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): March 16, 1998
INNOVATIVE VALVE TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 000-23231 76-0530346
(State or other jurisdiction (I.R.S. Employer
of incorporation) (Commission File Number) 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
Page 1
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ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS.
On March 16, 1998 (the "Closing Date"), Innovative Valve
Technologies, Inc., a Delaware corporation (the "Company"), acquired (the
"Acquisition") IPS Holding, Ltd., a Delaware corporation ("IPS Holding"), and
its direct and indirect subsidiaries, International Piping Services Company,
IPSCO (U.K.) Limited, Mid-America Energies, Corp. and IPSCO-Florida, Inc. (the
"IPSCO Subsidiaries" and, collectively with IPS Holding, "IPSCO") through (i) a
merger of IPS Holding with a wholly-owned subsidiary of the Company
("Acquisition Sub"), and (ii) several stock purchase transactions with the
minority stockholders of the IPSCO Subsidiaries. The Company completed the
Acquisition pursuant to a Merger Agreement, dated as of March 16, 1998, among
the Company, Acquisition Sub, the stockholders of IPS Holding and IPSCO, and
several separate Stock Acquisition Agreements among the Company and the minority
stockholders of the IPSCO Subsidiaries, who collectively owned all of the equity
ownership interests of the IPSCO Subsidiaries not owned by IPS Holding. As
consideration for the Acquisition, the Company (i) paid an aggregate cash
acquisition price of $7,776,632, and (ii) issued 807,828 shares of Company
common stock. In addition, IPSCO had outstanding indebtedness of $4,078,233
which became indebtedness of Acquisition Sub. The Company funded the payment of
the cash acquisition price through borrowings under its credit facility with
Chase Bank of Texas, National Association, as agent, and the other lenders party
thereto. The parties determined the consideration for the Acquisition through
arm's-length negotiations.
IPSCO, with its headquarters in Downers Grove, Illinois and through
its domestic operating locations in Florida, Illinois, New Jersey, North
Carolina and Texas and its international operations in England, Germany and the
United Arab Emirates, provides on-line piping and valve services which include
hot tapping, line stopping and leak sealing. In addition, IPSCO manufactures
certain small diameter hot tapping and line stopping machinery for sale to
industrial customers and service companies engaged in the provision of hot
tapping and line stopping services. The customer base for IPSCO's on-line
services includes the chemical, petrochemical and municipal water industries.
The Company intends to use the acquired operations in the manner previously used
by IPSCO.
A copy of the Company's March 19, 1998 press release that relates to
the Acquisition is included as Exhibit 99.1 to this Report and incorporated
herein by reference thereto.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
(a) FINANCIAL STATEMENTS OF BUSINESS ACQUIRED.
The historical financial statements of IPSCO set forth in the
Company's Registration Statement on Form S-4 (Reg. No. 333-49283) are
incorporated herein by reference thereto. A copy of such financial statements is
included as Exhibit 99.2 to this Report.
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(b) PRO FORMA FINANCIAL INFORMATION.
The Unaudited Pro Forma Combined Financial Statements set forth in
the Company's Registration Statement on Form S-4 (Reg. No. 333-49283) are
incorporated herein by reference thereto. A copy of such Unaudited Pro Forma
Combined financial statements is included as Exhibit 99.3 to this Report. In
addition, the Consolidated Balance Sheet of the Company and its subsidiaries as
of March 31, 1998, reflecting, among other things, the Company's acquisition of
IPSCO, is incorporated herein by reference to Item 1 of the Company's Quarterly
Report on Form 10-Q for the quarter ended March 31, 1998. A copy of such
Consolidated Balance Sheet, along with the other interim financial statements of
the Company and its subsidiaries included in Item 1 of the Company's Quarterly
Report on Form 10-Q for the quarter ended March 31, 1998, is included as Exhibit
99.4 to this Report.
(c) EXHIBITS
2* Merger Agreement, dated as of March 16, 1998, by and among
Innovative Valve Technologies, Inc., IPSCO Acquisition, Inc., IPS
Holding, Ltd. ("IPS"), the Subsidiaries of IPS named therein and the
Stockholders of IPS named therein. Pursuant to Item 601(b)(2) of
Regulation S-K, the Company has omitted certain Schedules and
Exhibits to the Merger Agreement (all of which are listed therein)
from this Exhibit 2. It hereby agrees to furnish supplementally a
copy of any such omitted item to the Securities and Exchange
Commission on its request.
23.1 Consent of Arthur Andersen LLP
99.1* Press release issued March 19, 1998.
99.2 IPS Financial Statements.
99.3 Innovative Valve Technologies, Inc. Pro Forma Financial Information.
99.4 Item 1 (Financial Statements) of Innovative Valve Technologies,
Inc.'s Quarterly Report on Form 10-Q for the quarter ended March 31,
1998.
---------------
* Previously filed.
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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.
/s/ CHARLES F. SCHUGART
By: Charles F. Schugart
Chief Financial Officer and Senior
Vice President - Corporate Development
Date: May 29, 1998
EXHIBIT 23.1
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.
