting which the Company or any Company Subsidiary is, or at any time during
that period was, a "contributing sponsor" or an "employer" as defined in
Sections 4001(a)(13) and 3(5), respectively, of ERISA (each plan described in
this clause (A) being a "Company ERISA Pension Plan"), (B) each other ERISA
Pension Benefit Plan respecting which an ERISA Affiliate is, or at any time
during that period was, such a "contributing sponsor" or "employer" (each plan
described in this clause (B) being an "ERISA Affiliate Pension Plan") and (C)
each other ERISA Employee Benefit Plan that is being, or at any time during that
period was, sponsored, maintained or contributed to by the Company or any
Company Subsidiary (each plan described in this clause (C) and each Company
ERISA Pension Plan being a "Company ERISA Benefit Plan"), (ii) states the
termination date of each Company ERISA Benefit Plan and ERISA Affiliate Pension
Plan that has been terminated and (iii) identifies for each ERISA Affiliate
Pension Plan the relevant ERISA Affiliates. The Company has provided INVATEC
with (i) true, complete and correct copies of (A) each Company ERISA Benefit
Plan and ERISA Affiliate Pension Plan, (B) each trust agreement related thereto
and (C) all amendments to those plans and trust agreements. Except as set forth
in Section 2.27 of the Disclosure Statement, (i) neither the Company nor any
Company Subsidiary is, or at any time during the six-year period ended on the
date hereof was, a member of any ERISA Group that currently includes, or
included when the Company or a Company Subsidiary was a member, among its
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members any Person other than the Company and the Company Subsidiaries and (ii)
no Person is an ERISA Affiliate of the Company or any Company Subsidiary (other
than the Company or any Company Subsidiary in the case of any other Company
Subsidiary or any Company Subsidiary in the case of the Company, if the Company
and the Company Subsidiaries comprise an ERISA Group).
(e) EMPLOYEE POLICIES AND PROCEDURES. Section 2.27 of the Disclosure
Statement lists all Employee Policies and Procedures. The Company has provided
INVATEC with a copy of all written Employee Policies and Procedures and a
written description of all unwritten Employee Policies and Procedures that in
the aggregate are Material to the Company.
(f) UNWRITTEN AMENDMENTS. Except as described in Section 2.27 of the
Disclosure Statement, no unwritten amendments have been made, whether by oral
communication, pattern of conduct or otherwise, with respect to any of the
Employment Agreements, Other Compensation Plans or Employee Policies and
Procedures which in the aggregate are Material to the Company.
(g) LABOR COMPLIANCE. (a)(i) each of the Company and the Company
Subsidiaries has been and is in compliance with all applicable Governmental
Requirements respecting employment and employment practices, terms and
conditions of employment and wages and hours, and (ii) neither the Company nor
any Company Subsidiary is liable for any arrears of wages or penalties for
failure to comply with any of the foregoing, and (b) neither the Company nor any
Company Subsidiary has engaged in any unfair labor practice or discriminated on
the basis of race, color, religion, sex, national origin, age, disability or
handicap in its employment conditions or practices. Except as set forth in
Section 2.27 of the Disclosure Statement, there are no (i) unfair labor practice
charges or complaints or racial, color, religious, sex, national origin, age,
disability or handicap discrimination charges or complaints pending or, to the
knowledge of the Company, threatened against the Company or any of the Company
Subsidiaries before any Governmental Authority (nor, to the knowledge of the
Company, does any valid basis therefor exist) or (ii) existing or, to the
knowledge of the Company, threatened labor strikes, disputes, grievances,
controversies or other labor troubles affecting the Company or any of the
Company Subsidiaries (nor, to the knowledge of the Company, does any valid basis
therefor exist).
(h) UNIONS. Neither the Company nor any Company Subsidiary or ERISA
Affiliate has ever been a party to any agreement with any union, labor
organization or collective bargaining unit. No employees of the Company and the
Company Subsidiaries are represented by any union, labor organization or
collective bargaining unit. Except as set forth in Section 2.27 of the
Disclosure Statement, to the knowledge of the Company, none of the employees of
the Company and the Company Subsidiaries has threatened to organize or join a
union, labor organization or collective bargaining unit.
(i) NO ALIENS. To the knowledge of the Company, all employees of
each of the Company and the Company Subsidiaries are citizens of, or are
authorized in accordance with federal immigration laws to be employed in, the
United States.
(j) CHANGE OF CONTROL BENEFITS. Except as set forth in Section 2.27
of the Disclosure Statement, neither the Company nor any of the Company
Subsidiaries is a party to any agreement, or has established any policy,
practice or program, requiring it to make a payment or
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provide any other form of compensation or benefit or vesting rights to any
person performing services for the Company or any of the Company Subsidiaries
which would not be payable or provided in the absence of this Agreement or the
consummation of the transactions contemplated by this Agreement, including any
parachute payment under Section 280G of the Code.
(k) RETIREES. Except as described in Section 2.27 of the Disclosure
Statement, neither the Company nor any of the Company Subsidiaries has any
obligation or commitment to provide medical, dental or life insurance benefits
to or on behalf of any of its employees who may retire or any of its former
employees who have retired except as may be required pursuant to the
continuation of coverage provisions of Section 4980B of the Code and the
applicable parallel provisions of ERISA.
Section 2.28. COMPLIANCE WITH ERISA, ETC. (a) COMPLIANCE. Each of
the Company ERISA Benefit Plans and Other Compensation Plans (each, a "Plan")
(i) is in substantial compliance with all applicable provisions of ERISA, as
well as with all other applicable Governmental Requirements, and (ii) has been
administered, operated and managed in accordance with its governing documents.
(b) QUALIFICATION. All Plans that are intended to qualify under
Section 401(a) of the Code (the "Qualified Plans") are so qualified and have
been determined by the IRS to be so qualified (or application for determination
letters have been timely submitted to the IRS). The Company has provided INVATEC
with true, complete and correct copies of the current plan determination
letters, most recent actuarial valuation reports, if any, most recent Form 5500,
or, as applicable, Form 5500-C/R, filed with respect to each such Qualified Plan
and most recent trustee or custodian report. To the extent that any Qualified
Plans have not been amended to comply with applicable Governmental Requirements,
the remedial amendment period permitting retroactive amendment of these
Qualified Plans has not expired and will not expire within 120 days after the
Effective Time. All reports and other documents required to be filed with any
governmental agency or distributed to plan participants or beneficiaries
(including annual reports, summary annual reports, actuarial reports, PBGC-1
Forms, audits or Returns) have been timely filed or distributed.
(c) NO PROHIBITED TRANSACTIONS, ETC. None of the Stockholders, any
Plan or the Company or any Company Subsidiary has engaged in any Prohibited
Transaction. No Plan has incurred an accumulated funding deficiency, as defined
in Section 412(a) of the Code and Section 302(a) of ERISA, and no circumstances
exist pursuant to which the Company or any Company Subsidiary could have any
direct or indirect liability whatsoever (including being subject to any
statutory Lien to secure payment of any such liability), to the PBGC under Title
IV of ERISA or to the IRS for any excise tax or penalty with respect to any Plan
now or hereafter maintained or contributed to by the Company or any of its ERISA
Affiliates. Further:
(i) there have been no terminations, partial terminations or
discontinuances of contributions to any Qualified Plan without a
determination by the IRS that such action does not adversely affect the
tax-qualified status of that plan;
(ii) no Termination Event has occurred;
(iii) no Reportable Event has occurred with respect to any Plan
which was not properly reported;
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(iv) the valuation of assets of any Qualified Plan, as of the
Effective Time, shall equal or exceed the actuarial present value of all
"benefit liabilities" (within the meaning of Section 4001(a)(16) of ERISA)
under that plan in accordance with the assumptions contained in the
regulations of the PBGC governing the funding of terminated defined
benefit plans;
(v) with respect to Plans qualifying as "group health plans" under
Section 4980B of the Code or Section 607(l) or 609 of ERISA and related
regulations (relating to the benefit continuation rights imposed by
"COBRA" or qualified medical child support orders), the Company and each
Company Subsidiary and the Stockholders have complied (and at the
Effective Time will have complied) in all material respects with all
reporting, disclosure, notice, election and other benefit continuation and
coverage requirements imposed thereunder as and when applicable to those
plans, and neither the Company nor any Company Subsidiary has incurred (or
will incur) any direct or indirect liability or is (or will be) subject to
any loss, assessment, excise tax penalty, loss of federal income tax
deduction or other sanction, arising on account of or in respect of any
direct or indirect failure by the Company, any Company Subsidiary or any
Stockholder, at any time prior to the Effective Time, to comply with any
such federal or state benefit continuation or coverage requirement, which
is capable of being assessed or asserted before or after the Effective
Time directly or indirectly against the Company, any Company Subsidiary,
any Stockholder, INVATEC or any Subsidiary of INVATEC with respect to any
of those group health plans;
(vi) the Financial Statements as of the Current Balance Sheet Date
reflect the approximate total pension, medical and other benefit liability
for all Plans, and no material funding changes or irregularities are
reflected thereon which would cause those Financial Statements to be not
representative of prior periods; and
(vii) neither the Company nor any Company Subsidiary has incurred
liability under Section 4062 of ERISA.
(d) MULTIEMPLOYER PLANS. Except as set forth in Section 2.28 of the
Disclosure Statement, neither the Company nor any Company Subsidiary, and no
ERISA Affiliate of any of them, is, or at any time during the six-year period
ended on the date hereof was, obligated to contribute to a Multiemployer Plan.
Neither the Company nor any Company Subsidiary, and no ERISA Affiliate of any of
them, has made a complete or partial withdrawal from a Multiemployer Plan so as
to incur withdrawal liability as defined in Section 4201 of ERISA. Section 2.28
of the Disclosure Statement lists for each Multiemployer Plan the Company's best
estimate of the amount of withdrawal liability that would be incurred if the
Company and each of the its ERISA Affiliates were to make a complete withdrawal
from such Multiemployer Plan as of the Effective Time. Except as set forth in
that Section, the aggregate amount of such withdrawal liability if the Company
and each of its ERISA Affiliates were to make a complete withdrawal from each
such Multiemployer Plan would not exceed $25,000.
(e) CLAIMS AND LITIGATION. Except as set forth in Section 2.28 of
the Disclosure Statement, no Litigation or claims (other than routine claims for
benefits) are pending or, to the knowledge of the Company, threatened against,
or with respect to, any of the Plans or with respect to any fiduciary,
administrator or sponsor thereof (in their capacities as such), or any
party-in-interest thereof.
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(f) EXCISE TAXES, DAMAGES AND PENALTIES. No act, omission or
transaction has occurred which would result in the imposition on the Company or
any Company Subsidiary of (i) breach of fiduciary duty liability damages under
Section 409 of ERISA, (ii) a civil penalty assessed pursuant to subsection (c),
(i) or (l) of Section 502 of ERISA or (iii) any excise tax under applicable
provisions of the Code with respect to any Plan.
(g) VEBA WELFARE TRUST. Any trust funding a Plan, which is intended
to be exempt from federal income taxation pursuant to Section 501(c)(9) of the
Code, satisfies the requirements of that section and has received a favorable
determination letter from the IRS regarding that exempt status and has not,
since receipt of the most recent favorable determination letter, been amended or
operated in a way that would adversely affect that exempt status.
Section 2.29. TAXES. (a) Each of the following representations and
warranties in this Section 2.29 is qualified to the extent set forth in Section
2.29 of the Disclosure Statement.
(b) All Returns required to be filed with respect to any Tax for
which any of the Company and the Company Subsidiaries is liable have been duly
and timely filed with the appropriate Taxing Authority, each such Return is
true, correct and complete in all respects Material to the Company (and, in the
case of a Return filed by a Company Subsidiary, the Company Subsidiary), each
Tax shown to be payable on each such Return has been paid, each Tax payable by
the Company or a Company Subsidiary by assessment has been timely paid in the
amount assessed and adequate reserves have been established on the consolidated
books of the Company and the Company Subsidiaries for all Taxes for which any of
the Company and the Company Subsidiaries is liable, but the payment of which is
not yet due. Neither the Company nor any Company Subsidiary is, or ever has
been, liable for any Tax payable by reason of the income or property of a Person
other than the Company or a Company Subsidiary. Each of the Company and the
Company Subsidiaries has timely filed true, correct and complete declarations of
estimated Tax in each jurisdiction in which any such declaration is required to
be filed by it. No Liens for Taxes exist upon the assets of the Company or any
Company Subsidiary except Liens for Taxes which are not yet due. Neither the
Company nor any Company Subsidiary is, or ever has been, subject to Tax in any
jurisdiction outside of the United States. No Litigation with respect to any Tax
for which the Company or any Company Subsidiary is asserted to be liable is
pending or, to the knowledge of the Company or any Stockholder, threatened and
no basis which the Company or any Stockholder believes to be valid exists on
which any claim for any such Tax can be asserted against the Company or any
Company Subsidiary. There are no requests for rulings or determinations in
respect of any Taxes pending between the Company or any Company Subsidiary and
any Taxing Authority. No extension of any period during which any Tax may be
assessed or collected and for which the Company or any Company Subsidiary is or
may be liable has been granted to any Taxing Authority. Neither the Company nor
any Company Subsidiary is or has been a party to any tax allocation or sharing
agreement. All amounts required to be withheld by any of the Company and the
Company Subsidiaries and paid to governmental agencies for income, social
security, unemployment insurance, sales, excise, use and other Taxes have been
collected or withheld and paid to the proper Taxing Authority. The Company and
each Company Subsidiary have made all deposits required by law to be made with
respect to employees' withholding and other employment taxes.
(c) Neither the Company or any Company Subsidiary nor any
Stockholder is a "foreign person," as that term is referred to in Section
1445(f)(3) of the Code.
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(d) The Company has not filed a consent pursuant to Section 341(f)
of the Code or any comparable provision of any other tax statute and has not
agreed to have Section 341(f)(2) of the Code or any comparable provision of any
other tax statute apply to any disposition of an asset. The Company has not
made, is not obligated to make and is not a party to any agreement that could
require it to make any payment that is not deductible under Section 280G of the
Code. No asset of the Company or of any Company Subsidiary is subject to any
provision of applicable law which eliminates or reduces the allowance for
depreciation or amortization in respect of that asset below the allowance
generally available to an asset of its type. No accounting method changes of the
Company or of any Company Subsidiary exist or are proposed or threatened which
could give rise to an adjustment under Section 481 of the Code. If the Company
or any predecessor corporation at any time has filed an election to be an S
corporation, within the meaning of Section 1361(a)(1) of the Code or any
predecessor provision or comparable provisions of state laws, the Company and
any predecessor corporation have at all times met all requirements for such
election, and such election has at all times been and is presently valid and in
full force and effect.
Section 2.30. GOVERNMENT CONTRACTS. Except as set forth in Section
2.30 of the Disclosure Statement, neither the Company nor any Company Subsidiary
is a party to any governmental contract subject to price redetermination or
renegotiation.
Section 2.31. ABSENCE OF CHANGES. Since the Current Balance Sheet
Date, except as set forth in Section 2.31 of the Disclosure Statement, none of
the following has occurred with respect to the Company or any Company
Subsidiary:
(a) any circumstance, condition, event or state of facts (either
singly or in the aggregate), other than conditions generally affecting
Valve Repair and Distribution Services Business, which has caused, is
causing or will cause a Material Adverse Effect;
(b) any change in its authorized Capital Stock or in any of its
outstanding Capital Stock or Derivative Securities;
(c) any Restricted Payment, except any declaration or payment of
dividends by any Company Subsidiary solely to the Company;
(d) any increase in, or any commitment or promise to increase, the
rates of Cash Compensation as of the date hereof, or the amounts or other
benefits paid or payable under any Company ERISA Pension Benefit Plan or
Other Compensation Plan, except for ordinary and customary bonuses and
salary increases for employees (other than the Stockholders or their
Immediate Family Members) at the times and in the amounts consistent with
its past practice;
(e) any work interruptions, labor grievances or claims filed, or any
similar event or condition of any character, that will have a Material
Adverse Effect on the Surviving Corporation following the Effective Time;
(f) any distribution, sale or transfer of, or any Company Commitment
to distribute, sell or transfer, any of its assets or properties of any
kind which singly is or in the aggregate are Material to the Acquired
Business, other than distributions, sales or transfers
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in the ordinary course of its business and consistent with its past
practices to Persons other than the Stockholders and their Immediate
Family Members and Affiliates;
(g) any cancellation, or agreement to cancel, any Indebtedness,
obligation or other liability owing to it, including any Indebtedness,
obligation or other liability of any Stockholder or any Related Person or
Affiliate thereof, provided that it may negotiate and adjust bills in the
course of good faith disputes with customers in a manner consistent with
past practice, if all those adjustments are included in the Supplemental
Information provided INVATEC pursuant to Section 4.07;
(h) any plan, agreement or arrangement granting any preferential
rights to purchase or acquire any interest in any of its assets, property
or rights or requiring consent of any Person to the transfer and
assignment of any such assets, property or rights;
(i) any purchase or acquisition of, or agreement, plan or
arrangement to purchase or acquire, any property, rights or assets outside
of the ordinary course of its business consistent with its past practices;
(j) any waiver of any of its rights or claims that singly is or in
the aggregate are Material to the Acquired Business;
(k) any transaction by it outside the ordinary course of its
business or not consistent with its past practices;
(l) any incurrence by it of any Indebtedness or any Guaranty not
constituting its Indebtedness, or any Company Commitment to incur any
Indebtedness or any such Guaranty;
(m) any investment in the Capital Stock, Derivative Securities or
Indebtedness of any Person other than a Permitted Investment;
(n) except in accordance with the Company's consolidated capital
expenditure budget for the Company's current fiscal year, any capital
expenditure or series of related capital expenditures by the Company and
the Company Subsidiaries collectively in excess of $25,000, or commitments
by the Company and the Company Subsidiaries to make capital expenditures
totaling in excess of $25,000; or
(o) any cancellation or termination of a Material Agreement of the
Acquired Business.
Section 2.32. BANK RELATIONS; POWERS OF ATTORNEY. The Company has
provided INVATEC with an accurate, complete written statement setting
forth:
(a) the name of each financial institution in which the Company or
any Company Subsidiary has borrowing or investment arrangements, deposit
or checking accounts or safe deposit boxes;
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(b) the types of those arrangements and accounts, including, as
applicable, names in which accounts or boxes are held, the account or box
numbers and the name of each Person authorized to draw thereon or have
access thereto; and
(c) the name of each Person holding a general or special power of
attorney from the Company or any Company Subsidiary and a description of
the terms of each such power.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF INVATEC AND NEWCO
INVATEC and Newco jointly and severally represent and warrant to the
Company and each Stockholder that all the following representations and
warranties in this Article III are as of the date of this Agreement, and will be
on the Closing Date and immediately prior to the Effective Time, true and
correct:
Section 3.01. ORGANIZATION; POWER. Each of INVATEC and Newco is a
corporation duly organized, validly existing and in good standing under the laws
of its Organization State, and each of INVATEC and Newco has all requisite
corporate power and authority under the laws of its Organization State and its
Charter Documents to own or lease and to operate its properties presently and
following the Effective Time and to carry on its business as now conducted and
as proposed to be conducted following the Effective Time.
Section 3.02. AUTHORIZATION; ENFORCEABILITY; ABSENCE OF CONFLICTS;
REQUIRED CONSENTS. (a) The execution, delivery and performance by each of
INVATEC and Newco of this Agreement and each other Transaction Document to which
it is a party, and the effectuation of the Acquisition and the other
transactions contemplated hereby and thereby, are within its corporate power
under its Charter Documents and the applicable Governmental Requirements of its
Organization State and have been duly authorized by all proceedings, including
actions permitted to be taken in lieu of proceedings, required under its Charter
Documents and the applicable Governmental Requirements of its Organization
State.
(b) This Agreement has been, and each of the other Transaction
Documents to which either of INVATEC or Newco is a party, when executed and
delivered to the other parties thereto (or, in the case of the Certificates of
Merger, if any, the applicable Governmental Authorities), will have been, duly
executed and delivered by it and is, or when so executed and delivered will be,
its legal, valid and binding obligation, enforceable against it in accordance
with its terms, except as that enforceability may be (i) limited by any
applicable bankruptcy, insolvency, reorganization, moratorium or similar laws
affecting the enforcement of creditors' rights generally and (ii) subject to
general principles of equity (regardless of whether that enforceability is
considered in a proceeding in equity or at law).
(c) The execution, delivery and performance in accordance with their
respective terms by each of INVATEC and Newco of the Transaction Documents to
which it is a party have not and will not (i) violate, breach or constitute a
default under (A) the Charter Documents of INVATEC or Newco, (B) any
Governmental Requirement applicable to INVATEC or Newco or (C) any Material
Agreement of INVATEC or Newco, (ii) result in the acceleration or mandatory
prepayment of any Indebtedness, or any Guaranty not constituting Indebtedness,
of INVATEC or
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Newco or afford any holder of any of that Indebtedness, or any beneficiary of
any of those Guaranties, the right to require INVATEC or Newco to redeem,
purchase or otherwise acquire, reacquire or repay any of that Indebtedness, or
to perform any of those Guaranties, (iii) cause or result in the imposition of,
or afford any Person the right to obtain, any Lien upon any property or assets
of INVATEC or Newco (or upon any revenues, income or profits of either INVATEC
or Newco therefrom), other than negative pledge covenants of INVATEC respecting
its assets, or (iv) result in the revocation, cancellation, suspension or
material modification, in any single case or in the aggregate, of any
Governmental Approval possessed by INVATEC or Newco at the date hereof and
necessary for the ownership or lease and the operation of its properties or the
carrying on of its business as now conducted, including any necessary
Governmental Approval under each applicable Environmental Law.
(d) Except for (i) the filing of the Certificates of Merger, if any,
with the applicable Governmental Authorities, (ii) filings of the Registration
Statement under the Securities Act and the SEC order declaring the Registration
Statement effective under the Securities Act and (iii) as may be required by the
HSR Act or the applicable state securities or blue sky laws, no Governmental
Approvals are required to be obtained, and no reports or notices to or filings
with any Governmental Authority are required to be made, by INVATEC or Newco for
the execution, delivery or performance by INVATEC or Newco of the Transaction
Documents to which it is a party, the enforcement against INVATEC or Newco, as
the case may be, of its obligations thereunder or the effectuation of the
Acquisition and the other transactions contemplated thereby.
Section 3.03. CHARTER DOCUMENTS. INVATEC has delivered to the
Company true, complete and correct copies of the Charter Documents of each of
INVATEC and Newco. No breach or violation of any Charter Document of either
INVATEC or Newco has occurred and is continuing.
Section 3.04. CAPITAL STOCK OF INVATEC AND NEWCO. (a) Immediately
prior to the Effective Time, (i) the authorized Capital Stock of INVATEC will be
comprised of (A) 30,000,000 shares of INVATEC Common Stock, $.001 par value per
share, and (B) 5,000,000 shares of preferred stock, $.001 par value per share,
(ii) before giving effect to the Acquisition and the merger or other acquisition
transactions contemplated by the Other Agreements, (A) the number of shares of
INVATEC Common Stock then issued and outstanding will be as set forth in the
Registration Statement when it becomes effective under the Securities Act, (B)
no shares of the INVATEC preferred stock then will be issued or outstanding and
(C) INVATEC will have reserved for issuance pursuant to compensation plans or
the exercise of Derivative Securities the number of shares of INVATEC Common
Stock set forth in the Registration Statement when it becomes effective under
the Securities Act.
(b) The authorized Capital Stock of Newco is comprised of 1,000
shares of Newco Common Stock, all of which shares are issued, outstanding and
owned, of record and beneficially, by INVATEC.
(c) All shares of INVATEC Common Stock and Newco Common Stock
outstanding immediately prior to the Effective Time, and all shares of INVATEC
Common Stock to be issued pursuant to Paragraph 2, when issued, (i) will have
been duly authorized and validly issued in accordance with the DGCL and their
issuer's Charter Documents and (ii) will be fully paid and nonassessable. None
of the shares of INVATEC Common Stock to be issued pursuant to Paragraph 2 will,
when issued, have been issued in breach or violation of (i) any applicable
statutory
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or contractual preemptive rights, or any other rights of any kind (including any
rights of first offer or refusal), of any Person or (ii) the terms of any of its
Derivative Securities then outstanding.
Section 3.05. SUBSIDIARIES. Immediately prior to the IPO Closing
Date, (a) INVATEC will have no Subsidiaries other than those listed in Exhibit
21 to the Registration Statement, (b) Newco will have no Subsidiaries and (c)
neither INVATEC nor Newco will own, of record or beneficially, directly or
indirectly through any Person or otherwise (except pursuant hereto or to the
Other Agreements), any Capital Stock or Derivative Securities of any Entity not
described in this Section 3.05 as a Subsidiary of INVATEC (in the case of
INVATEC) or any Entity (in the case of Newco).
Section 3.06. COMPLIANCE WITH LAWS; NO LITIGATION. Each of INVATEC
and Newco is in compliance with all Governmental Requirements applicable to it
(except to the extent that such any noncompliance would not be reasonably
anticipated to result in a Material Adverse Event), and no Litigation is pending
or, to the knowledge of INVATEC, threatened to which INVATEC or Newco is or may
become a party which (a) questions or involves the validity or enforceability of
any obligation of INVATEC or Newco under any Transaction Document, (b) seeks (or
reasonably may be expected to seek) (i) to prevent or delay consummation by
INVATEC or Newco of the transactions contemplated by this Agreement to be
consummated by INVATEC or Newco, as the case may be, or (ii) damages from
INVATEC or Newco in connection with any such consummation.
Section 3.07. NO BROKERS. Except as set forth on Schedule 3.07,
INVATEC has not, directly or indirectly, in connection with this Agreement or
the transactions contemplated hereby (a) employed any broker, finder or agent or
(b) agreed to pay or incurred any obligation to pay any broker's or finder's
fee, any sales commission or any similar form of compensation.
ARTICLE IV
COVENANTS EXTENDING TO THE EFFECTIVE TIME
Section 4.01. ACCESS AND COOPERATION; DUE DILIGENCE. (a) From the
date hereof and until the Effective Time, the Company will (i) afford to the
Representatives of INVATEC and each Other Acquired Business reasonable access to
all the key employees, sites, properties, books and records of each of the
Company and the Company Subsidiaries, (ii) provide INVATEC with such additional
financial and operating data and other information relating to the business and
properties of each of the Company and the Company Subsidiaries as INVATEC or any
Other Acquired Business may from time to time reasonably request and (iii)
cooperate with INVATEC and each Other Acquired Business and their respective
Representatives in the preparation of any documents or other material that may
be required in connection with any Transaction Documents or any Other
Transaction Documents. Each Stockholder and the Company will treat all
Confidential Information obtained by them in connection with the negotiation and
performance of this Agreement or the due diligence investigations conducted with
respect to each Other Acquired Business as confidential in accordance with the
provisions of Section 10.01. In addition, INVATEC will cause each Other Acquired
Business to enter into a provision similar to this Section 4.01 in order to
require each Other Acquired Business to keep confidential any Confidential
Information respecting any of the Company and the Company Subsidiaries obtained
by that Other Acquired Business.
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(b) Each of the Company and the Stockholders will use its best
efforts to secure, as soon as practicable after the date hereof, all approvals
or consents of third Persons as may be necessary to consummate the transactions
contemplated hereby.
(c) From the date hereof and until the Effective Time, INVATEC and
Newco will (i) afford to the Representatives of the Company and the Stockholders
access to all sites, properties, books and records of INVATEC and Newco, (ii)
provide the Company with such additional financial and operating data and other
information relating to the business and properties of INVATEC and Newco as the
Company or any Stockholder may from time to time reasonably request and (iii)
cooperate with the Company and the Stockholders and their respective
Representatives in the preparation of any documents or other material which may
be required in connection with any Transaction Documents.
(d) If this Agreement is terminated pursuant to Section 11.01,
INVATEC promptly will return all written Confidential Information of the Company
it then possesses to the Company.
Section 4.02. CONDUCT OF BUSINESS PENDING THE EFFECTIVE TIME. From
the date hereof and until the Effective Time, the Company will, and will cause
each Company Subsidiary to, except as and only to the extent set forth in
Section 4.02 of the Disclosure Statement:
(a) carry on its businesses in substantially the same manner as it
has heretofore and not introduce any new methods of management, operation
or accounting that in the aggregate are Material to the Company;
(b) maintain its properties and facilities, including those held
under leases, in as good working order and condition as at present,
ordinary wear and tear excepted;
(c) perform all its obligations under agreements relating to or
affecting its assets, properties and other rights;
(d) keep in full force and effect without interruption all its
present insurance policies or other comparable insurance coverage;
(e) use reasonable commercial efforts to (i) maintain and preserve
its business organization intact, (ii) retain its present employees and
(iii) maintain its relationships with suppliers, customers and others
having business relations with it;
(f) comply with all applicable Governmental Requirements; and
(g) except as required or expressly permitted by this Agreement,
maintain the instruments and agreements governing its outstanding
Indebtedness and leases on their present terms and not enter into new or
amended Indebtedness or lease instruments or agreements involving amounts
over $10,000 in any single case or $100,000 in the aggregate, without the
prior written consent of INVATEC (which consent will not be unreasonably
withheld).
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Section 4.03. PROHIBITED ACTIVITIES. From the date hereof and until
the Effective Time, without the prior written consent of INVATEC or unless as
required or expressly permitted by this Agreement, the Company will not, and
will not permit any Company Subsidiary to, except as and only to the extent set
forth in Section 4.03 of the Disclosure Statement:
(a) make any change in its Charter Documents;
(b) issue any of its Capital Stock or issue or otherwise create any
of its Derivative Securities;
(c) make any Restricted Payment;
(d) make any investments (other than Permitted Investments) in the
Capital Stock, Derivative Securities or Indebtedness of any Person;
(e) enter into any contract or commitment or incur or agree to incur
any liability or make any capital expenditures in a single transaction or
a series of related transactions involving an aggregate amount of more
than $25,000 otherwise than in the ordinary course of its business and
consistent with its past practice;
(f) increase or commit or promise to increase the Cash Compensation
payable or to become payable to any officer, director, stockholder,
employee or agent, consultant or independent contractor of any of the
Company and the Company Subsidiaries or make any discretionary bonus or
management fee payment to any such Person, except bonuses or salary
increases to employees (other than the Stockholders or their Immediate
Family Members) at the times and in the amounts consistent with its past
practice;
(g) create, assume or permit to be created or imposed any Liens
(other than Permitted Liens) upon any of its assets or properties, whether
now owned or hereafter acquired, except for purchase money Liens incurred
in connection with the acquisition of equipment with an aggregate cost not
in excess of $25,000 and necessary or desirable for the conduct of the
business of any of the Company and the Company Subsidiaries;
(h) (i) adopt, establish, amend or terminate any ERISA Employee
Benefit Plan, or any Other Compensation Plan or Employee Policies and
Procedures or (ii) take any discretionary action, or omit to take any
contractually required action, if that action or omission could either (A)
deplete the assets of any ERISA Employee Benefit Plan or any Other
Compensation Plan or (B) increase the liabilities or obligations under any
such plan;
(i) sell, assign, lease or otherwise transfer or dispose of any of
its owned or leased property or equipment otherwise than in the ordinary
course of its business and consistent with its past practice;
(j) negotiate for the acquisition of any business or the start-up of
any new business;
(k) merge, consolidate or effect a share exchange with, or agree to
merge, consolidate or effect a share exchange with, any other Entity;
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(l) waive any of its rights or claims that in the aggregate are
Material to the Acquired Business, provided that it may negotiate and
adjust bills in the course of good faith disputes with customers in a
manner consistent with past practice, but such adjustments will not be
deemed to be included in Section 4.07 of the Disclosure Statement unless
specifically listed in the Supplemental Information;
(m) commit breaches that in the aggregate are Material to the
Company of or amend or terminate any Material Agreement of the Company or
any of its Governmental Approvals; or
(n) enter into any other transaction (i) outside the ordinary course
of its business, (ii) inconsistent with its past practice or (iii)
prohibited hereby.
Section 4.04. NO SHOP; RELEASE OF DIRECTORS. (a) Each of the Company
and the Stockholders agrees that, from the date hereof and until the first to
occur of the Effective Time or the termination of this Agreement in accordance
with Article XI, neither the Company nor any Stockholder, nor any of their
respective officers and directors shall, and the Company and each Stockholder
will direct and use their best efforts to cause each of their respective
Representatives not to, initiate, solicit or encourage, directly or indirectly,
any inquiries or the making or implementation of any proposal or offer
(including any proposal or offer to the Stockholders) with respect to a merger,
acquisition, consolidation or similar transaction involving, or any purchase of
all or any significant portion of the assets or any equity securities of, the
Company (any such proposal or offer being an "Acquisition Proposal") or engage
in any activities, discussions or negotiations concerning, or provide any
Confidential Information respecting, the Acquired Business, any Other Acquired
Business or INVATEC to, or have any discussions with, any Person relating to an
Acquisition Proposal or otherwise facilitate any effort or attempt to make or
implement an Acquisition Proposal. The Company and each Stockholder will: (i)
immediately cease and cause to be terminated any existing activities,
discussions or negotiations with any Persons conducted heretofore with respect
to any of the foregoing, and each will take the steps necessary to inform the
Persons referred to in the first sentence of this Section 4.04(a) of the
obligations undertaken in this Section 4.04(a); and (ii) notify INVATEC
immediately if any such inquiries or proposals are received by, any such
information is requested from or any such discussions or negotiations are sought
to be initiated or continued with the Company or any Stockholder.
(b) Each of the Company and the Stockholders hereby (i) waives every
right, if any, the Governmental Requirements of the Company's Organization State
afford the Company or Stockholders to require the Company's directors (or their
equivalents if the Company is not a corporation), in the exercise of their
fiduciary duties in their capacity as such, to engage in any of the activities
prohibited by this Section 4.04 and (ii) releases each such person from any and
all liability he might otherwise have to the Company or any Stockholders but for
this release.
Section 4.05. NOTICE TO BARGAINING AGENTS. Prior to the IPO Closing
Date, the Company will (a) satisfy any requirement for notice of the
transactions contemplated by this Agreement under applicable collective
bargaining agreements and (b) provide INVATEC with proof that any required
notice has been sent.
Section 4.06. NOTIFICATION OF CERTAIN MATTERS. The Stockholders and
the Company shall give prompt notice to INVATEC of (a) the existence or
occurrence of each condition or state
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of facts which will or reasonably could be expected to cause any representation
or warranty of the Company or any Stockholder contained herein to be untrue or
incorrect in any material respect at or prior to the Closing or on the IPO
Closing Date and (b) any material failure of any Stockholder or the Company to
comply with or satisfy any covenant, condition or agreement to be complied with
or satisfied by that Person hereunder. INVATEC shall give prompt notice to the
Company of (a) the existence or occurrence of each condition or state of facts
which will or reasonably could be expected to cause any representation or
warranty of INVATEC or Newco contained herein to be untrue or inaccurate at or
prior to the Closing or on the IPO Closing Date and (b) any material failure of
INVATEC or Newco to comply with or satisfy any covenant, condition or agreement
to be complied with or satisfied by it hereunder. The delivery of any notice
pursuant to this Section 4.06 shall not be deemed to (a) modify the
representations or warranties herein of the party delivering that notice, or any
other party, which modification may be made only pursuant to Section 4.07, (b)
modify the conditions set forth or referred to in Article V or (c) limit or
otherwise affect the remedies available hereunder to the party receiving that
notice.
Section 4.07. SUPPLEMENTAL INFORMATION. Each of the Company and the
Stockholders agrees that, with respect to the representations and warranties of
that party contained in this Agreement, that party will have the continuing
obligation (except to the extent otherwise provided in Section 4.07) until the
Effective Time to provide INVATEC promptly with such additional supplemental
Information (collectively, the "Supplemental Information"), in the form of (a)
amendments to then existing Schedules or Sections of the Disclosure Statement or
(b) additional Schedules or Sections of the Disclosure Statement, as would be
necessary, in the light of the circumstances, conditions, events and states of
facts then known to the Company or any Stockholder, to make each of those
representations and warranties true and correct as of the Closing and on the IPO
Closing Date. For purposes only of determining whether the conditions to the
obligations of INVATEC and Newco which are specified in Section 5.03 have been
satisfied, the Schedules and the Disclosure Statement as of the Closing and on
the IPO Closing Date shall be deemed to be the Schedules and the Disclosure
Statement as of the date hereof as amended or supplemented by the Supplemental
Information provided to INVATEC prior to the Effective Time pursuant to this
Section 4.07; provided, however, that if the Supplemental Information so
provided discloses the existence of circumstances, conditions, events or states
of facts which, in any combination thereof, (a) have had a Material Adverse
Effect that was not reflected in the determination of the Ceiling Amount or, in
the sole judgment of INVATEC (which shall be conclusive for purposes of this
Section 4.07 and Article IX, but not for any purpose of Sections 6.05 or 7.06),
(b) are having or will have a Material Adverse Effect, INVATEC will be entitled
to terminate this Agreement pursuant to Section 11.01(a)(iv); and provided,
further, that if INVATEC is entitled to terminate this Agreement pursuant to
Section 11.01(a)(iv), but elects not to do so, it will be entitled to treat as
INVATEC Indemnified Losses or INVATEC Unindemnified Losses (which treatment will
not prejudice the right of any Stockholder under Section 6.05 or Article VII, as
applicable, to contest Damage Claims made by INVATEC in respect of those INVATEC
Indemnified Losses or INVATEC Unindemnified Losses), as applicable, all Damages
to the Acquired Business which are attributable to the circumstances,
conditions, events and states of facts first disclosed herein after the date
hereof in the Supplemental Information. INVATEC will provide the Company with
copies of the Registration Statement, including all pre-effective amendments
thereto, promptly after the filing thereof with the SEC under the Securities
Act.
Section 4.08. COOPERATION IN CONNECTION WITH THE IPO. The Company
and the Stockholders will (a) provide INVATEC and the Underwriter with all the
Information concerning
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the Company or any of the Stockholders which is reasonably requested by INVATEC
and the Underwriter from time to time in connection with effecting the IPO and
(b) cooperate with INVATEC and the Underwriter and their respective
Representatives in the preparation and amendment of the Registration Statement
(including the Financial Statements) and in responding to the comments of the
SEC staff, if any, with respect thereto, to the extent that any of the foregoing
concern or reasonably relate to the Company or any Stockholder. The Company and
each Stockholder agree promptly to (a) advise INVATEC if, at any time during the
period in which a prospectus relating to the IPO is required to be delivered
under the Securities Act, any information contained in the then current
Registration Statement prospectus concerning the Company or the Stockholders
becomes incorrect or incomplete in any material respect and (b) provide INVATEC
with the information needed to correct or complete that information.
Section 4.09. ADDITIONAL FINANCIAL STATEMENTS. The Company will
furnish to INVATEC:
(a) as soon as available and in any event within 30 days after the
end of each of the Company's fiscal quarters which ends prior to the IPO Pricing
Date, an unaudited balance sheet of the Acquired Business as of the end of that
fiscal quarter and the related statements of income or operations, cash flows
and stockholders' or other owners' equity for that fiscal quarter and for the
period of the Company's fiscal year ended with that quarter, in each case (i)
setting forth in comparative form the figures for the corresponding portion of
the Company's previous fiscal year and (ii) prepared in accordance with GAAP
applied on basis consistent (A) throughout the periods indicated (excepting
footnotes) and (B) with the basis on which the Initial Financial Statements
including the Current Balance Sheet were prepared; and
(b) if requested by INVATEC in connection with any amendment of the
Registration Statement and promptly following any such request, such summary
operating or other financial information of the Acquired Business as of the end
of either the first or second fiscal month in any of the Company's fiscal
quarters as INVATEC may request.
Section 4.10. TERMINATION OF PLANS. If requested by INVATEC, the
Company will, or will cause the applicable Company Subsidiary to, if permitted
by all applicable Governmental Requirements to do so, terminate each Plan
identified in Section 2.27(c) or (d) of the Disclosure Statement as a "Plan To
Be Terminated" prior to the Effective Time.
Section 4.11. DISPOSITION OF UNWANTED ASSETS. At or prior to the
Closing, the Company will make all arrangements and take all such actions as are
necessary and satisfactory to INVATEC to dispose, prior to the Effective Time,
of those assets of it or of one or more of the Company or the Company
Subsidiaries which are listed in Section 4.11 of the Disclosure Statement.
Section 4.12. HSR ACT MATTERS. If INVATEC shall determine that
filings pursuant to and under the HSR Act are necessary or appropriate in
connection with the effectuation of the Acquisition or the consummation of the
acquisitions contemplated by the Other Agreements, and advises the Company in
writing of that determination, the Company promptly will compile and file (or
will cause its "ultimate parent entity" (as determined for purposes of the HSR
Act) to file) under the HSR Act such information respecting it as the HSR Act
requires of an Entity to be acquired, and the expiration or termination of the
applicable waiting period and any extension thereof under the HSR Act shall be
deemed a condition precedent set forth in Section 5.01(b).
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ARTICLE V
THE CLOSING AND CONDITIONS TO CLOSING AND CONSUMMATION
Section 5.01. CONDITIONS TO THE OBLIGATIONS OF EACH PARTY. (a) The
obligation of each party hereto to take the actions contemplated to be taken by
that party at the Closing is subject to the satisfaction on or before the
Closing Date of each of the following conditions or waiver pursuant to Section
10.04.
(i) NO LITIGATION. No Litigation shall be pending on the Closing
Date to restrain, prohibit or otherwise interfere with, or to obtain
material damages or other relief from INVATEC or any Subsidiary of INVATEC
in connection with, the consummation of the Acquisition or the IPO;
(ii) GOVERNMENTAL APPROVALS. All Governmental Approvals (other than
the acceptance for filing of the Certificates of Merger) required to be
obtained by any of the Company, INVATEC and any Subsidiary of INVATEC in
connection with the consummation of the Acquisition and the IPO shall have
been obtained; and
(iii) THE REGISTRATION STATEMENT. (A) The Registration Statement, as
amended to cover the offering, issuance and sale by INVATEC of such number
of shares of INVATEC Common Stock at the IPO Price (which need not be set
forth in the Registration Statement when it becomes effective under the
Securities Act) as shall yield aggregate cash proceeds to INVATEC from
that sale (net of the Underwriter's discount or commissions) in at least
the amount (the "Minimum Cash Amount") that is sufficient, when added to
the funds, if any, available from other sources (if any, and as set forth
in the Registration Statement when it becomes effective under the
Securities Act) (the "Other Financing Sources") to enable INVATEC to pay
or otherwise deliver on the IPO Closing Date (1) the total cash portion of
the Acquisition Consideration then to be delivered pursuant to Paragraph
2; (2) the total cash portion of the acquisition consideration then to be
delivered pursuant to the Other Agreements as a result of the consummation
of the acquisition transactions contemplated thereby and (3) the total
amount of Indebtedness of the Company and each Other Acquired Business and
INVATEC which the Registration Statement discloses at the time it becomes
effective under the Securities Act will be repaid with proceeds received
by INVATEC from the IPO and the Other Financing Sources, shall have been
declared effective under the Securities Act by the SEC; (B) no stop order
suspending the effectiveness of the Registration Statement shall have been
issued by the SEC, and the SEC shall not have initiated or threatened to
initiate Litigation for that purpose; and (C) the Underwriter shall have
agreed in writing (the "Underwriting Agreement," which term includes the
related pricing agreement, if any) to purchase from INVATEC on a firm
commitment basis for resale to the public initially at the IPO Price,
subject to the conditions set forth in the Underwriting Agreement, such
number of shares of INVATEC Common Stock covered by the Registration
Statement as, when multiplied by the price per share of INVATEC Common
Stock to be paid by the Underwriter to INVATEC pursuant to the
Underwriting Agreement, shall equal at least the Minimum Cash Amount.
