SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (date of earliest event reported): December 17, 1997
INNOVATIVE VALVE TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 000-23231 76-0530346
(State or other jurisdiction (Commission File Number) (I.R.S. Employer
of incorporation) Identification No.)
2 NORTHPOINT DRIVE, SUITE 300
HOUSTON, TEXAS 77060
(Address of principal executive offices and zip code)
Registrant's telephone number, including area code: (281) 925-0300
14900 Woodham Drive, Suite A-125
Houston, Texas 77073
(Former address)
<PAGE>
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS.
On December 17, 1997 (the "Closing Date"), Innovative Valve
Technologies, Inc., a Delaware corporation (the "Company"), acquired Dalco,
Inc., a Kentucky corporation ("Dalco"), through a merger (the "Acquisition") of
Dalco with and into DIVT Acquisition, LLC, a Kentucky limited liability company
and a wholly owned subsidiary of the Company ("DIVT"). The Acquisition was
completed pursuant to a Merger Agreement dated as of December 17, 1997 ("the
Merger Agreement") by and among the Company, DIVT, Dalco and Mr. James H.
Merrell and Mr. Christian G. Sawyer (collectively, the "Stockholders"). As
consideration for the Acquisition, the Company issued (i) an aggregate of
$4,550,000 of short-term notes (the "Short-Term Notes") and (ii) an aggregate of
$4,550,000 of convertible notes (the "Convertible Notes"). In addition, pursuant
to the terms of the Merger Agreement, (i) the Stockholders caused Dalco to make
distributions to them aggregating $340,000, in respect of federal and state
taxes attributable to income from Dalco's fiscal year ended October 31, 1997 and
its S corporation termination year commencing November 1, 1997, and (ii) Dalco
had outstanding indebtedness of $283,459 which became indebtedness of DIVT
(which survived the merger and changed its name to "Dalco, LLC") on consummation
of the Acquisition. The total consideration for the Acquisition is subject to
downward adjustment for any decrease in Dalco's Working Capital (as defined in
the Merger Agreement) from October 31, 1997 to December 17, 1997. The parties
determined the consideration for the Acquisition and the other terms and
provisions of the Merger Agreement and the related agreements entered into among
the parties through arm's-length negotiations.
The Short-Term Notes bore interest at a rate of 5.5% per annum,
became due and payable in full on January 2, 1998 and were unsecured. The
Convertible Notes bear interest at a rate of 5.5% per annum (with interest
payable quarterly beginning March 31, 1998), become due and payable in full on
December 17, 2002, are unsecured and subordinated to all the Company's Senior
Indebtedness (as defined in the Convertible Notes and including all indebtedness
under the Company's credit facility with Chase Bank of Texas, N.A., as agent,
and the other lenders party thereto (the "Credit Facility")) and are convertible
into shares of the Company's common stock, par value $.001 per share, at a
conversion price of approximately $22.20 per share beginning December 17, 1998.
The Company funded the payment of the Short-Term Notes through borrowings under
the Credit Facility. The Acquisition is being treated as a purchase for
accounting purposes. In connection with the Acquisition, the Company entered
into an employment agreement with each of Messrs. Merrell and Sawyer, providing
for their continuation as executive officers of the acquired business.
Dalco assembles, distributes and repairs a variety of industrial
valves (including pressure relief valves and control valves) and related
products (including pneumatic and electric actuators and controls). Dalco serves
customers throughout Kentucky and the southern regions of Indiana and Ohio, with
a focus on the following markets: power utility; chemical processing; food and
beverage; pulp and paper; refining; steel processing; and pharmaceutical
manufacturing. Dalco's main office, shop facilities and warehouse are located in
Louisville, Kentucky, and it has
2
<PAGE>
a sales office and a small warehouse in the Greater Cincinnati area. The Company
currently intends to use the acquired operations in the manner previously used
by Dalco.
A copy of the press release dated December 18, 1997 issued by the
Company and relating to the closing of the Acquisition is attached as Exhibit 99
hereto and incorporated herein by reference.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
(A) FINANCIAL STATEMENTS OF BUSINESS ACQUIRED.
