AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 21, 1998
REGISTRATION NO. 333-49283
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 2
TO
FORM S-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
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INNOVATIVE VALVE TECHNOLOGIES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
5085, 7699
(PRIMARY STANDARD INDUSTRIAL
CLASSIFICATION CODE NUMBERS)
DELAWARE 76-0530346
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
2 NORTHPOINT DRIVE, SUITE 300
HOUSTON, TEXAS 77060
(281) 925-0300
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
WILLIAM E. HAYNES
PRESIDENT AND CHIEF EXECUTIVE OFFICER
INNOVATIVE VALVE TECHNOLOGIES, INC.
2 NORTHPOINT DRIVE, SUITE 300
HOUSTON, TEXAS 77060
(281) 925-0300
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
------------------------
COPY TO:
JAMES L. LEADER, ESQ.
BAKER & BOTTS, L.L.P.
3000 ONE SHELL PLAZA
910 LOUISIANA
HOUSTON, TEXAS 77002-4995
(713) 229-1234
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITIES TO THE
PUBLIC: From time to time after the Registration Statement becomes effective.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION DATED MAY 21, 1998
PROSPECTUS
[INVATEC LOGO]
COMMON STOCK
CONVERTIBLE SUBORDINATED DEBT SECURITIES
------------------
Innovative Valve Technologies, Inc. ("Invatec") may offer and issue the
5,000,000 shares of its common stock, $.001 par value per share (the "Common
Stock"), and $50,000,000 aggregate principal amount of its convertible
subordinated debt securities (the "Convertible Debt Securities") this
Prospectus covers in business combination transactions (each, an
"Acquisition") involving its acquisition, directly or indirectly, of
businesses or other operating assets. Invatec anticipates these Acquisitions
will consist principally of businesses that provide maintenance, repair,
replacement and value-added distribution services for industrial valves, piping
systems and other process-system components used in petrochemical and other
chemical plants, petroleum refineries, pulp and paper mills, electric and other
utilities and other industrial process facilities. Invatec expects that (i) it
will determine the terms of these Acquisitions by direct negotiations with the
owners or controlling persons of the businesses or assets to be acquired, (ii)
the shares of Common Stock issued will be valued at prices reasonably related to
market prices prevailing either at the time an acquisition agreement is executed
or at or about the time of delivery of the shares and (iii) the Convertible Debt
Securities issued will be valued at prices reasonably related to their principal
amount. It does not expect to pay any underwriting discounts or commissions, but
may pay finder's fees from time to time with respect to specific Acquisitions.
Any person receiving any such fees may be deemed to be an underwriter within the
meaning of the Securities Act of 1933, as amended (the "Securities Act").
Invatec will pay all expenses of this offering.
The Convertible Debt Securities will be convertible into Common Stock at
any time on or after their Convertibility Commencement Date (as defined herein)
and at or before maturity, unless previously redeemed, at their Initial
Conversion Price (as defined herein) as the applicable prospectus supplement or
supplements (each, a "Prospectus Supplement") and pricing supplement or
supplements (each, a "Pricing Supplement") hereto will specify, subject to
adjustment in certain events.
The Convertible Debt Securities will be (i) unsecured obligations of
Invatec, (ii) subordinate to all present and future Senior Indebtedness (as
defined in the Indenture described herein or any applicable supplement to that
Indenture or Prospectus Supplement relating to one or more series of Convertible
Debt Securities) of Invatec and (iii) effectively subordinated to all
indebtedness and other liabilities of subsidiaries of Invatec. Invatec, a
holding company, does not generate any operating revenues on its own, and its
ability to pay interest on and principal of the Convertible Debt Securities and
to meet its other cash needs depends on its receiving sufficient funds therefor
from its subsidiaries.
As of May 20, 1998, 8,723,338 shares of Common Stock were issued and
outstanding. The Common Stock is quoted on the Nasdaq National Market under the
symbol "IVTC." On May 20, 1998, the last reported sale price of the Common
Stock on the Nasdaq National Market was $15.25 per share.
Invatec may require persons receiving shares of the Common Stock or any
Convertible Debt Securities offered hereby to hold some portions of those shares
or securities for periods of up to two years. In addition, pursuant to the
provisions of Rule 145 under the Securities Act, the volume limitations and
certain other requirements of Rule 144 under the Securities Act will apply to
resales of those shares of Common Stock or Convertible Debt Securities by
affiliates of the businesses the Company acquires for a period of one year from
the date of acquisition of shares of Common Stock or Convertible Debt
Securities, as applicable (or such shorter period as the Securities and Exchange
Commission (the "SEC") may prescribe).
SEE "RISK FACTORS" ON PAGE 5 OF THIS PROSPECTUS FOR A DISCUSSION OF
CERTAIN RISK AND OTHER FACTORS THAT SHOULD BE CONSIDERED BEFORE ACQUIRING THE
SECURITIES OFFERED HEREBY.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
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The date of this Prospectus is May , 1998.
<PAGE>
PROSPECTUS SUMMARY
THE DETAILED INFORMATION AND FINANCIAL STATEMENTS, INCLUDING THE NOTES
THERETO, APPEARING ELSEWHERE IN THIS PROSPECTUS QUALIFY THE FOLLOWING SUMMARY IN
ITS ENTIRETY. UNLESS THE CONTEXT OTHERWISE INDICATES, (I) INFORMATION HEREIN
RESPECTING THE COMPANY'S OPERATIONS GIVES EFFECT TO THE COMPANY'S ACQUISITIONS
COMPLETED THROUGH APRIL 1, 1998 AND (II) REFERENCES HEREIN TO (A) "INVATEC"
MEAN INNOVATIVE VALVE TECHNOLOGIES, INC. AND (B) THE "COMPANY" MEAN INVATEC
AND ITS SUBSIDIARIES.
THE COMPANY
Invatec was incorporated on March 6, 1997 to create the leading
single-source provider of comprehensive maintenance, repair, replacement and
value-added distribution services for industrial valves, piping systems and
other process-system components (collectively, "repair and distribution
services") throughout North America. To achieve this goal, Invatec has embarked
on an aggressive acquisition program and is implementing a national operating
strategy it has designed to enhance internal growth, market share and
profitability.
On October 28, 1997, Invatec (i) closed its initial public offering (the
"IPO") of its Common Stock and (ii) consolidated seven established businesses
(the "Initial Acquired Businesses") providing various repair and distribution
services by means of two purchase transactions and a merger (the "SSI Merger")
in which its affiliate, The Safe Seal Company, Inc. ("SSI"), became its
subsidiary. Prior to those transactions, SSI had purchased three Initial
Acquired Businesses in the first half of 1997 and Invatec had purchased one
Initial Acquired Business in July 1997, but otherwise had not conducted any
operations of its own.
A holding company, Invatec conducts its business through its operating
subsidiaries.
Since October 1997 and through April 1, 1998, Invatec purchased seven
additional repair and distribution services businesses (the "Additional
Acquired Businesses" and, together with the Initial Acquired Businesses, the
"Acquired Businesses"). For the year ended December 31, 1997 and the three
months ended March 31, 1998, the Company's unaudited pro forma combined revenues
were as follows (in thousands):
THREE MONTHS
YEAR ENDED ENDED
DECEMBER 31, MARCH 31,
1997 1998
------------ ------------
Initial Acquired Businesses............. $ 90,901 $ 24,132
Additional Acquired Businesses.......... 71,358 15,183
------------ ------------
Total Company........................... $162,259 $ 39,315
============ ============
The Acquired Businesses have been in business an average of 32 years, and
the Company currently has 52 operating locations in the United States, one in
Canada, two in Europe and one in the Middle East. Its principal executive
offices are located at 2 Northpoint Drive, Suite 300, Houston, Texas 77060, and
its telephone number at that address is (281) 925-0300. Invatec is a Delaware
corporation.
BUSINESS STRATEGIES
To enhance its market position as a leading national provider of repair and
distribution services, the Company is emphasizing growth through acquisitions of
additional repair and distribution services businesses and is implementing a
national operating strategy aimed at increasing internal growth and market share
and enhancing profitability. These growth strategies focus on capitalizing on
certain trends in the Company's targeted industries, including increased
outsourcing, increased focus on reducing economic losses attributable to leaking
valves and increasingly more stringent regulatory requirements applicable to
process-system facilities.
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<PAGE>
ACQUISITION STRATEGY. The Company has implemented an aggressive
acquisition program to expand into additional markets and enhance its position
in existing markets. Given the large size and fragmentation of the repair and
distribution services industry, the Company believes there are numerous
potential acquisition candidates in both the markets the Company currently
serves and new markets.
The Company seeks to acquire well established repair and distribution
services companies in significant centers of its targeted process industries in
North American markets. It also intends to make tuck-in acquisitions that
provide access to additional customers, specialized services, new products or
other strategic synergies. The Company evaluates the extent to which its
acquisition candidates demonstrate the potential for substantial revenue and
earnings growth when combined with the Company's existing operations. An
important criterion for the Company's acquisition candidates (particularly
candidates in new markets) is high-quality operating management and the desire
of those persons to remain in place and continue running the acquired operations
for an extended period of time. The Company maintains a stock-based compensation
program designed to help the Company retain its operating management personnel,
develop a sense of proprietorship of those persons in the Company and align the
interests of those persons with those of the Company's stockholders generally.
The Company believes it is well positioned to implement its acquisition
strategy because of: (i) its decentralized operating strategy; (ii) its
visibility and access to financial resources as a public company; and (iii) its
ability to provide acquired businesses and their owners with both liquidity and
the opportunity to participate in the Company's growth and expansion. The
Company has no pending agreements, arrangements, commitments or understandings
with respect to any material acquisition. The Company cannot predict the timing
or success of, or the potential capital commitments associated with, its
acquisition program. The Company's acquisition strategy presents risks that,
singly or in any combination, could have a material adverse effect on its
business and financial performance, and the success of that strategy depends on
the extent to which the Company is able to acquire, successfully integrate and
profitably manage additional businesses. See "Risk Factors -- Dependence on
Acquisitions for Growth," " -- Capital Requirements" and " -- Factors
Affecting Internal Growth."
NATIONAL OPERATING STRATEGY. The principal elements of the Company's
national operating strategy are: (i) cross-selling repair and distribution
services; (ii) capitalizing on the Company's geographic diversity to develop
national and regional customer and original equipment manufacturer
relationships; (iii) achieving cost efficiencies and standardizing and
implementing "best practices;" and (iv) increasing internal growth through the
roll-out of the Company's proprietary SafeSeal on-line valve repair system.
RISK FACTORS
The securities offered hereby involve a high degree of risk. Risks include,
in the case of the Common Stock and the Convertible Debt Securities, the
possible volatility of the future trading prices of the Common Stock, the
potential effect of shares eligible for future sale on those prices, the
potential adverse effects of Invatec's authorized preferred stock and the
potential anti-takeover effects of certain provisions in Invatec's Certificate
of Incorporation and Bylaws and the Delaware General Business Corporation Law.
In the case of the Convertible Debt Securities, additional risks include their
subordination provisions, Invatec's holding company structure, the absence of
any protection against takeovers or highly leveraged transactions and the
absence of a market for those securities. For information respecting these
risks, risks related to the Company's integration of Acquired Businesses,
dependence on acquisitions for growth, capital requirements, reliance on
customers in historically cyclical industries and dependence on key personnel
and manufacturers, certain factors that may affect internal growth and the
possible effects of operating hazards, competition and governmental regulation
on future results, see "Risk Factors."
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SUMMARY FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The following summary unaudited pro forma combined statements of operations
derive from the Unaudited Pro Forma Combined Financial Statements of the Company
elsewhere herein and give effect to various events and transactions, including
the acquisitions of all the Acquired Businesses, the SSI Merger and the IPO, as
if they had occurred on January 1, 1997. See the Unaudited Pro Forma Combined
Financial Statements and the notes thereto elsewhere herein. The following
summary balance sheet information presents historical information from the
Company's unaudited March 31, 1998 consolidated balance sheet elsewhere herein.
THREE MONTHS
YEAR ENDED ENDED
DECEMBER 31, MARCH 31,
1997 1998
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STATEMENT OF OPERATIONS INFORMATION
(UNAUDITED PRO FORMA COMBINED(1)):
Revenues........................ $162,259 $39,315
Gross profit.................... 51,882 12,972
Selling, general and
administrative expenses....... 40,624 9,439
Goodwill amortization(2)........ 1,896 460
Income from operations.......... 9,362 3,073
Interest expense, net........... (3,631) (1,108)
Other income (expense), net..... 155 69
Income from continuing
operations.................... $ 3,355 $ 1,160
============ =============
Income per share from continuing
operations -- Basic........... $ 0.39 $ 0.13
============ =============
Income per share from continuing
operations -- Diluted......... $ 0.38 $ 0.13
============ =============
Shares used in computing pro
forma income per share from
continuing
operations -- Basic(2)........ 8,702 8,702
============ =============
Shares used in computing pro
forma income per share from
continuing
operations -- Diluted(2)...... 8,851 8,994
============ =============
MARCH 31,
1998
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BALANCE SHEET INFORMATION (UNAUDITED
HISTORICAL):
Working capital................. $ 35,669
Total assets.................... 156,921
Total debt, including current
portion........................ 64,008
Stockholders' equity............ 73,054
- ------------
(1) See Note 1 of the Notes to Unaudited Pro Forma Combined Financial Statements
of the Company on page F-6 for information respecting the events and
transactions the pro forma combined information assumes occurred on January
1, 1997 and the other pro forma adjustments the pro forma information also
reflects. This pro forma information (i) is not necessarily indicative of
the results the Company would have obtained had those events and
transactions actually occurred when assumed or of the Company's future
results and (ii) is based on preliminary estimates of fair value, available
information and certain assumptions management deems appropriate. Management
expects the preliminary allocation of the purchase prices will not 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.
(2) Computed as described in Note 2 of the Notes to Unaudited Pro Forma Combined
Financial Statements.
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RISK FACTORS
PROSPECTIVE INVESTORS IN THE SECURITIES OFFERED HEREBY SHOULD CAREFULLY
CONSIDER THE FOLLOWING FACTORS AND THE OTHER INFORMATION THIS PROSPECTUS
CONTAINS. THIS PROSPECTUS CONTAINS STATEMENTS OF MANAGEMENT'S PLANS AND
OBJECTIVES AND OTHER "FORWARD-LOOKING STATEMENTS" THAT INVOLVE A NUMBER OF
RISKS, UNCERTAINTIES AND ASSUMPTIONS. NO ASSURANCE CAN BE GIVEN THAT ACTUAL
RESULTS WILL NOT DIFFER MATERIALLY FROM THESE STATEMENTS AS A RESULT OF VARIOUS
FACTORS, INCLUDING THE FOLLOWING:
INTRODUCTION
On October 28, 1997, Invatec (i) closed its initial public offering (the
"IPO") of its common stock (the "Common Stock") and (ii) consolidated seven
established businesses (the "Initial Acquired Businesses") providing various
maintenance, repair, replacement and value-added distribution services for
industrial valves, piping systems and other process-system components
(collectively, "repair and distribution services") by means of two purchase
transactions and a merger in which its affiliate, The Safe Seal Company, Inc.
("SSI"), became its subsidiary. Prior to those transactions, SSI had purchased
three Initial Acquired Businesses in the first half of 1997 and Invatec had
purchased one Initial Acquired Business in July 1997, but otherwise had not
conducted any operations of its own since its formation in March 1997.
HISTORY OF LOSSES
The consolidated financial statements of Invatec and its subsidiaries
(collectively, the "Company") in this Prospectus present SSI as the "accounting
acquirer" in the acquisitions of the other Initial Acquired Businesses. During
1993, 1994, 1995 and 1996, SSI incurred historical net losses of $263,000,
$281,000, $1,505,000 and $415,000, respectively, while the Company incurred an
historical net loss of $7,500,000 during 1997. The loss Invatec incurred in 1997
reflects special non-cash, non-recurring compensation expenses totaling
$7,613,000, but no assurance can be given the Company will not continue to incur
losses in 1998 and future periods.
LIMITED COMBINED OPERATING HISTORY; RISKS ASSOCIATED WITH INTEGRATING ACQUIRED
BUSINESSES
Because the Company is consolidating the operations of the Acquired
Businesses and recording their acquisitions in accordance with the purchase
method of accounting, the pro forma information herein may not be indicative of
the Company's future operating results and financial condition. The success of
the Company will depend, in part, on the extent to which the Company is able to
integrate the Acquired Businesses and such additional businesses as it may
hereafter acquire into a cohesive, efficient enterprise. The Company's executive
officers have only limited experience working together, and no assurance can be
given they will be able to manage the Company effectively or successfully
execute the Company's acquisition and operating strategies. The inability of the
Company to integrate the Acquired Businesses successfully would have a material
adverse effect on the Company's business, financial condition and operating
results and would render unlikely that its acquisition and internal growth
strategies would be successful. See "Business -- Business Strategies."
DEPENDENCE ON ACQUISITIONS FOR GROWTH
The Company's business strategies for growth focus primarily on acquiring
additional businesses providing repair and distribution services. This
acquisition strategy presents risks that, singly or in any combination, could
materially adversely affect the Company's business and financial performance.
These risks include (i) the adverse effects on existing operations which could
result from the diversion of management attention and resources to acquisitions,
(ii) the possible loss of acquired customer or supplier bases and key personnel,
including service technicians and machinists, and (iii) the contingent and
latent risks (including environmental risks) associated with the past operations
of and other unanticipated problems arising in the acquired businesses. The
success of the Company's acquisition strategy will depend on the extent to which
the Company is able to acquire, successfully integrate and profitably manage
additional businesses. In this connection, if competition for acquisition
candidates develops, the cost of acquiring businesses could increase materially,
and some competitors may have greater resources than the Company to finance
acquisition opportunities and may be willing to pay higher prices than the
Company for
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the same opportunities. Acquisitions accounted for as purchases may result in
substantial annual non-cash amortization charges for goodwill and other
intangible assets in the Company's statements of operations.
CAPITAL REQUIREMENTS
The Company's acquisition strategy will require substantial capital. The
Company intends to finance future acquisitions with future free cash flow, by
borrowing under the Company's $60 million revolving credit facility (the
"Credit Facility"), with the proceeds from public or private sales of equity
and debt securities and through issuances of shares of Common Stock or debt
securities, including the Convertible Debt Securities. Using internally
generated cash or debt to complete acquisitions could substantially limit the
Company's operational and financial flexibility. The extent to which the Company
will be able or willing to use shares of Common Stock or Convertible Debt
Securities to consummate acquisitions will depend on the market value of the
Common Stock from time to time and the willingness of potential sellers to
accept these securities as full or partial payment. The Credit Facility requires
the consent of the lenders for acquisitions exceeding a certain level of cash
consideration, prohibits the payment of cash dividends by Invatec, restricts the
ability of the Company to incur additional indebtedness and requires the Company
to comply with certain financial restrictions. These provisions could restrict
materially the ability of the Company to effect future acquisitions on terms it
would prefer or to finance acquisitions with proceeds from debt financings. No
assurance can be given the Company will be able to obtain the capital it will
need to finance a successful acquisition program and its other cash needs. If
the Company is unable to obtain additional capital on acceptable terms, it may
be required to reduce the scope of the expansion it presently anticipates, which
could materially adversely affect its growth. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."
FACTORS AFFECTING INTERNAL GROWTH
Factors affecting the Company's ability to generate internal growth include
the extent to which it is able to (i) establish efficient centralized financial
and other administrative systems to replace the separate systems the businesses
it acquires have used and otherwise integrate these businesses into a cohesive,
efficient enterprise, (ii) expand the range of repair services of the Acquired
Businesses and other businesses it may acquire, (iii) leverage its relationships
with customers in existing markets into work for those customers in other
markets where they currently use the services of competitors and (iv) reduce
overhead costs of acquired businesses. No assurance can be given the Company
will be able to market its proprietary SafeSeal technology successfully as being
safer, more effective and more cost-efficient than other available on-line valve
repair methods. Factors affecting the Company's ability to expand services
include the extent to which it is able to attract and retain qualified operating
management, service technicians and machinists in existing and new areas of
operation and train its technicians to use the SafeSeal technology and other new
technologies that become available.
CONCENTRATION OF OWNERSHIP
At May 20, 1998, subsidiaries of Philip Services Corp. (collectively with
its subsidiaries, "Philip") owned approximately 26.9% of the outstanding
Common Stock. Were Philip to acquire, alone or acting in concert with others,
voting control of more than 50% of the outstanding shares of Common Stock, it
and such other persons, if any, would be able to exercise control over the
Company's affairs and to elect the entire Board of Directors of Invatec.
SUBORDINATION OF CONVERTIBLE DEBT SECURITIES; HOLDING COMPANY STRUCTURE
The Convertible Debt Securities will be subordinate in right of payment to
all current and future Senior Indebtedness of Invatec. Senior Indebtedness
includes all indebtedness (whether secured or unsecured) borrowed under the
Company's $60.0 million revolving credit facility (the "Credit Facility") or
successor credit facilities and substantially all other indebtedness of Invatec,
whether existing on or created or incurred after the date the Convertible Debt
Securities are issued, that is not made subordinate to or PARI
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PASSU with the Convertible Debt Securities by the instrument creating the
indebtedness. Invatec contemplates that Senior Indebtedness other than Credit
Facility indebtedness will be limited to secured indebtedness. Subject to that
limitation, as of May 20, 1998, the aggregate amount of Senior Indebtedness to
which the Convertible Debt Securities would have been subordinated was
approximately $54.6 million, consisting of secured indebtedness outstanding
under the Credit Facility. The Indenture under which Invatec will issue the
Convertible Debt Securities does not limit the amount of additional
indebtedness, including Senior Indebtedness, which Invatec can create, incur,
assume or guarantee. By reason of the subordination of the Convertible Debt
Securities, if any insolvency, bankruptcy, liquidation, reorganization,
dissolution or winding up of the business of Invatec occurs, the assets of
Invatec will be available to pay the amounts due on the Convertible Debt
Securities only after all Senior Indebtedness has been paid in full.
Invatec, as a holding company whose principal assets are the shares of
capital stock of its subsidiaries, does not generate any operating revenues of
its own. Consequently, it depends on dividends, advances and payments from its
subsidiaries to fund its activities and meet its cash needs, including its debt
service requirements. The subsidiaries are separate and distinct legal entities
and have no obligation, contingent or otherwise, to pay any amounts due pursuant
to the Convertible Debt Securities or to make funds available therefor. Their
ability to pay dividends or make other payments or advances to Invatec will
depend on their operating results and will be subject to various business
considerations and to applicable state laws. In addition, holders of the
Convertible Debt Securities are effectively subordinated to the claims of
creditors of Invatec's subsidiaries to the extent of the assets of such
subsidiaries. If any insolvency, bankruptcy, liquidation, reorganization,
dissolution or winding up of the business of any subsidiary of Invatec occurs,
creditors of that subsidiary generally will have the right to be paid in full
before any distribution is made to Invatec or the holders of the Convertible
Debt Securities. See "Description of the Convertible Debt Securities."
Substantially all the subsidiaries of Invatec have guaranteed the payment
of its obligations under the Credit Facility, and the stock of those
subsidiaries has been pledged by Invatec or their immediate parent corporations
as collateral securing those obligations.
CHANGE OF CONTROL AND OTHER EVENTS
The Indenture does not afford holders of Convertible Debt Securities any
protection in the event of any change of control of Invatec or any highly
leveraged business combination, recapitalization, reorganization or other
transaction involving Invatec which might materially adversely affect Invatec's
financial condition.
RELIANCE ON CUSTOMERS IN HISTORICALLY CYCLICAL INDUSTRIES
The businesses of most of the Company's industrial customers, particularly
refineries and chemical, power and pulp and paper plants, tend to be cyclical.
Margins in those industries are highly sensitive to demand cycles, and the
Company's customers in those industries historically have tended to delay large
capital projects, including expensive turnarounds, during down cycles. As a
result, the Company's business and results of operations may reflect the
cyclical nature of the various industries it serves.
OPERATING HAZARDS
The Company performs a significant portion of its repair services in
refineries, chemical plants and other industrial facilities that process,
produce, store, transport or handle potentially hazardous substances, including
highly corrosive, flammable or explosive substances kept at extremes of
temperature and pressure. These services (i) include sealing leaks and repairing
valves on process units operating under pressure, (ii) typically involve a
combination of individuals and machinery operating in restricted work areas and
(iii) are subject to the usual hazards associated with providing on-site
services in these types of facilities, such as pipeline leaks and ruptures,
explosions, fires, oil and chemical spills and discharges or releases of toxic
substances or gases. These hazards can cause personal injury and loss of life,
severe damage to or destruction of property and equipment and environmental
damage and may result in suspension of operations of all or part of the facility
being serviced. If a catastrophic event occurs at a plant to which the Company
provides services, the Company may have to defend itself against large claims.
It
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<PAGE>
maintains insurance coverage in the amounts and against the risks it believes
accord with industry practice, but this insurance does not cover all types or
amounts of liabilities. No assurance can be given either (i) this insurance will
be adequate to cover all losses or liabilities the Company may incur in its
operations or (ii) the Company will be able to maintain insurance of the types
or at levels it deems necessary or adequate or at rates it considers reasonable.
COMPETITION
The markets for the Company's repair and distribution services generally
are highly competitive. The Company believes the principal competitive factors
in a distributor's sale of new valves and other process-systems components
direcly to industries in the distributor's market include price and the ability
of the distributor to offer on a timely basis a wide selection of the new,
better-performing valves and other components the oringinal equipment
manufacturers ("OEMs") have designed to meet the needs of these industries.
Factors affecting delivery time include inventory size and whether, in the case
of pressure safety, relief and safety-relief valves (collectively, "PRVs") and
certain other valves, the OEM or the distributor assembles, sets, tests and
seals, or otherwise customizes, the valve. In the case of repair services, the
Company believes the principal competitive factors are quality and availability
of service (including emergency service and documentation of valve histories),
price, use of OEM-approved replacement parts, familiarity with the OEMs'
products and local brand equity of the repair business.
In its distribution operations, the Company competes with the direct sales
forces and distribution networks of OEMs offering the same or comparable lines
of products. It competes for repair services business with other repair services
businesses, OEMs and customers' in-house manintenance crews. Some of its
competitors may have lower overhead cost structures and, consequently, may be
able to provide their services at lower rates than the Company. The Company's
competitors for on-line leak sealing services include two national competitors
and several regional competitors. See "Business -- Competition."
The Company believes the industrial valve repair and distribution sectors
of the industrial valve industry are subject to consolidation, and that a number
of competitors may attempt to consolidate these sectors. Some of these
competitors may have greater resources than the Company to finance acquisition
and internal growth opportunities and may be willing to pay higher prices than
the Company for the same opportunities. Consequently, the Company may encounter
significant competition in its efforts to achieve its growth objectives,
particularly through its acquisition strategy.
RELIANCE ON PATENTS AND PROPRIETARY TECHNOLOGIES
The success of the Company may depend in part on its ability to obtain and
protect patents and other intellectual property rights covering its products and
services. One of the Company's customers has a license to certain of the
Company's technology under certain of its patents pertaining to the SafeSeal
system. Although, to the knowledge of the Company, that customer has not pursued
the development of technology that would compete with the SafeSeal system (and
instead has opted to continue outsourcing on-line valve repair service work to
the Company), there can be no assurance it will not elect to do so in the
future. Moreover, there can be no assurance others will not independently
develop substantially equivalent or better technology that would be free of the
Company's patents and other intellectual property rights. See
"Business -- Intellectual Property."
GOVERNMENTAL REGULATION
A wide range of federal, state and local regulations relating to health,
safety and environmental matters applies to the Company's business. The
Company's in-shop reconditioning and remanufacturing of used valves frequently
involves the use, handling, storage and contracting for the disposal or
recycling of a variety of substances or wastes considered hazardous or toxic.
Environmental laws are complex and subject to frequent change. These laws impose
liability in some cases without regard to negligence or fault and expose the
Company to liability for the conduct of or conditions caused by others, or for
acts of the Company which complied with all applicable laws when performed. No
assurance can be given the
8
<PAGE>
Company's compliance with current, amended, new or more stringent laws or
regulations, stricter interpretations of existing laws or the future discovery
of environmental conditions will not require additional, material expenditures
by the Company. Regulations of the Occupational Safety and Health Administration
("OSHA") also apply to the Company's businesses, including requirements the
Company's training programs must meet respecting, among other matters, release
detection procedures, appropriate work practices, emergency procedures and other
methods the Company's technicians can use to protect themselves and the
environment. See "Business -- Governmental Regulation and Environmental
Matters." Future acquisitions by the Company also may be subject to regulation,
including antitrust reviews.
DEPENDENCE ON KEY PERSONNEL
The success of the Company's operations will depend on the continuing
efforts of its executive officers and the senior management of the Acquired
Businesses and likely will depend on the senior management of any significant
businesses the Company acquires in the future. The business or prospects of the
Company could be affected adversely if any of these persons do not continue in
their respective management roles after joining the Company and the Company is
unable to attract and retain qualified replacements. The ability of the Acquired
Businesses (other than SSI) and any additional repair services companies the
Company may acquire to include the SafeSeal system in their services will
require the training of their service technicians in the use of the technology,
and the success of the Company's growth strategy generally, as well as the
Company's current operations, will depend on the extent to which it is able to
retain, recruit and train qualified sales personnel, service technicians and
machinists who meet the Company's standards of service to customers.
DEPENDENCE ON MANUFACTURERS
The success of the Company as a value-added distributor of new valves and
other process-system components depends on its relationships with the OEMs for
which it distributes products. In these relationships, the Company acts either
as a sales representative on a commission basis for direct sales by the OEM to
the end user or purchases products on a discount basis for resale, generally on
a value-added basis. OEMs typically exercise a great deal of control over their
distributors. An OEM may assign a territory to a distributor on an exclusive or
nonexclusive basis, refuse to assign additional territories to its distributors
and reserve the right to sell directly to customers in an assigned territory.
The typical distribution agreement is terminable at will on relatively short
prior notice and restricts the ability of the distributor to offer similar
products made by another OEM. The Company's business strategy could conflict
with existing or future OEM distributor policies or programs. Actions taken by
OEMs to exploit their bargaining positions with the Company could materially
adversely affect the Company's ability to implement its growth strategies and
maintain its existing distribution services business on a short-term basis. See
"Business -- Suppliers_-- Relationships With OEMs."
The success of the Company as a value-added distributor also depends on the
extent to which its OEMs are able to create demand for their products in the
markets the Company serves. Factors affecting this demand include, in addition
to price, product quality and performance (including durability and safety) and
delivery time, the relative strengths of the brand names and the marketing
abilities of the OEMs. See "Business -- Competition."
ABSENCE OF MARKET FOR THE CONVERTIBLE SUBORDINATED DEBT SECURITIES
No market currently exists for the Convertible Debt Securities, and no
assurance can be given a market for the Convertible Debt Securities will
develop, as to the liquidity or sustainability of any market that may develop or
as to the ability of holders of the Convertible Debt Securities to sell them at
any price. Future trading prices of the Convertible Debt Securities will depend
on many factors, including, among others, prevailing interest rates, Invatec's
operating results, the price of the Common Stock and the market for similar
securities.
9
<PAGE>
POSSIBLE VOLATILITY OF COMMON STOCK PRICE
The market price of the Common Stock may be subject to significant
fluctuations from time to time in response to numerous factors, including
variations in the reported financial results of the Company and changing
conditions in the economy in general or in the Company's industry in particular.
In addition, the stock markets experience significant price and volume
volatility from time to time, which may affect the market price of the Common
Stock for reasons unrelated to the Company's performance at that time.
POTENTIAL EFFECT OF SHARES ELIGIBLE FOR FUTURE SALE ON PRICE OF COMMON STOCK
At May 20, 1998, 8,723,338 shares of Common Stock were outstanding (without
giving effect to the potential conversion of convertible subordinated notes
issued in the acquisitions of certain Acquired Businesses (the "Convertible
Notes") into up to 668,959 shares of Common Stock). The 3,852,500 shares sold
in the IPO are freely tradable. Substantially all the remaining shares
outstanding may be resold publicly only following their effective registration
under the Securities Act, or pursuant to an available exemption from the
registration requirements of the Securities Act, such as provided by Securities
Act Rule 144. Under Rule 144, substantially all those shares will be eligible
for Rule 144 sales, subject to certain volume limitations and other
requirements, after October 28, 1998. In addition, the holders of a substantial
number of those remaining shares have certain rights to cause the shares of
Common Stock held by or issuable to them to be registered in connection with
certain future offerings pursuant to a registration statement Invatec files with
the SEC.
Invatec has filed a registration statement on Form S-8 to register the
shares reserved or to be available for issuance pursuant to its 1997 Incentive
Plan. The shares registered thereby generally will become available for sale in
the open market by holders who are not affiliates of the Company and, subject to
the volume and other limitations of Rule 144, by holders who are affiliates of
the Company.
For information respecting restrictions on sales by Philip, Invatec's
management and others, see "Shares Eligible for Future Sale."
Pursuant to Securities Act Rule 145, the volume limitations and certain
other requirements of Rule 144 will apply to resales of the securities this
Prospectus covers by affiliates of the businesses the Company acquires for a
period of one year from the date of their acquisition (or such shorter period as
the SEC may prescribe), but otherwise these securities will be freely tradable
by persons not affiliated with Invatec unless Invatec restricts their resale by
contract.
The availability for sale, or sale, of the shares of Common Stock eligible
for future sale could adversely affect the market price of the Common Stock
prevailing from time to time. See "Shares Eligible for Future Sale."
POTENTIAL ADVERSE EFFECTS OF AUTHORIZED PREFERRED STOCK
Invatec's Certificate of Incorporation (the "Charter") authorizes Invatec
to issue, without stockholder approval, one or more classes or series of
preferred stock having such preferences, powers and relative, participating,
optional and other rights (including preferences over the Common Stock
respecting dividends and distributions) as the Board of Directors of Invatec may
determine. The terms of one or more classes or series of preferred stock could
adversely impact the rights of holders of shares of Common Stock or could have
anti-takeover effects. See " -- Potential Anti-takeover Effects of Certain
Charter, Bylaw and Statutory Provisions" and "Description of Capital Stock."
POTENTIAL ANTI-TAKEOVER EFFECTS OF CERTAIN CHARTER, BYLAW AND STATUTORY
PROVISIONS
Invatec has adopted a stockholder rights plan. This plan and provisions of
the Charter, Invatec's Bylaws and a Delaware General Corporation Law (the
"DGCL") provision may delay, discourage, inhibit, prevent or render more
difficult an attempt to obtain control of Invatec, whether by means of a tender
offer, business combination, proxy contest or otherwise. The provisions include
the authorization of "blank check" preferred stock, classification of the
Board of Directors, a prohibition of stockholder action by less than unanimous
written consent and DGCL restrictions on business combinations with certain
interested parties. See "Description of Capital Stock."
10
<PAGE>
THE COMPANY
INVATEC
Invatec was formed in March 1997 to create the leading single-source
provider of comprehensive maintenance, repair, replacement and value-added
distribution services for industrial valves, piping systems and other
process-system components (collectively, "repair and distribution services")
throughout North America. To achieve this goal, Invatec has embarked on an
aggressive acquisition program and is implementing a national operating strategy
it has designed to enhance internal growth, market share and profitability. Its
principal executive offices are located at 2 Northpoint Drive, Suite 300,
Houston, Texas 77060, and its telephone number at that address is (281)
925-0300. Invatec is a Delaware corporation.
THE ACQUIRED BUSINESSES
INITIAL ACQUIRED BUSINESSES. Concurrently with the closing of the IPO,
Invatec consolidated the seven Initial Acquired Businesses. The Initial Acquired
Businesses are, in addition to SSI, Harley Industries, Inc., Steam Supply &
Rubber Co., Inc. and three related entities, Industrial Controls & Equipment,
Inc. and three related entities, GSV, Inc., Plant Specialties, Inc. and Southern
Valve Service, Inc. and a related entity.
The Initial Acquired Businesses provide various repair and distribution
services from locations in 17 states and Canada to power and other utilities,
petroleum refineries, petrochemical and other chemical plants, pulp and paper
mills and other process industries. With the exception of SSI's on-line leak
sealing and valve-packing restoration services, on-site and in-shop off-line
repair services historically constituted substantially all the repair services
the Initial Acquired Businesses performed.
ADDITIONAL ACQUIRED BUSINESSES. Since the IPO and through April 1, 1998,
the Company purchased seven Additional Acquired Businesses. These businesses
include Dalco, Inc., based in Kentucky, Cypress Industries, Inc., based in
Illinois, and IPS Holding, Ltd., based in Illinois. The total purchase price the
Company paid for the seven businesses included $41.3 million in cash and assumed
debt, $4.7 million of short-term notes, $6.8 million of convertible subordinated
notes and 878,106 shares of Common Stock. See Notes 2, 3, and 18 of the Notes to
Consolidated Financial Statements of the Company. As a result of these
acquisitions, the Company has expanded its business to include on-line hot
tapping and line stopping services both in the United States and abroad, repair
and replacement of steam turbines and other repair services.
11
<PAGE>
PRICE RANGE OF COMMON STOCK
Since October 1997, the Common Stock has been quoted on the Nasdaq National
Market under the symbol "IVTC." As of May 20, 1998, 8,723,338 shares of Common
Stock were outstanding, and held by approximately 71 stockholders of record. The
number of record holders does not bear any relationship to the number of
beneficial owners of the Common Stock.
The following table sets forth the range of high and low closing prices for
the Common Stock on the Nasdaq National Market for the periods indicated:
HIGH LOW
--------- ---------
1997:
4th quarter (from October
23)............................. $ 20.25 $ 15.75
1998:
1st quarter................... $ 20.13 $ 15.50
2nd quarter (through May
20)............................. $ 18.25 $ 15.13
The last reported closing price of the Common Stock on the Nasdaq National
Market on May 20, 1998 was $15.25 per share.
DIVIDEND POLICY
Invatec has not paid or declared any dividends since its formation and
currently intends to retain earnings to finance the expansion of its business.
Any future dividends will be at the discretion of the Board of Directors after
taking into account various factors the Board of Directors deems relevant,
including the Company's financial condition and performance, cash needs and
expansion plans, income tax consequences and the restrictions Delaware and other
applicable laws and its credit facilities then impose. The Credit Facility
prohibits the payment of dividends. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Liquidity and Capital
Resources" and Note 7 of the Notes to Consolidated Financial Statements of the
Company.
12
<PAGE>
CAPITALIZATION
The following table sets forth the short-term and current maturities of
long-term obligations and capitalization as of March 31, 1998 of the Company (in
thousands).