ARTHUR ANDERSEN LLP
Houston, Texas
May 26, 1998
EXHIBIT 99.2
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To IPS Holding, Ltd.:
We have audited the accompanying consolidated balance sheets of IPS
Holding, Ltd. (a Delaware corporation) and subsidiaries, as of March 31, 1997
and February 28, 1998, and the related consolidated statements of operations,
stockholders' equity and cash flows for the year ended March 31, 1997 and for
the eleven months ended February 28, 1998. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated 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 consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position,
of IPS Holding, Ltd. and subsidiaries, as of March 31, 1997 and February 28,
1998, and the results of their operations and their cash flows for the year
ended March 31, 1997 and for the eleven months ended February 28, 1998, in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
April 8, 1998
1
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IPS HOLDING, LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1997 FEBRUARY 28, 1998
--------------- ------------------
ASSETS
CURRENT ASSETS:
Cash............................ $ 130,695 $ 63,915
Accounts receivable, net of
allowances of $61,314 and
$81,046......................... 3,112,540 4,100,520
Inventories..................... 2,358,675 2,737,145
Prepaid expenses................ 95,035 132,997
Other current assets............ 178,598 150,742
--------------- ------------------
Total current assets....... 5,875,543 7,185,319
PROPERTY AND EQUIPMENT, net.......... 2,678,529 3,081,493
RELATED-PARTY NOTES RECEIVABLE....... 19,376 19,376
OTHER NONCURRENT ASSETS, net......... 128,507 36,000
--------------- ------------------
$ 8,701,955 $ 10,322,188
=============== ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued
expenses........................ $ 2,263,822 $ 2,335,997
Line of credit.................. 1,392,657 2,417,014
Current maturities of long-term
debt............................ 345,977 1,197,338
Accrued compensation............ 375,130 386,050
Income taxes payable............ 390,637 295,163
Current portion of obligations
under capital leases............ 72,897 70,751
--------------- ------------------
Total current
liabilities................ 4,841,120 6,702,313
LONG-TERM DEBT, net of current
maturities........................... 1,535,436 586,777
DEFERRED INCOME TAXES................ 90,154 40,435
RELATED PARTY PAYABLE................ 12,763 --
OBLIGATIONS UNDER CAPITAL LEASES..... 103,413 92,081
MINORITY INTEREST.................... 266,059 367,707
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, $1.00 par value,
21,025 shares authorized,
20,000 issued and
outstanding................... 20,000 20,000
Additional paid-in capital...... 380,000 380,000
Cumulative translation
adjustment.................... (27,730) (28,964)
Retained earnings............... 1,480,740 2,161,839
--------------- ------------------
Total stockholders'
equity..................... 1,853,010 2,532,875
--------------- ------------------
$ 8,701,955 $ 10,322,188
=============== ==================
The accompanying notes are an integral part of these consolidated financial
statements.
2
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IPS HOLDING, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
ELEVEN MONTHS
YEAR ENDED ENDED
MARCH 31, 1997 FEBRUARY 28, 1998
-------------- -----------------
REVENUES............................. $ 20,869,489 $21,440,702
COST OF OPERATIONS................... 12,818,247 13,164,086
-------------- -----------------
Gross profit.................... 8,051,242 8,276,616
SELLING, GENERAL AND ADMINSISTRATIVE
EXPENSES........................... 6,557,493 6,680,309
-------------- -----------------
Income from operations.......... 1,493,749 1,596,307
OTHER INCOME (EXPENSE):
Interest expense................ (308,551) (378,605)
Other........................... 189,530 66,156
-------------- -----------------
INCOME BEFORE INCOME TAXES........... 1,374,728 1,283,858
PROVISION FOR INCOME TAXES........... 485,986 521,546
-------------- -----------------
NET INCOME BEFORE MINORITY
INTEREST........................... 888,742 762,312
MINORITY INTEREST.................... 101,839 81,213
-------------- -----------------
NET INCOME........................... $ 786,903 $ 681,099
============== =================
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE>
IPS HOLDING, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL CUMULATIVE
----------------- PAID-IN TRANSLATION RETAINED
SHARES AMOUNT CAPITAL ADJUSTMENT EARNINGS TOTAL
------ ------- ---------- ----------- ---------- ------------
<S> <C> <C> <C> <C> <C>
BALANCE, March 31, 1996.............. 20,000 $20,000 $ 380,000 -- $ 693,837 $ 1,093,837
Net income...................... -- -- -- -- 786,903 786,903
Translation adjustment.......... -- -- -- $ (27,730) -- (27,730)
------ ------- ---------- ----------- ---------- ------------
BALANCE, March 31, 1997.............. 20,000 20,000 380,000 (27,730) 1,480,740 1,853,010
Net income...................... -- -- -- -- 681,099 681,099
Translation adjustment.......... -- -- -- (1,234) -- (1,234)
------ ------- ---------- ----------- ---------- ------------
BALANCE, February 28, 1998........... 20,000 $20,000 $ 380,000 $ (28,964) $2,161,839 $ 2,532,875
====== ======= ========== =========== ========== ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE>
IPS HOLDING, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
ELEVEN MONTHS
YEAR ENDED ENDED
MARCH 31, 1997 FEBRUARY 28, 1998
-------------- -----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income......................... $ 786,903 $ 681,099
Adjustments to reconcile net income
to net cash
Provided by (used in)
operating activities --
Depreciation and
amortization............... 403,592 423,022
Loss on disposal of assets.... 17,205 24,182
Minority interest............. 101,839 81,213
(Increase) decrease in--
Accounts receivable...... 413,267 (987,980)
Inventories.............. (868,698) (378,470)
Prepaid expenses and
other assets.......... (290,272) 82,401
Increase (decrease) in --
Accounts payable and
accrued expenses...... (108,797) 8,462
Accrued compensation..... 155,054 10,920
Income taxes payable..... 49,843 (95,474)
-------------- -----------------
Net cash provided by
(used in) operating
activities............ 659,936 (150,625)
-------------- -----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and
equipment........................ (932,681) (907,578)
Proceeds from sale of property and
equipment........................ 34,313 57,407
-------------- -----------------
Net cash (used in) investing
activities................. (898,368) (850,171)
-------------- -----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings on line of credit... 369,153 1,024,357
Borrowings of debt................. 360,282 1,281,625
Repayments of debt................. (324,338) (1,346,119)
Payments on capital leases......... (70,206) (46,282)
Contribution by minority
shareholder in subsidiary........ -- 20,435
-------------- -----------------
Net cash provided by
financing
activities............ 334,891 934,016
-------------- -----------------
NET INCREASE (DECREASE) IN CASH......... 96,459 (66,780)
CASH, beginning of period............... 34,236 130,695
-------------- -----------------
CASH, end of period..................... $ 130,695 $ 63,915
============== =================
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE>
IPS HOLDING, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1 BUSINESS AND ORGANIZATION:
The consolidated balance sheets and related consolidated statements of
operations, stockholders' equity and cash flows include IPS Holding, Ltd. ("IPS
Holding"), IPSCO U.S., Corp. ("IPSCO U.S."), IPSCO Gmbh ("IPSCO Gmbh") and
IPSCO U.K., Ltd. ("IPSCO U.K.") (collectively, "IPS Holding, Ltd." or the
"Company"). The Company has operations located in the United States, Europe
and the Middle East.