(b) The obligation of each party hereto with respect to the actions
to be taken on the IPO Closing Date is subject to the satisfaction on that date
of each of the following conditions:
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(i) NO LITIGATION. No Litigation shall be pending on the IPO Closing
Date to restrain, prohibit or otherwise interfere with, or to obtain
material damages or other relief from INVATEC or any Subsidiary of INVATEC
in connection with, the consummation of the Acquisition or the IPO;
(ii) GOVERNMENTAL APPROVALS. All Governmental Approvals required to
be obtained by the Company, INVATEC and Newco in connection with the
consummation of the Acquisition and the IPO shall have been obtained;
(iii) CLOSING OF THE IPO. INVATEC shall have issued and sold shares
of INVATEC Common Stock to the Underwriter in accordance with the
Underwriting Agreement for initial resale at the IPO Price and received
payment therefor in an amount at least equal to the amount by which (A)
the Minimum Cash Amount exceeds (B) the aggregate amount of funds actually
received on the IPO Closing Date, if any, from any one or more of the
Other Financing Sources.
Section 5.02. CONDITIONS TO THE OBLIGATIONS OF THE COMPANY AND THE
STOCKHOLDERS. The obligations of the Company and each Stockholder with respect
to actions to be taken by them at or before the Closing Date and the actions to
be taken on the IPO Closing Date are subject to the satisfaction, or the written
waiver by the Company on behalf of itself and each Stockholder pursuant to
Section 10.04 on or before the Closing Date of (i) all the conditions set forth
in Section 5.01(a) and (ii) all the following conditions:
(A) REPRESENTATIONS AND WARRANTIES. All the representations and
warranties of INVATEC and Newco in Article III shall be true and correct
as of the Closing as though made at that time;
(B) DELIVERY OF DOCUMENTS. INVATEC shall have delivered to the
Company, with copies for each Stockholder:
(1) an INVATEC officer's certificate respecting the
representations and warranties of INVATEC and Newco in Article III
and compliance with the covenants of INVATEC and Newco in Article IV
and in the form thereof attached as an exhibit to the Closing
Memorandum;
(2) opinions dated the IPO Closing Date and addressed to the
Company and the Stockholders from Counsel for INVATEC and Newco
substantially in the forms thereof attached as exhibits to the
Closing Memorandum;
(3) a certificate of the secretary or any assistant secretary
of INVATEC in the form thereof (without attachments thereto)
attached as an exhibit to the Closing Memorandum and respecting, and
to which is attached: (a) the Charter Documents of each of INVATEC
and Newco (certified by the Secretary of State of or other
appropriate Governmental Authority of its Organization State in the
case of its articles or certificate of incorporation included
therein); (b) the resolutions of the boards of directors of INVATEC
and Newco respecting the Transaction Documents and the transactions
contemplated thereby; (c) a certificate respecting the incumbency
and true signatures of the INVATEC and Newco officers who execute
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the Transaction Documents on behalf of INVATEC and Newco,
respectively; (d) a specimen certificate evidencing shares of
INVATEC Common Stock; (e) the prospectus included in the
Registration Statement when it became effective; and (f) a facsimile
copy of the Underwriting Agreement as executed and delivered by
INVATEC and the Underwriter;
(4) the Registration Rights Agreement duly executed and
delivered by INVATEC; and
(5) for each of INVATEC and Newco, a certificate, dated as of
a Current Date, duly issued by the appropriate Governmental
Authorities in its Organization State showing it to be in existence
or good standing and authorized to do business in that State.
Section 5.03. CONDITIONS TO THE OBLIGATIONS OF INVATEC AND NEWCO.
(a) The obligations of INVATEC and Newco with respect to actions to be taken by
them at or before the Closing are subject to the satisfaction, or the waiver by
INVATEC pursuant to Section 10.04, on or before the Closing Date of (i) all the
conditions set forth in Section 5.01(a) and (ii) all the following conditions:
(A) REPRESENTATIONS AND WARRANTIES. All the representations and
warranties of the Stockholders and the Company in Articles I and II and in
the Special Provisions, if any, shall be true and correct as of the
Closing as though made at that time;
(B) DELIVERY OF DOCUMENTS. The Stockholders and the Company shall
have delivered to INVATEC:
(1) a Company officer's certificate, signed by a Responsible
Officer, respecting the representations and warranties of the
Stockholders and the Company in Articles I and II and in the Special
Provisions, if any, and compliance with the covenants of the
Stockholders and the Company in Article IV and in the form thereof
attached as an exhibit to the Closing Memorandum;
(2) opinions dated the IPO Closing Date and addressed to
INVATEC from Counsel for the Company and the Stockholders
substantially in the form thereof attached as exhibits to the
Closing Memorandum;
(3) a certificate of the secretary or any assistant secretary
of the Company in the form thereof (without attachments thereto)
attached as an exhibit to the Closing Memorandum and respecting, and
to which is attached: (a) the Charter Documents of the Company; (b)
the resolutions of the board of directors of the Company respecting
the Transaction Documents and the transactions contemplated thereby;
and (c) a certificate respecting the incumbency and true signatures
of the Responsible Officers who execute the Transaction Documents on
behalf of the Company;
(4) from each Stockholder, a certificate to the effect that no
withholding is required under Section 1445 of the Code and in the
form of thereof attached as an
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exhibit to the Closing Memorandum with the blanks appropriately
filled, duly executed and delivered by that Stockholder;
(5) From each officer and director of the Company and each
Company Subsidiary, if any, a notice of resignation in the form
thereof attached as an exhibit to the Closing Memorandum; and
(6) for each of the Company and the Company Subsidiaries, a
certificate, dated as of a Current Date, duly issued by the
appropriate Governmental Authorities in its Organization State and
in each other jurisdiction listed for it in Section 2.02 of the
Disclosure Statement, showing it to be in good standing and
authorized to do business in its Organization State and those other
jurisdictions and that all state franchise and/or income tax returns
and taxes due by it in its Organization State and those other
jurisdictions for all periods prior to the Closing have been filed
and paid.
(b) The obligations of INVATEC and Newco with respect to the actions
to be taken on the IPO Closing Date are subject to the satisfaction on that date
of (i) all the conditions set forth in Section 5.01(b), if any, and (ii) the
condition that all the representations and warranties of the Stockholders and
the Company in Articles I and II and the Special Provisions, if any, shall be
true and correct as of the IPO Closing Date as though made on that date.
ARTICLE VI
COVENANTS FOLLOWING THE EFFECTIVE TIME
Section 6.01. DISCLOSURE. If, subsequent to the IPO Pricing Date and
prior to the 25th day after the date of the Final Prospectus, any Stockholder
becomes aware of any fact or circumstance which would change (or, if after the
Effective Time, would have changed) a representation or warranty of the Company
or any Stockholder in this Agreement or would affect any document delivered
pursuant hereto in any material respect, that Stockholder will promptly give
notice of that fact or circumstance to INVATEC.
Section 6.02. PREPARATION AND FILING OF TAX RETURNS. Each party
hereto will, and will cause its Affiliates to, provide to each of the other
parties hereto such cooperation and information as any of them reasonably may
request in filing any Return, amended Return or claim for refund, determining a
liability for Taxes or a right to refund of Taxes or in conducting any audit or
other proceeding in respect of Taxes. This cooperation and information shall
include providing copies of all relevant portions of the relevant Returns,
together with such accompanying schedules and work papers, documents relating to
rulings or other determinations by Taxing Authorities and records concerning the
ownership and Tax bases of property as are relevant which a party possesses.
Each party will make its employees, if any, reasonably available on a mutually
convenient basis at its cost to provide an explanation of any documents or
information so provided. Subject to the preceding sentence, each party required
to file Returns pursuant to this Agreement shall bear all costs attributable to
the preparation and filing of those Returns.
Section 6.03. DIRECTORS. INVATEC will cause such corporate
proceedings as on its part will be necessary to cause each of the persons, if
any, who are named in the Final Prospectus
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as persons who will become members of the board of directors of INVATEC
following the Effective Time to be appointed to that board when that prospectus
so provides.
Section 6.04. REMOVAL OF GUARANTIES. INVATEC will use its reasonable
efforts to ensure that, within 90 days after the Effective Time, either (a) the
Stockholder Guaranties, if any, listed in Section 6.04 of the Disclosure
Statement are terminated or (b) the Indebtedness to which those Guaranties
relate is retired; provided, however, that if INVATEC is unable to effect the
termination of any of those Guaranties or the retirement of any of that
Indebtedness, INVATEC will indemnify and hold harmless each Stockholder from and
against any liabilities, claims, demands, judgments, losses, costs, damages or
expenses whatsoever (including reasonable attorneys' fees) that such Stockholder
may sustain, suffer or incur and that result from or arise out of or relate to
that Guaranty or that Indebtedness, as the case may be.
Section 6.05. SURVIVAL OF REPRESENTATIONS AND WARRANTIES. (a)
Notwithstanding any investigation at any time made by or on behalf of any party
hereto, the representations and warranties set forth in Articles I, II and III
and in any certificate delivered in connection herewith with respect to any of
those representations and warranties will survive the closing and the Effective
Time until the day that is two years from the Effective Time, whereupon they
will terminate and expire, except as follows: (i) the representations and
warranties of the Stockholders which relate expressly or by necessary
implication to Taxes, ERISA or the Governmental Requirements referred to in
clause (iii) of Section 7.02(a) will survive until the expiration of the
applicable statutes of limitations (including all periods of extension and
tolling); (ii) the representations and warranties of the Stockholders which
relate expressly or by necessary implication to the environment or Environmental
Laws will survive indefinitely; and (iii) the representations and warranties of
the Company will terminate and expire at the Effective Time.
(b) After a representation and warranty has expired, as provided in
Section 6.05(a), no Damage Claim constituting an INVATEC Indemnified Loss will
or may be made or prosecuted through Litigation or otherwise, by any Person who
would have been entitled to Damages on the basis of that representation and
warranty prior to its termination and expiration, provided that: (i) the amount
of that claim, if against any Stockholder, shall be taken into account in
determining whether the aggregate amount of all claims against that Stockholder
has exceeded that Stockholder's Pro Rata Share of the Threshold Amount for
purposes of Section 6.06; and (ii) in the case of each representation and
warranty that will terminate and expire as provided in this Section 6.05, no
Damage Claim presented in writing for Damages to the Person or Persons from
which or whom those damages are sought on the basis of that representation and
warranty prior to its termination and expiration will be affected in any way by
that termination and expiration.
Section 6.06. LIMITATIONS ON DAMAGE CLAIMS. (a) In the event INVATEC
should have any Damage Claim hereunder following the Effective Time against any
Stockholder which does not involve an INVATEC Indemnified Loss (each such Damage
Claim not involving an INVATEC Indemnified Loss being an "INVATEC Unindemnified
Loss"), that Stockholder will not be liable to INVATEC on account of that
INVATEC Unindemnified Loss unless the liability of that Stockholder in respect
of that INVATEC Unindemnified Loss, when aggregated with the liability of all
Stockholders in respect of the sum of (i) all INVATEC Unindemnified Losses and
(ii) all INVATEC Indemnified Losses under Section 7.02(a), exceeds, and only to
the extent the aggregate amount of all those INVATEC Unindemnified Losses and
INVATEC Indemnified Losses does exceed, the Threshold Amount. In no event shall
(i) the aggregate joint and several liability of the
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Stockholders under this Agreement, including Section 7.02(a), exceed the Ceiling
Amount or (ii) the aggregate liability of each Stockholder under this Agreement,
including Sections 7.02(a) and 7.02(b), exceed that Stockholder's Pro Rata Share
of the Ceiling Amount. For purposes of determining the amount of INVATEC
Unindemnified Losses and INVATEC Indemnified Losses, no effect will be given to
any resulting Tax benefit to INVATEC or any other INVATEC Indemnified Party.
(b) In the event any Stockholder should have any Damage Claim
hereunder following the Effective Time against INVATEC which does not involve a
Stockholder Indemnified Loss (each such Damage Claim not involving a Stockholder
Indemnified Loss being a "Stockholder Unindemnified Loss"), INVATEC will not be
liable to that Stockholder on account of that Stockholder Unindemnified Loss
unless the liability of INVATEC on account of that Stockholder Unindemnified
Loss, when aggregated with the liability of INVATEC in respect of the sum of (i)
all Stockholder Unindemnified Losses for which it has become liable and (ii) all
Stockholder Indemnified Losses for which it has become liable, exceeds, and only
to the extent the aggregate amount of all those Stockholder Unindemnified Losses
and Stockholder Indemnified Losses does exceed, the Threshold Amount. In no
event shall INVATEC be liable under this Agreement, including Section 7.03, for
any amount in excess of the Ceiling Amount. For purposes of determining the
amount of Stockholder Unindemnified Losses and Stockholder Indemnified Losses,
no effect will be given to any resulting Tax benefit to any Stockholder
Indemnified Party.
(c) Neither any INVATEC Unindemnified Loss nor any Stockholder
Unindemnified Loss shall include any consequential, exemplary, punitive or
treble damage (including any loss of earnings or profits), and INVATEC hereby
releases each Stockholder, and each Stockholder hereby releases INVATEC, in each
case to the fullest extent permitted by applicable law, from liability for any
such excluded Damage.
ARTICLE VII
INDEMNIFICATION
Section 7.01. IN RESPECT OF REPRESENTATIONS AND WARRANTIES. After a
representation and warranty has terminated and expired as provided in Section
6.05, no indemnification will or may be sought pursuant to this Article VII on
the basis of that representation and warranty by any Person who would have been
entitled pursuant to this Article VII to indemnification on the basis of that
representation and warranty prior to its termination and expiration, provided
that: (a) the amount of that claim, if against any Stockholder, shall be taken
into account in determining whether the aggregate amount of all claims against
that Stockholder has exceeded that Stockholder's Pro Rata Share of the Threshold
Amount for purposes of Section 7.06; and (b) in the case of each representation
and warranty that will terminate and expire as provided in Section 6.05, no
claim presented in writing for indemnification pursuant to this Article VII on
the basis of that representation and warranty prior to its termination and
expiration will be affected in any way by that termination and expiration.
Section 7.02. INDEMNIFICATION OF INVATEC INDEMNIFIED PARTIES. (a)
Subject to the applicable provisions of Sections 7.01 and 7.06, the Stockholders
covenant and agree that they, jointly and severally, will indemnify each INVATEC
Indemnified Party against, and hold each INVATEC Indemnified Party harmless from
and in respect of, all Third Party Claims that arise from,
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are based on or relate or otherwise are attributable to (i) any breach of the
representations and warranties of the Stockholders or the Company set forth
herein (other than in Article I) or in certificates delivered in connection
herewith (other than in respect of certificates relating only to the
representations and warranties in Article I), (ii) any nonfulfillment of any
joint and several covenant or agreement on the part of the Stockholders or the
Company under this Agreement or (iii) any liability under the Securities Act,
the Exchange Act or other applicable Governmental Requirement which arises out
of or is based on (A) any untrue statement or alleged untrue statement of a
material fact relating to the Company and the Company Subsidiaries, or any of
them, which is (1) provided to INVATEC or its counsel by the Company or the
Stockholders and (2) contained in any preliminary prospectus relating to the
IPO, the Registration Statement or any prospectus forming a part thereof, or any
amendment thereof or supplement thereto, and not corrected by the Stockholder or
the Company after the Company or such Stockholder has been given a reasonable
opportunity to review such preliminary prospectus or other documentation, or (B)
any omission or alleged omission to state therein a material fact relating to
the Company and the Company Subsidiaries, or any of them, required to be stated
therein or necessary to make the statements therein not misleading, and not
provided to INVATEC or its counsel by the Company or the Stockholders after the
Company or the Stockholders have been given a reasonable opportunity to review
such preliminary prospectus or other documentation or furnish such information
(each such Third Party Claim and each Third Party Claim described in Section
7.02(b) being an "INVATEC Indemnified Loss").
(b) Each Stockholder, severally and not jointly with any other
Person, covenants and agrees that he will indemnify each INVATEC Indemnified
Party against, and hold each INVATEC Indemnified Party harmless from and in
respect of, all Third Party Claims that arise from, are based on or relate or
otherwise are attributable to (i) any breach of the representations and
warranties of that Stockholder solely as to that Stockholder set forth in
Article I or in certificates delivered by that Stockholder and relating to those
representations and warranties, (ii) any nonfulfillment of any several, and not
joint and several, agreement on the part of that Stockholder under this
Agreement or (iii) any liability under the Securities Act, the Exchange Act or
other applicable Governmental Requirement which arises out of or is based on (A)
any untrue statement or alleged untrue statement of a material fact relating
solely to that Stockholder which is (1) provided to INVATEC or its counsel by
that Stockholder and (2) contained in any preliminary prospectus relating to the
IPO, the Registration Statement or any prospectus forming a part thereof, or any
amendment thereof or supplement thereto and not corrected by the Stockholder or
the Company after the Company or such Stockholder has been given a reasonable
opportunity to review such preliminary prospectus or other documentation, or (B)
any omission or alleged omission to state therein a material fact relating
solely to that Stockholder required to be stated therein or necessary to make
the statements therein not misleading, and not provided to INVATEC or its
counsel by that Stockholder after the Company or such Stockholder has been given
a reasonable opportunity to review such preliminary prospectus or other
documentation or furnish such information.
Section 7.03. INDEMNIFICATION OF STOCKHOLDER INDEMNIFIED PARTIES.
Subject to the provisions of Sections 7.01 and 7.06, INVATEC covenants and
agrees that it will indemnify each Stockholder Indemnified Party against, and
hold each Stockholder Indemnified Party harmless from and in respect of, all
Third Party Claims that arise from, are based on or relate or otherwise are
attributable to (i) any breach by INVATEC or Newco of their representations and
warranties set forth herein or in their certificates delivered to the Company or
the Stockholders in connection herewith, (ii) any nonfulfillment of any covenant
or agreement on the part of INVATEC or Newco under this Agreement or (iii) any
liability under the Securities Act, the Exchange Act or other applicable
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Governmental Requirement which arises out of or is based on (A) any untrue
statement or alleged untrue statement of a material fact relating to INVATEC,
any Subsidiary of INVATEC or any of the Other Acquired Businesses contained in
any preliminary prospectus relating to the IPO, the Registration Statement or
any prospectus forming a part thereof, or any amendment thereof or supplement
thereto (other than matters with respect to which the Stockholders are required
to indemnify the INVATEC Indemnified Party under Section 7.02), or (B) any
omission or alleged omission to state therein a material fact relating to
INVATEC, any Subsidiary of INVATEC or any of the Other Acquired Businesses, or
any of them (other than matters with respect to which the Stockholders are
required to indemnify the INVATEC Indemnified Party under Section 7.02),
required to be stated therein or necessary to make the statements therein not
misleading in the light of the circumstances under which they were made (each
such Third Party Claim being a "Stockholder Indemnified Loss").
Section 7.04. CONDITIONS OF INDEMNIFICATION. (a) All claims for
indemnification under this Agreement shall be asserted and resolved as follows
in this Section 7.04.
(b) A party claiming indemnification under this Agreement (an
"Indemnified Party") shall promptly (i) notify the party from whom
indemnification is sought (the "Indemnifying Party") of any Third Party Claim
asserted against the Indemnified Party which could give rise to a right of
indemnification under this Agreement and (ii) transmit to the Indemnifying Party
a written notice ("Claim Notice") describing in reasonable detail the nature of
the Third Party Claim, a copy of all papers served with respect to that claim
(if any), an estimate of the amount of damages attributable to the Third Party
Claim to the extent feasible (which estimate shall not be conclusive of the
final amount of that claim) and the basis for the Indemnified Party's request
for indemnification under this Agreement. Except as set forth in Section 7.01,
the failure to promptly deliver a Claim Notice shall not relieve the
Indemnifying Party of its obligations to the Indemnified Party with respect to
the related Third Party Claim except to the extent that the resulting delay is
materially prejudicial to the defense of that claim. Within 15 days after
receipt of any Claim Notice (the "Election Period"), the Indemnifying Party
shall notify the Indemnified Party (i) whether the Indemnifying Party disputes
its potential liability to the Indemnified Party under this Article VII with
respect to that Third Party Claim and (ii) if the Indemnifying Party does not
dispute its potential liability to the Indemnified Party with respect to that
Third Party Claim, whether the Indemnifying Party desires, at the sole cost and
expense of the Indemnifying Party, to defend the Indemnified Party against that
Third Party Claim.
(c) If the Indemnifying Party does not dispute its potential
liability to the Indemnified Party and notifies the Indemnified Party within the
Election Period that the Indemnifying Party elects to assume the defense of the
Third Party Claim, then the Indemnifying Party shall have the right to defend,
at its sole cost and expense, that Third Party Claim by all appropriate
proceedings, which proceedings shall be prosecuted diligently by the
Indemnifying Party to a final conclusion or settled at the discretion of the
Indemnifying Party in accordance with this Section 7.04(c) and the Indemnified
Party will furnish the Indemnifying Party with all information in its possession
with respect to that Third Party Claim and otherwise cooperate with the
Indemnifying Party in the defense of that Third Party Claim; provided, however,
that the Indemnifying Party shall not enter into any settlement with respect to
any Third Party Claim that purports to limit the activities of, or otherwise
restrict in any way, any Indemnified Party or any Affiliate of any Indemnified
Party without the prior consent of that Indemnified Party (which consent may be
withheld in the sole discretion of that Indemnified Party). The Indemnified
Party
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is hereby authorized, at the sole cost and expense of the Indemnifying Party, to
file, during the Election Period, any motion, answer or other pleadings that the
Indemnified Party shall deem necessary or appropriate to protect its interests
or those of the Indemnifying Party. The Indemnified Party may participate in,
but not control, any defense or settlement of any Third Party Claim controlled
by the Indemnifying Party pursuant to this Section 7.04(c) and will bear its own
costs and expenses with respect to that participation; provided, however, that
if the named parties to any such action (including any impleaded parties)
include both the Indemnifying Party and the Indemnified Party, and the
Indemnified Party has been advised by counsel that there may be one or more
legal defenses available to it which are different from or additional to those
available to the Indemnifying Party, then the Indemnified Party may employ
separate counsel at the expense of the Indemnifying Party, and, on its written
notification of that employment, the Indemnifying Party shall not have the right
to assume or continue the defense of such action on behalf of the Indemnified
Party.
(d) If the Indemnifying Party (i) within the Election Period (A)
disputes its potential liability to the Indemnified Party under this Article
VII, (B) elects not to defend the Indemnified Party pursuant to Section 7.04(c)
or (C) fails to notify the Indemnified Party that the Indemnifying Party elects
to defend the Indemnified Party pursuant to Section 7.04(c) or (ii) elects to
defend the Indemnified Party pursuant to Section 7.04(c) but fails diligently
and promptly to prosecute or settle the Third Party Claim, then the Indemnified
Party shall have the right to defend, at the sole cost and expense of the
Indemnifying Party (if the Indemnified Party is entitled to indemnification
hereunder), the Third Party Claim by all appropriate proceedings, which
proceedings shall be promptly and vigorously prosecuted by the Indemnified Party
to a final conclusion or settled. The Indemnified Party shall have full control
of such defense and proceedings. Notwithstanding the foregoing, if the
Indemnifying Party has delivered a written notice to the Indemnified Party to
the effect that the Indemnifying Party disputes its potential liability to the
Indemnified Party under this Article VII and if such dispute is resolved in
favor of the Indemnifying Party, the Indemnifying Party shall not be required to
bear the costs and expenses of the Indemnified Party's defense pursuant to this
Section 7.04 or of the Indemnifying Party's participation therein at the
Indemnified Party's request, and the Indemnified Party shall reimburse the
Indemnifying Party in full for all reasonable costs and expenses of such
litigation. The Indemnifying Party may participate in, but not control, any
defense or settlement controlled by the Indemnified Party pursuant to this
Section 7.04(d), and the Indemnifying Party shall bear its own costs and
expenses with respect to such participation.
(e) Payments of all amounts owing by an Indemnifying Party pursuant
to this Article VII relating to a Third Party Claim shall be made within 30 days
after the latest of (i) the settlement of that Third Party Claim, (ii) the
expiration of the period for appeal of a final adjudication of that Third Party
Claim or (iii) the expiration of the period for appeal of a final adjudication
of the Indemnifying Party's liability to the Indemnified Party under this
Agreement in respect of that Third Party Claim.
Section 7.05. REMEDIES NOT EXCLUSIVE. The remedies provided in this
Agreement shall not be exclusive of any other rights or remedies available to
one party against any other party, either at law or in equity.
Section 7.06. LIMITATIONS ON INDEMNIFICATION. (a) Notwithstanding
the provisions of Section 7.02(a), no Stockholder shall be required to indemnify
or hold harmless any of the INVATEC Indemnified Parties on account of any
INVATEC Indemnified Loss under Section
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7.02(a) unless the liability of the Company and the Stockholders in respect of
that INVATEC Indemnified Loss, when aggregated with the liability of all
Stockholders in respect of the sum of (i) all INVATEC Unindemnified Losses and
(ii) all INVATEC Indemnified Losses under Section 7.02(a), exceeds, and only to
the extent the aggregate amount of all those INVATEC Unindemnified Losses and
INVATEC Indemnified Losses does exceed, the Threshold Amount. In no event shall
(i) the aggregate joint and several liability of the Stockholders under this
Agreement, including Section 7.02(a), exceed the Ceiling Amount or (ii) the
aggregate liability of each Stockholder under this Agreement, including Sections
7.02(a) and 7.02(b), exceed that Stockholder's Pro Rata Share of the Ceiling
Amount. For purposes of determining the amount of INVATEC Indemnified Losses, no
effect will be given to any resulting Tax benefit to any INVATEC Indemnified
Party.
(b) Notwithstanding the provisions of Section 7.03, INVATEC shall
not be required to indemnify or hold harmless any of the Stockholder Indemnified
Parties on account of any Stockholder Indemnified Loss unless the liability of
INVATEC in respect of that Stockholder Indemnified Loss, when aggregated with
the liability of INVATEC in respect of the sum of (i) all Stockholder
Unindemnified Losses and (ii) all Stockholder Indemnified Losses, exceeds, and
only to the extent the aggregate amount of all those Stockholder Unindemnified
Losses and Stockholder Indemnified Losses does exceed, the Threshold Amount. In
no event shall INVATEC be liable under this Agreement, including Section 7.03,
for any amount in excess of the Ceiling Amount. For purposes of determining the
amount of Stockholder Indemnified Losses, no effect will be given to any
resulting Tax benefit to any Stockholder Indemnified Party.
ARTICLE VIII
LIMITATIONS ON COMPETITION
Section 8.01. PROHIBITED ACTIVITIES. Each Stockholder agrees,
severally and not jointly with any other Person, that he will not, during the
period beginning on the date hereof and ending on the third anniversary of the
Closing Date, directly or indirectly, for any reason, for his own account or on
behalf of or together with any other Person:
(a) engage as an officer, director or in any other managerial
capacity or as an owner, co-owner or other investor of or in, whether as
an employee, independent contractor, consultant or advisor, or as a sales
representative or distributor of any kind, any business selling any
products or providing any services in competition with the Acquired
Business or INVATEC or any Subsidiary of INVATEC (INVATEC and its
Subsidiaries collectively being "INVATEC" for purposes of this Article
VIII) within any Territory surrounding any service facility in which the
Acquired Business was engaged in business on the date hereof or
immediately prior to the Effective Date (hereinafter the "Territory").
(b) call on any natural person who is at that time employed by the
Acquired Business or INVATEC in any managerial capacity with the purpose
or intent of attracting that person from the employ of the Acquired
Business or INVATEC, provided that the Stockholder may call on and hire
any Immediate Family Member;
(c) call on any Person that at that time is, or at any time within
one year prior to that time was, a customer of the Acquired Business or
INVATEC within any Territory (i) for the purpose of soliciting or selling
any product or service in competition with the Acquired
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Business or INVATEC in that Territory and (ii) with the knowledge of that
customer relationship; or
(d) call on any Entity which has been called on by INVATEC in
connection with a possible acquisition by INVATEC, with the knowledge of
that Entity's status as such an acquisition candidate, for the purpose of
acquiring that Entity or arranging the acquisition of that Entity by any
Person other than INVATEC.
Notwithstanding the foregoing, any Stockholder may own and hold as a passive
investment up to 5% of the outstanding capital stock of a competing Entity if
that class of capital stock is listed on a national stock exchange or included
in the Nasdaq National Market.
Section 8.02. DAMAGES. Because of the difficulty of measuring
economic losses to INVATEC as a result of any breach by a Stockholder of his
covenants in Section 8.01, and because of the immediate and irreparable damage
that could be caused to INVATEC for which it would have no other adequate
remedy, each Stockholder agrees that INVATEC may enforce the provisions of
Section 8.01 by injunctions and restraining orders against that Stockholder if
he breaches any of those provisions.
Section 8.03. REASONABLE RESTRAINT. The parties hereto each agree
that Sections 8.01 and 8.02 impose a reasonable restraint on the Stockholders in
light of the activities and business of INVATEC on the date hereof, the current
business plans of INVATEC and the investment, if any, by each Stockholder in
INVATEC as a result of the Acquisition.
Section 8.04. SEVERABILITY; REFORMATION. The covenants in this
Article VIII are severable and separate, and the unenforceability of any
specific covenant in this Article VIII is not intended by any party hereto to,
and shall not, affect the provisions of any other covenant in this Article VIII.
If any court of competent jurisdiction shall determine that the scope, time or
territorial restrictions set forth in Section 8.01 are unreasonable as applied
to any Stockholder, the parties hereto, including that Stockholder, acknowledge
their mutual intention and agreement that those restrictions be enforced to the
fullest extent the court deems reasonable, and thereby shall be reformed to that
extent as applied to that Stockholder and any other Stockholder similarly
situated.
Section 8.05. INDEPENDENT COVENANT. All the covenants in this
Article VIII are intended by each party hereto to, and shall, be construed as an
agreement independent of any other provision in this Agreement, and the
existence of any claim or cause of action of any Stockholder against INVATEC,
whether predicated on this Agreement or otherwise, shall not constitute a
defense to the enforcement by INVATEC of any covenant in this Article VIII. It
is specifically agreed that the period specified in Section 8.01 shall be
computed in the case of each Stockholder by excluding from that computation any
time during which that Stockholder is in violation of any provision of Section
8.01. The covenants contained in this Article VIII shall not be affected by any
breach of any other provision hereof by any party hereto.
Section 8.06. MATERIALITY. The Company and each Stockholder,
severally and not jointly with any other Person, hereby agree that this Article
VIII is a material and substantial part of the transactions contemplated hereby.
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Section 8.07. EMPLOYMENT AGREEMENTS. The provisions of this Article
8 and Section 10.01 of this Agreement are in addition to, and not in lieu of,
any provisions regarding noncompetition and Confidential Information contained
in any Employment Agreement(s) with any of Stockholders delivered in connection
with the transactions set forth or contemplated herein.
ARTICLE IX
DEFINITIONS AND DEFINITIONAL PROVISIONS
Section 9.01. DEFINED TERMS. As used in this Agreement, the
following terms have the meanings assigned to them below:
"ACQUIRED BUSINESS" has the meaning specified in Paragraph 1.
"ACQUISITION" has the meaning specified in the Preliminary
Statement.
"ACQUISITION CONSIDERATION" has the meaning specified in Paragraph
2.
"ACQUISITION PROPOSAL" has the meaning specified in Section 4.04.
"AFFILIATE" means, as to any specified Person, any other Person
that, directly or indirectly through one or more intermediaries or
otherwise, controls, is controlled by or is under common control with the
specified Person. As used in this definition, "control" means the
possession, directly or indirectly, of the power to direct or cause the
direction of the management or policies of a Person (whether through
ownership of Capital Stock of that Person, by contract or otherwise).
"AGREEMENT" means this Agreement, including all attached Schedules,
Annexes, Addenda and Exhibits, as each of the same may be amended,
modified or supplemented from time to time pursuant to the provisions
hereof or thereof.
"CAPITAL LEASE" means a lease of (or other agreement conveying the
right to use) real or personal property that is required to be classified
and accounted for as a capital lease under GAAP as in effect on the date
of this Agreement.
"CAPITAL STOCK" means, with respect to: (a) any corporation, any
share, or any depositary receipt or other certificate representing any
share, of an equity ownership interest in that corporation; and (b) any
other Entity, any share, membership or other percentage interest, unit of
participation or other equivalent (however designated) of an equity
interest in that Entity.
"CASH COMPENSATION" means, as applied to any employee, nonemployee
director or officer of, or any natural person who performs consulting or
other independent contractor services for, the Company or any Company
Subsidiary, the wages, salaries, bonuses (discretionary and formula), fees
and other cash compensation paid or payable by the Company and each
Company Subsidiary to that employee or other natural person.
"CEILING AMOUNT" has the meaning specified in Paragraph 1.
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"CERTIFICATE OF MERGER" means, if the Acquisition is effected by
means of a Merger, (a) the articles or certificate of merger respecting
that Merger which contains the information required by the laws of
Surviving Corporation's Organization State to effect that Merger and, if
the Organization State of any Entity merged into the Surviving Corporation
in that Merger is not the Organization State of the Surviving Corporation,
(b) the articles or certificate of merger respecting that Merger which
contains the information required by the laws of that merged Entity's
Organization State to effect that Merger.
"CERCLA" means the Comprehensive Environmental Response,
Conservation, and Liability Act of 1980.
"CHARTER DOCUMENTS" means, with respect to any Entity at any time,
in each case as amended, modified and supplemented at that time, the
articles or certificate of formation, incorporation or organization (or
the equivalent organizational documents) of that Entity, (b) the bylaws or
limited liability company agreement or regulations (or the equivalent
governing documents) of that Entity and (c) each document setting forth
the designation, amount and relative rights, limitations and preferences
of any class or series of that Entity's Capital Stock or of any rights in
respect of that Entity's Capital Stock.
"CLAIM NOTICE" has the meaning specified in Section 7.04.
"CLOSING" has the meaning specified in Paragraph 3.
"CLOSING DATE" has the meaning specified in Paragraph 1.
"CODE" means the Internal Revenue Code of 1986.
"COMPANY" has the meaning specified in Paragraph 1.
"COMPANY CAPITAL STOCK" has the meaning specified in Paragraph 1.
"COMPANY COMMITMENT" has the meaning specified in Section 2.23.
"COMPANY ERISA BENEFIT PLAN" has the meaning specified in Section
2.27.
"COMPANY ERISA PENSION PLAN" has the meaning specified in Section
2.27.
"COMPANY SUBSIDIARY" means at any time any Entity that is a
Subsidiary of the Company at that time.
"CONFIDENTIAL INFORMATION" means, with respect to any Person, all
trade secrets and other confidential, nonpublic and/or proprietary
information of that Person, including information derived from reports,
investigations, research, work in progress, codes, marketing and sales
programs, capital expenditure projects, cost summaries, pricing formulae,
contract analyses, financial information, projections, confidential
filings with any Governmental Authority and all other confidential,
nonpublic concepts, methods of doing business, ideas, materials or
information prepared or performed for, by or on behalf of that Person.
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"CURRENT BALANCE SHEET" has the meaning specified in Paragraph 1.
"CURRENT BALANCE SHEET DATE" has the meaning specified in Paragraph
1.
"CURRENT DATE" means any day during the 20-day period ending on the
date of the Closing.
"DAMAGE" to any specified Person means, except as otherwise provided
in Section 6.06(c), any cost, damage (including any consequential,
exemplary, punitive or treble damage) or expense (including reasonable
fees and actual disbursements by attorneys, consultants, experts or other
Representatives and Litigation costs) to, any fine of or penalty on or any
liability (including loss of earnings or profits) of any other nature of
that Person.
"DAMAGE CLAIM" means, as asserted (a) against any specified Person,
any claim, demand or Litigation made or pending against the specified
Person for Damages to any other Person, or (b) by the specified Person,
any claim or demand of the specified Person against any other Person for
Damages to the specified Person.
"DGCL" means the General Corporation Law of the State of Delaware.
"DERIVATIVE SECURITIES" of a specified Entity means any Capital
Stock, debt security or other Indebtedness of the specified Entity or any
other Person which is convertible into or exchangeable for, or any option,
warrant or other right to acquire, (a) any unissued Capital Stock of the
specified Entity or (b) any Capital Stock of the specified Entity which
has been issued and is being held by the Entity directly or indirectly as
treasury Capital Stock.
"EFFECTIVE DATE" has the meaning specified in Paragraph 1.
"EFFECTIVE TIME" has the meaning specified in Paragraph 2.
"ELECTION PERIOD" has the meaning specified in Section 7.04.
"EMPLOYEE POLICIES AND PROCEDURES" means at any time all employee
manuals and all material policies, procedures and work-related rules that
apply at that time to any employee, nonemployee director or officer of, or
any other natural person performing consulting or other independent
contractor services for, the Company or any Company Subsidiary.
"EMPLOYMENT AGREEMENT" means at any time any (a) agreement to which
the Company or any Company Subsidiary is a party which then relates to the
direct or indirect employment or engagement, or arises from the past
employment or engagement, of any natural person by the Company or any
Company Subsidiary, whether as an employee, a nonemployee officer or
director, a consultant or other independent contractor, a sales
representative or a distributor of any kind, including any employee
leasing or service agreement and any noncompetition agreement, and (b)
agreement between the Company or any Company Subsidiary and any Person
which arises from the sale of a business by that
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Person to the Company or any Company Subsidiary and limits that Person's
competition with the Company or any Company Subsidiary.
"ENTITY" means any sole proprietorship, corporation, partnership of
any kind having a separate legal status, limited liability company,
business trust, unincorporated organization or association, mutual
company, joint stock company or joint venture.
"ENVIRONMENTAL LAWS" means any and all Governmental Requirements
relating to the environment or public or worker health or safety,
including ambient air, surface water, land surface or subsurface strata,
or to emissions, discharges, releases or threatened releases of
pollutants, contaminants, chemicals or industrial, toxic or hazardous
substances or wastes (including Solid Wastes, Hazardous Wastes or
Hazardous Substances) or noxious noise or odor into the environment, or
otherwise relating to the manufacture, processing, distribution, use,
treatment, storage, disposal, recycling, removal, transport or handling of
pollutants, contaminants, chemicals or industrial, toxic or hazardous
substances or wastes (including petroleum, petroleum distillates, asbestos
or asbestos-containing material, volatile organic compounds or
polychlorinated biphenyls).
"ERISA" means the Employee Retirement Income Security Act of 1974.
"ERISA AFFILIATE" means, with respect to any specified Person at any
time, any other Person, including an Affiliate of the specified Person,
that is, or at any time within six years of that time was, a member of any
ERISA Group of which the specified Person is or was a member at the same
time.
"ERISA AFFILIATE PENSION PLAN" has the meaning specified in Section
2.25.
"ERISA EMPLOYEE BENEFIT PLAN" means any "employee benefit plan" as
defined in Section 3(3) of ERISA and includes any ERISA Pension Benefit
Plan.
"ERISA GROUP" means any "group of organizations" within the meaning
of Section 414(b), (c), (m) or (o) of the Code or any "controlled group"
as defined in Section 4001(a)(14) of ERISA.
"ERISA PENSION BENEFIT PLAN" means any "employee pension benefit
plan," as defined in Section 3(2) of ERISA, including any plan that is
covered by Title IV of ERISA or subject to the minimum funding standards
under Section 412 of the Code (excluding any Multiemployer Plan).
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as
amended.
"FINAL PROSPECTUS" means the prospectus included in the Registration
Statement at the time it becomes effective, except that if the prospectus
first furnished to the Underwriter after the Registration Statement
becomes effective for use in connection with the IPO differs from the
prospectus included in the Registration Statement at the time it becomes
effective (whether or not that prospectus so furnished is required to be
filed with the SEC pursuant to Securities Act Rule 424(b)), the prospectus
so first furnished is the "Final Prospectus."
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"FINANCIAL STATEMENTS" means the Initial Financial Statements and
the other financial statements of the Company and the Company
Subsidiaries, if any, delivered to INVATEC pursuant to Section 4.09 prior
to the Effective Time.
"GAAP" means, as applied to any of the Financial Statements,
generally accepted accounting principles and practices in the United
States as in effect from time to time which (a) have been concurred in by
Arthur Andersen LLP and (b) have been or are applied on a basis consistent
(except for changes concurred in by Arthur Andersen LLP) with the most
recent audited Financial Statements delivered to INVATEC prior to the
Effective Time.
"GOVERNMENTAL APPROVAL" means at any time any authorization,
consent, approval, permit, franchise, certificate, license, implementing
order or exemption of, or registration or filing with, any Governmental
Authority, including any certification or licensing of a natural person to
engage in a profession or trade or a specific regulated activity, at that
time.
"GOVERNMENTAL AUTHORITY" means (a) any national, state, county,
municipal or other government, domestic or foreign, or any agency, board,
bureau, commission, court, department or other instrumentality of any such
government, or (b) any Person having the authority under any applicable
Governmental Requirement to assess and collect Taxes for its own account.
"GOVERNMENTAL REQUIREMENT" means at any time (a) any law, statute,
code, ordinance, order, rule, regulation, judgment, decree, injunction,
writ, edict, award, authorization or other requirement of any Governmental
Authority in effect at that time or (b) any obligation included in any
certificate, certification, franchise, permit or license issued by any
Governmental Authority or resulting from binding arbitration, including
any requirement under common law, at that time.