MARCH 31,
1998
---------
Current maturities of long-term
obligations........................ $ 642
=========
Long-term debt, less current
maturities......................... 322
Credit Facility...................... 50,128
Convertible subordinated debt........ 12,917
Other long-term obligations.......... 1,248
Stockholders' equity:
Preferred Stock: $0.001 par
value, 5,000,000 shares
authorized; none issued or
outstanding.................... --
Common Stock; $0.001 par value,
30,000,000 shares authorized;
8,702,338 shares issued and
outstanding(1)................. 9
Additional paid-in capital...... 82,142
Retained deficit................ (9,096)
---------
Total stockholders'
equity................... 73,055
---------
Total
capitalization...... $ 137,670
=========
- ------------
(1) Excludes (i) an aggregate of 668,959 shares of Common Stock issuable on the
conversion of convertible subordinated debt securities that are convertible
at initial conversion prices ranging from $16.90 to $22.52 and (ii) an
aggregate of 1,344,748 shares of Common Stock subject to stock options that
were outstanding at May 20, 1998.
13
<PAGE>
SELECTED FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND RATIOS)
For financial reporting purposes, SSI is the acquirer in all the
acquisitions by Invatec prior to October 31, 1997. Consequently, the Company's
historical financial statements for periods ended on or before October 31, 1997
are the consolidated historical financial statements of SSI. As used in this
discussion, the "Company" means (i) SSI and its consolidated subsidiaries
prior to October 31, 1997 and (ii) Invatec and its consolidated subsidiaries on
that date and thereafter. The following selected historical financial
information derives from the Company's audited consolidated financial statements
in this Prospectus for each year in the three-year period ended December 31,
1997. The remaining selected historical financial information of the Company
derives from its unaudited financial statements, which it has prepared on the
same basis as the audited financial statements and, in the case of the interim
period statements, reflect, in the Company's opinion, all adjustments,
consisting of normal recurring adjustments, necesssary for a fair presentation
of that information. The following selected unaudited pro forma combined
statements of operations information derives from the Company's Unaudited Pro
Forma Combined Financial Statements in this Prospectus and gives effect to
various events and transactions, including the acquisitions of the Acquired
Businesses, the SSI Merger and the IPO, as if they had occurred on January 1,
1997. See the Unaudited Pro Forma Combined Financial Statements and the notes
thereto elsewhere herein. The summary financial information below should be read
in conjunction with the historical and unaudited pro forma financial statements
and notes thereto elsewhere herein.
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31 ENDED MARCH 31
------------------------------------------------------ --------------------
1993 1994 1995 1996 1997(1) 1997 1998
--------- --------- --------- --------- ------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
HISTORICAL STATEMENTS OF OPERATIONS
INFORMATION:
Revenues......................... $ 1,787 $ 2,547 $ 2,852 $ 3,888 $58,621 $ 6,945 $ 33,504
Gross profit..................... 959 1,276 1,268 1,512 18,800 2,194 10,956
Selling, general and
administrative expense......... 1,221 1,268 1,853 1,917 16,805 1,951 8,059
Special compensation
expense(1)..................... -- -- -- 38 7,614 2,605 --
Income (loss) from operations.... (262) 8 (585) (443) (5,619) (2,362) 2,897
Interest income (expense), net... (1) (7) 10 28 (2,901) (343) (709)
Other income (expense), net...... -- (282) (930) -- (3) -- 13
Income (loss) before income
taxes.......................... (263) (281) (1,505) (415) (8,523) (2,705) 2,201
Income (loss) before dividends
applicable to preferred
stock.......................... $ (263) $ (281) $ (1,505) $ (415) $(7,500) $ (2,156) $ 1,255
Preferred stock dividends........ (12) (12) (41) (192) (157) (47) --
--------- --------- --------- --------- ------- --------- ---------
Income (loss) applicable to
common shares.................. $ (275) $ (293) $ (1,546) $ (607) $(7,657) $ (2,203) $ 1,255
========= ========= ========= ========= ======= ========= =========
Income (loss) per share--Basic... $ (0.23) $ (0.23) $ (1.17) $ (0.42) $ (2.25) $ (1.06) $ 0.16
========= ========= ========= ========= ======= ========= =========
Income (loss) per
share--Diluted................. $ (0.23) $ (0.23) $ (1.17) $ (0.42) $ (2.25) $ (1.06) $ 0.15
========= ========= ========= ========= ======= ========= =========
Shares used in computing income
(loss) per share--Basic........ 1,196 1,252 1,320 1,441 3,398 2,088 8,029
========= ========= ========= ========= ======= ========= =========
Shares used in computing income
(loss) per share--Diluted...... 1,196 1,252 1,320 1,441 3,398 2,088 8,685
========= ========= ========= ========= ======= ========= =========
Ratio of earnings to fixed
charges(2)..................... N/A N/A N/A N/A N/A N/A 3.2x
========= ========= ========= ========= ======= ========= =========
</TABLE>
THREE MONTHS
YEAR ENDED ENDED
DECEMBER 31, 1997 MARCH 31, 1998
----------------- --------------
PRO FORMA COMBINED STATEMENT OF
OPERATIONS INFORMATION(3):
Revenue.......................... $ 162,259 $ 39,315
Gross profit..................... 51,882 12,972
Selling, general and
administrative expenses........ 40,624 9,439
Goodwill amortization............ 1,896 460
Income from operations........... 9,362 3,073
Interest expense, net............ (3,631) (1,108)
Other income (expense), net...... 155 69
Income from continuing
operations..................... $ 3,355 $ 1,160
======== ==============
Income per share from continuing
operations -- Basic............ $ 0.39 $ 0.13
======== ==============
Income per share from continuing
operations -- Diluted.......... $ 0.38 $ 0.13
======== ==============
Shares used in computing pro
forma income per share from
continuing
operations -- Basic............ 8,702 8,702
======== ==============
Shares used in computing pro
forma income per share from
continuing
operations -- Diluted.......... 8,851 8,994
======== ==============
(FOOTNOTES ON FOLLOWING PAGE)
14
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31
----------------------------------------------------- MARCH 31,
1993 1994 1995 1996 1997 1998
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
HISTORICAL BALANCE SHEET INFORMATION:
Working capital (deficit)........ $ 163 $ (202) $ 823 $ (13) $ 21,232 $ 35,669
Total assets..................... 623 668 23,109 2,228 105,432 156,921
Total debt, including current
portion........................ 25 93 -- 589 29,527 64,008
Stockholders' equity (deficit)... 44 (75) (1,075) (1,394) 59,869 73,054
</TABLE>
- ------------
(1) Non-cash, non-recurring special compensation expenses of $7.6 million and
$2.6 million for the year ended December 31, 1997 and the three months ended
March 31, 1997, respectively, attributable to certain awards of stock, stock
options and certain stock sales and financing fees of $1.0 million (included
in interest expense) related to guarantees by Philip. See Note 2 of the
Notes to Consolidated Financial Statements of the Company.
(2) For purposes of calculating this ratio, "earnings" consist of earnings
before fixed charges and income tax, while "fixed charges" consist of
interest expense and one-third of rental expense, which the Company
estimates to be representative of the interest factor therein. As a result
of historical operating losses in the years ended December 31, 1993, 1994,
1995, 1996 and 1997 and the three month period ended March 31, 1997,
historical earnings did not cover fixed charges for those periods by
$263,000, $281,000, $1,505,000, $415,000, $8,523,000 and $962,000,
respectively.
(3) See Note 1 of the Notes to Unaudited Pro Forma Combined Financial Statements
of the Company on page F-6 for information respecting the events and
transactions the pro forma combined information assumes occurred on January
1, 1997 and the other pro forma adjustments the pro forma information also
reflects. This pro forma information (i) is not necessarily indicative of
the results the Company would have obtained had those events and
transactions actually occurred when assumed or of the Company's future
results and (ii) is based on preliminary estimates of fair value, available
information and certain assumptions management deems appropriate. Management
expects the preliminary allocation of the purchase prices will not 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.
15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the financial
statements and related notes thereto and "Selected Financial Information"
included elsewhere in this Prospectus. Statements herein regarding future
financial or operational performance and results of the Company or other similar
matters that are not historical facts constitute forward-looking statements and
are subject to numerous risks and uncertainties, including those discussed in
"Risk Factors" herein.
OVERVIEW
The Company derives its revenues principally from its sales of industrial
valves and other process-system components and its performance of comprehensive,
maintenance, repair, replacement and value-added distribution services of
industrial valves and other process-system components. Cost of operations
consists principally of direct costs of valves and components sold, coupled with
labor and overhead costs connected with the performance of repair services.
Selling, general and administrative expenses consist principally of compensation
and benefits payable to owners and to sales, management and administrative
personnel and insurance, depreciation and amortization and other related
expenses.
Invatec is in the process of integrating the Acquired Businesses and their
operations and administrative functions. This process may present opportunities
to reduce costs through eliminating duplicative functions and operating
locations and developing 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 expected savings and incremental costs may render historical
operating results not comparable to, or indicative of, future performance.
The success of the Company will depend, in part, on the extent to which the
Company is able to integrate the Acquired Businesses and such additional
businesses as it may hereafter acquire into a cohesive, efficient enterprise.
The Company's executive officers have only limited experience working together,
and no assurance can be given they will be able to manage the Company
effectively or successfully execute the Company's acquisition and operating
strategies. The inability of the Company to integrate the Acquired Businesses
successfully would have a material adverse effect on the Company's business,
financial condition and operating results and would render unlikely that its
acquisition and internal growth strategies would be successful. See
"Business -- Business Strategies."
The Company's financial statements present SSI as the "accounting
acquirer" in the acquisitions Invatec effected through October 31, 1997.
Consequently, the Company's historical financial statements for periods ended on
or before that date are SSI's historical consolidated financial statements, and
in this discussion the term "Company" means (i) SSI and its consolidated
subsidiaries prior to that date and (ii) Invatec and its consolidated
subsidiaries on that date and thereafter.
16
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth selected historical consolidated financial
information of the Company and that information as a percentage of the Company's
historical consolidated revenues for the periods indicated (dollars in
thousands). The results for the 1997 periods include the results from the
Acquired Businesses from their respective acquisition dates.
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31 ENDED MARCH 31
---------------------------------------------------------------- --------------------
1995 1996 1997 1997
-------------------- -------------------- -------------------- --------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues............................. $ 2,852 100% $ 3,888 100% $ 58,621 100% $ 6,945 100%
Cost of operations................... 1,584 56 2,376 61 39,821 68 4,751 68
--------- --- --------- --- --------- --- --------- ---
Gross profit......................... 1,268 44 1,512 39 18,800 32 2,194 32
Selling, general and administrative
expenses........................... 1,853 65 1,917 49 16,805 29 1,951 28
Special compensation expense......... -- -- 38 1 7,614 13 2,605 38
--------- --- --------- --- --------- --- --------- ---
Income (loss) from operations........ $ (585) (21) $ (443) (11) $ (5,619) (10) $ (2,362) (34)
========= === ========= === ========= === ========= ===
</TABLE>
1998
--------------------
Revenues............................. $ 33,504 100%
Cost of operations................... 22,548 67
--------- ---
Gross profit......................... 10,956 33
Selling, general and administrative
expenses........................... 8,059 24
Special compensation expense......... -- --
--------- ---
Income (loss) from operations........ $ 2,897 9
========= ===
THREE MONTHS ENDED MARCH 31, 1997 COMPARED TO THREE MONTHS ENDED MARCH 31, 1998
(UNAUDITED)
REVENUES -- Revenues increased $26.6 million, or 382%, from $6.9 million in
the three months ended March 31, 1997 to $33.5 million in the corresponding
period in 1998. This increase primarily resulted from the inclusion in the 1998
period of the results of the businesses acquired during the fourth quarter of
1997 and the first quarter of 1998.
GROSS PROFIT -- Gross profit increased $8.8 million, or 399%, from $2.2
million in the three months ended March 31, 1997 to $11.0 million in the
corresponding period in 1998. This increase occurred principally as a result of
the inclusion in the 1998 period of the incremental gross profit of the
businesses acquired during the fourth quarter of 1997 and the first quarter of
1998. As a percentage of revenues, gross profit increased from 32% in the three
months ended March 31, 1997 to 33% in the same period in 1998.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES -- Selling, general and
administrative expenses increased $6.1 million, or 313%, from $2.0 million in
the three months ended March 31, 1997 to $8.1 million in the corresponding
period in 1998. This increase primarily reflected the incremental selling,
general and administrative expenses in the 1998 period of the businesses
acquired during the fourth quarter of 1997 and the first quarter of 1998. As a
percentage of revenues, these expenses decreased from 28% in the three months
ended March 31, 1997 to 24% in the same period in 1998, primarily as a result of
an essentially flat spending level being spread over a larger revenue base.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
REVENUES -- Revenues increased $54.7 million, or 1,408%, from $3.9 million
in 1996 to $58.6 million in 1997. This increase resulted from the inclusion of
the results of the Acquired Businesses purchased in 1997 from their respective
dates of acquisition.
GROSS PROFIT -- Gross profit increased $17.3 million, or 1,143%, from $1.5
million in 1996 to $18.8 million in 1997, primarily as a result of the
incremental gross margins generated by the Acquired Businesses Invatec purchased
in 1997. As a percentage of revenues, gross profit decreased from 39% in 1996 to
32% in 1997. This decrease reflects the expansion of the Company's consolidated
operations to include the off-line distribution and related services operations
of the businesses purchased in 1997 which historically have generated lower
gross margins than SSI's gross margins attributable to its on-line repair
services operations.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES -- This increase primarily
reflects the incremental selling, general and administrative expenses of the
businesses acquired in 1997 and the building of the Company's corporate
management team. As a percentage of revenues, these expenses decreased from 49%
in 1996 to 29% in 1997 as a result of being spread over a larger revenue base
coupled with the implementation of the Company's cost reduction strategies.
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SPECIAL COMPENSATION EXPENSE -- Special compensation expense increased $7.6
million, or 19,937%, from $38,000 in 1996 to $7.6 million in 1997. In 1996,
these non-cash expenses related to the issuance by SSI of its common stock and
options to purchase its common stock under employee benefit programs. In 1997,
these non-cash expenses related to an SSI issuance of shares of its common
stock, sales by Invatec of Common Stock and certain options granted by Invatec
to purchase Common Stock. See Note 2 of the Notes to Consolidated Financial
Statements of the Company in this Prospectus.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
REVENUES -- Revenues increased $1.0 million, or 36%, from $2.9 million in
1995 to $3.9 million in 1996. This increase resulted primarily from SSI
obtaining, in early 1996, sole-source contracts to provide leak sealing and
related services to two significant petrochemical companies located in the
United States Gulf Coast region. An expansion of SSI's sales force during 1996
also contributed to the increase in revenues in fiscal 1996.
GROSS PROFIT -- Gross profit increased $0.2 million, or 19%, from $1.3
million in 1995 to $1.5 million in 1996. As a percentage of revenues, gross
profits decreased from 44% in 1995 to 39% in 1996, principally as a result of:
(i) aggressive pricing offered by SSI to obtain the sole-source contracts
referred to above; (ii) a marginal increase in the cost of certain raw materials
utilized in its leak sealing business; and (iii) increases in staffing levels in
1996 in preparation for higher future levels of business activity.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES -- Selling, general and
administrative expenses remained consistent at $1.9 million in both 1995 and
1996. As a percentage of revenues, these expenses decreased from 65% in 1995 to
49% in 1996 as a result of being spread over a larger revenue base.
LIQUIDITY AND CAPITAL RESOURCES
The following table sets forth selected information from the Company's
consolidated statements of cash flows (in millions):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31 MARCH 31
------------------------------- --------------------
1995 1996 1997 1997 1998
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Net cash used in operating
activities......................... $ (1.1) $ (0.9) $ (0.3) $ (1.0) $ (4.3)
Net cash used in investing
activities......................... -- (0.2) (52.6) (10.3) (31.4)
Net cash provided by financing
activities......................... 2.5 -- 55.0 11.3 33.5
--------- --------- --------- --------- ---------
Net change in cash................... $ 1.4 $ (1.1) $ 2.1 $ -- $ (2.2)
========= ========= ========= ========= =========
</TABLE>
For the period from January 1, 1995 through March 31, 1998, the Company's
operations used $6.6 million of cash primarily as a result of its losses in 1995
and 1996 and the 1997 and 1998 increase in inventory and accounts receivable
levels required to support the Company's internal sales growth programs. Cash
used in investing activities of $84.2 million in the same period consisted
primarily of $51.6 million used to purchase the Acquired Businesses in 1997 and
$30.7 million used to purchase businesses in the first quarter of 1998. Cash
provided from financing activities in the same period of $91.0 million primarily
reflects net proceeds from the Company's IPO of $44.0 million and net borrowings
under credit facilities of $50.1 million offset by repayments of debt to Philip
of $3.0 million.
The Company anticipates that its cash flow from operations will provide
cash in excess of the Company's normal working capital needs, debt service
requirements and planned capital expenditures for property and equipment for at
least the next several years. The Company does not have any material commitments
for such capital expenditures during the 12 months ending May 20, 1999.
The Company's Credit Facility is a revolving credit facility of up to $60
million the Company may use for acquisitions and general corporate purposes.
Invatec's present and future subsidiaries will guarantee the repayment of all
amounts due under the facility, and the facility is secured by the capital stock
of those subsidiaries and the Company's accounts receivable and inventories. The
Credit Facility requires the consent of the lenders for acquisitions exceeding a
certain level of cash consideration, prohibits the payment of cash dividends by
Invatec, restricts the ability of the Company to incur other indebtedness and
requires the Company to comply with certain financial covenants. It is scheduled
to mature in September 2000. At
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May 20, 1998, $54.6 million of borrowings were outstanding under the Credit
Facility and bore an average interest rate of 8.4%.
At May 20, 1998, the Company's capitalization included approximately $12.9
million aggregate principal amount of convertible subordinated notes due 2002-04
that bore a weighted average interest rate of 5.3%. The Company issued these
notes as consideration in acquisitions of Acquired Businesses. These notes are
convertible into Common Stock at initial conversion prices ranging from $16.90
to $22.52 per share Apart from these notes and Credit Facility borrowings, the
Company did not have outstanding any material indebtedness for borrowed money at
May 20, 1998.
The Company intends to pursue attractive acquisition opportunities. The
timing, size or success of any acquisition effort and the associated potential
capital commitments are unpredictable. The Company expects to fund future
acquisitions through the public or private sales of equity or debt securities as
well as through a combination of cash flow from operations, issuances of
convertible Debt Securities and borrowings under the Credit Facility. Management
believes that in the event of additional cash needs required to support the
acquisition program, the Company may need to seek additional financing through
amendments to increase the borrowing capacity under the existing Credit Facility
or the public or private sale of equity or debt securities. There can be no
assurance that the Company could secure such financing if and when it is needed
or on terms the Company deems acceptable. See "Risk Factors -- Capital
Requirements."
YEAR 2000 ISSUE
The Company is reviewing its computer programs and systems to ensure that
they will function properly and be Year 2000 compliant. In this process, the
Company expects to replace some existing systems and upgrade others. The Company
presently believes that, with modifications to existing software and converting
to new software, the Year 2000 problem will not pose significant operational
problems for the Company's computer systems. The estimated cost of these efforts
is not expected to be material to the Company's financial position or any year's
results of operations.
FLUCTUATIONS IN OPERATING RESULTS
The Company's results of operations may fluctuate significantly from
quarter to quarter or year to year because of a number of factors, including the
timing of future acquisitions, seasonal fluctuations in the demand for repair
and distribution services (particularly the demand attributable to scheduled
turnarounds in the power industry, which typically are scheduled for
mild-weather months) and competitive factors. Accordingly, quarterly comparisons
of the Company's revenues and operating results should not be relied on as an
indication of future performance, and the results of any quarterly period may
not be indicative of results to be expected for a full year.
19
<PAGE>
BUSINESS
GENERAL
Invatec was formed in March 1997 to create the leading single-source
provider of comprehensive maintenance, repair, replacement and value-added
distribution services for industrial valves, piping systems and other
process-system components (collectively, "repair and distribution services")
throughout North America. To achieve this goal, Invatec has embarked on an
aggressive acquisition program and is implementing a national operating strategy
it has designed to enhance internal growth, market share and profitability.
INDUSTRY BACKGROUND
OVERVIEW. Petrochemical and other chemical plants, petroleum refineries,
pulp and paper mills, electric and other utilities and other industrial process
facilities use industrial valves to direct and regulate the flow of feedstocks,
intermediates, products and fuels in their process piping systems. Industrial
valves, ranging in diameter from less than 1/2 inch to over 20 feet, serve as
mechanical control, blocking and pressure-relief devices in piping applications
involving a myriad of liquids, gases, dry materials and other substances. The
service environments for industrial valves range from relatively benign to
severe, and the useful life of an industrial valve can range from several hours
to 30 years or more depending on the severity of its service and other factors.
These factors include the materials comprising the valve, the quality of its
manufacture and the frequency and quality of its repair. Classified by how they
are powered, industrial valves may be divided into two broad categories: (i)
those powered manually ("standard" valves); and (ii) those operated by devices
("actuators") using electric, hydraulic or pneumatic power ("actuated"
valves). Actuated valves include those originally installed as such and standard
valves that have been upgraded. Valves of both types include rising stem valves
("RSVs") and pressure safety, relief and safety-relief valves ("PRVs").
Process industries use PRVs to relieve excess pressure in process equipment,
pressure vessels, boilers and pipelines in order to prevent explosions or other
system damage. PRVs typically are designed to contain pressure up to a
predetermined level (which is individually set for each valve) and then to open
and relieve excess pressure in a controlled manner. Standard PRVs are
self-operating and typically are spring loaded, while actuated PRVs typically
are operated by a pilot controller that actuates the valve.
Process systems consist of discrete units or trains of units which
generally operate continuously under pressure. In many process industries, these
systems handle corrosive substances and are subject to high cycling rates and
extremes of pressure and temperature. Leaks occur as a result, and a principal
source of leaks are valves using rising stems to direct their opening and
closing. Original equipment manufacturers ("OEMs") use various packing
materials to seal the stem area in RSVs, but these seals are vulnerable to the
effects of friction and pressure and, in many cases, normal packing shrinkage
and deterioration.
The process systems in the industries the Company serves generally require
emergency work and comprehensive scheduled periodic off-line repairs (called
"turnarounds"). Emergency work is performed, if practicable, while the
affected unit remains in operation and under pressure. On-line repairs
historically have consisted of sealing leaking pipes and flanges with various
enclosures and clamps and repacking leaking valves as interim measures pending
the next scheduled turnaround. Turnarounds typically involve the shutdown of an
entire process unit or trains of process units to permit the disassembly, repair
and/or replacement and reassembly of component parts (including industrial
valves), a process that can take from a few days to several months.
The Company believes that the repair and distribution services sectors of
its industry represent, as of March 1997, a current worldwide annual market of
approximately $20.6 billion in revenues, of which North America accounts for
approximately $9.2 billion in revenues, including approximately $3.7 billion
attributable to repair services and approximately $5.5 billion attributable to
distribution services.
OEM's generally sell their products through various independent
distribution channels. The types of distributors include (i) wholesalers selling
commodity-type valves primarily to retailers, (ii) valve and pipefitting
stocking distributors selling standard RSVs and other standard valves, (iii)
speciality flow
20
<PAGE>
control distributors selling actuated valves packaged with other control
products as complete systems and (iv) full-line distributors selling all types
of valves and valve-control systems. Value-added distribution services include
the assembly, testing, sealing and certification of PRVs and customizing
original equipment to meet the customer's specifications.
Repair services include "on-line" repairs of valves, piping systems and
other process-system components that continue to operate under pressure while
the repair is made and "off-line" repairs involving the repair of valves and
other process-system components that have been temporarily removed from a
process system. Off-line repairs are made either at the customer's facility (an
"on-site" repair) or in the repair service company's facility (an "in-shop"
repair).
In the United States, end users, distributors and repair companies perform
most repair and distribution services, while OEMs generally offer these services
only on a limited basis. The Company believes, on the basis of available market
data, that (i) the independent repair and distribution services sectors include
approximately 1,200 companies, consisting predominantly of small businesses
operating in single geographic areas in proximity to their customers, and (ii)
most of these companies have limited access to capital for modernization and
expansion and limited exit strategies for their owners. The Company also
believes that, as part of an overall emphasis on reducing operating costs, many
end users are increasing their outsourcing of various non-revenue-producing
activities, such as plant maintenance (including outsourcing of entire valve
maintenance and management programs).
The Company believes significant opportunities are available in the repair
and distribution services sectors of its industry to a well-capitalized national
company employing professionally trained service technicians and machinists and
providing a full complement of on-line, on-site and in-shop repair services. It
also believes the fragmented nature of its industry will provide it with
significant opportunities to consolidate the capabilities and resources of a
large number of existing repair and distribution services businesses.
MARKET ENVIRONMENT AND TRENDS. The Company has targeted selected groups of
end users in the following three categories of process industries in the United
States, Canada and Mexico as its initial primary market for expanding its repair
and distribution services: (i) petrochemical and other chemical plants,
petroleum refineries and pulp and paper mills (process manufacturers); (ii)
conventional and nuclear electric power plants and cogenerators and water and
wastewater utilities (utilities); and (iii) crude oil and natural gas producers,
gas processing plants and oil, gas and products pipelines (resource industries).
The Company believes these targeted groups account for substantially all the
approximately 140 million RSVs the Company believes currently are in service in
North America and are heavy users of PRVs and other valves. These groups also
are characterized by severe service applications in their processes which
require valves that can endure corrosive substances, flammable and explosive
materials, high cycling rates and extremes of pressure and temperature. The
Company believes economic conditions (generally and in these targeted groups),
technological developments and health, safety and environmental concerns drive
the markets for repair services and value-added distribution services in these
groups.
The Company's targeted industries use industrial valves currently ranging
in cost from less than $10 to more than $100,000. Historically, the extent to
which general and specific industry economic conditions or forecasts spurred the
construction of new plants or expansions of existing plant capacities has
determined the demand for new industrial valves. The Company believes that (i)
for a number of years, many companies in these industries lengthened the period
of time between turnarounds to minimize the economic costs associated with
turnarounds and delayed construction of new plant facilities and outlays of
capital expenditures for improvements of existing facilities and, as a result,
(ii) they are using a large population of aged valves which will require
increasing levels of repair and replacement. In recent years, various factors
have led companies in these industries to undertake capital expenditure programs
to retool their existing process operations with new or improved labor-, time-
and other cost-reducing devices. The Company believes this trend has
strengthened both the replacement market for industrial valves and the market
for independent, comprehensive repair services.
21
<PAGE>
Because the Company's targeted industries generally manufacture or produce
commodities, they compete generally on the basis of price with each other and,
in many cases, with overseas companies having lower-cost labor pools or raw
material or other competitive advantages. The downward pressure this competition
places on prices has led to the trend in these industries to attempt to achieve
operating efficiencies as a means of preserving or enhancing operating margins
while remaining competitive in their markets. Also contributing to this trend
are various technological developments that enable these industries to reduce
operating costs by modernizing existing process systems and other plant
operations or replacing existing process systems with new, more efficient
systems. For example, some industries have developed new process technologies
requiring equipment to operate under higher pressures and thus entailing the
replacement or pressure-resetting of installed PRVs. Similarly, automation of
valve and other process control devices and computerized information management
systems enable these industries to use a smaller work force to perform essential
non-revenue-producing services, while the emergence of reliable independent
service providers using new technologies in areas such as valve repair service,
inventory management and turnaround planning enables these industries
increasingly to outsource these services, typically at a net savings. The
Company believes that many companies in these industries have eliminated or
severely reduced the size of their own repair crews and engineering staffs. In
addition, in order to reduce the size of their purchasing departments and the
costs of contract administration, these companies are trending towards using
fewer in-house administrators overseeing a reduced number of vendors performing
an increasing amount of services.
The efforts of the Company's targeted industries to reduce their costs have
led OEMs to design and tool for the manufacture of more energy-efficient and
reliable valves. Because valve design and manufacture is capital intensive and
price is a primary competitive factor in the sale of new valves, the Company
believes that valve OEMs are under pressure to reduce their own costs and
increasingly will evaluate the potential cost savings from outsourcing their
assembly, sales and other functions and reducing the number of distributors they
utilize and are required to monitor.
Another factor driving certain of the Company's targeted industries towards
spending for new valves and related products and new valve repair service
technologies is the mandate of the federal Clean Air Act, as amended in 1990,
that various process industries, including most of those the Company serves, use
the maximum achievable control technology ("MACT") available (i) to minimize
the occurrences of fugitive emissions from their process systems of certain
volatile organic compounds or other hazardous air pollutants and (ii) to control
the emissions that do occur. Regulations promulgated by the United States
Environmental Protection Agency currently require the phase-in (first in newly
constructed, reconstructed or modified process systems and then in existing
unmodified systems) of MACT performance standards for all major source
categories of hazardous air pollutants. To achieve compliance with the
applicable performance standards, federal and state regulations require the
process industries covered thereby to establish leak detection and repair
programs incorporating specified protocols.
The Company believes that increasingly stringent federal and state
regulations and performance standards will increase demand for the Company's
products and services. Industries subject to these standards now can monitor
valves to quantify the amount of feedstock, intermediates, products or fuel
which is being lost attributable to leaking valves and quantify the costs
associated with these leaks. The Company believes these industries increasingly
will seek to prevent and remedy leaking valves as efficiently and expeditiously
as possible.
BUSINESS STRATEGIES
To enhance its market position as a leading national provider of repair and
distribution services, the Company is emphasizing growth through acquisitions of
additional repair and distribution services businesses and is implementing a
national operating strategy aimed at increasing internal growth and market share
and enhancing profitability. These growth strategies focus on capitalizing on
certain trends in the Company's targeted industries, including increased
outsourcing, increased focus on reducing economic losses attributable to leaking
valves and increasingly more stringent regulatory requirements applicable to
process-system facilities.
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<PAGE>
ACQUISITION STRATEGY. The Company has implemented an aggressive
acquisition program to expand into additional markets and enhance its position
in existing markets. Given the large size and fragmentation of the repair and
distribution services industry, the Company believes there are numerous
potential acquisition candidates in both the markets the Company currently
serves and new markets.
The Company seeks to acquire well established repair and distribution
services companies in significant centers of its targeted process industries in
North American markets. It also intends to make tuck-in acquisitions that
provide access to additional customers, specialized services, new products or
other strategic synergies. The Company evaluates the extent to which its
acquisition candidates demonstrate the potential for substantial revenue and
earnings growth when combined with the Company's existing operations. An
important criterion for the Company's acquisition candidates (particularly
candidates in new markets) is high-quality operating management and the desire
of those persons to remain in place and continue running the acquired operations
for an extended period of time. The Company maintains a stock-based compensation
program designed to help the Company retain its operating management personnel,
develop a sense of proprietorship of those persons in the Company and align the
interests of those persons with those of the Company's stockholders generally.
The Company believes it is well positioned to implement its acquisition
strategy because of: (i) its decentralized operating strategy; (ii) its
visibility and access to financial resources as a public company; and (iii) its
ability to provide acquired businesses and their owners with both liquidity and
the opportunity to participate in the Company's growth and expansion. The
Company cannot, however, predict the timing or success of, or the potential
capital commitments associated with, its acquisition program. The Company's
acquisition strategy presents risks that, singly or in any combination, could
have a material adverse effect on its business and financial performance, and
the success of that strategy depends on the extent to which the Company is able
to acquire, successfully integrate and profitably manage additional businesses.
See "Risk Factors."
The consideration for each acquisition varies on a case-by-case basis, with
the major factors being historical operating results, the future prospects of
the business to be acquired and the ability of that business to complement the
services offered by the Company. As consideration for acquisitions, the Company
uses various combinations of Common Stock, cash, Convertible Debt Securities and
promissory notes. The extent to which the Company will be able or willing to use
Common Stock in making future acquisitions will depend on its market value from
time to time and the willingness of potential sellers to accept it as full or
partial payment. The Company may use the Credit Facility for acquisitions. At
May 20, 1998, outstanding borrowings under the Credit Facility totaled $54.6
million. The Company's ability to finance future acquisitions may be limited by
the extent to which it is able to raise capital for financing acquisitions, as
well as to expand existing operations, through equity or debt financings. See
"Risk Factors."
The Company has not acquired and presently does not intend to acquire any
valve manufacturing operations.
NATIONAL OPERATING STRATEGY. The principal elements of the Company's
national operating strategy are: (i) cross-selling repair and distribution
services; (ii) capitalizing on the Company's geographic diversity to develop
national and regional customer and OEM relationships; (iii) achieving cost
efficiencies and standardizing and implementing "best practices;" and (iv)
increasing internal growth through the roll-out of the Company's proprietary
SafeSeal on-line valve repair system. See " -- Repair Services,"
" -- Distribution Services," " -- Operations" and " -- Sales and
Marketing." Various factors may affect the extent to which the Company is able
to implement this strategy successfully. See "Risk Factors."
REPAIR SERVICES
The Company provides a variety of off-line repair services (including both
on-site and in-shop repair services) and on-line repair services for valves,
piping systems and other process-system components. These services vary by
industry and by process applications within each industry.
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OFF-LINE SERVICES. The Company's off-line services include: diagnosis and
testing of valve performance, including nondestructive examination using dye
penetrants and mag-particle testing; repair, rebuilding and replacement of RSVs,
PRVs and other valves; custom-designing, machining and plating of pressure-
sealed gaskets; repair and upgrading of standard valves of various types; repair
and replacement of actuators and positioners used with actuated valves; cleaning
of valves used in chlorine, oxygen and other service applications; inspection,
repair and replacement of steam turbine components; and reconditioning and
casting babbitted bearings used as linings between stationary bearings and
rotating shafts. Valve repair services include: replacing broken stems and other
components with OEMs' parts or equivalent parts that the Company machines and
fabricates; blasting valve interiors with metal shot to remove process residue
and corroded material; welding overlays to refinish valve seats and other worn
areas; upgrading standard valves with actuators and related parts; and modifying
existing components to meet OEMs' specifications for repacking with new, pliable
packing materials. In some locations, the Company also reconditions its
customers' used valves, and remanufactures used valves (other than PRVs) it has
purchased, typically at scrap metal value, to equal or exceed the original OEMs'
specifications. It typically sells its remanufactured valves under a one-year
warranty at a discount from the price of a comparable new valve. The Company
intends to expand these services throughout its operations. As part of the
repair process, the Company uses high-pressure air, steam and liquid lines and
related instrumentation to test and certify the performance capabilities of the
valves and other equipment it repairs.
An important part of the Company's repair services is providing detailed
documentation of the sources and types of the materials and components used to
make repairs, the repair methods applied, the design specifications adhered to
and test results. Customers can use this information in connection with their
planning for future turnarounds and repairs. In addition, customers subject to
federal and state fugitive emissions control regulations are required to
maintain this information in their corrective action files.
ON-LINE SERVICES. The Company's on-line services include (i) hot tapping
and line stopping services; (ii) using conventional technologies to seal leaking
pipes, flanges and valves as interim measures pending the affected system's next
scheduled shutdown and turnaround; and (iii) in the case of RSVs leaking as a
result of the deterioration of their stem-packing materials, using the SafeSeal
system to restore the packing materials generally to their original performance
capabilities.
Hot tapping involves the use of special equipment to cut into a piping
system operating under pressure in order to connect a new pipe or other
process-system component. Line stopping is a means of stopping flow and
providing a shut-off in a piping system where none exists. This service enables
the customer to isolate piping system lines for repairs, alterations or
relocations. The Company provides these services to offshore pipelines as well
as to onshore plants and pipeline systems.
In performing interim on-line repairs, the Company designs line enclosures
and flange clamps to meet customer-specific technical and engineering objectives
and applicable industry and regulatory code requirements.
In SafeSeal valve restorations, the Company uses a valveless injection
fitting and a combination of specialized tools to inject the appropriate pliable
(or "nonhardening") compound into the valve's packing gland. The compound
supplements the existing packing to stop the leak and restore the sealing
capability of the packing. Except in severe operating conditions, a trained
technician using the SafeSealsystem can complete an on-line restoration in less
than one hour. In certain limited cases, two fittings and injections are
required to seal the leak. The Company believes the SafeSeal system is safer,
more effective and more cost-efficient than conventional on-line valve-repacking
methods.
OPERATING HAZARDS. The Company performs a significant portion of its
repair services in refineries, chemical plants and other industrial facilities
that process, produce, store, transport or handle potentially hazardous
substances, including highly corrosive, flammable or explosive substances kept
at extremes of temperature and pressure. These services are subject to the usual
hazards associated with providing on-site services in these types of facilities.
See "-- Legal Proceedings and Insurance" and "Risk Factors."
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<PAGE>
DISTRIBUTION SERVICES
The Company currently sells new valves and related instrumentation and
other process-system components directly to its process-industry customers from
a majority of its sales and service locations. In addition to purchasing valves
from OEMs for resale, the Company also acts as a sales representative for a
number of OEMs. In this capacity, it typically promotes the sale and
distribution of the OEMs' products in designated territories for direct factory
shipment to the customer and is compensated by the OEMs on a commission basis.
At each sales location, the Company maintains inventories of valves and
other equipment typically used by the process industries it serves from that
location. Because customers place many of their orders in connection with new
construction or planned turnarounds, the Company often is able to arrange for
just-in-time deliveries of the original equipment required to fill these orders.
The Company's value-added valve distribution services primarily involve the
assembly, setting, testing and sealing of spring-loaded and pilot-operated PRVs
and also include: assembling other original valves with optional components
supplied by the same or different OEMs; customizing the original equipment for
installation in the customer's process unit; combining two or more valves in
configurations designed for specific process applications; and testing and
calibrating, as applicable, individual components and accessories and complete
equipment packages. As a part of its standard quality assurance program, the
Company supplements the positive material identification information OEMs
furnish to trace all materials they use in manufacturing their valves and other
equipment with its own material certifications, testing certificates and
full-assembly and test reports. Compiling this information (i) enables customers
to comply with applicable internal and regulatory recordkeeping requirements and
to demonstrate compliance with applicable industry and regulatory performance
standards, (ii) facilitates the repair or replacement of component parts, and
the reconditioning of entire valve assemblies, to the original design
specifications and (iii) provides the initial step in a predictive valve
maintenance program that uses actual operating histories to plan turnarounds
and, by isolating the reasons for equipment failures, spurs the use of different
or new materials and technologies.
OPERATIONS
The Company operates on a decentralized basis, and the management of each
operating company and each regional operating group is responsible for its
day-to-day operations, growth and profitability. The Company has centralized and
manages its cash management, auditing and internal control, employee benefits,
financing, financial reporting, risk management and business acquisition
activities at its corporate headquarters. It coordinates the sharing among its
operating locations of financial resources for improved systems and expansion of
services, training programs, financial controls, purchasing information and
operating expertise. The Company's executive management team directs the
development of the Company's marketing strategies and programs and is
responsible for key national supplier and customer relationships. The Company
has established standard reporting mechanisms to enhance its ability to monitor
each local or regional operation and assimilate acquired businesses and is
implementing performance-based incentive plans keyed to defined operational and
productivity measurements and benchmarks. The Company periodically reviews the
operations of the Company and other repair and distribution services businesses
in order to identify the "best practices" the Company will implement
throughout its operations. In order to reduce traditional corporate headquarters
expenses (as a percentage of revenues) and increase efficiencies, the Company
outsources various functions, including various personnel management and other
human resource services, legal and tax services, risk management and management
information systems design and implementation.