Financial Statements of Dalco, Inc
Report of Independent Public Accountants.........................4
Balance Sheets as of October 31, 1996 and 1997...................5
Statements of Operations for the Years Ended October 31,
1996 and 1997..................................................6
Statements of Stockholders' Equity for the Years Ended
October 31, 1996 and 1997......................................7
Statements of Cash Flows for the Years Ended October 31, 1996
and 1997.......................................................8
Notes to Financial Statements....................................9
(B) PRO FORMA COMBINED FINANCIAL INFORMATION.
Unaudited Pro Forma Combined Financial Statements
Basis of Presentation...........................................13
Unaudited Pro Forma Combined Balance Sheet as of
September 30, 1997............................................14
Unaudited Pro Forma Combined Statement of Operations for the
Year Ended December 31, 1996 .................................15
Unaudited Pro Forma Combined Statement of Operations for
the Nine Months Ended September 30, 1997 .....................16
Notes to Unaudited Pro Forma Combined Financial Statements......17
(C) EXHIBITS
2* Merger Agreement dated as of December 17, 1997 by and among
Innovative Valve Technologies, Inc., DIVT Acquisition, LLC, Dalco,
Inc. and the Stockholders named therein. Pursuant to Item 601(b)(2)
of Regulation S-K, certain Schedules and Exhibits to the Merger
Agreement (all of which are listed therein) have been omitted from
this Exhibit 2. The Company hereby agrees to furnish supplementally
a copy of any such omitted item to the Securities and Exchange
Commission upon request.
23 Consent of Arthur Andersen LLP.
99* Press release issued December 18, 1997.
_________
* Previously Filed
3
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of Dalco, Inc.:
We have audited the accompanying balance sheets of Dalco, Inc. (a Kentucky
corporation), as of October 31, 1996 and 1997, and the related statements of
operations, stockholders' equity and cash flows for two years in the period
ended October 31, 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 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 Dalco, Inc., as of October 31,
1996 and 1997, and the results of its operations and its cash flows for the two
years in the period ended October 31, 1997 in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
December 23, 1997
4
<PAGE>
DALCO, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
OCTOBER 31
--------------------------
1996 1997
----------- -----------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash .................................................. $ 68,547 $ 240,810
Accounts receivable ................................... 1,362,091 1,281,887
Inventories ........................................... 976,790 1,142,249
Prepaid expenses and other current assets ............. 8,168 7,993
----------- -----------
Total current assets ..................... 2,415,596 2,672,939
PROPERTY AND EQUIPMENT, net ............................. 375,782 308,496
OTHER NONCURRENT ASSETS, net ............................ 35,783 45,542
----------- -----------
Total assets ............................. $ 2,827,161 $ 3,026,977
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses ................. $ 643,068 $ 696,593
Line of credit ........................................ 187,000 100,000
Current maturities of long-term debt .................. 72,787 78,801
Current portion of obligations under capital leases ... 19,856 21,670
----------- -----------
Total current liabilities ................ 922,711 897,064
----------- -----------
LONG-TERM DEBT, net of current maturities ............... 124,288 45,493
OBLIGATIONS UNDER CAPITAL LEASES, net of current
portion ............................................. 58,209 36,541
----------- -----------
182,497 82,034
----------- -----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, no par value, 2,000 shares
authorized, 300 shares issued and outstanding ........ 1,050 1,050
Treasury stock ........................................ (22,054) (22,054)
Retained earnings ..................................... 1,742,957 2,068,883
----------- -----------
Total stockholders' equity ............... 1,721,953 2,047,879
----------- -----------
Total liabilities and stockholders' equity $ 2,827,161 $ 3,026,977
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
DALCO, INC.