"GUARANTY" means, for any specified Person, without duplication, any
liability, contingent or otherwise, of that Person guaranteeing or
otherwise becoming liable for any obligation of any other Person (the
"primary obligor") in any manner, whether directly or indirectly, and
including any liability of the specified Person, direct or indirect, (a)
to purchase or pay (or advance or supply funds for the purchase or payment
of) that obligation or to purchase (or to advance or supply funds for the
purchase of) any security for the payment of that obligation, (b) to
purchase property, securities or services for the purpose of assuring the
owner of that obligation of its payment or (c) to maintain working
capital, equity capital or other financial statement condition or
liquidity of the primary obligor so as to enable the primary obligor to
pay that obligation; provided, that the term "Guaranty" does not include
endorsements for collection or deposit in the ordinary course of the
endorser's business.
"HSR ACT" means the Hart-Scott-Rodino Antitrust Improvements Act of
1976.
"IMMEDIATE FAMILY MEMBER" of a Stockholder means at any time: (a) if
that Stockholder is a natural person, any child or grandchild (by blood or
legal adoption) or spouse of that Stockholder at that time, or any child
of that spouse; and (b) if that Stockholder is an Entity whose ultimate
beneficial owner is a natural person, or a natural person and his spouse,
any child or grandchild (by blood or legal adoption) or spouse at that
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time (if not then an ultimate beneficial owner of that Entity), or any
child of that spouse, of the ultimate beneficial owner or owners.
"INDEBTEDNESS" of any Person means, without duplication, (a) any
liability of that Person (i) for borrowed money or arising out of any
extension of credit to or for the account of that Person (including
reimbursement or payment obligations with respect to surety bonds, letters
of credit, banker's acceptances and similar instruments), for the deferred
purchase price of property or services or arising under conditional sale
or other title retention agreements, other than trade payables arising in
the ordinary course of business, (ii) evidenced by notes, bonds,
debentures or similar instruments, (iii) in respect of Capital Leases or
(iv) in respect of Interest Rate Protection Agreements, (b) any liability
secured by any Lien upon any property or assets of that Person (or upon
any revenues, income or profits of that Person therefrom), whether or not
that Person has assumed that liability or otherwise become liable for the
payment thereof, (c) any liability of others of the type described in the
preceding clause (a) or (b) in respect of which that Person has incurred,
assumed or acquired a liability by means of a Guaranty.
"INDEMNITY NOTICE" has the meaning specified in Section 7.04.
"INDEMNIFIED PARTY" has the meaning specified in Section 7.04.
"INDEMNIFYING PARTY" has the meaning specified in Section 7.04.
"INFORMATION" means written information, including (a) data,
certificates, reports and statements (excluding Financial Statements) and
(b) summaries of unwritten agreements, arrangements, contracts, plans,
policies, programs or practices or of unwritten amendments or
modifications of, supplements to or waivers under any of the foregoing
documents.
"IPO" means the first time a registration statement filed under the
Securities Act and respecting a primary offering by INVATEC to the public
of shares of INVATEC Common Stock is declared effective under the
Securities Act and the shares registered by that registration statement
are issued and sold by INVATEC (otherwise than pursuant to the exercise by
the Underwriter of any over-allotment option).
"IPO CLOSING DATE" means the date on which INVATEC first receives
payment for the shares of INVATEC Common Stock it sells to the Underwriter
in the IPO.
"IPO PRICE" means the price per share of INVATEC Common Stock which
is set forth as the "price to public" on the cover page of the Final
Prospectus.
"IPO PRICING DATE" means the date, if any, on which INVATEC and the
Underwriter agree in the Underwriting Agreement to the price per share of
INVATEC Common Stock at which the Underwriter, subject to the terms and
conditions of the Underwriting Agreement, will purchase newly issued
shares of INVATEC Common Stock from INVATEC on the IPO Closing Date.
"INVATEC COMMON STOCK" means the common stock, par value $.001 per
share, of INVATEC.
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"INVATEC INDEMNIFIED PARTY" means INVATEC and its Affiliates and
each of their respective officers, directors, employees, agents and
counsel; provided, however, that no Person who indemnifies INVATEC
Indemnified Parties in this Agreement in his capacity as a Stockholder
will be an INVATEC Indemnified Party for purposes of this Agreement,
notwithstanding that the Person is an INVATEC Indemnified Party for
purposes of one or more of the Other Agreements.
"INVATEC INDEMNIFIED LOSS" has the meaning specified in Section
7.02.
"INVATEC UNINDEMNIFIED LOSS" has the meaning specified in Section
6.06.
"INTEREST RATE PROTECTION AGREEMENT" means, for any Person, any
interest rate swap, cap or collar agreement or similar arrangement
providing for the transfer or mitigation of interest rate risks of that
Person either generally or under specific contingencies between that
Person and any other Person.
"IRS" means the Internal Revenue Service.
"LIEN" means, with respect to any property or asset of any Person
(or any revenues, income or profits of that Person therefrom) (in each
case whether the same is consensual or nonconsensual or arises by
contract, operation of law, legal process or otherwise), (a) any mortgage,
lien, security interest, pledge, attachment, levy or other charge or
encumbrance of any kind thereupon or in respect thereof or (b) any other
arrangement under which the same is transferred, sequestered or otherwise
identified with the intention of subjecting the same to, or making the
same available for, the payment or performance of any liability in
priority to the payment of the ordinary, unsecured creditors of that
Person, including any "adverse claim" (as defined in Section 8-302(b) of
each applicable Uniform Commercial Code) in the case of any Capital Stock.
For purposes of this Agreement, a Person shall be deemed to own subject to
a Lien any asset that it has acquired or holds subject to the interest of
a vendor or lessor under any conditional sale agreement, Capital Lease or
other title retention agreement relating to that asset.
"LITIGATION" means any action, case, proceeding, claim, grievance,
suit or investigation or other proceeding conducted by or pending before
any Governmental Authority or any arbitration proceeding.
"MATERIAL" means, as applied to any Entity or the Acquired Business,
material to the business, operations, property or assets, liabilities,
financial condition or results of operations of that Entity and its
Subsidiaries considered as a whole or the Acquired Business, as the case
may be.
"MATERIAL ADVERSE EFFECT" means, with respect to the consequences of
any fact or circumstance (including the occurrence or non-occurrence of
any event) to the Acquired Business, that such fact or circumstance has
caused, is causing or will cause, directly, indirectly or consequentially,
singly or in the aggregate with other facts and circumstances, any Damages
in excess of the Threshold Amount.
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"MATERIAL AGREEMENT" of any Entity means any contract or agreement
(a) to which that Entity or any of its Subsidiaries is a party, or by
which that Entity or any of its Subsidiaries is bound or to which any
property or assets of that Entity or any of its Subsidiaries is subject
and (b) which is Material to that Entity.
"MERGER" means a transaction as a result of which the Acquisition is
effected and in which either (a) Newco is merged with or into the Company
or (b) the Company is merged with or into Newco, as the case may be.
"MINIMUM CASH AMOUNT" has the meaning specified in Section 5.01.
"MOODY'S" means Moody's Investors Service, Inc.
"MULTIEMPLOYER PLAN" means a "multiemployer plan" as defined in
Section 4001(a)(3) of ERISA, Section 414 of the Code or Section 3(37) of
ERISA.
"NEWCO" means such business corporation, if any, as shall be formed
or utilized by INVATEC for the purpose of acquiring the stock of the
Company or consummating a Merger therewith.
"NEWCO COMMON STOCK" means the common stock of Newco.
"ORGANIZATION STATE" means, as applied to (a) any corporation, its
state or other jurisdiction of incorporation, (b) any limited liability
company or limited partnership, the state or other jurisdiction under
whose laws it is organized and existing in that legal form, and (c) any
other Entity, the state or other jurisdiction whose laws govern that
Entity's internal affairs.
"OTHER ACQUIRED BUSINESS" has the meaning specified in the
Preliminary Statement.
"OTHER AGREEMENTS" has the meaning specified in the Preliminary
Statement.
"OTHER COMPENSATION PLAN" means any compensation arrangement, plan,
policy, practice or program established, maintained or sponsored by the
Company or any Company Subsidiary, or to which the Company or any Company
Subsidiary contributes, on behalf of any of its employees, nonemployee
directors or officers or other natural persons performing consulting or
other independent contractor services for the Company or any Company
Subsidiary, (a) including all such arrangements, plans, policies,
practices or programs providing for severance pay, deferred compensation,
incentive, bonus or performance awards or the actual or phantom ownership
of any Capital Stock or Derivative Securities of the Company or any
Company Subsidiary, but (b) excluding all Company ERISA Pension Benefit
Plans and Employment Agreements.
"OTHER FINANCING SOURCES" has the meaning specified in Section 5.01.
"OTHER TRANSACTION DOCUMENTS" means the Other Agreements and the
other written agreements, documents, instruments and certificates at any
time executed pursuant to or in
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connection with the Other Agreements (other than the Transaction Documents
and the Underwriting Agreement), all as amended, modified or supplemented
from time to time.
"PBGC" means the Pension Benefit Guaranty Corporation.
"PERMITTED INVESTMENTS" means: at the time of purchase or other
acquisition by the Company or any Company Subsidiary, (a) obligations
issued or guaranteed by the United States of America with a remaining
maturity not exceeding one year, (b) commercial paper with maturities of
not more than 270 days and a published rating of not less than A-1 by S&P
or P-1 by Moody's and (c) certificates of deposit and bankers' acceptances
having maturities of not more than one year of any commercial bank or
trust company if (i) that bank or trust company has a combined capital and
surplus of at least $500,000,000 and (ii) its unsecured long-term debt
obligations, or those of a holding company of which it is a subsidiary,
are rated not less than A- by S&P or A3 by Moody's.
"PERMITTED LIENS" means, as applied to the property or assets of any
Person (or any revenues, income or profits of that Person therefrom): (a)
Liens for Taxes if the same are not at the time due and delinquent; (b)
Liens of carriers, warehousemen, mechanics, laborers and materialmen for
sums not yet due; (c) Liens incurred in the ordinary course of that
Person's business in connection with worker's compensation, unemployment
insurance and other social security legislation (other than pursuant to
ERISA or Section 412(n) of the Code); (d) Liens incurred in the ordinary
course of that Person's business in connection with deposit accounts or to
secure the performance of bids, tenders, trade contracts, statutory
obligations, surety and appeal bonds, performance and return-of-money
bonds and other obligations of like nature; (e) easements, rights-of-way,
reservations, restrictions and other similar encumbrances incurred in the
ordinary course of that Person's business or existing on property and not
materially interfering with the ordinary conduct of that Person's business
or the use of that property; (f) defects or irregularities in that
Person's title to its real properties which do not materially (i) diminish
the value of the surface estate or (ii) interfere with the ordinary
conduct of that Person's business or the use of any of such properties;
(g) any interest or title of a lessor of assets being leased by any Person
pursuant to any Capital Lease disclosed in Section 2.18 of the Disclosure
Statement or any lease that, pursuant to GAAP, would be accounted for as
an operating lease; and (h) Liens securing purchase money Indebtedness
disclosed in Section 2.17 or 2.18 of the Disclosure Statement so long as
such Liens do not attach to any property or assets other than the
properties or assets purchased with the proceeds of that Indebtedness.
"PERSON" means any natural person, Entity, estate, trust, union or
employee organization or Governmental Authority or, for the purpose of the
definition of "ERISA Affiliate," any trade or business.
"PLAN" has the meaning specified in Section 2.28.
"PROHIBITED TRANSACTION" means any transaction that is prohibited
under Section 4975 of the Code or Section 406 of ERISA and not exempt
under Section 4975 of the Code or Section 408 of ERISA.
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"PROPRIETARY RIGHTS" means (a) patents, applications for patents and
patent rights, (b) in each case, whether registered, unregistered or under
pending registration, trademark rights, trade names, trade name rights,
corporate names, business names, trade styles or dress, service marks and
logos and other trade designations and copyrights and (c), in the case of
the Company or any Company Subsidiary, all agreements relating to the
technology, know-how or processes used in any business of the Company or
any Company Subsidiary.
"PRO RATA SHARE" has the meaning specified in Paragraph 1.
"QUALIFIED PLANS" has the meaning specified in Section 2.28.
"REGISTRATION STATEMENT" means the registration statement, including
(a) each preliminary prospectus included therein prior to the date on
which that registration statement is declared effective under the
Securities Act (including any prospectus filed with the SEC pursuant to
Securities Act Rule 424(b)), (b) the Final Prospectus and (c) any
amendments thereof and all supplements and exhibits thereto, filed by
INVATEC with the SEC to register shares of INVATEC Common Stock under the
Securities Act for public offering and sale in the IPO.
"RELATED PARTY AGREEMENT" means any contract or other agreement,
written or oral, (a) to which the Company or any Company Subsidiary is a
party or is bound or by which any property of the Company or any Company
Subsidiary is bound or may be subject and (b) (i) to which any Stockholder
or any of that Stockholder's Related Persons or Affiliates also is a
party, (ii) of which any Stockholder or any of that Stockholder's Related
Persons or Affiliates is a beneficiary or (iii) as to which any
transaction contemplated thereby properly would be characterized (without
regard to the amount involved) as a related party transaction for purposes
of applying the disclosure requirements of GAAP or the SEC applicable to
the financial statements of the Company and the Company Subsidiaries which
are included in the Registration Statement.
"RELATED PERSON" of a Stockholder means: (a) if that Stockholder is
a natural person, (i) any Immediate Family Member of that Stockholder,
(ii) any Estate of that Stockholder or any Immediate Family Member of that
Stockholder, (iii) the trustee of any inter vivos or testamentary trust of
which all the beneficiaries are Related Persons of that Stockholder and
(iv) any Entity the entire equity interest in which is owned by any one or
more of that Stockholder and Related Persons of that Stockholder; and (b)
if that Stockholder is an Entity, Estate or trust, (i) any Person who owns
an equity interest in that Stockholder on the date hereof, (ii) any Person
who would be a Related Person under clause (a) of this definition of a
natural person who is an ultimate beneficial owner of that Stockholder or
(iii) any other Entity the entire equity interest in which is owned by any
one or more of that Stockholder and Related Persons of that Stockholder.
As used in this definition, "Estate" means, as to any natural person who
has died or been adjudicated mentally incompetent by a court of competent
jurisdiction, (a) that person's estate or (b) the administrator,
conservator, executor, guardian or representative of that estate.
"REPORTABLE EVENT" means, with respect to any Company ERISA Pension
Plan, (a) the occurrence of any of the events set forth in Section 4043(b)
or (c) (other than a Reportable Event as to which the provision of 30
days' notice to the PBGC is waived under
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applicable regulations), 4062(e) or 4063(a) of ERISA with respect to that
plan, (b) any event requiring the Company or any ERISA Affiliate to
provide security to that plan under Section 401(a)(29) of the Code or (c)
any failure to make a payment required by Section 412(m) of the Code with
respect to that plan.
"REPRESENTATIVES" means, with respect to any Person, the directors,
officers, employees, Affiliates, accountants (including independent
certified public accountants), advisors, attorneys, consultants or other
agents of that Person, or any other representatives of that Person or of
any of those directors, officers, employees, Affiliates, accountants
(including independent certified public accountants), advisors, attorneys,
consultants or other agents.
"RCRA" means the Resource Conservation and Recovery Act of 1976.
"RESTRICTED PAYMENT" means, with respect to any Entity at any time,
any of the following effected by that Entity: (a) any declaration or
payment of any dividend or other distribution, direct or indirect, on
account of any Capital Stock of that Entity or any Affiliate of that
Entity or (b) any direct or indirect redemption, retirement, purchase or
other acquisition for value of, or any direct or indirect purchase,
payment or sinking fund or similar deposit for the redemption, retirement,
purchase or other acquisition for value of, or to obtain the surrender of,
any then outstanding Capital Stock of that Entity or any Affiliate of that
Entity or any then outstanding warrants, options or other rights to
acquire or subscribe for or purchase unissued or treasury Capital Stock of
that Entity or any Affiliate of that Entity.
"RETURNS" of a Person means the returns, reports or statements
(including any information returns) any Governmental Requirement requires
to be filed by that Person for purposes of any Tax.
"SECTION 351 TRANSACTION" means, if the Acquisition is structured as
a transaction qualifying for the deferral of federal income tax under
Section 351 of the Code, that transaction.
"SECTION 368 REORGANIZATION" means, if the Acquisition is structured
as a transaction qualifying as a reorganization under Section 368 of the
Code, that transaction.
"SEC" means the Securities and Exchange Commission.
"SECURITIES ACT" means the Securities Act of 1933.
"SOLID WASTES, HAZARDOUS WASTES OR HAZARDOUS SUBSTANCES" have the
meanings ascribed to those terms in CERCLA, RCRA or any other
Environmental Law applicable to the business or operations of the Company
or any Company Subsidiary which imparts a broader meaning to any of those
terms than does CERCLA or RCRA.
"SPECIAL PROVISIONS" means the Special Provisions of INVATEC, if
any, referred to in Paragraph 5 and incorporated by reference in this
Agreement.
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"S&P" means Standard and Poor's Rating Group.
"STOCKHOLDER INDEMNIFIED PARTY" means (a) each Stockholder and each
of that Stockholder's Affiliates (other than the Company or, following the
Effective Time, INVATEC or any of its Subsidiaries, if the Stockholder is
an Affiliate of INVATEC), agents and counsel and (b) prior to the
Effective Time, the Company and each of its officers, directors,
employees, agents and counsel who are not Stockholder Indemnified Parties
within the meaning of clause (a) of this definition.
"STOCKHOLDER INDEMNIFIED LOSS" has the meaning specified in Section
7.03.
"STOCKHOLDER UNINDEMNIFIED LOSS" has the meaning specified in
Section 6.06.
"STOCK PURCHASE" means a transaction as a result of which the
Acquisition is effected by means of the purchase by INVATEC or Newco from
the Stockholders of all the outstanding Company Capital Stock.
"SUBSIDIARY" of any specified Person at any time, means any Entity a
majority of the Capital Stock of which is at that time owned or
controlled, directly or indirectly, by the specified Person.
"SUPPLEMENTAL INFORMATION" has the meaning specified in Section
4.07.
"SURVIVING CORPORATION" means, if the Acquisition is effected by
means of Merger, the Company or the Person to be designated in the
Certificate of Merger as the surviving Entity of that merger.
"TAX" or "TAXES" means all net or gross income, gross receipts, net
proceeds, sales, use, ad valorem, value added, franchise, bank shares,
withholding, payroll, employment, excise, property, deed, stamp,
alternative or add-on minimum, environmental or other taxes, assessments,
duties, fees, levies or other governmental charges or assessments of any
nature whatever imposed by any Governmental Requirement, whether disputed
or not, together with any interest, penalties, additions to tax or
additional amounts with respect thereto.
"TAXING AUTHORITY" means any Governmental Authority having or
purporting to exercise jurisdiction with respect to any Tax.
"TERMINATION EVENT" means, with respect to any Company ERISA Pension
Plan, (a) any Reportable Event with respect to that plan which is likely
to result in the termination of that plan, (b) the termination of, or the
filing of a notice of intent to terminate, that plan or the treatment of
any amendment to that plan as a termination under Section 4041(c) of ERISA
or (c) the institution of proceedings to terminate, or the appointment of
a trustee to administer, that plan under Section 4042 of ERISA.
"THIRD PARTY CLAIM" means any claim asserted by any Person that or
who is not a party to this Agreement against any Indemnified Party.
"THRESHOLD AMOUNT" has the meaning specified in Paragraph 1.
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"TRANSACTION DOCUMENT" means this Agreement, the Certificates of
Merger and the other written agreements, documents, instruments and
certificates executed pursuant to or in connection with this Agreement
(other than the Other Transaction Documents and the Underwriting
Agreement), including those specified in Article V to be delivered at or
before the Closing, all as amended, modified or supplemented from time to
time.
"UNDERWRITER" means collectively (a) the investment banking firms
that prospectively may enter into the Underwriting Agreement and (b) from
and after the IPO Pricing Date, the investment banking firms parties to
the Underwriting Agreement.
"UNDERWRITING AGREEMENT" has the meaning specified in Section
5.01(a)(iii).
"VALVE REPAIR AND DISTRIBUTION SERVICES BUSINESS" means the
assembly, setting, testing or sealing, the maintenance, repair,
reconditioning or remanufacturing, or the sale or other distribution, of
industrial valves and other process-system components or equipment.
"WELFARE PLAN" means an "employee welfare benefit plan" as defined
in Section 3(1) of ERISA.
"WHOLLY OWNED SUBSIDIARY" means any corporation or other Entity all
of whose outstanding Capital Stock on a fully diluted basis is owned and
controlled, directly or indirectly through another Wholly Owned
Subsidiary, by the Company.
Section 9.02. OTHER DEFINED TERMS. Words and terms used in these
Uniform Provisions which are defined elsewhere in this Agreement are used herein
as therein defined.
Section 9.03. OTHER DEFINITIONAL PROVISIONS. (a) Except as otherwise
specified herein, all references herein to any Governmental Requirement defined
or referred to herein, including the Code, CERCLA, ERISA, the Exchange Act, RCRA
and the Securities Act, shall be deemed references to that Governmental
Requirement or any successor Governmental Requirement, as the same may have been
amended or supplemented from time to time, and any rules or regulations
promulgated thereunder.
(b) When used in this Agreement, the words "herein," "hereof" and
"hereunder" and words of similar import refer to this Agreement as a whole and
not to any provision of this Agreement, and the words "Article," "Paragraph,"
"Section," "Preliminary Statement," "Annex," "Addendum," "Schedule" and
"Exhibit" refer to Articles, Paragraphs and Sections of, the Preliminary
Statement in, and Annexes, Addenda, Schedules and Exhibits to, this Agreement
unless otherwise specified.
(c) Whenever the context so requires, the singular number includes
the plural and vice versa, and a reference to one gender includes the other
gender and the neuter.
(d) The word "including" (and, with correlative meaning, the word
"include") means including, without limiting the generality of any description
preceding such word, and the words "shall" and "will" are used interchangeably
and have the same meaning.
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Section 9.04. CAPTIONS. Captions to Articles, Paragraphs, Sections
and subsections of, and Annexes, Addenda, Schedules and Exhibits to, this
Agreement or any other Transaction Document are included for convenience of
reference only, and these captions shall not constitute a part of this Agreement
or any other Transaction Document for any other purpose or in any way affect the
meaning or construction of any provision of this Agreement or any other
Transaction Document.
ARTICLE X
GENERAL PROVISIONS
Section 10.01. TREATMENT OF CONFIDENTIAL INFORMATION. (a) Each of
the Company and the Stockholders, severally and not jointly with any other
Person, acknowledges that it has or may have had in the past, currently has and
in the future may have access to Confidential Information of the Company and the
Company Subsidiaries, the Other Acquired Businesses and their Subsidiaries and
INVATEC and its Subsidiaries. Each of the Company and the Stockholders,
severally and not jointly with any other Person, agrees that it will keep
confidential all such Confidential Information furnished to it and, except with
the specific prior written consent of INVATEC, will not disclose such
Confidential Information to any Person except (a) Representatives of INVATEC and
(b) its own Representatives, provided that these Representatives (other than
counsel) agree to the confidentiality provisions of this Section 10.01;
provided, however, that Confidential Information shall not include such
information as (i) becomes known to the public generally through no fault of any
Stockholder, (ii) is required to be disclosed by law or the order of any
Governmental Authority under color of law, provided, that prior to disclosing
any information pursuant to this clause (ii), each Stockholder shall, if
possible, give prior written notice thereof to INVATEC and provide INVATEC with
the opportunity to contest such disclosure, or (iii) the disclosing party
reasonably believes is required to be disclosed in connection with the defense
of a lawsuit against the disclosing party. In the event of a breach or
threatened breach by any Stockholder of the provisions of this Section 11.01
with respect to any Confidential Information, INVATEC shall be entitled to an
injunction restraining such Stockholder from disclosing, in whole or in part,
that Confidential Information. Nothing herein shall be construed as prohibiting
INVATEC from pursuing any other available remedy for such breach or threatened
breach, including the recovery of damages.
(b) Because of the difficulty of measuring economic losses as a
result of the breach of the foregoing covenants in Section 10.01(a), and because
of the immediate and irreparable damage that would be caused to INVATEC for
which it would have no other adequate remedy, each of the Company and the
Stockholders agrees that INVATEC may enforce the provisions of Section 10.01(a)
by injunctions and restraining orders against each of them who breaches any of
those provisions.
(c) The obligations of the parties under this Section 10.01 shall
survive the termination of this Agreement.
Section 10.02. BROKERS AND AGENTS. The Stockholders jointly and
severally represent and warrant to INVATEC that the Company has not directly or
indirectly employed or become obligated to pay any broker or similar agent in
connection with the transactions contemplated hereby and agree, without regard
to the Threshold Amount limitations set forth in Article VII, to indemnify
INVATEC against all Damage Claims arising out of claims for any and all fees and
commissions of brokers or similar agents employed or promised payment by the
Company.
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<PAGE>
Section 10.03. ASSIGNMENT; NO THIRD PARTY BENEFICIARIES. This
Agreement and the rights of the parties hereunder may not be assigned (except by
operation of law) and shall be binding on and inure to the benefit of the
parties hereto, the successors of INVATEC, and the heirs and legal
representatives of the Stockholders (and, in the case of any trust, the
successor trustees of that trust). Neither this Agreement nor any other
Transaction Document is intended, or shall be construed, deemed or interpreted,
to confer on any Person not a party hereto or thereto any rights or remedies
hereunder or thereunder, except as provided in Section 10.12 or Article VII or
as otherwise provided expressly herein or therein.
Section 10.04. ENTIRE AGREEMENT; AMENDMENT; WAIVERS. This Agreement
and the documents delivered pursuant hereto constitute the entire agreement and
understanding among the Stockholders, the Company, INVATEC and Newco and
supersede all prior agreements and understandings, both written and oral,
relating to the subject matter of this Agreement. This Agreement may be amended,
modified or supplemented, and any right hereunder may be waived, if, but only
if, that amendment, modification, supplement or waiver is in writing and signed
by the Stockholders entitled to receive at least 80% of the total Acquisition
Consideration, the Company and INVATEC; provided, however, that no such
amendment, modification, supplement or waiver will be effective unless it is
signed by each Stockholder affected thereby to the extent that it (a) changes
the several nature of that Stockholder's representations and warranties (to the
extent they are not already joint and several as provided in Article I and
Section 10.02), (b) reduces the amount, or changes the components, of the
Acquisition Consideration that Stockholder is entitled to receive pursuant to
Paragraph 2, or (c) amends or waives this sentence. The waiver of any of the
terms and conditions hereof shall not be construed or interpreted as, or deemed
to be, a waiver of any other term or condition hereof.
Section 10.05. EXPENSES. Whether or not the transactions
contemplated hereby are consummated, (a) INVATEC will pay the fees, expenses and
disbursements of INVATEC and its Subsidiaries and their Representatives which
are incurred in connection with the subject matter of this Agreement and any
amendments thereto, including all costs and expenses incurred in the performance
of and compliance with all conditions to be performed by INVATEC under this
Agreement, and (b) if the Effective Time occurs, the Stockholders will pay from
personal funds, and not from funds of the Company or any Company Subsidiary, all
sales, use, transfer and other similar taxes and fees incurred in connection
with the transactions contemplated hereby including the fees, expenses and
disbursements of counsel for the Company and the Stockholders incurred in
connection with the subject matter of this Agreement. The Stockholders will file
all necessary documentation and Returns with respect to all sales, use, transfer
and other similar taxes and fees they are required by this Section 10.05 to pay.
In addition, each Stockholder acknowledges that he, and not the Company or
INVATEC or the Surviving Corporation, will pay all Taxes due upon receipt of the
consideration payable to that Stockholder pursuant to the transactions
contemplated by this Agreement.
Section 10.06. NOTICES. All notices required or permitted hereunder
shall be in writing, and shall be deemed to be delivered and received (a) if
personally delivered or if delivered by telex, telegram, facsimile or courier
service, when actually received by the party to whom notice is sent or (b) if
delivered by mail (whether actually received or not), at the close of business
on the third Houston, Texas business day next following the day when placed in
the mail, postage prepaid, certified or registered, addressed to the appropriate
party or parties, at the address of such party set
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<PAGE>
forth below (or at such other address as such party may designate by written
notice to all other parties in accordance herewith):
(i) if to INVATEC or any of its Subsidiaries, addressed to it at:
Innovative Valve Technologies, Inc.
14900 Woodham, Suite A-125
Houston, Texas 77073
Attn.:William E. Haynes
Fax No.: (281) 821-1123
; and
(ii) if to the Company or any of the Stockholders, addressed to such
Person as set forth in Paragraph 7.
Section 10.07. GOVERNING LAW. THIS AGREEMENT AND THE RIGHTS AND
OBLIGATIONS OF THE PARTIES HERETO SHALL BE GOVERNED BY AND CONSTRUED AND
ENFORCED IN ACCORDANCE WITH THE SUBSTANTIVE LAWS OF THE STATE OF TEXAS WITHOUT
REGARD TO THE CONFLICTS OF LAW PROVISIONS THEREOF.
Section 10.08. EXERCISE OF RIGHTS AND REMEDIES. Except as otherwise
provided herein, no delay or omission in the exercise of any right, power or
remedy accruing to any party hereto as a result of any breach or default
hereunder by any other party hereto shall impair any such right, power or
remedy, nor shall it be construed, deemed or interpreted as a waiver of or
acquiescence in any such breach or default, or of any similar breach or default
occurring later; nor shall any waiver of any single breach or default be
construed, deemed or interpreted as a waiver of any other breach or default
hereunder occurring before or after that waiver.
Section 10.09. TIME. Time is of the essence in the performance of
this Agreement in all respects.
Section 10.10. REFORMATION AND SEVERABILITY. If any provision of
this Agreement is invalid, illegal or unenforceable, that provision shall, to
the extent possible, be modified in such manner as to be valid, legal and
enforceable but so as to most nearly retain the intent of the parties hereto as
expressed herein, and if such a modification is not possible, that provision
shall be severed from this Agreement, and in either case the validity, legality
and enforceability of the remaining provisions of this Agreement shall not in
any way be affected or impaired thereby.
Section 10.11. REMEDIES CUMULATIVE. No right, remedy or election
given by any term of this Agreement shall be deemed exclusive, but each shall be
cumulative with all other rights, remedies and elections available at law or in
equity.
Section 10.12. RELEASE. Subject to the limitations set forth in the
last sentence in this Section 10.12, each Stockholder hereby unconditionally and
irrevocably releases and forever discharges, effective as of and forever after
the Effective Time, to the fullest extent permitted by applicable law, all past,
present and future INVATEC Indemnified Parties (including, after the Effective
Time, each of the Company and the Company Subsidiaries which is a Subsidiary of
INVATEC immediately after the Effective Time) (collectively, the "Released
Parties") from any and
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<PAGE>
all debts, liabilities, obligations, claims, demands, actions or causes of
action, suits, judgments or controversies of any kind whatsoever (collectively,
"Pre-Acquisition Claims") against the Company and the Company Subsidiaries, if
any, or any of them that arises out of or is based on any agreement or
understanding or act or failure to act (INCLUDING ANY ACT OR FAILURE TO ACT THAT
CONSTITUTES ORDINARY OR GROSS NEGLIGENCE OR RECKLESS OR WILLFUL, WANTON
MISCONDUCT), misrepresentation, omission, transaction, fact, event or other
matter occurring prior to the Effective Time (whether based at law or in equity
or otherwise, foreseen or unforeseen, matured or unmatured, known or unknown,
accrued or not accrued) (collectively, "Pre-Acquisition Matters"), including:
(a) claims by the Stockholder with respect to repayment of loans or
indebtedness; (b) any rights, titles and interests in, to or under any
agreements, arrangements or understandings to which the Stockholder is a party;
and (c) claims by the Stockholder with respect to dividends, violation of
preemptive rights, or payment of salaries or other compensation or in any way
arising out of or in connection with the Stockholder's employment with the
Company or any Company Subsidiary, the cessation of that employment, the
Stockholder's status as an officer, director or stockholder of the Company or
otherwise (but excluding any and all claims in respect of (i) accrued and unpaid
amounts owing to the Stockholder pursuant to each Employment Agreement disclosed
in Section 2.27 to the Disclosure Statement to which the Stockholder is a party,
(ii) accrued and unpaid cash compensation owing to the Stockholder in the normal
and ordinary course of business and consistent with past practices, (iii)
benefits accrued under each Company ERISA Benefit Plan or Other Compensation
Plan, the existence of which has been disclosed in Section 2.27 to the
Disclosure Statement, and (iv) amounts or other obligations owing to the
Stockholder, directly or indirectly, pursuant to each Retained Related Party
Agreement, if any, which is disclosed in Section 2.12 to the Disclosure
Statement and to which the Stockholder, directly or indirectly, is a party). The
Stockholder further agrees not to file or bring any Litigation before any
Governmental Authority on the basis of or respecting any Pre-Acquisition Claim
concerning any Pre-Acquisition Matter against any Related Party. Each
Stockholder (a) acknowledges that he or she fully comprehends and understands
all the terms of this Section 10.12 and their legal effects and (b) expressly
represents and warrants that (i) he or she is competent to effect the release
made in this Section 10.12 knowingly and voluntarily and without reliance on any
statement or representation of any Released Party or its Representatives and
(ii) he or she had the opportunity to consult with an attorney of his or her
choice regarding this Section 10.12. This Section 10.12 shall not affect the
rights of the Stockholders under this Agreement or any other Transaction
Document.
Section 10.13. RESPECTING THE IPO. Each of the Company and the
Stockholders acknowledges and agrees that: (a) no firm commitment, binding
agreement or promise or other assurance of any kind, whether express or implied,
oral or written, exists at the date hereof that the Registration Statement will
become effective or that the IPO will occur at a particular range of prices or
occur at all; (b) neither INVATEC or any of its representatives nor any
prospective underwriters in the IPO will have any liability to the Company, the
Stockholder or any of their respective Affiliates or associates for any failure
of (i) the Registration Statement to become effective (provided, however, that
INVATEC will use its reasonable best efforts to cause the Registration Statement
to become effective prior to December 31, 1997) or (ii) the IPO to occur at a
particular price or within a particular range of prices or to occur at all; and
(c) the decision of the Stockholder to enter into this Agreement, or to vote in
favor of or consent to the Merger, has been or will be made independent of, and
without reliance on, any statements, opinions or other communications of, or due
diligence investigations that have been or will be made or performed by, any
prospective underwriter relative to INVATEC or the IPO. The Underwriter shall
have no obligation to either
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<PAGE>
the Company or the Stockholder with respect to any disclosure contained in the
Registration Statement.
ARTICLE XI
TERMINATION
Section 11.01. TERMINATION OF THIS AGREEMENT. (a) This Agreement may
be terminated at any time prior to the Closing solely:
(i) by the mutual written consent of INVATEC and the Company;
(ii) by the Stockholders or the Company, on the one hand, or by
INVATEC, on the other hand, if the transactions contemplated by this
Agreement to take place at the Closing shall not have been consummated by
October 31, 1997, unless the failure of such transactions to be
consummated results from the willful failure of the party (or in the case
of the Stockholders and the Company, any of them) seeking to terminate
this Agreement to perform or adhere to any agreement required hereby to be
performed or adhered to by it prior to or at the Closing or thereafter on
the IPO Closing Date;
(iii) by the Stockholders or the Company, on the one hand, or by
INVATEC, on the other hand, if a material breach or default shall be made
by the other party (or in the case of the Stockholders and the Company,
any of them) in the observance or in the due and timely performance of any
of the covenants, agreements or conditions contained herein; or
(iv) by INVATEC if it is entitled to do so as provided in Section
4.07.
(b) This Agreement may be terminated after the Closing solely:
(i) by INVATEC or the Company if the Underwriting Agreement is
terminated pursuant to its terms after the Closing and prior to the
consummation of the IPO; or
(ii) automatically and without action on the part of any party
hereto if the IPO is not consummated within 15 New York City business days
after the date of the Closing.
Section 11.02. LIABILITIES IN EVENT OF TERMINATION. If this
Agreement is terminated pursuant to Section 11.01, there shall be no liability
or obligation on the part of any party hereto except (a) as provided in Section
10.05 and (b) to the extent that such liability is based on the breach by that
party of any of its representations, warranties or covenants set forth in this
Agreement.
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EXHIBIT 4.1
TEMPORARY CERTIFICATE EXCHANGEABLE FOR DEFINITIVE
ENGRAVED CERTIFICATE WHEN READY FOR DELIVERY
THIS CERTIFICATE IS TRANSFERABLE
IN NEW YORK, NY AND RIDGEFIELD PARK, NJ
INNOVATIVE VALVE TECHNOLOGIES, INC.
INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE
COMMON STOCK
SEE REVERSE FOR
CERTAIN DEFINITIONS
AND LEGENDS
CUSIP 45767J 10 6
THIS CERTIFIES THAT___________________________________________________________
IS THE OWNER OF_______________________________________________________________
FULLY PAID AND NON-ASSESSABLE SHARES OF THE PAR VALUE OF $.001 PER SHARE OF THE
COMMON STOCK OF
INNOVATIVE VALVE TECHNOLOGIES, INC.
transferable on the books of the Corporation in person or by duly authorized
attorney upon surrender of this certificate properly endorsed. This certificate
and the shares represented hereby are issued and shall be held subject to the
provisions of the laws of the State of Delaware and to all of the provisions of
the Restated Certificate of Incorporation and the Bylaws of the Corporation, as
amended from time to time (copies of which are on file at the office of the
Corporation), to all of which the holder of this certificate by acceptance
hereof assents. This certificate is not valid until countersigned by the
Transfer Agent and registered by the Registrar.
IN WITNESS WHEREOF, the Corporation has caused this certificate to be
signed by its duly authorized officers and its corporate seal to be hereto
affixed.
Dated CHAIRMAN OF THE BOARD
PRESIDENT AND CHIEF EXECUTIVE OFFICER
SECRETARY
COUNTERSIGNED AND REGISTERED:
CHASEMELLON SHAREHOLDER SERVICES, L.L.C.
TRANSFER AGENT
AND REGISTRAR
BY
AUTHORIZED SIGNATURE
<PAGE>
INNOVATIVE VALVE TECHNOLOGIES, INC.
The Corporation is authorized to issue Common Stock, par value $.001 per
share, and Preffered Stock, par value $.001 per share. The Board of Directors of
the Corporation has authority to fix the number of shares and the designation of
any series of Preferred Stock and to determine the powers, designations,
preferences and relative, participating, optional or other special rights
between owners of stock or series thereof of the Corproation, and the
qualifications, limitations or restrictions of such preferences and/or rights.
The Corporation will furnish without charge to each stockholder who so requests
a full statement of the foregoing as established from time to time by the
Restated Certificate of Incorporation of the Corporation and by any certificate
of designations. Any such request should be made to the Secretary of the
Corporation at the offices of the Corporation.
The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM - as tenants in common
TEN ENT - as tenants by the entireties
JT TEN - as joint tenants with right of survivorship and not as
tenants in common
UNIF GIFT MIN ACT - ____________________ Custodian _____________________
(Cust) (Minor)
Under Uniform Gifts to Minors Act _____________________
(State)
UNIF TRF MIN ACT - _______________ Custodian (until age ____) ___________
(Cust) (Minor)
Under Uniform Transfer to Minors Act ___________
(State)
Additional abbreviations may also be used though not in the above list.
For value received, ____________________ hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY NUMBER OR OTHER
INDENTIFYING NUMBER OF ASSIGNEE
-------------------------------
| |
| |
-------------------------------
- --------------------------------------------------------------------------------
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE OF ASSIGNEE)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- ----------------------------------------------------------------------- shares
of the capital stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint ____________________________________Attorney
to transfer the said stock on the books of the within named Corporation with
full power of substitution in the premises.
Dated _____________________
NOTICE:
X________________________________
THE SIGNATURE(S) TO THIS ASSIGNMENT MUST (SIGNATURE)
CORRESOND WITH THE NAME(S) AS WRITTEN ON
THE FACE OF THE CERTIFICATE IN EVERY X________________________________
PARTICULAR WITHOUT ALTERATION OR (SIGNATURE)
ENLARGEMENT OR ANY CHANGE WHATEVER.
----------------------------------------
This certificate also evidences and |THE SIGNATURES(S) SHOULD BE GUARANTEED
entitles the holder hereof to certain |BY AN ELIGIBLE GUARANTOR INSTITUTION
Rights as set forth in the Rights |(BANKS, STOCKBROKERS, SAVINGS AND LOAN
Agreement between Innovative Valve |ASSOCIATIONS AND CREDIT UNIONS WITH
Technologies, Inc. (the "Company") and |MEMBERSHIP IN AN APPROVED SIGNATURE
ChaseMellon Shareholder Services, L.L.C |GUARANTEE MEDALLION PROGRAM). PURSUANT
(the "Rights Agent") dated as of |TO S.E.C. RULE 17Ad-15.
September 1, 1997 as it may from time to|---------------------------------------
time be supplemented or amended (the |SIGNATURES(S) GUARANTEED BY:
"Rights Agreement"), the terms of which |
are hereby incorporated herein by |
reference and a copy of which is on file|
at the principal offices of the Company.|
Under certain circumstances, as set |
forth in the Rights Agreement, such |
Rights may be redeemed, may be |
exchanged, may expire or may be |
evidenced by separate certificates and |
will no longer by evidenced by this |
cerrtificate. The Comany will mail to |
the holder of this certificate a copy |
of the Rights Agreement, as in effect on|
the date of mailing, without charge |
promptly after receipt of a written |
request therefor. Under certain |
circumstances set forth in the Rights |
Agreement, Rights beneficially owned by |
or transferred to any Person who is, was|
or becomes an Acquiring Person or any |
Affiliate or Associate thereof (as such |
terms are defined in the Rights |
Agreement), and certain transferees |
thereof, will become null and void and |
will no longer be transferable. |---------------------------------------
EXHIBIT 4.2
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT (this "Agreement") is made as of
June 9, 1997 by and among Innovative Valve Technologies, Inc., a Delaware
corporation ("IVT"), the Holders listed on the signature pages hereof (the
"Initial Holders") and any Holder hereafter becoming a party hereto in
accordance with the provisions hereof.
WHEREAS, each Initial Holder has received, or will receive on the
IPO Closing Date (as hereinafter defined), shares of common stock, par value
$.001 per share, of IVT pursuant to an agreement with IVT, and IVT, in order to
induce that Initial Holder to enter into that agreement, has agreed to provide
registration rights on the terms set forth in this Agreement for the benefit of
that Initial Holder;
NOW, THEREFORE, in consideration of the premises and the mutual
covenants and agreements set forth herein, and intending to be legally bound
hereby, the parties to this Agreement agree as follows:
1. DEFINED TERMS. As used in this Agreement, the following terms
have the meanings assigned to them below:
"AFFILIATE" means, as to any specified Person, any other Person
that, directly or indirectly through one or more intermediaries or
otherwise, controls, is controlled by or is under common control with the
specified Person. As used in this definition, "control" means the
possession, directly or indirectly, of the power to direct or cause the
direction of the management or policies of a Person (whether through
ownership of capital stock of that Person, by contract or otherwise).