The Company conducts its repair and distribution services operations
through its local sales and service centers. It typically staffs its service
centers with customer service and order entry personnel, repair coordinators and
inventory, shipping and receiving and office personnel. The Company currently
performs in-shop valve and other equipment assembly, testing and certification
at many of its operating facilities. Most of these locations are authorized by
various OEMs as centers for the assembly, sale and repair of their valves and
other products and maintain various professional certifications by organizations
such as the
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American Society of Mechanical Engineers ("ASME") and the National Board of
Boiler & Professional Vessel Inspectors.
The Company performs most of its on-site repair services on a scheduled
basis in response to the customer's call. The Company also offers 24-hour
emergency on-line and on-site repair services from many of its service
locations.
The Company operates mobile machine shops that allow its technicians to
perform repair and installation functions at the facilities of its customers.
These shops typically are self-contained trucks or trailers the Company equips
with various combinations of lathes, milling machines, grinders, welding
equipment, drill presses, line stop and hot tap fittings and drilling and other
equipment, test stands, work benches and hand tools. The Company maintains its
mobile shops at various locations, and from time to time it will maintain a shop
indefinitely at a customer's facility if the work so warrants.
The Company utilizes its repair and maintenance personnel to remanufacture
valves for sale at times of decreased demand for repair and maintenance
activities. This incremental activity enables the Company to maintain sufficient
staff to meet the high level of activity associated with turnarounds and to
produce a valuable product in times of decreased activity. The Company has no
significant new manufacturing operations.
SALES AND MARKETING
The Company employs a direct sales force to conduct its marketing and sales
activities. Most product and service orders are awarded by plant maintenance
managers to a small number of pre-approved vendors, with little direct bidding
for each job. More recently, plant owners have begun establishing sole-source
relationships with large, well-insured vendors with reputations for efficient
response, safe technicians and comprehensive service. The Company's sales and
marketing efforts typically focus on one-on-one relationships with plant
maintenance managers and turnaround planners and include regular visits to
customer plants to ensure client satisfaction. Initial visits also typically
involve demonstration of the Company's technical abilities at the plant or the
Company's shop facilities. The Company regularly advertises in trade journals,
participates in trade shows and conducts customer appreciation functions. The
Company also has an organized national accounts program that targets large
multi-location industrial customers.
Many of the Company's customers are regional and national companies in the
petroleum refining, chemical and pulp and paper industries and utilities.
For 1997, none of the Company's customers accounted for 10% or more of the
Company's pro forma combined revenues. While the Company is not dependent on any
one customer, the loss of one of its significant customers could, at least on a
short-term basis, have an adverse effect on the Company's results of operations.
The Company generally seeks to enter into national or regional "blanket"
contracts with its large customers. These contracts function to designate the
Company as an approved service provider for a customer and establish certain
standard terms and conditions for providing service to plants or other
facilities owned or operated by that customer. Although these blanket contracts
generally do not establish the Company as an exclusive provider of repair and
distribution services, the Company believes they are an important consideration
for plant managers and other decision makers in the usual process of selecting a
vendor of the services the Company provides.
SUPPLIERS
VALVES, PARTS AND FITTINGS. The Company purchases substantially all the
new valves and other process-system components it distributes from OEMs. Its
principal suppliers include OEMs offering multiple product lines and OEMs
offering various specialized product lines. Invatec is not materially dependent
on any single OEM for the achievement of its growth strategies over the long
term. The loss of one or more product lines could, however, have a material
adverse effect on the ability of the Company to achieve its expectations on a
short-term basis.
26
<PAGE>
RELATIONSHIPS WITH OEMS. The success of the Company as a value-added
distributor of new valves and other process-system components and as a
factory-authorized repair service provider depends on its relationships with the
OEMs of these products. Except for its distribution agreements with OEMs, the
Company generally has no contractual repair-services contracts with OEMs.
The typical distribution agreement in the Company's industry specifies the
territory or territories in which the distributor has the right and obligation
to sell the OEM's products and the services (sales, assembly or repair) the
distributor is authorized to, or must, perform. An OEM may (i) assign a
territory on an exclusive or a nonexclusive basis, (ii) limit the range of the
OEM's products the distributor may sell or service, (iii) authorize or restrict
sales or services by the distributor outside the assigned territory, (iv) refuse
to assign the distributor additional territories and (v) reserve to itself the
right to deal exclusively with specified customers or classes of customers (for
example, national accounts or engineering and construction companies) in the
assigned territory. The Company believes the current fragmentation of the
distribution sector of its industry reflects the traditional assignment by OEMs
of territories on generally a local basis to distributors operating from a
single facility.
The typical distribution agreement may limit the distributor's role to that
of sales representative acting on a commission basis or provide for purchases by
the distributor for resales to end users. It also may impose requirements on the
distributor concerning such matters as (i) minimum individual or annual purchase
orders, (ii) maintenance of minimum inventories, (iii) establishment and
maintenance of facilities and equipment to perform specified services and (iv)
training of sales personnel and service technicians. Many OEMs closely monitor
compliance with these requirements. The distribution agreement also typically
(i) grants the distributor the nonexclusive right to use and display the OEM's
trademarks and service marks in the form and manner approved by the OEM and (ii)
prohibits the distributor from offering products that compete with the OEM's
products the distributor is authorized to sell.
The Company's distribution agreements generally have indefinite terms and
are subject to termination by either party on prior notice generally ranging
from 30 to 90 days.
The Company's business strategy could conflict with existing or future OEM
distributor policies or programs. The Company believes, however, that it offers
attractive benefits to OEMs. For large OEMs, it offers a cost-effective
distribution alternative that promotes consistent quality and possesses
significant financial and human resources. For small and mid-sized OEMs, it
offers access to broader markets and expertise in marketing. In addition, the
Company offers to all OEMs (i) a central source of market and usage data,
including complete life histories of valves and other products, and (ii) a means
of reducing their own selling costs through additional outsourcing of their
assembly, testing, repair and certification services, reducing the number of
distributors they are required to monitor and eliminating transition problems
associated with local owner-operated distributorships. Although no assurance can
be given that OEMs will not take actions that could materially adversely affect
the Company's ability to implement its growth strategies and maintain its
existing distribution services business, the Company believes that the
combination of (i) the advantages it offers to OEMs and (ii) the desire of end
users to reduce the number of their vendors should result in these issues being
resolved on a mutually satisfactory basis.
HIRING, TRAINING AND SAFETY
The Company seeks to ensure through its hiring procedures and continuous
training programs and the training programs its OEMs offer that (i) its
product-assembly and service technicians and machinists meet the performance and
safety standards the Company and its OEMs, professional and industry codes and
federal, state and local laws and regulations have established and possess the
required ASME, factory or other certifications and (ii) its sales personnel are
trained thoroughly in the selection, application, adaptation and customization
of the products it distributes and types of repair services it offers.
Because on-line and on-site repair services often are performed in
emergency situations under dangerous circumstances, the Company provides its
technicians with extensive classroom and field training and supervision and
establishes and enforces strict safety and competency requirements, including
physical exams and periodic drug testing in some cases. The Company's training
programs for its on-site repair
27
<PAGE>
technicians must meet OSHA requirements respecting, among other matters, release
detection procedures, appropriate work practices, emergency procedures and other
measures these technicians can take to protect themselves and the environment.
COMPETITION
The markets for the Company's repair and distribution services generally
are highly competitive. The Company believes the principal competitive factors
in a distributor's sale of new valves and other process-system components
directly to industries in the distributor's market include price and the ability
of the distributor to offer on a timely basis a wide selection of the new,
better-performing valves and components OEMs have designed to meet the needs of
these industries. Factors affecting delivery time include inventory size and
accessibility and whether, in the case of PRVs and certain other valves, the OEM
or the distributor assembles, sets, tests and seals, or otherwise customizes,
the valve. The Company believes its assembly and testing facilities enable it
generally to deliver valves ready for installation faster than the relevant OEM.
In the case of repair services, the Company believes the principal competitive
factors are quality and availability of service (including emergency service and
documentation of valve histories), price, use of OEM-approved replacement parts,
familiarity with the OEMs' products and local brand equity of the repair
business.
In its distribution operations, the Company competes with the direct sales
forces and distribution networks of OEMs offering the same or comparable lines
of products. The success of the Company as a provider of value-added
distribution services depends on the extent to which the OEMs with which it has
distribution arrangements are able to create a demand for their products in the
territories they assign the Company. Factors affecting this demand include, in
addition to price, product quality and performance (including durability and
safety), delivery time and the relative strengths of the brand name and
marketing ability of the OEM.
The Company competes for repair services business with other repair service
businesses and, to a lesser extent, with OEMs and customers' in-house
maintenance crews. Some of its competitors may have lower overhead cost
structures and, consequently, may be able to provide their services at lower
rates than the Company. The Company's competitors for on-line repairs include
two national competitors (the Furmanite Division of Kaneb Services, Inc. and
Team, Inc.) and several regional competitors. Competition in the market for
off-line repair services is highly fragmented, although certain competitors may
have dominant positions in some of the local markets they serve.
RESEARCH AND DEVELOPMENT
The Company conducts research and development to improve the quality and
efficiency of its services. Research and development activities include (i)
developing new technologies and compounds for repairs, (ii) both in-house and
extensive field testing of new technology to be used in conjunction with the
Company's repair service operations and (iii) assisting the Company's sales
organization and customers with special projects. Amounts spent on research and
development during the past three years have not been material.
Through its research and development efforts, the Company is developing an
air-driven friction welding device and related processes it intends to market as
the SafeWeld system. Although there can be no assurance the SafeWeld system will
be commercially successful, the Company believes this system will be a
significant enhancement to the SafeSealsystem.
INTELLECTUAL PROPERTY
The Company holds various United States and foreign patents, including some
relating to the Safe Seal system. It does not consider any individual patent to
be presently material to its consolidated business and believes its future
success will depend more on its technological capabilities and the application
of know-how in the conduct of that business. The Company enjoys service and
product name recognition, principally through various common law trademarks.
28
<PAGE>
For information respecting a license to certain of the Company's technology
under certain of its patents pertaining to the SafeSeal system see "Risk
Factors -- Reliance on Patents and Proprietary Technologies."
EMPLOYEES
At April 30, 1998, the Company had approximately 1,200 full-time employees.
Approximately 15 are members of the United Steelworkers of America, AFL/CIO
union. The collective bargaining agreement with the Steelworkers Union expires
in 1999. None of the Company's other employees are represented by a union.
Management believes the Company's relations with its employees are satisfactory.
The Company has not experienced any strikes or work stoppages that have had
a material impact on the Company's operations and financial condition. The
Company's future success will depend, in part, on its ability to attract, retain
and motivate highly qualified technical, marketing, engineering and management
personnel. The repair services business is characterized by high turnover rates
among field service technicians. The Company seeks to attract and retain
qualified service technicians and other technical field personnel by providing
competitive compensation packages. It has never experienced a prolonged shortage
of qualified personnel in any of its operations (and does not currently
anticipate any such shortage), but if demand for repair services were to
increase rapidly, retention of qualified field personnel might become more
difficult without significant increases in compensation.
FACILITIES
The Company leases or owns 52 operating facilities in the United States,
one in Canada, two in Europe and one in Abu Dhabi. It holds most of these
facilities under lease. The facilities consist principally of sales and
services, remanufacturing and administrative facilities. The Company believes
its facilities are adequately maintained and sufficient for its planned
operations at each location.
The Company's principal executive and administrative offices are located in
Houston, Texas.
GOVERNMENTAL REGULATION AND ENVIRONMENTAL MATTERS
A wide range of federal, state and local regulations relating to health,
safety and environmental matters applies to the Company's business. The
Company's in-shop reconditioning and remanufacturing of used valves frequently
involves the use, handling, storage and contracting for the disposal or
recycling of a variety of substances or wastes considered hazardous or toxic.
Environmental laws are complex and subject to frequent change. These laws impose
"strict liability" in some cases without regard to negligence or fault.
Sanctions for noncompliance may include revocation of permits, corrective action
orders, administrative or civil penalties and criminal prosecution. Certain
environmental laws provide for joint and several strict liability for
remediation of spills and releases of hazardous substances. In addition,
businesses may be subject to claims alleging personal injury or property damage
as a result of alleged exposure to hazardous substances, as well as damage to
natural resources. These laws and regulations also may expose the Company to
liability for the conduct of or conditions caused by others, or for acts of the
Company which complied with all applicable laws when performed. No assurance can
be given the Company's compliance with amended, new or more stringent laws or
regulations, stricter interpretations of existing laws or the future discovery
of environmental conditions will not require additional, material expenditures
by the Company. OSHA regulations also apply to the Company's business, including
requirements the Company's training programs must meet. See "-- Hiring,
Training and Safety." Future acquisitions by the Company also may be subject to
regulation, including antitrust reviews.
The Company believes it has all material permits and licenses required to
conduct its operations and is in compliance, in all material respects, with
applicable regulatory requirements relating to its operations. The Company's
capital expenditures relating to environmental matters were not material on a
pro forma combined basis in 1997. The Company has not been cited, sued or
otherwise held liable for any violations of any governmental regulations
(including environment, OSHA or local) that have had a material impact on the
Company's operations or financial condition. It does not currently anticipate
any material adverse effect on its business or financial condition as a result
of its future compliance with existing environmental laws and regulations
controlling the discharge of materials into the environment.
29
<PAGE>
LEGAL PROCEEDINGS AND INSURANCE
Steam Supply and a Mobil Corp. unit are named defendants in a proceeding
initiated by the City of Long Beach, California in October 1997 in a Long Beach
municipal court. The complaint arises from an in-shop repair Steam Supply
performed in February 1997, alleges the repair involved a release of hydrogen
sulfide gas into the atmosphere in violation of the California Health & Safety
Code and seeks monetary sanctions. Management of the Company believes this
proceeding will not have any material adverse effect on its financial condition
or operating results.
The Company is, from time to time, a party to litigation arising in the
normal course of its business, most of which involves claims for personal injury
and property damage allegedly incurred in connection with its operations. It
currently is not involved in any litigation it believes will have a material
adverse effect on its financial condition or results of operations.
The Company maintains insurance in such amounts and against such risks as
it deems prudent, although no assurance can be given that such insurance will be
sufficient under all circumstances to protect the Company against significant
claims for damages. The occurrence of a significant event not fully insured
against could materially and adversely affect the Company's financial condition
and results of operations. Moreover, no assurance can be given that the Company
will be able to maintain adequate insurance in the future at commercially
reasonable rates or on acceptable terms.
30
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information as of April 1, 1998
concerning the directors and executive officers of Invatec:
DIRECTOR
NAME AGE POSITION CLASS
- ------------------------------ --- ------------------------------ --------
William E. Haynes(1)(2)(3).... 54 Chairman of the Board, I
President and Chief Executive
Officer
Charles F. Schugart........... 38 Chief Financial Officer,
Senior Vice
President -- Corporate
Development, Treasurer and
Secretary
Denny A. Rigas................ 53 Senior Vice
President -- Technology and
Marketing
Pliny L. Olivier.............. 52 Senior Vice
President -- Operations
Douglas R. Harrington, Jr..... 33 Vice President and Corporate
Controller
John L. King.................. 27 Vice President -- Corporate
Development
Frank L. Lombard.............. 54 Vice President -- Corporate
Development
Curry B. Walker............... 62 Vice President -- Quality,
Safety and Engineering
Michael A. Baker(4)(5)........ 51 Director III
Robert M. Chiste(1)(2)(5)..... 50 Director III
Arthur L. French(2)(3)(4)..... 57 Director I
Tommy E. Knight(1)(5)......... 58 Director II
Dr. Pierre R. Latour(3)(4).... 57 Director II
T. Wayne Wren, Jr.(1)......... 48 Director III
- ------------
(1) Member of Board Executive Committee.
(2) Member of Board Nominating Committee.
(3) Member of Board Technology Committee.
(4) Member of Board Audit Committee.
(5) Member of Board Compensation Committee.
Invatec's Board of Directors (the "Board") has three director classes,
each of which, following a transitional period, will have a three-year term,
with one class being elected each year at that year's annual stockholders'
meeting. The second term of the Class I directors will expire at the 2001
meeting, while the initial terms of the Class II directors and the Class III
directors will expire at the 1999 meeting and the 2000 meeting, respectively.
The Board appoints Invatec's executive officers annually to serve for the
ensuing year or until the Board appoints their respective successors. The
executive officers and directors listed above have had the business experience
indicated below during the last five years.
WILLIAM E. HAYNES has been Chairman of the Board since May 1997 and
President and Chief Executive Officer since March 1997. He also has served as
President and Chief Executive Officer of SSI from November 1996 until March
1997. From July 1992 through December 1995, Mr. Haynes served as President and
Chief Executive Officer of LYONDELL-CITGO Refining Company Ltd. He served in
various executive capacities for Lyondell Petrochemical Company from 1985 to
1993 and in various technical, management and executive positions with Atlantic
Richfield commencing in 1967. Mr. Haynes is a director of Philip Services Corp.,
an industrial and environmental services company.
CHARLES F. SCHUGART has been Chief Financial Officer since March 1997 and
has been Senior Vice President -- Corporate Development since July 1997. He
previously served for over 12 years in a variety of capacities with Arthur
Andersen LLP, including most recently as Senior Manager. Mr. Schugart is a
Certified Public Accountant.
DENNY A. RIGAS has been Senior Vice President -- Technology and Marketing
since May 1997. From 1993 to May 1997, Mr. Rigas served as an executive vice
president and general manager of the Triconex
31
<PAGE>
Corporation, a manufacturer of integrated safety systems for process-system
industries. Mr. Rigas has a total of 30 years of domestic and international
experience in the oil and gas hydrocarbon processing, process, pipeline, power,
marine and other industries. He has served in executive and sales/marketing
management positions in the last 18 years with, among others, a subsidiary of
Rockwell International Corporation, Lummus Crest and Foster Wheeler. Mr. Rigas
is a registered professional engineer in the State of Texas.
PLINY L. OLIVIER has been Senior Vice President -- Operations of Invatec
since March 1998. Prior thereto, Mr. Olivier had been President of GSV, Inc.
since November 1985. Prior thereto, he had more than 30 years managerial
experience in the chemical and other industries.
DOUGLAS R. HARRINGTON, JR. has been Vice President and Corporate Controller
since March 1997 and has served in the same capacities for SSI since February
1997. Prior to February 1997, he served in various capacities, including most
recently as Controller -- U.S. Operations for Gundle/SLT Environmental, Inc.
from March 1992 through May 1995 and from January 1996 until February 1997. From
May 1995 through December 1995, Mr. Harrington served as Senior
Manager -- Accounting for BSG Consulting, Inc. Mr. Harrington is a Certified
Public Accountant.
JOHN L. KING has been Vice President -- Corporate Development since March
1997. Prior to March 1997, he served for over five years in a variety of
capacities with Arthur Andersen LLP, including most recently as an audit
manager. Mr. King is a Certified Public Accountant.
FRANK L. LOMBARD has been Vice President -- Corporate Development since
March 1997 and served in the same capacity for SSI from August 1993 until March
1997. From 1982 until joining SSI in 1993, he served as President of Westheimer
Financial Group, Inc., a privately held investment banking and corporate finance
advisory firm in Houston, Texas.
CURRY B. WALKER has been Vice President -- Quality, Safety and Engineering
since July 1997. Prior thereto, Mr. Walker served as President of Plant
Specialties, Inc. for over 10 years.
MICHAEL A. BAKER was a founder of American Medical Response, Inc., a
Boston-based company engaged in the provision of a national ambulance service
network, and served on its board of directors from February 1992 until it was
acquired in February 1996.
ROBERT M. CHISTE was President, Industrial Services Group, of Philip
Services Corp. from July 1997 until May 1998. He served as Vice Chairman of
Allwaste, Inc. ("Allwaste"), a provider of industrial and environmental
services, from May 1997 through July 1997, President and Chief Executive Officer
of Allwaste from October 1994 through July 1997 and a director of Allwaste from
January 1995 through August 1997. Philip Services Corp. acquired Allwaste
effective July 31, 1997. Prior to October 1994, Mr. Chiste served as Chief
Executive Officer and President of American National Power, Inc. and as Senior
Vice President of Transco Energy Company. Mr. Chiste is a director of Franklin
Credit Management Corp., a New York-based financial services company.
ARTHUR L. FRENCH has served as Chairman of the Board, Chief Executive
Officer and President of Metals USA, Inc., a metals processor and manufacturer
of metal components, since December 1996. Prior thereto, Mr. French served as
Executive Vice President and a director of Keystone International, Inc., a
manufacturer of industrial valves and controls, with responsibility for domestic
and international operations.
TOMMY E. KNIGHT was President and Chief Executive Officer of Brown & Root,
Inc., a subsidiary of Halliburton Company and one of the largest international
construction firms in the world, from June 1992 until his retirement in
September 1996. Mr. Knight is a director of Metals USA, Inc.
PIERRE R. LATOUR, PH.D. is an independent consulting chemical engineer. Dr.
Latour co-founded Setpoint, Inc. and served as a director and a vice president
of consulting, oil refining, central marketing and business development until he
retired in January 1995. He then served as a vice president of business
development for Dynamic Matrix Control Corp. ("Dynamic") and then Aspen
Technology, Inc. after it acquired both Setpoint, Inc. and Dynamic in January
1996. He retired from Aspen Technology, Inc. in January 1997.
32
<PAGE>
T. WAYNE WREN, JR. has served as Senior Vice President of PSC Enterprises,
Inc., a subsidiary of Philip Services Corp., since July 1997 and served as
Senior Vice President -- Chief Financial Officer and Treasurer of Allwaste from
March 1996 through July 1997, having served as its Vice President -- Chief
Financial Officer since November 1995. From January 1994 to November 1995, Mr.
Wren was an independent financial consultant. He previously served as Allwaste's
Vice President -- Chief Financial Officer from August 1991 to December 1993. He
also provided financial consulting services to Allwaste pursuant to a consulting
agreement from January 1994 to June 1994.
DIRECTOR COMPENSATION
Invatec pays each director who is not a Company employee (a "Nonemployee
Director") fees of $1,000 for each Board and each Board committee meeting
attended (except for committee meetings held on the same day as Board meetings)
and periodically grants Nonemployee Directors options to purchase shares of
Common Stock pursuant to the Company's 1997 Incentive Plan (the "Incentive
Plan"). It will not pay any additional compensation to its employees for
serving as directors, but will reimburse all directors for out-of-pocket
expenses they incur in connection with attending Board or Board committee
meetings or otherwise in their capacity as directors.
EXECUTIVE COMPENSATION
The following table sets forth information regarding aggregate cash
compensation, restricted stock and stock option awards and other compensation
earned by the Company's Chief Executive Officer and its four other most highly
compensated executive officers for services rendered to the Company during 1997:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION AWARDS
ANNUAL COMPENSATION ------------------------------------------
------------------------------------- SHARES
OTHER ANNUAL UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION SALARY BONUS COMPENSATION STOCK AWARDS OPTIONS COMPENSATION
- ------------------------------------- -------- -------- ------------ ------------ ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
William E. Haynes ................... $125,000(1) $127,750 $724,700(2) $ -- 347,966(3) $ --
President and Chief Executive
Officer
Charles F. Schugart ................. 151,042(4) 122,500 150,000(5) -- 138,608(3) --
Senior Vice President and Chief
Financial Officer
Denny A. Rigas ...................... 111,892(4) 25,000 -- -- 122,710 110,674(6)
Senior Vice President -- Technology
and Marketing
Douglas R. Harrington Jr. ........... 72,958(4) 34,000 15,000(7) -- 61,356 --
Vice President and Corporate
Controller
Frank L. Lombard .................... 81,100 32,040 93,500(8) -- 19,593(3) --
Vice President -- Corporate
Development
</TABLE>
- ------------
(1) Represents salary from May 1997. Mr Haynes did not receive any salary prior
to May 1997.
(2) Represents a one-time $300,000 bonus paid on the closing of the IPO and a
January 1997 award of SSI common stock valued at $424,700 for federal income
tax purposes.
(3) Includes shares subject to options into which previously outstanding options
granted in 1997 to purchase shares of SSI common stock were converted in the
SSI Merger, as follows; Mr. Haynes -- 250,000; and Mr. Schugart -- 100,000.
Excludes, in the case of Mr. Lombard, options to purchase 38,000 shares of
Common Stock into which previously outstanding options granted prior to 1997
to purchase SSI common stock were converted in the SSI Merger.
(4) Represents salary from date of employment in 1997: Mr. Schugart -- February;
Mr. Rigas -- May; and Mr. Harrington -- February.
(5) Represents a one-time $50,000 bonus and a January 1997 award of SSI common
stock valued at $100,000 for federal income tax purposes.
(6) Represents a one-time reimbursement of moving expenses paid under Mr.
Rigas's employment agreement.
(7) Represents a one-time bonus paid on the closing of the IPO.
(8) Represents a January 1997 award of SSI common stock valued at this amount
for federal income tax purposes.
33
<PAGE>
OPTION GRANTS
The following table sets forth information regarding the options granted
during 1997 to the executive officers named in the Summary Compensation Table:
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
----------------------------------------------------- POTENTIAL REALIZABLE
PERCENT VALUE AT ASSUMED
NUMBER OF OF TOTAL ANNUAL RATES OF STOCK
SHARES OPTIONS PRICE APPRECIATION FOR
UNDERLYING GRANTED TO OPTION TERM(3)
OPTIONS EMPLOYEES EXERCISE EXPIRATION ----------------------
NAME GRANTED IN 1997 PRICE DATE 5% 10%
- ------------------------------------- ----------- ---------- -------- ------------ --------- -----------
<S> <C> <C> <C> <C> <C> <C>
William E. Haynes.................... 250,000 27.9% (1) October 2004 $ 415,976 $ 1,634,613
97,966 $ 1.00(2) October 2004 39,882 92,942
Charles F. Schugart.................. 100,000 11.1% (1) October 2004 166,390 653,845
38,608 $ 1.00(2) October 2004 15,717 36,628
Denny A. Rigas....................... 100,000 9.8% (1) October 2004 166,390 653,846
22,710 $ 1.00(2) October 2004 9,245 21,545
Douglas R. Harrington, Jr............ 50,000 4.9% (1) October 2004 83,196 326,922
11,356 $ 1.00(2) October 2004 4,623 10,774
Frank L. Lombard..................... 19,593 1.6% $ 1.00(2) October 2004 7,976 18,588
</TABLE>
- ------------
(1) The excercise price per share for 50% of the shares shown is $9.00, and the
exercise price per share for 50% of the shares shown is $13.00. All these
options were granted in tandem prior to the closing of the IPO, and the
Board determined that, as of the respective grant dates of these options,
their per-share exercise prices exceeded the then fair market value of a
share of Common Stock. This presentation assumes the $9.00 exercise price
was that fair market value on the date of grant of each of these options.
(2) The options having an exercise price per share of $1.00 were granted in
August 1997 (prior to the closing of the IPO), and the Board determined
that, as of the date of grant of these options, the exercise price exceeded
the then fair market value of a share of Common Stock. This presentation
assumes the fair market value of the Common Stock on the date of grant of
these options was $1.00 per share.
(3) Calculated on the basis of the indicated rate of appreciation in the value
of the Common Stock, compounded annually from the assumed fair market value
on the date of grant, from the date of grant to the end of the option term.
AGGREGATE OPTION HOLDINGS AND YEAR-END VALUES
No options to purchase Common Stock were exercised during 1997. The
following table presents information regarding the value of options outstanding
at December 31, 1997 for each of the executive officers named in the Summary
Compensation Table:
<TABLE>
<CAPTION>
NUMBER OF SHARES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
OPTIONS AT FISCAL YEAR-END AT FISCAL YEAR-END(1)
----------------------------- -----------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------------------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
William E. Haynes.................... 160,466 187,500 $ 2,463,971 $ 1,734,375
Charles F. Schugart.................. 63,608 75,000 974,454 693,750
Denny A. Rigas....................... 47,710 75,000 668,418 693,750
Douglas R. Harrington Jr............. 23,856 37,500 334,228 346,875
Frank L. Lombard..................... 57,593 -- 766,665 --
</TABLE>
- ------------
(1) The closing price for the Common Stock on the Nasdaq National Market was
$20.25 on December 31, 1997. Value is calculated on the basis of the
difference between the option exercise price and $20.25.
EMPLOYMENT AGREEMENTS
Invatec has employment agreements with Messrs. Haynes, Schugart and Rigas.
Each of these agreements (i) provides for an annual minimum base salary, (ii)
entitles the employee to participate in all the Company's compensation plans (as
defined) in which executive officers of Invatec participate and (iii) has a
continuous term of three (Mr. Haynes) or two (Messrs. Schugart and Rigas) years,
subject to the right
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of either party to terminate the employee's employment at any time. If the
employee's employment is terminated by reason of the employee's death or
disability (as defined), by the Company without cause (as defined) or by the
employee for good cause (as defined), the employee or his estate will be
entitled to a lump-sum payment equal to a multiple (three for Mr. Haynes and two
for Messrs. Schugart and Rigas) of his highest annual salary and incentive
bonuses. If a change of control (as defined) of the Company occurs, the employee
may terminate his employment at any time during the 460-day period beginning 211
days following that event and receive the same lump-sum payment together with
such amount as may be necessary to hold him harmless from the consequences of
any resulting excise or other similar purpose tax relating to "parachute
payments" under the Internal Revenue Code of 1986, as amended. Each agreement
contains a covenant limiting competition with the Company for two years
following termination of employment. Copies of these agreements are included as
exhibits to the Registration Statement on Form S-4 of which this Prospectus is a
part (the "Acquisition Shelf Registration Statement"). The Company also has
employment agreements with Mr. Harrington and other executive officers of
Invatec.
LOANS TO EXECUTIVE OFFICERS
At May 20, 1998, Invatec had outstanding interest-free loans it has made to
Messrs. Haynes, Schugart and Rigas pursuant to their employment agreements in
the principal amounts of $174,338, $41,050, and $100,000, respectively, and an
outstanding interest-free loan of $30,600 it has made to Mr. Lombard. The loans
to Messrs. Haynes Schugart and Lombard were made to enable them to pay the
federal income taxes attributable to the stock awards made to them in 1997 and
reflected in the Summary Compensation Table above under "Other Annual
Compensation." The loans to Messrs. Haynes, Schugart and Lombard may be repaid,
at the borrower's option, in cash or shares of Common Stock valued at its market
value at the time of payment. At the option of Mr. Rigas, his loan may be repaid
out of, or offset against, any bonus or other amount payable to him under his
employment agreement. Promissory notes evidence these loans.
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
FINANCING ARRANGEMENTS
Invatec was initially capitalized in March 1997 with $216.12 provided by
Messrs. Haynes, Schugart, and Lombard and Computerized Accounting & Tax
Services, Inc. ("CATS"), a corporation owned by Roger L. Miller, in exchange
for 146,959 shares of Common Stock. In June 1997, Messrs. Haynes, Schugart,
Rigas, Lombard, King and Harrington and CATS purchased an additional 95,880
shares of Common Stock for a total purchase price of $141.00. Philip advanced
funds to Invatec to enable Invatec to pay various expenses incurred in
connection with its efforts to create the Company and effect the IPO. As part of
its funding arrangements with Invatec, Philip also guaranteed the payment of
convertible notes included in the consideration paid for certain Initial
Acquired Businesses and provided cash to pay for acquisitions. Beginning in
October 1995 and continuing through October 31, 1997, Philip advanced funds to
SSI, in the form of equity investments ($10.4 million, including the Philip
subordinated notes described below), loans and credit support for SSI's bank
borrowings, to pay costs related to the acquisitions of Harley, GSV and Plant
Specialties and the IPO.
Philip entered into its funding arrangements with Invatec pursuant to a May
1997 agreement (as subsequently modified, the "1997 Agreement") among SSI,
Philip, Mr. Miller, CATS and The Roger L. Miller Family Trust (the "Miller
Trust" and, collectively with Mr. Miller and CATS, the "Miller Interests").
Mr. Miller, who founded SSI in 1991 and was its President until December 1996,
was then Chairman of the Board of SSI and, as the trustee of the Miller Trust
and the owner of CATS, controlled approximately 47.3% of SSI's outstanding
common stock. In the 1997 Agreement, (i) the parties modified or superseded
prior agreements pursuant to which Philip had been providing financing and
credit support for the expansion of SSI's business and (ii) the Miller Interests
agreed to (a) transfer the voting power of their SSI common stock to a voting
trustee pursuant to a voting trust agreement (which terminated when the IPO
closed), (b) cooperate with Invatec and SSI in facilitating the completion of
the IPO and (c) sell to Philip when the IPO closed at least 25% of the shares of
Common Stock they would own immediately following the SSI Merger. As provided in
the 1997 Agreement: (i) Mr. Miller remained a member of the three-member SSI
board of directors until the IPO closed, but resigned from all other positions
he held with SSI and ceased to participate in all SSI compensation and other
benefit arrangements; (ii) CATS terminated all its arrangements with SSI,
including a management services agreement under which it would have been paid
$225,000 during the three-year period ending December 31, 1999; and (iii) SSI
paid $300,000 in cash to CATS in complete satisfaction of all claims CATS or Mr.
Miller had or otherwise might have for any services rendered or to be rendered
for SSI or Invatec.
Immediately before the IPO, Invatec owed Philip approximately $11.6
million, consisting of cash advances made and certain guarantee fees.
Contemporaneously with the IPO, Invatec repaid this entire amount, including
approximately $8.6 million paid with 1,036,013 shares of Common Stock (valued at
the initial IPO price ($13.00 per share) for this purpose) and $3.0 million paid
in cash.
THE SSI MERGER
Immediately before the SSI Merger, the Miller interests owned 2,289,881
shares of SSI common stock (47.3% of the total shares then outstanding),
including 235,097 shares awarded to CATS in January 1997 and 14,784 shares
purchased by CATS in connection with the June 1997 exercise of an option granted
in 1992 to a former SSI employee to purchase 68,001 shares of SSI common stock
at an exercise price of $3.68 per share, for which the Miller Interests received
a total of 1,144,941 shares of Common Stock as a result of the SSI Merger.
Also immediately before the SSI Merger, Philip owned all the outstanding
SSI preferred stock (20,000 shares), for which it paid $2.0 million ($100 per
share) in October 1995, and 1,701,713 shares of SSI common stock, which it
acquired as follows: (i) in October 1995 it purchased 286,960 shares from SSI
for $500,000 (approximately $1.74 per share); (ii) in January 1997 it exercised
warrants it had received in October 1995 and July 1996 to purchase 1,361,536
shares; and (iii) in June 1997 it purchased 53,217 shares in connection with the
exercise of the 1992 employee stock option referred to above. It had purchased
the
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1995 warrant for $100,000 and guaranteed the repayment of a $2.0 million
revolving line of credit to SSI in exchange for the 1996 warrant. Together, the
warrants entitled Philip to purchase at $3.68 per share such number of shares as
would be necessary to afford it ownership, on a fully diluted basis, of 36.5% of
the SSI common stock outstanding after their exercise. To facilitate SSI's
acquisition of Harley Industries, Inc. ("Harley"), Philip and SSI agreed in
September 1996 that Philip would exercise the warrants at an exercise price of
$3.16 per share. The total exercise price consisted of (i) $3.3 million
aggregate principal amount of subordinated 8% promissory notes issued by Philip
and paid as partial consideration in the Harley acquisition and (ii)
approximately $1.0 million in cash.
As a result of the SSI Merger, Philip received: (i) for the SSI preferred
stock it owned, 153,847 shares of Common Stock; and (ii) for the SSI common
stock it owned, 850,856 shares of Common Stock.
Individuals who are directors or executive officers of Invatec received the
following number of shares of Common Stock in the SSI Merger for their shares of
SSI common stock: Mr. Haynes -- 72,199; Mr. Schugart -- 17,000; and Mr.
Lombard -- 15,902. In addition, Messrs. Haynes and Schugart received the 1997
Incentive Plan options shown for them in the table under "Management -- Option
Grants," Mr. Lombard received a 1997 Incentive Plan option to purchase 38,000
shares of Common Stock at an exercise price of $10.00 per share and T. Wayne
Wren, Jr., a director of Invatec, received a 1997 Incentive Plan option to
purchase 15,000 shares of Common Stock at an exercise price of $10.00 per share
in exchange for a warrant he acquired in 1995 to purchase SSI common stock.
CERTAIN MANAGEMENT FEES
SSI paid management fees and other amounts of $120,000, $108,000 and
$353,000 during 1995, 1996 and 1997, respectively, to CATS for Mr. Miller's
services. The 1997 payment included the $300,000 SSI paid to CATS pursuant to
the 1997 Agreement in satisfaction of present and future claims. See
" -- Financing Arrangements."
CONSULTING AGREEMENT
In March 1997, Invatec entered into a consulting agreement with Wasatch
Capital Corporation, an affiliate of Michael A. Baker, who became a director of
Invatec when the IPO closed. The consulting agreement, effective on September 1,
1997, provides for an initial three-year term (which may be extended for
successive one-year periods), during which acquisition consulting and related
services, including assistance in acquisition strategic planning, target
analysis, transaction structuring, are to be provided by or under the direction
of Mr. Baker. The consulting agreement provides for annual consulting fees
(payable pro rata on a monthly basis) of $100,000 for the first year of the
term, $80,000 for the second year of the term and $60,000 for the third year and
any extension year. The consulting agreement also provides for bonuses that may
be granted at the discretion of Invatec's President (subject to the approval of
the Executive Committee of the Board) and reimbursement of ordinary and
necessary expenses incurred in the performance of the consulting services.
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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of March 31, 1998, the "beneficial
ownership" (as defined by the SEC) of the Common Stock of (i) each person known
to the Company to beneficially own more than 5% of the outstanding shares of
Common Stock, (ii) each of Invatec's current directors and executive officers
and (iii) all directors and executive officers of Invatec as a group.
SHARES BENEFICIALLY
OWNED(1)
---------------------
NAME NUMBER PERCENT
- ------------------------------------- --------- --------
Philip Services Corp.(2)............. 2,340,716 26.9%
100 King Street
P.O. Box 2440, LCD 1
Hamilton, Ontario Canada L8N 4J6
Roger L. Miller(3)................... 889,621 10.2
The Roger L. Miller Family
Trust(3)........................... 694,000 8.0
The TCW Group, Inc.(4)............... 524,000 6.0
865 South Figuerda Street
Los Angeles, CA 90017
Robert Day (4)....................... 524,000 6.0
William E. Haynes.................... 307,131 3.5
Charles F. Schugart.................. 121,408 1.4
Denny A. Rigas....................... 81,710 *
Pliny L. Olivier..................... 10,000 *
Douglas R. Harrington, Jr. .......... 40,856 *
John L. King......................... 40,856 *
Frank L. Lombard..................... 88,388 1.0
Curry B. Walker(5)................... 189,171 2.2
Robert M. Chiste..................... 40,000 *
T. Wayne Wren........................ 20,000 *
Pierre R. Latour..................... 5,000 *
Arthur L. French..................... 2,000 *
Tommy E. Knight...................... 1,000 *
Executive officers and directors as a
group
(13 persons)....................... 947,520 10.9
- ------------
* Less than 1%.