STATEMENTS OF OPERATIONS
YEAR ENDED OCTOBER 31
---------------------------
1996 1997
----------- -----------
REVENUES ....................................... $ 8,832,810 $ 9,620,492
COST OF OPERATIONS ............................. 6,429,440 6,816,752
----------- -----------
Gross profit .............. 2,403,370 2,803,740
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES ... 1,717,885 1,777,291
----------- -----------
Income from operations .... 685,485 1,026,449
OTHER INCOME (EXPENSE):
Interest expense ............................. (40,688) (28,557)
Other ........................................ 7,020 5,435
----------- -----------
INCOME BEFORE INCOME TAXES ..................... 651,817 1,003,327
PROVISION FOR INCOME TAXES ..................... 5,428 12,372
----------- -----------
NET INCOME ..................................... $ 646,389 $ 990,955
=========== ===========
The accompanying notes are an integral part of these financial statements.
6
<PAGE>
DALCO, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK
----------------- TREASURY RETAINED
SHARES AMOUNT STOCK EARNINGS TOTAL
-------- ------ -------- ----------- -----------
<S> <C> <C> <C> <C> <C>
BALANCE, October 31, 1995 . 300 $1,050 $(22,054) $ 1,497,954 $ 1,476,950
Stockholder distributions -- -- -- (401,386) (401,386)
Net income .............. -- -- -- 646,389 646,389
-------- ------ -------- ----------- -----------
BALANCE, October 31, 1996 . 300 1,050 (22,054) 1,742,957 1,721,953
Stockholder distributions -- -- -- (665,029) (665,029)
Net income .............. -- -- -- 990,955 990,955
-------- ------ -------- ----------- -----------
BALANCE, October 31, 1997 . 300 $1,050 $(22,054) $ 2,068,883 $ 2,047,879
======== ====== ======== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
7
<PAGE>
DALCO, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31
------------------------
1996 1997
--------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income .............................................. $ 646,389 $ 990,955
Adjustments to reconcile net income to net cash
provided by operating activities-
Depreciation and amortization ........................ 123,814 107,203
Gain on disposal of property and equipment ........... (1,723) --
(Increase) decrease in-
Accounts receivable ................................. (227,699) 80,204
Inventories ......................................... (66,602) (165,459)
Prepaid expenses and other current assets ........... 664 175
Other noncurrent assets ............................. 5,694 (9,759)
Accounts payable and accrued expenses ............... (73,806) 53,525
--------- -----------
Net cash provided by operating activities .. 406,731 1,056,844
--------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment ..................... (22,091) (39,917)
Proceeds from sale of property and equipment ............ 3,000 --
--------- -----------
Net cash used in investing activities ...... (19,091) (39,917)
--------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (repayments) on line of credit ........... 67,000 (87,000)
Payments on capital leases .............................. (14,490) (19,856)
Repayments of long-term debt ............................ (67,130) (72,779)
Stockholder distributions ............................... (401,386) (665,029)
--------- -----------
Net cash used in financing activities ...... (416,006) (844,664)
--------- -----------
NET INCREASE (DECREASE) IN CASH ........................... (28,366) 172,263
CASH, beginning of year ................................... 96,913 68,547
--------- -----------
CASH, end of year ......................................... $ 68,547 $ 240,810
========= ===========
SUPPLEMENTAL DISCLOSURES:
Interest paid ........................................... $ 42,750 $ 29,161
Income taxes paid ....................................... 3,691 6,328
</TABLE>
The accompanying notes are an integral part of these financial statements.
8
<PAGE>
DALCO, INC.
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION:
Dalco, Inc. ("Dalco" or the "Company") was incorporated in Kentucky in 1971.
Dalco assembles, distributes and repairs industrial valves (including pressure
relief valves and control valves) and related products (including pneumatic and
electric actuators and controls). The Company serves industrial customers
throughout Kentucky and the southern regions of Indiana and Ohio.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation is computed over the
estimated useful lives of the assets, primarily using accelerated methods.
Leasehold improvements to the Company's facility, which is leased from the
stockholders, are amortized over the estimated useful life as used for federal
income tax purposes. 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.
Leases having the substance of financing transactions have been capitalized and
the related lease obligations have been included in obligations under capital
leases. The leased assets are depreciated over their estimated useful lives.
Accumulated amortization of equipment under capital leases was $50,188 and
$78,101 at October 31, 1996 and 1997, respectively.