"BLUE SKY LAW" has the meaning specified in Section 4(a).
"CLAIMS" has the meaning specified in Section 10(a).
"COMMON STOCK" means the common stock, par value $.001 per share, of
IVT.
"ELIGIBLE OFFERING" has the meaning specified in Section 3(a).
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as
amended, and any successor thereto and the rules and regulations
thereunder.
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<PAGE>
"EXEMPT OFFERING" means any offering by IVT of shares of Common
Stock (i) in connection with or pursuant to any benefit, compensation,
incentive or savings plan or program in which any of the officers,
directors, employees or independent contractors of IVT or any of its
subsidiaries participate, (ii) as consideration in any business
combination or other acquisition transaction, (iii) as the securities into
or for which other equity or debt securities are convertible or
exchangeable, or as the securities that may be acquired by the exercise of
options, warrants or other rights, in each case at a conversion, exchange
or exercise price representing a premium over the trading price of the
Common Stock at the time of the offering, (iv) made pursuant to Regulation
S under the Securities Act (or any similar provision then in force) or (v)
made only to existing holders of securities issued by IVT.
"HOLDER" means at any time any Person then owning Registrable Common
and having the rights and obligations of a Holder and which (i) is an
Initial Holder, (ii) has been assigned those rights and obligations
pursuant to Section 9(a) or (iii) has become a Holder pursuant to Section
9(b).
"INDEMNIFIED PARTY" has the meaning specified in Section 10(b).
"INITIAL HOLDER" has the meaning specified in the preamble hereto.
"IPO" means the first time a registration statement filed by IVT
under the Securities Act and respecting an underwritten primary offering
by IVT of shares of Common Stock is declared effective under the
Securities Act and any of those registered shares are issued and sold by
IVT (otherwise than pursuant to the exercise of any over-allotment
option).
"IPO CLOSING DATE" means the date on which IVT first receives
payment for shares of Common Stock it sells in the IPO.
"INSPECTOR" has the meaning specified in Section 4(a).
"LOCKUP PERIOD" has the meaning specified in Section 7.
"PERSON" means any natural person, sole proprietorship, corporation,
partnership, limited liability company, business trust, unincorporated
organization or association, estate or trust.
"PROCEEDING" has the meaning specified in Section 10(b).
"RECORDS" has the meaning specified in Section 4(a).
"RED HERRING PROSPECTUS" means, as applied to any registration
statement IVT files under the Securities Act to register unissued shares
of Common Stock for a public offering
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<PAGE>
by it of those shares (other than an Exempt Offering), the prospectus
included in that registration statement which is labeled "subject to
completion" and is first used in "roadshow" presentations by IVT to
potential investors in connection with that offering.
"REGISTRABLE COMMON" means (i) the Common Stock issued to the
Initial Holders on or before the IPO Closing Date and (ii) the Common
Stock designated by IVT in writing as Registrable Common and issued to
Persons who become Holders pursuant to Section 9(b). For purposes of this
Agreement, a share of Registrable Common will cease to be Registrable
Common when (i) a registration statement covering that share has been
filed and become effective under the Securities Act and its Holder
distributes it by means of that effective registration statement, (ii) its
Holder distributes it to the public pursuant to Rule 144 or (iii) it may
be distributed to the public in the United States without being registered
for resale under the Securities Act or subject to the volume limitations
of Rule 144.
"REGISTRATION NOTICE" has the meaning specified in Section 3(b).
"RELATED PARTY" means, as to any specified Person, any other Person
who is an officer, director or agent of the specified Person or who
controls the specified Person within the meaning of Section 15 of the
Securities Act or Section 20 of the Exchange Act.
"REQUESTING HOLDER" has the meaning specified in Section 3(d).
"REQUEST NOTICE" has the meaning specified in Section 3(c).
"RESTRICTED PERIOD" means (i) the period from and including the IPO
Closing Date through and including the second anniversary of the IPO
Closing Date and, as applied to Persons who become Holders pursuant to
Section 9(b), (ii) the period designated by Invatec in writing as their
"Restricted Period."
"RULE 144" means Rule 144 (or any similar or successor provision)
under the Securities Act.
"SECURITIES ACT" means the Securities Act of 1933, as amended, and
any successor thereto and the rules and regulations thereunder.
"SEC" means the Securities and Exchange Commission and any successor
thereto as the agency administering the Securities Act.
"SELLING HOLDER" has the meaning specified in Section 4(a).
"SELLERS' REGISTRATION STATEMENT" means a registration statement
filed by IVT under the Securities Act to register shares of Registrable
Common for resale by Holders.
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<PAGE>
2. OTHER DEFINITIONAL PROVISIONS. (a) When used in this Agreement,
the words "herein," "hereof," "hereto" and "hereunder" and words of similar
import refer to this Agreement as a whole and not to any provision of this
Agreement.
(b) Whenever the context so requires, the singular number includes
the plural and vice versa, and a reference to one gender includes the other
genders.
(c) The word "including" (and, with correlative meaning, the word
"include") means including with limiting the generality of any description
preceding that word, and the verbs "shall" and "will" are used interchangeably
and have the same meaning.
(d) The term "underwriter," as used herein, does not include any
Holder.
3. REGISTRATION RIGHTS. (a) If IVT proposes to register any shares
of Common Stock for its own account under the Securities Act at any time or
times after the Restricted Period and before December 31, 2002 for a public
offering, other than an Exempt Offering, in the United States, of those shares
for cash (each such public offering, other than an Exempt Offering, being an
"Eligible Offering"), then, at each of those times, each then Holder will,
subject to the terms and conditions hereof, be entitled to have such number of
shares of that Holder's Registrable Common as that Holder may request in
accordance with Section 3(c) registered under the Securities Act for disposition
by means of the registration statement relating to that Eligible Offering.
(b) In the case of each Eligible Offering, IVT will deliver to each
then Holder a written notice of that offering (a "Registration Notice") at least
15 days prior to its filing with the SEC of the registration statement, or the
amendment thereto, which includes the Red Herring Prospectus for that offering.
IVT will briefly describe in each Registration Notice the Eligible Offering to
which that notice relates and inform the addressee that it has 10 days within
which to request to include shares of its Registrable Common in the registration
statement for that offering.
(c) Any Holder desiring to participate in any Eligible Offering must
deliver to IVT within 10 days after the Holder receives the Registration Notice
for that offering a written notice to that effect (a "Request Notice"),
specifying the number of shares of the Holder's Registrable Common the Holder
desires to have registered under the Securities Act for inclusion in that
offering. Any Holder that does not deliver a Request Notice for an Eligible
Offering within that 10-day period will be deemed to have waived its right to
participate in that offering unless IVT agrees otherwise in writing.
(d) Any holder that delivers a Request Notice relating to an
Eligible Offering on a timely basis, or as otherwise agreed by IVT, pursuant to
Section 3(c) (each such Holder being a "Requesting Holder") will be entitled to
offer and sell shares of its Registrable Common in that offering on the terms
and conditions on which IVT offers and sells shares of Common Stock in that
offering if the Requesting Holder complies with the applicable provisions of
Sections 4, 5 and 10; provided, however, that: (i) IVT may reserve to itself the
right to be the exclusive grantor of any
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underwriter's overallotment option; and (ii) the shares of Registrable Common
any Requesting Holder will be entitled to offer and sell will be subject to
reduction as provided in Section 3(e).
(e) IVT will have the right to determine the aggregate size of each
Eligible Offering and to limit the number of shares of Registrable Common to be
included in that offering without reducing the number of shares of Common Stock
to be offered by IVT in that offering, as follows: (i) if the lead managing
underwriter selected by IVT for an Eligible Offering (or, if that offering will
not be underwritten, a financial advisor to IVT) determines that marketing
factors render necessary or advisable a limitation on the number of shares of
Registrable Common to be included in that offering, IVT will be required to
include in that offering only such number of shares of Registrable Common, if
any, as that lead managing underwriter (or financial advisor, as the case may
be) believes (as evidenced by its written advice to IVT) will not jeopardize the
success of the primary offering by IVT; and (ii) if IVT limits the number of
shares of Registrable Common that Requesting Holders may have included in any
Eligible Offering pursuant to clause (i), but does not exclude all shares of
Registrable Common from that offering, the maximum number of shares of
Registrable Common to be included in that offering on behalf of each of those
Requesting Holders will be the product of (A) the number of shares of
Registrable Common that Requesting Holder has specified in its Request Notice
relating to that offering multiplied by (B) the fraction the numerator of which
is the number of shares of Registrable Common that Requesting Holder has
specified in its Request Notice relating to that offering and the denominator of
which is the aggregate number of shares of Registrable Common all those
Requesting Holders have specified in their Request Notices relating to that
offering. If IVT determines, on the basis of advice of its tax counsel or
independent accountants, that the inclusion of a Requesting Holder's shares of
Registrable Common in any Eligible Offering likely would jeopardize the
nonrecognition status under the Internal Revenue Code of 1986, as amended, of
any acquisition transaction effected by IVT, IVT will be entitled to limit the
number of shares that Requesting Holder may have included in that offering to
such number, if any, as IVT determines will not jeopardize that status.
4. REGISTRATION PROCEDURES. (a) Whenever IVT is required by Section
3 to include shares of Registrable Common in a registration statement relating
to an Eligible Offering, it will, subject to the applicable terms and conditions
hereof:
(i) cause those shares to be registered under the Securities Act by
means of a Seller's Registrable Statement, in either the original filing
thereof or in a pre-effective amendment to a previously filed registration
statement;
(ii) prior to the first to occur of (A) the sale by the Holders
thereof, by means of the Sellers' Registration Statement after it becomes
effective under the Securities Act, of all the shares of Registrable
Common covered by the Sellers' Registration Statement when it becomes
effective under the Securities Act and the elapse of the period in which a
dealer is required by the Securities Act to deliver a prospectus in
connection with its offer and sale of any of those shares and (B) the
withdrawal by IVT of the Sellers' Registration Statement pursuant to
Securities Act Rule 477, prepare and file with the SEC under the
Securities Act
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such amendments (including post-effective amendments) to the Sellers'
Registration Statement and supplements to the related prospectus as are
necessary (A) to reflect the plan of distribution contemplated by the
Sellers' Registration Statement and (B) so that (1) neither the Sellers'
Registration Statement nor that prospectus contains any untrue statement
of a material fact or omits to state a material fact required to be stated
therein or necessary to make the statements therein not misleading and (2)
both the Sellers' Registration Statement and that prospectus comply in all
material respects with all other applicable legal requirements;
(iii) provide to each Requesting Holder named as a selling
stockholder in the Sellers' Registration Statement (each a "Selling
Holder") such number of prospectuses (including preliminary prospectuses)
and other documents incident to the offering and sale of that Selling
Holder's Registrable Common by means of the Sellers' Registration
Statement as that Selling Holder from time to time reasonably may request;
(iv) prior to the time the Seller's Registration Statement or any
post-effective amendment thereto becomes effective under the Securities
Act, provide an opportunity to review and comment with respect to that
document to one counsel selected by Selling Holders holding a majority of
the shares of Registrable Common covered by that document and reasonably
satisfactory to IVT;
(v) provide to each Selling Holder, any managing underwriter
participating in the distribution of the shares of Registrable Common
covered by the Sellers' Registration Statement and any accountant, lawyer
or other professional retained by that Selling Holder or managing
underwriter (each an "Inspector") reasonable access to appropriate
officers and employees of IVT to ask questions and obtain information
reasonably requested by that Inspector in connection with that Sellers'
Registration Statement; provided, however, that in connection with any
such access or request, each Selling Holder will and will cause each of
its representative Inspectors to, and IVT may require each other Inspector
to, (A) cooperate to the extent reasonably practicable to minimize any
disruption in the operation by IVT of its business, (B) keep confidential
all records, documents and information IVT advises are confidential or of
a proprietary nature (collectively, the "Records") and (C) not use the
information it obtains from the Records as a basis for any market
transactions in the securities of IVT unless and until that information is
in the public domain or otherwise becomes publicly available;
(vi) use its good-faith efforts to register and qualify the
Registrable Common covered by the Sellers' Registration Statement under
the applicable securities or "blue sky" laws (collectively, "Blue Sky
Laws") of such jurisdictions as any Selling Holder reasonably may request;
provided that it will not be required to (A) qualify generally to do
business in any jurisdiction where it otherwise would not be required to
qualify but for this paragraph (vi), (B) subject itself to taxation in any
such jurisdiction or (C) consent to general service of process in any such
jurisdiction;
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(vii) notify each Selling Holder promptly (A) when it is informed
that the Sellers' Registration Statement or any post-effective amendment
thereto becomes effective under the Securities Act, (B) of any request by
the SEC for an amendment to the Sellers' Registration Statement or a
supplement to any related prospectus, (C) of the issuance by the SEC of
any stop order suspending the effectiveness of the Sellers' Registration
Statement or any order preventing or suspending the use of any related
prospectus or the initiation or threat by the SEC of any proceeding for
any of those purposes, (D) of the suspension of the qualification of any
shares of Registrable Common covered by the Sellers' Registration
Statement for sale in any jurisdiction or the initiation or threat of any
proceeding for that purpose and (E) of any determination by it that any
event has occurred or fact exists which makes untrue any statement of a
material fact included in the Sellers' Registration Statement or any
related then current prospectus or which requires the making of a change
in the Sellers' Registration Statement or that prospectus in order that
the same will not contain any untrue statement of a material fact or omit
to state a material fact required to be contained therein or necessary to
make the statements therein not misleading;
(viii)if any order is issued which (A) suspends the effectiveness of
the Sellers' Registration Statement, (B) suspends or prevents the use of
any related then-current prospectus or (C) suspends the qualification of
any shares of Registrable Common covered by the Sellers' Registration
Statement for sale in any jurisdiction, use its reasonable best efforts to
obtain the withdrawal of that order;
(ix) if the Eligible Offering to which the Sellers' Registration
Statement relates is being underwritten by underwriters, (A) enter into
agreements customary at the time (including an underwriting or purchase
agreement in then-customary form) as those underwriters reasonably may
request in order to facilitate the disposition of the shares of
Registrable Common in that offering, (B) use reasonable diligence to
obtain an opinion of legal counsel (who may be its general counsel)
covering such matters as are then customarily covered by opinions
addressed to those underwriters by an issuer's counsel and (C) use
reasonable diligence to obtain a "comfort" letter or letters from its
independent public accountants in their customary form and covering such
matters of the type then customarily covered by "comfort" letters as those
underwriters reasonably may request; and
(x) otherwise use its good-faith efforts to comply with all
applicable rules and regulations of the SEC and make available to its
security holders, as soon as reasonably practicable, an earnings statement
that (A) covers a period of at least 12 months beginning within three
months after the effective date of the Sellers' Registration Statement and
(B) satisfies the provisions of Section 11(a) of the Securities Act.
(b) In connection with each Eligible Offering, IVT, in its sole
discretion, will determine whether to proceed with or terminate that offering
and to select any underwriter or underwriters to administer that offering.
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5. UNDERWRITING ARRANGEMENTS. No Holder will be permitted to
participate in any registration hereunder of securities being underwritten and
offered for resale by underwriters unless the Holder (i) agrees to sell the
Holder's Registrable Common on the basis provided in any underwriting
arrangements approved by the Persons entitled hereunder to approve those
arrangements, (ii) enters into a written agreement with the managing underwriter
or the representative of the underwriters in such form and containing such
provisions as are then customary in the securities business for such an
arrangement between those underwriters and issuers of IVT's size and investment
stature and (iii) completes and executes all questionnaires, powers of attorney,
indemnities and other documents, and obtains such spousal or other consents, as
are reasonably required under the terms of those arrangements and this
Agreement. If a Selling Holder disapproves of the proposed terms of any such
underwriting, it may elect to withdraw therefrom by written notice to the
Company and the managing underwriter, delivered not less than seven days before
the Sellers' Registration Statement is first declared effective under the
Securities Act.
6. RULE 144 REPORTING. IVT will:
(i) make and keep public information available (as those terms are
understood and defined in Rule 144) at all times from and after 90 days
following the IPO Closing Date;
(ii) use its good-faith efforts to file with the SEC in a timely
manner all reports and other documents Section 13 or 15(d) of the Exchange
Act, as applicable, requires it to file with the SEC; and
(iii) so long as a Holder owns shares of Registrable Common, deliver
to the Holder, on the Holder's request, a written statement as to whether
it is in compliance with the requirements referred to in clause (ii) above
(if it is then subject to those requirements).
7. MARKET STANDOFF. Each Holder agrees, to the extent permitted by
applicable law, that, for so long as the Holder holds shares of Registrable
Common, the Holder will not, except as permitted by Section 2, sell, transfer or
otherwise dispose of in a public transaction (including through put or
short-sale arrangements) shares of Common Stock in the period (i) beginning 10
days prior to the effectiveness under the Securities Act of any registration
statement covering shares of Common Stock being publicly offered in an Eligible
Offering or in an Exempt Offering of the type specified in clause (iii) of the
definition of Exempt Offering and (ii) ending 90 days following the date of that
effectiveness (each such period being a "Lockup Period"). IVT will provide each
Holder written notice of any Lockup Period.
8. REGISTRATION EXPENSES. (a) Except as provided in Section 8(b),
IVT will pay or otherwise bear all the expense attributable to the registration
of Registrable Common under the Securities Act for sale pursuant to Section 2,
including all the following: (i) registration and filing fees payable under the
Securities Act or Blue Sky Laws; (ii) fees and expenses incurred in complying
with Blue Sky Laws, including the reasonable fees and disbursements of counsel
incurred in that connection; (iii) printing expenses; (iv) messenger and
delivery expenses; (v) the Company's
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internal expenses, including the salaries and expenses of its employees; (vi)
fees and expenses attributable to the listing of the Registrable Common on each
securities exchange (including, for this purpose, the NASDAQ national market) on
which the Common Stock is then listed at IVT's initiation; (vii) registrar and
transfer agents' fees; (viii) fees and disbursements of IVT's counsel and
independent certified public accountants; (ix) securities act liability
insurance premiums (if IVT elects to obtain that insurance); and (x) fees and
expenses of any special experts or other Persons retained by IVT in connection
with its compliance with this Agreement.
(b) Each Selling Holder will pay or otherwise bear all underwriting
commissions and discounts and transfer taxes attributable to that Selling
Holder's sale or other disposition of shares of Registrable Common, and each
Holder will pay or otherwise bear (i) the fees and expenses of that Holder's
counsel and any other special experts or Persons retained by that Holder in
connection with any Seller's Registration Statement or the sale or other
disposition of that Holder's Registrable Common and (ii) that Holder's internal
expenses, including the salaries and expenses of that Holder's employees.
9. TRANSFERS AND ADDITIONAL GRANTS OF REGISTRATION RIGHTS. (a) A
Holder may not transfer the registration rights this Agreement affords the
Holder to any other Person except as provided in this Section 9: (i) a Holder
who is a natural person may transfer those rights to a member of his immediate
family or a trust for the benefit of one or more members of his immediate
family; (ii) a Holder that is a corporation or other entity may transfer those
rights to an Affiliate of the Holder which also is a corporation or other
entity; and (iii) a Holder may transfer those rights to any other Holder;
provided, that any such transfer will be permitted only if the transferee
executes an addendum to this Agreement, in a form satisfactory to IVT, in which
that transferee agrees to comply with and otherwise be bound by all the terms
and conditions hereof.
(b) IVT may, without the consent of any Holder, extend the
registration rights this Agreement provides to additional Persons who become
holders of Common Stock after the date hereof by entering into one more addenda
to this Agreement with those Persons pursuant to which, for all purposes hereof,
those Persons will become Holders and any shares of Common Stock referred to in
those addenda will become Registrable Common. Nothing herein will limit or
otherwise restrict the ability or right of IVT to grant to any Person any
registration or similar rights in the future respecting shares of Common Stock
or any other securities IVT may issue, whether pursuant to the provisions of
this Section 9 or otherwise.
10. INDEMNIFICATION; CONTRIBUTION. (a) INDEMNIFICATION BY IVT. IVT
will, to the extent permitted by applicable law, indemnify each Selling Holder
who sells shares of Registrable Common by means of a Sellers' Registration
Statement and each of that Selling Holder's Related Parties against, and hold
each of those Persons harmless from and in respect of, any and all claims,
damages, losses, liabilities and expenses (including reasonable legal expenses)
whatsoever (collectively, "Claims") that arise from or are based on any untrue
statement or alleged untrue statement of a material fact contained in that
Sellers' Registration Statement or any prospectus (including any preliminary
prospectus) forming a part thereof, or any amendment thereof or
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supplement thereto, or any omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading in the light of the circumstances under which they were
made, except insofar as those Claims arise out of or are based on any such
untrue statement or omission or allegation thereof based on information
furnished in writing to IVT by or on behalf of that Selling Holder expressly for
use therein. In connection with any underwritten offering of shares of
Registrable Common, IVT will indemnify and hold harmless each participating
underwriter and each of that underwriter's Related Parties on either (i)
substantially the same basis on which it will indemnify each Selling Holder and
that Selling Holder's Related Parties pursuant to this Section 10(a) or (ii)
such other basis as is customarily obtained by underwriters from issuers at the
time of that offering. Notwithstanding the foregoing, IVT's obligations to
indemnify and hold harmless pursuant to this Section 10(a) with respect to any
Claim (or action or proceeding in respect thereof) that arises from or is based
on any untrue or alleged untrue statement contained in, or any omission or
alleged omission from, any preliminary prospectus will not inure to the benefit
of any Selling Holder or underwriter or its Related Parties if it is determined
that (i) a copy of the prospectus used to confirm the sale of shares of
Registrable Common to the Person asserting that claim was not sent or given to
that Person at or prior to the written confirmation of that sale, (ii) the
untrue statement or alleged untrue statement or the omission or alleged omission
was corrected by that prospectus and (iii) it was the responsibility of that
Selling Holder or that underwriter (or any dealer acquiring those shares
directly or indirectly from that underwriter) to send or give that prospectus to
that Person.
(b) CONDUCT OF INDEMNIFICATION PROCEEDINGS. Each Person claiming
indemnification from IVT pursuant to this Section 10 (an "Indemnified Party")
will, promptly after that Indemnified Party becomes aware of any assertion or
commencement of any action or proceeding against that Indemnified Party in
respect of which indemnity may be sought from IVT (a "Proceeding"), promptly
notify IVT in writing of the Proceeding; provided, that an Indemnified Party's
failure to so notify IVT will not relieve IVT from any liability it may have to
that Indemnified Party otherwise than pursuant to the provisions of this Section
10. If any Proceeding is brought against any Indemnified Party and that
Indemnified Party duly notifies IVT thereof: (i) IVT will have the right, at its
expense, to assume the defense thereof, including the employment of counsel; and
(ii) the Indemnified Party will have the right to employ separate counsel in the
Proceeding and participate in the defense thereof, but the Indemnified Party
will pay the fees and expenses of that separate counsel unless (A) IVT has
agreed in writing to pay those fees and expenses or (B) the named parties to the
Proceeding (including any impleaded parties) include both the Indemnified Party
and IVT, and counsel advises the Indemnified Party in writing that one or more
legal defenses may be available to the Indemnified Party which is or are
different from or additional to those available to IVT (in which case, if the
Indemnified Party notifies IVT in writing that the Indemnified Party elects to
employ separate counsel at the expense of IVT, IVT will not have the right to
assume the defense of the Proceeding on behalf of the Indemnified Party; it
being understood, however, that IVT will not, in connection with any one
Proceeding or separate but substantially similar or related Proceedings in the
same jurisdiction and arising out of the same general allegations or
circumstances, be liable for the fees and expenses of more than one separate law
firm (together with appropriate local counsel) at any time for all Indemnified
Parties). IVT will
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not be liable for any settlement of any Proceeding which any Indemnified Party
effects without IVT's written consent.
(c) INDEMNIFICATION BY SELLING HOLDERS. Each Selling Holder will, to
the extent permitted by applicable law, indemnify IVT and each of its Related
Parties against, and hold each of those Persons harmless from and in respect of,
Claims to the same extent as the indemnity from IVT to that Selling Holder in
Section 10(a), but only with respect to information that is furnished by or on
behalf of that Selling Holder expressly for use in a Sellers' Registration
Statement or any prospectus (including any preliminary prospectus) forming a
part thereof, or any amendment thereof or supplement thereto. If any action or
proceeding is brought against IVT or any of its Related Parties in respect of
which any of those Persons may seek indemnity from a Selling Holder pursuant to
this Section 10(c), that Selling Holder will have the rights and duties given to
IVT, and each of those Persons will have the rights and duties given to that
Selling Holder and that Selling Holder's Related Parties, by Section 10(b). Each
Selling Holder also will, to the extent permitted by applicable law, indemnify
and hold harmless the underwriters of the shares of Registrable Common offered
by that Selling Holder on substantially the same basis on which IVT will
indemnify and hold harmless those Persons pursuant to Section 10(a).
(d) CONTRIBUTION. If the indemnification this Section 10 provides
for is unavailable to any party intended to be indemnified pursuant to this
Section 10 in respect of any Claims referred to herein, the parties who would
have indemnified that party in the contemplation of this Section 10 will, in
lieu of providing that indemnification, contribute to the amount paid or payable
by that party as a result of those Claims, as follows:
(i) as between IVT and the Selling Holders, on the one hand, and the
underwriters of shares of Registrable Common, on the other hand, (A) in
such proportion as is appropriate to reflect the relative benefits
received by IVT and the Selling Holders and by those underwriters from the
offering of those shares or, if that allocation is not permitted by
applicable law, (B) in such proportion as is appropriate to reflect not
only those relative benefits, but also the relative faults of IVT and the
Selling Holders and of those underwriters in connection with the
statements or omissions that resulted in those Claims, as well as any
other relevant equitable considerations; and
(ii) as between IVT, on the one hand, and each Selling Holder, on
the other hand, in such proportion as is appropriate to reflect the
relative faults of IVT and of that Selling Holder in connection with those
statements or omissions, as well as any other relevant equitable
considerations.
The relative benefits received by IVT and the Selling Holders, on the one hand,
and the underwriters participating in the underwritten offering of shares of
Registrable Common, on the other hand, will be deemed to be in the same
proportion as the total proceeds from that offering (including shares of Common
Stock being offered by IVT), net of underwriting discounts and commissions, but
before deducting expenses, bear to the total amount of underwriting discounts
and commissions received
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by those underwriters in that offering, while (i) relative faults of IVT and the
Selling Holders and of those underwriters will be determined by reference to,
among other facts, whether the statements or omissions that resulted in the
Claims in respect of which contribution is being made are or relate to
information supplied by IVT and the Selling Holders or by those underwriters and
(ii) the relative faults of IVT and of the Selling Holders will be determined by
reference to, among other facts, (A) whether those statements or omissions are
or relate to information supplied by IVT or by the Selling Holders and (B) those
Persons' relative intent, knowledge, access to information and opportunity to
correct those statements or omissions or prevent them from being made. IVT and
the Selling Holders agree it would not be just or equitable if contribution
pursuant to this Section 10(d) were to be determined by pro rata allocation
(even if the underwriters, if any, were to be treated as one entity for this
purpose) or by any other allocation method that does not take into account the
equitable considerations referred to in this Section 10(d).
(e) LIMITATIONS ON CONTRIBUTION. No underwriter will be required to
contribute to IVT or the Selling Holders, pursuant to Section 10(d) or
otherwise, any amount in excess of the amount by which (i) the total price at
which the shares of Registrable Common underwritten by it and distributed to the
public were offered to the public exceeds (ii) the amount of any damages it
otherwise has been required to pay by reason of the statements or omissions that
resulted in the Claims in respect of which contribution is being made, and no
Selling Holder will be required to contribute to IVT or any underwriter,
pursuant to Section 10(d) or otherwise, any amount in excess of the amount by
which (i) the total price at which that Selling Holder's shares of Registrable
Common were offered to the public exceeds (ii) the amount of any damages that
Selling Holder otherwise has been required to pay by reason of those statements
or omissions. No Person guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the Securities Act) will be entitled to contribution
from any Person who was not guilty of such fraudulent misrepresentation. If
indemnification is available under this Section 10, the indemnifying parties
will indemnify each indemnified party to the full extent provided in Sections
10(a) and (c) without regard to the relative fault of any Person or any other
equitable consideration referred to in Section 10(d).
11. MISCELLANEOUS. (a) AMENDMENTS AND WAIVERS. Except as otherwise
provided herein, the provisions of this Agreement may not be amended, modified
or supplemented, and waivers or consents to departures from the provisions
hereof may not be given, unless IVT has obtained the written consent of Holders
of at least 51% of the shares of Registrable Common then outstanding.
(b) NOTICES. All notices and other communications provided for or
permitted hereunder must be in writing and will be deemed delivered and received
(i) if personally delivered or if delivered by telex, telegram, facsimile or
courier service, when actually received by the party to whom the notice or
communication is sent, or (ii) if delivered by mail (whether actually received
or not), at the close of business on the third Houston, Texas business day next
following the day when placed in the mail, postage prepaid, certified or
registered, addressed to the appropriate party or parties at the address of that
party set forth or referred to below (or at such other address as that party may
designate by written notice to each other party in accordance herewith):
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(A) if to a Holder, at the most current address given by that Holder
to IVT in a writing making specific reference to this Agreement, with a
copy (which will not constitute notice for purposes of this Agreement) to
such legal counsel, if any, as that Holder may designate in that writing;
and
(B) if to IVT, at the following address:
Innovative Valve Technologies, Inc.
14900 Woodham Drive, Suite A-125
Houston, Texas 77073
Attn: Corporate Secretary
Telecopy: (281) 821-1123
with copies to: Baker & Botts, L.L.P.
3000 One Shell Plaza
Houston, Texas 77002-4995
Attn: James L. Leader, Esq.
Telecopy: (713) 229-1522
(c) SUCCESSORS AND ASSIGNS. This Agreement will inure to the benefit
of and be binding on the heirs, executors, administrators, successors and
assigns of each of the parties hereto.
(d) COUNTERPARTS. This Agreement may be executed in any number of
counterparts and by the parties hereto in separate counterparts, each of which
when so executed will be deemed to be an original and all of which taken
together will constitute one and the same agreement.
(e) HEADINGS AND REFERENCES. The headings in this Agreement are for
convenience of reference only and will not limit or otherwise affect the meaning
hereof. References herein to "Sections" are to Sections of this Agreement unless
otherwise indicated.
(f) GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED
IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS APPLICABLE TO CONTRACTS MADE
AND TO BE PERFORMED WHOLLY WITHIN THAT STATE.
(g) SEVERABILITY. If any one or more of the provisions contained
herein, or the application thereof in any circumstances, is held invalid,
illegal or unenforceable in any respect for any reason, the validity, legality
and enforceability of that provision in every other respect and of the remaining
provisions contained herein will not be in any way impaired thereby, it being
intended by each party hereto that all the rights and privileges of all parties
hereto will be enforceable to the fullest extent permitted by law.
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(h) ENTIRE AGREEMENT; TERMINATION. The parties hereto intend that
this Agreement will be considered for all purposes as the final expression, and
a complete and exclusive statement, of their mutual agreement and understanding
in respect of the subject matter contained herein. This Agreement supersedes all
prior agreements and understandings between the parties to this Agreement with
respect to that subject matter. This Agreement, except the provisions of
Sections 1 and 10 (which will survive until the expiration of the applicable
statutes of limitations) and this Section 11, will terminate and be of no
further force or effect on December 31, 2002; provided, that if IVT delivers a
Registration Notice relating to an Eligible Offering that is pending on December
31, 2002, all the provisions of this Agreement will survive until that Eligible
Offering is closed or abandoned by IVT.
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IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
INNOVATIVE VALVE TECHNOLOGIES, INC.
By: /s/ Charles F. Schugart
Name: Charles F. Schugart
Title: Senior Vice President
HOLDERS:
ALLWASTE, INC.
By: /s/ Robert M. Chiste
Name: Robert M. Chiste
Title:
ALLWASTE ENVIRONMENTAL SERVICES, INC.
By: /s/ Robert M. Chiste
Name: Robert M. Chiste
Title:
/s/ WILLIAM E. HAYNES
William E. Haynes
/s/ CHARLES F. SCHUGART
Charles F. Schugart
/s/ DENNY A. RIGAS
Denny A. Rigas
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EXHIBIT 4.9
FUNDING AGREEMENT
FUNDING AGREEMENT (this "Agreement") dated as of June 9, 1997, as amended
and restated as of August 15, 1997, between INNOVATIVE VALVE TECHNOLOGIES, INC.,
a Delaware corporation (the "Company"), and ALLWASTE, INC., a Delaware
corporation ("Allwaste").
W I T N E S S E T H:
WHEREAS, the Company proposes to acquire a number of companies in the
industrial valve distribution and repair services business (the "Proposed
Acquisitions") for various combinations of cash and common stock, par value
$.001 per share, of the Company ("Common Stock") prior to or concurrently with
the successful completion of an initial underwritten public offering of Common
Stock by the Company (the "IPO" and, together with the Proposed Acquisitions,
the "Transactions");
WHEREAS, the Company desires to obtain a commitment for up to $6,000,000
of financing to pay the fees and expenses of its legal counsel and independent
public accountants, its organizational expenses and the various other expenses
the Company expects to incur up to the time the Transactions close (the "Pre-IPO
Expenses"); and
WHEREAS, to June 9, 1997 Allwaste has advanced $2,128,935 (the "Previously
Advanced Amount") to The Safe Seal Company, Inc., a Texas corporation ("SSI"),
pursuant to the terms of a letter agreement dated September 18, 1996 (the
"Letter Agreement") to cover Pre-IPO Expenses;
NOW, THEREFORE, in consideration of the agreements and undertakings of the
parties hereinafter set forth, and for other good and valuable consideration,
the receipt and sufficiency of which the parties hereto hereby acknowledge, the
parties hereto hereby agree as follows:
1. COMMITMENT.
1.1 ADVANCES. Subject to the terms and conditions of this Agreement,
Allwaste agrees to make advances (the "Advances") to the Company from time to
time between the date hereof and the Termination Date (as hereinafter defined)
up to an aggregate principal amount of $6,000,000. The term "Termination Date"
means the earliest to occur of (i) December 31, 1997, (ii) the date on which the
Company first receives payment for the shares of Common Stock it sells in the
IPO (the "IPO Closing Date"), (iii) the Abandonment Date (as defined in the
Modification and Settlement Agreement dated as of May 9, 1997, as amended and
restated as of August 15, 1997, by and among SSI, Allwaste and the other parties
thereto) or (iv) the date Allwaste terminates its commitment hereunder pursuant
to Section 7; provided, however, if the Company has filed a registration
statement relating to the IPO under the Securities Act of 1933, as amended (the
"Securities Act"),
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on or before December 31, 1997 and is pursuing the IPO on December 31, 1997, the
date referred to in clause (i) of this sentence will be the first to occur of
(a) the date the Company withdraws that registration statement pursuant to Rule
477 under the Securities Act, (b) the date that registration statement is
abandoned pursuant to Rule 479 under the Securities Act or (c) May 31, 1998.
Allwaste also agrees to use commercially reasonable efforts to fund, on terms
acceptable to the Company, the cash portion of the purchase price payable in
each Proposed Acquisition that the Company effects prior to the IPO Closing
Date, subject to Allwaste's covenants and other agreements with Philip Services
Corp. Notwithstanding any provision hereof or of the Letter Agreement to the
contrary, (i) the Previously Advanced Amount will be deemed for all purposes an
Advance made under this Agreement on June 9, 1997 and (ii) on the execution and
delivery of this Agreement by Allwaste, SSI will have no obligation to repay the
Previously Advanced Amount or any interest that may have accrued thereon to
Allwaste.
1.2 CONVERTIBLE PROMISSORY NOTE. When the Company executes and delivers
this Agreement to Allwaste, the Company also will execute and deliver to
Allwaste a Convertible Promissory Note in the form of Exhibit A (the "Note").
1.3 PROCEDURE FOR ADVANCES. Monthly hereafter between the date hereof and
the Termination Date, the Company may request an Advance hereunder by delivering
to Allwaste a Request for Advance in substantially the form of Exhibit B, with
the blanks therein appropriately filled. A Request for Advance may direct that
the Advance be made to the Company or directly to such third parties as may be
specified in the Request for Advance. Any amounts paid to third parties pursuant
to such a direction in a Request for Advance shall be deemed to be made on
behalf of the Company and, to the extent those amounts constitute expenses,
those amounts will constitute expenses of the Company for all purposes and the
Company shall be the owner of any and all benefits attributable to such
expenses. Within five business days after Allwaste receives any Request for
Advance from the Company, Allwaste will make the Advance requested thereby to
the Company or to the Company's order as indicated in the Request for Advance.
1.4 CONVERSION AND REPAYMENT OF THE NOTE; PAYMENT OF OTHER OBLIGATIONS
WITH COMMON STOCK. The Note will be subject to conversion and repayment in
accordance with its terms. Allwaste agrees that the Company may, at its option
exercisable on the IPO Closing Date, satisfy the payment obligations it owes to
Allwaste on the IPO Closing Date, in an aggregate amount not to exceed the
amount by which $10,000,000 exceeds the unpaid principal amount of the Note
immediately before its conversion, with shares of Common Stock valued, for
purposes of this Section 1.4, at the IPO Price (as defined in the Note).
1.5 INTEREST RATE. The Advances will bear interest at the annual rate per
annum of 8%; provided, however, that on the occurrence and during the
continuance of an Event of Default (as hereinafter defined), the Advances will
bear interest at the rate of 10% per annum. Interest on the Note will be
computed on the basis of a year of 365 or 366 days, as the case may be.
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1.6 REGISTRATION RIGHTS. Simultaneously with the execution and delivery of
this Agreement, the Company and Allwaste will execute and deliver a Registration
Rights Agreement in the form of Exhibit C (the "Registration Agreement").
2. REPRESENTATIONS OF THE COMPANY. The Company represents and warrants to
Allwaste as follows:
2.1 ORGANIZATION. The Company: (i) is a corporation duly organized,
validly existing and in good standing under the laws of the State of Delaware
and has the corporate power to (a) conduct its business as now conducted and as
proposed to be conducted, (b) enter into and perform its obligations under this
Agreement and the Registration Agreement and (c) issue and perform its
obligations under the Note and (ii) has delivered to Allwaste copies of the
Company's Certificate of Incorporation and bylaws, each as in effect as of the
date of this Agreement, and each of which has been certified by the Company's
secretary.
2.2 CAPITALIZATION. On August 15, 1997, after giving effect to the
contemplated combination of the outstanding Common Stock on a 0.68 for 1 basis,
the authorized capital stock of the Company will consist of (i) Common Stock, of
which 30,000,000 shares will be authorized and 242,839 shares will be issued and
outstanding and owned of record and beneficially by the persons named below in
the following amounts:
NO. OF OUTSTANDING
STOCKHOLDER SHARES OWNED
----------- ------------------
William E. Haynes 74,466
Charles F. Schugart 40,800
Frank L. Lombard 14,893
John L. King 17,000
Douglas R. Harrington, Jr. 17,000
Denny A. Rigas 34,000
Computerized Accounting & Tax
Services, Inc. 44,680
and (ii) preferred stock, $.001 par value per share, of which 5,000,000 shares
are authorized and none of which are issued or outstanding. The shares of Common
Stock then issued and outstanding will be duly authorized, validly issued, fully
paid and nonassessable. All shares of Common Stock issuable on conversion of the
Note or pursuant to Section 1.4 have been duly reserved for issuance. If and
when shares of Common Stock are issued on conversion of the Note or pursuant to
Section 1.4, those shares will be duly authorized, validly issued, fully paid
and nonassessable.
2.3 PROPOSED ACQUISITIONS. As of the date hereof, the Company has provided
to Allwaste a copy of each letter of intent it has heretofore entered into with
respect to any Proposed Acquisition.
2.4 NO LITIGATION. There are no claims, actions, suits, proceedings or
investigations pending or, to the knowledge of the Company, threatened against
or affecting the Company. The
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Company is not subject to any continuing court or administrative order, writ,
injunction or decree applicable to it or its assets or operations. There are no
outstanding judgments against the Company.
2.5 NO GOVERNMENTAL APPROVALS. No authorization, approval, consent or
order of, or registration, declaration or filing with, any court or governmental
body is required by or on behalf of the Company in connection with the Company's
execution or performance of this Agreement, the Note or, except as contemplated
thereby, the Registration Agreement. To the Company's knowledge, the Company and
its subsidiaries are conducting their respective businesses and operations in
compliance with all governmental rules and regulations applicable thereto,
including, without limitation, those relating to occupational safety, health and
employment practices, and none of them is in violation or default in any
material respect under any statute, law, rule, ordinance, judgment, order,
decree or other governmental authorization or approval applicable to it, except
for any such violation or default that would not result in a material adverse
effect on the condition (financial or other), business, properties or results of
operations of the Company and its subsidiaries taken as a whole.
2.6 NO BROKERS. The Company is not liable for any investment banking fee,
finder's fee, brokerage payment or other similar payment in connection with the
origin, negotiation or consummation of the transactions contemplated by this
Agreement. Neither the Company nor any stockholder of the Company is a party to
any agreement, understanding or arrangement, or has committed any act, which
might give rise to any valid claim against the Company or Allwaste for any such
fee, commission or other payment.
2.7 AUTHORITY OF THE COMPANY. The execution, delivery and performance by
the Company of this Agreement, the Note and the Registration Agreement have been
duly authorized and approved by the Board of Directors of the Company. No
further action remains to be taken in order to have completed all action
required by law and the Company's certificate of incorporation and bylaws to
authorize the execution, delivery and performance by the Company of this
Agreement, the Note or the Registration Agreement. This Agreement, the Note and
the Registration Agreement are valid and binding obligations of the Company,
enforceable against it in accordance with their respective terms, except as that
enforceability may be limited by any applicable bankruptcy, insolvency,
reorganization, moratorium or similar laws affecting the enforcement of
creditors' rights generally. The Company's execution and delivery of this
Agreement, the Note and the Registration Agreement do not, and the Company's
performance of this Agreement, the Note and the Registration Agreement will not,
violate, conflict with or constitute a breach of or a default under the
certificate of incorporation or bylaws of the Company or any loan or credit
agreement, indenture, mortgage, deed of trust, contract, lease, license or other
contract or agreement to which the Company is a party or by which it is bound or
violate any order, writ, injunction or decree of any court, administrative
agency or governmental body.