(1) Shares shown include shares subject to currently exercisable options, as
follows: Mr. Haynes -- 160,466; Mr. Schugart -- 63,608; Mr. Rigas -- 47,710;
Mr. Olivier -- 10,000; Mr. Harrington -- 23,856; Mr. King -- 23,856; Mr.
Lombard -- 57,593; Mr. Walker -- 10,000; Mr. Wren -- 15,000; and all
executive officers and directors as a group -- 412,089. Except as Notes (2),
(3) and (4) to this table otherwise state, the persons indicated as owning
the outstanding shares shown have sole voting and investment power with
respect to those shares.
(2) Shares shown are directly owned by wholly owned subsidiaries of Philip
Services Corp., a public company, as follows: Allwaste, Inc. -- 2,185,758
shares; and Philip Environmental Services, Inc. -- 154,958 shares. The
address of both Philip Services Corp. subsidiaries is 5151 San Felipe, Suite
1600, Houston, Texas 77056-3609. Felix Pardo, the president and chief
executive officer of Philip Services Corp., has sole voting and investment
power respecting the shares of which Philip Services Corp. is the
"beneficial owner," subject to the direction of that corporation's board
of directors. Mr. Pardo disclaims "beneficial ownership" of those shares.
(3) Mr. Miller is the direct beneficial owner of 51,000 shares and, as the
trustee of The Roger L. Miller Family Trust (the "Miller Trust") and the
owner of Computerized Accounting and Tax Services, Inc. ("CATS"), is the
"beneficial owner" of the shares they own. The address of Mr. Miller, the
Miller Trust and CATS is P.O. Box 572843, Houston, Texas 77257.
(4) According to a Schedule 13G dated February 12, 1998, (i) The TCW Group,
Inc. ("TCW") is the direct beneficial owner of 524,000 shares, (ii)
Robert Day, as an individual deemed to control TCW, is the "beneficial
owner" of the shares it owns and (iii) the reporting persons have sole
voting power and sole dispositive power with respect to all 524,000 shares.
Mr. Day and TCW have the same address. Mr. Day and TCW disclaim beneficial
ownership of all such shares, which are held by subsidiary investment
manager corporations on behalf of those subsidiaries' clients.
(5) Shares shown include 179,171 shares issuable on the conversion of a
convertible subordinated note at an initial conversion price of $16.90 per
share.
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DESCRIPTION OF THE CONVERTIBLE DEBT SECURITIES
Invatec will issue the Convertible Debt Securities offered hereby (the
"Convertible Securities") under an Indenture dated as of June 1, 1998 (the
"Indenture") between Invatec and U.S. Trust Company of Texas, N.A., as trustee
(the "Trustee"). The following description of the Convertible Securities
summarizes certain general terms and provisions of the Convertible Securities to
which any Prospectus Supplement (including any Pricing Supplement) may relate
(the "Offered Convertible Securities"). A Prospectus Supplement relating to
the Offered Convertible Securities will describe the particular terms of the
Offered Convertible Securities and the extent to which the general terms and
provisions of the Indenture will apply. The terms of the Offered Convertible
Securities also will include those made a part of the Indenture by the Trust
Indenture Act of 1939, as amended (the "Trust Indenture Act"). The statements
under this caption relating to the Convertible Securities and the Indenture are
summaries only, do not purport to be complete and are subject to, and are
qualified in their entirety by reference to, all the provisions of the
Indenture, including the definitions therein of certain terms, and the Trust
Indenture Act. Certain terms defined in the Indenture are capitalized herein.
The Indenture is an exhibit to the Acquisition Shelf Registration Statement and
is incorporated herein by this reference.
GENERAL
The Indenture provides that Invatec may issue Convertible Securities from
time to time thereunder in one or more series, each in such aggregate principal
amount as Invatec may authorize from time to time. All Convertible Securities of
one series need not be issued at the same time and, unless a Prospectus
Supplement with respect to any series provides otherwise, Invatec may reopen
that series, without the consent of the holders of that series, and issue
additional Convertible Securities of that series. The Indenture does not limit
either (i) the aggregate principal amount of Convertible Securities which
Invatec can issue thereunder or (ii) the amount of other indebtedness or
liabilities, secured or unsecured, which Invatec or its subsidiaries may incur.
Unless a Prospectus Supplement with respect to one or more series indicates
otherwise, the Convertible Securities will not benefit from any covenant or
other provision that would provide protection to Holders of the Convertible
Securities against any sudden and dramatic decline in credit quality of the
Company resulting from any takeover or highly leveraged transaction, including a
recapitalization or similar restructuring.
The Convertible Securities are unsecured obligations of Invatec.
Unless a Prospectus Supplement with respect to one or more series indicates
otherwise, Invatec will pay principal of, and any premium or interest on, the
Convertible Securities at the office of the Trustee and the Convertible
Securities may be surrendered for registration of transfer, exchange or
conversion at that office. Invatec may, at its option, pay any interest on the
Convertible Securities by check mailed to the address of each person entitled
thereto as it appears in the applicable Securities Register for the Convertible
Securities on the Regular Record Date for that interest payment.
No service charge will be made for any registration of transfer or exchange
of the Convertible Securities, but Invatec may require payment of a sum
sufficient to cover any tax or other governmental charge and any other expenses
(including the fees and expenses of the Trustee) payable in connection
therewith. If a Prospectus Supplement provides for the redemption of a series of
Convertible Securities, Invatec will not be required (i) to issue, register the
transfer of or exchange any of those Convertible Securities during a period
beginning at the opening of business 15 days before the day of the mailing of a
notice of redemption and ending at the close of business on the day of that
mailing or (ii) to register the transfer of or exchange any of those Convertible
Securities selected for redemption in whole or in part, except the unredeemed
portion of those Convertible Securities it is redeeming in part.
All monies Invatec pays to the Trustee or any Paying Agent, or Invatec
holds in trust, for the payment of principal of and any premium and interest on
any Convertible Security which remain unclaimed for two years after that
principal, premium or interest becomes due and payable may be repaid to Invatec
or released
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from trust, as the case may be. Thereafter, the Holder of that Convertible
Security may, as an unsecured general creditor, look only to Invatec for payment
thereof.
The applicable Prospectus Supplement sets forth the following terms of the
Offered Convertible Securities: (i) the title and aggregate principal amount of
the Offered Convertible Securities; (ii) the date or dates, or the method for
determining the date or dates, Invatec will issue the Offered Convertible
Securities (each an "Original Issue Date") and the date or dates on which the
Offered Convertible Securities will mature; (iii) the rate or rates (which may
be fixed or variable) per annum, if any, at which the Offered Convertible
Securities will bear interest or the method of determining such rate or rates;
(iv) the date or dates from which that interest, if any, will accrue and the
date or dates on which that interest, if any, will be payable; (v) the terms for
redemption or early payment, if any, including any mandatory or optional sinking
fund, repurchase obligation or analogous provision; (vi) the date or dates
(each, a "Convertibility Commencement Date") on which the Offered Convertible
Securities first become convertible into Common Stock and their Initial
Conversion Price; (vii) whether Invatec will issue the Offered Convertible
Securities in fully registered form or bearer form or any combination thereof;
(viii) whether Invatec will issue the Offered Convertible Securities in the
temporary or permanent form of one or more global securities; (ix) if other than
U.S. dollars, the currency, currencies or currency unit or units in which the
Offered Convertible Securities will be denominated and in which Invatec will pay
the principal of, and premium and interest, if any, on, the Offered Convertible
Securities; (x) whether the Senior Indebtedness to which the Indenture will
subordinate Offered Convertible Securities will be as the Indenture defines or
that Prospectus Supplement defines and the terms on which the Offered Securities
will be subordinated to that Senior Indebtedness, if those differ from the
subordination provisions in the Indenture; (xi) whether, and the terms and
conditions on which, Invatec or a Holder may elect that, or the other
circumstances under which, Invatec will pay principal of, or premium or
interest, if any, on the Offered Convertible Securities in a currency or
currencies or currency unit or units other than that in which the Offered
Convertible Securities are denominated; and (xii) any other specific terms of
the Offered Convertible Securities. That Prospectus Supplement also contains
information with respect to the additional covenants, if any, Invatec includes
in the terms of the Offered Convertible Securities.
Invatec may issue the Convertible Securities as Original Issue Discount
Securities. An Original Issue Discount Security is a Security Invatec issues at
a price lower than the amount it will pay on the Stated Maturity thereof and
which provides that, on redemption or acceleration of the maturity thereof, an
amount less than the amount payable on the Stated Maturity thereof and
determined in accordance with the terms of the Convertible Security may become
due and payable.
CONVERSION RIGHTS
Each Convertible Security will be convertible into Common Stock, at the
option of its Holder, at any time on or after its Convertibility Commencement
Date and prior to its redemption (if redeemable) or final maturity, initially at
its Initial Conversion Price per share, subject to adjustment as described
below. The right to convert Convertible Securities that the applicable
Prospectus Supplement provides are subject to redemption will, with respect to
those Convertible Securities that have been called for redemption, terminate at
the close of business on the second business day preceding the Redemption Date
therefore unless Invatec defaults in making the payment due on that redemption.
The applicable Prospectus Supplement will set forth, or describe the method
for determining, the first date on which a Convertible Security may be converted
into Common Stock (the "Convertibility Commencement Date"). In the case of
Convertible Securities Invatec issues as purchase consideration in any
acquisition for which the seller seeks installment-sale treatment for federal
income tax purposes, their Convertibility Commencement Date will be the first
day following the first anniversary of the closing of the acquisition, unless
the Prospectus Supplement provides otherwise. The applicable Prospectus
Supplement also will set forth, or describe the method for determining, the
initial conversion price of each Convertible Security on the assumption that the
Convertible Security is convertible at any time following its Original Issue
Date (or the Original Issue Date of its earliest Predecessor Security) (the
"Initial Conversion Price").
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The conversion price of each Convertible Security will be subject to
adjustment as and when any of the following events occurs after its Original
Issue Date (or the Original Issue Date of any of its Predecessor Securities):
(i) the subdivision, combination or reclassification of outstanding shares of
Common Stock; (ii) the payment of a dividend or distribution on the Common Stock
exclusively in Common Stock or any other class of capital stock of Invatec which
includes Common Stock; (iii) the issuance of rights or warrants to all holders
of Common Stock entitling them to acquire shares of Common Stock (or securities
convertible into Common Stock) at a price per share less than the then Current
Market Price; and (iv) the distribution to all holders of Common Stock of shares
of capital stock of Invatec other than Common Stock, evidences of indebtedness
of Invatec, cash or assets (including securities, but excluding (a) dividends or
distributions paid exclusively in cash, (b) dividends or distributions provided
for in clause (ii) above and (c) rights and warrants provided for in clause
(iii) above). No adjustment of any conversion price will be required to be made
until cumulative adjustments amount to at least 1.0% of that conversion price,
as last adjusted. Any adjustment that would otherwise be required to be made
will be carried forward and taken into account in any subsequent adjustment.
Invatec will have the right to reduce the conversion price of any
Convertible Security by such amount as it considers to be advisable in order
that any event treated for federal income tax purposes as a dividend of stock or
stock rights will not be taxable to the holders of Common Stock or, if that is
not possible, to diminish any income taxes that are otherwise payable because of
that event. In the case of any consolidation or merger of Invatec with or into
any other corporation (other than one in which no change is made in the
outstanding Common Stock), or the sale or transfer of all or substantially all
the properties and assets of Invatec, the Holder of any Convertible Security
then Outstanding will, with certain exceptions, have the right thereafter to
convert that Convertible Security only into the kind and amount of securities,
cash and other property receivable on that consolidation, merger, sale or
transfer by a holder of the number of shares of Common Stock into which that
Convertible Security might have been converted immediately prior to that
consolidation, merger, sale or transfer; and adjustments will be provided for
events subsequent thereto which are as nearly equivalent as practical to the
conversion price adjustments described above.
Invatec will not issue fractional shares of Common Stock on conversion of
any Convertible Security, but, in lieu thereof, will pay a cash adjustment based
on the Closing Price at the close of business on the day of conversion. If any
Convertible Security is surrendered for conversion during the period from the
close of business on any Regular Record Date therefor through and including the
next succeeding Interest Payment Date therefor (except any such Convertible
Security called for redemption on a Redemption Date, or repurchasable on a
Repurchase Date occurring within that period), that Convertible Security when
surrendered for conversion must be accompanied by payment in New York Clearing
House funds, or other funds acceptable to Invatec, of an amount equal to the
interest thereon which the registered Holder on that Regular Date is to receive.
Except as described in the preceding sentence, Invatec will not pay any interest
on converted Convertible Securities with respect to any Interest Payment Date
subsequent to the date of conversion. No other payment or adjustment for
interest or dividends will be made on conversion of any Convertible Security.
SUBORDINATION
Unless a Prospectus Supplement with respect to a series of the Convertible
Securities otherwise provides, the following are the subordination provisions
under the Indenture with respect to that series.
The payment of the principal of and any premium or interest on the
Convertible Securities and any other payment obligations of Invatec in respect
of the Convertible Securities (including any obligation to repurchase the
Convertible Securities) are, to the extent set forth in the Indenture,
subordinated in right of payment to the prior payment in full in cash or cash
equivalents of all Senior Indebtedness, whether outstanding on the date of the
Indenture or thereafter incurred. If there is a payment or distribution of
assets to creditors on any liquidation, dissolution, winding up, receivership,
reorganization, assignment for the benefit of creditors, marshaling of assets
and liabilities or any bankruptcy, insolvency or similar case or proceeding of
Invatec, the holders of all Senior Indebtedness will be entitled to receive
payment in full in cash or cash equivalents of all Obligations due or to become
due in respect of that Senior Indebtedness
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(including interest after the commencement of any such case or proceeding,
notwithstanding that Invatec may be excused as a result of that case or
proceeding from the obligation to pay all or any part of the interest otherwise
payable in respect of any Senior Indebtedness) before the Holders of the
Convertible Securities will be entitled to receive any payment in respect of the
principal of or any premium or interest on the Convertible Securities, and until
all Obligations with respect to the Senior Indebtedness are paid in full in cash
or cash equivalents, any distribution to which the Holders of the Convertible
Securities would be entitled must be made to the holders of the Senior
Indebtedness. Invatec also may not make any payment (whether by redemption,
purchase, retirement, defeasance or otherwise) on or in respect of the
Convertible Securities if (i) a default in the payment of the principal of or
any premium or interest on any Designated Senior Indebtedness (a "Payment
Default") occurs or (ii) any other default occurs and is continuing with
respect to any Designated Senior Indebtedness which permits holders of
Designated Senior Indebtedness as to which that default relates to accelerate
its maturity (a "Nonpayment Default") and the Trustee receives notice of that
default (a "Payment Blockage Notice") from (a) if that Nonpayment Default
shall have occurred under the Credit Facility or any other secured debt facility
with banks or other lenders which provides revolving credit loans, term loans,
receivables financing (including through the sale of receivables) or letters of
credit (each an "Other Debt Facility"), the representative of the Credit
Facility or that Other Debt Facility, as the case may be, or (b) if that
Nonpayment Default shall have occurred with respect to any other issue of
Designated Senior Indebtedness, the holders, or a representative of the holders,
of at least 20% of that Designated Senior Indebtedness. The payments on or in
respect of the Convertible Securities will be resumed (i) in the case of a
Payment Default respecting Designated Senior Indebtedness, on the date on which
that default is cured or waived, and (ii) in the case of a Nonpayment Default
respecting Designated Senior Indebtedness, on the date when that default is
cured or waived or the applicable Payment Blockage Notice is retracted by
written notice to the Trustee by the holders who gave that notice.
If the Maturity of any Convertible Securities is accelerated because of an
Event of Default with respect thereto, (i) the Indenture requires Invatec to
promptly notify holders of Designated Senior Indebtedness of that event and (ii)
the Holders of those Convertible Securities will, to the extent permitted by
law, be prohibited for the period the applicable Prospectus Supplement specifies
thereafter from making any bankruptcy filing with respect to Invatec or, to the
extent permitted by law, from filing suit to enforce their rights under the
Indenture.
Unless a Prospectus Supplement provides otherwise for one or more series of
Convertible Securities, the Indenture's definition of "Senior Indebtedness"
will apply to the Convertible Securities. The Indenture will define "Senior
Indebtedness" as the principal of and premium, if any, and interest on and
other Obligations in respect of (i) all secured indebtedness of Invatec for
money borrowed, including any secured indebtedness under the Credit Facility and
any successor thereto and any secured indebtedness under all Other Debt
Facilities, whether outstanding on the date of execution of the Indenture or
thereafter created, incurred or assumed, and (ii) any amendments, renewals,
extensions, modifications, refinancings and refundings of any of the foregoing.
For purposes of this definition, "indebtedness for money borrowed" when used
with respect to Invatec means (i) any obligation of, or any obligation
guaranteed by, Invatec for the repayment of borrowed money (including fees,
penalties and other obligations in respect thereof), whether or not evidenced by
bonds, debentures, notes or other written instruments, (ii) any deferred payment
obligation of, or any such obligation guaranteed by, Invatec for the payment of
the purchase price of property or assets evidenced by a note or similar
instrument and (iii) any obligation of, or any such obligation guaranteed by,
Invatec for the payment of rent or other amounts under a lease of property or
assets, which obligation is required to be classified and accounted for as a
capitalized lease on the balance sheet of Invatec under generally accepted
accounting principles. For a description of the Credit Facility, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources." As used in the Indenture: (i)
"Obligations" in respect of the Senior Indebtedness include any principal,
interest, premiums, fees, indemnifications, reimbursements, damages and other
liabilities payable under the documentation governing any such indebtedness; and
(ii) "Designated Senior Indebtedness" means (a) Obligations under the Credit
Facility and all secured Other Debt Facilities and (b) any other Senior
Indebtedness the principal amount of which is $25.0 million or more that Invatec
has
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designated to be "Designated Senior Indebtedness." The Prospectus Supplement
relating to any series of Convertible Securities may provide that the "Senior
Indebtedness" to which the Indenture subordinates Convertible Securities of
that series will include all indebtedness of Invatec for money borrowed, whether
secured or unsecured, except any such indebtedness that, by the terms of the
instrument or instruments by which it was created or incurred, expressly
provides that it (i) is junior in right of payment to those Convertible
Securities or (ii) ranks pari passu in right of payment with those Convertible
Securities.
The Convertible Securities will be obligations exclusively of Invatec.
Invatec currently conducts its operations through its subsidiaries, which are
separate and distinct legal entities and have no obligation, contingent or
otherwise, to pay any amounts due in respect of the Convertible Securities or to
make any funds available therefor, whether by dividends, loans or other
payments. The ability of any subsidiary of Invatec to loan or advance funds or
pay dividends to Invatec (i) may be subject to contractual or statutory
restrictions, (ii) will be contingent on the subsidiary's earnings and cash
flows and (iii) will be subject to various business considerations.
The Convertible Securities will be effectively subordinated to all
indebtedness and other liabilities and commitments (including trade payables and
lease obligations) of subsidiaries of Invatec. Any right of Invatec to receive
assets of any of its subsidiaries on the liquidation or reorganization of that
subsidiary (and any consequent right of the Holders of the Convertible
Securities to participate in those assets) will be effectively subordinated to
the claims of that subsidiary's creditors, except to the extent that Invatec is
itself recognized as a creditor of that subsidiary, in which case the claims of
Invatec would still be subordinated to any security in the assets of that
subsidiary and any indebtedness of that subsidiary senior to that held by
Invatec.
The Indenture does not limit or prohibit the incurrence of (i) Senior
Indebtedness or (ii) indebtedness, liabilities or other commitments by Invatec
or its subsidiaries. As of May 20, 1998, the aggregate amount of Senior
Indebtedness to which the Convertible Securities would have been subordinated
was approximately $54.6 million. At the same date, the Convertible Securities
would have ranked PARI PASSU (equally) with $12.9 million aggregate principal
amount of then outstanding Convertible Notes. Invatec expects to incur Senior
Indebtedness from time to time in the future, including Senior Indebtedness
under the Credit Facility. See "Capitalization" and "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."
CONSOLIDATION, MERGER AND SALE OF ASSETS
The Indenture provides that Invatec will not consolidate with or merge into
any other Person or convey, transfer or lease its properties and assets
substantially as an entirety to any Person in one transaction or a series of
related transactions, or permit any single Person to consolidate with or merge
into Invatec, unless (i) if applicable, the Person formed by such consolidation
or into which Invatec is merged or the Person or corporation which acquires the
properties and assets of the Company substantially as an entirety is a
corporation, limited liability company, partnership or trust organized and
validly existing under the laws of the United States or any state thereof or the
District of Columbia and expressly assumes payment of the principal of and any
premium and interest on the Convertible Securities and the performance or
observance of each obligation of Invatec under the Indenture, (ii) immediately
after giving effect to that transaction, no Event of Default will have occurred
and be continuing, (iii) that consolidation, merger, conveyance, transfer or
lease does not adversely affect the validity or enforceability of the
Convertible Securities and (iv) Invatec has delivered to the Trustee an
Officer's Certificate and an Opinion of Counsel, each stating that the
consolidation, merger, conveyance, transfer or lease complies with the
provisions of the Indenture.
EVENTS OF DEFAULT
Unless a Prospectus Supplement with respect to any series of the
Convertible Securities otherwise provides, the following are Events of Default
under the Indenture with respect to that series: (i) default in the payment of
principal of or any premium on any Convertible Security when due (even if the
Indenture's subordination provisions prohibit that payment); (ii) default in the
payment of any interest on any
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Convertible Security of that series when due, which default continues for 30
days (even if the Indenture's subordination provisions prohibit that payment);
(iii) default in the performance or breach of any other covenant or warranty of
Invatec in the Indenture (other than a covenant the Indenture includes for one
or more series of Convertible Securities other than Convertible Securities of
that series) which continues for 60 days after written notice as the Indenture
provides; (iv) default under one or more bonds, debentures, notes or other
evidences of indebtedness for money borrowed by Invatec or any of its
consolidated subsidiaries or under one or more mortgages, indentures or
instruments under which there may be issued or by which there may be secured or
evidenced any indebtedness for money borrowed by Invatec or any of its
consolidated subsidiaries, whether that indebtedness now exists or is hereafter
created, which default individually or in the aggregate constitutes a failure to
pay the principal of indebtedness in excess of $10 million when due and payable
after the expiration of any applicable grace period with respect thereto or
results in indebtedness in excess of $10 million becoming or being declared due
and payable prior to the date on which it would otherwise have become due and
payable, without that indebtedness having been discharged, or that acceleration
having been rescinded or annulled, within a period of 30 days after there shall
have been given to Invatec by the Trustee or to Invatec and the Trustee by
Holders of at least 25% in aggregate principal amount of the Outstanding
Convertible Securities a written notice specifying such default and requiring
Invatec to cause such indebtedness to be discharged or cause such acceleration
to be rescinded or annulled; (v) certain events in bankruptcy or reorganization
of or similar events respecting Invatec or any of its Significant Subsidiaries;
and (vi) any other Event of Default as the applicable Prospectus Supplement may
specify with respect to the Convertible Securities of that series.
If an Event of Default with respect to any Outstanding series of
Convertible Securities occurs and is continuing, the Trustee or Holders of not
less than 25% in aggregate principal amount of the Outstanding Convertible
Securities of that series (if the Event of Default is one of the types described
in clause (i), (ii) or (viii) above) or at least 25% in aggregate principal
amount of all Outstanding Convertible Securities (if the Event of Default is of
any other type) may declare the principal of and any premium and interest on all
the Outstanding Convertible Securities of the applicable series (or of all
Outstanding Convertible Securities, as the case may be) to be due and payable
immediately, but if a majority in principal amount of Holders of Outstanding
Convertible Securities of the applicable series (or of all Outstanding
Convertible Securities, as the case may be) waive any past default (except the
nonpayment of any premium or interest on or principal of any Convertible
Security and subject to certain other limitations), then such default will cease
to exist and any Event of Default arising therefrom will be deemed cured for
every purpose of the Indenture; but no such waiver will extend to any subsequent
or other default. If an Event of Default occurs and is continuing as a result of
an event of bankruptcy or reorganization of Invatec or any of its Significant
Subsidiaries, the principal of and any premium and accrued and unpaid interest
on all Outstanding Convertible Securities will automatically become due and
payable without any declaration or other act on the part of the Trustee or any
Holder of any Convertible Securities. Invatec must furnish to the Trustee
annually a statement as to the performance by Invatec of certain of its
obligations under the Indenture and as to any default in that performance. The
Indenture provides that the Trustee may withhold notice to Holders of the
Convertible Securities of any series of any continuing default (except in the
case of a default in payment of the principal of or any premium or interest on
those Convertible Securities), if the Trustee considers it in the interest of
those Holders to do so.
MODIFICATIONS AND AMENDMENTS
Invatec and the Trustee may modify or amend the Indenture without the
consent of Holders to: (i) set forth the terms of the Convertible Securities of
any series, including for purposes of that series any change in the definition
of Senior Indebtedness; (ii) evidence the succession of another Person to
Invatec and the assumption by any such successor of the covenants of Invatec in
the Indenture and the Convertible Securities; (iii) for the benefit of the
Holders of Convertible Securities of any or all series, add to the covenants of
Invatec, add an additional Event of Default or surrender any right or power
conferred on Invatec; (iv) secure the Convertible Securities; (v) make provision
with respect to the conversion rights of Holders if a consolidation, merger or
sale of assets involving Invatec occurs, as required by the Indenture;
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(vi) evidence and provide for the acceptance of appointment by a successor
Trustee or successor Trustees with respect to the Convertible Securities; or
(vii) cure any ambiguity in or omission from, or correct or supplement any
provision in, the Indenture or the Convertible Securities which may be defective
or inconsistent with any other provision or make any other provisions with
respect to matters or questions arising under the Indenture which are not
inconsistent with the provisions of the Indenture; provided, however, that no
such modification or amendment described in this clause (vii) may adversely
affect the interest of Holders of Securities of any series in any material
respect.
Invatec and the Trustee may modify or amend the Indenture with the consent
of the Holders of a majority in principal amount of the Outstanding Convertible
Securities affected thereby; provided, that no such amendment or modification
may, without the consent of the Holder of each Outstanding Convertible Security
affected thereby, (i) change the stated maturity date of the principal of, or
any installment of principal or interest on, that Convertible Security or reduce
the principal amount thereof or the rate of interest thereon or any premium
payable on the redemption thereof, or change the coin or currency in which that
Convertible Security or any premium or interest thereon is payable, or impair
the right to institute suit for the enforcement of any payment on or with
respect to that Convertible Security, (ii) reduce the percentage in principal
amount of the Outstanding Convertible Securities the consent of whose Holders is
required for any such supplemental indenture, or the consent of whose Holders is
required for any waiver of compliance with certain provisions of the Indenture
or certain defaults thereunder and their consequences or (iii) modify any
Indenture provisions relating to the subordination of the Outstanding
Convertible Securities in a manner adverse to their Holders.
SATISFACTION AND DISCHARGE
Invatec may discharge its obligations under the Indenture while Convertible
Securities remain Outstanding, subject to certain conditions, if all Outstanding
Convertible Securities have become due and payable or will become due and
payable at their scheduled maturity or for any other reason within one year, if
Invatec has deposited with the Trustee an amount in cash sufficient (without any
consideration of any investment of that cash) to pay and discharge all
Outstanding Convertible Securities on the date of their scheduled maturity or
the scheduled date of other payment.
MEETINGS OF HOLDERS
The Indenture provides for meetings of the Holders of Convertible
Securities of any series. The Trustee, Invatec or the holders of at least 10% in
principal amount of the Outstanding Convertible Securities of any series may
call for a meeting of Holders of that series at any time, in any such case on
notice given as the Indenture provides. Except for any consent that must be
given by the Holder of each Outstanding Convertible Security affected thereby,
as described above under " -- Modifications and Amendments," any resolution
presented at a meeting or adjourned meeting at which a quorum is present may be
adopted by the affirmative vote of the Holders of a majority in principal amount
of the Outstanding Convertible Securities of that series; provided, however,
that, except for any consent that must be given by the Holder of each
Outstanding Convertible Security affected thereby, any resolution with respect
to any request, demand, authorization, direction, notice, consent, waiver or
other action that may be made, given or taken by the Holders of a specified
percentage, which is less than a majority in principal amount of the Outstanding
Convertible Securities of a series, may be adopted at a meeting or adjourned
meeting duly reconvened at which a quorum is present by the affirmative vote of
the Holders of such specified percentage in principal amount of the Outstanding
Convertible Securities of that series. Subject to the proviso set forth above,
any resolution passed or decision taken at any meeting of Holders of Convertible
Securities of any series duly held in accordance with the Indenture will be
binding on all Holders of Convertible Securities of that series. The quorum at
any meeting called to adopt a resolution, and at any reconvened meeting, will be
Persons holding or representing a majority in principal amount of the
Outstanding Convertible Securities of a series.
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FORM, DENOMINATION AND REGISTRATION
Unless the applicable Prospectus Supplement provides otherwise, the
Convertible Securities will be issued in fully registered form, without coupons,
in denominations of $1,000 and any integral multiples thereof.
GOVERNING LAW
The Indenture and the Convertible Securities will be governed by and
construed in accordance with the laws of the State of New York, without giving
effect to that state's conflict of laws principles.
INFORMATION CONCERNING THE TRUSTEE
The Indenture contains certain limitations on the right of the Trustee, as
a creditor of the Company, to obtain payment of claims in certain cases and to
realize on certain property received with respect to any such claims, as
security or otherwise. The Trustee is permitted to engage in other transactions,
except that, if it acquires any conflicting interest (as defined), it must
eliminate that conflict or resign.
Invatec and its subsidiaries may maintain deposit accounts and conduct
other banking transactions with the Trustee in the ordinary course of business.
DESCRIPTION OF CAPITAL STOCK
Invatec's Charter authorizes Invatec to issue 30,000,000 shares of Common
Stock and 5,000,000 shares of preferred stock, par value $.001 per share (the
"Preferred Stock"). At May 20, 1998, 8,723,338 shares of Common Stock were
issued and outstanding and no shares of Preferred Stock had been issued. The
following summary is qualified in its entirety by reference to the Charter,
which is an exhibit to the Acquisition Shelf Registration Statement.
COMMON STOCK
Each share of Common Stock (i) has one vote in the election of each
director and on other corporate matters, (ii) affords no cumulative voting or
preemptive rights and (iii) is not convertible, redeemable, assessable or
entitled to the benefits of any sinking fund. Holders of Common Stock are
entitled to dividends in such amounts and at such times as the Board may in its
discretion declare out of funds legally available therefore.
PREFERRED STOCK
The Board may direct Invatec to issue shares of Preferred Stock from time
to time. Subject to certain Charter provisions and applicable law, it may,
without any action by holders of the Common Stock, (i) adopt resolutions to
issue the shares in one or more classes or series, (ii) fix the number of shares
and change the number of shares constituting any class or series and (iii)
provide for or change the voting powers, designations, preferences and relative,
participating, optional or other special rights, and qualifications, limitations
or restrictions thereof, including dividend rights and rates, redemption terms
and prices, repurchase obligations, conversion rights and liquidation
preferences, of the shares constituting any class or series.
The Board could cause Invatec to issue shares of, or rights to purchase,
Preferred Stock the terms of which might (i) discourage an unsolicited proposal
to acquire the Company, (ii) facilitate a particular business combination
involving the Company or (iii) adversely affect the voting power of holders of
the Common Stock. Any such action could discourage a transaction that some or a
majority of the stockholders might believe to be in their best interests or in
which stockholders might receive a premium for their stock over its then market
price.
STOCKHOLDER RIGHTS PLAN
Each share of Common Stock outstanding or offered hereby includes one right
("Right") to purchase from Invatec a unit consisting of one one-hundredth of a
share (a "Fractional Share") of Series A Junior
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Participating Preferred Stock, par value $.001 per share of Invatec (the
"Junior Participating Preferred Stock"), at a purchase price of $48.00 per
Fractional Share, subject to adjustment in certain events (the "Purchase
Price"). The following summary description of the Rights is qualified in its
entirety by reference to the Rights Agreement between Invatec and a Rights Agent
(the "Rights Agreement"), the form of which is filed as an exhibit to the
Acquisition Shelf Registration Statement.
Initially, the Rights will attach to all certificates representing
outstanding shares of Common Stock, including the shares of Common Stock offered
hereby, and no separate certificates for the Rights ("Rights Certificates")
will be distributed. The Rights will separate from the Common Stock and a
"Distribution Date" will, with certain exceptions, occur on the earlier of (i)
10 days following a public announcement that a person or group of affiliated or
associated persons (an "Acquiring Person") has acquired, or obtained the right
to acquire, beneficial ownership of 15% or more of the outstanding shares of
Common Stock (the date of the announcement being the "Stock Acquisition Date")
or (ii) 10 business days following the commencement of a tender or exchange
offer that would result in a person's becoming an Acquiring Person.
Notwithstanding the foregoing, so long as Philip (including, for purposes of the
Rights Agreement, its wholly owned subsidiaries), together with all its
affiliates and associates, remains the beneficial owner of 15% or more of the
outstanding shares of Common Stock, Philip shall not be or become an Acquiring
Person. In certain circumstances, the Distribution Date may be deferred by the
Board. Certain inadvertent acquisitions will not result in a person's becoming
an Acquiring Person if the person promptly divests itself of sufficient Common
Stock. Until the Distribution Date, (i) the Rights will be evidenced by the
Common Stock certificates and will be transferred with and only with those
certificates, (ii) Common Stock certificates will contain a notation
incorporating the Rights Agreement by reference and (iii) the surrender for
transfer of any certificate for Common Stock also will constitute the transfer
of the Rights associated with the stock represented by such certificate.
The Rights are not exercisable until the Distribution Date and will expire
at the close of business on September 30, 2007, unless earlier redeemed or
exchanged by Invatec as described below.
As soon as practicable after the Distribution Date, Rights Certificates
will be mailed to holders of record of Common Stock as of the close of business
on the Distribution Date and, from and after the Distribution Date, the separate
Rights Certificates alone will represent the Rights. All shares of Common Stock
issued prior to the Distribution Date will be issued with Rights. Shares of
Common Stock issued after the Distribution Date in connection with certain
employee benefit plans or upon conversion of certain securities will be issued
with Rights. Except as otherwise determined by the Board, no other shares of
Common Stock issued after the Distribution Date will be issued with Rights.
In the event (a "Flip-In Event") that a person becomes an Acquiring
Person (except pursuant to a tender or exchange offer for all outstanding shares
of Common Stock at a price and on terms that a majority of the independent
members of the Board determines to be fair to and otherwise in the best
interests of Invatec and its stockholders (a "Permitted Offer")), each holder
of a Right will thereafter have the right to receive, on exercise of that Right,
a number of shares of Common Stock (or, in certain circumstances, cash, property
or other securities of Invatec) having a Current Market Price (as defined in the
Rights Agreement) equal to two times the exercise price of the Right.
Notwithstanding the foregoing, following the occurrence of any Triggering Event
(as defined below), all Rights that are, or (under certain circumstances
specified in the Rights Agreement) were, beneficially owned by an Acquiring
Person (or by certain related parties) will be null and void in the
circumstances set forth in the Rights Agreement. Rights are not exercisable
following the occurrence of any Flip-In Event until such time as the Rights are
no longer redeemable by Invatec as set forth below.
In the event (a "Flip-Over Event") that, at any time from and after the
time an Acquiring Person becomes such, (i) Invatec is acquired in a merger or
other business combination transaction (other than certain mergers that follow a
Permitted Offer) or (ii) 50% or more of the Company's assets or earning power is
sold or transferred, each holder of a Right (except Rights that previously have
been voided as set forth above) shall thereafter have the right to receive, on
exercise of such Right, a number of shares of
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common stock of the acquiring company having a Current Market Price equal to two
times the exercise price of the Right. Flip-In Events and Flip-Over Events are
collectively referred to as "Triggering Events."
The number of outstanding Rights associated with a share of Common Stock,
or the number of Fractional Shares of Junior Participating Preferred Stock
issuable upon exercise of a Right and the Purchase Price, are subject to
adjustment in the event of a stock dividend on, or a subdivision, combination or
reclassification of, the Common Stock occurring prior to the Distribution Date.
The Purchase Price payable, and the number of Fractional Shares of Junior
Participating Preferred Stock or other securities or property issuable, upon
exercise of the Rights are subject to adjustment from time to time to prevent
dilution in the event of certain transactions affecting the Junior Participating
Preferred Stock.
With certain exceptions, no adjustment in the Purchase Price will be
required until cumulative adjustments amount to at least 1% of the Purchase
Price. No fractional shares of Junior Participating Preferred Stock that are not
integral multiples of a Fractional Share are required to be issued and, in lieu
thereof, an adjustment in cash will be made based on the market price of the
Junior Participating Preferred Stock on the last trading date prior to the date
of exercise. Pursuant to the Rights Agreement, Invatec reserves the right to
require prior to the occurrence of a Triggering Event that, on any exercise of
Rights, a number of Rights be exercised so that only whole shares of Junior
Participating Preferred Stock will be issued.
At any time until 10 days following the first date of public announcement
of the occurrence of a Flip-In Event, Invatec may redeem the Rights in whole,
but not in part, at a price of $.01 per Right, payable, at the option of
Invatec, in cash, shares of the Common Stock or such other consideration as the
Board may determine. Immediately on the effectiveness of the action of the Board
ordering redemption of the Rights, the Rights will terminate and the only right
of the holders of Rights will be to receive the $.01 redemption price.
At any time after the occurrence of a Flip-In Event and prior to a person's
becoming the beneficial owner of 50% or more of the shares of Common Stock then
outstanding or the occurrence of a Flip-Over Event, Invatec may, at its option,
exchange the Rights (other than Rights owned by an Acquiring Person or an
affiliate or an associate of an Acquiring Person, which will have become void)
in whole or in part, at an exchange ratio of one share of Common Stock, and/or
other equity securities deemed to have the same value as one share of Common
Stock, per Right, subject to adjustment.
Other than the redemption price, any of the provisions of the Rights
Agreement may be amended by the Board as long as the Rights are redeemable.