INCOME TAXES
The stockholders of the Company elected to be taxed under the Subchapter S
provisions of the Internal Revenue Code. Under these provisions, taxable income
and applicable tax credits are attributed directly to the stockholders, and no
federal income taxes are imposed on the Company. Accordingly, a provision for
federal and state income taxes has not been established. The income tax
provision consists of local income taxes. The Company has filed to terminate its
S Corporation status effective November 1, 1998.
REVENUE RECOGNITION
Revenue is recognized as products are sold and as services are performed.
CASH
The Company considers all short-term debt securities purchased with a maturity
of three months or less to be cash equivalents.
INVENTORY
Inventories are valued at the lower of cost or market using the first-in,
first-out method of accounting.
9
<PAGE>
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
3. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following:
OCTOBER 31
-----------------------
1996 1997
-------- --------
Machinery and equipment .......................... $375,821 $388,117
Leasehold improvements ........................... 158,817 158,817
Vehicles ......................................... 109,678 124,955
Office furniture and equipment ................... 112,572 124,916
Equipment under capital leases ................... 106,674 106,674
-------- --------
863,562 903,479
Less- Accumulated depreciation and
amortization ..................................... 487,780 594,983
-------- --------
$375,782 $308,496
======== ========
Depreciation and amortization expense was $123,814 and $107,203 for the years
ended October 31, 1996 and 1997, respectively.
4. ACCOUNTS PAYABLE AND ACCRUED EXPENSES:
Accounts payable and accrued expenses consist of the following:
OCTOBER 31
---------------------------
1996 1997
-------- --------
Accounts payable ......................... $448,383 $517,034
Accrued profit-sharing
contribution ............................. 115,000 78,055
Accrued payroll .......................... 74,951 91,095
Other .................................... 4,734 10,409
-------- --------
$643,068 $696,593
======== ========
5. LINE OF CREDIT:
The Company has a credit agreement with a bank. The agreement allows the Company
to borrow up to $750,000. Borrowings bear interest at prime (8.5 percent at
October 31, 1997), with interest payable monthly. The line of credit is
unsecured. Borrowings under this line were $187,000 and $100,000 at October 31,
1996 and 1997, respectively.
10
<PAGE>
6. LONG-TERM DEBT:
Long-term debt consists of the following:
OCTOBER 31
---------------------
1996 1997
-------- --------
Notes payable to bank-
Notes due in monthly installments of $6,254,
with interest due monthly at 8.75%
through June 1999; secured by inventory .......... $168,840 $106,264
Notes due in monthly installments of $538,
with interest due monthly at 8.24% through
June 1999; secured by vehicle .................... 15,405 10,020
Notes due in monthly installments of $475,
with interest due monthly at 8.2% through
April 1999; secured by vehicle ................... 12,830 8,010
-------- --------
197,075 124,294
Less- Current maturities ............................. 72,783 78,801
-------- --------
$124,292 $ 45,493
======== ========
Principal payments on long-term debt are due as follows:
Year ending October 31-
1998 ...................... $ 78,801
1999 ...................... 45,493
--------
$124,294
========
At October 31, 1997, the note payable secured by inventory was subject to a
credit agreement that requires the Company to maintain minimum levels of net
worth and working capital and to maintain minimum ratios of interest coverage
and net worth. At October 31, 1997, the Company was in compliance with respect
to all covenants.
Management estimates that the fair value of its debt obligations approximates
the historical value at October 31, 1997 and 1996.
7. OBLIGATIONS UNDER CAPITAL LEASES:
The Company leases certain telephone and computer equipment under capital
leases. The following is a schedule of future minimum lease payments under
capital leases, together with the present value of the net minimum lease
payments as of October 31, 1997:
1998 ..................................... $25,876
1999 ..................................... 23,753
2000 ..................................... 15,590
-------
Total minimum lease payments .......... 65,219
Less- Amount representing interest ....... 7,009
-------
Present value of net minimum lease
payments ............................ $58,210
=======
11
<PAGE>
8. PROFIT-SHARING PLAN:
The Company has a profit-sharing plan covering all employees who meet certain
requirements as to service and age. Profit-sharing contributions are made at the
discretion of the Company. Profit-sharing contributions for the years ended
October 31, 1996 and 1997, were $115,000 and $115,000, respectively.