IPS Holding, Ltd. is principally engaged in the business of on-line repair
services and specializing in the provision of hot tapping and line stopping
equipment and services to municipal water and industrial customers in order to
prevent shutdowns or outages during maintenance, retrofitting alterations,
emergencies and new construction.
2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
IPS Holding, Ltd. and all majority-owned subsidiaries. All significant
intercompany transactions have been eliminated. Minority interest expense
reflects the minority shareholders' interest in the net income of certain
subsidiaries.
CASH
Cash includes all highly liquid debt instruments with an original maturity
of three months or less. Cash payments for interest during the year ended March
31, 1997 and the eleven months ended February 28, 1998 were approximately
$194,000 and $361,000. Cash payments for taxes during the year ended March 31,
1997 and the eleven months ended February 28, 1998 were approximately $396,000
and $542,000.
INVENTORIES
Inventories are stated at the lower of cost or market determined by the
first-in, first-out (FIFO) method.
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,
"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.
REVENUE RECOGNITION
Service revenue is recognized on performance, and sales revenue is
recognized as products are shipped or delivered.
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
6
<PAGE>
IPS HOLDING, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
FOREIGN CURRENCY TRANSLATION
The Company's financial statements of foreign subsidiaries are reported in
U.S. dollars. Foreign subsidiaries using the local currency as their functional
currency translate their financial statements into U.S. dollars using the
current rate method. Assets and liabilities are translated at the rates of
exchange in effect at year-end, common stock and additional paid-in capital are
translated using historical rates and revenue and expense accounts are
translated at the average rates of exchange in effect during the year.
Translation adjustments are recorded as a separate component of stockholders'
equity rather than directly to operations.
3. PROPERTY AND EQUIPMENT:
Property and equipment consists of the following:
ESTIMATED MARCH 31, FEBRUARY 28,
USEFUL LIVES 1997 1998
-------------- -------------- ------------
Land........................... -- $ 226,780 $ 226,780
Buildings...................... 31 - 40 years 822,679 822,679
Vehicles....................... 5 - 7 years 831,316 914,800
Field service equipment........ 5 - 7 years 423,674 593,394
Furniture and fixtures......... 5 - 7 years 391,018 654,481
Machinery and equipment........ 5 - 7 years 1,439,844 1,507,837
Leasehold improvements......... 5 - 20 years 30,671 210,270
-------------- ------------
4,165,982 4,930,241
Less -- Accumulated
depreciation................. (1,487,453) (1,848,748)
-------------- ------------
Property and equipment, net.... $ 2,678,529 $ 3,081,493
============== ============
4. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:
Activity in the Company's allowance for doubtful accounts as of March 31,
1997 and February 28, 1998 consists of the following:
MARCH 31, FEBRUARY 28,
1997 1998
--------- ------------
Balance at beginning of period....... $ 54,756 $ 61,314
Amounts charged to results of
operations........................... 103,672 83,488
Deductions for uncollectible accounts
written off.......................... (97,114) (63,756)
--------- ------------
Balance at end of period............. $ 61,314 $ 81,046
========= ============
Accounts payable and accrued expenses as of March 31, 1997 and February 28,
1998 consist of the following:
MARCH 31, FEBRUARY 28,
1997 1998
---------- ------------
Accounts payable..................... $1,818,965 $ 1,757,873
Accrued commissions.................. 68,085 101,847
Other accrued expenses............... 376,772 476,277
---------- ------------
$2,263,822 $ 2,335,997
========== ============
7
<PAGE>
IPS HOLDING, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. LINE OF CREDIT:
The Company has credit agreements with banks. The agreements allow the
Company to borrow up to $4,000,000. Borrowings bear interest at prime (8.50% at
February 28, 1998), with interest payable monthly. The line of credit is secured
by accounts receivable and inventory. The available borrowing capacity at
February 28, 1998 was $1,583,000.
6. LONG-TERM DEBT:
Long-term debt consists of the following:
MARCH 31, 1997 FEBRUARY 28, 1998
-------------- -----------------
Notes payable secured by vehicles,
interest at 8.25% to 10.5%, payable in
monthly installments of $458 to $626,
including interest, final installments
April 1998 through May 2000........... $ 143,829 $ 126,438
Note payable to bank secured by
equipment, interest at 8.5%, payable
in monthly installments of $5,180
including interest, until March
1998.................................. 106,200 49,245
Note payable on equipment, interest at
8.0%, payable in monthly installments
of $1,667 plus interest, until July
1998.................................. 29,301 8,455
Note payable on equipment, interest at
8.64%, payable in monthly installments
of $5,718 including interest, until
August 2000........................... -- 153,491
Note payable to bank secured by
equipment, interest at 8.18%, payable
in monthly installments of $4,036 plus
interest, until January 2000.......... 154,966 108,863
Mortgage payable on building, interest
at 8.53%, payable in monthly
installments of $2,703, including
interest, until September 2005........ 256,971 247,423
Mortgage payable on building, interest
at 9.0%, payable in monthly
installments of $730 including
interest, until June 2006............. 54,888 51,249
Mortgage payable on building, interest
at 3.0% above base rate (8.5% at
February 28, 1998), payable in monthly
installments of $5,666 including
interest, until May 2000.............. 158,086 123,323
Mortgage payable on building, interest
at 2.5% above base rate (8.0% at
February 28, 1998), payable in monthly
installments of $1,569 including
interest, until September 2008........ 106,568 97,260
Notes payable to stockholders, due on
demand, interest payable in monthly
installments.......................... 870,604 818,368
-------------- -----------------
1,881,413 1,784,115
Less -- Current maturities.............. 345,977 1,197,338
-------------- -----------------
$1,535,436 $ 586,777
============== =================
8
<PAGE>
IPS HOLDING, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Principal payments on long-term debt are due as follows:
Twelve months ending February 28 --
1999.......................... $ 1,197,338
2000.......................... 239,971
2001.......................... 86,829
2002.......................... 30,161
2003.......................... 32,046
Thereafter.................... 197,770
------------
$ 1,784,115
============
7. RELATED-PARTY TRANSACTIONS:
The Company is owed $19,376 from a shareholder-related entity at March 31,
1997 and February 28, 1998. The Company owed $12,763 to a shareholder who is
also an officer of the Company at March 31, 1997. The Company leases its
facilities in Illinois from a shareholder-related entity.