Thereafter, the provisions of the Rights Agreement other than the redemption
price may be amended by the Board only in order to cure any ambiguity, defect or
inconsistency, to make changes that do not materially adversely affect the
interests of holders of Rights (excluding the interests of any Acquiring
Person), or to shorten or lengthen any time period under the Rights Agreement;
provided, however, that no amendment to lengthen the time period governing
redemption shall be made at such time as the Rights are not redeemable. Until a
Right is exercised, the holder thereof, as such, will have no rights to vote or
receive dividends or any other rights as a stockholder of Invatec.
The Rights will have certain anti-takeover effects. They will cause
substantial dilution to any person or group that attempts to acquire the Company
without the approval of the Board. As a result, the overall effect of the Rights
may be to render more difficult or discourage any attempt to acquire the
Company, even if such acquisition may be favorable to the interests of the
Company's stockholders. Because the Board can redeem the Rights or approve a
Permitted Offer, the Rights should not interfere with a merger or other business
combination approved by the Board. The Rights are being issued to protect
Invatec's stockholders from coercive or abusive takeover tactics and to afford
the Board more negotiating leverage in dealing with prospective acquirers.
STATUTORY BUSINESS COMBINATION PROVISION
As a Delaware corporation, Invatec is subject to Section 203 of the DGCL.
In general, Section 203 prevents an "interested stockholder" (defined
generally as a person owning 15% or more of a Delaware
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corporation's outstanding voting stock) from engaging in a "business
combination" (as defined) with the corporation for three years following the
date such person became an interested stockholder unless: (i) before such person
became an interested stockholder, the board of directors of the corporation
approved the transaction in which the interested stockholder became an
interested stockholder or approved the business combination; (ii) on
consummation of the transaction that resulted in the interested stockholder's
becoming an interested stockholder, the interested stockholder owned at least
85% of the voting stock of the corporation outstanding at the time the
transaction commenced (excluding stock held by directors who are also officers
of the corporation and by employee stock plans that do not provide employees
with the right to determine confidentially whether shares held subject to the
plan will be tendered in a tender or exchange offer); or (iii) following the
transaction in which such person became an interested stockholder, the business
combination was approved by the board of directors of the corporation and
authorized at a meeting of stockholders by the affirmative vote of the holders
of 66 2/3% of the outstanding voting stock of the corporation not owned by the
interested stockholder. Under Section 203, the restrictions described above also
do not apply to certain business combinations proposed by an interested
stockholder following the announcement or notification of one of certain
extraordinary transactions involving the corporation and a person who had not
been an interested stockholder during the previous three years or who became an
interested stockholder with the approval of a majority of the corporation's
directors, if such extraordinary transaction is approved or not opposed by a
majority of the directors who were directors prior to any person becoming an
interested stockholder during the previous three years or were recommended for
election or elected to succeed such directors by a majority of such directors.
OTHER MATTERS
Delaware law authorizes Delaware corporations to limit or eliminate the
personal liability of their directors to them and their stockholders for
monetary damages for breach of a director's fiduciary duty of care. The duty of
care requires that, when acting on behalf of the corporation, directors must
exercise an informed business judgment based on all material information
reasonably available to them. Absent the limitations authorized by Delaware law,
directors of Delaware corporations are accountable to those corporations and
their stockholders for monetary damages for conduct constituting gross
negligence in the exercise of their duty of care. Delaware law enables Delaware
corporations to limit available relief to equitable remedies such as injunction
or rescission. The Charter limits the liability of directors of Invatec to
Invatec or its stockholders to the fullest extent permitted by Delaware law.
Specifically, no member of the Board will be personally liable for monetary
damages for breach of the member's fiduciary duty as a director, except for
liability (i) for any breach of the member's duty of loyalty to Invatec or its
stockholders, (ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) for unlawful
payments of dividends or unlawful stock repurchases or redemptions as provided
in Section 174 of the DGCL or (iv) for any transaction from which the member
derived an improper personal benefit. This Charter provision could have the
effect of reducing the likelihood of derivative litigation against directors and
may discourage or deter stockholders or management from bringing a lawsuit
against directors for breach of their duty of care, even though such an action,
if successful, might otherwise have benefited Invatec and its stockholders.
Invatec's Bylaws (the "Bylaws") provide indemnification to Invatec's officers
and directors and certain other persons with respect to certain matters, and
Invatec has entered into agreements with each of its directors and executive
officers providing for indemnification with respect to certain matters.
The Charter provides that stockholders may act only at an annual or special
meeting of stockholders and may not act by written consent. The Bylaws provide
that only the Chairman of the Board, the President or a majority of the Board
may call a special meeting of stockholders.
The Charter provides that the Board will consist of three classes of
directors serving for staggered terms, and Invatec currently contemplates that
approximately one-third of the Board will be elected each year. This Charter
provision could prevent a party who acquires control of a majority of the
outstanding voting stock of Invatec from obtaining control of the Board until
the second annual stockholders' meeting following the date that party obtains
that control.
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The Charter provides that the number of directors will be as determined by
the Board from time to time, but will not be less than three. It also provides
that directors may be removed only for cause, and then only by the affirmative
vote of the holders of at least a majority of all outstanding voting stock
entitled to vote. This provision, in conjunction with the Charter provisions
authorizing the Board to fill vacant directorships, will prevent stockholders
from removing incumbent directors without cause and filling the resulting
vacancies with their own nominees.
STOCKHOLDER PROPOSALS
The Bylaws contain advance-notice and other procedural requirements that
apply to stockholder nominations of persons for election to the Board at any
annual or special meeting of stockholders and to stockholder proposals that any
other action be taken at any annual meeting. In the case of any annual meeting,
a stockholder proposing to nominate a person for election to the Board or
proposing that any other action be taken must give the Secretary of Invatec
written notice of the proposal not less than 90 days before the anniversary date
of the immediately preceding annual meeting (subject to certain exceptions if
the pending annual meeting date differs by more than specified periods from that
anniversary date). If a special meeting is called for the election of directors,
a stockholder proposing to nominate a person for that election must give the
Secretary of Invatec written notice of the proposal no later than the close of
business on the 10th day following the first to occur of (i) the day on which
notice of the date of the special meeting was mailed to stockholders or (ii) the
day public disclosure of the date of the special meeting was made. The Bylaws
prescribe the specific information any advance written stockholder notice must
contain. The foregoing summary is qualified in its entirety by reference to the
Bylaws, which are an exhibit to the Registration Statement.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is ChaseMellon
Shareholder Services, L.L.C.
50
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
At May 20, 1998, 8,723,338 shares of Common Stock were outstanding. The
3,852,500 shares sold in the IPO are freely tradable by the public.
Substantially all the remaining outstanding shares of Common Stock
(collectively, the "Restricted Shares") have not been registered under the
Securities Act and may be resold publicly only following their effective
registration under that act or pursuant to an available exemption from the
registration requirements of that act (such as Rule 144 thereunder).
Invatec has filed a registration statement on Form S-8 under the Securities
Act to register the shares of Common Stock reserved or to be available for
issuance pursuant to the Incentive Plan. Shares of Common Stock issued pursuant
to the Incentive Plan generally will be available for sale in the open market by
holders who are not affiliates of the Company and, subject to the volume and
other limitations of Rule 144, by holders who are affiliates of the Company.
In general, under Rule 144 if a minimum of one year has elapsed since the
later of the date of acquisition of the restricted securities from the issuer or
from an affiliate of the issuer, a person (or persons whose shares of Common
Stock are aggregated), including persons who may be deemed "affiliates" of the
Company, would be entitled to sell within any three-month period a number of
shares of Common Stock that does not exceed the greater of (i) 1% of the then
outstanding shares of Common Stock (I.E., 87,023 shares at April 1, 1998) and
(ii) the average weekly trading volume during a preceding period of four
calendar weeks. Sales under Rule 144 are also subject to certain provisions as
to the manner of sale, notice requirements and the availability of current
public information about the Company. In addition, under Rule 144(k), if a
period of at least two years has elapsed since the later of the date restricted
securities were acquired from the Company or the date they were acquired from an
affiliate of the Company, a stockholder who is not an affiliate of the Company
at the time of sale and has not been an affiliate for at least three months
prior to the sale would be entitled to sell shares of Common Stock in the public
market immediately without compliance with the foregoing requirements under Rule
144. Rule 144 does not require the same person to have held the securities for
the applicable periods. The foregoing summary of Rule 144 is not intended to be
a complete description thereof. The SEC has proposed certain amendments to Rule
144 that would, among other things, eliminate the manner of sale requirements
and revise the notice provisions of that rule. The SEC has also solicited
comments on other possible changes to Rule 144, including possible revisions to
the one- and two-year holding periods and the volume limitations referred to
above.
Philip and the Miller Interests have agreed not to sell the shares of
Common Stock they owned when the IPO closed until October 29, 1999 (provided
that the Miller Interests may sell shares of Common Stock after April 20, 1998
with the prior written consent of NationsBanc Montgomery Securities LLC). In
addition, the stockholders of SVS and the directors and executive officers of
Invatec have agreed not to sell the shares of Common Stock they owned when the
IPO closed until after October 28, 1998. Invatec has agreed that it will not
waive any of those contractual prohibitions without the prior written consent of
NationsBanc Montgomery Securities LLC.
Invatec has granted "piggyback" registration rights to Philip, Messrs.
Haynes, Schugart, Rigas and Wren and the holders of the convertible notes issued
to purchase certain Acquired Businesses such that, following the applicable
restricted period, they may include any shares of Common Stock owned by them in
certain types of registrations by Invatec under the Securities Act of any Common
Stock for its own account for cash, subject to certain exceptions, Invatec is
generally required to pay the costs associated with any such offering other than
underwriting discounts and commissions and transfer taxes attributable to the
shares sold on behalf of the selling stockholders. The registration rights
agreements provide that the number of shares of Common Stock that must be
registered on behalf of the selling stockholders is subject to limitation if the
managing underwriter or Invatec's financial advisor, as the case may be,
determines that market conditions so require. Invatec will indemnify the selling
stockholders thereunder, and those stockholders will indemnify Invatec, against
certain liabilities in respect of any registration statement or offering that
includes shares pursuant to the registration rights agreements.
51
<PAGE>
Pursuant to Securities Act Rule 145, the volume limitations and certain
other requirements of Rule 144 will apply to resales of the shares of Common
Stock and Convertible Debt Securities this Prospectus covers by affiliates of
the businesses the Company acquires for a period of one year from the date of
their acquisition (or such shorter period as the SEC may prescribe), but
otherwise these securities will be freely tradable after their issuance by
persons not affiliated with the Company unless the Company contractually
restricts their sale.
52
<PAGE>
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
The following summarizes the material United States federal income tax
consequences under generally applicable current law of the acquisition,
ownership, conversion and disposition of Convertible Securities and Common Stock
acquired from Invatec in connection with the direct and indirect acquisition of
businesses, properties or securities in a business combination transaction (a
"Business Combination") and the acquisition, ownership, conversion and
disposition of Common Stock acquired on the conversion of one or more
Convertible Securities acquired from Invatec in a Business Combination by
persons who hold those Convertible Securities and any such Common Stock as
capital assets. It does not, however, discuss the effect of (i) special rules,
such as those applicable to tax-exempt organizations, insurance companies,
financial institutions, persons who hold the Convertible Securities or Common
Stock in connection with a straddle, individuals who expatriate from the United
States or dealers, (ii) rules that may permit (a) gain realized on the receipt
of Convertible Securities in exchange for property transferred to Invatec in a
Business Combination to be reported on the installment method or (b) the receipt
of Convertible Securities or Common Stock in a Business Combination without
recognition of gain or loss or (iii) any foreign, state or local tax law.
Accordingly, each person who is considering the acquisition of Convertible
Securities or Common Stock in a Business Combination pursuant to this Prospectus
should consult his or her own tax advisor regarding the matters discussed herein
in light of his or her particular circumstances and the application of state,
local and foreign tax laws.
The following statements are based on the Internal Revenue Code of 1986, as
amended (the "Code"), existing regulations thereunder and the current judicial
and administrative interpretations thereof. They do not constitute or derive
from, and are not based on, the opinion of any tax counsel.
OWNERSHIP BY U.S. PERSONS
The following applies to a person who is a citizen or resident of the
United States (a "U.S. Holder"), a corporation or partnership created or
organized in the United States or any state thereof or a trust that is described
in Section 7701(a)(30) of the Code or an estate that is not a foreign estate
within the meaning of Section 7701(a)(31) of the Code.
INTEREST ON CONVERTIBLE SECURITIES. The portion of any stated interest on
a Convertible Security which is qualified stated interest will be taxable as
ordinary income at the time that interest is paid or accrued in accordance with
the U.S. Holder's method of accounting for United States federal income tax
purposes. The portion of the stated interest on a Convertible Security which is
not qualified stated interest and, in certain circumstances, a portion of the
stated principal on a Convertible Security will be classified as original issue
discount. Any such original issue discount will be included in income at times
that generally precede the payment of that original issue discount. The effect
of the foregoing principles on a particular Convertible Security will depend, in
part, on the terms of the Convertible Security. A person who is considering the
acquisition of a Convertible Security in a Business Combination pursuant to this
Prospectus should consult with his or her tax advisor regarding the amount of
any such original issue discount with respect to that Convertible Security and
the effect thereof on such person.
CONVERSION OF CONVERTIBLE SECURITIES. A U.S. Holder not using the
installment method to report income on the receipt of a Convertible Security in
a Business Combination will generally not recognize gain or loss on the
conversion of that Convertible Security into Common Stock except for the capital
gain or loss resulting from the receipt of cash in lieu of a fractional share
equal to that amount of cash reduced by the basis of the portion of the
Convertible Security in respect of which that cash was paid. The basis of the
Common Stock received on the conversion will be the adjusted basis of the
converted Convertible Security at the time of conversion increased by any gain
that is recognized, decreased by any loss that is recognized and decreased by
any cash that is received. The holding period of that Common Stock will include
the holding period of the converted Convertible Security.
Rev. Rul. 72-264 provides that (i) a U.S. Holder using the installment
method to report income on the receipt of a Convertible Security (any such
Convertible Security is referred to herein as an "Installment Method
Convertible Security") in a Business Combination will recognize gain or loss on
the conversion of
53
<PAGE>
that Installment Method Convertible Security into Common Stock and (ii) the
amount of that gain or loss will be the amount of cash received in lieu of a
fractional share increased by the fair market value of the Common Stock received
and reduced by the basis (as defined in Section 453B(b) of the Code) of that
Convertible Security. Any gain or loss so recognized will be considered to
result from the sale or exchange of the property in exchange for which the
Installment Method Convertible Security was received.
CONSTRUCTIVE DIVIDEND. A distribution to holders of Common Stock may cause
a deemed distribution (which will be a dividend to the extent of the current or
accumulated earnings and profits of Invatec) to the holders of Convertible
Securities if the conversion price or conversion ratio of the Convertible
Securities is adjusted to reflect that distribution.
SALE OR EXCHANGE OF CONVERTIBLE SECURITIES OR COMMON STOCK. Gain or loss
will be recognized on the sale or exchange of Convertible Securities or of
Common Stock in an amount equal to the difference between (i) the amount of cash
and the fair market value of any other property received by the U.S. Holder
(excluding, in the case of Convertible Securities, any amount representing
accrued, but theretofore unrecognized, interest, which will be taxable as such)
and (ii) the Holder's adjusted basis in the property sold or exchanged. If the
Convertible Security is an Installment Method Convertible Security, any gain or
loss recognized on the sale or exchange thereof will be considered to result
from the sale or exchange of the property in exchange for which the Installment
Method Convertible Security was received. If the Convertible Security is not an
Installment Method Convertible Security, any such gain (other than gain
characterized as interest under the market discount rules) or loss with respect
to that Convertible Security will be a capital gain or loss if the Convertible
Securities are held as capital assets. Gain or loss recognized on the sale or
exchange of Common Stock will be a capital gain or loss if the Common Stock is
held as a capital asset.
DIVIDENDS ON COMMON STOCK. Distributions on the Common Stock will be
dividends to the extent of the current or accumulated earnings and profits of
Invatec, then a nontaxable return of capital reducing the Holder's adjusted
basis in the Common Stock until such adjusted basis is reduced to zero and
finally an amount received in exchange for the Common Stock. Dividends paid to
domestic corporations may qualify for the dividends-received deduction subject
to certain limiting provisions.
OWNERSHIP BY NON-U.S. HOLDERS
The following applies to a person who is not a U.S. Holder (a "Non-U.S.
Holder") and to the income received thereby, such as interest, dividends and
gain or loss on disposition, with respect to Convertible Securities and Common
Stock which is not effectively connected with the conduct by the Non-U.S. Holder
of a trade or business in the United States. Any such effectively connected
items of income generally will be subject to the United States federal income
tax that applies to U.S. Holders, and, in the case of such a Non-U.S. Holder
that is a foreign corporation, those items also will be subject to the branch
profits tax.
INTEREST ON CONVERTIBLE SECURITIES. Interest paid on Convertible
Securities to a Non-U.S. Holder will not be subject to United States federal
income tax or to withholding under the portfolio interest exemption in respect
thereof if: (i) the beneficial owner (or, if certain requirements are satisfied,
a member of a class of financial institutions) certifies, under penalties of
perjury, that the beneficial owner is not a U.S. Holder and provides the
beneficial owner's name and address; (ii) the Non-U.S. Holder does not own
actually or constructively 10% or more of the total voting power of all classes
of stock of Invatec entitled to vote (Common Stock into which a Convertible
Security can be converted is constructively owned for these purposes); (iii) the
Non-U.S. Holder is not a controlled foreign corporation with respect to which
Invatec is a "related person" within the meaning of Section 864(d)(4) of the
Code; and (iv) the Non-U.S. Holder is not a bank holding the Convertible
Securities as a result of an extension of credit made pursuant to a loan
agreement entered into in the ordinary course of its trade or business. Accrued
market discount on a Convertible Security is not treated for these purposes as
interest income.
If the foregoing conditions are not satisfied, then the interest generally
will be subject to United States federal income tax withholding at a rate of 30%
(or any lower rate provided by any applicable treaty).
54
<PAGE>
SALE OR EXCHANGE OF CONVERTIBLE SECURITIES OR COMMON STOCK; CONVERSION OF
CONVERTIBLE SECURITIES. A Non-U.S. Holder generally will not be subject to
United States federal income tax on gain recognized on the sale or exchange of
Convertible Securities or Common Stock or on the conversion of a Convertible
Security unless (i) the Holder is an individual who is present in the United
States for 183 or more days in the taxable year and certain other conditions are
satisfied or (ii) Invatec is (as is not expected) a "United States real
property holding corporation," as defined in Section 897 of the Code, and
certain exceptions do not apply. Notwithstanding the foregoing, if any
Convertible Security is received in exchange for property used in the conduct of
a trade or business in the United States and the gain that was realized on the
receipt of that Convertible Security was reported on the installment method, any
gain that is realized on the collection, conversion, sale, exchange or other
disposition of that Convertible Security may be subject to United States income
tax as though the Non-U.S. Holder were a citizen or resident of the United
States.
DIVIDENDS ON COMMON STOCK. Any distribution on Common Stock to a Non-U.S.
Holder will be subject to United States federal income tax withholding at a rate
of 30% (or any lower rate provided by any applicable treaty).
ESTATE TAX. An individual Non-U.S. Holder of a Convertible Security will
not be required to include the value of that Convertible Security in his gross
estate for United States federal estate tax purposes, if (i) interest received
at the time of death would have been exempt from income tax under the portfolio
interest exemption (which is discussed above) (ii) the required statement that
the beneficial owner is not a U.S. person has been filed and, at the time of the
Holder's death, (iii) payments of interest on that Convertible Security would
not have been effectively connected with the conduct by the Holder of a trade or
business in the United States.
BACKUP WITHHOLDING; INFORMATION REPORTING
U.S. HOLDERS. A noncorporate U.S. Holder who owns Convertible Securities
will be subject to backup withholding at the rate of 31% as well as information
reporting with respect to both interest paid on the Convertible Securities and
the proceeds of any sale, exchange or redemption thereof if the payee fails to
furnish a taxpayer identification number and in certain other circumstances.
NON-U.S. HOLDERS. A noncorporate Non-U.S. Holder who delivers the
statement discussed above to establish the availability of the portfolio
interest exemption in respect of interest on a Convertible Security is not
subject to backup withholding or information reporting in respect of the
interest paid on that Convertible Security.
A Non-U.S. Holder will be exempt from backup withholding and from
information reporting with respect to a payment of proceeds from the sale or
exchange of a Convertible Security through a broker if such Non-U.S. Holder is
an "exempt foreign person", and provides the broker with a statement to that
effect, or the payment is made through a foreign office of certain foreign
brokers. A Non-U.S. Holder should consult with its own advisers as to the
exemptions discussed in this paragraph.
CREDITS AND REFUNDS OF BACKUP WITHHOLDING. Any amounts withheld under the
backup withholding rules will be allowed as a refund or a credit against the
Holder's United States federal income tax liability if certain information is
furnished to the Internal Revenue Service.
PLAN OF DISTRIBUTION
This Prospectus covers the offer and sale of up to 5,000,000 shares of
Common Stock and $50,000,000 aggregate principal amount of Convertible Debt
Securities which Invatec may issue from time to time in connection with future
direct and indirect acquisitions of other businesses, properties or securities
in business combination transactions.
Invatec expects that (i) it will determine the terms on which it may issue
the shares of Common Stock and Convertible Debt Securities covered hereby by
direct negotiations with the owners or controlling persons of the businesses or
assets to be acquired, (ii) the shares of Common Stock issued will be valued at
prices reasonably related to market prices prevailing either at the time an
acquisition agreement is executed
55
<PAGE>
or at or about the time of delivery of those shares and (iii) the Convertible
Debt Securities issued will be valued at prices reasonably related to their
principal amount.
LEGAL MATTERS
Certain legal matters in connection with the issuance of the Common Stock
and the Convertible Debt Securities offered hereby are being passed on for
Invatec by Baker & Botts, L.L.P., Houston, Texas.
EXPERTS
Except as noted below, the audited financial statements included in this
Prospectus have been audited by Arthur Andersen LLP, independent public
accountants, as indicated in their reports with respect thereto, and are
included herein in reliance upon the authority of said firm as experts in giving
said reports.
The consolidated financial statements of Harley as of October 31, 1995 and
1996 and for each of the three years in the period ended October 31, 1996 and
the financial statements of GSV, Inc. as of December 31, 1995 and 1996 and for
each of the three years in the period ended December 31, 1996, and the
statements of operations, stockholders' equity, and cash flows of GSV, Inc. for
the two months ended February 28, 1997, included in this Prospectus have been
audited by Deloitte & Touche LLP, independent auditors, as stated in their
reports appearing herein, and have been so included in reliance upon the reports
of such firm given upon their authority as experts in accounting and auditing.
The financial statements of Cypress Industries, Inc. as of December 31,
1997 and for the year then ended included in this Prospectus have been audited
by Crowe Chizek and Company LLP, independent auditors, as stated in their report
appearing herein, and have been so included in reliance upon the report of such
firm given upon their authority as experts in accounting and auditing.
ADDITIONAL INFORMATION
Invatec is subject to the reporting requirements of the Exchange Act, and,
in accordance therewith, files reports, proxy statements and other information
with the SEC. These reports, proxy statements and other information, once filed,
may be inspected, without charge, at the public reference facilities of the SEC
at its principal office at Judiciary Plaza, 450 Fifth Street, N.W., Room 1024,
Washington, D.C. 20549, and its regional offices at Citicorp Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661, and at 7 World Trade
Center, 13th Floor, New York, New York 10048. Copies of all or any portion of
these documents can be obtained at prescribed rates from the Public Reference
Section of the SEC at its principal office at Judiciary Plaza, 450 Fifth Street,
N.W., Room 1024, Washington, D.C. 20549. The SEC maintains an Internet web site
that contains reports, proxy statements and other information regarding issuers
(including Invatec) that file electronically with the SEC. The address of that
site is http://www.sec.gov.
Invatec has filed the Acquisition Shelf Registration Statement on Form S-4
under the Securities Act with the SEC with respect to this offering. This
Prospectus, filed as a part of the Acquisition Shelf Registration Statement,
does not contain all the information set forth therein, or the exhibits and
schedules thereto, in accordance with the rules and regulations of the SEC, and
reference hereby is made to that omitted information. The statements in this
Prospectus concerning documents filed or incorporated by reference as exhibits
to the Acquisition Shelf Registration Statement accurately describe the material
provisions of those documents and are qualified in their entirety by reference
to those exhibits for complete statements of their provisions. The Acquisition
Shelf Registration Statement and the exhibits and schedules thereto may be
inspected and copied at the principal office of the SEC in Washington, D.C., as
described above, and are also available at the SEC's Internet web site described
above.
56
<PAGE>
INDEX TO FINANCIAL STATEMENTS
PAGE
------
Innovative Valve Technologies,
Inc. and Acquired Businesses
Unaudited Pro Forma Combined
Financial Statements
Pro Forma Combined
Statement of Operations for
the Year Ended December 31,
1997 (unaudited)........... F-3
Pro Forma Consolidated
Statement of Operations for
the Year Ended December 31,
1997 (unaudited)........... F-4
Pro Forma Combined
Statement of Operations for
the Three Months Ended
March 31, 1998............. F-5
Notes to Unaudited Pro
Forma Combined Financial
Statements................. F-6
Innovative Valve Technologies,
Inc. and Subsidiaries
Report of Independent
Public Accountants......... F-9
Consolidated Balance
Sheets..................... F-10
Consolidated Statements of
Operations................. F-11
Consolidated Statements of
Stockholders' Equity
(Deficit).................. F-12
Consolidated Statements of
Cash Flows................. F-13
Notes to Consolidated
Financial Statements....... F-14
Innovative Valve Technologies,
Inc. and Subsidiaries
Report of Independent
Public Accountants......... F-26
Consolidated Balance
Sheet...................... F-27
Consolidated Statement of
Operations................. F-28
Consolidated Statement of
Stockholders' Deficit...... F-29
Consolidated Statement of
Cash Flows................. F-30
Notes to Consolidated
Financial Statements....... F-31
The Safe Seal Company, Inc. and
Subsidiaries
Report of Independent
Public Accountants......... F-35
Consolidated Balance
Sheets..................... F-36
Consolidated Statements of
Operations................. F-37
Consolidated Statements of
Stockholders' Equity
(Deficit).................. F-38
Consolidated Statements of
Cash Flows................. F-39
Notes to Consolidated
Financial Statements....... F-40
Harley Industries, Inc. and
Subsidiaries
Independent Auditors'
Reports.................... F-48
Consolidated Balance
Sheets..................... F-50
Consolidated Statements of
Operations................. F-51
Consolidated Statements of
Stockholders' Equity....... F-52
Consolidated Statements of
Cash Flows................. F-53
Notes to Consolidated
Financial Statements....... F-54
Steam Supply Group
Report of Independent
Public Accountants......... F-63
Combined Balance Sheets.... F-64
Combined Statements of
Operations................. F-65
Combined Statements of
Stockholders' Equity
(Deficit).................. F-66
Combined Statements of Cash
Flows...................... F-67
Notes to Combined Financial
Statements................. F-68
F-1
<PAGE>
PAGE
------
ICE/VARCO Group
Report of Independent
Public Accountants......... F-75
Combined Balance Sheets.... F-76
Combined Statements of
Operations................. F-77
Combined Statements of
Stockholders' Deficit...... F-78
Combined Statements of Cash
Flows...................... F-79
Notes to Combined Financial
Statements................. F-80
GSV, Inc.
Independent Auditors'
Report..................... F-86
Balance Sheets............. F-87
Statements of Operations... F-88
Statements of Stockholders'
Equity..................... F-89
Statements of Cash Flows... F-90
Notes to Financial
Statements................. F-91
Plant Specialties, Inc.
Report of Independent
Public Accountants......... F-95
Balance Sheets............. F-96
Statements of Operations... F-97
Statements of Stockholders'
Equity..................... F-98
Statements of Cash Flows... F-99
Notes to Financial
Statements................. F-100
Southern Valve Group
Report of Independent
Public Accountants......... F-105
Combined Balance Sheets.... F-106
Combined Statements of
Operations................. F-107
Combined Statements of
Stockholders' Equity....... F-108
Combined Statements of Cash
Flows...................... F-109
Notes to Combined Financial
Statements................. F-110
Dalco, Inc.
Report of Independent
Public Accountants......... F-114
Balance Sheets............. F-115
Statements of Operations... F-116
Statements of Stockholders'
Equity..................... F-117
Statements of Cash Flows... F-118
Notes to Financial
Statements................. F-119
Cypress Industries, Inc.
Report of Independent
Public Accountants......... F-123
Balance Sheet.............. F-124
Statement of Income........ F-125
Statement of Stockholders'
Equity..................... F-126
Statement of Cash Flows.... F-127
Notes to Financial
Statements................. F-128
IPS Holding, Ltd. and
Subsidiaries
Report of Independent
Public Accountants......... F-131
Consolidated Balance
Sheets..................... F-132
Consolidated Statements of
Operations................. F-133
Consolidated Statements of
Stockholders' Equity....... F-134
Consolidated Statements of
Cash Flows................. F-135
Notes to Consolidated
Financial Statements....... F-136
F-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.
F-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.
F-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.
F-5
<PAGE>
INNOVATIVE VALVE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA COMBINED 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 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 F-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 page F-3 and F-5 condenses the
unaudited pro forma consolidated statement of operations information on page F-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
F-6
<PAGE>
INNOVATIVE VALVE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
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. 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.
F-7
<PAGE>
INNOVATIVE VALVE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(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.
F-8
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Innovative Valve Technologies, Inc.:
We have audited the accompanying consolidated balance sheets of Innovative
Valve Technologies, Inc. and subsidiaries, (a Delaware corporation), as of
December 31, 1996 and 1997, and the related statements of operations,
stockholders' deficit and cash flows for each of the three years in the period
ended December 31, 1997. 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 statements 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 Innovative Valve Technologies, Inc. and Subsidiaries, as of December 31,
1997, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
March 10, 1998
F-9
<PAGE>
INNOVATIVE VALVE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31
------------------------------- MARCH 31,
1996 1997 1998
-------------- --------------- ---------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash............................... $ 396,637 $ 2,544,450 $ 365,094
Accounts receivable, net of
allowance of $25,000, $1,079,857
and $1,423,465................... 535,647 17,680,697 27,851,234
Inventories, net................... 36,140 15,987,765 20,996,852
Prepaid expenses and other current
assets........................... 111,638 1,171,090 1,763,520
Deferred tax asset................. -- 3,723,448 3,944,898
-------------- --------------- ---------------
Total current assets..... 1,080,062 41,107,450 54,921,598
PROPERTY AND EQUIPMENT, net............. 140,449 11,474,701 16,279,083
GOODWILL, net........................... -- 48,387,981 81,128,397
PATENT COSTS, net....................... 741,611 682,436 675,064
OTHER NONCURRENT ASSETS, net............ 325,993 3,780,115 3,916,521
-------------- --------------- ---------------
$ 2,288,115 $ 105,432,683 $ 156,920,663
============== =============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
(DEFICIT)
CURRENT LIABILITIES:
Short-term debt.................... $ -- $ 4,660,924 $ --
Current maturities of long-term
debt............................. -- 304,310 642,113
Accounts payable and accrued
expenses......................... 1,092,891 14,910,638 18,610,425
-------------- --------------- ---------------
Total current
liabilities........... 1,092,891 19,875,872 19,252,538
LONG TERM DEBT, net of current
maturities............................ 588,970 318,911 321,555
CREDIT FACILITY......................... -- 11,750,000 50,127,800
CONVERTIBLE SUBORDINATED DEBT........... -- 12,493,178 12,916,928
OTHER LONG TERM LIABILITIES............. -- 1,125,417 1,247,624
COMMITMENTS AND CONTINGENCIES
REDEEMABLE PREFERRED STOCK.............. 2,000,000 -- --
STOCKHOLDERS' EQUITY (DEFICIT):
Common stock, $0.001 par value,
30,000,000 shares authorized,
1,481,919, 7,890,198 and
8,702,338 issued and
outstanding...................... 1,482 7,890 8,702
Additional paid-in capital......... 1,298,471 70,212,035 82,141,828
Retained deficit................... (2,693,699) (10,350,620) (9,096,312)
-------------- --------------- ---------------
Total stockholders'
equity (deficit)...... (1,393,746) 59,869,305 73,054,218
-------------- --------------- ---------------
$ 2,288,115 $ 105,432,683 $ 156,920,663
============== =============== ===============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-10
<PAGE>
INNOVATIVE VALVE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31 ENDED MARCH 31
-------------------------------------------- ------------------------------
1995 1996 1997 1997 1998
-------------- ------------ -------------- -------------- --------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES................................ $ 2,852,356 $ 3,887,761 $ 58,620,946 $ 6,944,997 $ 33,504,037
COST OF OPERATIONS...................... 1,583,940 2,375,245 39,820,941 4,750,866 22,548,216
-------------- ------------ -------------- -------------- --------------
Gross profit.................. 1,268,416 1,512,516 18,800,005 2,194,131 10,955,821
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES.............................. 1,852,895 1,917,063 16,805,309 1,951,357 8,058,774
SPECIAL COMPENSATION EXPENSE............ -- 38,048 7,613,386 2,605,005 --
-------------- ------------ -------------- -------------- --------------
Income (loss) from
operations................. (584,479) (442,595) (5,618,690) (2,362,231) 2,897,047
OTHER INCOME (EXPENSE):
Patent defense costs............... (880,068) -- -- -- --
Interest income (expense), net..... 10,181 27,703 (2,901,039) (342,699) (709,490)
Other.............................. (50,126) 393 (2,957) (38) 12,983
-------------- ------------ -------------- -------------- --------------
(920,013) 28,096 (2,903,996) (342,737) (696,507)
-------------- ------------ -------------- -------------- --------------
INCOME (LOSS) BEFORE INCOME TAXES....... (1,504,492) (414,499) (8,522,686) (2,704,968) 2,200,540
PROVISION (BENEFIT) FOR INCOME TAXES.... -- -- (1,022,722) (549,416) 946,232
-------------- ------------ -------------- -------------- --------------
NET INCOME (LOSS)....................... $ (1,504,492) $ (414,499) $ (7,499,964) $ (2,155,552) $ 1,254,308
============== ============ ============== ============== ==============
NET INCOME (LOSS) BEFORE DIVIDENDS
APPLICABLE TO PREFERRED STOCK......... (1,504,492) (414,499) (7,499,964) $ (2,155,552) $ 1,254,308
PREFERRED STOCK DIVIDENDS............... (41,123) (191,854) (156,957) (47,500) --
-------------- ------------ -------------- -------------- --------------
NET INCOME (LOSS) APPLICABLE TO COMMON
SHARES................................ $ (1,545,615) $ (606,353) $ (7,656,921) $ (2,203,052) $ 1,254,308
============== ============ ============== ============== ==============
Earnings Per Share--Basic............... $ (1.17) $ (0.42) $ (2.25) $ (1.06) $ 0.16
============== ============ ============== ============== ==============
Earnings Per Share--Diluted............. $ (1.17) $ (0.42) $ (2.25) $ (1.06) $ 0.15
============== ============ ============== ============== ==============
Weighted average common shares
outstanding -- Basic.................... 1,320,439 1,441,135 3,397,980 2,087,941 8,029,092
============== ============ ============== ============== ==============
Weighted average common shares
outstanding--Diluted.................... 1,320,439 1,441,135 3,397,980 2,087,941 8,684,764
============== ============ ============== ============== ==============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-11
<PAGE>
INNOVATIVE VALVE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
--------------------- PAID-IN RETAINED
SHARES AMOUNT CAPITAL DEFICIT TOTAL
---------- -------- ----------- ------------ --------------
<S> <C> <C> <C> <C> <C>
BALANCE, December 31, 1994........... 1,288,451 $ 1,288 $ 465,117 $ (541,731) $ (75,326)
SSI preferred stock dividends... -- -- -- (41,123) (41,123)
Sale of SSI common stock
warrant....................... -- -- 100,000 -- 100,000
Issuance of SSI common stock.... 144,500 145 445,355 -- 445,500
Net loss........................ -- -- -- (1,504,492) (1,504,492)
---------- -------- ----------- ------------ --------------
BALANCE, December 31, 1995........... 1,432,951 1,433 1,010,472 (2,087,346) (1,075,441)
SSI preferred stock dividends... -- -- -- (191,854) (191,854)
Issuances of SSI common stock... 60,868 61 357,987 -- 358,048
Retirement of SSI common
stock......................... (11,900) (12) (69,988) -- (70,000)
Net loss........................ -- -- -- (414,499) (414,499)
---------- -------- ----------- ------------ --------------
BALANCE, December 31, 1996........... 1,481,919 1,482 1,298,471 (2,693,699) (1,393,746)
SSI preferred stock dividends... -- -- -- (156,957) (156,957)
Issuances of SSI common stock... 222,650 223 2,604,782 -- 2,605,005
Exercise of SSI common stock
warrant and options........... 714,769 715 4,554,141 -- 4,554,856
Issuance of common stock to
certain executives............ 242,839 243 5,008,675 -- 5,008,918
Public offering, net of offering
costs......................... 3,852,500 3,853 44,018,053 -- 44,021,906
Issuances of common stock in
acquisitions.................. 185,661 185 2,129,794 -- 2,129,979
Redemption of SSI redeemable
preferred stock and payment of
indebtedness to Philip........ 1,189,860 1,189 10,598,119 -- 10,599,308
Net loss........................ -- -- -- (7,499,964) (7,499,964)
---------- -------- ----------- ------------ --------------
BALANCE, December 31, 1997........... 7,890,198 7,890 70,212,035 (10,350,620) 59,869,305
Acquisition of Acquired Business
(unaudited)................... 807,828 808 11,904,557 -- 11,905,365
Exercise of stock options
(unaudited)................... 4,312 4 25,236 -- 25,240
Net income (unaudited).......... -- -- -- 1,254,308 1,254,308
---------- -------- ----------- ------------ --------------
BALANCE, March 31, 1998
(unaudited)........................ 8,702,338 $ 8,702 $82,141,828 $ (9,096,312) $ 73,054,218
========== ======== =========== ============ ==============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-12
<PAGE>
INNOVATIVE VALVE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31 MARCH 31
------------------------------------------- ----------------------------
1995 1996 1997 1997 1998
------------ ------------ ------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).................. $ (1,504,492) $ (414,499) $ (7,499,964) $ (2,155,552) $ 1,254,308
Adjustments to reconcile net income
(loss) to net cash used in
operating activities --
Depreciation and
amortization................ 28,525 31,183 1,235,940 141,949 736,916
Deferred taxes................. -- -- 4,982,917 -- 241,778
Special compensation expense... -- 38,048 7,613,386 2,605,005 --
Gain on sale of property and
equipment................... (1,879) -- -- -- --
(Increase) decrease in --
Accounts receivable......... (145,835) (49,736) (1,219,537) (1,837,333) (3,651,014)
Inventories................. -- (13,660) (4,187,410) 131,026 (1,732,334)
Prepaid expenses and other
current assets............ 35,402 (66,161) 424,535 (838,886) (653,373)
Other noncurrent assets,
net....................... -- (324,246) 1,141,616 (629,916) 766,418
Increase (decrease) --
Accounts payable and accrued
expenses.................. 493,084 (91,195) (2,806,726) 1,616,525 (1,249,657)
------------ ------------ ------------- ------------- -------------
Net cash used in operating
activities.............. (1,095,195) (890,266) (315,243) (967,182) (4,286,958)
------------ ------------ ------------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and
equipment........................ (7,530) (128,309) (1,062,366) (80,881) (746,162)
Additions to patent costs.......... (3,384) (46,030) -- -- --
Proceeds from sale of property and
equipment........................ 10,500 -- 17,137 -- --
Business acquisitions, net of cash
acquired of $499,436, $39,250 and
$185,094......................... -- -- (51,555,833) (10,186,417) (30,674,244)
------------ ------------ ------------- ------------- -------------
Net cash used in investing
activities.............. (414) (174,339) (52,601,062) (10,267,298) (31,420,406)
------------ ------------ ------------- ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings of debt................. -- 265,000 29,348,272 10,743,245 --
Repayments of debt................. (93,333) -- (27,981,507) -- (151,208)
Repayments of short-term debt...... -- -- -- -- (4,660,924)
Net borrowings under Credit
Facility......................... -- -- 11,750,000 -- 38,377,800
Payments on non-compete
obligations...................... -- -- (152,662) -- (65,160)
Repayment of debt to Philip........ -- -- (2,981,789) -- --
Proceeds from sale/exercise of SSI
common stock warrant............. 100,000 -- 1,216,855 596,000 --
Proceeds from sale of common stock,
net of offering costs............ 445,500 -- 44,021,906 -- --
SSI common stock repurchases....... -- (70,000) -- -- --
Proceeds from sale of redeemable
SSI preferred stock.............. 2,000,000 -- -- -- --
Proceeds from exercise of stock
options.......................... -- -- -- -- 27,500
Preferred stock dividends.......... -- (191,854) (156,957) (47,500) --
------------ ------------ ------------- ------------- -------------
Net cash provided by
financing activities.... 2,452,167 3,146 55,064,118 11,291,745 33,528,008
------------ ------------ ------------- ------------- -------------
NET INCREASE (DECREASE) IN CASH...... 1,356,558 (1,061,459) 2,147,813 57,265 (2,179,356)
CASH, beginning of period............ 101,538 1,458,096 396,637 396,637 2,544,450
------------ ------------ ------------- ------------- -------------
CASH, end of period.................. $ 1,458,096 $ 396,637 $ 2,544,450 $ 453,902 $ 365,094
============ ============ ============= ============= =============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-13
<PAGE>
INNOVATIVE VALVE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION:
Innovative Valve Technologies, Inc. ("Invatec" or the "Company") 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 "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, "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 Specialities, Inc. ("PSI"). SSI and its subsidiaries were affiliates of
Invatec prior to the SSI Merger.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF PRESENTATION
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 (together with the
Initial Acquired Businesses, the "Acquired Businesses") in 1997. 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. To
date, there have not been any material changes to goodwill as a result of
purchase price allocations being finalized.