9. SERVICE AND DISTRIBUTION AGREEMENTS:
The Company purchases, sells and services various products under service and
distribution agreements with certain suppliers. These agreements are generally
cancelable upon 30 to 60 days notice.
10. COMMITMENTS AND CONTINGENCIES:
The Company leases its facilities and certain vehicles under operating leases.
The Company's headquarters in Louisville is leased from the Company's two
stockholders. Rental commitments under noncancelable operating leases are as
follows:
LEASE WITH
STOCKHOLDERS OTHER TOTAL
-------------- ---------- ----------
Year ending October 31-
1998 .............................. $ 81,996 $ 29,439 $ 111,435
1999 .............................. 81,996 25,490 107,486
2000 .............................. 81,996 18,812 100,808
2001 .............................. 81,996 18,240 100,236
2002 .............................. 81,996 18,240 100,236
Later Years........................ 757,164 -- 757,164
-------------- ---------- ----------
$ 1,167,144 $ 110,221 $1,277,365
============== ========== ==========
Rent expense under the above leases was $89,304 for each of the years ended
October 31,1996 and 1997, including $60,000 paid in each of those years to the
Company's two stockholders.
11. SIGNIFICANT CUSTOMER:
During fiscal 1996 and 1997, one customer accounted for approximately 34 percent
of the Company's revenues.
12. SUBSEQUENT EVENT:
On December 17, 1997, Innovative Valve Technologies, Inc. ("Invatec") acquired
all the outstanding stock of Dalco through a merger of Dalco with an Invatec
subsidiary. The total consideration was in excess of the recorded amounts of the
Company's net assets.
12
<PAGE>
INNOVATIVE VALVE TECHNOLOGIES, INC. AND ACQUIRED BUSINESSES
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
BASIS OF PRESENTATION
Innovative Valve Technologies, Inc. ("Invatec") was incorporated in
Delaware 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 throughout
North America. Except for its purchase of Steam Supply & Rubber Co., Inc. and
three related entities (collectively, "Steam Supply") in July 1997, Invatec
conducted no operations of its own prior to the closing on October 28, 1997 of
(i) its initial public offering (the "IP0") of its common stock, par value
$.OOl per share ("Common Stock"), (ii) its purchase of Industrial Controls &
Equipment, Inc. and three related entities (collectively, "ICE/VARCO") and
Southern Valve Services, Inc. and a related entity (collectively, "SVS") and
(iii) a merger (the "SSI Merger") in which The Safe Seal Company, Inc. ("SSI")
became its subsidiary. Earlier in 1997, SSI had purchased Harley Industries,
Inc. ("Harley"), GSV, Inc. ("GSV") and Plant Specialties, Inc. ("PSI"). SSI and
its subsidiaries were affiliates of Invatec prior to the SSI Merger.
For financial reporting purposes, SSI is presented as the "accounting
acquirer" of Steam Supply, ICE/VARCO, SVS, Harley, GSV and PSI (collectively,
the "Initial Acquired Businesses"), and, as used herein, the term "Company"
means (i) SSI and its consolidated subsidiaries prior to October 31, 1997 and
(ii) Invatec and its consolidated subsidiaries (including SSI) on that date and
thereafter.
Following the IP0, the Company acquired Dalco, Inc. ("Dalco") and two
other additional businesses (the "Other Subsequently Acquired Businesses" and,
collectively with the Initial Acquired Business and Dalco, the "Acquired
Businesses") in the fourth quarter of 1997.
The Company is accounting for the acquisitions of the Acquired
Businesses (collectively, the "Acquisitions") in accordance with the purchase
method of accounting. The allocation of the purchase prices paid to the assets
acquired and the liabilities assumed in the Acquisitions has been recorded
initially on the basis of preliminary estimates of fair value and may be
revised as additional information concerning the valuation of those assets and
liabilities becomes available.