3. REPRESENTATIONS OF ALLWASTE. Allwaste represents and warrants to the Company
as follows:
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3.1 AUTHORITY OF ALLWASTE. Allwaste has all requisite authority to enter
into this Agreement and to perform all the obligations required to be performed
by Allwaste under this Agreement. This Agreement has been duly executed and
delivered by Allwaste, and, on execution and delivery by the Company, this
Agreement will be the valid and legally binding obligation of Allwaste,
enforceable against it in accordance with its terms, except as that
enforceability may be limited by any applicable bankruptcy, insolvency,
reorganization, moratorium or similar laws affecting the enforcement of
creditors' rights generally.
3.2 MEANS OF SOLICITATION. Neither the Company nor any person acting or
purporting to act on behalf of the Company has offered or sold to Allwaste the
Note or the Common Stock underlying the Note or issuable pursuant to Section 1.4
by means of any form of general solicitation or general advertising. Allwaste is
acquiring the Note solely for its own beneficial account, for investment
purposes, and not with any view to, or for resale in connection with, any
distribution (within the meaning of the Securities Act) of the Note or the
Common Stock issuable on conversion of the Note or pursuant to Section 1.4.
Allwaste is an "accredited investor" within the meaning of Regulation D under
the Securities Act. Allwaste understands that the Note and that Common Stock
have not been registered under the Securities Act or any state securities laws,
by reason of specific exemptions under the provisions thereof which depend in
part on the investment intent of Allwaste and on the accuracy of certain other
representations made by Allwaste in this Agreement. Allwaste understands that
the Company is relying on the representations and agreements contained in this
Agreement for the purpose of determining that the transactions contemplated by
this Agreement meet the requirements for those exemptions.
3.3 NO GOVERNMENTAL APPROVALS. No authorization, approval, consent or
order of, or registration, declaration or filing with, any court or governmental
body is required by or on behalf of Allwaste in connection with Allwaste's
execution or performance of this Agreement or the Registration Agreement.
3.4 NO BROKERS. Allwaste is not a party to any agreement, understanding or
arrangement, and has not committed any act, which might give rise to any valid
claim against the Company for any finder's fee, brokerage payment or other
similar payment in connection with the origin, negotiation or consummation of
the transactions contemplated by this Agreement.
4. LEGENDS AND RESTRICTIONS ON TRANSFER.
4.1 SECURITIES ACT LEGENDS. Each certificate or other document
representing the Note and the shares of Common Stock issuable on conversion of
the Note or pursuant to Section 1.4 (collectively the "Securities" and
individually a "Security") will be stamped or otherwise imprinted with a
restrictive legend in the form set forth in Exhibit A (in the case of the Note)
or as follows (in the case of those shares):
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THE SHARES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933 AND MAY ONLY BE SOLD OR OTHERWISE TRANSFERRED IF
THE HOLDER HEREOF COMPLIES WITH THAT LAW AND OTHER APPLICABLE SECURITIES
LAWS.
Except as provided in Section 4.2, if any Security is transferred or reissued,
the certificates or other instruments representing it also will bear the
appropriate legend prescribed above.
4.2 REMOVAL OF SECURITIES ACT LEGENDS. The Company will promptly deliver
or cause to be delivered a new certificate or certificates or instrument or
instruments representing any Security, which certificate or certificates or
instrument or instruments will not bear the legends referred to or set forth in
Section 4.1, when it determines (on the basis of such documentation as the
Company reasonably requires, including an opinion of counsel) that the Security
has been held beneficially by its holder for at least two years for purposes of
Rule 144 under the Securities Act ("Rule 144") and that such holder is not and
has not been within the preceding three months an affiliate of the Company. All
determinations pursuant to the preceding sentence will be made in accordance
with Rule 144(k) or any applicable successor rule. If a period shorter than
specified above is permitted by reason of the amendment or replacement of Rule
144(k), the Company will impose no greater restriction than the restriction
imposed as the result of that amendment or replacement.
4.3 RESTRICTION ON TRANSFER OF COMMON STOCK. Allwaste agrees with the
Company that, during the two-year period ending on the second anniversary of the
IPO Closing Date, Allwaste will not voluntarily, except pursuant to and in
accordance with the applicable provisions of the Registration Agreement: (i)
sell, assign, exchange, transfer, encumber, pledge, distribute, appoint or
otherwise dispose of (a) any shares of Common Stock issued on conversion of the
Note or pursuant to Section 1.4 or (b) any interest in (including any option to
buy or sell) any of those shares of Common Stock, in whole or in part, and the
Company will have no obligation to, and shall not, treat any such attempted
transfer as effective for any purpose; or (ii) engage in any transaction,
whether or not with respect to any shares of Common Stock or any interest
therein, the intent or effect of which is to reduce the risk of owning the
shares of Common Stock issued on conversion of the Note or pursuant to Section
1.4 (including, for example, engaging in put, call, short-sale, straddle or
similar market transactions). Allwaste also agrees with the Company that the
certificates evidencing the Common Stock issued on conversion of the Note or
pursuant to Section 1.4 will bear a legend substantially in the form set forth
below and containing such other information as the Company may deem necessary or
appropriate:
EXCEPT PURSUANT TO THE TERMS OF THE FUNDING AGREEMENT DATED AS OF JUNE 9,
1997 BETWEEN THE ISSUER AND THE HOLDER OF THIS CERTIFICATE, THE SHARES
REPRESENTED BY THIS CERTIFICATE MAY NOT BE VOLUNTARILY SOLD, ASSIGNED,
EXCHANGED, TRANSFERRED, ENCUMBERED, PLEDGED, DISTRIBUTED, APPOINTED OR
OTHERWISE DISPOSED OF, AND THE ISSUER SHALL NOT BE REQUIRED TO GIVE EFFECT
TO ANY ATTEMPTED VOLUNTARY SALE, ASSIGNMENT, EXCHANGE, TRANSFER,
ENCUMBRANCE, PLEDGE, DISTRIBUTION, APPOINTMENT OR OTHER DISPOSITION OF ANY
OF THOSE SHARES, DURING THE TWO-YEAR PERIOD ENDING ON __________ [DATE
THAT IS THE SECOND ANNIVERSARY OF THE IPO CLOSING DATE.]
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ON THE WRITTEN REQUEST OF THE HOLDER OF THIS CERTIFICATE, THE ISSUER
AGREES TO REMOVE THIS RESTRICTIVE LEGEND (AND ANY STOP ORDER PLACED WITH
THE TRANSFER AGENT) AFTER THE DATE SPECIFIED ABOVE.
5. COVENANTS OF THE COMPANY. The Company hereby covenants and agrees as follows:
5.1 CERTAIN ACTIONS PROHIBITED. Until the IPO has been consummated and the
Note has been paid in full (including by conversion thereof), the Company will
not (without the prior approval of Allwaste), except as specifically
contemplated by this Agreement, change the capital structure of the Company in
any way and will not:
(i) issue any additional shares of its capital stock;
(ii) pay or declare any dividends or other distributions on, or
purchase or redeem any outstanding shares of, Common Stock;
(iii) dispose of any material amount of its assets;
(iv) adopt any new employee benefit plan or stock option plan; or
(v) guarantee the obligations or indebtedness of any other person.
5.2 ACQUISITIONS. The Company will use its reasonable business efforts to
enter into letters of intent and definitive agreements with leading industrial
valve distribution or repair services companies and will keep Allwaste advised
of the progress of its negotiations with the prospective sellers of those
companies. The Company will not enter into any such definitive agreement unless
it is (i) in material accordance with the valuation methodology previously
discussed (or such other valuation methodology mutually agreed on by the Company
and Allwaste) between the Company and Allwaste and (ii) approved by Allwaste.
The Company will use its reasonable business efforts to close the Proposed
Acquisitions of each such company simultaneously with the closing of the IPO.
5.3 IPO. The Company will use its reasonable business efforts to
consummate the IPO as promptly as practicable.
5.4 ACCESS. The Company will provide to Allwaste and its counsel,
accountants and other representatives access, at reasonable times during normal
business hours, to all the properties, books and records, contracts and
agreements and employees of the Company, so that Allwaste may have full
opportunity to make such investigation as it desires to make of the business and
assets of the Company and the companies to be acquired by the Company.
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6. CONDITIONS TO ADVANCES.
Allwaste will not be obligated to make any Advance unless it has
received (i) the Note and the Registration Agreement, duly executed and
delivered by the Company, (ii) resolutions of the Board of Directors of the
Company, duly certified by the secretary of the Company, authorizing the
execution, delivery and performance by the Company of this Agreement, the Note
and the Registration Agreement, and (iii) the certificate of incorporation and
bylaws, as amended to date, of the Company, duly certified by the secretary of
the Company. In addition, Allwaste will not be obligated to make any Advance
unless on the applicable date that Advance is to be made (and after giving
effect to the requested Advance): (i) Allwaste has timely received a Request for
Advance; (ii) all the representations and warranties of the Company in this
Agreement are true and correct in all material respects; (iii) no material
adverse change with respect to the business, operations, prospects or properties
of the Company has occurred and is continuing; and (iv) no Default or Event of
Default (as defined below) exists. Each Request for Advance delivered to
Allwaste will constitute the representation and warranty by the Company to
Allwaste that the statements in clauses (ii), (iii) and (iv) in the preceding
sentence are true and correct in all respects at the time of that delivery.
7. EVENTS OF DEFAULT.
7.1 EVENTS OF DEFAULT. For purposes of this Agreement, the occurrence of
any one or more of the following events is an "Event of Default" (and the
occurrence of an event that, but for the passage of time or the giving of notice
or both, would be an Event of Default is a "Default"):
(i) the failure of the Company to pay any amount due hereunder or
under the Note when it becomes due and payable and the continuation of
that failure for five days after written notice of nonpayment has been
given to the Company by Allwaste;
(ii) the failure of the Company to properly perform, observe and
comply with any covenant contained in Section 5.1;
(iii) the failure or refusal of the Company to punctually and
properly perform, observe and comply with any covenant, agreement or
condition contained in this Agreement, the Note or the Registration
Agreement, other than the covenants referred to in clauses (i) and (ii) of
this Section 7.1, and the continuation of that failure or refusal for 15
days after written notice of that failure or refusal has been given to the
Company by Allwaste;
(iv) the Company (a) voluntarily seeks, consents to or acquiesces in
the benefit or benefits of any Debtor Relief Law (as hereinafter defined)
or (b) becomes party to (or be made the subject of) any proceeding
provided by any Debtor Relief Law, other than as a creditor or claimant,
that could suspend or otherwise adversely affect the rights of Allwaste
(or the then current holder of the Note) granted hereunder (unless in the
event that proceeding is involuntary, the petition instituting the same is
dismissed within 90 days of the
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filing of same) (as used herein, the term "Debtor Relief Law" means the
Bankruptcy Code of the United States of America and all other applicable
liquidation, conservatorship, bankruptcy, moratorium, rearrangement,
receivership, insolvency, reorganization or similar debtor relief laws
from time to time in effect affecting the rights of creditors generally);
or
(v) any material representation or warranty made by the Company
herein at any time proves to have been materially incorrect when made.
7.2 CONSEQUENCES. If an Event of Default described in Section 7.1(iv)
exists, Allwaste's commitment to make Advances automatically will terminate and
the entire unpaid balance of the Advances automatically will become due and
payable without any action of any kind by Allwaste. If any other Default or
Event of Default exists, Allwaste may do any one or more of the following: (i)
declare the entire unpaid balance of all or any part of the Advances immediately
due and payable; (ii) terminate its commitment to make Advances; (iii) reduce
any claim to judgment; and (iv) exercise any and all other legal or equitable
rights afforded by this Agreement or the Note or the laws of the State of Texas
or any other applicable jurisdiction. The Company waives presentment and demand
for payment, protest, notice of intention to accelerate, notice of acceleration
and notice of protest and nonpayment. No waiver of a Default or an Event of
Default by Allwaste will be deemed a waiver of any other then existing or
subsequent Default or Event of Default. No delay or omission by Allwaste in
exercising any right under this Agreement or the Note will impair that right or
be construed as a waiver of that right, nor will any single partial exercise of
any right preclude any other or further exercise of that or any other right.
8. MISCELLANEOUS.
8.1 REMEDIES NOT EXCLUSIVE. No remedy conferred by any of the specific
provisions of this Agreement is intended to be exclusive of any other remedy,
and each and every remedy will be cumulative and in addition to every other
remedy given hereunder or now or hereafter existing at law or in equity or by
statute or otherwise. The election of any one or more remedies by any party
hereto will not constitute a waiver of the right to pursue other available
remedies.
8.2 PARTIES BOUND; ASSIGNMENT. Except to the extent otherwise expressly
provided herein, this Agreement will be binding upon and inure to the benefit of
the parties hereto and their respective heirs, representatives, administrators,
guardians, successors and assigns; and no other person will have any right,
benefit or obligation hereunder. The rights and obligations of either party to
this Agreement are not assignable without the prior written consent of the other
party.
8.3 NOTICES. All notices, reports, records or other communications that
are required or permitted to be given to the parties under this Agreement will
be sufficient in all respects if given in writing and delivered in person, by
telecopy, by overnight courier or by registered or certified mail, postage
prepaid, return receipt requested, to the receiving party at the following
address:
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If to Allwaste: Allwaste, Inc.
5151 San Felipe, Suite 1600
Houston, Texas 77056-3609
Attention: Robert M. Chiste
If to the Company: Innovative Valve Technologies, Inc.
14900 Woodham Drive, Suite A-125
Houston, Texas 77073
Attention: William E. Haynes
or to such other address as such party may have given to the other party by
notice pursuant to this Section 8.3. Notice will be deemed given on the date of
delivery, in the case of personal delivery or telecopy, or on the delivery or
refusal date, as specified on the return receipt, in the case of overnight
courier or registered or certified mail.
8.4 CHOICE OF LAW. This Agreement will be construed and interpreted, and
the rights of the parties hereto will be determined in accordance with, the laws
of the State of Texas, without giving effect to any conflicts of laws
principles.
8.5 ENTIRE AGREEMENT; AMENDMENTS AND WAIVERS. This Agreement, including
the Exhibits, constitutes the entire agreement between the parties pertaining to
the subject matter hereof and supersedes all prior and contemporaneous
agreements, understandings, negotiations and discussions, whether oral or
written, of the parties. Except as set forth herein, there are no warranties,
representations or other agreements between the parties in connection with the
subject matter hereof. No supplement, modification or waiver of any of the
provisions of this Agreement will be binding unless it is specifically
designated to be a supplement, modification or waiver of this Agreement and is
executed in writing by each party to be bound thereby.
8.6 FURTHER ASSURANCES. From time to time hereafter and without further
consideration, each of the parties hereto will execute and deliver such
documents and instruments and take such actions as the other party hereto may
reasonably request in order to more effectively consummate the transactions
contemplated by this Agreement or as shall be reasonably necessary or
appropriate in connection with the carrying out of the parties' respective
obligations hereunder or the purposes of this Agreement.
8.7 SEVERABILITY. In the event that any one or more of the provisions
contained herein, or the application thereof in any circumstances, is held
invalid, illegal or unenforceable in any respect for any reason, the validity,
legality and enforceability of any such provision in every other respect and of
the remaining provisions contained herein shall not be in any way impaired
thereby, it being intended that all the rights and privileges of the parties
hereunder shall be enforceable to the fullest extent permitted by law.
8.8 NO PARTNERSHIP. Nothing in this Agreement creates or is intended to
create any
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partnership or joint venture between Allwaste and the Company.
8.9 MULTIPLE COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which will be deemed an original, but all of which
together will constitute one and the same instrument.
8.10 HEADINGS AND REFERENCES; JOINT DRAFTING. The headings of the several
Sections herein are inserted for convenience of reference only and are not
intended to be a part of or to affect the meaning or interpretation of this
Agreement. References in this Agreement to "Sections" and "Exhibits" are to
Sections of and Exhibits to this Agreement unless otherwise indicated. This
Agreement and its Exhibits have been jointly drafted by the parties and their
counsel. Neither this Agreement nor any of its Exhibits shall be construed
against any party based on its authorship.
IN WITNESS WHEREOF, the parties have duly executed this Agreement as of
the date first written above.
INNOVATIVE VALVE TECHNOLOGIES, INC.
By: /s/ CHARLES F. SCHUGART
Charles F. Schugart
Senior Vice President--
Chief Financial Officer
ALLWASTE, INC.
By: /s/ Robert M. Chiste
Name: Robert M. Chiste
Title:
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EXHIBIT A
THIS NOTE AND THE SECURITIES INTO WHICH THIS NOTE IS CONVERTIBLE IN PART HAVE
NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 AND MAY ONLY BE SOLD OR
OTHERWISE TRANSFERRED IF THE HOLDER HEREOF COMPLIES WITH THAT LAW AND OTHER
APPLICABLE SECURITIES LAWS.
CONVERTIBLE PROMISSORY NOTE
$6,000,000 June 9, 1997
FOR VALUE RECEIVED, the undersigned, INNOVATIVE VALVE TECHNOLOGIES, INC.,
a Delaware corporation ("Maker"), hereby promises to pay (subject to the
immediately following paragraph) to the order of ALLWASTE, INC., a Delaware
corporation ("Payee"), at its principal offices at 5151 San Felipe, Suite 1600,
Houston, Texas 77056-3609, the principal sum of SIX MILLION United States
Dollars (U.S.$6,000,000) or, if less, the aggregate principal amount of all
Advances (this and certain other terms not otherwise defined in this Convertible
Promissory Note (this "Note") are used as defined in the Funding Agreement
referred to below) made by Payee to Maker, at the time specified in the Funding
Agreement. Unless the Conversion referred to below occurs, Maker promises to pay
interest on the unpaid principal amount of each Advance from the date of that
Advance until that principal amount is repaid in full at the rate per annum of
8%; provided, that during the continuation of any Event of Default, that rate
per annum will be 10%. When the principal amount of this Note becomes payable,
the interest accrued hereon also will become payable. This Note is the Note
referred to in, and is entitled to the benefits of, the Funding Agreement dated
as of June 9, 1997, as amended and restated as of August 15, 1997, between Maker
and Payee (as supplemented, modified and amended from time to time, the "Funding
Agreement"), which Funding Agreement contains among its provisions certain
provisions for the acceleration of the maturity of this Note on the happening of
certain stated events.
Simultaneously with the closing of the IPO, (i) $500,000 of the
outstanding principal amount of this Note or, if less, the entire outstanding
principal amount of this Note will automatically convert, together with all
interest accrued on the principal amount of this Note, into 420,629 shares of
Common Stock and (ii) the remaining outstanding principal amount, if any, of
this Note will automatically convert into such number of whole shares of Common
Stock as shall most nearly equal, but not exceed, the quotient of that remaining
outstanding principal amount divided by the IPO Price (the conversions pursuant
to this sentence being the "Conversion," and the "IPO Price" being the price per
share at which the Common Stock is initially offered to the public in the IPO).
Prior to the Conversion, Payee, as such, will not be entitled to any rights of a
holder of Common Stock.
EXECUTED as of the date set forth above.
INNOVATIVE VALVE TECHNOLOGIES, INC.
By:
Charles F. Schugart
Senior Vice President--
Chief Financial Officer
A-1
<PAGE>
EXHIBIT B
REQUEST FOR ADVANCE
, 199
Allwaste, Inc.
5151 San Felipe, Suite 1600
Houston, Texas 77056-3609
Attention: T. Wayne Wren, Jr.
Reference is made to the Funding Agreement dated as of June 9, 1997
(as supplemented, modified or amended from time to time, the "Funding
Agreement") between Innovative Valve Technologies, Inc. (the "Company") and
Allwaste, Inc. Capitalized terms used herein and not otherwise defined herein
are used as defined in the Funding Agreement. The Company hereby gives you
notice pursuant to Section 1.3 of the Funding Agreement that it requests an
Advance under the Funding Agreement on the following terms:
(A) Advance date _________________.
(B) Amount of Advance $_________________.
(C) Payment of Advance to be made to (check one) ______ the Company
______ third parties (list indicating specific parties and amounts
attached).
The Company hereby certifies that the funds provided to it pursuant
to this request will be used to pay Pre-IPO Expenses.
Very truly yours,
INNOVATIVE VALVE TECHNOLOGIES, INC.
By:
Name:
Title:
B-1
EXHIBIT 10.2
William E. Haynes
EMPLOYMENT AGREEMENT
This Employment Agreement (the "Agreement") is entered into as of
January 27, 1997 (the "Effective Date"), by and between The Safe Seal Company,
Inc., a Texas corporation, and William E. Haynes (the "Executive").
RECITAL:
WHEREAS, the Company desires to employ the Executive, and the
Executive agrees to work in the employ of the Company, and
WHEREAS, the parties hereto desire to set forth the terms of
Executive's Employment with the Company,
NOW, THEREFORE, the parties hereto agree as follows:
1. EMPLOYMENT. The Company hereby employs the Executive, and the
Executive hereby accepts Employment, on the terms and
conditions herein set forth.
2. DUTIES. (a) The Company will employ the Executive as Chairman
of the Board, President and Chief Executive Officer ("CEO") of
the Company, (b) the Executive will serve in the Company's
employ in that position and (c) under the direction of the
Board of Directors of the Company (the "Board"), the Executive
shall perform such duties, and have such powers, authority,
functions, duties and responsibilities for the Company and
corporations and other entities affiliated with the Company as
are commensurate and consistent with his employment in the
position of CEO. The Executive also shall have such additional
powers, authority, functions, duties and responsibilities as
may be assigned to him by the Board; provided that, without
the Executive's written consent, those additional powers,
authority, functions, duties and responsibilities shall not be
inconsistent or interfere with, or detract from, those herein
vested in, or otherwise then being performed for the Company
by, the Executive. In the event of an increase in the
Executive's duties, the Compensation Committee of the Board
(the "Compensation Committee") shall review the Executive's
compensation and benefits to determine if an adjustment in
compensation and employee benefits commensurate with the
Executive's new duties is warranted, in accordance with the
Company's compensation policies.
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3. TERM OF EMPLOYMENT. Subject to the provisions of Section 8,
the term of the Executive's Employment hereunder shall
commence on May 15, 1997, for a continually renewing term of
three years commencing on that date and renewing each day
thereafter for an additional day without any further action by
either the Company or the Executive, it being the intention of
the parties that there shall be continuously a remaining term
of three years' duration of the Executive's Employment until
an event has occurred as described in, or one of the parties
shall have made an appropriate election pursuant to, the
provisions of Section 8. When the termination date of the
Executive's Employment shall have occurred and the Company
shall have paid to the Executive all the applicable amounts
that Section 9 provides the Company shall pay as a result of
the termination of the Executive's Employment, this Agreement
will terminate and have no further force or effect, except
that Sections 15 through 29 shall survive that termination
indefinitely and Section 11 shall survive for the period of
time provided for therein.
4. EXTENT OF SERVICES. The Executive shall not at any time during
his Employment engage in any other activities unless those
activities do not interfere materially with the Executive's
duties and responsibilities to the Company at that time. The
foregoing, however, shall not preclude the Executive from
engaging in appropriate civic, charitable, professional or
trade association activities or from serving on one or more
boards of directors of public or private companies, as long as
such activities and services do not conflict with his
responsibilities to the Company. In addition, it is recognized
that the Executive has an equity interest in Oiltanking
Infrastructure Management Co. which will require some of his
time and services, but will not materially affect the
performance by the Executive of his services hereunder.
5. NO FORCED RELOCATION. The Executive shall not be required to
move his principal place of residence from the Houston, Texas
area or to perform regular duties that could reasonably be
expected to require either such move against his wish or to
spend amounts of time each week outside the Houston, Texas
area which are unreasonable in relation to the duties and
responsibilities of the Executive hereunder, and the Company
agrees that, if it requests the Executive to make such a move
and the Executive declines that request, (a) that declination
shall not constitute any basis for a termination of the
Executive's Employment and (b) no animosity or prejudice will
be held against Executive.
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<PAGE>
6. COMPENSATION.
(a) SALARY. An annual base salary shall be payable to the
Executive by the Company as a guaranteed minimum amount
under this Agreement for each calendar year during the
period from May 15, 1997 to the termination date of the
Executive's Employment. That annual base salary shall
(i) accrue daily on the basis of a 365-day year, (ii) be
payable to the Executive in the intervals consistent
with the Company's normal payroll schedules (but in no
event less frequently than semi-monthly) and (iii) be
payable at an initial annual rate of $200,000. The
Executive's annual base salary shall not be decreased,
but shall be adjusted annually in each December to
reflect such adjustments, if any, as the Compensation
Committee determines appropriate based on the
Executive's performance during the most recent
performance period, in accordance with the Company's
compensation policies. A failure of the Company to
increase the Executive's annual base salary would not
constitute a breach or violation of this Agreement by
the Company.
(b) HIRING BONUS, STOCK AWARD AND STOCK OPTIONS. The Company
shall pay the Executive on the IPO Closing Date a hiring
bonus of $300,000. The Company shall pay the Executive
as of the Effective Date a stock award (the "Stock
Award") consisting of 212,348 shares (the "Award
Shares") of the Company's authorized and unissued common
stock (the "Common Stock"). The Company shall also grant
to the Executive effective as of the Effective Date (i)
a nonqualified stock option to purchase 125,000 shares
of Common Stock from the Company at an exercise price
per share equal to the IPO Price and (ii) a nonqualified
option to purchase 125,000 shares of Common Stock from
the Company at an exercise price per share equal to the
lesser of (A) $9.00 and (B) the IPO Price (each option
being an "Option"). The term of each Option shall be
seven years from the IPO Closing Date. Each Option will
become exercisable with respect to 25% of the shares of
Common Stock covered thereby on each of the IPO Closing
Date and the first three anniversaries of the IPO
Closing Date, subject to acceleration as provided in
this Section 6(b). Neither the number of shares of
Common Stock subject to, nor the exercise price
established by, either Option will be subject to any
adjustment by reason of any direct or indirect
combination of the outstanding Common Stock prior to the
IPO Closing Date. The Executive agrees that the Company
may exchange for the Options nonqualified stock options
having the same terms and issued pursuant to the
Innovative Valve Technologies, Inc. 1997 Incentive Plan
(the
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<PAGE>
"1997 Incentive Plan"). If the Executive's Employment is
terminated under Section 8(a), (b) or (d) prior to the
fifth anniversary of the IPO Closing Date, the Options
will, notwithstanding any contrary provision of any
Incentive Plan or any award agreement evidencing the
Options thereunder, (i) become, to the extent not
already exercisable, exercisable in whole on the
termination date of the Executive's Employment and (ii)
remain exercisable at least until the date that is the
second anniversary of that termination date. If the
Executive's Employment is terminated under Section 8(e)
prior to the fifth anniversary of the IPO Closing Date,
the Options will, notwithstanding any contrary provision
of any Incentive Plan or any award agreement evidencing
the Options thereunder, (i) become, to the extent not
already exercisable, exercisable on each anniversary of
the IPO Closing Date, as provided above, and (ii) remain
exercisable (to the extent then and thereafter. If the
Executive's Employment is terminated under Section 8(c)
or (f), the Options, to the extent they are outstanding
and exercisable as of the time immediately prior to the
termination date of the Executive's Employment, will
remain outstanding and continue to be exercisable until
the date that is 10 days after that termination date (or
such later date, if any, as the Incentive Plan covering
the Options or any award agreement evidencing the
Options shall prescribe in the case of the termination
of the Executive's Employment under the circumstances
covered by Section 8(c) or (f), as the case may be).
(c) OTHER COMPENSATION. The Executive shall be entitled to
participate in all Compensation Plans from time to time
in effect while in the Employment of the Company,
regardless of whether the Executive is an Executive
Officer. All awards to the Executive under all Incentive
Plans shall take into account the Executive's positions
with and duties and responsibilities to the Company and
its subsidiaries and affiliates. Without limiting the
generality of the foregoing, the Executive shall be
eligible for an annual incentive award in accordance
with the Annual Incentive Plan (the "AIP") currently
being developed as a part of the 1997 Incentive Plan, or
such other plan as may be substituted for the AIP, and
subject to the approval of the Compensation Committee.
The actual target amount of the Executive's annual bonus
under the AIP is currently unknown, although the Company
and the Executive contemplate it will be 100% of the
Executive's annual salary under Section 6(a). The
Executive's rights to benefits at the termination of his
Employment under the Compensation Plans shall be
governed by the provisions of those plans.
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<PAGE>
(d) EXPENSES. The Executive shall be entitled to prompt
reimbursement of all reasonable business expenses
incurred by him in the performance of his duties during
the term of this Agreement, subject to the presenting of
appropriate vouchers and receipts in accordance with the
Company's policies.
7. OTHER BENEFITS.
(a) EMPLOYEE BENEFITS AND PROGRAMS. During the term of this
Agreement, the Executive and the members of his
immediate family shall be entitled to participate in any
employee benefit plans or programs of the Company to the
extent that his position, tenure, salary, age, health
and other qualifications make him or them, as the case
may be, eligible to participate, subject to the rules
and regulations applicable thereto.
(b) SUBSCRIPTIONS AND MEMBERSHIPS. The Company shall pay
periodical subscription costs and membership fees and
dues for the Executive to join professional
organizations appropriate for the CEO.
(c) LOANS TO PAY FEDERAL TAXES. The Company shall loan to
the Executive sufficient funds to pay all federal income
and Medicare tax liability ("Tax Liability") due by
reason of the issuance of the Award Shares to the
Executive (which liability is estimated to be 41.05% of
the "fair market value of the Award Shares," as defined
below). The fair market value of the Award Shares shall
be the fair market value of the Award Shares as of
January 27, 1997, as determined on or prior to April 10,
1997 by Hill Valuation Group, taking into account any
applicable discount for lack of marketability or
minority interest of such shares as of January 27, 1997.
Such loan shall be noninterest- bearing and shall be
evidenced by an unsecured promissory note (the "Tax
Note"). The Tax Note shall be prepayable at any time and
mature in full three years from the date any funds were
first advanced to the Executive under this Section 7(c).
If the Executive sells any Award Shares (or any
securities into which Award Shares have been converted)
for cash while the Tax Note remains outstanding and
unpaid, the Executive shall prepay the Tax Note within
five business days after the Executive receives the
proceeds from that sale in the amount equal to the
lesser of (i) the then unpaid balance of the Tax Note or
(ii) the cash proceeds, net of any applicable commission
and other sale expense and any applicable capital gain
or other income tax, the Executive receives from that
sale. The Tax Note shall be payable either in cash or,
in the event that on any date the Executive
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<PAGE>
makes any payment thereon the Common Stock is listed on
the New York Stock Exchange or another national
securities exchange or is quoted through the NASDAQ
National Market System (the "NMS") and the Executive
desires to pay such loan by delivery of shares of Common
Stock, in shares of Common Stock valued at the closing
price of the Common Stock on (i) the national securities
exchange on which the Common Stock is listed (or, if
there is more than one, the national securities exchange
the Company has designated as the principal market for
the Common Stock) or (ii) the NMS, as the case may be,
on the then most recent day on which the Common Stock
traded on such national securities exchange or the NMS,
as the case may be; provided, however, that in the event
the IPO is not completed, payment of the Tax Note may be
made by the Executive tendering all the Award Shares to
the Company in exchange for cancellation of the Tax
Note.
.
(d) VACATION. The Executive shall be entitled to four weeks
of vacation leave with full pay during each year of this
Agreement (each such year being a 12-month period ending
on May 15). The times for such vacations shall be
selected by the Executive, subject to the prior approval
of the Company. The Executive may accrue up to eight
weeks of vacation time from year to year, but vacation
time otherwise shall not accrue from year to year.
8. TERMINATION. The Executive's Employment hereunder may be
terminated prior to the term provided for in Section 3 only
under the following circumstances:
(a) DEATH. The Executive's Employment shall terminate
automatically on the date of his death.
(b) DISABILITY. If a Disability occurs and is continuing,
the Executive's Employment shall terminate 30 days after
the Company gives the Executive written notice that it
intends to terminate his Employment on account of that
Disability or on such later date as the Company
specifies in such notice. If the Executive resumes the
performance of substantially all his duties under this
Agreement before the termination becomes effective, the
notice of intent to terminate shall be deemed to have
been revoked.
(c) VOLUNTARY TERMINATION. The Executive may terminate his
Employment at any time and without Good Cause with 30
days' prior written notice to the Company.
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<PAGE>
(d) TERMINATION FOR GOOD CAUSE. The Executive may terminate
his Employment for Good Cause at any time within 180
days (730 days if the Good Cause is the occurrence of a
Change of Control) after the Executive becomes
consciously aware that the facts and circumstances
constituting that Good Cause exist and are continuing by
giving the Company 14 days' prior written notice that
the Executive intends to terminate his Employment for
Good Cause, which notice will identify that Good Cause;
provided, however, that if a Change of Control occurs,
the Executive shall not have Good Cause to terminate his
Employment solely by reason of the occurrence of that
event until 270 days after that occurrence.
(e) INVOLUNTARY TERMINATION. The Executive's Employment is
at will. The Company reserves the right to terminate the
Executive's Employment at anytime whatsoever, without
cause, with 14 days' prior written notice to the
Executive.
(f) INVOLUNTARY TERMINATION FOR CAUSE. The Company reserves
the right to terminate the Executive's Employment for
Cause. In the event that the Company determines that
Cause exists under Section 10(f)(i) for the termination
of the Executive's Employment, the Company shall provide
in writing (the "Notice of Cause") the basis for that
determination and the manner, if any, in which the
breach or neglect can be cured. If either the Company
has determined that the breach or neglect cannot be
cured, as set forth in the Notice of Cause, or has
advised the Executive in the Notice of Cause of the
manner in which the breach or neglect can be cured, but
the Executive fails to effect that cure within 30 days
after his receipt of the Notice of Cause, the Company
shall be entitled to give the Executive written notice
of his termination for Cause. In the event that the
Company determines that Cause exists under Section
10(f)(ii) for the termination of the Executive's
Employment, it shall be entitled to terminate the
Executive's Employment without providing a Notice of
Cause or any opportunity prior to that termination to
contest that determination. Any termination of the
Executive's Employment for Cause pursuant to this
Section 8(f) shall be effective immediately upon the
Executive's receipt of the Company's written notice of
that termination and the Cause therefor.
(g) TERMINATION FOR IPO FAILURE. If the IPO Closing Date
does not occur on or before December 31, 1997, the
Executive may terminate his Employment at any time
thereafter with 14 days' prior written notice to the
Company.
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<PAGE>
9. SEVERANCE PAYMENTS. If the Executive's Employment is
terminated during the term of this Agreement, the Executive
shall be entitled to receive severance payments as follows:
(a) If the Executive's Employment is terminated under
Section 8(a), (b), (d) or (e), the Company will pay or
cause to be paid to the Executive (or, in the case of a
termination under Section (a), the beneficiary the
Executive has designated in writing to the Company to
receive payment pursuant to this Section 9(a) or, in the
absence of such designation, the Executive's estate):
(i) the Accrued Salary;
(ii) the Other Earned Compensation;
(iii) the Reimbursable Expenses; and
(iv) the Severance Benefit.
(b) If the Executive's Employment is terminated under
Section 8(c) or (f), the Company will pay or cause to be
paid to the Executive:
(i) the Accrued Salary determined as of the
termination date of the Executive's Employment;
(ii) the Other Earned Compensation; and
(iii) the Reimbursable Expenses.
(c) Any payments to which the Executive (or his designated
beneficiary or estate, if Section 8(a) applies) is
entitled pursuant to paragraph (i) and (iv) of
subsection (a) of this Section 9 or paragraph (i) of
subsection (b) of this Section 9, as applicable, will be
paid in a single lump sum within five days after the
termination date of the Executive's Employment;
provided, however, that if Section 8(a) applies and the
Executive's designated beneficiary or estate is the
beneficiary of one or more insurance policies purchased
by the Company and then in effect the proceeds of which
are payable to that beneficiary by reason of the
Executive's death, then (i) the Company, at its option,
may credit the amount of those proceeds, as and when
paid by the insurer to that beneficiary, against the
payment to which the Executive's designated beneficiary
or estate is entitled pursuant to paragraph (iv) of
subsection (a) of this Section 9 and, if it exercises
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that option, (ii) the payment otherwise due pursuant to
that paragraph (iv) will bear interest on the
outstanding balance thereof from and including the fifth
day after that termination date to the date of payment
by the insurer to that beneficiary at the rate of
interest specified in Section 29; and provided, further,
that if Section 8(b) applies and the Executive is the
beneficiary of disability insurance purchased by the
Company and then in effect, the Company, at its option,
may credit the proceeds of that insurance which are
payable to the Executive, valued at their present value
as of that termination date using the interest rate
specified in Section 29 and then in effect as the
discount rate, against the payment to which the
Executive is entitled pursuant to paragraph (iv) of
subsection (a) of this Section 9. Any payments to which
the Executive (or his designated beneficiary or estate,
if Section 8(a) applies) is entitled pursuant to
paragraphs (ii) and (iii) of subsection (a) or (b) of
this Section 9, as applicable, will be paid in a single
lump sum within five days after the termination date of
the Executive's Employment or as soon thereafter as is
administratively feasible, together with interest
accrued thereon from and including the fifth date after
that termination date to the date of payment at the rate
of interest specified in Section 29.
(d) Except as provided in Sections 13 and 23 and this
Section, the Company will have no payment obligations
under this Agreement to the Executive (or his designated
beneficiary or estate, if Section 8(a) applies) after
the termination date of the Executive's Employment.
10. DEFINITION OF TERMS. The following terms used in this
Agreement when capitalized shall have the following meanings:
(a) ACCRUED SALARY. "Accrued Salary" shall mean the salary
that has accrued, and the salary that would accrue
through and including the last day of the pay period in
which the termination date of the Executive's Employment
occurs, under Section 6(a) which has not been paid to
the Executive as of that termination date.
(b) ACQUIRING PERSON. "Acquiring Person" shall mean any
person who or which, together with all Affiliates and
Associates of such person, is or are the Beneficial
Owner of 15% or more of the shares of Common Stock then
outstanding, but does not include any Exempt Person;
provided, however, that a person shall not be or become
an Acquiring Person if such person, together with its
Affiliates and Associates, shall become the Beneficial
Owner of 15% or more of the shares of Common Stock then
outstanding solely as a result of a
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<PAGE>
reduction in the number of shares of Common Stock
outstanding due to the repurchase of Common Stock by the
Company, unless and until such time as such person or
any Affiliate or Associate of such person shall purchase
or otherwise become the Beneficial Owner of additional
shares of Common Stock constituting 1% or more of the
then outstanding shares of Common Stock or any other
person (or persons) who is (or collectively are) the
Beneficial Owner of shares of Common Stock constituting
1% or more of the then outstanding shares of Common
Stock shall become an Affiliate or Associate of such
person, unless, in either such case, such person,
together with all Affiliates and Associates of such
person, is not then the Beneficial Owner of 15% or more
of the shares of Common Stock then outstanding.
(c) AFFILIATE. "Affiliate" has the meaning ascribed to that
term in Exchange Act Rule 12b-2.
(d) ASSOCIATE. "Associate" shall mean, with reference to any
person, (i) any corporation, firm, partnership,
association, unincorporated organization or other entity
(other than the Company or a subsidiary of the Company)
of which that person is an officer or general partner
(or officer or general partner of a general partner) or
is, directly or indirectly, the Beneficial Owner of 10%
or more of any class of its equity securities, (ii) any
trust or other estate in which that person has a
substantial beneficial interest or for or of which that
person serves as trustee or in a similar fiduciary
capacity and (iii) any relative or spouse of that
person, or any relative of that spouse, who has the same
home as that person.
(e) BENEFICIAL OWNER. A specified person shall be deemed the
"Beneficial Owner" of, and shall be deemed to
"beneficially own," any securities:
(i) of which that person or any of that person's
Affiliates or Associates, directly or indirectly,
is the "beneficial owner" (as determined pursuant
to Rule 13d-3 under the Securities Exchange Act of
1934, as amended (the "Exchange Act"), or
otherwise has the right to vote or dispose of,
including pursuant to any agreement, arrangement
or understanding (whether or not in writing);
provided, however, that a person shall not be
deemed the "Beneficial Owner" of, or to
"beneficially own," any security under this
subparagraph (i) as a result of an agreement,
arrangement or understanding to
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vote that security if that agreement, arrangement
or understanding: (A) arises solely from a
revocable proxy or consent given in response to a
public (that is, not including a solicitation
exempted by Exchange Act Rule 14a-2(b)(2)) proxy
or consent solicitation made pursuant to, and in
accordance with, the applicable provisions of the
Exchange Act; and (B) is not then reportable by
such person on Exchange Act Schedule 13D (or any
comparable or successor report);
(ii) which that person or any of that person's
Affiliates or Associates, directly or indirectly,
has the right or obligation to acquire (whether
that right or obligation is exercisable or
effective immediately or only after the passage of
time or the occurrence of an event) pursuant to
any agreement, arrangement or understanding
(whether or not in writing) or on the exercise of
conversion rights, exchange rights, other rights,
warrants or options, or otherwise; provided,
however, that a person shall not be deemed the
"Beneficial Owner" of, or to "beneficially own,"
securities tendered pursuant to a tender or
exchange offer made by that person or any of that
person's Affiliates or Associates until those
tendered securities are accepted for purchase or
exchange; or
(iii) which are beneficially owned, directly or
indirectly, by (A) any other person (or any
Affiliate or Associate thereof) with which the
specified person or any of the specified person's
Affiliates or Associates has any agreement,
arrangement or understanding (whether or not in
writing) for the purpose of acquiring, holding,
voting (except pursuant to a revocable proxy or
consent as described in the proviso to
subparagraph (i) of this definition) or disposing
of any voting securities of the Company or (B) any
group (as that term is used in Exchange Act Rule
13d-5(b)) of which that specified person is a
member;
provided, however, that nothing in this definition shall
cause a person engaged in business as an underwriter of
securities to be the "Beneficial Owner" of, or to
"beneficially own," any securities acquired through that
person's participation in good faith in a firm
commitment underwriting until the expiration of 40 days
after the date of that acquisition. For purposes of this
Agreement, "voting" a security shall include voting,
granting a proxy, acting by consent,
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<PAGE>
making a request or demand relating to corporate action
(including, without limitation, calling a stockholder
meeting) or otherwise giving an authorization (within
the meaning of Section 14(a) of the Exchange Act) in
respect of such security.
(f) CAUSE. "Cause" shall mean that the Executive has
(i) willfully breached or habitually neglected
(otherwise than by reason of injury or physical or
mental illness) the duties which he was required
to perform under the terms of this Agreement, or
(ii) committed act(s) of dishonesty, fraud or
misrepresentation or other act(s) of moral
turpitude that would prevent the effective
performance of his duties under this Agreement.