The financial statements include the accounts of the Company and its wholly
owned subsidiaries. All significant intercompany accounts and transactions have
been eliminated in consolidation.
INTERIM FINANCIAL INFORMATION
The interim consolidated financial statements herein have been prepared by
the Company without audit, pursuant to rules and regulations of the Securities
and Exchange Commission 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. Operating results for interim periods are not necessarily indicative of
the results for a full year.
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
F-14
<PAGE>
INNOVATIVE VALVE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
ACCOUNTING FOR LONG-LIVED ASSETS
Effective January 1, 1995, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." Accordingly, in
the event that facts and circumstances indicate that property and equipment, and
intangible or other assets, may be impaired, an evaluation of recoverability
would be performed. If an evaluation is required, the estimated future
undiscounted cash flows associated with the asset are compared to the asset's
carrying amount to determine if a write-down to market value or discounted cash
flow value is necessary. Adoption of this standard did not have a material
effect on the financial position or results of operations of the Company.
GOODWILL
Goodwill represents the excess of the aggregate purchase price paid by the
Company in the acquisition of businesses accounted for as purchases over the
fair market value of the net assets acquired. Goodwill is amortized on a
straight-line basis over 40 years. As of December 31, 1997, accumulated
amortization was approximately $467,000.
The Company periodically evaluates the recoverability of intangibles
resulting from business acquisitions and measures the amount of impairment, if
any, by assessing current and future levels of income and cash flows as well as
other factors, such as business trends and prospects and market and economic
conditions.
DEBT ISSUE COSTS
Debt issue costs related to the Company's Credit Facility (see Note 7) are
included in other noncurrent assets and are amortized to interest expense over
the scheduled maturity of the debt. As of December 31, 1997, accumulated
amortization was approximately $31,000.
EARNINGS PER SHARE
The Company adopted SFAS No. 128 in 1997, and all earnings per share
previously reported have been restated. Basic earnings per share is computed by
dividing net income by the weighted average common shares outstanding. Diluted
earnings per share is computed by dividing net income by the weighted average
number of common and common equivalent shares outstanding. Common Share
equivalents including options to purchase 1,395,748 shares of Common Stock and
$12.5 million of subordinated debt convertible into Common Shares at prices
ranging between $16.90 and $22.90 per share, outstanding at December 31, 1997
were not included in the computation of diluted EPS as their effect on EPS was
antidilutive.
STOCK-BASED COMPENSATION
In accordance with SFAS No. 123, the Company has elected to use the method
APB Opinion No. 25 prescribes to measure its compensation costs attributable to
stock-based compensation and to include in Note 12 of these Notes the pro forma
effect on those costs using the fair value approach that SFAS No. 123 would
have.
INCOME TAXES
The Company follows the liability method of accounting for income taxes in
accordance with SFAS No. 109. Under this method, deferred income taxes are
recorded based upon differences between the financial reporting and tax bases of
assets and liabilities and are measured using the enacted tax rates and laws
that will be in effect when the underlying assets or liabilities are recovered
or settled.
Prior to the Acquisitions, certain Acquired Businesses' stockholders were
taxed under the provisions of subchapter S of the Internal Revenue Code. Under
these provisions, the stockholders paid income taxes on
F-15
<PAGE>
INNOVATIVE VALVE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
their proportionate share of their companies' earnings. Because the stockholders
were taxed directly, their businesses paid no federal income tax and only
certain state income taxes.
The Company intends to file a consolidated federal income tax return that
will include the operations of the Acquired Businesses for periods subsequent to
their respective acquisitions dates.
REVENUE RECOGNITION
Revenue is recognized as products are sold and as services are performed.
CASH
Cash payments for interest during 1995, 1996 and 1997 were approximately
$8,000, $4,000, and $1,954,000 respectively. Cash payments for taxes during
1995, 1996 and 1997 were $0, $0, and $306,000, respectively. Noncash activities
for the year ended December 31, 1997 consisted of approximately $10.6 million of
obligations and preferred stock owned by a related party which were converted
into Common Stock.
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.
SPECIAL COMPENSATION EXPENSE
In 1996, the SSI recorded a special non-cash compensation expense of
$38,048 related to the issuance of 4,513 shares of its common stock, $0.01 par
value ("SSI Common Stock"), and options to purchase 1,955 shares of that stock
under employee benefit programs.
In 1997, SSI recorded a special non-cash compensation expense of
approximately $2.6 million related to the issuance of 221,595 shares of Common
Stock to three members of executive management and to Computerized Accounting &
Tax Services, Inc. ("CATS"), a related party, to attract such individuals and
CATS to effect the IPO. For financial statement presentation purposes, these
shares were valued at approximately $11.70 per share.
During 1997, Invatec recorded a special non-cash compensation expense of
approximately $5.0 million related to (i) its issuance of 242,839 shares of
Common Stock to six members of executive management and CATS to attract them to
effect the IPO and (ii) its grant to certain of its officers of options to
purchase 202,589 shares of Common Stock at an exercise price of $1.00 per share.
For financial statement presentation purposes, the shares were valued at
approximately $11.70 per share and the options were valued at approximately
$10.70 per option share.
NEW ACCOUNTING PRONOUNCEMENT
SFAS No. 130, "Reporting Comprehensive Income" issued in June 1997,
establishes standards for the reporting of comprehensive income in a company's
financial statements. Comprehensive Income includes all changes in the equity of
a company during the period which result from the Company's transactions with
its stockholders. For the Company, SFAS No. 130 will be effective for the year
beginning January 1, 1998. The Company has not completed its analysis of the
impact of this new pronouncement. The Company believes implementation of SFAS
No. 130 will not have a material effect on its financial statements.
3. ACQUISITIONS:
In November 1996, the Company acquired The Spin Safe Corporation, Inc.
("Spin Safe") in exchange for 54,400 shares of Common Stock, valued at $5.88
per share, and noninterest-bearing notes payable of $400,000 and an agreement to
pay certain royalties. The notes are due in four equal annual installments
F-16
<PAGE>
INNOVATIVE VALVE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
beginning January 15, 1998. Additionally, the Company entered into an agreement
with the former stockholders of Spin Safe, pursuant to which the Company will
make royalty payments to them based on the number of times in excess of a
specified base the Safe SealE system is used by the Company through 2011. The
cost of this acquisition is recorded as patent costs.
The aggregate consideration paid by the Company to purchase Acquired
Businesses in 1997 (as described in Note 1) was $52.2 million in cash and
assumed debt, $17.2 million in the form of short-term notes and subordinated
notes convertible into common shares and 185,661 shares of Common Stock.
Of the total purchase price paid for the Acquisitions, $23.2 million has
been allocated to net assets acquired, and the remaining $48.9 million has been
recorded as goodwill. On the basis of management's preliminary analysis, the
Company expects the historical carrying values of the Acquired Businesses'
assets and liabilities will approximate fair value, but this analysis is subject
to revision, within one year of acquisition, as more information regarding asset
and liability valuations becomes available. To date, there have not been any
material changes to goodwill as a result of purchase price allocations being
finalized.
The following table reflects, on an unaudited pro forma basis, the combined
operations of the Company as if the IPO, the SSI Merger, the Company's 1997
acquisitions of Acquired Businesses and certain other events and transactions
discussed under " -- Unaudited Pro Forma Combined Statements of Operations" in
Note 2 also had taken place on January 1, 1996. 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 these events
and transactions actually taken place when assumed, has obtained since the dates
of acquisition or may obtain in the future.
1996 1997
---------- ----------
(UNAUDITED AND IN
THOUSANDS)
Revenues............................. $ 102,110 $ 116,670
Income before income taxes........... 4,352 5,043
Net income........................... 2,481 2,875
Basic income per share............... $ .31 $ .36
========== ==========
Diluted income per share............. $ .31 $ .35
========== ==========
See discussion of the pro forma adjustments, reflected in the above amounts
in Note 2 under "Unaudited Pro Forma Combined Statements of Operations."
4. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following:
DECEMBER 31
ESTIMATED ---------------------------
USEFUL LIVES 1996 1997
------------ ---------- ---------------
Land.............................. -- $ -- $ 1,616,660
Buildings......................... 30 years -- 4,232,884
Leasehold improvements............ 30 years -- 988,561
Furniture and fixtures............ 3-5 years 126,262 3,175,375
Machinery and equipment........... 5 years 60,650 16,632,340
---------- ---------------
186,912 26,645,820
Less -- Accumulated
depreciation............... (46,463) (15,171,119)
---------- ---------------
Property and equipment, net.. $ 140,449 $ 11,474,701
========== ===============
F-17
<PAGE>
INNOVATIVE VALVE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:
Activity in the Company's allowance for doubtful accounts consists of the
following:
DECEMBER 31
----------------------------------
1995 1996 1997
--------- --------- ------------
Balance, at beginning of year........ $ 25,000 $ 25,000 $ 25,000
Additions............................ -- -- 102,243
Deductions........................... -- -- (80,810)
Allowance for doubtful accounts at
acquisition dates.................. -- -- 1,033,424
--------- --------- ------------
Balance, at end of year.............. $ 25,000 $ 25,000 $ 1,079,857
========= ========= ============
Accounts payable and accrued expenses consist of the following:
DECEMBER 31
----------------------------
1996 1997
------------ --------------
Accounts payable, trade.............. $ 287,165 $ 8,553,604
Accrued compensation and benefits.... 120,567 1,904,116
Accrued insurance.................... -- 1,277,637
Accrued legal fees................... 170,696 140,696
Due to Philip........................ 287,195 --
Other accrued expenses............... 227,268 3,034,585
------------ --------------
$ 1,092,891 $ 14,910,638
============ ==============
6. SHORT-TERM DEBT:
In connection with the Company's purchase of Dalco, two short-term notes
totalling $4.7 million were issued to the former owners of Dalco. The notes bore
interest at a rate of 5.5% per annum, were unsecured and were repaid on January
2, 1998.
7. CREDIT FACILITY:
Contemporaneously with the closing of the IPO, Invatec entered into a new
revolving credit facility (the "Credit Facility") with a syndicate of
commercial banks. The Credit Facility replaced SSI's commercial credit
facilities theretofore in effect.
The Credit Facility is a three-year revolving credit facility pursuant to
which Invatec may borrow up to $60.0 million to finance acquisitions and for
general corporate purposes, including refinancing of borrowed-money indebtedness
of businesses acquired and funding working capital needs. Loans under the Credit
Facility will bear interest at a designated variable base rate plus a margin
ranging from 0 to 100 basis points depending on the ratio of the Company's
borrowed money and certain other indebtedness to its trailing pro forma
consolidated earnings before interest, income taxes, depreciation and
amortization. At Invatec's option, loans may bear interest based on a designated
London interbank offering rate plus a margin ranging from 100 to 275 basis
points depending on the same ratio. The margin is subject to being reset from
time to time. Commitment fees of 25 to 50 basis points per annum are payable on
the unused portion of the line of credit. The Credit Facility has a $5.0 million
sublimit for standby letters of credit. It requires the consent of the lenders
for any acquisition involving a purchase price of greater than $5.0 million,
prohibits the payment of dividends by Invatec, limits the amount of indebtedness
the Company may incur and requires the Company to comply with certain financial
covenants. The Credit Facility will terminate and all amounts outstanding, if
any, thereunder, will be due and payable in September 2000. The Company's
subsidiaries have guaranteed the repayment of, and the capital stock of those
subsidiaries and the Company's accounts receivable and inventories will be
collateral security for, all amounts owed under the Credit Facility. At
F-18
<PAGE>
INNOVATIVE VALVE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
December 31, 1997, the Company had $11,750,000 outstanding under the Credit
Facility at an interest rate of 8.5%.
8. LONG-TERM DEBT:
Long-term debt consists of the following at December 31:
1996 1997
---------- ----------
Revolving line of credit payable to a
bank, due June 30, 2002, with
interest due monthly at 1.25% over
cost (as defined) (6.75% at
December 31, 1996), secured by
assignment of all assets. The
available borrowing capacity at
December 31, 1996 was
$1,735,000......................... $ 265,000 --
Notes payable to former stockholders
of Spin Safe, with annual
installments of $100,000 beginning
January 15, 1998, non-interest
bearing, due January 15, 2001,
unsecured.......................... 323,970 358,125
Installment notes payable; interest
ranging from 6.06% to 10%, payable
in monthly installments through
2001; secured by certain assets.... -- 265,096
---------- ----------
588,970 623,221
Less: current maturities............. -- 304,310
---------- ----------
$ 588,970 $ 318,911
========== ==========
9. CONVERTIBLE SUBORDINATED DEBT:
At December 31, 1997, outstanding convertible subordinated debt consisted
of approximately $5.1 million aggregate principal amount of 5.0% notes due in
2002, $2.8 million aggregate principal amount of 5.5% notes due in 2004 and,
$4.6 million aggregate principal amount of 5.0% notes due in 2002. These notes
are convertible at initial conversion prices ranging from $16.90 to $22.20 per
share at the option of the holder in whole at any time.
10. INCOME TAXES:
The provision (benefit) for income taxes consisted of:
YEAR ENDED DECEMBER 31,
----------------------------------------------
1995 1996 1997
-------------- -------------- --------------
Current:
U.S. Federal............. $ -- $ -- $ (1,026,565)
State.................... -- -- 513,854
-------------- -------------- --------------
Total current provision.. -- -- (512,711)
Deferred:
U.S. Federal............. -- -- (478,127)
State.................... -- -- (31,884)
-------------- -------------- --------------
Total deferred provision. -- -- (510,011)
-------------- -------------- --------------
Total income tax provision.... $ -- $ -- $ (1,022,722)
============== ============== ==============
F-19
<PAGE>
INNOVATIVE VALVE TECHNOLOGIES, INC. 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 DECEMBER 31
-------------------------------------
1995 1996 1997
----------- ----------- -----------
Statutory federal income tax
benefit............................ (34)% (34)% (34)%
Special compensation charge.......... -- -- 22%
Nondeductible goodwill............... -- -- 2%
Nondeductible expenses............... -- -- 3%
State taxes, net of federal benefit
of 34%............................. -- -- 4%
Other................................ -- -- 1%
Valuation allowance.................. 34 34 (10)%
--- --- ---
Effective income tax rate............ 0% 0% (12)%
=== === ===
Net deferred tax assets consist of the following:
DECEMBER 31
--------------------------
1996 1997
------------ ------------
Current deferred tax assets:
Accrued liabilities and
valuation allowances not
currently deductible.......... $ 160,910 $ 3,723,448
------------ ------------
160,910 3,723,448
Noncurrent deferred tax assets:
Net operating losses............ 686,316 172,893
Special compensation charge..... -- 802,050
Amortization of intangibles..... -- 149,871
Other........................... -- 266,210
------------ ------------
686,316 1,391,024
Valuation allowance.................. (847,226) --
------------ ------------
Total deferred tax assets............ $ -- $ 5,114,472
============ ============
Noncurrent deferred tax
liabilities........................ -- (131,555)
------------ ------------
Net deferred tax assets.............. $ -- $ 4,982,917
============ ============
The Company records a valuation allowance for deferred tax assets when
management believes it is more likely than not the asset will not be realized.
Management believes that the Company's deferred tax asset will be fully realized
due to its acquisition strategy and therefore has eliminated the valuation
allowance for this asset as of December 31, 1997.
Deferred income tax provisions result from temporary differences in the
recognition of income and expenses for financial reporting purposes and for tax
purposes. The tax effects of these temporary differences representing deferred
tax assets and liabilities result principally from the following:
YEAR ENDED DECEMBER 31
----------------------------------------
1995 1996 1997
------------ ------------ ------------
Deferred tax provision during the
year
Net operating loss.............. $ 304,600 $ 107,301 $ 644,022
Special compensation charge..... -- -- (802,050)
Depreciation.................... 53,093 (2,520) 128,843
Accrued expenses not deductible
for tax......................... 95,065 25,168 366,400
Valuation allowance............. (452,758) (129,949) (847,226)
------------ ------------ ------------
Total...................... $ -- $ -- $ (510,011)
============ ============ ============
F-20
<PAGE>
INNOVATIVE VALVE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Certain deferred tax assets and liabilities were recorded with respect to
purchase accounting for the Acquired Business during the year ended December 31,
1997.
11. STOCKHOLDERS' EQUITY:
SSI COMMON STOCK
In 1995, the Company implemented an employee benefit award program. Under
this program, the Company awarded 4,726 shares of Common Stock to employees. In
1996, employees forfeited 816 of these shares and the Company recorded non-cash
compensation expense of $11,500 with respect to the 1,955 of these shares that
had vested. The Company discontinued the program in 1997 and cancelled the
remaining unvested shares.
REVERSE STOCK SPLIT
Prior to the SSI Merger, SSI and Invatec each effected a 0.68-for-one
reverse stock split of its outstanding common stock. The accompanying financial
statements have been prepared as if these splits had been effected as of the
beginning of the earliest period presented.
SSI MERGER
As a result of the SSI Merger: (i) the shares of SSI Common Stock and
redeemable preferred stock outstanding as of October 31, 1997 were converted
into shares of Common Stock; (ii) outstanding options and a warrant to purchase
shares of SSI Common Stock were converted into options to purchase Common Stock;
and (iii) SSI's authorized capital stock became 1,000 shares of SSI Common
Stock, par value $1.00 per share, all of which have been issued and are
outstanding and owned by Invatec. All share and per share information for the
periods shown, except authorized shares, have been restated to reflect the
merger as of the beginning of the earliest period presented.
INVATEC COMMON STOCK
Invatec sold 3,852,500 shares of Common Stock in the IPO. The initial price
to the public in the IPO was $13.00, and Invatec's proceeds from the IPO, net of
an underwriting discount of $3.5 million and IPO expenses of $2.6 million,
including approximately $1.5 million of expenses which were initially funded
through advances obtained from Philip, totaled $44.0 million.
At December 31, 1997, the Company had reserved 650,140 shares of Common
Stock for issuance on conversion of its outstanding convertible subordinated
notes described in Note 9 and 1,395,748 shares of Common Stock for issuance on
the exercise of stock options then outstanding under Invatec's 1997 Incentive
Plan, of which options to purchase a total of 533,873 shares then were
exercisable at exercise prices ranging from $1.00 per share to $13.00 per share.
Invatec's certificate of incorporation authorizes the issuance of up to
30.0 million shares of Common Stock, of which 7,890,198 shares were issued and
outstanding as of December 31, 1997, and 5.0 million shares of preferred stock,
none of which has been issued.
STOCK OPTIONS
In 1996, the Company began a management stock option program that was
discontinued in 1997. Under this program, the Company granted both shares of
Common Stock and options to purchase shares of Common Stock to certain members
of management. The options vested monthly and were exercisable at any time
following the six-month period ending June 30 or December 31 in which the
options were earned. The Company had reserved 200,000 shares of Common Stock for
issuance in this program. During 1996, the Company granted 4,513 shares of
Common Stock and options to purchase 71,899 shares of Common Stock. The options
had an exercise price of $10.00 per share and are exercisable through July 1,
2001. In 1996, the Company recorded non-cash compensation expense of $26,548 for
the 4,513 shares issued with a fair market value of $5.88 per share. No
compensation expense was recorded for the options granted in 1996 because their
exercise price exceeded the fair market value of the underlying shares ($5.88
per share).
F-21
<PAGE>
INNOVATIVE VALVE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Prior to 1996, the Company had, from time to time, granted options to key
employees at or above the market value of the Common Stock. The options granted
had exercise prices ranging from $5.00 to $20.00 per share. All but 50,000
options expired in 1996. The remaining options were exercised in June 1997.
1997 INCENTIVE PLAN
The Company has adopted an incentive plan (the "Incentive Plan") that
provides for the granting or awarding of stock options and other
performance-based awards to key employees, nonemployee directors and independent
contractors of the Company and its subsidiaries. The Incentive Plan aims to
attract and retain the services of key employees and qualified independent
directors and contractors by making stock option and other performance-based
awards tied to the growth and performance of the Company. At December 31, 1997,
Invatec had reserved 1,500,000 shares of Common Stock for use under the
Incentive Plan. Beginning in the second quarter of 1998, the number of shares
available for that use will be the greater of 1,500,000 or 15% of the number of
shares of Common Stock outstanding on the last day of the preceding quarter.
The following table summarizes the stock options outstanding at December
31, 1997 and changes during the three years then ended:
WEIGHTED-
SHARES UNDER AVERAGE
OPTION EXERCISE PRICE
------------- ---------------
Balance at December 31, 1994......... 121,000 $ 13.18
Granted......................... -- --
Exercised....................... -- --
-------------
Balance at December 31, 1995......... 121,000 13.18
Granted......................... 71,899 10.00
Exercised....................... -- --
Cancelled....................... (71,000) 18.94
-------------
Balance at December 31, 1996......... 121,899 7.94
Warrants converted to options... 15,000 10.00
Granted......................... 1,310,389 9.97
Exercised....................... (50,000) 5.00
Cancelled....................... (1,540) 10.00
-------------
Balance at December 31, 1997......... 1,395,748 9.97
=============
Available for grant at December 31,
1997................................. 104,252
=============
Options exercisable at December 31,
1997................................. 533,873 7.03
=============
The options outstanding at December 31, 1997 have exercise prices from
$1.00 to $17.125 per share, with a weighted average exercise price of $9.97 and
a weighted average remaining contractual life of 6.92 years.
The Company accounts for options by applying APB Opinion No. 25, under
which no compensation expense (other than described in Note 2) has been
recognized. The Company's pro forma compensation expense for 1996 is zero as
options were determined to be without value under SFAS No. 123, "Accounting for
Stock-Based Compensation," using the minimum value option method.
F-22
<PAGE>
INNOVATIVE VALVE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
If the Company had recorded 1997 compensation cost for option grants
consistent with SFAS No. 123, 1997 net loss and loss per share would have been
increased by the following pro forma amounts (in thousands, except per share
data):
YEAR ENDED
DECEMBER 31, 1997
------------------
Net Loss:
As Reported..................... $ (7,499,964)
Pro forma....................... $ (8,350,661)
Loss Per Share:
Basic
As Reported..................... $ (2.25)
Pro forma....................... $ (2.50)
The pro forma compensation cost may not be representative of that to be
expected in future years because options vest over several years and additional
awards may be made each year.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model, with the following weighted average
assumptions used for grants in 1997: dividend yield of 0%; expected volatility
of 48.43%; risk-free interest rate of 6.09%; and expected lives of 6.92 years.
WARRANTS
During 1997, Philip exercised warrants to purchase 680,768 shares of SSI
Common Stock at an exercise price of $6.32 per share. Consideration for the
exercise consisted of approximately $3.3 million of Philip promissory notes and
approximately $1.2 million in cash. The Company used the Philip notes as part of
the consideration it paid for Harley.
STOCK REPURCHASES
In December 1996, the Company purchased 11,900 shares of SSI Common Stock
from certain stockholders for $70,000 ($5.88 per share). It subsequently
canceled these shares.
12. REDEEMABLE PREFERRED STOCK:
In 1995, SSI issued and sold 20,000 shares of its redeemable preferred
stock to Philip for $2.0 million ($100 per share). In the SSI Merger, these
shares, together with accrued dividends thereon, converted into 154,958 shares
of Common Stock.
13. COMMITMENTS AND CONTINGENCIES:
OPERATING LEASES
The Company leases warehouse space, office facilities and vehicles under
noncancelable leases. Rental expense for 1995, 1996 and 1997 was approximately
$90,300, $162,400, and $822,400 respectively. The following represents future
minimum rental payments under noncancelable operating leases:
Year ending December 31 --
1998............................... $ 910,403
1999............................... 760,615
2000............................... 656,017
2001............................... 519,120
2002............................... 325,011
Thereafter......................... 500,275
------------
$ 3,671,441
============
F-23
<PAGE>
INNOVATIVE VALVE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
LITIGATION
In the ordinary course of its business, the Company has become involved in
various legal actions. Management, after consultation with legal counsel, does
not believe that the outcome of these legal actions will have a material effect
on the Company's financial position or results of operations.
14. CERTAIN TRANSACTIONS:
The Company had a management agreement with CATS, an entity then related by
common ownership. Management fee expense for 1995, 1996, and 1997 was
approximately $120,000, $108,000, and $353,000, respectively. This agreement
terminated in 1997.
15. EMPLOYEE BENEFIT PLANS:
The Company maintains certain 401(k) plans which allow eligible employees
to defer a portion of their income through contributions to the plans. No
contributions were required or made to these plans during 1995 or 1996. The
Company contributed approximately $59,000 to its plans during the year ended
December 31, 1997.
16. RELATIONSHIP WITH PHILIP:
In 1996, Philip agreed to make certain advances to SSI to enable SSI, or
its successors, to pursue a possible initial public offering. As a result of
Philip's financial support of SSI's acquisition of Harley, Philip became a
related party of the Company for financial statement presentation purposes
effective January 31, 1997. In June 1997, Invatec entered into a funding
arrangement with Philip pursuant to which Philip advanced funds to Invatec to
pay costs related to the IPO and Invatec assumed SSI's obligation to repay the
Philip advances and the related deferred offering costs funded with these
advances.
In connection with the IPO, Invatec issued 1,036,013 shares of Common Stock
to Philip as payment of $8.6 million of indebtedness owed to Philip. Immediately
after the IPO, Invatec repaid the remaining $3.0 million of indebtedness owed to
Philip in cash.
17. SERVICE AND DISTRIBUTION AGREEMENTS:
The Company purchases, sells and services various products under service
and distribution agreements with its major suppliers. In general, these
agreements are cancelable by the suppliers upon 30 to 60 days' notice.
Management does not anticipate cancelation of these agreements.
18. SUBSEQUENT EVENTS:
During the first quarter of 1998, the Company purchased three additional
businesses providing services in its industry for a total consideration (subject
to certain adjustments) consisting of approximately $20.0 million in cash, $9.2
million aggregate principal amount of assumed debt, 807,828 shares of Common
Stock, and $0.4 million aggregate principal amount of convertible subordinated
notes. The Company used borrowings under the Credit Facility to fund the cash
portions of the purchase prices.
On the basis of management's preliminary analysis, the Company expects the
historical carrying values of the Acquired Businesses' assets and liabilities
will approximate fair value, but this analysis is subject to revision as more
information regarding asset and liability valuations becomes available. Of the
total purchase price paid for the Acquisitions, $11 million has been allocated
to net assets acquired, and the remaining $32 million has been recorded as
goodwill using these preliminary estimates.
The following table reflects, on an unaudited pro forma basis, the combined
operations of the Company as if the IPO, the SSI Merger, the Company's 1997
acquisitions of Acquired Businesses and certain other events and transactions
discussed under " -- Unaudited Pro Forma Combined Statements of Operations" in
Note 2 and the acquisitions in the first quarter of 1998 had taken place on
January 1, 1997. These pro forma results have been prepared for comparative
purposes only and do not purport to be
F-24
<PAGE>
INNOVATIVE VALVE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
indicative of the results of operations the Company would have obtained had
these events and transactions actually taken place when assumed, has obtained
since the dates of acquisition or may obtain in the future.
THREE MONTHS
YEAR ENDED ENDED
DECEMBER 31, 1997 MARCH 31, 1998
----------------- --------------
(UNAUDITED AND IN THOUSANDS)
Revenues................................ $ 162,259 $ 39,315
Income before income taxes.............. 5,886 2,034
Net income.............................. 3,355 1,160
Basic income per share.................. $ 0.39 $ 0.13
================= ==============
Diluted income per share................ $ 0.38 $ 0.13
================= ==============
See discussion of the pro forma statements, reflected in the above amounts
in Note 2 under "Unaudited Pro Forma Combined Statements of Operations."
F-25
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Innovative Valve Technologies, Inc.:
We have audited the accompanying consolidated balance sheet of Innovative
Valve Technologies, Inc. and subsidiaries (a Delaware corporation), as of
September 30, 1997, and the related consolidated statements of operations,
stockholders' deficit and cash flows for the period from inception (March 16,
1997) through September 30, 1997. These 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
Innovative Valve Technologies, Inc. and subsidiaries, as of September 30, 1997,
and the results of their operations and their cash flows for the period from
inception (March 16, 1997) through September 30, 1997, in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
March 10, 1998
F-26
<PAGE>
INNOVATIVE VALVE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET -- SEPTEMBER 30, 1997
ASSETS
CURRENT ASSETS:
Trade accounts receivable, net of
allowance of $46,578.............. $ 2,717,617
Inventories, net................... 1,647,347
Prepaid expenses and other......... 138,876
--------------
Total current assets.......... 4,503,840
PROPERTY AND EQUIPMENT, net............. 1,379,245
RECEIVABLE FROM THE SAFE SEAL COMPANY,
INC................................... 6,414,636
GOODWILL, net........................... 7,959,884
OTHER NONCURRENT ASSETS................. 2,085,042
--------------
$ 22,342,647
==============
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Short-term debt.................... $ 4,791,764
Current maturities of long-term
debt.............................. 818,993
Credit facility.................... 2,522,895
Accounts payable and accrued
expenses.......................... 9,904,055
--------------
Total current liabilities..... 18,037,707
CONVERTIBLE SUBORDINATED DEBT........... 6,143,180
OTHER LONG-TERM LIABILITIES............. 710,528
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIT:
Common stock, $0.001 par value,
30,000,000 shares authorized,
242,839 shares issued and
outstanding....................... 243
Additional paid-in capital......... 5,008,672
Retained deficit................... (7,557,683)
--------------
Total stockholders' deficit... (2,548,768)
--------------
$ 22,342,647
==============
The accompanying notes are an integral part of this consolidated financial
statement.
F-27
<PAGE>
INNOVATIVE VALVE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE PERIOD FROM INCEPTION (MARCH 16, 1997)
THROUGH SEPTEMBER 30, 1997
REVENUES............................. $ 2,414,324
COST OF OPERATIONS................... 1,749,628
--------------
Gross profit.................... 664,696
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES........................... 2,564,748
SPECIAL COMPENSATION EXPENSE......... 5,008,381
--------------
LOSS FROM OPERATIONS................. (6,908,433)
INTEREST EXPENSE..................... 638,638
OTHER EXPENSE........................ 10,612
--------------
LOSS FROM OPERATIONS BEFORE INCOME
TAXES.............................. (7,557,683)
PROVISION FOR INCOME TAXES........... --
--------------
NET LOSS............................. $ (7,557,683)
==============
The accompanying notes are an integral part of this consolidated financial
statement.
F-28
<PAGE>
INNOVATIVE VALVE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT
FOR THE PERIOD FROM INCEPTION (MARCH 16, 1997)
THROUGH SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
------------------ PAID-IN RETAINED
SHARES AMOUNT CAPITAL DEFICIT TOTAL
------- ------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
BALANCE, March 16, 1997.............. -- $ -- $ -- $ -- $ --
Issuance of Common Stock........ 242,839 243 2,840,973 -- 2,841,216
Issuance of stock options to
certain executives............ -- -- 2,167,699 -- 2,167,699
Net loss........................ -- -- -- (7,557,683) (7,557,683)
------- ------- ----------- ----------- -----------
BALANCE, September 30, 1997.......... 242,839 $ 243 $ 5,008,672 $(7,557,683) $(2,548,768)
======= ======= =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of this consolidated financial
statement.
F-29
<PAGE>
INNOVATIVE VALVE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM INCEPTION (MARCH 16, 1997)
THROUGH SEPTEMBER 30, 1997
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss................................ $ (7,557,683)
Adjustments to reconcile net loss to net
cash used in operating activities --
Depreciation and amortization...... 91,044
Special compensation expense....... 5,008,558
(Increase) decrease in --
Receivable from The Safe Seal
Company, Inc. ............... 362,612
Trade accounts receivable..... (974,753)
Inventories................... (285,565)
Prepaid expenses and other
current assets............... 79,924
Other noncurrent assets....... (3,135,829)
Accounts payable and accrued
expenses..................... 7,980,650
---------------
Net cash provided by operating
activities................... 1,568,958
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and
equipment......................... (549,812)
Net proceeds from property and
equipment sales................... (9,095)
Business acquisitions.............. (6,809,946)
---------------
Net cash used in investing
activities................... (7,368,853)
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings of debt................. 4,976,689
Borrowings under credit facility... 2,522,895
Proceeds from the issuance of
common stock...................... 357
Funding of deferred offering
costs............................. (1,700,046)
---------------
Net cash provided by financing
activities................... 5,799,895
NET CHANGE IN CASH...................... --
CASH, beginning of period............... --
---------------
CASH, end of period..................... $ --
===============
The accompanying notes are an integral part of this consolidated financial
statement.
F-30
<PAGE>
INNOVATIVE VALVE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION:
BACKGROUND
Innovative Valve Technologies, Inc. (the "Company" or "Invatec") was
established as a Delaware corporation on March 16, 1997, to create the leading
single-source provider of comprehensive maintenance, repair and value-added
distribution services for industrial valves and related process-system
components throughout North America. 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 "IPO") of its common
stock, par value $.001 per share ("Common Stock"), (ii) its purchase of two
value repair and distribution companies and (iii) a merger (the "SSI Merger")
in which The Safe Seal Company, Inc. ("SSI") became its subsidiary. Pursuant
to the SSI Merger each outstanding share of SSI common stock will be converted
into 1/2 of a share of Common Stock and the redemption of SSI preferred stock
for shares of Common Stock at the initial offering price of $13. Prior to the
SSI Merger, Invatec and SSI were under the common voting control of the trustee
of a voting trust establish in May 1997.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF PRESENTATION
The financial statements include the accounts of the Company and its wholly
owned subsidiaries. All significant intercompany accounts and transactions have
been eliminated in consolidation.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost, and depreciation is computed
using the straight-line method over the estimated useful lives of the assets.
The costs of major improvements are capitalized. Expenditures for maintenance,
repairs and minor improvements are expensed as incurred. When property and
equipment are sold or retired, the cost and related accumulated depreciation are
removed and the resulting gain or loss is included in results of operations.
GOODWILL
Goodwill represents the excess of the aggregate purchase price paid by the
Company in the acquisition of businesses accounted for as purchases over the
fair market value of the net assets acquired. Goodwill is amortized on a
straight-line basis over 40 years.
The Company periodically evaluates the recoverability of intangibles
resulting from business acquisitions and measures the amount of impairment, if
any, by assessing current and future levels of income and cash flows as well as
other factors, such as business trends and prospects and market and economic
conditions.
INCOME TAXES
Invatec follows the liability method of accounting for income taxes in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 109.
Under this method, deferred income taxes are recorded based upon differences
between the financial reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates and laws that will be in effect when the
underlying assets or liabilities are recovered or settled. Invatec has recorded
a full valuation allowance against all deferred tax assets due to the
uncertainty of ultimate realizability. Accordingly, no income tax benefit has
been recorded for current year losses.
SPECIAL COMPENSATION EXPENSE ON COMMON STOCK ISSUANCE
The Company recorded a special non-cash compensation expense of
approximately $2.8 million related to the issuance of 242,839 shares of Common
Stock to six members of executive management and a
F-31
<PAGE>
INNOVATIVE VALVE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
related party to attract such individuals and that party to effect the IPO (see
Note 1). For financial statement presentation purposes, these shares were valued
at approximately $11.70 per share.
SUPPLEMENTAL CASH FLOW INFORMATION
During the period from inception (March 16, 1997) through September 30,
1997, the Company had non-cash activities consisting of the assumption of
approximately $6,777,000 of notes issued by SSI in connection with SSI's
acquisition of Plant Specialties, Inc. ("Plant Specialties") and assumption of
the indebtedness (including accrued interest) owed to Philip.