The unaudited pro forma combined financial statements give effect to the
following events and transactions (the "Transactions"): (i) under the caption
"The Company" -- (a) the SSI Merger and the acquisitions of the Initial Acquired
Businesses; (b) the financing of the purchase prices paid for the Initial
Acquired Businesses; (c) certain reverse stock splits completed prior to the
closing of the IPO; (d) the issuance of Common Stock and the payment of cash to
repay indebtedness owed to Philip Services Corp.; (e) the closing of the IP0 and
the application of Invatec's proceeds therefrom; (f) the exercise of the
underwriters' over-allotment option granted in connection with the IPO and the
application of Invatec's proceeds therefrom; and (ii) under the remaining
captions -- the Acquisitions of Dalco (which is considered a "significant
subsidiary" of the Company) and the Other Subsequently Acquired Businesses.
The following unaudited pro forma combined balance sheet gives effect to
the Transactions that occurred in the fourth quarter of 1997 as if they had
occurred on September 30, 1997, while the unaudited pro forma combined
statements of operations give effect to all the Transactions as if they had
occurred at the beginning of each period presented. The unaudited pro forma
combined statements convert the results of operations of the Acquired Businesses
whose historical fiscal periods were not on a calendar-year basis to a
calendar-year basis and include pro forma adjustments consisting principally of
the following: (i) the adjustments to selling, general and administrative
expenses described below; (ii) adjustments for the effects of recording
inventories on a first-in, first-out rather than on a last-in, first-out basis
at PSI and Steam Supply; (iii) adjustments for pro forma goodwill amortization
using a 40-year estimated life; (iv) eliminations of historical interest expense
resulting from the application of proceeds from the IP0 and the use of Common
Stock to retire outstanding indebtedness; and (v) adjustments to federal and
state income tax provisions.
The unaudited 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 employed by
the Company after the acquisition of their Acquired Businesses and will not be
replaced; (ii) the elimination of certain excess administrative support service
fees charged by ICE/VARCO's former parent company; and (iii) the reversal of the
special non-cash, non-recurring compensation expense attributable to stock
awards made by SSI and Common Stock sales and option awards made by Invatec.
The integration of the Acquired Businesses may present opportunities to
reduce other costs through the elimination of duplicative functions and
operating locations and the development of economies of scale, particularly as a
result of the Company's ability to (i) consolidate insurance programs, (ii)
borrow at lower interest rates than the Acquired Businesses, (iii) obtain
greater discounts from suppliers and (iv) generate savings in other general and
administrative areas. The Company cannot currently quantify these anticipated
savings and expects these savings will be partially offset by incremental costs
that the Company expects to incur, but also cannot currently quantify
accurately. These costs include those associated with corporate management and
administration, being a public company, systems integration and facilities
expansions and consolidations. The unaudited pro forma combined financial
information herein reflects neither unquantifiable expected savings nor
unquantifiable expected incremental costs.
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 unaudited pro
forma combined statements of operations do not include adjustments for $330,000
of bonuses paid to three executive officers of Invatec on completion of the IPO
and $159,000 of financing charges due to Philip, which were recorded subsequent
to September 30, 1997.
The unaudited pro forma combined financial information presented herein
does not purport to represent what the Company's financial position or results
of operations actually would have been had such events occurred at the beginning
of the periods presented, as assumed, or to project the Company's financial
position or results of operations for any future period or the future results of
the Acquired Businesses.