8. INSURANCE CAPTIVE INVESTMENT:
The Company is a shareholder in a captive insurance affiliate. The
obligations of the captive insurance affiliate are secured by reinsurance
contracts with the Zurich American Insurance Group. The Company has issued a
letter of credit in the amount of $145,080 to the insurance affiliate as
security for its proportionate share of the affiliate's obligations under the
reinsurance contracts.
9. INCOME TAXES:
The Company and its subsidiaries file a consolidated federal income tax
return, excluding a subsidiary owned less than the statutory percentage for
inclusion, which files a separate federal income tax return. No provision has
been made for U.S. income taxes on unremitted earnings of foreign subsidiaries.
It is the present intention of management to reinvest a major portion of such
unremitted earnings in foreign operations.
The provision (benefit) for income taxes consisted of:
ELEVEN MONTHS
YEAR ENDED ENDED
MARCH 31, 1997 FEBRUARY 28, 1998
--------------- ------------------
Current:
U.S. Federal.................... $ 274,628 $ 416,568
State........................... 73,347 101,829
Foreign......................... 160,733 (42,219)
--------------- ------------------
Total current provision.... $ 508,708 $ 476,178
--------------- ------------------
Deferred:
U.S. Federal.................... $ (25,113) $ 34,780
State........................... (6,935) 8,695
Foreign......................... 9,326 1,893
--------------- ------------------
Total deferred provision
(benefit).................. $ (22,722) $ 45,368
--------------- ------------------
Total income tax
provision.................. $ 485,986 $ 521,546
=============== ==================
9
<PAGE>
IPS HOLDING, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 ELEVEN MONTHS ENDED
MARCH 31, 1997 FEBRUARY 28, 1998
-------------- -------------------
Statutory federal income tax rate....... 34.0% 34.0%
Nondeductible expenses.................. 1.0 1.8
State taxes, net of federal tax benefit
of 34%................................ 3.2 5.7
Other................................... (2.8) (0.9)
-------------- -----
Effective income tax rate............... 35.4% 40.6%
============== =====
Deferred income tax provisions result from temporary differences in the
recognition of income and expenses for financial reporting purposes and for tax
purposes. The primary source of temporary differences is depreciation on
property and equipment.
10. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
The Company leases its facilities and certain vehicles under operating
leases. Rental commitments under noncancellable operating leases are as follows:
Twelve months ending February 28 --
1999............................ $ 312,973
2000............................ 317,536
2001............................ 258,431
2002............................ 231,725
2003............................ 236,326
Thereafter...................... 1,081,884
------------
$ 2,438,875
============
Rent expense under the above leases was $315,000 and $392,000 for the year
ended March 31, 1997 and for the eleven months ended February 28, 1998,
respectively.
CAPITAL LEASES
The Company leases certain equipment under capital leases. The following is
a schedule of future minimum lease payments required under the leases:
Twelve months ending February 28--
1999............................ $ 83,114
2000............................ 30,840
2001............................ 28,602
2002............................ 26,369
2003............................ 24,132
----------
Total minimum lease
payments................ $ 193,057
Less--Amount representing
interest...................... 30,225
----------
Present value of net minimum
lease payments................ $ 162,832
==========
10
<PAGE>
IPS HOLDING, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. SUBSEQUENT EVENTS:
On March 16, 1998, Innovative Valve Technologies, Inc. ("Invatec")
acquired all the outstanding stock of IPS Holding, Ltd. and subsidiaries. The
total consideration was in excess of the recorded amounts of the Company's net
assets. In conjunction with the acquisition, certain notes payable and the line
of credit were paid off.
11
EXHIBIT 99.3
INNOVATIVE VALVE TECHNOLOGIES, INC. AND ACQUIRED BUSINESSES
UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS
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 and 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 "IPO") of its common stock, par value
$.001 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, "SSV") 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.
For accounting purposes, the effective dates of the acquisitions of the
Initial Acquired Businesses in 1997 are as follows: (i) Harley -- January 31;
(ii) GSV -- February 28; (iii) PSI -- May 31, (iv) Steam Supply -- July 31, and
(v) ICE/VARCO and SVS -- October 31. Following the IPO, the Company acquired
Dalco, Inc. ("Dalco") and three other additional businesses in 1997. The
effective date of the acquisitions of Dalco and the three other additional
businesses acquired in 1997 is November 30, 1997. In the first quarter of 1998,
the Company acquired three businesses, including Cypress Industries Inc.
("Cypress") and IPS Holding, Ltd., ("IPSCO") (together with the Initial
Acquired Businesses, Dalco and the other businesses acquired during 1997, the
"Acquired Businesses"). The Company accounted for the Acquired Businesses 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 of the Acquired Businesses has been recorded initially on the basis
of preliminary estimates of fair value and may be revised, within one year of
acquisition, as additional information concerning the valuation of those assets
and liabilities becomes available. In management's opinion, the preliminary
allocation of the purchase prices is not expected to differ materially from the
final allocation. To date, there have not been any material changes to goodwill
as a result of purchase price allocations being finalized.