The Company did not pay taxes or interest during the period from inception
through September 30, 1997.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
3. PROPERTY AND EQUIPMENT:
Property and equipment at September 30, 1997 consist of the following:
ESTIMATED DECEMBER 31,
USEFUL LIVES 1996
------------ --------------
Land................................. -- $ 167,095
Buildings............................ 30 years 610,952
Leasehold improvements............... 30 years 57,843
Furniture and fixtures............... 3-5 years 2,424,264
Machinery and equipment.............. 5 years 397,095
--------------
3,657,249
Less -- Accumulated
depreciation.................. (2,278,004)
--------------
Property and equipment, net..... $ 1,379,245
==============
4. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:
Accounts payable and accrued expenses at September 30, 1997 consist of the
following:
Accrued interest..................... 1,031,057
Accounts payable, trade.............. 6,851,078
Accrued compensation and benefits.... 441,075
Other accrued expenses............... 1,580,845
------------
$ 9,904,055
============
5. DEBT:
In June 1997, Invatec entered into a funding arrangement with Philip
pursuant to which Philip advanced funds to Invatec (the "Philip Advances") to
pay costs related to the IPO and Invatec assumed SSI's obligation to repay the
Philip Advances and the related deferred offering costs funded with the Philip
Advances. Pursuant to this arrangement, $2,128,935 of short-term debt and
$484,000 of accrued financing charges incurred by SSI prior to the funding
arrangement were transferred to Invatec. The Philip Advances
F-32
<PAGE>
INNOVATIVE VALVE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
have been included in short-term debt and bear interest at 8% per annum and may
be converted into Common Stock. The Philip Advances were due at the closing of
the IPO, and were repaid with Common Stock valued at the IPO initial offering
price of $13.
Long-term debt consists of a $853,186 note payable to a former stockholder
of Plant Specialties issued in connection with SSI's acquisition of Plant
Specialties. The note was assumed from SSI by Invatec in June 1997. The note
bears interest at 9.0% per annum and is secured by real estate. Principal and
interest was paid monthly and the note was paid in full in December 1997.
6. CONVERTIBLE SUBORDINATED NOTES PAYABLE:
At September 30, 1997, outstanding convertible subordinated debt consisted
of approximately $3.3 million aggregate principal amount of 5.0% notes due in
2002 (issued by SSI as part of the purchase price for PSI and thereafter assumed
by Invatec) and $2.8 million aggregate principal amount of 5.5% notes due in
2004 (issued by Invatec as part of the purchase price for Steam Supply). As a
result of the IPO, these notes are convertible into Common Stock, at the option
of the holders, at an initial conversion price of $16.90 per share.
7. CAPITAL STOCK AND STOCK OPTIONS:
COMMON STOCK
In connection with the organization and initial capitalization of Invatec,
Invatec issued and sold 242,839 shares of Common Stock in March and June 1997 to
certain members of its management and a related party for $357. For financial
statement presentation purposes, this Common Stock was valued at $11.70 per
share, resulting in a special non-cash compensation expense of $2,840,859.
PREFERRED STOCK
Invatec's charter authorizes the issuance of up to 5,000,000 shares of
preferred stock. As of September 30, 1997, no shares of preferred stock had been
issued.
1997 INCENTIVE PLAN
The Company has adopted an incentive plan (the "Plan") that provides for
the granting or awarding of stock options and other performance-based awards to
key employees, nonemployee directors and independent contractors of the Company
and its subsidiaries. In general, the terms of the options awards (including
vesting schedules) granted after the IPO will be established by the Compensation
Committee of the Company's board of directors. In August 1997, options to
purchase 202,589 shares of Common Stock were granted to certain members of
management at an exercise price of $1.00 per share, resulting in a special
non-cash non-recurring charge of approximately $2.2 million. As of October 27,
1997 Plan options to purchase approximately 1.3 million shares of Common Stock
were outstanding.
8. ACQUISITION OF STEAM SUPPLY:
In July 1997, Invatec acquired Steam Supply & Rubber Co., Inc. and three of
its affiliated companies (collectively, "Steam Supply") for total
consideration of $10.6 million, comprised of $2.7 million of cash, $2.8 million
aggregate principal amount of Invatec's seven-year 5.5% convertible subordinated
notes and the assumption of $5.1 million of debt and other non-current
liabilities. Invatec is accounting for this acquisition in accordance with the
purchase method of accounting, and the effective date of this acquisition is
July 31, 1997 for financial statement presentation purposes.
On June 29, 1997, in connection with the acquisition of Steam Supply, the
Company borrowed $2.0 million from Philip and paid the proceeds into escrow
pursuant to the definitive agreement to purchase Steam Supply. The note due to
Philip bears interest at Philip's borrowing rate plus 10.0% (approximately 18%
at June 30, 1997) and was paid upon the closing of the IPO.
F-33
<PAGE>
INNOVATIVE VALVE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. NEW ACCOUNTING PRONOUNCEMENT:
SFAS No. 123, "Accounting for Stock-Based Compensation," allows entities
to choose between a new fair-value-based method of accounting for employee stock
options or similar equity instruments and the current intrinsic-value-based
method of accounting prescribed by Accounting Principles Board Opinion No. 25
("APB No. 25"). Entities electing to remain with the accounting in APB No. 25
must make pro forma disclosures of net income and earnings per share as if the
fair value method of accounting had been applied. The Company will provide pro
forma disclosure of net income and earnings per share, as applicable, in the
notes to future consolidated financial statements.
10. ACQUISITIONS:
The Company has signed definitive agreements to acquire Industrial Controls
& Equipment, Inc. and three affiliated companies (collectively, "ICE/VARCO")
and Southern Valve Service, Inc. and one affiliated company (collectively,
"SVS"). The aggregate consideration the Company will pay in these acquisitions
is $11.1 million, comprised of $9.6 million in cash and assumed debt and $1.5
million in Common Stock valued for this purpose at the initial public offering
price per share in the IPO. The closings of these acquisitions are conditioned
on the completion of the IPO. The total consideration payable in each
acquisition is subject to an increase in total consideration contingent on the
operating results achieved in the first 12 months after acquisition. The
contingent payment for ICE/VARCO would consist of options to purchase 40,000
shares of Common Stock at an exercise price per share equal to the initial
public offering price of $13 per share, while the contingent payment for SVS
would be payable in a combination of Common Stock and cash in an amount that is
not presently determinable.
11. SUBSEQUENT EVENTS:
REVERSE STOCK SPLIT
In October 1997, Invatec effected a 0.68-for-one reverse stock split of
each share of Common Stock then outstanding. The accompanying financial
statements have been prepared as if such reverse split had been effected at
inception (March 16, 1997).
IPO AND MERGER
On October 28, 1997, Invatec (i) closed its IPO of its Common Stock and
(ii) consolidated seven established businesses providing various repair and
distribution services by means of two purchase transactions and a merger in
which its affiliate, SSI became its subsidiary.
F-34
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To The Safe Seal Company, Inc. and Subsidiaries:
We have audited the accompanying consolidated balance sheets of The Safe
Seal Company, Inc. (a Texas corporation) and subsidiaries, as of December 31,
1995 and 1996, and the related consolidated statements of operations,
stockholders' equity (deficit) and cash flows for each of the three years in the
period ended December 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
The Safe Seal Company, Inc. and subsidiaries, as of December 31, 1995 and 1996,
and the results of their operations and their cash flows for each of the three
years in the period ended December 31, 1996, in conformity with generally
accepted accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
February 14, 1997
F-35
<PAGE>
THE SAFE SEAL COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31
------------------------------
1995 1996
-------------- --------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash............................... $ 1,458,096 $ 396,637
Accounts receivable, net of
allowance of $25,000 and
$25,000........................... 485,911 535,647
Inventories........................ 17,480 36,140
Prepaid expenses and other current
assets............................ 45,477 111,638
-------------- --------------
Total current assets..... 2,006,964 1,080,062
PROPERTY AND EQUIPMENT, net............. 32,502 140,449
GOODWILL, net........................... -- --
PATENT COSTS, net....................... 56,833 741,611
OTHER NONCURRENT ASSETS, net............ 12,346 325,993
-------------- --------------
$ 2,108,645 $ 2,288,115
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
(DEFICIT)
CURRENT LIABILITIES:
Short-term debt.................... $ -- $ --
Current maturities of long-term
debt.............................. -- --
Accounts payable and accrued
expenses.......................... 1,184,086 1,092,891
Other current liabilities.......... -- --
-------------- --------------
Total current
liabilities.......... 1,184,086 1,092,891
LONG TERM DEBT, net of current
maturities............................ -- 588,970
PAYABLE TO INNOVATIVE VALVE
TECHNOLOGIES, INC..................... -- --
COMMITMENTS AND CONTINGENCIES
REDEEMABLE PREFERRED STOCK.............. 2,000,000 2,000,000
STOCKHOLDERS' EQUITY (DEFICIT):
Common stock, $0.01 par value,
10,000,000 shares authorized,
2,865,902 shares and 2,963,838
shares issued and outstanding..... 28,659 29,638
Additional paid-in capital......... 983,246 1,270,315
Retained deficit................... (2,087,346) (2,693,699)
-------------- --------------
Total stockholders'
equity (deficit)..... (1,075,441) (1,393,746)
-------------- --------------
$ 2,108,645 $ 2,288,115
============== ==============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-36
<PAGE>
THE SAFE SEAL COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31
--------------------------------------
1994 1995 1996
----------- ------------ -----------
REVENUES............................... $ 2,547,360 $ 2,852,356 $ 3,887,761
COST OF OPERATIONS..................... 1,270,788 1,583,940 2,375,245
----------- ------------ -----------
Gross profit.................. 1,276,572 1,268,416 1,512,516
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES............................. 1,267,899 1,852,895 1,917,063
SPECIAL COMPENSATION EXPENSE ON COMMON
STOCK ISSUANCE....................... -- -- 38,048
----------- ------------ -----------
Income (loss) from
operations.................. 8,673 (584,479) (442,595)
OTHER INCOME (EXPENSE):
Patent defense costs............... (168,705) (880,068) --
Interest income (expense), net..... (7,048) 10,181 27,703
Other.............................. (113,635) (50,126) 393
----------- ------------ -----------
(289,388) (920,013) 28,096
----------- ------------ -----------
LOSS BEFORE INCOME TAXES............... (280,715) (1,504,492) (414,499)
PROVISION (BENEFIT) FOR INCOME TAXES... -- -- --
----------- ------------ -----------
NET LOSS............................... $ (280,715) $ (1,504,492) $ (414,499)
=========== ============ ===========
The accompanying notes are an integral part of these consolidated financial
statements.
F-37
<PAGE>
THE SAFE SEAL COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
--------------------- PAID-IN RETAINED
SHARES AMOUNT CAPITAL DEFICIT TOTAL
--------- -------- ----------- ----------- --------------
<S> <C> <C> <C> <C> <C>
BALANCE, December 31, 1993........... 2,463,424 $ 24,634 $ 268,801 $ (249,016) $ 44,419
Preferred stock dividends....... -- -- -- (12,000) (12,000)
Issuance of common stock........ 62,478 625 22,345 -- 22,970
Conversion of redeemable
preferred stock to common
stock......................... 51,000 510 149,490 -- 150,000
Net loss........................ -- -- -- (280,715) (280,715)
--------- -------- ----------- ----------- --------------
BALANCE, December 31, 1994........... 2,576,902 25,769 440,636 (541,731) (75,326)
Preferred stock dividends....... -- -- -- (41,123) (41,123)
Sale of common stock warrant.... -- -- 100,000 -- 100,000
Issuance of common stock........ 289,000 2,890 442,610 -- 445,500
Net loss........................ -- -- -- (1,504,492) (1,504,492)
--------- -------- ----------- ----------- --------------
BALANCE, December 31, 1995........... 2,865,902 28,659 983,246 (2,087,346) (1,075,441)
Preferred stock dividends....... -- -- -- (191,854) (191,854)
Issuances of common stock....... 121,736 1,217 356,831 -- 358,048
Retirement of stock............. (23,800) (238) (69,762) -- (70,000)
Net loss........................ -- -- -- (414,499) (414,499)
--------- -------- ----------- ----------- --------------
BALANCE, December 31, 1996........... 2,963,838 $ 29,638 $ 1,270,315 $(2,693,699) $ (1,393,746)
========= ======== =========== =========== ==============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-38
<PAGE>
THE SAFE SEAL COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31
--------------------------------------
1994 1995 1996
----------- ------------ -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss........................... $ (280,715) $ (1,504,492) $ (414,499)
Adjustments to reconcile net loss
to net cash
provided by (used in) operating
activities --
Depreciation and
amortization................ 27,179 28,525 31,183
Special compensation expense on
issuance of common stock.... -- -- 38,048
(Gain) loss on sale of property
and equipment............... 13,196 (1,879) --
(Increase) decrease in --
Accounts receivable......... (87,683) (145,835) (49,736)
Inventories................. -- -- (13,660)
Prepaid expenses and other
current assets............ (23,767) 35,402 (66,161)
Other noncurrent assets..... (39,544) -- (324,246)
Increase (decrease) --
Accounts payable and accrued
expenses.................. 399,318 493,084 (91,195)
Payable to Innovative Valve
Technologies, Inc......... -- -- --
----------- ------------ -----------
Net cash provided by (used
in) operating
activities.............. 7,984 (1,095,195) (890,266)
----------- ------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and
equipment........................ (28,593) (7,530) (128,309)
Additions to patent costs.......... (75,570) (3,384) (46,030)
Proceeds from sale of property and
equipment........................ 40,000 10,500 --
Proceeds from sale of
investments...................... 53,107 -- --
Business acquisitions, net of cash
acquired of $135,109............. -- -- --
----------- ------------ -----------
Net cash used in investing
activities.............. (11,056) (414) (174,339)
----------- ------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings of debt................. 100,000 -- 265,000
Repayments of debt................. (31,667) (93,333) --
Proceeds from sale/exercise of
common stock warrant............. -- 100,000 --
Proceeds from sale of common
stock............................ -- 445,500 --
Stock repurchases.................. -- -- (70,000)
Proceeds from sale of redeemable
preferred stock.................. -- 2,000,000 --
Preferred stock dividends.......... (12,000) -- (191,854)
----------- ------------ -----------
Net cash provided by (used
in) financing
activities.............. 56,333 2,452,167 3,146
----------- ------------ -----------
NET INCREASE (DECREASE) IN CASH...... 53,261 1,356,558 (1,061,459)
CASH, beginning of period............ 48,277 101,538 1,458,096
----------- ------------ -----------
CASH, end of period.................. $ 101,538 $ 1,458,096 $ 396,637
=========== ============ ===========
The accompanying notes are an integral part of these consolidated financial
statements.
F-39
<PAGE>
THE SAFE SEAL COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION:
The Safe Seal Company, Inc. (the "Company" or "SSI") was incorporated
in the State of Texas in January 1991 and is principally engaged in the business
of providing on-line leak sealing and valve maintenance and repair services to
industrial customers in the Gulf Coast area of the United States.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF PRESENTATION
The financial statements include the accounts of the Company and its wholly
owned subsidiaries. All significant intercompany accounts and transactions have
been eliminated in consolidation.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost, and depreciation is computed
using the straight-line method over the estimated useful lives of the assets.
The costs of major improvements are capitalized. Expenditures for maintenance,
repairs and minor improvements are expensed as incurred. When property and
equipment are sold or retired, the cost and related accumulated depreciation are
removed and the resulting gain or loss is included in results of operations.
INCOME TAXES
The Company follows the liability method of accounting for income taxes in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 109.
Under this method, deferred income taxes are recorded based upon differences
between the financial reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates and laws that will be in effect when the
underlying assets or liabilities are recovered or settled.
REVENUE RECOGNITION
Revenue is recognized as products are sold and as services are performed.
CASH
Cash payments for interest during 1994, 1995 and 1996 were approximately
$7,000, $8,000 and $4,000, respectively.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
SPECIAL COMPENSATION EXPENSE ON COMMON STOCK ISSUANCE
In 1996, the Company recorded a special compensation expense of $38,048
related to the issuance of its common stock, $0.01 par value (the "Common
Stock"), and options to purchase Common Stock under employee benefit programs.
See Note 8 for further discussion.
In the six months ended June 30, 1997, the Company recorded a special
non-cash compensation expense of approximately $2.6 million on common stock
issuance related to the issuance of 443,190 shares of Common Stock to three
members of executive management and to Computerized Accounting & Tax Services,
Inc. ("CATS"), a related party owned by Roger L Miller (see Note 11), to
attract such individuals and CATS to effect the Offering (see Note 13). For
financial statement presentation purposes, these shares were valued at
approximately $5.85 per share.
F-40
<PAGE>
THE SAFE SEAL COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NEW ACCOUNTING PRONOUNCEMENT
Effective January 1, 1995, the Company adopted SFAS No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of." Accordingly, in the event that facts and circumstances indicate that
property and equipment, and intangible or other assets, may be impaired, an
evaluation of recoverability would be performed. If an evaluation is required,
the estimated future undiscounted cash flows associated with the asset are
compared to the asset's carrying amount to determine if a write-down to market
value or discounted cash flow value is necessary. Adoption of this standard did
not have a material effect on the financial position or results of operations of
the Company.
3. ACQUISITION OF THE SPIN SAFE CORPORATION, INC.:
In November 1996, the Company acquired The Spin Safe Corporation, Inc.
("Spin Safe") in exchange for 108,800 shares of Common Stock, valued at $2.94
per share, and noninterest-bearing notes payable of $400,000. The notes are due
in four equal annual installments beginning January 15, 1998. Additionally, the
Company entered into an agreement with the former stockholders of Spin Safe,
pursuant to which the Company will make royalty payments to them based on the
number of times in excess of a specified base the Safe SealE system is used by
the Company through 2011. The cost of this acquisition is recorded as patent
costs.
4. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following:
DECEMBER 31
ESTIMATED ----------------------
USEFUL LIVES 1995 1996
------------ ---------- ----------
Vehicles............................. 5 years $ -- $ 5,904
Furniture and fixtures............... 3-5 years 41,423 126,262
Machinery and equipment.............. 5 years 17,180 54,746
---------- ----------
58,603 186,912
Less -- Accumulated
depreciation.................. (26,101) (46,463)
---------- ----------
Property and equipment, net..... $ 32,502 $ 140,449
========== ==========
5. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:
Activity in the Company's allowance for doubtful accounts consists of the
following:
DECEMBER 31
-------------------------------
1994 1995 1996
--------- --------- ---------
Balance, at beginning of year........ $ 25,000 $ 25,000 $ 25,000
Additions............................ -- -- --
Deductions........................... -- -- --
--------- --------- ---------
Balance, at end of year.............. $ 25,000 $ 25,000 $ 25,000
========= ========= =========
F-41
<PAGE>
THE SAFE SEAL COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Accounts payable and accrued expenses consist of the following:
DECEMBER 31
--------------------------
1995 1996
------------ ------------
Accounts payable, trade.............. $ 278,457 $ 287,165
Accrued compensation and benefits.... 74,583 120,567
Accrued legal fees................... 593,311 170,696
Accrued dividends.................... 65,123 47,500
Accrued royalties.................... 56,833 70,117
Due to Philip Services Corp.
subsidiary ........................ -- 287,195
Other accrued expenses............... 115,779 109,651
------------ ------------
$ 1,184,086 $ 1,092,891
============ ============
6. LONG-TERM DEBT:
Long-term debt consists of the following at December 31, 1996:
Revolving line of credit payable to a
bank, due June 30, 2002, with
interest due monthly at 1.25% over
cost (as defined) (6.75% at
December 31, 1996), secured by
assignment of all assets. The
available borrowing capacity at
December 31, 1996 was
$1,735,000......................... $ 265,000
Notes payable to former stockholders
of Spin Safe, with annual
installments of $100,000 beginning
January 15, 1998, non-interest
bearing, due January 15, 2001,
unsecured.......................... 323,970
----------
$ 588,970
==========
7. INCOME TAXES:
Actual income tax expense differs from income tax expense computed by
applying the U.S. federal statutory corporate tax rate to income before income
taxes as follows:
YEAR ENDED DECEMBER 31
-------------------------------------
1994 1995 1996
----------- ----------- -----------
Statutory federal income tax
benefit............................ (34)% (34)% (34)%
Valuation allowance.................. 34 34 34
--- --- ---
Effective income tax rate............ 0% 0% 0%
=== === ===
Net deferred tax assets consist of the following:
DECEMBER 31
--------------------------
1995 1996
------------ ------------
Current deferred tax assets.......... $ 135,741 $ 160,910
Noncurrent deferred tax assets....... 581,536 686,316
Valuation allowance.................. (717,277) (847,226)
------------ ------------
Total deferred tax
assets.................. $ -- $ --
============ ============
The Company records a valuation allowance for deferred tax assets when
management believes it is more likely than not the asset will not be realized.
Because of the Company's history of generating significant taxable losses, a
valuation allowance equal to its deferred tax assets has been established.
F-42
<PAGE>
THE SAFE SEAL COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Deferred income tax provisions result from temporary differences in the
recognition of income and expenses for financial reporting purposes and for tax
purposes. The tax effects of these temporary differences representing deferred
tax assets and liabilities result principally from the following:
YEAR ENDED DECEMBER 31
--------------------------------------
1994 1995 1996
---------- ------------ ------------
Depreciation and amortization........ $ (15,235) $ 53,093 $ (2,520)
Net operating loss................... 74,051 304,600 107,301
Accrued expenses not deducted for
tax................................ -- 95,065 25,168
Change in valuation allowance........ (58,816) (452,758) (129,949)
---------- ------------ ------------
$ -- $ -- $ --
========== ============ ============
8. STOCKHOLDERS' EQUITY:
COMMON STOCK
In 1995, the Company implemented an employee benefit award program. Under
this program, the Company awarded 9,452 shares of Common Stock to employees. The
shares vested 50 percent at December 31, 1996, and the remainder were to become
fully vested on December 31, 1997. The Company recorded compensation expense,
equal to the fair value of the shares, on the date the shares vested. During
1996, 1,632 shares were forfeited by employees. In 1996, the Company recorded
non-cash compensation expense of $11,500 for the 3,910 shares that vested
related to this program, which was discontinued in 1997, and all remaining
unvested shares were cancelled.
STOCK OPTIONS
In 1996, the Company began a management stock option program that was
discontinued in 1997. Under this program, the Company granted both shares of
Common Stock and options to purchase shares of Common Stock to certain members
of management. The options vested monthly and were exercisable at any time
following the six-month period ending June 30 or December 31 in which the
options were earned. The Company had reserved 400,000 shares of Common Stock for
issuance in this program. During 1996, the Company granted 9,026 shares of
Common Stock and options to purchase 143,798 shares of Common Stock. The options
had an exercise price of $5.00 per share and are exercisable through July 1,
2001. In 1996, the Company recorded non-cash compensation expense of $26,548 for
the 9,026 shares issued with a fair market value of $2.94 per share. No
compensation expense was recorded for the options granted in 1996 because their
exercise price exceeded the fair market value of the underlying shares ($2.94
per share). Prior to 1996, the Company had, from time to time, granted options
to key employees at or above the market value of the Common Stock. The options
granted had exercise prices ranging from $2.50 to $10.00 per share. All but
100,000 options expired in 1996. The remaining options were exercised in June
1997.
The Company accounts for options by applying APB Opinion No. 25, under
which no compensation expense has been recognized. The Company's pro forma
compensation expense is zero as options were determined to be without value
under SFAS No. 123, "Accounting for Stock-Based Compensation," using the
minimum value option method with the following assumptions, as prescribed by
SFAS No. 123:
Remaining life.......................... 4.5 years
Exercise price.......................... $5.00/share
Risk-free rate of return................ 7%
F-43
<PAGE>
THE SAFE SEAL COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A summary of the stock options at December 31, 1996 and changes during the
three years then ended is presented in the table and narrative below:
WEIGHTED-
SHARES UNDER AVERAGE
OPTION EXERCISE PRICE
------------- ---------------
Balance at December 31, 1993......... 27,000 $ 10.00
Granted......................... 215,000 6.16
-------------
Balance at December 31, 1994......... 242,000 6.59
Granted......................... -- --
Exercised....................... -- --
-------------
Balance at December 31, 1995......... 242,000 6.59
Granted......................... 143,798 5.00
Exercised....................... -- --
Cancelled....................... (142,000) 9.47
-------------
Balance at December 31, 1996......... 243,798 3.97
=============
Available for grant at December 31,
1996................................. 256,202
=============
Shares exercisable at December 31,
1996................................. 243,798 3.97
=============
The options outstanding at December 31, 1996 have exercise prices from
$2.50 to $5.00 per share, with a weighted average exercise price of $3.97 and a
weighted average remaining contractual life of three years. All these options
are exercisable.
WARRANTS
In 1995, the Company sold to a subsidiary of Philip Services Corp.
(collectively with its subsidiaries, "Philip") a warrant entitling Philip to
purchase newly issued shares of Common Stock in such number as would equal 35
percent of the outstanding Common Stock, on a fully diluted basis, at $3.68 per
share. During 1996, the Company granted Philip a warrant to purchase additional
newly issued shares of Common Stock in such number as would equal 1.5 percent of
outstanding Common Stock, on a fully diluted basis, at $3.68 per share. The
warrants were exercisable, at Philip's discretion, through January 8, 1999. In
September 1996, the Company agreed to adjust the warrants' exercise price to
$3.16 in return for accelerated exercise and on January 31, 1997, Philip
exercised the warrants. Consideration for the exercise of the warrants consisted
of the issuance of approximately $3.3 million of promissory notes issued by
Philip (the "Philip Notes") and cash of approximately $1,216,855 paid during
the six months ended June 30, 1997. The exercise of these warrants and issuance
of the promissory notes occurred concurrently with the Company's purchase of
Harley Industries, Inc. ("Harley") (see Note 12), in connection with which the
Company assigned the Philip Notes to the sellers of Harley.
In 1995, the Company granted a consultant a warrant entitling its holder to
purchase 15,000 shares of Common Stock at $10.00 per share. The warrant is
exercisable, at the option of its holder, through the year 2000. The consultant
subsequently became an officer of Philip and a director of the Company.
STOCK REPURCHASES
In December 1996, the Company purchased 23,800 shares of Common Stock from
certain stockholders for total cash consideration of $70,000 ($2.94 per share).
The shares repurchased by the Company were subsequently canceled.
F-44
<PAGE>
THE SAFE SEAL COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. REDEEMABLE PREFERRED STOCK:
In 1995, the Company authorized the issuance of 1,000,000 shares of
preferred stock with a par value of $0.01 per share. Of the authorized shares,
20,000 were designated as Class A redeemable preferred stock (the "Class A
Preferred Stock"). Holders of Class A Preferred Stock are entitled to receive
preferential dividends, in cash or Common Stock (with an agreed value of $1.84
per common share), at an annual rate of $9.50 per share. The Company is required
to redeem the Class A Preferred Stock at $100 per share by October 12, 1999. The
Company sold the Class A Preferred Stock in 1995 for $2,000,000 to Philip.
10. COMMITMENTS AND CONTINGENCIES:
OPERATING LEASES
The Company leases warehouse space, office facilities and vehicles under
noncancelable leases. Rental expense for 1994, 1995 and 1996 was approximately
$91,700, $90,300 and $162,400, respectively. The following represents future
minimum rental payments under noncancelable operating leases:
Year ending December 31 --
1997............................... $ 133,900
1998............................... 102,300
1999............................... 52,400
2000............................... 28,800
2001............................... 24,000
Thereafter......................... --
----------
$ 341,400
==========
LITIGATION
In the ordinary course of its business, the Company has become involved in
various legal actions. Management does not believe that the outcome of these
legal actions will have a material effect on the Company's financial position or
results of operations.
11. CERTAIN TRANSACTIONS:
The Company has had a management agreement with CATS, an entity related by
common ownership. Management fee expense for 1994, 1995 and 1996 was
approximately $119,000, $120,000 and $108,000, respectively. This agreement was
terminated in 1997.
12. ACQUISITION OF HARLEY:
Effective January 31, 1997, the Company acquired all the outstanding stock
of Harley in a purchase transaction. Concurrent with the purchase of Harley, the
Company sold a division of Harley ("Harley Equipment") for $1.9 million in
cash and a receivable of $1.9 million, subject to final adjustment. The total
purchase price for Harley was $14.0 million of cash and assumed debt, including
a contingent cash payment of $1.0 million due upon the completion of the
Offering and $3.3 million of notes issued by Philip (see Note 8) and excluding
$3.8 million in cash and notes received from the sale of Harley Equipment.
Harley is principally engaged in the repair and distribution of valves, gauges,
measurement instruments and related parts for chemical manufacturing and power
industries located primarily in the midwestern and southeastern United States.
F-45
<PAGE>
THE SAFE SEAL COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
13. SUBSEQUENT EVENTS (UNAUDITED):
REVERSE STOCK SPLIT
In October 1997, the Company effected a 0.68-for-one reverse stock split of
the outstanding Common Stock. The accompanying financial statements have been
prepared as if such reverse split had been effected as of the beginning of the
earliest period presented.
ACQUISITIONS
Effective February 28, 1997, SSI acquired all the outstanding stock of GSV,
Inc. ("GSV") in a purchase transaction for approximately $7.3 million of cash
and debt assumed. GSV machines, repairs and sells valves and valve components in
Florida.
Effective May 31, 1997, SSI acquired all the outstanding stock of Plant
Specialties, Inc. ("Plant Specialties") and certain assets and real estate
owned by a former stockholder of Plant Specialties in a purchase transaction for
total consideration of $7.6 million, which consisted of $3.4 million in cash and
assumed debt, the issuance of $3.3 million of convertible notes and the issuance
of a $0.9 million note secured by real property. In June 1997, Innovative Valve
Technologies, Inc. ("Invatec"), a related party (see below), assumed the
Company's obligations on these notes. Plant Specialties sells and repairs valves
and instrumentation and provides engineering services to petrochemical and
oilfield industries in Louisiana and the Gulf Coast area.
The following table reflects, on an unaudited pro forma basis, the combined
operations of SSI, Harley, GSV and Plant Specialties, as if the acquisition of
these companies (the "Acquisitions") had taken place on January 1, 1996.
Adjustments have been made to reflect the accounting basis used in recording the
Acquisitions. These pro forma results have been prepared for comparative
purposes only and do not purport to be indicative of the results of operations
the Company would have obtained had the Acquisitions taken effect on January 1,
1996, has obtained since the date of acquisition or may obtain in the future.
YEAR ENDED
DECEMBER 31,
1996
------------
(UNAUDITED
AND IN
THOUSANDS)
Revenues............................. $ 45,670
Income before income taxes........... 2,551
Net income........................... 1,036
To partially fund the Acquisitions, the Company entered into two separate
credit facilities (the "Facilities"). One of the Facilities provides for loans
of approximately $17.5 million, consisting of $7.5 million of fixed-term loans
($4.8 million of which have been guaranteed by Philip) and up to $10.0 million
of revolving credit loans keyed to a borrowing base of, and secured by, accounts
receivable and inventories. The other Facility is a $7.0 million advancing line
of credit which has been guaranteed by Philip. As of June 30, 1997,
approximately $19.1 million was outstanding under the Facilities, including
approximately $1.4 million of current maturities. The Company anticipates that
the Facilities will be replaced with a new credit facility after the Merger and
Offering described below.
RELATIONSHIP WITH INVATEC
In March 1997, certain holders of the outstanding Common Stock organized
Invatec to become the Company's parent corporation by means of a merger (the
"Merger") to be effected concurrently with the closing by Invatec of an
initial public offering (the "Offering") of its common stock (the "Invatec
Common Stock"). As a result of the Merger, the outstanding Class A Preferred
Stock and Common Stock will be converted into the right to receive shares of
Invatec Common Stock.
F-46
<PAGE>
THE SAFE SEAL COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Since May 1997, the Company and Invatec have been under the common control
of a voting trustee pursuant to voting trust agreements covering a majority of
the outstanding Common Stock and most outstanding shares of Invatec Common
Stock.
RELATIONSHIP WITH PHILIP
In 1996, Philip agreed to make certain advances (the "Philip Advances")
to the Company to enable the Company, or its successors, to pursue a possible
initial public offering. At December 31, 1996, the Company owed Philip $287,195
under this agreement, and the Company's other noncurrent assets included
$259,929 representing deferred offering costs funded with the Philip Advances.
As a result of Philip's financial support of the Company's acquisition of
Harley, Philip became a related party of the Company for financial statement
presentation purposes effective January 31, 1997.
In June 1997, Invatec entered into a funding arrangement with Philip
pursuant to which Philip has advanced funds to Invatec to pay costs related to
the Offering and Invatec has assumed the Company's obligation to repay the
Philip Advances and the related deferred offering costs funded with the Philip
Advances. Pursuant to that agreement, $2,128,935 of short-term debt and $484,000
of accrued financing charges were transferred to Invatec.
14. SUPPLEMENTAL UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION:
Concurrently with the Merger and the closing of the Offering, Invatec
acquired in separate purchase transactions (i) Industrial Controls & Equipment,
Inc. and three affiliated companies (collectively, "ICE/VARCO") and (ii)
Southern Valve Service, Inc. and one affiliated company (collectively, "SVS").
In July 1997, Invatec acquired in a purchase transaction Steam Supply & Rubber
Co., Inc. and three of its affiliates (collectively, "Steam Supply" and,
together with ICE/VARCO, SVS, Harley, GSV and Plant Specialties, the "Acquired
Businesses"). For financial statement presentation purposes, the Company is the
"accounting acquirer" of the Acquired Businesses, and the following
supplemental unaudited pro forma combined financial information gives effect to
the acquisitions as if they had taken place on January 1, 1996 and as restated
to convert the results of operations of Acquired Businesses whose historical
fiscal periods were not on a calendar year basis to a calendar year basis. The
combined results of operations for the periods presented below do not purport to
be comparable to and may not be indicative of the Company's post-combination
results of operations because (i) SSI and the Acquired Businesses were not under
common control or management and (ii) a new basis of accounting was established
to record the purchase of the Acquired Businesses under the purchase method of
accounting.
YEAR ENDED
DECEMBER 31, 1996
-----------------
(UNAUDITED AND
IN THOUSANDS)
Revenues............................. $77,508
Cost of operations................... 54,613
-----------------
Gross profit......................... 22,895
Selling, general and administrative
expenses........................... 19,307
-----------------
Income from operations............... $ 3,588
=================
15. EVENTS SUBSEQUENT TO DATE OF AUDITOR'S REPORT (UNAUDITED)
On October 28, 1997, Invatec (i) closed its initial public offering of its
common stock and (ii) consolidated seven established businesses providing
various repair and distribution services by means of two purchase transactions
and a merger in which its affiliate SSI, became its subsidiary.
F-47
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Harley Industries, Inc.:
We have audited the accompanying consolidated balance sheets of Harley
Industries, Inc. and subsidiaries as of October 31, 1995 and 1996, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the three years in the period ended October 31, 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Harley Industries, Inc. and
subsidiaries as of October 31, 1995 and 1996, and the results of their
operations and their cash flows for each of the three years in the period ended
October 31, 1996 in conformity with generally accepted accounting principles.
As discussed in Note 2, in December 1996 the Company's stockholders entered
into agreements for the sale of the Company's outstanding common stock.
Deloitte & Touche LLP
Tulsa, Oklahoma
January 17, 1997
(January 31, 1997 as to Notes 2 and 7)
F-48
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
Harley Industries, Inc.:
We have audited the accompanying consolidated statement of operations,
stockholders' equity and cash flows of Harley Industries, Inc. and subsidiaries
for the period from November 1, 1996 through January 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 audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated results of operations and cash flows
of Harley Industries, Inc. and subsidiaries for the period from November 1, 1996
through January 31, 1997, in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Houston, Texas
March 19, 1998
F-49
<PAGE>
HARLEY INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
OCTOBER 31
------------------------------
1995 1996
-------------- --------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash............................... $ 21,738 $ 37,250
Accounts receivable, less allowance
for doubtful accounts of $100,000
and $117,000...................... 3,394,506 4,391,442
Inventories........................ 3,612,653 3,258,243
Prepaid expenses and other current
assets............................ 40,141 33,358
Deferred income tax assets......... 151,000 315,000
-------------- --------------
Total current assets.......... 7,220,038 8,035,293
NET ASSETS OF DISCONTINUED OPERATIONS... 3,876,294 3,114,979
PROPERTY, PLANT AND EQUIPMENT -- Net.... 1,731,368 2,630,489
OTHER ASSETS............................ 1,710,279 1,825,809
-------------- --------------
$ 14,537,979 $ 15,606,570
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued
expenses.......................... $ 1,731,291 $ 2,424,408
Current portion of long-term
debt.............................. 445,528 477,309
Current portion of non-compete
obligations....................... 142,617 151,504
-------------- --------------
Total current liabilities..... 2,319,436 3,053,221
LONG-TERM DEBT.......................... 7,653,798 8,245,087
OBLIGATIONS UNDER NON-COMPETE
AGREEMENTS............................ 267,490 112,809
-------------- --------------
Total liabilities............. 10,240,724 11,411,117
-------------- --------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, $.01 stated value:
Authorized, 3,000,000 shares;
issued and outstanding, 780,428
shares.......................... 7,804 7,804
Additional paid-in capital......... 5,555,273 5,555,273
Accumulated deficit................ (1,265,822) (1,367,624)
-------------- --------------
Total stockholders' equity.... 4,297,255 4,195,453
-------------- --------------
$ 14,537,979 $ 15,606,570
============== ==============
</TABLE>
See notes to consolidated financial statements.
F-50
<PAGE>
HARLEY INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED OCTOBER 31 ENDED
---------------------------------------------- JANUARY 31,
1994 1995 1996 1997
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
REVENUES................................ $ 16,621,198 $ 18,990,013 $ 21,391,102 $5,987,992
COST OF OPERATIONS...................... 12,325,705 14,024,693 15,447,669 4,415,807
-------------- -------------- -------------- --------------
Gross profit....................... 4,295,493 4,965,320 5,943,433 1,572,185
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES.............................. 4,530,176 4,383,840 5,563,334 1,845,477
-------------- -------------- -------------- --------------
Income (loss) from operations...... (234,683) 581,480 380,099 (273,292)
INTEREST EXPENSE........................ 408,518 539,215 527,188 152,660
-------------- -------------- -------------- --------------
INCOME (LOSS) FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES................... (643,201) 42,265 (147,089) (425,952)
PROVISION (BENEFIT) FOR INCOME TAXES.... (270,000) 15,000 (57,000) (150,212)
-------------- -------------- -------------- --------------
INCOME (LOSS) FROM CONTINUING
OPERATIONS............................ (373,201) 27,265 (90,089) (275,740)
INCOME (LOSS) FROM DISCONTINUED
OPERATIONS, NET OF PROVISION (BENEFIT)
FOR TAXES OF $180,800, $35,000,
$(9,000) and $(33,991)................ 265,044 58,719 (11,713) (53,166)
-------------- -------------- -------------- --------------
NET INCOME (LOSS)....................... $ (108,157) $ 85,984 $ (101,802) $ (328,906)
============== ============== ============== ==============
</TABLE>
See notes to consolidated financial statements.