13
<PAGE>
INNOVATIVE VALVE TECHNOLOGIES, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
SEPTEMBER 30,1997
(In Thousands)
<TABLE>
<CAPTION>
OTHER
THE SUBSEQUENT PRO FORMA PRO FORMA
COMPANY DALCO ACQUISITIONS ADJUSTMENTS COMBINED
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ............... $ 7,881 $ 187 $ 605 $ (13,970)(a) $ 100
5,397 (b)
Accounts receivable, net ................ 14,025 1,283 2,402 -- 17,710
Inventories ............................. 10,825 1,209 1,513 -- 13,547
Prepaid expenses and other current assets 1,822 62 63 -- 1,947
------------ ------------ ------------ ------------ ------------
Total current assets ............. 34,553 2,741 4,583 (8,573) 33,304
PROPERTY AND EQUIPMENT, net .................... 9,252 308 971 -- 10,531
GOODWILL ....................................... 28,908 -- 32 13,662 (a) 42,602
OTHER NONCURRENT ASSETS ........................ 4,399 36 28 -- 4,463
------------ ------------ ------------ ------------ ------------
Total assets ..................... $ 77,112 $ 3,085 $ 5,614 $ 5,089 $ 90,900
============ ============ ============ ============ ============
LIABILITIES AND
STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable and accrued expenses ... 10,610 634 627 -- 11,871
Short-term debt ......................... -- 191 1,467 (1,658)(a) 5,397
5,397 (b)
Current maturities of long-term debt .... -- 100 166 (266)(a) --
Other current liabilities................ 743 -- -- -- 743
------------ ------------ ------------ ------------ ------------
Total current liabilities ....... 11,353 925 2,260 3,473 18,011
LONG-TERM DEBT, net of current maturities....... -- 90 506 (596)(a) --
CONVERTIBLE NOTES .............................. 6,143 -- -- 6,350 (a) 12,493
OTHER NONCURRENT LIABILITIES ................... 853 -- -- -- 853
STOCKHOLDERS' EQUITY
Common stock ........................... 7 1 144 (145)(a) 7
Treasury stock .......................... -- (22) (55) 77 (a) --
Additional paid-in capital............... 70,289 -- -- 780 (a) 71,069
Retained earnings (deficit) ............. (11,533) 2,091 2,759 (4,850)(a) (11,533)
------------ ------------ ------------ ------------ ------------
Total stockholders' equity (deficit) .... 58,763 2,070 2,848 (4,138) 59,543
------------ ------------ ------------ ------------ ------------
Total liabilities and stockholders'equity $ 77,112 $ 3,085 $ 5,614 $ 5,089 $ 90,900
============ ============ ============ ============ ============
</TABLE>
See accompanying notes to unaudited pro forma combined financial statements.
14
<PAGE>
INNOVATIVE VALVE TECHNOLOGIES, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31,1996
(In Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
OTHER
THE SUBSEQUENT PRO FORMA PRO FORMA
COMPANY DALCO ACQUISITIONS ADJUSTMENTS COMBINED
-------- ------- -------- ------- ---------
<S> <C> <C> <C> <C> <C>
REVENUES ............................. $ 77,508 $ 8,959 $ 15,643 $ -- $ 102,110
COST OF OPERATIONS ................... 54,613 6,404 9,804 -- 70,821
-------- ------- -------- ------- ---------
Gross Profit..................... 22,895 2,555 5,839 -- 31,289
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES.............. 19,307 1,706 5,515 (915)(aa) 25,955
342 (bb)
-------- ------- -------- ------- ---------
Income from operations .......... 3,588 849 324 573 5,334
OTHER INCOME (EXPENSE):
Interest, net ................... (332) (38) (246) (421)(cc) (1037)
Other ........................... 14 1 40 -- 55
-------- ------- -------- ------- ---------
(318) (37) (206) (421) (982)
INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES.................. 3,270 812 118 152 4,352
PROVISION FOR INCOME TAXES ........... 1,407 9 1 454 (dd) 1,871
-------- ------- -------- ------- ---------
INCOME FROM CONTINUING OPERATIONS .... $ 1,863 $ 803 $ 117 $ (302) $ 2,481
======== ======= ======== ======= =========
PRO FORMA INCOME PER SHARE FROM
CONTINUING OPERATIONS................ $ 0.31
=========
SHARES USED IN COMPUTING PRO FORMA
INCOME PER SHARE FROM CONTINUING OPERATIONS 8,008 (ee)
=========
</TABLE>
See accompanying notes to unaudited pro forma combined financial statements.