(g) CHANGE OF CONTROL. "Change of Control" shall mean the
occurrence of any of the following events that occurs
after the IPO Closing Date: (i) any person becomes an
Acquiring Person or (ii) a merger of the Company with or
into, or a sale by the Company of its properties and
assets substantially as an entirety to, another person
occurs and, immediately after that occurrence, any
person, other than an Exempt Person, together with all
Affiliates and Associates of such person, shall be the
Beneficial Owner of 15% or more of the total voting
power of the then outstanding Voting Shares of the
person surviving that transaction (in the case or a
merger or consolidation) or the person acquiring those
properties and assets substantially as an entirety.
(h) COMPANY. "Company" shall mean (i) The Safe Seal Company,
Inc., a Texas corporation, and (ii) any person that
assumes the obligations of "the Company" hereunder, by
operation of law, pursuant to Section 16 or otherwise.
(i) COMPENSATION PLAN. "Compensation Plan" shall mean any
compensation arrangement, plan, policy, practice or
program established, maintained or sponsored by the
Company or any subsidiary of the Company, or to which
the Company or any subsidiary of the Company
contributes, on behalf of any Executive Officer or any
member of the immediate family of any Executive Officer
by reason of his status as such, (i) including (A) any
"employee pension benefit plan" (as defined in Section
3(2) of the Employee Retirement Income Security Act of
1974, as amended
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<PAGE>
("ERISA")) or other "employee benefit plan" (as defined
in Section 3(3) of ERISA), (B) any other retirement or
savings plan, including any supplemental benefit
arrangement relating to any plan intended to be
qualified under Section 401(a) of the Internal Revenue
Code of 1986, as amended (the "Code"), or whose benefits
are limited by the Code or ERISA, (C) any "employee
welfare plan" (as defined in Section 3(1) of ERISA), (D)
any arrangement, plan, policy, practice or program
providing for severance pay, deferred compensation or
insurance benefit, (E) any Incentive Plan and (F) any
arrangement, plan, policy, practice or program (1)
authorizing and providing for the payment or
reimbursement of expenses attributable to air travel and
hotel occupancy while traveling on business for the
Company or (2) providing for the payment of business
luncheon and country club dues, long-distance charges,
mobile phone monthly air time or other recurring monthly
charges or any other fringe benefit, allowance or
accommodation of employment, but (ii) excluding any
compensation arrangement, plan, policy, practice or
program to the extent it provides for annual base
salary.
(j) DISABILITY. "Disability" shall mean that the Executive
has been unable to perform his essential duties under
this Agreement for a period of at least six consecutive
months as a result of his incapacity due to injury or
physical or mental illness.
(k) EMPLOYMENT. "Employment" shall mean the salaried
employment of the Employee by the Company or a
subsidiary of the Company hereunder.
(l) EXECUTIVE OFFICER. "Executive Officer" shall mean any of
the chairman of the board, the chief executive officer,
the chief operating officer, the chief financial
officer, the president, any executive, regional or other
group or senior vice president or any vice president of
the Company.
(m) EXEMPT PERSON. "Exempt Person" shall mean: (i)(A) the
Company, any subsidiary of the Company, any employee
benefit plan of the Company or any subsidiary of the
Company and (B) any person organized, appointed or
established by the Company for or pursuant to the terms
of any such plan or for the purpose of funding any such
plan or funding other employee benefits for employees of
the Company or any subsidiary of the Company; (ii) the
Executive, any Affiliate of the Executive which the
Executive controls or any group (as that term is used in
Exchange Act Rule 13d-5(b)) of which the
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Executive or any such Affiliate is a member; (iii)
Allwaste, Inc., a Delaware corporation and any Affiliate
(other than the Executive, if the Executive is an
Affiliate) of Allwaste, Inc. (collectively, "Allwaste");
and (iv) The Roger L. Miller Family Trust and any
beneficiary or trustee of The Roger L. Miller Family
Trust (collectively, the "Miller Trust"); provided,
however, that Allwaste or Miller Trust shall cease to be
an Exempt Person if at any time after the IPO Closing
Date (A) that person becomes the Beneficial Owner of
additional shares of Common Stock constituting 1% or
more of the then outstanding shares of Common Stock or
(B) any other person, other than the Executive, who is
the Beneficial Owner of at least 1% of the then
outstanding shares of Common Stock shall become an
Affiliate of that person.
(n) GOOD CAUSE. "Good Cause" for the Employee's termination
of his Employment shall mean: (i) any decrease in the
annual base salary under Section 6(a) or any other
violation hereof in any material respect by the Company;
(ii) any material reduction in the Executive's
compensation under Section 6; (iii) the assignment to
the Employee of duties inconsistent in any material
respect with the Employee's then current positions
(including status, offices, titles and reporting
requirements), authority, duties or responsibilities or
any other action by the Company which results in a
material diminution in those positions, authority,
duties or responsibilities; (iv) the occurrence of a
Change of Control; (v) the occurrence of the Abandonment
Date; (vi) the IPO Closing Date continues not to have
occurred past December 31, 1997 and Innovative Valve
Technologies, Inc. ("Invatec") has not filed a
registration statement relating to the IPO (the
"Registration Statement") under the Securities Act of
1933, as amended (the "Securities Act"), on or before
December 31, 1997; or (vii) Invatec has filed the
Registration Statement under the Securities Act on or
before December 31, 1997 and the IPO Closing Date
continues not to have occurred past May 31, 1998. As
used herein, "Abandonment Date" shall mean the first to
occur of (i) the "Abandonment Date" (as defined in the
Modification and Settlement Agreement dated as of May 9,
1997 by and among the Company, Allwaste, Inc., Allwaste
Environmental Services, Inc., Roger L. Miller and the
other parties thereto, (ii) the date Invatec withdraws
the Registration Statement pursuant to Rule 477 under
the Securities Act or (iii) the date the Registration
Statement is abandoned pursuant to Rule 479 under the
Securities Act.
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<PAGE>
(o) INCENTIVE PLAN. "Incentive Plan" shall mean any
compensation arrangement, plan, policy, practice or
program established, maintained or sponsored by the
Company or any subsidiary of the Company, or to which
the Company or any subsidiary of the Company
contributes, on behalf of any Executive Officer and
which provides for incentive, bonus or other
performance-based awards of cash, securities, the
phantom equivalent of securities or other property,
including any stock option, stock appreciation right and
restricted stock plan, but excluding any plan intended
to qualify as a plan under any one or more of Sections
401(a), 401(k) or 423 of the Code.
(p) IPO. "IPO" shall mean the first time a registration
statement filed under the Securities Act and respecting
an underwritten primary offering by Invatec of shares of
its common stock (the "IVT Common Stock") is declared
effective under that act and the shares registered by
that registration statement are issued and sold by
Invatec (otherwise than pursuant to the exercise of any
over-allotment option).
(q) IPO CLOSING DATE. "IPO Closing Date" shall mean the date
on which Invatec first receives payment for the shares
of IVT Common Stock it sells in the IPO.
(r) IPO PRICE. "IPO Price" shall mean the price per share at
which the IVT Common Stock is initially offered to the
public in the IPO.
(s) OTHER EARNED COMPENSATION. "Other Earned Compensation"
shall mean all the compensation earned by the Executive
prior to the termination date of his Employment as a
result of his Employment (including compensation the
payment of which has been deferred by the Executive, but
excluding Accrued Salary and compensation to be paid to
the Executive in accordance with the terms of any
Compensation Plan), together with all accrued interest
or earnings, if any, thereon, which has not been paid to
the Executive as of that date.
(t) REIMBURSABLE EXPENSES. "Reimbursable Expenses" shall
mean the expenses incurred by the Executive on or prior
to the termination date of his Employment which are to
be reimbursed to the Executive under Section 6(c) and
which have not been reimbursed to the Executive as of
that date.
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<PAGE>
(u) SEVERANCE BENEFIT. "Severance Benefit" shall mean the
sum of: (i) the amount equal to the product of (A) the
Applicable Monthly Salary Rate multiplied by (B) 36; and
(ii) the amount equal to the product of (A) 3 multiplied
by (B) (1) the greater of (a) the target amount of all
incentive awards or payments that would have been owing
to the Executive for the Company's fiscal year in which
the termination date of the Executive's Employment
occurs were the Executive's Employment to have continued
to the end of that fiscal year, regardless of the level
of attainment of the performance objectives for that
fiscal year, or (b) the amount of the highest aggregate
amount of all incentive awards and payments made to the
Executive for any fiscal year of the Company prior to
that fiscal year or, if the Executive's Employment is
terminated prior to the payment of any incentive payment
or award to the Executive for his services hereunder
during the Company's fiscal year ended December 31,
1997, (2) $200,000; provided, however, if the Executive
terminates his Employment for the Good Cause specified
in clause (v) of the definition thereof after December
31, 1997 and prior to the IPO Closing Date, the
Severance Benefit shall be $400,000. As used herein,
"Applicable Monthly Salary Rate" shall mean 1/12th of
the higher of (i) the annual salary rate in effect under
Section 6(a) immediately prior to the termination date
of the Executive's Employment and (ii) the highest
annual salary rate theretofore in effect under Section
6(a) for any period.
11. NON-COMPETITION CLAUSE. In addition to his obligations as an
executive and whether or not he remains an executive of the Company,
the Executive agrees that during the period commencing with the
Effective Date and ending upon the second anniversary of the
termination date of his Employment following termination of his
Employment under any of Section 8(b), (c), (e) or (f), he will not,
without the prior written consent of the Company, engage, directly
or indirectly, in any business that sells any industrial valves or
performs any industrial-valve services in competition with the
Company or any subsidiary of the Company in any area within any
"Territory" surrounding any service facility of the Company or any
subsidiary of the Company (determined as of that termination date).
For purposes of this Section 11, the "Territory" surrounding any
service facility will be: (i) the city, town or village in which
that service facility is located; (ii) the county or parish in which
that service facility is located; (iii) the counties or parishes
contiguous to the county or parish in which that service facility is
located; (iv) the area located within 50 miles of that service
facility; (v) the area located within 100 miles of that service
area; and (vi) the area in which that service facility regularly
provides services at the locations of its customers.
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<PAGE>
12. REGISTRATION RIGHTS; LEGEND.
(a) As used in this Section 12, the term "Registrable Stock" shall
mean the Award Shares and the shares of Common Stock issuable
on the exercise of the Options (the "Option Shares").
(b) As soon as is practicable following the IPO Closing Date, the
Company will file a registration statement on Form S-8 under
the Securities Act to register the Option Shares (which
registration statement may be the registration statement that
registers all the shares of Common Stock reserved or to be
available for issuance pursuant to the 1997 Incentive Plan).
(c) Prior to July 15, 1997, the Company will execute and deliver
to the Executive a registration rights agreement in
substantially the form delivered to the Executive.
(d) The Executive represents that the Registrable Stock and the
Options are being acquired for investment only and not with a
view toward the resale or distribution thereof. The Executive
is willing and able to bear the economic risk of an investment
in the Registrable Stock, has no need for liquidity with
respect thereto and is able to sustain a complete loss of his
investment. The Executive agrees and understands that the
shares of Registrable Stock are restricted securities as
defined in Rule 144 promulgated under the Securities Act and
may not be sold, assigned or transferred except in a
registered offering under the Securities Act and applicable
blue sky laws, or pursuant to an exemption therefrom. The
following legend shall be set forth on each certificate
representing the Award Shares:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, NOR
THE SECURITIES LAWS OF ANY STATE. SUCH SECURITIES CANNOT BE
OFFERED, SOLD, PLEDGED, HYPOTHECATED OR OTHERWISE TRANSFERRED
EXCEPT UPON (1) SUCH REGISTRATION, OR (2) DELIVERY TO THE
ISSUER OF THESE SECURITIES OF AN OPINION OF COUNSEL,
REASONABLY ACCEPTABLE TO THE ISSUER, THAT REGISTRATION IS NOT
REQUIRED FOR SUCH TRANSFER OR (3) SUBMISSION TO THE ISSUER OF
THESE SECURITIES OF OTHER EVIDENCE, REASONABLY ACCEPTABLE TO
THE ISSUER, TO THE EFFECT THAT ANY SUCH SALE, PLEDGE,
HYPOTHECATION OR TRANSFER SHALL NOT BE IN VIOLATION OF THE
SECURITIES ACT OF 1933, AS AMENDED, APPLICABLE STATE
SECURITIES LAWS OR ANY RULES OR REGULATIONS PROMULGATED
THEREUNDER."
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<PAGE>
13. TAX INDEMNITY. Should any of the payments of salary, other incentive
or supplemental compensation, benefits, allowances, awards,
payments, reimbursements or other perquisites, or any other payment
in the nature of compensation, singly, in any combination or in the
aggregate, that are provided for hereunder to be paid to or for the
benefit of the Executive be determined or alleged to be subject to
an excise or similar purpose tax pursuant to Section 4999 of the
Code, or any successor or other comparable federal, state or local
tax law by reason of being a "parachute payment" (within the meaning
of Section 280G of the Code), the Company shall pay to the Executive
such additional compensation as is necessary (after taking into
account all federal, state and local taxes payable by the Executive
as a result of the receipt of such additional compensation) to place
the Executive in the same after-tax position (including federal,
state and local taxes) he would have been in had no such excise or
similar purpose tax (or interest or penalties thereon) been paid or
incurred. The Company hereby agrees to pay such additional
compensation within the earlier to occur of (i) five business days
after the Executive notifies the Company that the Executive intends
to file a tax return taking the position that such excise or similar
purpose tax is due and payable in reliance on a written opinion of
the Executive's tax counsel (such tax counsel to be chosen solely by
the Executive) that it is more likely than not that such excise tax
is due and payable or (ii) 24 hours of any notice of or action by
the Company that it intends to take the position that such excise
tax is due and payable. The costs of obtaining the tax counsel
opinion referred to in clause (i) of the preceding sentence shall be
borne by the Company, and as long as such tax counsel was chosen by
the Executive in good faith, the conclusions reached in such opinion
shall not be challenged or disputed by the Company. If the Executive
intends to make any payment with respect to any such excise or
similar purpose tax as a result of an adjustment to the Executive's
tax liability by any federal, state or local tax authority, the
Company will pay such additional compensation by delivering its
cashier's check payable in such amount to the Executive within five
business days after the Executive notifies the Company of his
intention to make such payment. Without limiting the obligation of
the Company hereunder, the Executive agrees, in the event the
Executive makes any payment pursuant to the preceding sentence, to
negotiate with the Company in good faith with respect to procedures
reasonably requested by the Company which would afford the Company
the ability to contest the imposition of such excise or similar
purpose tax; provided, however, that the Executive will not be
required to afford the Company any right to contest the
applicability of any such excise or similar purpose tax to the
extent that the Executive reasonably determines (based upon the
opinion of his tax counsel) that such contest is inconsistent with
the overall tax interests of the Executive.
14. LOCATIONS OF PERFORMANCE. The Executive's services shall be
performed primarily in the vicinity of Houston, Texas. The parties
acknowledge, however, that the Executive may be required to travel
in connection with the performance of his duties hereunder.
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<PAGE>
15. PROPRIETARY INFORMATION.
(a) The Executive agrees to comply fully with the Company's
policies relating to non-disclosure of the Company's trade
secrets and proprietary information and processes. Without
limiting the generality of the foregoing, the Executive will
not, during the term of his Employment, disclose any such
secrets, information or processes to any person, firm,
corporation, association or other entity for any reason or
purpose whatsoever except as may be required by law or
governmental agency or legal process, nor shall the Executive
make use of any such property for his own purposes or for the
benefit of any person, firm, corporation or other entity
(except the Company or any of its subsidiaries) under any
circumstances during or after the term of his Employment,
provided that after the term of his Employment this provision
shall not apply to secrets, information and processes that are
then in the public domain (provided that the Executive was not
responsible, directly or indirectly, for such secrets,
information or processes entering the public domain without
the Company's consent).
(b) The Executive hereby sells, transfers and assigns to the
Company all the entire right, title and interest of the
Executive in and to all inventions, ideas, disclosures and
improvements, whether patented or unpatented, and
copyrightable material, to the extent (i) made or conceived by
the Executive solely or jointly with others during the term of
this Agreement and (ii) relating to or used or useful in the
design, manufacture, assembly, operation, maintenance, repair,
reconditioning or remanufacturing of batch or continuous
process systems or units and their component parts and related
equipment and tools, including, without limitation, industrial
valves and their component parts and packing materials and
other process system components (collectively "Valve
Technology"). The Executive shall communicate promptly and
disclose to the Company, in such form as the Company requests,
all information, details and data pertaining to the
aforementioned Valve Technology; and, whether during the term
hereof or thereafter, the Executive shall execute and deliver
to the Company such formal transfers and assignments and such
other papers and documents as may be required of the Executive
to permit the Company to file and prosecute any patent
applications relating to such Valve Technology and, as to
copyrightable material, to obtain copyright thereon.
(c) Trade secrets, proprietary information and processes shall not
be deemed to include information which is:
(i) known to the Executive at the time it is disclosed to
him;
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<PAGE>
(ii) publicly known (or becomes publicly known) without the
fault or negligence of Executive;
(iii) received from a third party without restriction and
without breach of this Agreement;
(iv) approved for release by written authorization of the
Company; or
(v) required to be disclosed by law or legal process;
provided, however, that in the event of a proposed
disclosure pursuant to this subsection (c)(v), the
Executive shall give the Company prior written notice
before such disclosure is made.
16. ASSIGNMENT. This Agreement may not be assigned by any party hereto;
provided that the Company may assign this Agreement, in connection
with a merger or consolidation involving the Company or a sale of
its business, properties and assets substantially as an entirety to
the surviving corporation or purchaser as the case may be, so long
as such assignee assumes the Company's obligations hereunder. The
Company shall require any successor (direct or indirect (including,
without limitation, by becoming the sole stockholder of the Company)
and whether by purchase, merger, consolidation, share exchange or
otherwise) to the business, properties and assets of the Company
substantially as an entirety expressly to assume and agree to
perform this Agreement in the same manner and to the same extent the
Company would have been required to perform it had no such
succession taken place. This Agreement shall be binding upon all
successors and assigns.
17. NOTICES. Any notice required or permitted to be given under this
Agreement shall be sufficient if in writing and sent by registered
mail to the Executive at his residence maintained on the Company's
records, or to the Company at its address at 14900 Woodham Drive,
Suite A-125, Houston, Texas, 77073, Attention: Corporate Secretary,
or such other addresses as either party shall notify the other in
accordance
with the above procedure.
18. FORCE MAJEURE. Neither party shall be liable to the other for any
delay or failure to perform hereunder, which delay or failure is due
to causes beyond the control of said party, including, but not
limited to: acts of God; acts of the public enemy; acts of the
United States of America or any state, territory or political
subdivision thereof or of the District of Columbia; fires; floods;
epidemics; quarantine restrictions; strikes; or freight embargoes;
provided, however, that this Section 18 will not relieve the Company
of any of its payment obligations to the Executive under this
Agreement. Notwithstanding the foregoing provisions of this Section
18, in every case the delay or failure to perform must be beyond the
control and without the fault or negligence of the party claiming
excusable delay.
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<PAGE>
19. INTEGRATION. This Agreement represents the entire agreement and
understanding between the parties as to the subject matter hereof
and supersedes all prior or contemporaneous agreements whether
written or oral. No waiver, alteration or modification of any of the
provisions of this Agreement shall be binding unless in writing and
signed by duly authorized representatives of the parties hereto.
20. WAIVER. Failure or delay on the part of either party hereto to
enforce any right, power or privilege hereunder shall not be deemed
to constitute a waiver thereof. Additionally, a waiver by either
party of a breach of any promise herein by the other party shall not
operate as or be construed to constitute a waiver of any subsequent
breach by such other party.
21. SAVINGS CLAUSE. If any term, covenant or condition of this Agreement
or the application thereof to any person or circumstance shall to
any extent be invalid or unenforceable, the remainder of this
Agreement, or the application of such term, covenant or condition to
persons or circumstances other than those as to which it is held
invalid or unenforceable shall not be affected thereby, and each
term, covenant or condition of this Agreement shall be valid and
enforced to the fullest extent permitted by law.
22. AUTHORITY TO CONTRACT. The Company warrants and represents to the
Executive that the Company has full authority to enter into this
Agreement and to consummate the transactions contemplated hereby and
that this Agreement is not in conflict with any other agreement to
which the Company is a party or by which it may be bound. The
Company further warrants and represents to the Executive that the
individual executing this Agreement on behalf of the Company has the
full power and authority to bind the Company to the terms hereof and
has been authorized to do so in accordance with the Company's
articles or certificate of incorporation and bylaws.
23. PAYMENT OF EXPENSES. If at any time during the term hereof or
afterwards: (a) there should exist a dispute or conflict between the
Executive and the Company or another Person as to the validity,
interpretation or application of any term or condition hereof, or as
to the Executive's entitlement to any benefit intended to be
bestowed hereby, which is not resolved to the satisfaction of the
Executive, (b) the Executive must (i) defend the validity of this
Agreement or (ii) contest any determination by the Company
concerning the amounts payable (or reimbursable) by the Company to
the Executive or (c) the Executive must prepare responses to an
Internal Revenue Service ("IRS") audit of, or otherwise defend, his
personal income tax return for any year the subject of any such
audit, or an adverse determination, administrative proceedings or
civil litigation arising therefrom, which is occasioned by or
related to an audit by the IRS of the Company's income tax returns,
then the Company hereby unconditionally agrees: (a) on written
demand of the Company by the Executive, to provide sums sufficient
to advance and pay on a current basis (either by paying
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directly or by reimbursing the Executive) not less than 30 days
after a written request therefor is submitted by the Executive, the
Executive's out of pocket costs and expenses (including attorney's
fees, expenses of investigation, travel, lodging, copying, delivery
services and disbursements for the fees and expenses of experts,
etc.) incurred by the Executive in connection with any such matter;
(b) the Executive shall be entitled, upon application to any court
of competent jurisdiction, to the entry of a mandatory injunction
without the necessity of posting any bond with respect thereto which
compels the Company to pay or advance such costs and expenses on a
current basis; and (c) the Company's obligations under this Section
23 will not be affected if the Executive is not the prevailing party
in the final resolution of any such matter unless it is determined
pursuant to Section 25 that, in the case of one or more of such
matters, the Executive has acted in bad faith or without a
reasonable basis for his position, in which event and, then only
with respect to such matter or matters, the successful or prevailing
party or parties shall be entitled to recover from the Executive
reasonable attorneys' fees and other costs incurred in connection
with that matter or matters (including the amounts paid by the
Company in respect of that matter or matters pursuant to this
Section 23), in addition to any other relief to which it or they may
be entitled.
24. REMEDIES. In the event of a breach by the Executive of Section 11 or
15 of this Agreement, in addition to other remedies provided by
applicable law, the Company will be entitled to issuance of a
temporary restraining order or preliminary injection enforcing its
rights under such Section.
25. ARBITRATION. Any and all disputes or controversies whether of law or
fact and of any nature whatsoever arising from or respecting this
Agreement shall be decided by arbitration by the American
Arbitration Association in accordance with its Commercial Rules,
except as modified herein.
(a) The arbitrator shall be selected as follows: in the event the
Company and the Executive agree on one arbitrator, the
arbitration shall be conducted by such arbitrator. In the
event the Company and the Executive do not so agree, the
Company and the Executive shall each select one independent,
qualified arbitrator, and the two arbitrators so selected
shall select the third arbitrator. The arbitrator(s) are
herein referred to as the "Panel." The Company reserves the
right to object to any individual arbitrator who shall be
employed by or affiliated with a competing organization.
(b) Arbitration shall take place at Houston, Texas, or any other
location mutually agreeable to the parties. At the request of
either party, arbitration proceedings will be conducted in the
utmost secrecy; in such case all documents, testimony and
records shall be received, heard and maintained by the Panel
in secrecy, available for inspection only by the Company or
the
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Executive and their respective attorneys and their respective
experts, who shall agree in advance and in writing to receive
all such information confidentially and to maintain such
information in secrecy until such information shall become
generally known. The Panel shall be able to award any and all
relief, including relief of an equitable nature. The award
rendered by the Panel may be enforceable in any court having
jurisdiction thereof.
(c) Reasonable notice of the time and place of arbitration shall
be given to all parties and any interested persons as shall be
required by law.
(d) The Company will pay all the fees and out-of-pocket expenses
of each arbitrator selected pursuant to this Section 25.
26. GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of Texas without regard to its
conflicts of law principles.
27. COUNTERPARTS. This Agreement may be executed in counterparts, each
of which shall be deemed an original, but all of which together
shall constitute one and the same instrument.
28. INDEMNIFICATION. The Executive shall be indemnified by the Company
to the maximum permitted by the law of the state of the Company's
incorporation, and by the law of the state of incorporation of any
subsidiary of the Company of which the Executive is a director or an
officer or employee, as the same may be in effect from time to time.
29. INTEREST. If any amounts required to be paid or reimbursed to the
Executive hereunder are not so paid or reimbursed at the times
provided herein (including amounts required to be paid by the
Company pursuant to Sections 6, 13 and 23), those amounts shall
accrue interest compounded daily at the annual percentage rate which
is three percentage points above the interest rate shown as the
Prime Rate in the Money Rates column in the then most recently
published edition of THE WALL STREET JOURNAL (Southwest Edition),
or, if such rate is not then so published, on at least a weekly
basis, the interest rate announced by Chase Manhattan Bank (or its
successor), from time to time, as its Base Rate (or prime lending
rate), from the date those amounts were required to have been paid
or reimbursed to the Executive until those amounts are finally and
fully paid or reimbursed; provided, however, that in no event shall
the amount of interest contracted for, charged or received hereunder
exceed the maximum non-usurious amount of interest allowed by
applicable law.
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IN WITNESS WHEREOF, the parties hereto have executed this Agreement
as of the date hereinabove first written.
THE SAFE SEAL COMPANY, INC.
By: /S/ CHARLES F. SCHUGART
Charles F. Schugart
Senior Vice President
EXECUTIVE:
/S/ WILLIAM E. HAYNES
William E. Haynes
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EXHIBIT 10.3
Charles F. Schugart
EMPLOYMENT AGREEMENT
This Employment Agreement (the "Agreement") is entered into as of
January 27, 1997 (the "Effective Date"), by and between The Safe Seal Company,
Inc., a Texas corporation, and Charles F. Schugart (the "Executive").
RECITAL:
WHEREAS, the Company desires to employ the Executive, and the
Executive agrees to work in the employ of the Company, and
WHEREAS, the parties hereto desire to set forth the terms of
Executive's Employment with the Company,
NOW, THEREFORE, the parties hereto agree as follows:
1. EMPLOYMENT. The Company hereby employs the Executive, and the
Executive hereby accepts Employment, on the terms and
conditions herein set forth.
2. DUTIES. (a) The Company will employ the Executive as Senior
Vice President and Chief Financial Officer ("CFO") of the
Company, (b) the Executive will serve in the Company's employ
in that position and (c) under the direction of the Board of
Directors of the Company (the "Board") or the Chief Executive
Officer of the Company (the "CEO"), the Executive shall
perform such duties, and have such powers, authority,
functions, duties and responsibilities for the Company and
corporations and other entities affiliated with the Company as
are commensurate and consistent with his employment in the
position of CFO. The Executive also shall have such additional
powers, authority, functions, duties and responsibilities as
may be assigned to him by the Board or the CEO; provided that,
without the Executive's written consent, those additional
powers, authority, functions, duties and responsibilities
shall not be inconsistent or interfere with, or detract from,
those herein vested in, or otherwise then being performed for
the Company by, the Executive. In the event of an increase in
the Executive's duties, the CEO shall review the Executive's
compensation and benefits to determine if an adjustment in
compensation and employee benefits commensurate with the
Executive's new duties is warranted, in accordance with the
Company's compensation policies and subject to approval by the
Compensation Committee of the Board (the "Compensation
Committee").
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<PAGE>
3. TERM OF EMPLOYMENT. Subject to the provisions of Section 8,
the term of the Executive's Employment hereunder shall
commence on February 3, 1997, for a continually renewing term
of two years commencing on that date and renewing each day
thereafter for an additional day without any further action by
either the Company or the Executive, it being the intention of
the parties that there shall be continuously a remaining term
of two years' duration of the Executive's Employment until an
event has occurred as described in, or one of the parties
shall have made an appropriate election pursuant to, the
provisions of Section 8. When the termination date of the
Executive's Employment shall have occurred and the Company
shall have paid to the Executive all the applicable amounts
that Section 9 provides the Company shall pay as a result of
the termination of the Executive's Employment, this Agreement
will terminate and have no further force or effect, except
that Sections 15 through 29 shall survive that termination
indefinitely and Section 11 shall survive for the period of
time provided for therein.
4. EXTENT OF SERVICES. The Executive shall not at any time during
his Employment engage in any other activities unless those
activities do not interfere materially with the Executive's
duties and responsibilities to the Company at that time. The
foregoing, however, shall not preclude the Executive from
engaging in appropriate civic, charitable, professional or
trade association activities or from serving on one or more
boards of directors of public companies, as long as such
activities and services do not conflict with his
responsibilities to the Company. In addition, it is realized
that the Executive has school aged children and from time to
time the Executive will attend activities in which the
children participate.
5. NO FORCED RELOCATION. The Executive shall not be required to
move his principal place of residence from the Houston, Texas
area or to perform regular duties that could reasonably be
expected to require either such move against his wish or to
spend amounts of time each week outside the Houston, Texas
area which are unreasonable in relation to the duties and
responsibilities of the Executive hereunder, and the Company
agrees that, if it requests the Executive to make such a move
and the Executive declines that request, (a) that declination
shall not constitute any basis for a termination of the
Executive's Employment and (b) no animosity or prejudice will
be held against Executive.
6. COMPENSATION.
(a) SALARY. An annual base salary shall be payable to the
Executive by the Company as a guaranteed minimum amount
under this Agreement for each calendar year during the
period from the Effective Date to
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the termination date of the Executive's Employment. That
annual base salary shall (i) accrue daily on the basis
of a 365-day year, (ii) be payable to the Executive in
the intervals consistent with the Company's normal
payroll schedules (but in no event less frequently than
semi-monthly) and (iii) be payable at an initial annual
rate of $150,000. The Executive's annual base salary
shall not be decreased, but shall be adjusted annually
in each December to reflect such adjustments, if any, as
the CEO determines appropriate based on the Executive's
performance during the most recent performance period,
in accordance with the Company's compensation policies
and subject to the approval of the Compensation
Committee. A failure of the Company to increase the
Executive's annual base salary would not constitute a
breach or violation of this Agreement by the Company.
(b) HIRING BONUS, STOCK AWARD AND STOCK OPTIONS. The Company
shall pay the Executive as of the Effective Date a
hiring bonus of $50,000. The Company shall pay the
Executive as of the Effective Date a stock award (the
"Stock Award") consisting of 50,000 shares (the "Award
Shares") of the Company's authorized and unissued common
stock (the "Common Stock"). The Company shall also grant
to the Executive effective as of the Effective Date (i)
a nonqualified stock option to purchase 50,000 shares of
Common Stock from the Company at an exercise price per
share equal to the IPO Price and (ii) a nonqualified
option to purchase 50,000 shares of Common Stock from
the Company at an exercise price per share equal to the
lesser of (A) $9.00 and (B) the IPO Price (each option
being an "Option"). The term of each Option shall be
seven years from the IPO Closing Date. Each Option will
become exercisable with respect to 25% of the shares of
Common Stock covered thereby on each of the IPO Closing
Date and the first three anniversaries of the IPO
Closing Date, subject to acceleration as provided in
this Section 6(b). Neither the number of shares of
Common Stock subject to, nor the exercise price
established by, either Option will be subject to any
adjustment by reason of any direct or indirect
combination of the outstanding Common Stock prior to the
IPO Closing Date. The Executive agrees that the Company
may exchange for the Options nonqualified stock options
having the same terms and issued pursuant to the
Innovative Valve Technologies, Inc. 1997 Incentive Plan
(the "1997 Incentive Plan"). If the Executive's
Employment is terminated under Section 8(a), (b) or (d)
prior to the fifth anniversary of the IPO Closing Date,
the Options will, notwithstanding any contrary provision
of any Incentive Plan or any award agreement evidencing
the Options thereunder, (i) become, to the extent not
already
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exercisable, exercisable in whole on the termination
date of the Executive's Employment and (ii) remain
exercisable at least until the date that is the second
anniversary of that termination date. If the Executive's
Employment is terminated under Section 8(e) prior to the
fifth anniversary of the IPO Closing Date, the Options
will, notwithstanding any contrary provision of any
Incentive Plan or any award agreement evidencing the
Options thereunder, (i) become, to the extent not
already exercisable, exercisable on each anniversary of
the IPO Closing Date, as provided above, and (ii) remain
exercisable (to the extent then and thereafter
exercisable) at least until the date that is the seventh
anniversary of the IPO Closing Date. If the Executive's
Employment is terminated under Section 8(c) or (f), the
Options, to the extent they are outstanding and
exercisable as of the time immediately prior to the
termination date of the Executive's Employment, will
remain outstanding and continue to be exercisable until
the date that is 10 days after that termination date (or
such later date, if any, as the Incentive Plan covering
the Options or any award agreement evidencing the
Options shall prescribe in the case of the termination
of the Executive's Employment under the circumstances
covered by Section 8(c) or (f), as the case may be).
(c) OTHER COMPENSATION. The Executive shall be entitled to
participate in all Compensation Plans from time to time
in effect while in the Employment of the Company,
regardless of whether the Executive is an Executive
Officer. All awards to the Executive under all Incentive
Plans shall take into account the Executive's positions
with and duties and responsibilities to the Company and
its subsidiaries and affiliates.
Without limiting the generality of the foregoing, the
Executive shall be eligible for an annual incentive
award in accordance with the Annual Incentive Plan (the
"AIP") currently being developed as a part of the 1997
Incentive Plan, or such other plan as may be substituted
for the AIP, and subject to the approval of the
Compensation Committee. The actual target amount of the
Executive's annual bonus under the AIP is currently
unknown, although the Company and the Executive
contemplate it will be 70% of the Executive's annual
salary under Section 6(a). The Executive's rights to
benefits at the termination of his Employment under the
Compensation Plans shall be governed by the provisions
of those plans.
(d) EXPENSES. The Executive shall be entitled to prompt
reimbursement of all reasonable business expenses
incurred by him in the performance of his duties during
the term of this Agreement, subject
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to the presenting of appropriate vouchers and receipts
in accordance with the Company's policies.
7. OTHER BENEFITS.
(a) EMPLOYEE BENEFITS AND PROGRAMS. During the term of this
Agreement, the Executive and the members of his
immediate family shall be entitled to participate in any
employee benefit plans or programs of the Company to the
extent that his position, tenure, salary, age, health
and other qualifications make him or them, as the case
may be, eligible to participate, subject to the rules
and regulations applicable thereto.
(b) MEMBERSHIPS. The Company shall pay membership fees for
the Executive to join professional organizations
mutually agreed to by the Executive and the CEO and
shall pay for licenses and fees required for maintaining
financial credentials as required to perform the duties
of CFO.
(c) LOANS TO PAY FEDERAL TAXES. The Company shall loan to
the Executive sufficient funds to pay all federal income
and Medicare tax liability ("Tax Liability") due by
reason of the issuance of the Award Shares to the
Executive (which liability is estimated to be 41.05% of
the "fair market value of the Award Shares," as defined
below). The fair market value of the Award Shares shall
be the fair market value of the Award Shares as of
January 27, 1997, as determined on or prior to April 10,
1997 by Hill Valuation Group, taking into account any
applicable discount for lack of marketability or
minority interest of such shares as of January 27, 1997.
Such loan shall be noninterest- bearing and shall be
evidenced by an unsecured promissory note (the "Tax
Note"). The Tax Note shall be prepayable at any time and
mature in full three years from the date any funds were
first advanced to the Executive under this Section 7(c).
If the Executive sells any Award Shares (or any
securities into which Award Shares have been converted)
for cash while the Tax Note remains outstanding and
unpaid, the Executive shall prepay the Tax Note within
five business days after the Executive receives the
proceeds from that sale in the amount equal to the
lesser of (i) the then unpaid balance of the Tax Note or
(ii) the cash proceeds, net of any applicable commission
and other sale expense and any applicable capital gain
or other income tax, the Executive receives from that
sale. The Tax Note shall be payable either in cash or,
in the event that on any date the Executive makes any
payment thereon the Common Stock is listed on the New
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York Stock Exchange or another national securities
exchange or is quoted through the NASDAQ National Market
System (the "NMS") and the Executive desires to pay such
loan by delivery of shares of Common Stock, in shares of
Common Stock valued at the closing price of the Common
Stock on (i) the national securities exchange on which
the Common Stock is listed (or, if there is more than
one, the national securities exchange the Company has
designated as the principal market for the Common Stock)
or (ii) the NMS, as the case may be, on the then most
recent day on which the Common Stock traded on such
national securities exchange or the NMS, as the case may
be; provided, however, that in the event the IPO is not
completed, payment of the Tax Note may be made by the
Executive tendering all the Award Shares to the Company
in exchange for cancellation of the Tax Note.
.
(d) VACATION. The Executive shall be entitled to four weeks
of vacation leave with full pay during each year of this
Agreement (each such year being a 12-month period ending
on February 3). The times for such vacations shall be
selected by the Executive, subject to the prior approval
of the Company. The Executive may accrue up to eight
weeks of vacation time from year to year, but vacation
time otherwise shall not accrue from year to year.
8. TERMINATION. The Executive's Employment hereunder may be
terminated prior to the term provided for in Section 3 only
under the following circumstances:
(a) DEATH. The Executive's Employment shall terminate
automatically on the date of his death.
(b) DISABILITY. If a Disability occurs and is continuing,
the Executive's Employment shall terminate 30 days after
the Company gives the Executive written notice that it
intends to terminate his Employment on account of that
Disability or on such later date as the Company
specifies in such notice. If the Executive resumes the
performance of substantially all his duties under this
Agreement before the termination becomes effective, the
notice of intent to terminate shall be deemed to have
been revoked.
(c) VOLUNTARY TERMINATION. The Executive may terminate his
Employment at any time and without Good Cause with 30
days' prior written notice to the Company.
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(d) TERMINATION FOR GOOD CAUSE. The Executive may terminate
his Employment for Good Cause at any time within 180
days (730 days if the Good Cause is the occurrence of a
Change of Control) after the Executive becomes
consciously aware that the facts and circumstances
constituting that Good Cause exist and are continuing by
giving the Company 14 days' prior written notice that
the Executive intends to terminate his Employment for
Good Cause, which notice will identify that Good Cause;
provided, however, that if a Change of Control occurs,
the Executive shall not have Good Cause to terminate his
Employment solely by reason of the occurrence of that
event until 270 days after that occurrence.
(e) INVOLUNTARY TERMINATION. The Executive's Employment is
at will. The Company reserves the right to terminate the
Executive's Employment at anytime whatsoever, without
cause, with 14 days' prior written notice to the
Executive.
(f) INVOLUNTARY TERMINATION FOR CAUSE. The Company reserves
the right to terminate the Executive's Employment for
Cause. In the event that the Company determines that
Cause exists under Section 10(f)(i) for the termination
of the Executive's Employment, the Company shall provide
in writing (the "Notice of Cause") the basis for that
determination and the manner, if any, in which the
breach or neglect can be cured. If either the Company
has determined that the breach or neglect cannot be
cured, as set forth in the Notice of Cause, or has
advised the Executive in the Notice of Cause of the
manner in which the breach or neglect can be cured, but
the Executive fails to effect that cure within 30 days
after his receipt of the Notice of Cause, the Company
shall be entitled to give the Executive written notice
of his termination for Cause. In the event that the
Company determines that Cause exists under Section
10(f)(ii) for the termination of the Executive's
Employment, it shall be entitled to terminate the
Executive's Employment without providing a Notice of
Cause or any opportunity prior to that termination to
contest that determination. Any termination of the
Executive's Employment for Cause pursuant to this
Section 8(f) shall be effective immediately upon the
Executive's receipt of the Company's written notice of
that termination and the Cause therefor.
9. SEVERANCE PAYMENTS. If the Executive's Employment is
terminated during the term of this Agreement, the Executive
shall be entitled to receive severance payments as follows:
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(a) If the Executive's Employment is terminated under
Section 8(a), (b), (d) or (e), the Company will pay or
cause to be paid to the Executive (or, in the case of a
termination under Section (a), the beneficiary the
Executive has designated in writing to the Company to
receive payment pursuant to this Section 9(a) or, in the
absence of such designation, the Executive's estate):
(i) the Accrued Salary;
(ii) the Other Earned Compensation;
(iii) the Reimbursable Expenses; and
(iv) the Severance Benefit.
(b) If the Executive's Employment is terminated under
Section 8(c) or (f), the Company will pay or cause to be
paid to the Executive:
(i) the Accrued Salary determined as of the termination
date of the Executive's Employment;
(ii) the Other Earned Compensation; and
(iii) the Reimbursable Expenses.
(c) Any payments to which the Executive (or his designated
beneficiary or estate, if Section 8(a) applies) is
entitled pursuant to paragraph (i) and (iv) of
subsection (a) of this Section 9 or paragraph (i) of
subsection (b) of this Section 9, as applicable, will be
paid in a single lump sum within five days after the
termination date of the Executive's Employment;
provided, however, that if Section 8(a) applies and the
Executive's designated beneficiary or estate is the
beneficiary of one or more insurance policies purchased
by the Company and then in effect the proceeds of which
are payable to that beneficiary by reason of the
Executive's death, then (i) the Company, at its option,
may credit the amount of those proceeds, as and when
paid by the insurer to that beneficiary, against the
payment to which the Executive's designated beneficiary
or estate is entitled pursuant to paragraph (iv) of
subsection (a) of this Section 9 and, if it exercises
that option, (ii) the payment otherwise due pursuant to
that paragraph (iv) will bear interest on the
outstanding balance thereof from and including the fifth
day after that termination date to the date of payment
by the insurer to that beneficiary at the rate of
interest
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<PAGE>
specified in Section 29; and provided, further, that if
Section 8(b) applies and the Executive is the
beneficiary of disability insurance purchased by the
Company and then in effect, the Company, at its option,
may credit the proceeds of that insurance which are
payable to the Executive, valued at their present value
as of that termination date using the interest rate
specified in Section 29 and then in effect as the
discount rate, against the payment to which the
Executive is entitled pursuant to paragraph (iv) of
subsection (a) of this Section 9. Any payments to which
the Executive (or his designated beneficiary or estate,
if Section 8(a) applies) is entitled pursuant to
paragraphs (ii) and (iii) of subsection (a) or (b) of
this Section 9, as applicable, will be paid in a single
lump sum within five days after the termination date of
the Executive's Employment or as soon thereafter as is
administratively feasible, together with interest
accrued thereon from and including the fifth date after
that termination date to the date of payment at the rate
of interest specified in Section 29.