The unaudited pro forma consolidated statement of operations on page 4
presents historical information as adjusted to give effect to the following
events and transactions as if they had occurred on January 1, 1997: (i) the
formation and organizational financing of Invatec; (ii) the SSI Merger; (iii)
the acquisitions of Acquired Businesses in 1997 and the financing of those
acquisitions; (iv) reverse stock splits of the outstanding Common Stock and the
SSI common stock effected in connection with the IPO; (v) the IPO and Invatec's
application of its net proceeds therefrom; and (vi) the issuance of shares of
Common Stock to repay indebtedness the Company owed to subsidiaries of Philip
Services Corp. (collectively with its subsidiaries, "Philip"). The unaudited
pro forma combined statement of operations on pages 3 and 5 condenses the
unaudited pro forma consolidated statement of operations information on page 4
under the caption "The Company" and adjusts that information to give effect to
the acquisitions of Acquired Businesses in 1998 (through March 31) and the
financing of these acquisitions. All the pro forma statements convert the
results of operations of the Acquired Businesses whose historical fiscal periods
were not on a calendar-year basis and include pro forma adjustments consisting
principally of the following: (i) the
1
<PAGE>
adjustments to selling, general and administrative expenses described below;
(ii) adjustments for pro forma goodwill amortization using a 40-year estimated
life; (iii) eliminations of historical interest expense resulting from the
application of proceeds from the IPO and the use of Common Stock to retire
outstanding indebtedness; and (iv) 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) salary differentials associated with certain owners and
managers of the Acquired Businesses; (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 certain stock awards made by SSI and
certain sales of Common Stock and issuances of options to purchase Common Stock
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 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.
2
<PAGE>
INNOVATIVE VALVE TECHNOLOGIES, INC. AND ACQUIRED BUSINESSES
(FOR BUSINESSES ACQUIRED THROUGH MARCH 31, 1998)
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THE
COMPANY
PRO OTHER PRO FORMA PRO FORMA
FORMA CYPRESS IPSCO ACQUISITION ADJUSTMENTS COMBINED
-------- -------- ------- ------------ ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
REVENUES............................. $116,670 $ 20,061 $22,895 $2,633 $-- $162,259
COST OF OPERATIONS................... 79,790 14,791 14,100 1,696 -- 110,377
-------- -------- ------- ------------ ----------- ----------
Gross profit.................... 36,880 5,270 8,795 937 -- 51,882
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES............ 30,434 4,440 7,119 856 (1,034)(aa) 42,520
705(bb)
-------- -------- ------- ------------ ----------- ----------
Income from operations.......... 6,446 830 1,676 81 329 9,362
OTHER INCOME (EXPENSE):
Interest, net................... (1,383) (475) (397) 9 (1,385)(cc) (3,631)
Other........................... (20) 6 161 8 -- 155
-------- -------- ------- ------------ ----------- ----------
INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES AND MINORITY
INTEREST........................... 5,043 361 1,440 98 (1,056) 5,886
PROVISION FOR INCOME TAXES........... 2,168 15 590 27 (269) (dd) 2,531
-------- -------- ------- ------------ ----------- ----------
INCOME FROM CONTINUING OPERATIONS
BEFORE MINORITY INTEREST........... 2,875 346 850 71 (787) 3,355
-------- -------- ------- ------------ ----------- ----------
MINORITY INTEREST.................... -- -- 94 -- (94)(ee) --
-------- -------- ------- ------------ ----------- ----------
NET INCOME........................... $ 2,875 $ 346 $ 756 $ 71 $ (693) $ 3,355
======== ======== ======= ============ =========== ==========
PRO FORMA INCOME PER SHARE FROM
CONTINUING OPERATIONS -- BASIC..... $ 0.39
==========
PRO FORMA INCOME PER SHARE
FROM CONTINUING
OPERATIONS -- DILUTED.............. $ 0.38
==========
SHARES USED IN COMPUTING
PRO FORMA INCOME PER
SHARE FROM CONTINUING
OPERATIONS -- BASIC................ 8,702(ff)
==========
SHARES USED IN COMPUTING
PRO FORMA INCOME PER
SHARE FROM CONTINUING
OPERATONS -- DILUTED............... 8,851(ff)
==========
</TABLE>
See accompanying notes to unaudited pro forma combined financial statements.
3
<PAGE>
INNOVATIVE VALVE TECHNOLOGIES, INC. AND ACQUIRED BUSINESSES
(FOR BUSINESSES ACQUIRED THROUGH DECEMBER 31, 1997)
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
ICE/VARCO
PLANT STEAM JANUARY
THE HARLEY GSV SPECIALTIES SUPPLY 1 -
COMPANY JANUARY 1 - JANUARY 1 - JANUARY 1 - JANUARY 1 - OCTOBER
HISTORICAL JANUARY 31 FEBRUARY 28 MAY 31 JULY 31 31
---------- ----------- ----------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
REVENUES............................. $ 58,621 $ 1,853 $ 1,637 $ 5,087 $ 9,592 $12,446
COST OF OPERATIONS................... 39,821 1,338 1,258 3,061 6,671 9,227
---------- ----------- ----------- ----------- ----------- ---------
Gross profit..................... 18,800 515 379 2,026 2,921 3,219
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES........................... 16,805 640 243 1,203 2,782 2,811
SPECIAL COMPENSATION EXPENSE......... 7,613 -- -- -- -- --
---------- ----------- ----------- ----------- ----------- ---------
Income (loss) from operations.... (5,618) (125) 136 823 139 408
OTHER INCOME (EXPENSE):
Interest, net.................... (2,901) (52) (17) (110) (223) (3)
Other............................ (3) -- (3) 12 9 16
---------- ----------- ----------- ----------- ----------- ---------
INCOME (LOSS) FROM CONTINUING
OPERATIONS BEFORE INCOME TAXES..... (8,522) (177) 116 725 (75) 421
PROVISION (BENEFIT) FOR INCOME
TAXES.............................. (1,022) (69) -- 272 (29) --
---------- ----------- ----------- ----------- ----------- ---------
INCOME (LOSS) FROM CONTINUING
OPERATIONS......................... $ (7,500) $ (108) $ 116 $ 453 $ (46) $ 421
========== =========== =========== =========== =========== =========
<CAPTION>
SVS DALCO OTHER THE
JANUARY 1 - JANUARY 1 - SUBSEQUENT PRO FORMA COMPANY
OCTOBER 31 NOVEMBER 30 ACQUISITIONS ADJUSTMENTS PRO FORMA
----------- ----------- ------------- ----------- ----------
<S> <C> <C> <C> <C> <C>
REVENUES............................. $ 3,545 $ 8,830 $15,059 $-- $116,670
COST OF OPERATIONS................... 2,458 6,327 9,629 -- 79,790
----------- ----------- ------------- ----------- ----------
Gross profit..................... 1,087 2,503 5,430 -- 36,880
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES........................... 826 1,713 4,256 (1,239)(gg) 30,434
724(hh)
(330)(ii)
SPECIAL COMPENSATION EXPENSE......... -- -- -- (7,613)(jj) --
----------- ----------- ------------- ----------- ----------
Income (loss) from operations.... 261 790 1,174 8,458 6,446
OTHER INCOME (EXPENSE):
Interest, net.................... (135) 12 (206) 2,252(kk) (1,383)
Other............................ -- (30) (21) -- (20)
----------- ----------- ------------- ----------- ----------
INCOME (LOSS) FROM CONTINUING
OPERATIONS BEFORE INCOME TAXES..... 126 772 947 10,710 5,043
PROVISION (BENEFIT) FOR INCOME
TAXES.............................. 54 46 356 2,560(ll) 2,168
----------- ----------- ------------- ----------- ----------
INCOME (LOSS) FROM CONTINUING
OPERATIONS......................... $ 72 $ 726 $ 591 $ 8,150 $ 2,875
=========== =========== ============= =========== ==========
</TABLE>
See accompanying notes to unaudited pro forma combined financial statements.