15
<PAGE>
INNOVATIVE VALVE TECHNOLOGIES, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30,1997
(In Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
OTHER
THE SUBSEQUENT PRO FORMA PRO FORMA
COMPANY DALCO ACQUISITIONS ADJUSTMENTS COMBINED
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
REVENUES ............................... $ 68,134 $ 7,246 $ 12,371 $ -- $ 87,751
COST OF OPERATIONS ..................... 46,857 5,128 7,762 -- 59,747
------------ ------------ ------------ ------------ ------------
Gross Profit ...................... 21,277 2,118 4,609 -- 28,004
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES ............... 17,840 1,408 3,586 (139)(aa) 22,951
256 (bb)
------------ ------------ ------------ ------------ ------------
Income from operations ............. 3,437 710 1,023 (117) 5,053
OTHER INCOME (EXPENSE):
Interest, net ...................... (243) (23) (197) (308)(cc) (771)
Other ............................. -- -- 33 -- 33
------------ ------------ ------------ ------------ ------------
(243) (23) (164) (308) (738)
INCOME FROM CONTINUING
OPERATIONS BEFORE INCOME TAXES ........ 3,194 687 859 (425) 4,315
PROVISION FOR INCOME TAXES ............. 1,456 8 -- 391 (dd) 1,855
------------ ------------ ------------ ------------ ------------
INCOME FROM CONTINUING OPERATIONS ...... $ 1,738 $ 679 $ 859 $ (816) $ 2,460
============ ============ ============ ============ ============
PRO FORMA INCOME PER SHARE FROM
CONTINUING OPERATIONS ................. $ 0.31
============
SHARES USED IN COMPUTING PRO FORMA
INCOME PER SHARE FROM CONTINUING OPERATIONS 8,008 (ee)
============
</TABLE>
See accompanying notes to unaudited pro forma combined financial statements.
16
<PAGE>
INNOVATIVE VALVE TECHNOLOGIES, INC. AND SUBSIDAIRIES
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
UNAUDITED PRO FORMA COMBINED BALANCE SHEET ADJUSTMENTS:
(a) Records the consideration for the acquisitions of Dalco and the Other
Subsequently Acquired Businesses consisting of $14.0 million in cash,
$6.4 million in convertible notes and $0.8 million in Common Stock for a
total estimated purchase price of $23.7 million (including $2.5 million
of assumed debt) and acquisition costs, resulting in goodwill of $13.7
million.
(b) Records the borrowings under a credit facility to pay cash consideration
due to former owners of the Other Subsequently Acquired Businesses and
repay outstanding indebtedness of the Other Subsequently Acquired
Businesses.
UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS ADJUSTMENTS:
(aa) Adjusts selling, general and administrative expenses to reflect (1) the
decrease in salaries and benefits associated with certain owners and
managers of Dalco and the Other Subsequently Acquired Businesses who
were not or will not be employed subsequent to the acquisition of their
respective businesses and who will not be replaced.
(bb) Records goodwill amortization expense over 40 years.
(cc) Records elimination of interest expense of Dalco and the Other
Subsequently Acquired Businesses and related interest expenses caused by
the issuances of convertible notes and borrowings under a credit
facility used to pay the cash portion of the combined purchase price and
the retirement of debt of those Acquired Businesses.
(dd) Records the incremental provision for federal and state income taxes
relating to S corporation income and other pro forma adjustments to
reflect an effective tax rate of 43%. In its assumption of the effective
tax rate, management has not considered the utilization of net operating
losses or other tax attributes previously generated by or existing with
respect to certain of the Acquired Businesses.
(ee) The number of shares of Common Stock outstanding includes shares issued
in connection with the IPO, the exercise of the related over-allotment
option and the Other Subsequently Acquired Businesses. The calculation
also includes the number of common stock equivalents determined using
the treasury stock method.
17
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
INNOVATIVE VALVE TECHNOLOGIES, INC.
By: /s/ CHARLES F. SCHUGART
Charles F. Schugart
Chief Financial Officer and Senior Vice
President - Corporate Development
Date: March 2, 1998
18
EXHIBIT 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants,we hereby consent to the incorporation
of our report included in this Form 8-K/A into the Company's previously filed
Registration Statement File No. 333-40023.
Houston, Texas
December 23, 1997