(d) Except as provided in Sections 13 and 23 and this
Section, the Company will have no payment obligations
under this Agreement to the Executive (or his designated
beneficiary or estate, if Section 8(a) applies) after
the termination date of the Executive's Employment.
10. DEFINITION OF TERMS. The following terms used in this
Agreement when capitalized shall have the following meanings:
(a) ACCRUED SALARY. "Accrued Salary" shall mean the salary
that has accrued, and the salary that would accrue
through and including the last day of the pay period in
which the termination date of the Executive's Employment
occurs, under Section 6(a) which has not been paid to
the Executive as of that termination date.
(b) ACQUIRING PERSON. "Acquiring Person" shall mean any
person who or which, together with all Affiliates and
Associates of such person, is or are the Beneficial
Owner of 15% or more of the shares of Common Stock then
outstanding, but does not include any Exempt Person;
provided, however, that a person shall not be or become
an Acquiring Person if such person, together with its
Affiliates and Associates, shall become the Beneficial
Owner of 15% or more of the shares of Common Stock then
outstanding solely as a result of a reduction in the
number of shares of Common Stock outstanding due to the
repurchase of Common Stock by the Company, unless and
until such time as such person or any Affiliate or
Associate of such person shall purchase or otherwise
become the Beneficial Owner of
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additional shares of Common Stock constituting 1% or
more of the then outstanding shares of Common Stock or
any other person (or persons) who is (or collectively
are) the Beneficial Owner of shares of Common Stock
constituting 1% or more of the then outstanding shares
of Common Stock shall become an Affiliate or Associate
of such person, unless, in either such case, such
person, together with all Affiliates and Associates of
such person, is not then the Beneficial Owner of 15% or
more of the shares of Common Stock then outstanding.
(c) AFFILIATE. "Affiliate" has the meaning ascribed to that
term in Exchange Act Rule 12b-2.
(d) ASSOCIATE. "Associate" shall mean, with reference to any
person, (i) any corporation, firm, partnership,
association, unincorporated organization or other entity
(other than the Company or a subsidiary of the Company)
of which that person is an officer or general partner
(or officer or general partner of a general partner) or
is, directly or indirectly, the Beneficial Owner of 10%
or more of any class of its equity securities, (ii) any
trust or other estate in which that person has a
substantial beneficial interest or for or of which that
person serves as trustee or in a similar fiduciary
capacity and (iii) any relative or spouse of that
person, or any relative of that spouse, who has the same
home as that person.
(e) BENEFICIAL OWNER. A specified person shall be deemed the
"Beneficial Owner" of, and shall be deemed to
"beneficially own," any securities:
(i) of which that person or any of that person's
Affiliates or Associates, directly or indirectly,
is the "beneficial owner" (as determined pursuant
to Rule 13d-3 under the Securities Exchange Act of
1934, as amended (the "Exchange Act"), or
otherwise has the right to vote or dispose of,
including pursuant to any agreement, arrangement
or understanding (whether or not in writing);
provided, however, that a person shall not be
deemed the "Beneficial Owner" of, or to
"beneficially own," any security under this
subparagraph (i) as a result of an agreement,
arrangement or understanding to vote that security
if that agreement, arrangement or understanding:
(A) arises solely from a revocable proxy or
consent given in response to a public (that is,
not including a solicitation exempted by Exchange
Act Rule 14a-2(b)(2))
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proxy or consent solicitation made pursuant to,
and in accordance with, the applicable provisions
of the Exchange Act; and (B) is not then
reportable by such person on Exchange Act Schedule
13D (or any comparable or successor report);
(ii) which that person or any of that person's
Affiliates or Associates, directly or indirectly,
has the right or obligation to acquire (whether
that right or obligation is exercisable or
effective immediately or only after the passage of
time or the occurrence of an event) pursuant to
any agreement, arrangement or understanding
(whether or not in writing) or on the exercise of
conversion rights, exchange rights, other rights,
warrants or options, or otherwise; provided,
however, that a person shall not be deemed the
"Beneficial Owner" of, or to "beneficially own,"
securities tendered pursuant to a tender or
exchange offer made by that person or any of that
person's Affiliates or Associates until those
tendered securities are accepted for purchase or
exchange; or
(iii) which are beneficially owned, directly or
indirectly, by (A) any other person (or any
Affiliate or Associate thereof) with which the
specified person or any of the specified person's
Affiliates or Associates has any agreement,
arrangement or understanding (whether or not in
writing) for the purpose of acquiring, holding,
voting (except pursuant to a revocable proxy or
consent as described in the proviso to
subparagraph (i) of this definition) or disposing
of any voting securities of the Company or (B) any
group (as that term is used in Exchange Act Rule
13d-5(b)) of which that specified person is a
member;
provided, however, that nothing in this definition shall
cause a person engaged in business as an underwriter of
securities to be the "Beneficial Owner" of, or to
"beneficially own," any securities acquired through that
person's participation in good faith in a firm
commitment underwriting until the expiration of 40 days
after the date of that acquisition. For purposes of this
Agreement, "voting" a security shall include voting,
granting a proxy, acting by consent, making a request or
demand relating to corporate action (including, without
limitation, calling a stockholder meeting) or otherwise
giving an authorization (within the meaning of Section
14(a) of the Exchange Act) in respect of such security.
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<PAGE>
(f) CAUSE. "Cause" shall mean that the Executive has
(i) willfully breached or habitually neglected
(otherwise than by reason of injury or physical or
mental illness) the duties which he was required
to perform under the terms of this Agreement, or
(ii) committed act(s) of dishonesty, fraud or
misrepresentation or other act(s) of moral
turpitude that would prevent the effective
performance of his duties under this Agreement.
(g) CHANGE OF CONTROL. "Change of Control" shall mean the
occurrence of any of the following events that occurs
after the IPO Closing Date: (i) any person becomes an
Acquiring Person or (ii) a merger of the Company with or
into, or a sale by the Company of its properties and
assets substantially as an entirety to, another person
occurs and, immediately after that occurrence, any
person, other than an Exempt Person, together with all
Affiliates and Associates of such person, shall be the
Beneficial Owner of 15% or more of the total voting
power of the then outstanding Voting Shares of the
person surviving that transaction (in the case or a
merger or consolidation) or the person acquiring those
properties and assets substantially as an entirety.
(h) COMPANY. "Company" shall mean (i) The Safe Seal Company,
Inc., a Texas corporation, and (ii) any person that
assumes the obligations of "the Company" hereunder, by
operation of law, pursuant to Section 16 or otherwise.
(i) COMPENSATION PLAN. "Compensation Plan" shall mean any
compensation arrangement, plan, policy, practice or
program established, maintained or sponsored by the
Company or any subsidiary of the Company, or to which
the Company or any subsidiary of the Company
contributes, on behalf of any Executive Officer or any
member of the immediate family of any Executive Officer
by reason of his status as such, (i) including (A) any
"employee pension benefit plan" (as defined in Section
3(2) of the Employee Retirement Income Security Act of
1974, as amended ("ERISA")) or other "employee benefit
plan" (as defined in Section 3(3) of ERISA), (B) any
other retirement or savings plan, including any
supplemental benefit arrangement relating to any plan
intended to be qualified under Section 401(a) of the
Internal Revenue
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<PAGE>
Code of 1986, as amended (the "Code"), or whose benefits
are limited by the Code or ERISA, (C) any "employee
welfare plan" (as defined in Section 3(1) of ERISA), (D)
any arrangement, plan, policy, practice or program
providing for severance pay, deferred compensation or
insurance benefit, (E) any Incentive Plan and (F) any
arrangement, plan, policy, practice or program (1)
authorizing and providing for the payment or
reimbursement of expenses attributable to air travel and
hotel occupancy while traveling on business for the
Company or (2) providing for the payment of business
luncheon and country club dues, long-distance charges,
mobile phone monthly air time or other recurring monthly
charges or any other fringe benefit, allowance or
accommodation of employment, but (ii) excluding any
compensation arrangement, plan, policy, practice or
program to the extent it provides for annual base
salary.
(j) DISABILITY. "Disability" shall mean that the Executive
has been unable to perform his essential duties under
this Agreement for a period of at least six consecutive
months as a result of his incapacity due to injury or
physical or mental illness.
(k) EMPLOYMENT. "Employment" shall mean the salaried
employment of the Employee by the Company or a
subsidiary of the Company hereunder.
(l) EXECUTIVE OFFICER. "Executive Officer" shall mean any of
the chairman of the board, the chief executive officer,
the chief operating officer, the chief financial
officer, the president, any executive, regional or other
group or senior vice president or any vice president of
the Company.
(m) EXEMPT PERSON. "Exempt Person" shall mean: (i)(A) the
Company, any subsidiary of the Company, any employee
benefit plan of the Company or any subsidiary of the
Company and (B) any person organized, appointed or
established by the Company for or pursuant to the terms
of any such plan or for the purpose of funding any such
plan or funding other employee benefits for employees of
the Company or any subsidiary of the Company; (ii) the
Executive, any Affiliate of the Executive which the
Executive controls or any group (as that term is used in
Exchange Act Rule 13d-5(b)) of which the Executive or
any such Affiliate is a member; (iii) Allwaste, Inc., a
Delaware corporation and any Affiliate (other than the
Executive, if the Executive is an Affiliate) of
Allwaste, Inc. (collectively, "Allwaste"); and (iv) The
Roger L. Miller Family Trust and any
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beneficiary or trustee of The Roger L. Miller Family
Trust (collectively, the "Miller Trust"); provided,
however, that Allwaste or the Miller Trust shall cease
to be an Exempt Person if at any time after the IPO
Closing Date (A) that person becomes the Beneficial
Owner of additional shares of Common Stock constituting
1% or more of the then outstanding shares of Common
Stock or (B) any other person, other than the Executive,
who is the Beneficial Owner of at least 1% of the then
outstanding shares of Common Stock shall become an
Affiliate of that person.
(n) GOOD CAUSE. "Good Cause" for the Employee's termination
of his Employment shall mean: (i) any decrease in the
annual base salary under Section 6(a) or any other
violation hereof in any material respect by the Company;
(ii) any material reduction in the Executive's
compensation under Section 6; (iii) the assignment to
the Employee of duties inconsistent in any material
respect with the Employee's then current positions
(including status, offices, titles and reporting
requirements), authority, duties or responsibilities or
any other action by the Company which results in a
material diminution in those positions, authority,
duties or responsibilities; (iv) William E. Haynes
ceases for any reason to be the CEO at any time prior to
the IPO Closing Date; or (v) the occurrence of a Change
of Control.
(o) INCENTIVE PLAN. "Incentive Plan" shall mean any
compensation arrangement, plan, policy, practice or
program established, maintained or sponsored by the
Company or any subsidiary of the Company, or to which
the Company or any subsidiary of the Company
contributes, on behalf of any Executive Officer and
which provides for incentive, bonus or other
performance-based awards of cash, securities, the
phantom equivalent of securities or other property,
including any stock option, stock appreciation right and
restricted stock plan, but excluding any plan intended
to qualify as a plan under any one or more of Sections
401(a), 401(k) or 423 of the Code.
(p) IPO. "IPO" shall mean the first time a registration
statement filed under the Securities Act of 1933, as
amended (the "Securities Act"), and respecting an
underwritten primary offering by Innovative Valve
Technologies, Inc. ("Invatec") of shares of its Common
Stock ("IVT Common Stock") is declared effective under
that act and the shares registered by that registration
statement are issued and sold by Invatec (otherwise than
pursuant to the exercise of any over-allotment option).
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<PAGE>
(q) IPO CLOSING DATE. "IPO Closing Date" shall mean the date
on which Invatec first receives payment for the shares
of IVT Common Stock it sells in the IPO.
(r) IPO PRICE. "IPO Price" shall mean the price per share at
which the IVT Common Stock is initially offered to the
public in the IPO.
(s) OTHER EARNED COMPENSATION. "Other Earned Compensation"
shall mean all the compensation earned by the Executive
prior to the termination date of his Employment as a
result of his Employment (including compensation the
payment of which has been deferred by the Executive, but
excluding Accrued Salary and compensation to be paid to
the Executive in accordance with the terms of any
Compensation Plan), together with all accrued interest
or earnings, if any, thereon, which has not been paid to
the Executive as of that date.
(t) REIMBURSABLE EXPENSES. "Reimbursable Expenses" shall
mean the expenses incurred by the Executive on or prior
to the termination date of his Employment which are to
be reimbursed to the Executive under Section 6(c) and
which have not been reimbursed to the Executive as of
that date.
(u) SEVERANCE BENEFIT. "Severance Benefit" shall mean the
sum of: (i) the amount equal to the product of (A) the
Applicable Monthly Salary Rate multiplied by (B) the
greater of (1) 24 and (2) the sum of 12 plus the number
(rounded to the next highest whole number, if not a
whole number) equal to the quotient of (a) the number of
whole and partial months during which the Executive has
remained in his Employment prior to the end of the month
in which the termination date of his Employment occurs
divided by (b) 12 (provided, however, that if the
Executive's Employment is terminated pursuant to Section
8(d) because a Change of Control has occurred, the sum
determined pursuant to this clause (2) shall not exceed
36); and (ii) the amount equal to the greater of (A)
twice the target amount of all incentive awards or
payments that would have been owing to the Executive for
the Company's fiscal year in which the termination date
of the Executive's Employment occurs were the
Executive's Employment to have continued to the end of
that fiscal year, regardless of the level of attainment
of the performance objectives for that fiscal year, (B)
twice the amount of the highest aggregate amount of all
incentive awards and payments made to the Executive for
any fiscal year of the Company prior to that fiscal year
or (C) if the Executive's Employment is terminated prior
to the payment of any incentive
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payment or award to the Executive for his services
hereunder during the Company's fiscal year ended
December 31, 1997, $245,000. As used herein, "Applicable
Monthly Salary Rate" shall mean 1/12th of the higher of
(i) the annual salary rate in effect under Section 6(a)
immediately prior to the termination date of the
Executive's Employment and (ii) the highest annual
salary rate theretofore in effect under Section 6(a) for
any period.
11. NON-COMPETITION CLAUSE. In addition to his obligations as an
executive and whether or not he remains an executive of the Company,
the Executive agrees that during the period commencing with the
Effective Date and ending upon the second anniversary of the
termination date of his Employment following termination of his
Employment under any of Section 8(b), (c), (e) or (f), he will not,
without the prior written consent of the Company, engage, directly
or indirectly, in any business that sells any industrial valves or
performs any industrial-valve services in competition with the
Company or any subsidiary of the Company in any area within any
"Territory" surrounding any service facility of the Company or any
subsidiary of the Company (determined as of that termination date).
For purposes of this Section 11, the "Territory" surrounding any
service facility will be: (i) the city, town or village in which
that service facility is located; (ii) the county or parish in which
that service facility is located; (iii) the counties or parishes
contiguous to the county or parish in which that service facility is
located; (iv) the area located within 50 miles of that service
facility; (v) the area located within 100 miles of that service
area; and (vi) the area in which that service facility regularly
provides services at the locations of its customers.
12. REGISTRATION RIGHTS; LEGEND.
(a) As used in this Section 12, the term "Registrable Stock" shall
mean the Award Shares and the shares of Common Stock issuable
on the exercise of the Options (the "Option Shares").
(b) As soon as is practicable following the IPO Closing Date, the
Company will file a registration statement on Form S-8 under
the Securities Act to register the Option Shares (which
registration statement may be the registration statement that
registers all the shares of Common Stock reserved or to be
available for issuance pursuant to the 1997 Incentive Plan).
(c) Prior to July 15, 1997, the Company will execute and deliver
to the Executive a registration rights agreement in
substantially the form delivered to the Executive.
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HOU03A:478817.1
<PAGE>
(d) The Executive represents that the Registrable Stock and the
Options are being acquired for investment only and not with a
view toward the resale or distribution thereof. The Executive
is willing and able to bear the economic risk of an investment
in the Registrable Stock, has no need for liquidity with
respect thereto and is able to sustain a complete loss of his
investment. The Executive agrees and understands that the
shares of Registrable Stock are restricted securities as
defined in Rule 144 promulgated under the Securities Act and
may not be sold, assigned or transferred except in a
registered offering under the Securities Act and applicable
blue sky laws, or pursuant to an exemption therefrom. The
following legend shall be set forth on each certificate
representing the Award Shares:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, NOR
THE SECURITIES LAWS OF ANY STATE. SUCH SECURITIES CANNOT BE
OFFERED, SOLD, PLEDGED, HYPOTHECATED OR OTHERWISE TRANSFERRED
EXCEPT UPON (1) SUCH REGISTRATION, OR (2) DELIVERY TO THE
ISSUER OF THESE SECURITIES OF AN OPINION OF COUNSEL,
REASONABLY ACCEPTABLE TO THE ISSUER, THAT REGISTRATION IS NOT
REQUIRED FOR SUCH TRANSFER OR (3) SUBMISSION TO THE ISSUER OF
THESE SECURITIES OF OTHER EVIDENCE, REASONABLY ACCEPTABLE TO
THE ISSUER, TO THE EFFECT THAT ANY SUCH SALE, PLEDGE,
HYPOTHECATION OR TRANSFER SHALL NOT BE IN VIOLATION OF THE
SECURITIES ACT OF 1933, AS AMENDED, APPLICABLE STATE
SECURITIES LAWS OR ANY RULES OR REGULATIONS PROMULGATED
THEREUNDER."
13. TAX INDEMNITY. Should any of the payments of salary, other incentive
or supplemental compensation, benefits, allowances, awards,
payments, reimbursements or other perquisites, or any other payment
in the nature of compensation, singly, in any combination or in the
aggregate, that are provided for hereunder to be paid to or for the
benefit of the Executive be determined or alleged to be subject to
an excise or similar purpose tax pursuant to Section 4999 of the
Code, or any successor or other comparable federal, state or local
tax law by reason of being a "parachute payment" (within the meaning
of Section 280G of the Code), the Company shall pay to the Executive
such additional compensation as is necessary (after taking into
account all federal, state and local taxes payable by the Executive
as a result of the receipt of such additional compensation) to place
the Executive in the same after-tax position (including federal,
state and local taxes) he would have been in had no such excise or
similar purpose tax (or interest or penalties thereon) been paid or
incurred. The Company hereby agrees to pay such additional
compensation within the earlier to occur of (i) five business days
after the Executive notifies the Company that the
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Executive intends to file a tax return taking the position that such
excise or similar purpose tax is due and payable in reliance on a
written opinion of the Executive's tax counsel (such tax counsel to
be chosen solely by the Executive) that it is more likely than not
that such excise tax is due and payable or (ii) 24 hours of any
notice of or action by the Company that it intends to take the
position that such excise tax is due and payable. The costs of
obtaining the tax counsel opinion referred to in clause (i) of the
preceding sentence shall be borne by the Company, and as long as
such tax counsel was chosen by the Executive in good faith, the
conclusions reached in such opinion shall not be challenged or
disputed by the Company. If the Executive intends to make any
payment with respect to any such excise or similar purpose tax as a
result of an adjustment to the Executive's tax liability by any
federal, state or local tax authority, the Company will pay such
additional compensation by delivering its cashier's check payable in
such amount to the Executive within five business days after the
Executive notifies the Company of his intention to make such
payment. Without limiting the obligation of the Company hereunder,
the Executive agrees, in the event the Executive makes any payment
pursuant to the preceding sentence, to negotiate with the Company in
good faith with respect to procedures reasonably requested by the
Company which would afford the Company the ability to contest the
imposition of such excise or similar purpose tax; provided, however,
that the Executive will not be required to afford the Company any
right to contest the applicability of any such excise or similar
purpose tax to the extent that the Executive reasonably determines
(based upon the opinion of his tax counsel) that such contest is
inconsistent with the overall tax interests of the Executive.
14. LOCATIONS OF PERFORMANCE. The Executive's services shall be
performed primarily in the vicinity of Houston, Texas. The parties
acknowledge, however, that the Executive may be required to travel
in connection with the performance of his duties hereunder.
15. PROPRIETARY INFORMATION.
(a) The Executive agrees to comply fully with the Company's
policies relating to non-disclosure of the Company's trade
secrets and proprietary information and processes. Without
limiting the generality of the foregoing, the Executive will
not, during the term of his Employment, disclose any such
secrets, information or processes to any person, firm,
corporation, association or other entity for any reason or
purpose whatsoever except as may be required by law or
governmental agency or legal process, nor shall the Executive
make use of any such property for his own purposes or for the
benefit of any person, firm, corporation or other entity
(except the Company or any of its subsidiaries) under any
circumstances during or after the term of his Employment,
provided that after the term of his Employment this provision
shall not apply to secrets, information and processes that are
then
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in the public domain (provided that the Executive was not
responsible, directly or indirectly, for such secrets,
information or processes entering the public domain without
the Company's consent).
(b) The Executive hereby sells, transfers and assigns to the
Company all the entire right, title and interest of the
Executive in and to all inventions, ideas, disclosures and
improvements, whether patented or unpatented, and
copyrightable material, to the extent (i) made or conceived by
the Executive solely or jointly with others during the term of
this Agreement and (ii) relating to or used or useful in the
design, manufacture, assembly, operation, maintenance, repair,
reconditioning or remanufacturing of batch or continuous
process systems or units and their component parts and related
equipment and tools, including, without limitation, industrial
valves and their component parts and packing materials and
other process system components (collectively "Valve
Technology"). The Executive shall communicate promptly and
disclose to the Company, in such form as the Company requests,
all information, details and data pertaining to the
aforementioned Valve Technology; and, whether during the term
hereof or thereafter, the Executive shall execute and deliver
to the Company such formal transfers and assignments and such
other papers and documents as may be required of the Executive
to permit the Company to file and prosecute any patent
applications relating to such Valve Technology and, as to
copyrightable material, to obtain copyright thereon.
(c) Trade secrets, proprietary information and processes shall not
be deemed to include information which is:
(i) known to the Executive at the time it is disclosed to
him;
(ii) publicly known (or becomes publicly known) without the
fault or negligence of Executive;
(iii) received from a third party without restriction and
without breach of this Agreement;
(iv) approved for release by written authorization of the
Company; or
(v) required to be disclosed by law or legal process;
provided, however, that in the event of a proposed
disclosure pursuant to this subsection (c)(v), the
Executive shall give the Company prior written notice
before such disclosure is made.
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<PAGE>
16. ASSIGNMENT. This Agreement may not be assigned by any party hereto;
provided that the Company may assign this Agreement, in connection
with a merger or consolidation involving the Company or a sale of
its business, properties and assets substantially as an entirety to
the surviving corporation or purchaser as the case may be, so long
as such assignee assumes the Company's obligations hereunder. The
Company shall require any successor (direct or indirect (including,
without limitation, by becoming the sole stockholder of the Company)
and whether by purchase, merger, consolidation, share exchange or
otherwise) to the business, properties and assets of the Company
substantially as an entirety expressly to assume and agree to
perform this Agreement in the same manner and to the same extent the
Company would have been required to perform it had no such
succession taken place. This Agreement shall be binding upon all
successors and assigns.
17. NOTICES. Any notice required or permitted to be given under this
Agreement shall be sufficient if in writing and sent by registered
mail to the Executive at his residence maintained on the Company's
records, or to the Company at its address at 14900 Woodham Drive,
Suite A-125, Houston, Texas, 77073, Attention: Chief Executive
Officer, or such other addresses as either party shall notify the
other in accordance with the above procedure.
18. FORCE MAJEURE. Neither party shall be liable to the other for any
delay or failure to perform hereunder, which delay or failure is due
to causes beyond the control of said party, including, but not
limited to: acts of God; acts of the public enemy; acts of the
United States of America or any state, territory or political
subdivision thereof or of the District of Columbia; fires; floods;
epidemics; quarantine restrictions; strikes; or freight embargoes;
provided, however, that this Section 18 will not relieve the Company
of any of its payment obligations to the Executive under this
Agreement. Notwithstanding the foregoing provisions of this Section
18, in every case the delay or failure to perform must be beyond the
control and without the fault or negligence of the party claiming
excusable delay.
19. INTEGRATION. This Agreement represents the entire agreement and
understanding between the parties as to the subject matter hereof
and supersedes all prior or contemporaneous agreements whether
written or oral. No waiver, alteration or modification of any of the
provisions of this Agreement shall be binding unless in writing and
signed by duly authorized representatives of the parties hereto.
20. WAIVER. Failure or delay on the part of either party hereto to
enforce any right, power or privilege hereunder shall not be deemed
to constitute a waiver thereof. Additionally, a waiver by either
party of a breach of any promise herein by the other party shall not
operate as or be construed to constitute a waiver of any subsequent
breach by such other party.
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<PAGE>
21. SAVINGS CLAUSE. If any term, covenant or condition of this Agreement
or the application thereof to any person or circumstance shall to
any extent be invalid or unenforceable, the remainder of this
Agreement, or the application of such term, covenant or condition to
persons or circumstances other than those as to which it is held
invalid or unenforceable shall not be affected thereby, and each
term, covenant or condition of this Agreement shall be valid and
enforced to the fullest extent permitted by law.
22. AUTHORITY TO CONTRACT. The Company warrants and represents to the
Executive that the Company has full authority to enter into this
Agreement and to consummate the transactions contemplated hereby and
that this Agreement is not in conflict with any other agreement to
which the Company is a party or by which it may be bound. The
Company further warrants and represents to the Executive that the
individual executing this Agreement on behalf of the Company has the
full power and authority to bind the Company to the terms hereof and
has been authorized to do so in accordance with the Company's
articles or certificate of incorporation and bylaws.
23. PAYMENT OF EXPENSES. If at any time during the term hereof or
afterwards: (a) there should exist a dispute or conflict between the
Executive and the Company or another Person as to the validity,
interpretation or application of any term or condition hereof, or as
to the Executive's entitlement to any benefit intended to be
bestowed hereby, which is not resolved to the satisfaction of the
Executive, (b) the Executive must (i) defend the validity of this
Agreement or (ii) contest any determination by the Company
concerning the amounts payable (or reimbursable) by the Company to
the Executive or (c) the Executive must prepare responses to an
Internal Revenue Service ("IRS") audit of, or otherwise defend, his
personal income tax return for any year the subject of any such
audit, or an adverse determination, administrative proceedings or
civil litigation arising therefrom, which is occasioned by or
related to an audit by the IRS of the Company's income tax returns,
then the Company hereby unconditionally agrees: (a) on written
demand of the Company by the Executive, to provide sums sufficient
to advance and pay on a current basis (either by paying directly or
by reimbursing the Executive) not less than 30 days after a written
request therefor is submitted by the Executive, the Executive's out
of pocket costs and expenses (including attorney's fees, expenses of
investigation, travel, lodging, copying, delivery services and
disbursements for the fees and expenses of experts, etc.) incurred
by the Executive in connection with any such matter; (b) the
Executive shall be entitled, upon application to any court of
competent jurisdiction, to the entry of a mandatory injunction
without the necessity of posting any bond with respect thereto which
compels the Company to pay or advance such costs and expenses on a
current basis; and (c) the Company's obligations under this Section
23 will not be affected if the Executive is not the prevailing party
in the final resolution of any such matter unless it is determined
pursuant to Section 25 that, in the case of one or more of such
matters, the Executive has acted in bad faith or without a
reasonable basis for
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<PAGE>
his position, in which event and, then only with respect to such
matter or matters, the successful or prevailing party or parties
shall be entitled to recover from the Executive reasonable
attorneys' fees and other costs incurred in connection with that
matter or matters (including the amounts paid by the Company in
respect of that matter or matters pursuant to this Section 23), in
addition to any other relief to which it or they may be entitled.
24. REMEDIES. In the event of a breach by the Executive of Section 11 or
15 of this Agreement, in addition to other remedies provided by
applicable law, the Company will be entitled to issuance of a
temporary restraining order or preliminary injection enforcing its
rights under such Section.
25. ARBITRATION. Any and all disputes or controversies whether of law or
fact and of any nature whatsoever arising from or respecting this
Agreement shall be decided by arbitration by the American
Arbitration Association in accordance with its Commercial Rules,
except as modified herein.
(a) The arbitrator shall be selected as follows: in the event the
Company and the Executive agree on one arbitrator, the
arbitration shall be conducted by such arbitrator. In the
event the Company and the Executive do not so agree, the
Company and the Executive shall each select one independent,
qualified arbitrator, and the two arbitrators so selected
shall select the third arbitrator. The arbitrator(s) are
herein referred to as the "Panel." The Company reserves the
right to object to any individual arbitrator who shall be
employed by or affiliated with a competing organization.
(b) Arbitration shall take place at Houston, Texas, or any other
location mutually agreeable to the parties. At the request of
either party, arbitration proceedings will be conducted in the
utmost secrecy; in such case all documents, testimony and
records shall be received, heard and maintained by the Panel
in secrecy, available for inspection only by the Company or
the Executive and their respective attorneys and their
respective experts, who shall agree in advance and in writing
to receive all such information confidentially and to maintain
such information in secrecy until such information shall
become generally known. The Panel shall be able to award any
and all relief, including relief of an equitable nature. The
award rendered by the Panel may be enforceable in any court
having jurisdiction thereof.
(c) Reasonable notice of the time and place of arbitration shall
be given to all parties and any interested persons as shall be
required by law.
(d) The Company will pay all the fees and out-of-pocket expenses
of each arbitrator selected pursuant to this Section 25.
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26. GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of Texas without regard to its
conflicts of law principles.
27. COUNTERPARTS. This Agreement may be executed in counterparts, each
of which shall be deemed an original, but all of which together
shall constitute one and the same instrument.
28. INDEMNIFICATION. The Executive shall be indemnified by the Company
to the maximum permitted by the law of the state of the Company's
incorporation, and by the law of the state of incorporation of any
subsidiary of the Company of which the Executive is a director or an
officer or employee, as the same may be in effect from time to time.
29. INTEREST. If any amounts required to be paid or reimbursed to the
Executive hereunder are not so paid or reimbursed at the times
provided herein (including amounts required to be paid by the
Company pursuant to Sections 6, 13 and 23), those amounts shall
accrue interest compounded daily at the annual percentage rate which
is three percentage points above the interest rate shown as the
Prime Rate in the Money Rates column in the then most recently
published edition of THE WALL STREET JOURNAL (Southwest Edition),
or, if such rate is not then so published, on at least a weekly
basis, the interest rate announced by Chase Manhattan Bank (or its
successor), from time to time, as its Base Rate (or prime lending
rate), from the date those amounts were required to have been paid
or reimbursed to the Executive until those amounts are finally and
fully paid or reimbursed; provided, however, that in no event shall
the amount of interest contracted for, charged or received hereunder
exceed the maximum non-usurious amount of interest allowed by
applicable law.
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IN WITNESS WHEREOF, the parties hereto have executed this Agreement
as of the date hereinabove first written.
THE SAFE SEAL COMPANY, INC.
By: /S/ WILLIAM E. HAYNES
William E. Haynes
President and Chief Executive Officer
EXECUTIVE:
/S/ CHARLES F. SCHUGART
Charles F. Schugart
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EXHIBIT 10.4
D. A. Rigas
EMPLOYMENT AGREEMENT
This Employment Agreement (the "Agreement") is entered into as of
May 6, 1997 (the "Effective Date"), by and between Innovative Valve
Technologies, Inc., a Delaware corporation (the "Company"), and D. A. Rigas (the
"Executive").
RECITAL:
WHEREAS, the Company desires to employ the Executive, and the
Executive agrees to work in the employ of the Company, and
WHEREAS, the parties hereto desire to set forth the terms of
Executive's Employment with the Company,
NOW, THEREFORE, the parties hereto agree as follows:
1. EMPLOYMENT. The Company hereby employs the Executive, and the
Executive hereby accepts Employment, on the terms and
conditions herein set forth.
2. DUTIES. (a) The Company will employ the Executive as Senior
Vice President -- Technology & Marketing ("SVP") of the
Company, (b) the Executive will serve in the Company's employ
in that position and (c) under the direction of the Board of
Directors of the Company (the "Board") or the Chief Executive
Officer of the Company (the "CEO"), the Executive shall
perform such duties, and have such powers, authority,
functions, duties and responsibilities for the Company and
corporations and other entities affiliated with the Company as
are commensurate and consistent with his employment in the
position of SVP. The Executive also shall have such additional
powers, authority, functions, duties and responsibilities as
may be assigned to him by the Board or the CEO; provided that,
without the Executive's written consent, those additional
powers, authority, functions, duties and responsibilities
shall not be inconsistent or interfere with, or detract from,
those herein vested in, or otherwise then being performed for
the Company by, the Executive. In the event of an increase in
the Executive's duties, the CEO shall review the Executive's
compensation and benefits to determine if an adjustment in
compensation and employee benefits commensurate with the
Executive's new duties is warranted, in accordance with the
Company's compensation policies and subject to approval by the
Compensation Committee of the Board (the "Compensation
Committee").
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<PAGE>
3. TERM OF EMPLOYMENT. Subject to the provisions of Section 8,
the term of the Executive's Employment hereunder shall
commence on June 9, 1997, for a continually renewing term of
two years commencing on that date and renewing each day
thereafter for an additional day without any further action by
either the Company or the Executive, it being the intention of
the parties that there shall be continuously a remaining term
of two years' duration of the Executive's Employment until an
event has occurred as described in, or one of the parties
shall have made an appropriate election pursuant to, the
provisions of Section 8. When the termination date of the
Executive's Employment shall have occurred and the Company
shall have paid to the Executive all the applicable amounts
that Section 9 provides the Company shall pay as a result of
the termination of the Executive's Employment, this Agreement
will terminate and have no further force or effect, except
that Sections 15 through 29 shall survive that termination
indefinitely and Section 11 shall survive for the period of
time provided for therein.
4. EXTENT OF SERVICES. The Executive shall not at any time during
his Employment engage in any other activities unless those
activities do not interfere materially with the Executive's
duties and responsibilities to the Company at that time. The
foregoing, however, shall not preclude the Executive from
engaging in appropriate civic, charitable, professional or
trade association activities or from serving on one or more
boards of directors of public companies, as long as such
activities and services do not conflict with his
responsibilities to the Company.
5. RELOCATION. In consideration of the Executive's Employment
hereunder, the Executive will move his principal place of
residence from California to the Houston, Texas area. The
Executive estimates that the cost of this relocation will be
from $100,000 to $110,000, and the Company will, on the
Executive's submission of appropriate invoices and receipts,
pay directly or reimburse the Executive for all the reasonable
costs and expenses the Executive incurs in moving his
household from California to the Houston, Texas area, provided
that the Company's liability therefor shall not exceed
$130,000. The Company agrees to advance to the Executive prior
to the date of that moving up to $100,000 for which the
Executive may provide appropriate invoices or receipts at a
later date. Once the Executive has relocated his principal
place of residence to the Houston, Texas area, the Executive
shall not be required to move his principal place of residence
from the Houston, Texas area or to perform regular duties that
could reasonably be expected to require either such move
against his wish or to spend amounts of time each week outside
the Houston, Texas area which are unreasonable in relation to
the duties and responsibilities of the Executive hereunder,
and the Company agrees that, if it requests the Executive to
make such a move and
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the Executive declines that request, (a) that declination
shall not constitute any basis for a termination of the
Executive's Employment and (b) no animosity or prejudice will
be held against Executive.
6. COMPENSATION.
(a) SALARY. An annual base salary shall be payable to the
Executive by the Company as a guaranteed minimum amount
under this Agreement for each calendar year during the
period from the Effective Date to the termination date
of the Executive's Employment. That annual base salary
shall (i) accrue daily on the basis of a 365-day year,
(ii) be payable to the Executive in the intervals
consistent with the Company's normal payroll schedules
(but in no event less frequently than semi-monthly) and
(iii) be payable at an initial annual rate of $175,000.
The Executive's annual base salary shall not be
decreased, but shall be adjusted annually in each
December to reflect such adjustments, if any, as the CEO
determines appropriate based on the Executive's
performance during the most recent performance period,
in accordance with the Company's compensation policies
and subject to the approval of the Compensation
Committee. A failure of the Company to increase the
Executive's annual base salary would not constitute a
breach or violation of this Agreement by the Company.
(b) STOCK SALE AND STOCK OPTIONS. The Company shall sell to
the Executive, and the Executive shall purchase from the
Company, effective as of the Effective Date, 50,000
shares of the Company's authorized and unissued common
stock, par value $.001 per share (the "Common Stock"),
for a cash purchase price of $.001 per share. The
Company shall also grant to the Executive effective as
of the Effective Date (i) a nonqualified stock option to
purchase 50,000 shares of Common Stock from the Company
at an exercise price per share equal to the IPO Price
and (ii) a nonqualified option to purchase 50,000 shares
of Common Stock from the Company at an exercise price
per share equal to the lesser of (A) $9.00 and (B) the
IPO Price (each option being an "Option"). The term of
each Option shall be seven years from the IPO Closing
Date. Each Option will become exercisable with respect
to 25% of the shares of Common Stock covered thereby on
each of the IPO Closing Date and the first three
anniversaries of the IPO Closing Date, subject to
acceleration as provided in this Section 6(b). Neither
the number of shares of Common Stock subject to, nor the
exercise price established by, either Option will be
subject to any adjustment by reason of any
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<PAGE>
direct or indirect combination of the outstanding Common
Stock prior to the IPO Closing Date. The Executive
agrees that the Options shall be evidenced by award
agreements under the Innovative Valve Technologies, Inc.
1997 Incentive Plan (the "1997 Incentive Plan"). If the
Executive's Employment is terminated under Section 8(a),
(b) or (d) prior to the fifth anniversary of the IPO
Closing Date, the Options will, notwithstanding any
contrary provision of any Incentive Plan or any award
agreement evidencing the Options thereunder, (i) become,
to the extent not already exercisable, exercisable in
whole on the termination date of the Executive's
Employment and (ii) remain exercisable at least until
the date that is the second anniversary of that
termination date. If the Executive's Employment is
terminated under Section 8(e) prior to the fifth
anniversary of the IPO Closing Date, the Options will,
notwithstanding any contrary provision of any Incentive
Plan or any award agreement evidencing the Options
thereunder, (i) become, to the extent not already
exercisable, exercisable on each anniversary of the IPO
Closing Date, as provided above, and (ii) remain
exercisable (to the extent then and thereafter
exercisable) at least until the date that is the seventh
anniversary of the IPO Closing Date. If the Executive's
Employment is terminated under Section 8(c) or (f), the
Options, to the extent they are outstanding and
exercisable as of the time immediately prior to the
termination date of the Executive's Employment, will
remain outstanding and continue to be exercisable until
the date that is 10 days after that termination date (or
such later date, if any, as the Incentive Plan covering
the Options or any award agreement evidencing the
Options shall prescribe in the case of the termination
of the Executive's Employment under the circumstances
covered by Section 8(c) or (f), as the case may be).
(c) OTHER COMPENSATION. The Executive shall be entitled to
participate in all Compensation Plans from time to time
in effect while in the Employment of the Company,
regardless of whether the Executive is an Executive
Officer. All awards to the Executive under all Incentive
Plans shall take into account the Executive's positions
with and duties and responsibilities to the Company and
its subsidiaries and affiliates.
Without limiting the generality of the foregoing, the
Executive shall be eligible for an annual incentive
award in accordance with the Annual Incentive Plan (the
"AIP") currently being developed as a part of the 1997
Incentive Plan, or such other plan as may be substituted
for the AIP, and subject to the approval of the
Compensation Committee. The actual target amount of the
Executive's annual bonus under the AIP is currently
unknown, although the Company
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and the Executive contemplate it will be 70% of the
Executive's annual salary under Section 6(a). The
Executive's rights to benefits at the termination of his
Employment under the Compensation Plans shall be
governed by the provisions of those plans.
(d) EXPENSES. The Executive shall be entitled to prompt
reimbursement of all reasonable business expenses
incurred by him in the performance of his duties during
the term of this Agreement, subject to the presenting of
appropriate vouchers and receipts in accordance with the
Company's policies.
7. OTHER BENEFITS.
(a) EMPLOYEE BENEFITS AND PROGRAMS. During the term of this
Agreement, the Executive and the members of his
immediate family shall be entitled to participate in any
employee benefit plans or programs of the Company to the
extent that his position, tenure, salary, age, health
and other qualifications make him or them, as the case
may be, eligible to participate, subject to the rules
and regulations applicable thereto.
(b) COUNTRY CLUB MEMBERSHIPS. The Company shall pay the
first $15,000 of any initial membership fee for the
Executive to join a country club in the Houston, Texas
area, plus the monthly membership fee (up to $300 per
month) with respect thereto throughout the term of this
Agreement.
(c) BRIDGE LOANS. The Company shall extent an interest-free
loan to the Executive of up to $100,000 (the "Bridge
Loan") on (i) at least 10 business days prior written
notice from the Executive and (ii) execution by the
Executive of a mutually acceptable unsecured promissory
note evidencing the Bridge Loan. The entire amount of
the Bridge Loan shall mature and become due and payable
upon the earlier of (i) June 9, 1999 or (ii) termination
of the Executive's Employment hereunder for any reason.
At the option of the Executive or the Company, the
Bridge Loan may be repaid in accordance with the terms
hereof out of, or offset against, any bonus or other
amount payable to the Executive hereunder.. . (d)
VACATION. The Executive shall be entitled to four weeks
of vacation leave with full pay during each year of this
Agreement (each such year being a 12-month period ending
on May 6). The times for such vacations shall be
selected by the Executive, subject to the prior
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approval of the Company. The Executive may accrue up to
eight weeks of vacation time from year to year, but
vacation time otherwise shall not accrue from year to
year.
(e) CAR ALLOWANCE. The Executive shall be furnished with an
automobile allowance in the aggregate amount of (i) $800
per month, for payment of all costs and expenses
incurred by the Executive relating to the purchase,
lease or operation of an automobile by the Executive
(other than fuel expenses), including but not limited to
oil, repair and maintenance costs and expenses, plus
(ii) the actual amount of the fuel expenses incurred by
the Executive in operating such automobile.
8. TERMINATION. The Executive's Employment hereunder may be
terminated prior to the term provided for in Section 3 only
under the following circumstances:
(a) DEATH. The Executive's Employment shall terminate
automatically on the date of his death.
(b) DISABILITY. If a Disability occurs and is continuing,
the Executive's Employment shall terminate 30 days after
the Company gives the Executive written notice that it
intends to terminate his Employment on account of that
Disability or on such later date as the Company
specifies in such notice. If the Executive resumes the
performance of substantially all his duties under this
Agreement before the termination becomes effective, the
notice of intent to terminate shall be deemed to have
been revoked.