4
<PAGE>
INNOVATIVE VALVE TECHNOLOGIES, INC. AND ACQUIRED BUSINESSES
(FOR BUSINESSES ACQUIRED THROUGH MARCH 31, 1998)
UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1998
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
CYPRESS IPSCO
THE COMPANY JANUARY 1 - JANUARY 1 - OTHER PRO FORMA PRO FORMA
HISTORICAL FEBRUARY 28 FEBRUARY 28 ACQUISITIONS ADJUSTMENTS COMBINED
------------ ------------ --------------- ------------ ------------ ----------
<S> <C> <C> <C> <C> <C> <C>
REVENUES............................. $ 33,504 $1,721 $ 3,898 $192 $-- $ 39,315
COST OF OPERATIONS................... 22,548 1,294 2,393 108 -- 26,343
------------ ------------ ------- ------------ ------------ ----------
Gross Profit..................... 10,956 427 1,505 84 -- 12,972
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES........................... 8,059 613 1,215 91 (180)(aa) 9,899
101(bb)
------------ ------------ ------- ------------ ------------ ----------
Income from operations........... 2,897 (186) 290 (7) 79 3,073
OTHER INCOME (EXPENSE):
Interest, net.................... (709) (56) (69) -- (274)(cc) (1,108)
Other............................ 13 44 12 -- -- 69
------------ ------------ ------- ------------ ------------ ----------
INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES AND MINORITY
INTEREST........................... 2,201 (198) 233 (7) (195) 2,034
PROVISION FOR INCOME TAXES........... 946 -- 95 -- (167)(dd) 874
------------ ------------ ------- ------------ ------------ ----------
INCOME FROM CONTINUING OPERATIONS
BEFORE MINORITY INTEREST........... 1,255 (198) 138 (7) (28) 1,160
------------ ------------ ------- ------------ ------------ ----------
MINORITY INTEREST.................... -- -- 15 -- (15)(ee) --
------------ ------------ ------- ------------ ------------ ----------
NET INCOME (LOSS).................... $ 1,255 $ (198) $ 123 $ (7) $ (13) $ 1,160
============ ============ ======= ============ ============ ==========
PRO FORMA INCOME PER SHARE FROM
CONTINUING OPERATIONS--BASIC....... $ 0.13
==========
PRO FORMA INCOME PER SHARE FROM
CONTINUING OPERATIONS--DILUTED..... $ 0.13
==========
SHARES USED IN COMPUTING PRO FORMA
INCOME PER SHARE FROM CONTINUING
OPERATIONS--BASIC.................. 8,702(ff)
==========
SHARES USED IN COMPUTING PRO FORMA
INCOME PER SHARE FROM CONTINUING
OPERATIONS--DILUTED................ 8,994(ff)
==========
</TABLE>
See accompanying notes to unaudited pro forma combined financial statements.
5
<PAGE>
INNOVATIVE VALVE TECHNOLOGIES, INC. AND ACQUIRED BUSINESSES
NOTES TO UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS
1. UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS ADJUSTMENTS:
UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS (FOR BUSINESSES ACQUIRED
THROUGH MARCH 31, 1998)
(aa) 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 either were not employed by the Company after the
acquisition of their Acquired Businesses and will not be replaced or agreed
prospectively to the decrease prior to acquisition of their Acquired Businesses.
(bb) Records pro forma goodwill amortization expense over 40 years.
(cc) Records the adjustment to interest expense resulting from borrowings
under the Credit Facility and pro forma adjustments to debt.
(dd) Records the incremental provision for income taxes as if all Acquired
Businesses had been subject to federal and state income taxes during the period
presented, using an effective tax rate of 43%. In its assumption of the
effective tax rate, management has not considered the utilization of net
operation losses or other tax attributes previously generated by or existing at
certain of the Acquired Businesses.
(ee) Records the elimination of minority interest in one of the Acquired
Businesses.
(ff) Pro forma weighted average shares outstanding are computed as follows
(in thousands):
1997 1998
--------- ---------
Assumed shares outstanding at January
1.................................... 8,702 8,702
Dilutive effect of stock options, net
of assumed repurchases of common
shares............................. 149 292
--------- ---------
Shares used in computing pro forma
income per share from continuing
operations -- diluted.............. 8,851 8,994
========= =========
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS (FOR BUSINESSES
ACQUIRED THROUGH
DECEMBER 31, 1997)
(gg) Adjusts selling, general and administrative expenses to reflect (i)
the decrease in salaries and benefits associated with certain owners of the
Acquired Businesses who either were not employed by the Company after the
acquisition of their Acquired Businesses and will not be replaced or agreed to
prospectively to the decrease prior to acquisition of their Acquired Businesses,
and (ii) the elimination of certain excess administrative support service fees
charged by ICE/VARCO's former parent.