(c) VOLUNTARY TERMINATION. The Executive may terminate his
Employment at any time and without Good Cause with 30
days' prior written notice to the Company.
(d) TERMINATION FOR GOOD CAUSE. The Executive may terminate
his Employment for Good Cause at any time within 180
days (730 days if the Good Cause is the occurrence of a
Change of Control) after the Executive becomes
consciously aware that the facts and circumstances
constituting that Good Cause exist and are continuing by
giving the Company 14 days' prior written notice that
the Executive intends to terminate his Employment for
Good Cause, which notice will identify that Good Cause;
provided, however, that if a Change of Control occurs,
the Executive shall not have Good
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Cause to terminate his Employment solely by reason of
the occurrence of that event until 270 days after that
occurrence.
(e) INVOLUNTARY TERMINATION. The Executive's Employment is
at will. The Company reserves the right to terminate the
Executive's Employment at anytime whatsoever, without
cause, with 14 days' prior written notice to the
Executive.
(f) INVOLUNTARY TERMINATION FOR CAUSE. The Company reserves
the right to terminate the Executive's Employment for
Cause. In the event that the Company determines that
Cause exists under Section 10(f)(i) for the termination
of the Executive's Employment, the Company shall provide
in writing (the "Notice of Cause") the basis for that
determination and the manner, if any, in which the
breach or neglect can be cured. If either the Company
has determined that the breach or neglect cannot be
cured, as set forth in the Notice of Cause, or has
advised the Executive in the Notice of Cause of the
manner in which the breach or neglect can be cured, but
the Executive fails to effect that cure within 30 days
after his receipt of the Notice of Cause, the Company
shall be entitled to give the Executive written notice
of his termination for Cause. In the event that the
Company determines that Cause exists under Section
10(f)(ii) for the termination of the Executive's
Employment, it shall be entitled to terminate the
Executive's Employment without providing a Notice of
Cause or any opportunity prior to that termination to
contest that determination. Any termination of the
Executive's Employment for Cause pursuant to this
Section 8(f) shall be effective immediately upon the
Executive's receipt of the Company's written notice of
that termination and the Cause therefor.
9. SEVERANCE PAYMENTS. If the Executive's Employment is
terminated during the term of this Agreement, the Executive
shall be entitled to receive severance payments as follows:
(a) If the Executive's Employment is terminated under
Section 8(a), (b), (d) or (e), the Company will pay or
cause to be paid to the Executive (or, in the case of a
termination under Section (a), the beneficiary the
Executive has designated in writing to the Company to
receive payment pursuant to this Section 9(a) or, in the
absence of such designation, the Executive's estate):
(i) the Accrued Salary;
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(ii) the Other Earned Compensation;
(iii) the Reimbursable Expenses; and
(iv) the Severance Benefit.
(b) If the Executive's Employment is terminated under
Section 8(c) or (f), the Company will pay or cause to be
paid to the Executive:
(i) the Accrued Salary determined as of the
termination date of the Executive's Employment;
(ii) the Other Earned Compensation; and
(iii) the Reimbursable Expenses.
(c) Any payments to which the Executive (or his designated
beneficiary or estate, if Section 8(a) applies) is
entitled pursuant to paragraph (i) and (iv) of
subsection (a) of this Section 9 or paragraph (i) of
subsection (b) of this Section 9, as applicable, will be
paid in a single lump sum within five days after the
termination date of the Executive's Employment;
provided, however, that if Section 8(a) applies and the
Executive's designated beneficiary or estate is the
beneficiary of one or more insurance policies purchased
by the Company and then in effect the proceeds of which
are payable to that beneficiary by reason of the
Executive's death, then (i) the Company, at its option,
may credit the amount of those proceeds, as and when
paid by the insurer to that beneficiary, against the
payment to which the Executive's designated beneficiary
or estate is entitled pursuant to paragraph (iv) of
subsection (a) of this Section 9 and, if it exercises
that option, (ii) the payment otherwise due pursuant to
that paragraph (iv) will bear interest on the
outstanding balance thereof from and including the fifth
day after that termination date to the date of payment
by the insurer to that beneficiary at the rate of
interest specified in Section 29; and provided, further,
that if Section 8(b) applies and the Executive is the
beneficiary of disability insurance purchased by the
Company and then in effect, the Company, at its option,
may credit the proceeds of that insurance which are
payable to the Executive, valued at their present value
as of that termination date using the interest rate
specified in Section 29 and then in effect as the
discount rate, against the payment to which the
Executive is entitled pursuant to paragraph (iv) of
subsection (a) of this Section 9. Any payments to which
the Executive (or his designated beneficiary
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or estate, if Section 8(a) applies) is entitled pursuant
to paragraphs (ii) and (iii) of subsection (a) or (b) of
this Section 9, as applicable, will be paid in a single
lump sum within five days after the termination date of
the Executive's Employment or as soon thereafter as is
administratively feasible, together with interest
accrued thereon from and including the fifth date after
that termination date to the date of payment at the rate
of interest specified in Section 29.
(d) Except as provided in Sections 13 and 23 and this
Section, the Company will have no payment obligations
under this Agreement to the Executive (or his designated
beneficiary or estate, if Section 8(a) applies) after
the termination date of the Executive's Employment.
10. DEFINITION OF TERMS. The following terms used in this
Agreement when capitalized shall have the following meanings:
(a) ACCRUED SALARY. "Accrued Salary" shall mean the salary
that has accrued, and the salary that would accrue
through and including the last day of the pay period in
which the termination date of the Executive's Employment
occurs, under Section 6(a) which has not been paid to
the Executive as of that termination date.
(b) ACQUIRING PERSON. "Acquiring Person" shall mean any
person who or which, together with all Affiliates and
Associates of such person, is or are the Beneficial
Owner of 15% or more of the shares of Common Stock then
outstanding, but does not include any Exempt Person;
provided, however, that a person shall not be or become
an Acquiring Person if such person, together with its
Affiliates and Associates, shall become the Beneficial
Owner of 15% or more of the shares of Common Stock then
outstanding solely as a result of a reduction in the
number of shares of Common Stock outstanding due to the
repurchase of Common Stock by the Company, unless and
until such time as such person or any Affiliate or
Associate of such person shall purchase or otherwise
become the Beneficial Owner of additional shares of
Common Stock constituting 1% or more of the then
outstanding shares of Common Stock or any other person
(or persons) who is (or collectively are) the Beneficial
Owner of shares of Common Stock constituting 1% or more
of the then outstanding shares of Common Stock shall
become an Affiliate or Associate of such person, unless,
in either such case, such person, together with all
Affiliates and Associates of such person, is not then
the Beneficial Owner of 15% or more of the shares of
Common Stock then outstanding.
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(c) AFFILIATE. "Affiliate" has the meaning ascribed to that
term in Exchange Act Rule 12b-2.
(d) ASSOCIATE. "Associate" shall mean, with reference to any
person, (i) any corporation, firm, partnership,
association, unincorporated organization or other entity
(other than the Company or a subsidiary of the Company)
of which that person is an officer or general partner
(or officer or general partner of a general partner) or
is, directly or indirectly, the Beneficial Owner of 10%
or more of any class of its equity securities, (ii) any
trust or other estate in which that person has a
substantial beneficial interest or for or of which that
person serves as trustee or in a similar fiduciary
capacity and (iii) any relative or spouse of that
person, or any relative of that spouse, who has the same
home as that person.
(e) BENEFICIAL OWNER. A specified person shall be deemed the
"Beneficial Owner" of, and shall be deemed to
"beneficially own," any securities:
(i) of which that person or any of that person's
Affiliates or Associates, directly or indirectly,
is the "beneficial owner" (as determined pursuant
to Rule 13d-3 under the Securities Exchange Act of
1934, as amended (the "Exchange Act"), or
otherwise has the right to vote or dispose of,
including pursuant to any agreement, arrangement
or understanding (whether or not in writing);
provided, however, that a person shall not be
deemed the "Beneficial Owner" of, or to
"beneficially own," any security under this
subparagraph (i) as a result of an agreement,
arrangement or understanding to vote that security
if that agreement, arrangement or understanding:
(A) arises solely from a revocable proxy or
consent given in response to a public (that is,
not including a solicitation exempted by Exchange
Act Rule 14a-2(b)(2)) proxy or consent
solicitation made pursuant to, and in accordance
with, the applicable provisions of the Exchange
Act; and (B) is not then reportable by such person
on Exchange Act Schedule 13D (or any comparable or
successor report);
(ii) which that person or any of that person's
Affiliates or Associates, directly or indirectly,
has the right or obligation to acquire (whether
that right or obligation is exercisable or
effective immediately or only after the passage of
time or the
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occurrence of an event) pursuant to any agreement,
arrangement or understanding (whether or not in
writing) or on the exercise of conversion rights,
exchange rights, other rights, warrants or
options, or otherwise; provided, however, that a
person shall not be deemed the "Beneficial Owner"
of, or to "beneficially own," securities tendered
pursuant to a tender or exchange offer made by
that person or any of that person's Affiliates or
Associates until those tendered securities are
accepted for purchase or exchange; or
(iii) which are beneficially owned, directly or
indirectly, by (A) any other person (or any
Affiliate or Associate thereof) with which the
specified person or any of the specified person's
Affiliates or Associates has any agreement,
arrangement or understanding (whether or not in
writing) for the purpose of acquiring, holding,
voting (except pursuant to a revocable proxy or
consent as described in the proviso to
subparagraph (i) of this definition) or disposing
of any voting securities of the Company or (B) any
group (as that term is used in Exchange Act Rule
13d-5(b)) of which that specified person is a
member;
provided, however, that nothing in this definition shall
cause a person engaged in business as an underwriter of
securities to be the "Beneficial Owner" of, or to
"beneficially own," any securities acquired through that
person's participation in good faith in a firm
commitment underwriting until the expiration of 40 days
after the date of that acquisition. For purposes of this
Agreement, "voting" a security shall include voting,
granting a proxy, acting by consent, making a request or
demand relating to corporate action (including, without
limitation, calling a stockholder meeting) or otherwise
giving an authorization (within the meaning of Section
14(a) of the Exchange Act) in respect of such security.
(f) CAUSE. "Cause" shall mean that the Executive has
(i) willfully breached or habitually neglected
(otherwise than by reason of injury or physical or
mental illness) the duties which he was required
to perform under the terms of this Agreement, or
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(ii) committed act(s) of dishonesty, fraud or
misrepresentation or other act(s) of moral
turpitude that would prevent the effective
performance of his duties under this Agreement.
(g) CHANGE OF CONTROL. "Change of Control" shall mean the
occurrence of any of the following events that occurs
after the IPO Closing Date: (i) any person becomes an
Acquiring Person or (ii) a merger of the Company with or
into, or a sale by the Company of its properties and
assets substantially as an entirety to, another person
occurs and, immediately after that occurrence, any
person, other than an Exempt Person, together with all
Affiliates and Associates of such person, shall be the
Beneficial Owner of 15% or more of the total voting
power of the then outstanding Voting Shares of the
person surviving that transaction (in the case or a
merger or consolidation) or the person acquiring those
properties and assets substantially as an entirety.
(h) COMPANY. "Company" shall mean (i) Innovative Valve
Technologies, Inc., a Delaware corporation, and (ii) any
person that assumes the obligations of "the Company"
hereunder, by operation of law, pursuant to Section 16
or otherwise.
(i) COMPENSATION PLAN. "Compensation Plan" shall mean any
compensation arrangement, plan, policy, practice or
program established, maintained or sponsored by the
Company or any subsidiary of the Company, or to which
the Company or any subsidiary of the Company
contributes, on behalf of any Executive Officer or any
member of the immediate family of any Executive Officer
by reason of his status as such, (i) including (A) any
"employee pension benefit plan" (as defined in Section
3(2) of the Employee Retirement Income Security Act of
1974, as amended ("ERISA")) or other "employee benefit
plan" (as defined in Section 3(3) of ERISA), (B) any
other retirement or savings plan, including any
supplemental benefit arrangement relating to any plan
intended to be qualified under Section 401(a) of the
Internal Revenue Code of 1986, as amended (the "Code"),
or whose benefits are limited by the Code or ERISA, (C)
any "employee welfare plan" (as defined in Section 3(1)
of ERISA), (D) any arrangement, plan, policy, practice
or program providing for severance pay, deferred
compensation or insurance benefit, (E) any Incentive
Plan and (F) any arrangement, plan, policy, practice or
program (1) authorizing and providing for the payment or
reimbursement of expenses attributable to air travel and
hotel occupancy while traveling on business for the
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Company or (2) providing for the payment of business
luncheon and country club dues, long-distance charges,
mobile phone monthly air time or other recurring monthly
charges or any other fringe benefit, allowance or
accommodation of employment, but (ii) excluding any
compensation arrangement, plan, policy, practice or
program to the extent it provides for annual base
salary.
(j) DISABILITY. "Disability" shall mean that the Executive
has been unable to perform his essential duties under
this Agreement for a period of at least six consecutive
months as a result of his incapacity due to injury or
physical or mental illness.
(k) EMPLOYMENT. "Employment" shall mean the salaried
employment of the Employee by the Company or a
subsidiary of the Company hereunder.
(l) EXECUTIVE OFFICER. "Executive Officer" shall mean any of
the chairman of the board, the chief executive officer,
the chief operating officer, the chief financial
officer, the president, any executive, regional or other
group or senior vice president or any vice president of
the Company.
(m) EXEMPT PERSON. "Exempt Person" shall mean: (i)(A) the
Company, any subsidiary of the Company, any employee
benefit plan of the Company or any subsidiary of the
Company and (B) any person organized, appointed or
established by the Company for or pursuant to the terms
of any such plan or for the purpose of funding any such
plan or funding other employee benefits for employees of
the Company or any subsidiary of the Company; (ii) the
Executive, any Affiliate of the Executive which the
Executive controls or any group (as that term is used in
Exchange Act Rule 13d-5(b)) of which the Executive or
any such Affiliate is a member; (iii) Allwaste, Inc., a
Delaware corporation and any Affiliate (other than the
Executive, if the Executive is an Affiliate) of
Allwaste, Inc. (collectively, "Allwaste"); and (iv) The
Roger L. Miller Family Trust and any beneficiary or
trustee of The Roger L. Miller Family Trust
(collectively, the "Miller Trust"); provided, however,
that Allwaste or the Miller Trust shall cease to be an
Exempt Person if at any time after the IPO Closing Date
(A) that person becomes the Beneficial Owner of
additional shares of Common Stock constituting 1% or
more of the then outstanding shares of Common Stock or
(B) any other person, other than the Executive, who is
the Beneficial Owner
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of at least 1% of the then outstanding shares of Common
Stock shall become an Affiliate of that person.
(n) GOOD CAUSE. "Good Cause" for the Employee's termination
of his Employment shall mean: (i) any decrease in the
annual base salary under Section 6(a) or any other
violation hereof in any material respect by the Company;
(ii) any material reduction in the Executive's
compensation under Section 6; (iii) the assignment to
the Employee of duties inconsistent in any material
respect with the Employee's then current positions
(including status, offices, titles and reporting
requirements), authority, duties or responsibilities or
any other action by the Company which results in a
material diminution in those positions, authority,
duties or responsibilities; or (iv) the occurrence of a
Change of Control.
(o) INCENTIVE PLAN. "Incentive Plan" shall mean any
compensation arrangement, plan, policy, practice or
program established, maintained or sponsored by the
Company or any subsidiary of the Company, or to which
the Company or any subsidiary of the Company
contributes, on behalf of any Executive Officer and
which provides for incentive, bonus or other
performance-based awards of cash, securities, the
phantom equivalent of securities or other property,
including any stock option, stock appreciation right and
restricted stock plan, but excluding any plan intended
to qualify as a plan under any one or more of Sections
401(a), 401(k) or 423 of the Code.
(p) IPO. "IPO" shall mean the first time a registration
statement filed under the Securities Act of 1933, as
amended (the "Securities Act"), and respecting an
underwritten primary offering by the Company of shares
of the Common Stock is declared effective under that act
and the shares registered by that registration statement
are issued and sold by the Company (otherwise than
pursuant to the exercise of any over-allotment option).
(q) IPO CLOSING DATE. "IPO Closing Date" shall mean the date
on which the Company first receives payment for the
shares of the Common Stock it sells in the IPO.
(r) IPO PRICE. "IPO Price" shall mean the price per share at
which the Common Stock is initially offered to the
public in the IPO.
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(s) OTHER EARNED COMPENSATION. "Other Earned Compensation"
shall mean all the compensation earned by the Executive
prior to the termination date of his Employment as a
result of his Employment (including compensation the
payment of which has been deferred by the Executive, but
excluding Accrued Salary and compensation to be paid to
the Executive in accordance with the terms of any
Compensation Plan), together with all accrued interest
or earnings, if any, thereon, which has not been paid to
the Executive as of that date.
(t) REIMBURSABLE EXPENSES. "Reimbursable Expenses" shall
mean the expenses incurred by the Executive on or prior
to the termination date of his Employment which are to
be reimbursed to the Executive under Section 6(c) and
which have not been reimbursed to the Executive as of
that date.
(u) SEVERANCE BENEFIT. "Severance Benefit" shall mean the
sum of: (i) the amount equal to the product of (A) the
Applicable Monthly Salary Rate multiplied by (B) the
greater of (1) 24 and (2) the sum of 12 plus the number
(rounded to the next highest whole number, if not a
whole number) equal to the quotient of (a) the number of
whole and partial months during which the Executive has
remained in his Employment prior to the end of the month
in which the termination date of his Employment occurs
divided by (b) 12 (provided, however, that if the
Executive's Employment is terminated pursuant to Section
8(d) because a Change of Control has occurred, the sum
determined pursuant to this clause (2) shall not exceed
36); and (ii) the amount equal to the greater of (A)
twice the target amount of all incentive awards or
payments that would have been owing to the Executive for
the Company's fiscal year in which the termination date
of the Executive's Employment occurs were the
Executive's Employment to have continued to the end of
that fiscal year, regardless of the level of attainment
of the performance objectives for that fiscal year, (B)
twice the amount of the highest aggregate amount of all
incentive awards and payments made to the Executive for
any fiscal year of the Company prior to that fiscal year
or (C) if the Executive's Employment is terminated prior
to the payment of any incentive payment or award to the
Executive for his services hereunder during the
Company's fiscal year ended December 31, 1997, $210,000.
As used herein, "Applicable Monthly Salary Rate" shall
mean 1/12th of the higher of (i) the annual salary rate
in effect under Section 6(a) immediately prior to the
termination date of the Executive's Employment and (ii)
the highest annual salary rate theretofore in effect
under Section 6(a) for any period.
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11. NON-COMPETITION CLAUSE. In addition to his obligations as an
executive and whether or not he remains an executive of the Company,
the Executive agrees that during the period commencing with the
Effective Date and ending upon the second anniversary of the
termination date of his Employment following termination of his
Employment under any of Section 8(b), (c), (e) or (f), he will not,
without the prior written consent of the Company, engage, directly
or indirectly, in any business that sells any products or performs
any services in competition with the Company or any subsidiary of
the Company in any area within any "Territory" surrounding any
service facility of the Company or any subsidiary of the Company
(determined as of that termination date). For purposes of this
Section 11, the "Territory" surrounding any service facility will
be: (i) the city, town or village in which that service facility is
located; (ii) the county or parish in which that service facility is
located; (iii) the counties or parishes contiguous to the county or
parish in which that service facility is located; (iv) the area
located within 50 miles of that service facility; (v) the area
located within 100 miles of that service area; and (vi) the area in
which that service facility regularly provides services at the
locations of its customers.
12. REGISTRATION RIGHTS; LEGEND.
(a) As used in this Section 12, the term "Registrable Stock" shall
mean the Award Shares and the shares of Common Stock issuable
on the exercise of the Options (the "Option Shares").
(b) As soon as is practicable following the IPO Closing Date, the
Company will file a registration statement on Form S-8 under
the Securities Act to register the Option Shares (which
registration statement may be the registration statement that
registers all the shares of Common Stock reserved or to be
available for issuance pursuant to the 1997 Incentive Plan).
(c) Prior to July 15, 1997, the Company will execute and deliver
to the Executive a registration rights agreement in
substantially the form delivered to the Executive.
(d) The Executive represents that the Registrable Stock and the
Options are being acquired for investment only and not with a
view toward the resale or distribution thereof. The Executive
is willing and able to bear the economic risk of an investment
in the Registrable Stock, has no need for liquidity with
respect thereto and is able to sustain a complete loss of his
investment. The Executive agrees and understands that the
shares of Registrable Stock are restricted securities as
defined in Rule 144 promulgated under the Securities Act and
may not be sold, assigned or transferred except in a
registered offering under the Securities Act and applicable
blue sky laws, or pursuant
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to an exemption therefrom. The following legend shall be set
forth on each certificate representing the Award Shares:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, NOR
THE SECURITIES LAWS OF ANY STATE. SUCH SECURITIES CANNOT BE
OFFERED, SOLD, PLEDGED, HYPOTHECATED OR OTHERWISE TRANSFERRED
EXCEPT UPON (1) SUCH REGISTRATION, OR (2) DELIVERY TO THE
ISSUER OF THESE SECURITIES OF AN OPINION OF COUNSEL,
REASONABLY ACCEPTABLE TO THE ISSUER, THAT REGISTRATION IS NOT
REQUIRED FOR SUCH TRANSFER OR (3) SUBMISSION TO THE ISSUER OF
THESE SECURITIES OF OTHER EVIDENCE, REASONABLY ACCEPTABLE TO
THE ISSUER, TO THE EFFECT THAT ANY SUCH SALE, PLEDGE,
HYPOTHECATION OR TRANSFER SHALL NOT BE IN VIOLATION OF THE
SECURITIES ACT OF 1933, AS AMENDED, APPLICABLE STATE
SECURITIES LAWS OR ANY RULES OR REGULATIONS PROMULGATED
THEREUNDER."
13. TAX INDEMNITY. Should any of the payments of salary, other incentive
or supplemental compensation, benefits, allowances, awards,
payments, reimbursements or other perquisites, or any other payment
in the nature of compensation, singly, in any combination or in the
aggregate, that are provided for hereunder to be paid to or for the
benefit of the Executive be determined or alleged to be subject to
an excise or similar purpose tax pursuant to Section 4999 of the
Code, or any successor or other comparable federal, state or local
tax law by reason of being a "parachute payment" (within the meaning
of Section 280G of the Code), the Company shall pay to the Executive
such additional compensation as is necessary (after taking into
account all federal, state and local taxes payable by the Executive
as a result of the receipt of such additional compensation) to place
the Executive in the same after-tax position (including federal,
state and local taxes) he would have been in had no such excise or
similar purpose tax (or interest or penalties thereon) been paid or
incurred. The Company hereby agrees to pay such additional
compensation within the earlier to occur of (i) five business days
after the Executive notifies the Company that the Executive intends
to file a tax return taking the position that such excise or similar
purpose tax is due and payable in reliance on a written opinion of
the Executive's tax counsel (such tax counsel to be chosen solely by
the Executive) that it is more likely than not that such excise tax
is due and payable or (ii) 24 hours of any notice of or action by
the Company that it intends to take the position that such excise
tax is due and payable. The costs of obtaining the tax counsel
opinion referred to in clause (i) of the preceding sentence shall be
borne by the Company, and as long as such tax counsel was chosen by
the Executive in good faith, the conclusions reached in such opinion
shall not be challenged or disputed by the Company. If the Executive
- 17 -
<PAGE>
intends to make any payment with respect to any such excise or
similar purpose tax as a result of an adjustment to the Executive's
tax liability by any federal, state or local tax authority, the
Company will pay such additional compensation by delivering its
cashier's check payable in such amount to the Executive within five
business days after the Executive notifies the Company of his
intention to make such payment. Without limiting the obligation of
the Company hereunder, the Executive agrees, in the event the
Executive makes any payment pursuant to the preceding sentence, to
negotiate with the Company in good faith with respect to procedures
reasonably requested by the Company which would afford the Company
the ability to contest the imposition of such excise or similar
purpose tax; provided, however, that the Executive will not be
required to afford the Company any right to contest the
applicability of any such excise or similar purpose tax to the
extent that the Executive reasonably determines (based upon the
opinion of his tax counsel) that such contest is inconsistent with
the overall tax interests of the Executive.
14. LOCATIONS OF PERFORMANCE. The Executive's services shall be
performed primarily in the vicinity of Houston, Texas. The parties
acknowledge, however, that the Executive may be required to travel
in connection with the performance of his duties hereunder.
15. PROPRIETARY INFORMATION.
(a) The Executive agrees to comply fully with the Company's
policies relating to non-disclosure of the Company's trade
secrets and proprietary information and processes. Without
limiting the generality of the foregoing, the Executive will
not, during the term of his Employment, disclose any such
secrets, information or processes to any person, firm,
corporation, association or other entity for any reason or
purpose whatsoever except as may be required by law or
governmental agency or legal process, nor shall the Executive
make use of any such property for his own purposes or for the
benefit of any person, firm, corporation or other entity
(except the Company or any of its subsidiaries) under any
circumstances during or after the term of his Employment,
provided that after the term of his Employment this provision
shall not apply to secrets, information and processes that are
then in the public domain (provided that the Executive was not
responsible, directly or indirectly, for such secrets,
information or processes entering the public domain without
the Company's consent).
(b) The Executive hereby sells, transfers and assigns to the
Company all the entire right, title and interest of the
Executive in and to all inventions, ideas, disclosures and
improvements, whether patented or unpatented, and
copyrightable material, to the extent (i) made or conceived by
the Executive solely or jointly with others during the term of
this Agreement and (ii)
- 18 -
<PAGE>
relating to or used or useful in the design, manufacture,
assembly, operation, maintenance, repair, reconditioning or
remanufacturing of batch or continuous process systems or
units and their component parts and related equipment and
tools, including, without limitation, industrial valves and
their component parts and packing materials and other process
system components (collectively "Valve Technology"). The
Executive shall communicate promptly and disclose to the
Company, in such form as the Company requests, all
information, details and data pertaining to the aforementioned
Valve Technology; and, whether during the term hereof or
thereafter, the Executive shall execute and deliver to the
Company such formal transfers and assignments and such other
papers and documents as may be required of the Executive to
permit the Company to file and prosecute any patent
applications relating to such Valve Technology and, as to
copyrightable material, to obtain copyright thereon.
(c) Trade secrets, proprietary information and processes shall not
be deemed to include information which is:
(i) known to the Executive at the time it is disclosed to
him;
(ii) publicly known (or becomes publicly known) without the
fault or negligence of Executive;
(iii) received from a third party without restriction and
without breach of this Agreement;
(iv) approved for release by written authorization of the
Company; or
(v) required to be disclosed by law or legal process;
provided, however, that in the event of a proposed
disclosure pursuant to this subsection (c)(v), the
Executive shall give the Company prior written notice
before such disclosure is made.
16. ASSIGNMENT. This Agreement may not be assigned by any party hereto;
provided that the Company may assign this Agreement, in connection
with a merger or consolidation involving the Company or a sale of
its business, properties and assets substantially as an entirety to
the surviving corporation or purchaser as the case may be, so long
as such assignee assumes the Company's obligations hereunder. The
Company shall require any successor (direct or indirect (including,
without limitation, by becoming the sole stockholder of the Company)
and whether by purchase, merger, consolidation, share exchange or
otherwise) to the business, properties and assets of the Company
substantially as an entirety expressly to assume and agree to
perform this Agreement in the same manner and to the same extent the
- 19 -
<PAGE>
Company would have been required to perform it had no such
succession taken place. This Agreement shall be binding upon all
successors and assigns.
17. NOTICES. Any notice required or permitted to be given under this
Agreement shall be sufficient if in writing and sent by registered
mail to the Executive at his residence maintained on the Company's
records, or to the Company at its address at 14900 Woodham Drive,
Suite A-125, Houston, Texas, 77073, Attention: Chief Executive
Officer, or such other addresses as either party shall notify the
other in accordance with the above procedure.
18. FORCE MAJEURE. Neither party shall be liable to the other for any
delay or failure to perform hereunder, which delay or failure is due
to causes beyond the control of said party, including, but not
limited to: acts of God; acts of the public enemy; acts of the
United States of America or any state, territory or political
subdivision thereof or of the District of Columbia; fires; floods;
epidemics; quarantine restrictions; strikes; or freight embargoes;
provided, however, that this Section 18 will not relieve the Company
of any of its payment obligations to the Executive under this
Agreement. Notwithstanding the foregoing provisions of this Section
18, in every case the delay or failure to perform must be beyond the
control and without the fault or negligence of the party claiming
excusable delay.
19. INTEGRATION. This Agreement represents the entire agreement and
understanding between the parties as to the subject matter hereof
and supersedes all prior or contemporaneous agreements whether
written or oral. No waiver, alteration or modification of any of the
provisions of this Agreement shall be binding unless in writing and
signed by duly authorized representatives of the parties hereto.
20. WAIVER. Failure or delay on the part of either party hereto to
enforce any right, power or privilege hereunder shall not be deemed
to constitute a waiver thereof. Additionally, a waiver by either
party of a breach of any promise herein by the other party shall not
operate as or be construed to constitute a waiver of any subsequent
breach by such other party.
21. SAVINGS CLAUSE. If any term, covenant or condition of this Agreement
or the application thereof to any person or circumstance shall to
any extent be invalid or unenforceable, the remainder of this
Agreement, or the application of such term, covenant or condition to
persons or circumstances other than those as to which it is held
invalid or unenforceable shall not be affected thereby, and each
term, covenant or condition of this Agreement shall be valid and
enforced to the fullest extent permitted by law.
22. AUTHORITY TO CONTRACT. The Company warrants and represents to the
Executive that the Company has full authority to enter into this
Agreement and to consummate the
- 20 -
<PAGE>
transactions contemplated hereby and that this Agreement is not in
conflict with any other agreement to which the Company is a party or
by which it may be bound. The Company further warrants and
represents to the Executive that the individual executing this
Agreement on behalf of the Company has the full power and authority
to bind the Company to the terms hereof and has been authorized to
do so in accordance with the Company's articles or certificate of
incorporation and bylaws.
23. PAYMENT OF EXPENSES. If at any time during the term hereof or
afterwards: (a) there should exist a dispute or conflict between the
Executive and the Company or another Person as to the validity,
interpretation or application of any term or condition hereof, or as
to the Executive's entitlement to any benefit intended to be
bestowed hereby, which is not resolved to the satisfaction of the
Executive, (b) the Executive must (i) defend the validity of this
Agreement or (ii) contest any determination by the Company
concerning the amounts payable (or reimbursable) by the Company to
the Executive or (c) the Executive must prepare responses to an
Internal Revenue Service ("IRS") audit of, or otherwise defend, his
personal income tax return for any year the subject of any such
audit, or an adverse determination, administrative proceedings or
civil litigation arising therefrom, which is occasioned by or
related to an audit by the IRS of the Company's income tax returns,
then the Company hereby unconditionally agrees: (a) on written
demand of the Company by the Executive, to provide sums sufficient
to advance and pay on a current basis (either by paying directly or
by reimbursing the Executive) not less than 30 days after a written
request therefor is submitted by the Executive, the Executive's out
of pocket costs and expenses (including attorney's fees, expenses of
investigation, travel, lodging, copying, delivery services and
disbursements for the fees and expenses of experts, etc.) incurred
by the Executive in connection with any such matter; (b) the
Executive shall be entitled, upon application to any court of
competent jurisdiction, to the entry of a mandatory injunction
without the necessity of posting any bond with respect thereto which
compels the Company to pay or advance such costs and expenses on a
current basis; and (c) the Company's obligations under this Section
23 will not be affected if the Executive is not the prevailing party
in the final resolution of any such matter unless it is determined
pursuant to Section 25 that, in the case of one or more of such
matters, the Executive has acted in bad faith or without a
reasonable basis for his position, in which event and, then only
with respect to such matter or matters, the successful or prevailing
party or parties shall be entitled to recover from the Executive
reasonable attorneys' fees and other costs incurred in connection
with that matter or matters (including the amounts paid by the
Company in respect of that matter or matters pursuant to this
Section 23), in addition to any other relief to which it or they may
be entitled.
24. REMEDIES. In the event of a breach by the Executive of Section 11 or
15 of this Agreement, in addition to other remedies provided by
applicable law, the Company
- 21 -
<PAGE>
will be entitled to issuance of a temporary restraining order or
preliminary injection enforcing its rights under such Section.
25. ARBITRATION. Any and all disputes or controversies whether of law or
fact and of any nature whatsoever arising from or respecting this
Agreement shall be decided by arbitration by the American
Arbitration Association in accordance with its Commercial Rules,
except as modified herein.
(a) The arbitrator shall be selected as follows: in the event the
Company and the Executive agree on one arbitrator, the
arbitration shall be conducted by such arbitrator. In the
event the Company and the Executive do not so agree, the
Company and the Executive shall each select one independent,
qualified arbitrator, and the two arbitrators so selected
shall select the third arbitrator. The arbitrator(s) are
herein referred to as the "Panel." The Company reserves the
right to object to any individual arbitrator who shall be
employed by or affiliated with a competing organization.
(b) Arbitration shall take place at Houston, Texas, or any other
location mutually agreeable to the parties. At the request of
either party, arbitration proceedings will be conducted in the
utmost secrecy; in such case all documents, testimony and
records shall be received, heard and maintained by the Panel
in secrecy, available for inspection only by the Company or
the Executive and their respective attorneys and their
respective experts, who shall agree in advance and in writing
to receive all such information confidentially and to maintain
such information in secrecy until such information shall
become generally known. The Panel shall be able to award any
and all relief, including relief of an equitable nature. The
award rendered by the Panel may be enforceable in any court
having jurisdiction thereof.
(c) Reasonable notice of the time and place of arbitration shall
be given to all parties and any interested persons as shall be
required by law.
(d) The Company will pay all the fees and out-of-pocket expenses
of each arbitrator selected pursuant to this Section 25.
26. GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of Texas without regard to its
conflicts of law principles.
27. COUNTERPARTS. This Agreement may be executed in counterparts, each
of which shall be deemed an original, but all of which together
shall constitute one and the same instrument.
- 22 -
<PAGE>
28. INDEMNIFICATION. The Executive shall be indemnified by the Company
to the maximum permitted by the law of the state of the Company's
incorporation, and by the law of the state of incorporation of any
subsidiary of the Company of which the Executive is a director or an
officer or employee, as the same may be in effect from time to time.
29. INTEREST. If any amounts required to be paid or reimbursed to the
Executive hereunder are not so paid or reimbursed at the times
provided herein (including amounts required to be paid by the
Company pursuant to Sections 6, 13 and 23), those amounts shall
accrue interest compounded daily at the annual percentage rate which
is three percentage points above the interest rate shown as the
Prime Rate in the Money Rates column in the then most recently
published edition of THE WALL STREET JOURNAL (Southwest Edition),
or, if such rate is not then so published, on at least a weekly
basis, the interest rate announced by Chase Manhattan Bank (or its
successor), from time to time, as its Base Rate (or prime lending
rate), from the date those amounts were required to have been paid
or reimbursed to the Executive until those amounts are finally and
fully paid or reimbursed; provided, however, that in no event shall
the amount of interest contracted for, charged or received hereunder
exceed the maximum non-usurious amount of interest allowed by
applicable law.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement
as of the date hereinabove first written.
INNOVATIVE VALVE TECHNOLOGIES, INC.
By: /S/ WILLIAM E. HAYNES
William E. Haynes
President and Chief Executive Officer
EXECUTIVE:
/S/ D. A. RIGAS
D. A. Rigas
- 23 -
EXHIBIT 21.1
SUBSIDIARIES OF INNOVATIVE VALVE TECHNOLOGIES, INC.
<TABLE>
<CAPTION>
PERCENTAGE OF PERCENTAGE OF
VOTING SECURITIES OWNED VOTING SECURITIES
JURISDICTION BY INNOVATIVE VALVE OWNED BY
NAME OF SUBSIDIARY OF INCORPORATION TECHNOLOGIES, INC. IMMEDIATE PARENT
- ------------------------------------- ----------------- ------------------------ -----------------
<S> <C> <C> <C>
The Safe Seal Company, Inc.* Texas 100%
Harley Industries, Inc.* California 100%
GSV, Inc.* (d/b/a Southern Valve
Co., and Gould Machine and
Fabrication) Florida 100%
Plant Specialties, Inc.* Louisiana 100%
Puget Investments, Inc. Washington 100%
Steam Supply & Rubber Co., Inc.
(d/b/a Steam Supply) Washington 100%
Flickinger Company (d/b/a
Flickinger Valve Company) Washington 100%
Flickinger-Benicia Inc. Washington 100%
Industrial Controls & Equipment,
Inc.* Pennsylvania 100%
Valve Actuation & Repair Co.* West Virginia 100%
Rickco Acquisition, Inc.* West Virginia 100%
BAS Technical Employment*
Placement Company West Virginia 100%
Southern Valve Services, Inc.* Alabama 100%
55 Leasing & Sales, Inc.* Alabama 100%
</TABLE>
- ------------
* Will become a direct or indirect wholly owned subsidiary of Innovative Valve
Technologies, Inc. (the "Company") upon the closing of the initial public
offering of Company common stock.
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
September 22, 1997
EXHIBIT 23.2
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Amendment No. 1 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
September 19, 1997
<PAGE>
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement of Innovative Valve
Technologies, Inc. on Form S-1 of our report dated April 11, 1997 appearing in
the Prospectus, which is part of this Registration Statement, 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.
We also consent to the reference to us under the heading "Experts" in
such Prospectus.
Deloitte & Touche LLP
Orlando, Florida
September 17, 1997
EXHIBIT 23.4
CONSENT OF PERSON NAMED TO BECOME A DIRECTOR
Pursuant to Rule 428 under the Securities Act of 1933, as amended (the
"Act"), I hereby consent to the use of my name and any references to me as a
person nominated to become a director of Innovative Valve Technologies, Inc.
("Invatec") in the Prospectus constituting a part of Invatec's Registration
Statement on Form S-1 to be filed with the Securities and Exchange Commission
pursuant to the Act.
Dated: July 30, 1997
/S/ MICHAEL A. BAKER
Name: Michael A. Baker
EXHIBIT 23.5
CONSENT OF PERSON NAMED TO BECOME A DIRECTOR
Pursuant to Rule 428 under the Securities Act of 1933, as amended (the
"Act"), I hereby consent to the use of my name and any references to me as a
person nominated to become a director of Innovative Valve Technologies, Inc.
("Invatec") in the Prospectus constituting a part of Invatec's Registration
Statement on Form S-1 to be filed with the Securities and Exchange Commission
pursuant to the Act.
Dated: July 30, 1997
/S/ ARTHUR L. FRENCH
Name: Arthur L. French
EXHIBIT 23.6
CONSENT OF PERSON NAMED TO BECOME A DIRECTOR
Pursuant to Rule 428 under the Securities Act of 1933, as amended (the
"Act"), I hereby consent to the use of my name and any references to me as a
person nominated to become a director of Innovative Valve Technologies, Inc.
("Invatec") in the Prospectus constituting a part of Invatec's Registration
Statement on Form S-1 to be filed with the Securities and Exchange Commission
pursuant to the Act.
Dated: July 30, 1997
/S/ TOMMY E. KNIGHT
Name: Tommy E. Knight
EXHIBIT 23.7
CONSENT OF PERSON NAMED TO BECOME A DIRECTOR
Pursuant to Rule 428 under the Securities Act of 1933, as amended (the
"Act"), I hereby consent to the use of my name and any references to me as a
person nominated to become a director of Innovative Valve Technologies, Inc.
("Invatec") in the Prospectus constituting a part of Invatec's Registration
Statement on Form S-1 to be filed with the Securities and Exchange Commission
pursuant to the Act.
Dated: July 30, 1997
/S/ PIERRE R. LATOUR
Name: Pierre R. Latour
EXHIBIT 23.8
CONSENT OF PERSON NAMED TO BECOME A DIRECTOR
Pursuant to Rule 428 under the Securities Act of 1933, as amended (the
"Act"), I hereby consent to the use of my name and any references to me as a
person nominated to become a director of Innovative Valve Technologies, Inc.
("Invatec") in the Prospectus constituting a part of Invatec's Registration
Statement on Form S-1 to be filed with the Securities and Exchange Commission
pursuant to the Act.
Dated: July 30, 1997
/S/ T. WAYNE WREN, JR.
Name: T. Wayne Wren, Jr.
EXHIBIT 23.9
CONSENT OF PERSON NAMED TO BECOME A DIRECTOR
Pursuant to Rule 428 under the Securities Act of 1933, as amended (the
"Act"), I hereby consent to the use of my name and any references to me as a
person nominated to become a director of Innovative Valve Technologies, Inc.
("Invatec") in the Prospectus constituting a part of Invatec's Registration
Statement on Form S-1 to be filed with the Securities and Exchange Commission
pursuant to the Act.
Dated: July 30, 1997
/S/ ROBERT M. CHISTE
Name: Robert M. Chiste
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE FINANCIAL DATA SCHEDULE CONTAIN SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THE SAFE SEAL COMPANY, INC. AND SUBSIDIARIES AS THE ACCOUNTING ACQUIROR AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> YEAR 6-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1997
<PERIOD-END> DEC-31-1996 JUN-30-1997
<CASH> 396,637 391,292
<SECURITIES> 0 0
<RECEIVABLES> 560,647 9,996,538
<ALLOWANCES> (25,000) (380,000)
<INVENTORY> 36,140 6,313,959
<CURRENT-ASSETS> 1,080,062 18,082,975
<PP&E> 186,912 14,640,552
<DEPRECIATION> (46,463) (8,241,626)
<TOTAL-ASSETS> 2,288,115 43,429,754
<CURRENT-LIABILITIES> 1,092,891 27,128,607
<BONDS> 588,970 5,237,262
2,000,000 2,000,000
0 0
<COMMON> 29,638 48,386
<OTHER-SE> (1,423,384) 3,692,148
<TOTAL-LIABILITY-AND-EQUITY> 2,288,115 43,429,754
<SALES> 3,887,761 19,759,635
<TOTAL-REVENUES> 3,887,761 19,759,635
<CGS> 2,375,245 13,494,613
<TOTAL-COSTS> 4,330,356 19,720,733
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 27,703 (998,111)
<INCOME-PRETAX> (414,499) (956,966)
<INCOME-TAX> 0 257,095
<INCOME-CONTINUING> (414,499) (681,871)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (414,499) (681,871)
<EPS-PRIMARY> 0 0
<EPS-DILUTED> 0 0
</TABLE>