(hh) Records pro forma goodwill amortization expense over 40 years.
(ii) Records the elimination of non-recurring IPO bonuses.
(jj) Records the elimination of non-cash, non-recurring special
compensation expense of $7.6 million attributable to certain awards of stock,
stock options and certain stock sales.
(kk) Records the pro forma adjustment to interest expense resulting from
(i) the application of the net proceeds of the IPO, (ii) borrowings under the
Credit Facility and, (iii) the elimination of certain financing fees paid to
Philip.
(ll) Records the incremental provision for income taxes as if all Acquired
Businesses had been subject to federal and state income taxes during the period
presented, using an effective tax rate of 43%. In its assumption of the
effective tax rate, management has not considered the utilization of net
operation losses or other tax attributes previously generated by or existing at
certain of the Acquired Businesses.
6
EXHIBIT 99.4
INNOVATIVE VALVE TECHNOLOGIES, INC.
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
INNOVATIVE VALVE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, MARCH 31,
1997 1998
------------ -------------
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash.................................... $ 2,544,450 $ 365,094
Accounts receivable, net of allowance of
$1,079,857 and $1,423,465............. 17,680,697 27,851,234
Inventories, net........................ 15,987,765 20,996,852
Prepaid expenses and other current
assets................................ 1,171,090 1,763,520
Deferred tax asset...................... 3,723,448 3,944,898
------------ -------------
Total current assets.......... 41,107,450 54,921,598
PROPERTY AND EQUIPMENT, net............. 11,474,701 16,279,083
GOODWILL, net........................... 48,387,981 81,128,397
PATENT COSTS, net....................... 682,436 675,064
OTHER NONCURRENT ASSETS, net............ 3,780,115 3,916,521
------------ -------------
$105,432,683 $156,920,663
============ =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term debt......................... $ 4,660,924 $ --
Current maturities of long-term debt.... 304,310 642,113
Accounts payable and accrued expenses... 14,910,638 18,610,425
------------ -------------
Total current liabilities..... 19,875,872 19,252,538
LONG-TERM DEBT, net..................... 318,911 321,555
CREDIT FACILITY......................... 11,750,000 50,127,800
CONVERTIBLE SUBORDINATED DEBT........... 12,493,178 12,916,928
OTHER LONG-TERM OBLIGATIONS............. 1,125,417 1,247,624
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, $.001 par value,
30,000,000 shares authorized,
7,890,198 and 8,702,338 shares
issued and outstanding........... 7,890 8,702
Additional paid-in capital......... 70,212,035 82,141,828
Retained deficit................... (10,350,620) (9,096,312)
------------ -------------
Total stockholders' equity.... 59,869,305 73,054,218
------------ -------------
$105,432,683 $156,920,663
============ =============
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
INNOVATIVE VALVE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS
ENDED MARCH 31
---------------------------
1997 1998
------------ ------------
REVENUES................................ $ 6,944,997 $ 33,504,037
COST OF OPERATIONS...................... 4,750,866 22,548,216
------------ -------------
Gross profit....................... 2,194,131 10,955,821
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES.............................. 1,951,357 8,058,774
SPECIAL COMPENSATION EXPENSE ........... 2,605,005 --
------------ -------------
Income (loss) from operations...... (2,362,231) 2,897,047
OTHER INCOME (EXPENSE):
Interest expense, net.............. (342,699) (709,490)
Other.............................. (38) 12,983
------------ -------------
INCOME (LOSS) BEFORE INCOME TAXES....... (2,704,968) 2,200,540
PROVISION (BENEFIT) FOR INCOME TAXES.... (549,416) 946,232
------------ -------------
NET INCOME (LOSS)....................... $ (2,155,552) $ 1,254,308
============ =============
NET INCOME (LOSS) BEFORE DIVIDENDS
APPLICABLE TO PREFERRED STOCK......... $ (2,155,552) $ 1,254,308
PREFERRED STOCK DIVIDENDS............... (47,500) --
------------- ------------
NET INCOME (LOSS) APPLICABLE TO COMMON
SHARES................................ $ (2,203,052) $ 1,254,308
============= ============
EARNINGS PER SHARE - BASIC.............. $ (1.06) $ 0.16
============= ============
EARNINGS PER SHARE - DILUTED............ $ (1.06) $ 0.15
============= ============
WEIGHTED AVERAGE SHARES
OUTSTANDING - BASIC................... 2,087,941 8,029,092
============= ============
WEIGHTED AVERAGE SHARES
OUTSTANDING - DILUTED................. 2,087,941 8,684,764
============= ============
The accompanying notes are an integral part of
these consolidated financial statements.
<PAGE>
INNOVATIVE VALVE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31
-----------------------------
1997 1998
------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ......................... $ (2,155,552) $ 1,254,308
Adjustments to reconcile net income
(loss) to net cash used in
operating activities --
Depreciation and amortization ........... 141,949 736,916
Special compensation expense ............ 2,605,005 --
Deferred taxes .......................... -- 241,778
(Increase) decrease in --
Accounts receivable .................. (1,837,333) (3,651,014)
Inventories .......................... 131,026 (1,732,334)
Prepaid expenses and other
current assets ................... (838,886) (653,373)
Other noncurrent assets .............. (629,916) 766,418
Increase (decrease) in --
Accounts payable and accrued
expenses ......................... 1,616,525 (1,249,657)
------------ ------------
Net cash used in operating
activities ..................... (967,182) (4,286,958)
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and
equipment .............................. (80,881) (746,162)
Business acquisitions, net of cash
acquired of $39,250 and $185,094 ....... (10,186,417) (30,674,244)
------------ ------------
Net cash used in investing
activities ..................... (10,267,298) (31,420,406)
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings of long-term debt .............. 10,743,245 --
Repayments of long-term debt .............. -- (151,208)
Repayments of short-term debt ............. -- (4,660,924)
Net borrowings on credit facility ......... -- 38,377,800
Payments on noncompete
obligations ............................ -- (65,160)
Proceeds from exercise of stock
options .............................. -- 27,500
Proceeds from exercise of common
stock warrant .......................... 596,000 --
Preferred stock dividends ................. (47,500) --
------------ ------------
Net cash provided by
financing activities ........... 11,291,745 33,528,008
NET INCREASE (DECREASE) IN CASH ................ 57,265 (2,179,356)
CASH, beginning of period ...................... 396,637 2,544,450
------------ ------------
CASH, end of period ............................ $ 453,902 $ 365,094
============ ============
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest .................... $ 342,699 $ 397,244
Cash paid for income taxes ................ $ -- $ 333,111
The accompanying notes are an integral part of these
consolidated financial statements.
<PAGE>
INNOVATIVE VALVE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. 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 an established business 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 "IPO") of its common stock ("Common
Stock"), (ii) its purchase of two established businesses and (iii) a merger (the
"SSI Merger") in which The Safe Seal Company, Inc. ("SSI") became its
subsidiary. Earlier in 1997, SSI had purchased three established businesses. 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 the seven businesses it and Invatec purchased through the IPO
closing date(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 IPO, the Company purchased four businesses in the fourth
quarter of 1997 and three businesses in the first quarter of 1998 (these
businesses, together with the Initial Acquired Businesses, are referred to
herein as the "Acquired Businesses"). The Company is accounting for the
acquisitions of the Aqcuired Businesses 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 of the Acquired Businesses 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 accompanying historical
consolidated statements of operations present historical information of the
Company which gives effect to the acquisitions as of their respective
acquisition dates.
The consolidated financial statements herein have been prepared by the
Company without audit, pursuant to rules and regulations of the Securities and
Exchange Commission (the "SEC") which permit certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles to be condensed or omitted. The
Company believes the presentation and disclosures herein are adequate to make
the information not misleading, and the financial statements reflect all
elimination entries and normal adjustments that are necessary for a fair
presentation of the results for the interim periods ended March 31, 1997 and
1998.
<PAGE>
INNOVATIVE VALVE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Operating results for interim periods are not necessarily indicative of the
results for full years. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Fluctuations in Operating Results" in
Item 2 of this Part I. Invatec's Annual Report on Form 10-K/A for the year ended
December 31, 1997 (the "1997 10-K Report") includes the Company's consolidated
financial statements and related notes for 1997.
2. NEW ACCOUNTING PRONOUNCEMENT:
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income" requires the presentation of comprehensive income in an
entity's financial statements. Comprehensive income represents all changes in
equity of an entity during the reporting period, including net income and
charges directly to equity which are excluded from net income (such as
additional minimum pension liability changes, currency translation adjustments,
unrealized gains and losses on available for sale securities). The Company
adopted this standard effective January 1, 1998. The adoption of this standard
did not have a material impact on its consolidated financial statements. For the
three month period ended March 31, 1998, there were no material items of
comprehensive income other than net income.
3. INCOME TAXES:
Certain of the Acquired Businesses' were subject to the provisions of
subchapter S of the Internal Revenue Code prior to their acquisition by the
Company. Under these provisions, their former stockholders paid income taxes on
their proportionate share of the earnings of these businesses. Because the
stockholders were taxed directly, their businesses paid no federal income tax
and only certain state income taxes.
The Company files a consolidated federal income tax return that includes
the operations of the Acquired Businesses for periods subsequent to their
respective acquisition dates.
The provision for income taxes included in the unaudited consolidated
statement of operations for the three months ended March 31, 1997 differs from
statutory federal and state rates primarily because of the partial recognition
of certain net operating loss benefits carried forward by SSI.
<PAGE>
INNOVATIVE VALVE TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
4. EARNINGS PER SHARE:
The computation of net income per share of common stock for the interim
periods presented is presented in accordance with SFAS No. 128 "Earnings Per
Share" based on the following shares of Common Stock outstanding:
1997 1998
---- ----
Issued and outstanding at January 1 .............. 1,481,919 7,890,198
Issued to acquire a business in the
first quarter of 1998(weighted) ............... -- 134,638
Issued for stock options exercised
and warrants exercised ........................ 606,022 4,256
--------- ---------
Weighted average shares outstanding
- basic ....................................... 2,087,941 8,029,092
Dilutive effect of shares issuable
on conversion of convertible notes .............. -- 363,502
Dilutive effect of shares issuable
on exercise of stock options .................... -- 292,170
--------- ---------
Weighted average shares outstanding -
diluted ........................................ 2,087,941 8,684,764
========= =========
The weighted average diluted earnings per share reflects the effect of
convertible subordinated notes which were outstanding during the periods
presented. The interest expense related to dilutive convertible subordinated
notes was approximately $46,000.
5. ACQUISITIONS:
During the quarter ended March 31, 1998, the Company acquired three
businesses for $30.4 million in cash and assumed debt, $0.4 million of
convertible subordinated notes and 807,828 shares of Common Stock. Of the total
purchase price paid for these acquisitions, $11 million has been allocated to
the net assets acquired and the remaining $32 million has been recorded as
goodwill. These acquisitions were accounted for as purchases and the
accompanying balance sheet as of March 31, 1998 includes preliminary allocations
of the respective purchase prices and are subject to final adjustment.
The following table reflects, on an unaudited pro forma basis, certain
results of the combined operations of the Company as if the IPO, the SSI Merger,
the Company's acquisitions of Acquired Businesses in 1997 and the first quarter
of 1998 and certain other events and transactions discussed in Note 1 had taken
place on January 1, 1997.
These pro forma results have been prepared for comparative purposes only
and do not purport to be indicative of the results of operations the Company
would have obtained had the acquisitions taken effect on January 1, 1997, has
obtained since the dates of acquisition or may obtain in the future.
<PAGE>
INNOVATIVE VALVE TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
March 31,
---------------------------
1997 1998
--------- -------
(Unaudited and in thousands,
except per share data)
Revenues ....................................... $39,606 $39,315
Income before income taxes ..................... 669 2,034
Net income ..................................... 381 1,160
======= =======
Earnings per share - basic ..................... $ 0.04 $ 0.13
======= =======
Earnings per share - diluted ................... $ 0.04 $ 0.13
======= =======