F-51
<PAGE>
HARLEY INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
------------------ PAID-IN ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT EQUITY
--------- ------ ------------ -------------- -------------
<S> <C> <C> <C> <C> <C>
BALANCE, OCTOBER 31, 1993............ 786,428 $7,864 $ 5,781,034 $ (1,243,649) $ 4,545,249
Purchase and retirement of
treasury stock................ (6,000) (60) (30,761) -- (30,821)
Capital distributions........... -- -- (60,000) -- (60,000)
Net loss........................ -- -- -- (108,157) (108,157)
--------- ------ ------------ -------------- -------------
BALANCE, OCTOBER 31, 1994............ 780,428 7,804 5,690,273 (1,351,806) 4,346,271
Capital distributions........... -- -- (135,000) -- (135,000)
Net income...................... -- -- -- 85,984 85,984
--------- ------ ------------ -------------- -------------
BALANCE, OCTOBER 31, 1995............ 780,428 7,804 5,555,273 (1,265,822) 4,297,255
Net loss........................ -- -- -- (101,802) (101,802)
--------- ------ ------------ -------------- -------------
BALANCE, OCTOBER 31, 1996............ 780,428 7,804 5,555,273 (1,367,624) 4,195,453
Net loss........................ -- -- -- (328,906) (328,906)
--------- ------ ------------ -------------- -------------
BALANCE, JANUARY 31, 1997............ 780,428 $7,804 $ 5,555,273 $ (1,696,530) $ 3,866,547
========= ====== ============ ============== =============
</TABLE>
See notes to consolidated financial statements.
F-52
<PAGE>
HARLEY INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS
YEARS ENDED OCTOBER 31 ENDED
------------------------------------------ JANUARY 31,
1994 1995 1996 1997
------------ ------------- ------------- --------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)................... $ (108,157) $ 85,984 $ (101,802) $ (328,906)
Reconciliation of net income (loss)
to net cash provided by (used in)
operating activities:
Discontinued operations........... (265,044) (58,719) 11,713 53,166
Depreciation and amortization..... 493,708 519,793 535,212 156,135
(Gain) loss on sale of property,
plant and equipment............ -- 610 (15,187) --
Deferred taxes.................... (214,000) 15,000 (166,000) (64,000)
Changes in operating assets and
liabilities:
Accounts receivable............ (558,983) (465,426) (996,936) 904,159
Inventories.................... (80,862) 120,375 322,954 (344,443)
Prepaid expenses and other
current assets............... 35,680 31,060 6,783 (77,331)
Other non-current assets....... -- (22,620) 7,870 (37,220)
Accounts payable and accrued
expenses..................... 44,271 237,673 693,117 (775,557)
------------ ------------- ------------- --------------
Net cash provided by (used
in) operating activities
of:
Continuing operations...... (653,387) 463,730 297,724 (513,997)
Discontinued operations.... (150,395) (264,084) 669,702 (803,582)
------------ ------------- ------------- --------------
Net cash provided by
(used in) operating
activities............ (803,782) 199,646 967,426 (1,317,579)
------------ ------------- ------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of business................ -- -- (1,382,470) --
Capital expenditures................ (488,195) (156,373) (73,694) (1,275)
Proceeds from sale of property,
plant, and equipment.............. -- 23,952 26,974 3,599
------------ ------------- ------------- --------------
Net cash provided by (used in)
investing activities......... (488,195) (132,421) (1,429,190) 2,324
------------ ------------- ------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (repayments) under
revolving credit agreements....... 1,126,050 168,233 1,071,827 1,354,949
Principal payments on other
long-term debt.................... (1,595,682) (363,045) (448,757) --
Borrowings under term loan
agreements........................ 1,988,573 400,000 -- --
Principal payments on non-compete
obligations....................... (131,001) (138,175) (145,794) (37,694)
Purchase and retirement of treasury
stock............................. (30,821) -- -- --
Capital distributions............... (60,000) (135,000) -- --
------------ ------------- ------------- --------------
Net cash provided by (used in)
financing activities......... 1,297,119 (67,987) 477,276 1,317,255
------------ ------------- ------------- --------------
INCREASE (DECREASE) IN CASH............. 5,142 (762) 15,512 2,000
CASH, BEGINNING OF PERIOD............... 17,358 22,500 21,738 37,250
------------ ------------- ------------- --------------
CASH, END OF PERIOD..................... $ 22,500 $ 21,738 $ 37,250 $ 39,250
============ ============= ============= ==============
</TABLE>
See notes to consolidated financial statements.
F-53
<PAGE>
HARLEY INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED OCTOBER 31, 1994, 1995, 1996 AND THREE MONTHS ENDED JANUARY 31, 1997
1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Harley
Industries, Inc. (the "Company") and its operative divisions, Harley Equipment
and Harley Valve and Instrument Company ("Harley Valve"), and other minor
subsidiaries. All material intercompany profits, transactions and balances have
been eliminated.
DESCRIPTION OF BUSINESS
The Company conducts its business activities through two operating
divisions, Harley Equipment and Harley Valve. Harley Equipment sells, customizes
and repairs engines, industrial vehicles, pumps and related parts. Harley Valve
customizes, repairs, tests and sells valves, gauges, measurement instruments and
related parts. The Company's principal customers are in the aircraft, chemical
manufacturing and power industries located primarily in the midwestern and
southeastern United States. The majority of sales of products and service
billings are made on account to customers based on pre-approved unsecured credit
terms determined by the Company. Allowances for uncollectible accounts are
established based on several factors which include, but are not limited to,
analysis of specific customers, historical trends, current economic conditions
and other information.
BASIS OF PRESENTATION
Due to the transactions described in Note 2, the accompanying consolidated
financial statements reflect the Company's Harley Equipment division as a
discontinued operation.
CASH
Cash consists of cash on hand and on deposit in banks.
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out method) or
market. Inventories not expected to be sold or utilized within one year are
recorded at estimated net realizable values and are included in the financial
statements as non-current assets.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are reported at cost, net of accumulated
depreciation. Depreciation is computed using the straight-line method based on
the estimated useful lives of the related assets, which are 15 to 30 years for
buildings, 7 years for machinery and equipment, 3 to 5 years for furniture and
fixtures and 3 years for other assets. During 1996 the Company determined the
estimated useful lives of certain of its buildings should be extended from 15
years to 30 years. The effect of this change in estimate was to decrease
depreciation expense and the net loss for the year ended October 31, 1996 by
approximately $52,000 and $31,200, respectively.
INTANGIBLE ASSETS
Intangible assets are reported at cost, net of accumulated amortization.
The costs of non-compete agreements entered into in connection with acquisitions
of businesses are amortized on the straight-line basis over their ten- and
five-year terms. Other intangible assets consist of the excess of cost over the
fair value of the net assets of acquired businesses, which is amortized on the
straight-line basis over 40 years. Management periodically evaluates the
recoverability of intangible asset carrying values based on projected operations
and other relevant factors of the acquired businesses. No valuation reserves
have been provided as a result of these evaluations. Amortization expense was
$171,720, $179,220, $172,426 and $40,431 for the years ended October 31, 1994,
1995, 1996 and the three months ended January 31, 1997, respectively.
F-54
<PAGE>
HARLEY INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NEW ACCOUNTING STANDARD
The Company has adopted, effective November 1, 1995, the provisions of
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of".
Accordingly, in the event that facts and circumstances indicate that property
and equipment, and intangible or other assets, may be impaired, an evaluation of
recoverability would be performed. If an evaluation is required, the estimated
future undiscounted cash flows associated with the asset are compared to the
asset's carrying amount to determine if a write-down to market value or
discounted cash flow value is necessary. Adoption of this standard did not have
a material effect on the financial position or results of operations of the
Company.
REVENUE RECOGNITION
Revenue on sales of products is recognized upon shipment to customers.
Revenue on service work is recognized upon completion of the service.
INCOME TAXES
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("FAS
109"). Under FAS 109, deferred income taxes reflect the net tax effects of (a)
temporary differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes, and
(b) operating loss and tax credit carryforwards.
MANAGEMENT ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the balance sheet date and
the reported amounts of revenue and expenses during the reporting period. Actual
results will be determined based on the outcome of future events and could
differ from the estimates.
2. SUBSEQUENT EVENTS AND DISCONTINUED OPERATIONS
In December 1996, the Company's stockholders entered into agreements with
The Safe Seal Company, Inc. ("Safe Seal") under which Safe Seal acquired 100%
of the outstanding common stock of the Company effective January 31, 1997 for
cash and notes of approximately $8,600,000, including a $1,000,000 cash payment
due upon the successful completion of a public stock offering by Safe Seal or
its successor company. Concurrent with the acquisition, Safe Seal entered into
an agreement to transfer certain assets and certain liabilities to Harley
Equipment and sell the stock of Harley Equipment for cash and notes to an
employee/minority stockholder of the Company. The Company's primary bank debt,
which was recorded on the records of Harley Equipment, was transferred to Harley
Valve and refinanced by Safe Seal (Note 7) in conjunction with the sale and
purchase transactions described above. The ultimate Harley Equipment purchase
price, estimated to be $3,100,000 to $3,800,000, will be based on the historical
carrying values of such assets and liabilities as of January 31, 1997 and is
subject to adjustment by the parties. Subsequent to January 31, 1997, the
parties entered into discussions to determine the final adjustments to the
purchase price. The Company believes that the ultimate adjustment made to the
purchase price will not have a material impact on the Company's financial
position or results of operation. For financial reporting purposes, the net
assets, results of operations and cash flows of Harley Equipment are included in
the Company's consolidated financial statements as discontinued operations.
Harley Equipment had revenues of $10,240,000, $10,318,000, $11,301,000 and
$2,518,000 for the years ended October 31, 1994, 1995,
F-55
<PAGE>
HARLEY INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1996 and the three months ended January 31, 1997, respectively. Net assets of
these discontinued operations at October 31, 1995 and 1996 are as follows:
OCTOBER 31
--------------------------
1995 1996
------------ ------------
Current assets.......................... $ 3,245,417 $ 3,581,497
Property, plant and equipment -- net.... 630,563 583,052
Other assets............................ 751,241 635,227
------------ ------------
Total assets.................. 4,627,221 4,799,776
Current liabilities..................... 750,927 1,684,797
------------ ------------
Net assets.................... $ 3,876,294 $ 3,114,979
============ ============
This historical financial information may not necessarily be indicative of
the conditions that would have existed if Harley Equipment had been operated as
an unaffiliated entity.
Interest expense has been allocated to discontinued operations based on the
ratio of net assets of discontinued operations to consolidated net assets.
Interest expense of $163,431, $245,057, $208,491 and $75,966 has been allocated
to discontinued operations in 1994, 1995, 1996 and the three months ended
January 31, 1997, respectively. Interest payments for the Company were $552,095,
$787,795, $735,632 and $164,826 in 1994, 1995, 1996 and the three months ended
January 31, 1997, respectively. In addition, certain additional compensation of
$475,000 (Note 13), which will be paid from the assets of Harley Equipment, has
been allocated to discontinued operations in 1996.
The Company's stockholders have indemnified Safe Seal for various
contingencies, including environmental and income tax matters. The stockholders
have also entered into agreements not-to-compete with Safe Seal.
3. PURCHASE OF VALVE BUSINESS
Effective June 4, 1996, the Company acquired certain assets of Henze
Services, Inc. for cash and direct acquisition costs of $1,382,470. The assets
acquired consisted of six branches primarily engaged in repair and servicing of
used valves and related products. Management subsequently consolidated two
locations into the operations of existing Harley Valve facilities. The
acquisition was accounted for using purchase accounting. The purchase price was
allocated to equipment acquired based on independent appraisals. In conjunction
with the acquisition, an escrow fund of $150,000 has been established pending
resolution of certain matters. The escrow fund is included in other noncurrent
assets pending its resolution. The results of operations of the Henze locations
are included in the accompanying consolidated statement of operations from the
acquisition date. The following pro forma information has been prepared assuming
that this acquisition had taken place as of November 1, 1994. The pro forma
information includes adjustments for interest expense that would have been
incurred to finance the purchase, depreciation based on the purchase price
allocation, and related income tax effects. The pro forma financial information
is not necessarily indicative of the results of operations that would have been
reported had the transaction been effected on November 1, 1994 (000's omitted).
YEAR ENDED OCTOBER
31
--------------------
1995 1996
--------- ---------
Revenues................................ $ 33,557 $ 27,382
Loss from continuing operations......... (396) (381)
Net loss................................ (337) (393)
F-56
<PAGE>
HARLEY INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. INVENTORIES
Inventories consist of the following:
OCTOBER 31
--------------------------
1995 1996
------------ ------------
Gauges, valves, measurement instruments
and related parts..................... $ 3,883,361 $ 3,461,662
Work in process......................... -- 98,745
------------ ------------
3,883,361 3,560,407
Less: amount classified as non-current
assets................................ 270,708 302,164
------------ ------------
Inventories classified as current
assets................................ $ 3,612,653 $ 3,258,243
============ ============
Inventories are stated net of valuation reserves of $295,000 and $374,000
at October 31, 1995 and 1996, respectively. Management estimates that
inventories of $270,708 and $302,164 at October 31, 1995 and 1996, respectively,
are in excess of Harley Valve's current sales and service work requirements.
Such inventories include used valves, replacement parts and other items which
are reported as non-current assets. Management has developed programs to reduce
these inventories to desired levels over the near term and believes the carrying
values of such inventories, net of valuation reserves, will ultimately be
recovered.
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following:
OCTOBER 31
------------------------------
1995 1996
-------------- --------------
Land.................................... $ 347,625 $ 347,625
Buildings............................... 1,027,956 1,008,375
Machinery and equipment................. 1,726,616 3,017,651
Furniture and fixtures.................. 361,957 328,169
Other................................... 282,398 282,264
-------------- --------------
3,746,552 4,984,084
Less accumulated depreciation........... (2,015,184) (2,353,595)
-------------- --------------
$ 1,731,368 $ 2,630,489
============== ==============
Depreciation expense was $321,988, $340,573, $362,786 and $115,704 for the
years ended October 31, 1994, 1995, 1996, and the three months ended January 31,
1997, respectively.
F-57
<PAGE>
HARLEY INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. OTHER ASSETS
Other assets consist of the following:
OCTOBER 31
--------------------------
1995 1996
------------ ------------
Non-current inventories, net............ $ 270,708 $ 302,164
Non-compete agreements, net of
accumulated amortization of $389,097
and $542,510.......................... 385,918 232,505
Other intangible assets, net of
accumulated amortization of $192,398
and $211,411.......................... 733,033 714,020
Escrow fund............................. -- 150,000
Other non-current assets................ 22,620 47,120
Deferred income tax assets.............. 298,000 380,000
------------ ------------
$ 1,710,279 $ 1,825,809
============ ============
7. DEBT
Debt consists of the following:
OCTOBER 31
--------------------------
1995 1996
------------ ------------
Revolving credit agreement.............. $ 5,889,000 $ 6,960,827
Term note agreement; interest at New
York prime rate plus .75% (9% at
October 31, 1996), payable in monthly
installments of $40,821 through April
1, 2000 when the remaining balance is
due................................... 1,493,806 1,127,719
Term note agreement; interest at New
York prime rate plus .75% (9% at
October 31, 1996), payable in monthly
installments of $7,734 through June 1,
1996 and $5,067 through April 1, 2000
when the remaining balance is due..... 447,566 407,695
Note payable to bank; interest at the
bank's base rate plus 1.5% (9.75% at
October 31, 1996), payable in monthly
installments of $2,020 through October
2000 when the remaining balance is
due; secured by first mortgage on land
and building with a carrying value of
$316,000.............................. 186,380 154,452
Note payable to individual; interest at
9%, payable in monthly installments
through October 2001; secured by real
estate with a carrying value of
$177,000.............................. 82,574 71,703
------------ ------------
8,099,326 8,722,396
Less current portion of long-term
debt.................................. (445,528) (477,309)
------------ ------------
Long-term debt.......................... $ 7,653,798 $ 8,245,087
============ ============
REVOLVING CREDIT AND TERM NOTE AGREEMENT
In May 1995, the Company restructured its borrowing facilities and executed
an amendment to its revolving credit and term note agreement (the "Agreement")
with a bank. The amended Agreement provides for two term notes, original
principal amounts totaling $2,102,356, and borrowings under a revolving facility
to the lesser of $7,000,000 or the Company's borrowing base (as defined) of
qualified accounts receivable and inventories. In July 1996, the Company
increased the borrowings under the revolving facility up to the lesser of
$7,500,000 or the Company's borrowing base. At October 31, 1996, remaining
borrowing capacity under the revolving facility was $539,000. The revolving
facility provides for
F-58
<PAGE>
HARLEY INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
interest at the New York prime rate plus .625% (8.875% at October 31, 1996), and
is due for renewal on March 1, 1997. The assets of the Company and 681,506
shares of Company common stock are pledged as collateral under the Agreement.
The Agreement contains various restrictive financial covenants including
maintaining net worth of $4.1 million, working capital of $3 million, a current
ratio of 1.25 to 1.0, maximum liabilities to tangible net worth of 3.25 to 1.0,
and minimum cash flow, as defined, of 1.4 to 1.0. In addition, the agreement
prohibits dividends, limits salaries and bonuses and requires bank consent on
ownership changes. As of October 31, 1996, the Company was not in compliance
with the working capital, current ratio, liabilities to net worth or cash flow
financial covenants, exceeded the salary and bonus limits and had entered into
agreements for ownership changes as described in Note 2. The bank has
temporarily waived these covenant violations contingent upon the transfer of
ownership.
The borrowings under the Company's revolving credit agreement and term
notes were repaid on January 31, 1997 in conjunction with the transfer of
ownership and replaced with bank debt issued by The Safe Seal Company, Inc. (See
Note 2). The borrowings under the Company's revolving credit agreement and term
notes have been classified based on their original maturities as of October 31,
1996 in the accompanying consolidated financial statements.
Principal payments on long-term debt (based on the original maturities) and
non-compete obligations (Note 8) are as follows:
YEAR ENDING LONG-TERM NON-COMPETE
OCTOBER 31 DEBT OBLIGATIONS TOTAL
- -------------------------------- ---------- ------------- ------------
1997.......................... $ 477,309 $ 151,504 $ 628,813
1998.......................... 7,482,904 86,537 7,569,441
1999.......................... 366,957 15,255 382,212
2000.......................... 379,872 11,017 390,889
2001.......................... 15,354 -- 15,354
---------- ------------- ------------
$8,722,396 $ 264,313 $ 8,986,709
========== ============= ============
8. OBLIGATIONS UNDER NON-COMPETE AGREEMENTS
In connection with the acquisitions of businesses, Harley Valve assumed
certain obligations under non-compete agreements and entered into additional
agreements whereby the former owners agreed not to compete with Harley Valve for
a five-year period. The agreements require monthly payments totaling $13,508 at
various maturities through 2000. At October 31, 1995 and 1996, the obligations
consist of the following:
1995 1996
------------ ------------
Total obligations, net of imputed
interest of $22,608 and $13,577
at 6% at October 31, 1995 and 1996,
respectively.......................... $ 410,107 $ 264,313
Current portion......................... (142,617) (151,504)
------------ ------------
Long-term portion....................... $ 267,490 $ 112,809
============ ============
F-59
<PAGE>
HARLEY INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. INCOME TAXES
The provision (benefit) for income taxes associated with continuing
operations consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31
----------------------------------- THREE MONTHS ENDED
1994 1995 1996 JANUARY 31, 1997
------------ --------- ---------- ------------------
<S> <C> <C> <C> <C>
Current:
Federal............................ $ (42,000) $ -- $ 29,000 $ (70,000)
State.............................. (14,000) -- 7,000 (16,000)
------------ --------- ---------- ------------------
(56,000) -- 36,000 (86,000)
Deferred expense (benefit).............. (214,000) 15,000 (93,000) (64,000)
------------ --------- ---------- ------------------
Provision (benefit) for income taxes.... $ (270,000) $ 15,000 $ (57,000) $ (150,000)
============ ========= ========== ==================
</TABLE>
The provisions (benefits) for income taxes vary from federal statutory
rates on earnings before income taxes due to the following:
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31
------------------------------- THREE MONTHS ENDED
1994 1995 1996 JANUARY 31, 1997
--------- --------- --------- ------------------
<S> <C> <C> <C> <C>
Income tax provision (benefit) at U.S.
Federal statutory rate, considering
surtax exemptions..................... (34.0)% 34.0% (34.0)% (34.0)%
State taxes, net of Federal tax
benefit............................... (5.0)% 5.0% (5.0)% (4.0)%
Amortization of goodwill................ 1.0% -- -- --
Other, net.............................. (4.0)% (3.5)% -- 2.7%
--------- --------- --------- ------
Effective tax rate...................... (42.0)% 35.5% (39.0)% (35.3)%
========= ========= ========= ======
</TABLE>
The sources of deferred income tax assets consist of available net
operating loss carryforwards and temporary differences between the financial and
tax bases of assets and liabilities, as follows:
OCTOBER 31
---------------------- THREE MONTHS ENDED
1995 1996 JANUARY 31, 1997
---------- ---------- ------------------
Loss carryforwards............. $ 72,000 $ -- $--
Accounts receivable reserves... 39,000 46,000 70,000
Inventories.................... 100,000 170,000 200,000
Property, plant and equipment.. 78,000 80,000 145,000
Intangible assets.............. 126,000 155,000 122,000
Accrued expenses and other..... 34,000 244,000 192,000
---------- ---------- ------------------
Deferred tax assets............ $ 449,000 $ 695,000 $729,000
========== ========== ==================
Classified as:
Current................... $ 151,000 $ 315,000 $262,000
Non-current............... 298,000 380,000 467,000
---------- ---------- ------------------
$ 449,000 $ 695,000 $729,000
========== ========== ==================
At October 31, 1995 and 1996, there are no material deferred tax
liabilities. Realization of the deferred tax assets is dependent on generating
sufficient taxable income in the future. Although realization is not assured,
management believes it is more likely than not that all of the deferred tax
assets will be realized. The amount of the deferred tax assets considered
realizable, however, could be reduced in the near term if
F-60
<PAGE>
HARLEY INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
estimates of future taxable income during the carryforward period are reduced or
should tax authorities disallow tax deductions.
The Company utilized $326,000, $326,000, and $254,000 of net operating loss
carryforwards in 1994, 1995, and 1996, respectively, to reduce taxable income
and current income tax liabilities. Utilization of net operating loss
carryforwards was limited to $326,000 annually due to the purchase of the
Company's preferred stock in 1991. The Company made income tax payments of
$31,840, $3,531, and $16,488 in 1994, 1995, and 1996, respectively.
The Company's 1993 and 1994 Federal income tax returns are currently being
examined by the Internal Revenue Service (the "IRS"). The Company and the IRS
are disputing certain purchase price allocations related to a 1993 acquisition.
The Company believes its positions are sustainable and additional taxes,
penalties or interest, if any, should not be material.
10. STOCKHOLDERS' EQUITY
The Company has authorized 1,950,000 shares of preferred stock, none of
which is issued or outstanding.
Options for the purchase of 20,000 shares of common stock at $4.45 have
been granted to a key employee. As of October 31, 1996, none of these options
have been exercised. The effects of these options are not material. These
options were terminated in conjunction with the transfers of ownership described
in Note 2.
In 1994, the Company purchased 6,000 shares of the Company's common stock
from an officer for approximately $31,000 and retired the shares.
11. RETIREMENT PLAN
The Company has a defined contribution retirement savings plan (the
"Retirement Plan") covering substantially all employees who meet certain
eligibility requirements as to age and length of service. The Retirement Plan
incorporates the salary reduction provisions of Section 401(k) of the Internal
Revenue Code and employees may contribute up to 15% of their compensation. The
Company may elect to match a percentage of the employees' contributions. There
were no Company contributions for the years ended October 31, 1996 and 1994.
Contributions charged to operations were $8,180 for the year ended October 31,
1995.
12. SERVICE AND DISTRIBUTION AGREEMENTS
Harley Valve purchases, sells and services various products under service
and distribution agreements with its major suppliers. The agreement with one key
supplier has a five-year term through April 1998. Approximately 50% of revenues
during each of the years ended October 31, 1994, 1995, and 1996 were derived
from sales of products purchased or services rendered under the agreement with
this supplier. Other agreements with major suppliers are generally cancelable by
the suppliers upon thirty to sixty days' notice. Management does not anticipate
cancellation of these agreements.
13. RELATED PARTY TRANSACTIONS
At October 31, 1995 and 1996, other assets of Harley Equipment include
notes receivable of $150,000 from the Company's president/majority stockholder.
The President's notes bear interest at the statutory rate required by the
Internal Revenue Service and are payable on demand. Interest income on the
President's notes totaled $9,375, $10,200, $10,200 and $0 for the years ended
October 31, 1994, 1995, 1996 and the three months ended January 31, 1997,
respectively.
In conjunction with the sale of the Company described in Note 2, additional
compensation totaling approximately $475,000 for various employees and fees
related to the sale of $150,000 charged to the
F-61
<PAGE>
HARLEY INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Company by a stockholder were incurred. The additional compensation is to be
paid from the assets of Harley Equipment and has been allocated to discontinued
operations. In November 1996, certain assets of Harley Equipment were sold to a
stockholder for $150,000, which represented their carrying values at October 31,
1996.
The Company has also entered into a contingent incentive award agreement
with a key Harley Valve employee which provides for a $50,000 payment upon
consummation of the sale of the Company and $50,000 payable ratably over the
following six months. No amounts related to this agreement were recorded by the
Company as of October 31, 1996.
14. LEASES
Harley Valve leases certain equipment and office and warehouse facilities.
Minimum rental commitments for Harley Valve under all operating leases with
noncancelable terms in excess of one year at October 31, 1996 were payable as
follows:
YEAR ENDING OCTOBER 31,
- ----------------------------------------
1997............................... $ 450,564
1998............................... 140,528
1999............................... 56,756
2000............................... 51,286
2001............................... 36,000
----------
$ 735,134
==========
Commencing in the year ended October 31, 1996, Harley Valve subleased
certain of its facilities to a third party under short-term leases.
Total rental expense amounted to approximately $281,000, $216,000, $274,000
and $92,000 for the years ended October 31, 1994, 1995, 1996 and the three
months ended January 31, 1997, respectively. Sublease income was approximately
$44,000 and $33,000 for the year ended October 31, 1996 and the three months
ended January 31, 1997, respectively.
15. ENVIRONMENTAL CONTINGENCIES
The Company is investigating various of its facilities for potential
environmental contamination and remediation, including an underground storage
tank at its Norfolk, Virginia location. Based on soil samples completed through
January 10, 1997, minimal contamination is indicated. Management believes costs,
if any, for environmental remediation at the Norfolk or other facilities will
not be material.
F-62
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Steam Supply Group:
We have audited the accompanying combined balance sheets of Steam Supply
Group (as defined in Note 1) as of October 31, 1995 and 1996, and the related
combined statements of operations, stockholders' equity (deficit) and cash flows
for each of the three years in the period ended October 31, 1996 and for the
nine months ended July 31, 1997. These financial statements are the
responsibility of the Group's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the combined financial position of Steam
Supply Group as of October 31, 1995 and 1996, and the combined results of their
operations and their combined cash flows for each of the three years in the
period ended October 31, 1996 and for the nine months ended July 31, 1997, in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
March 10, 1998
F-63
<PAGE>
STEAM SUPPLY GROUP
COMBINED BALANCE SHEETS
OCTOBER 31
--------------------------
1995 1996
------------ ------------
ASSETS
CURRENT ASSETS:
Cash............................... $ -- $ --
Accounts receivable, net of
allowance of $15,000 and $9,080... 1,854,097 2,007,558
Inventories........................ 1,843,530 2,083,181
Prepaid expenses................... 241,574 277,174
Current portion of related-party
notes receivable.................. 22,266 25,500
------------ ------------
Total current assets.......... 3,961,467 4,393,413
PROPERTY AND EQUIPMENT, net............. 787,592 1,123,146
RELATED-PARTY NOTES RECEIVABLE, net of
current portion....................... 587,731 647,871
OTHER NONCURRENT ASSETS, net............ 329,465 379,490
------------ ------------
$ 5,666,255 $ 6,543,920
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term debt.................... $ 2,432,000 $ 2,062,683
Current maturities of long-term
debt.............................. 148,000 245,400
Accounts payable and accrued
expenses.......................... 1,409,478 1,341,730
------------ ------------
Total current liabilities..... 3,989,478 3,649,813
LONG-TERM DEBT, net of current
maturities............................ 916,160 2,131,891
COMMITMENTS AND CONTINGENCIES
REDEEMABLE PREFERRED STOCK.............. 710,528 710,528
STOCKHOLDERS' EQUITY (DEFICIT):
Common stock....................... 173 173
Additional paid-in capital......... 17,958 17,958
Retained earnings.................. 31,958 33,557
------------ ------------
Total stockholders' equity.... 50,089 51,688
------------ ------------
$ 5,666,255 $ 6,543,920
============ ============
The accompanying notes are an integral part of these combined financial
statements.
F-64
<PAGE>
STEAM SUPPLY GROUP
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31 NINE MONTHS
---------------------------------------------- ENDED
1994 1995 1996 JULY 31, 1997
-------------- -------------- -------------- -------------
<S> <C> <C> <C> <C>
REVENUES............................. $ 14,777,360 $ 15,407,681 $ 15,078,741 $ 11,790,649
COST OF OPERATIONS................... 9,702,561 10,092,443 9,573,560 8,218,844
-------------- -------------- -------------- -------------
Gross profit.................... 5,074,799 5,315,238 5,505,181 3,571,805
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES........................... 5,022,066 4,825,535 5,107,379 3,475,888
-------------- -------------- -------------- -------------
Income from operations.......... 52,733 489,703 397,802 95,917
OTHER INCOME (EXPENSE):
Interest, net................... (244,611) (282,004) (303,482) (245,997)
Other........................... (52,512) 7,121 (9,881) (72,982)
-------------- -------------- -------------- -------------
(297,123) (274,883) (313,363) (318,979)
-------------- -------------- -------------- -------------
INCOME (LOSS) BEFORE INCOME TAXES.... (244,390) 214,820 84,439 (223,062)
PROVISION (BENEFIT) FOR INCOME
TAXES.............................. 2,185 97,900 33,100 (85,711)
-------------- -------------- -------------- -------------
NET INCOME (LOSS).................... $ (246,575) $ 116,920 $ 51,339 $ (137,351)
============== ============== ============== =============
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-65
<PAGE>
STEAM SUPPLY GROUP
COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
COMMON PAID-IN RETAINED
STOCK CAPITAL EARNINGS (DEFICIT) TOTAL
------ --------- ------------------- ------------
<S> <C> <C> <C> <C>
BALANCE, October 31, 1993............... $ 173 $ 17,958 $ 261,167 $ 279,298
Preferred dividends................ -- -- (49,817) (49,817)
Net loss........................... -- -- (246,575) (246,575)
------ --------- ------------------- ------------
BALANCE, October 31, 1994............... 173 17,958 (35,225) (17,094)
Preferred dividends................ -- -- (49,737) (49,737)
Net income......................... -- -- 116,920 116,920
------ --------- ------------------- ------------
BALANCE, October 31, 1995............... 173 17,958 31,958 50,089
Preferred dividends................ -- -- (49,740) (49,740)
Net income......................... -- -- 51,339 51,339
------ --------- ------------------- ------------
BALANCE, October 31, 1996............... 173 17,958 33,557 51,688
Preferred dividends................ -- -- (49,737) (49,737)
Net loss........................... -- -- (137,351) (137,351)
------ --------- ------------------- ------------
BALANCE, July 31, 1997.................. $ 173 $ 17,958 $(153,531) $ (135,400)
====== ========= =================== ============
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-66
<PAGE>
STEAM SUPPLY GROUP
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31 NINE MONTHS
------------------------------------ ENDED
1994 1995 1996 JULY 31, 1997
---------- ------------ ---------- ---------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)................ $ (246,575) $ 116,920 $ 51,339 $(137,351)
Adjustments to reconcile net
income (loss) to net cash
provided by (used in) operating
activities --
Depreciation and
amortization.............. 278,954 270,111 208,304 125,448
(Increase) decrease in --
Accounts receivable....... (173,560) (138,995) (153,461) 161,512
Inventories............... 175,605 56,528 (239,651) 348,144
Prepaid expenses and other
assets.................. (79,395) 81,422 (85,625) 104,073
Accounts payable and accrued
expenses.................. 165,685 123,792 (67,748) (306,068)
---------- ------------ ---------- ---------------
Net cash provided by
(used in) operating
activities......... 120,714 509,778 (286,842) 295,758
---------- ------------ ---------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and
equipment...................... (133,067) (117,445) (543,852) (68,906)
Advances on notes receivable..... (16,044) (138,334) (60,000) --
Collections on notes
receivable..................... 119,416 24,207 23,221 72,066
---------- ------------ ---------- ---------------
Net cash provided by
(used in) investing
activities......... (29,695) (231,572) (580,631) 3,160
---------- ------------ ---------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings of debt............... 819,633 831,681 1,215,683 --
Repayments of debt............... (848,570) (1,072,415) (298,470) (249,181)
Preferred dividends paid......... (49,817) (49,737) (49,740) (49,737)
---------- ------------ ---------- ---------------
Net cash provided by
(used in) financing
activities......... (78,754) (290,471) 867,473 (298,918)
---------- ------------ ---------- ---------------
NET CHANGE IN CASH................... 12,265 (12,265) -- --
CASH, beginning of period............ -- 12,265 -- --
---------- ------------ ---------- ---------------
CASH, end of period.................. $ 12,265 $ -- $ -- $ --
========== ============ ========== ===============
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-67
<PAGE>
STEAM SUPPLY GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS
1. BUSINESS, ORGANIZATION AND BASIS OF PRESENTATION:
The accompanying combined balance sheets and related combined statements of
operations, stockholders' equity and cash flows include Puget Investments, Inc.
("Puget"), Steam Supply & Rubber Co., Inc. ("Steam Supply"), Flickinger
Company and Flickinger-Benicia, Inc. ("Benicia"). Steam Supply and Flickinger
Company are wholly owned subsidiaries of Puget and are consolidated with the
accounts of Puget. Benicia is owned directly by the stockholders of Puget. As
Puget and Benicia (together, "Steam Supply Group" or the "Company") have
common ownership and management, the financial statements of each entity have
been combined for financial reporting reasons. All intercompany balances and
transactions have been eliminated.
Steam Supply Group services, repairs, sells and distributes industrial
valves and instruments. Steam Supply Group's customers primarily are
petrochemical, electric power and pulp and paper industries located in the
western continental United States and Alaska.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
CASH
Cash payments for interest during fiscal 1994, 1995 and 1996 were
approximately $272,878, $312,643 and $336,432, respectively. Cash payments for
taxes during fiscal 1995 and 1996 were approximately $65,286 and $107,310,
respectively. During fiscal 1994, the Company received $86,157 in income tax
refunds.
INVENTORIES
Inventories are valued at the lower of cost or market utilizing the
last-in, first-out method ("LIFO") and primarily consist of industrial valves,
valve parts and instrumentation. The excess of current costs determined using
the first-in, first-out method basis over the carrying values of LIFO
inventories was approximately $559,963 and $614,769 at October 31, 1995 and
1996, respectively.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost, and depreciation is computed
using the straight-line method over the estimated useful lives of the assets.
The costs of major improvements are capitalized. Expenditures for maintenance,
repairs and minor improvements are expensed as incurred. When property and
equipment are sold or retired, the cost and related accumulated depreciation are
removed and the resulting gain or loss is included in results of operations.
OTHER NONCURRENT ASSETS
Other noncurrent assets primarily consist of a noncompete covenant with a
former stockholder, which is being amortized on a straight-line basis over 10
years. Accumulated amortization as of October 31, 1995 and 1996 was $130,625 and
$159,125, respectively.
REVENUE RECOGNITION
Service revenue is recognized upon performance of the service, and product
sales revenue is recognized as products are shipped or delivered.
INCOME TAXES
Puget files a consolidated income tax return and follows the liability
method of accounting for income taxes in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 109. Under this method, deferred income
taxes are recorded based upon differences between the financial reporting and
tax bases of assets and liabilities and are measured using the enacted tax rates
and laws that will be in effect when the underlying assets or liabilities are
recovered or settled. Benicia is an S Corporation for federal
F-68
<PAGE>
STEAM SUPPLY GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
income tax purposes and, in accordance with the S Corporation provisions of the
Internal Revenue Code, the earnings of Benicia are included in the personal tax
returns of its stockholders. Accordingly, no federal income tax expense is
recorded in the financial statements relative to Benicia. Benicia does record
California state income tax expense.
STOCKHOLDERS' EQUITY
The common stock ownership of the Company as of October 31, 1995 and 1996
includes the following:
PAR VALUE SHARES SHARES
PER SHARE AUTHORIZED OUTSTANDING
---------- ---------- -----------
Puget................................ $ 1.00 500 173
Benicia.............................. -- 50,000 20,000
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
NEW ACCOUNTING PRONOUNCEMENT
Effective November 1, 1995, the Company adopted SFAS No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of." Accordingly, in the event that facts and circumstances indicate that
property and equipment, and intangible or other assets, may be impaired, an
evaluation of recoverability would be performed. If an evaluation of an asset is
required, the estimated future undiscounted cash flows associated with the asset
are compared to the asset's carrying amount to determine if a writedown to
market value or discounted cash flow value is necessary. Adoption of this
standard did not have a material effect on the combined financial position or
results of operations of the Company.
3. PROPERTY AND EQUIPMENT:
Property and equipment consists of the following:
OCTOBER 31
ESTIMATED --------------------------
USEFUL LIVES 1995 1996
------------ ------------ ------------
Land............................... $ 167,095 $ 167,095
Buildings.......................... 30 years 609,949 609,949
Office and shop equipment.......... 7 years 1,105,165 1,128,581
Computer equipment................. 5 years 338,578 698,583
Vehicles........................... 5 years 301,212 384,970
Furniture and fixtures............. 7 years 185,340 186,572
Leasehold improvements............. 20 years 10,410 50,481
------------ ------------
2,717,749 3,226,231
Less -- Accumulated depreciation... 1,930,157 2,103,085
------------ ------------
Property and equipment, net........ $ 787,592 $ 1,123,146
============ ============
F-69
<PAGE>
STEAM SUPPLY GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
4. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:
Activity in the Company's allowance for doubtful accounts for fiscal 1994,
1995 and 1996 consists of the following:
1994 1995 1996
--------- --------- ---------
Balance at beginning of fiscal
year................................. $ 15,000 $ 15,000 $ 15,000
Amounts charged (credited) to results
of operations...................... -- -- (5,920)
--------- --------- ---------
Balance at end of fiscal year........ $ 15,000 $ 15,000 $ 9,080
========= ========= =========
Accounts payable and accrued expenses as of October 31, 1995 and 1996
consist of the following:
1995 1996
------------ ------------
Accounts payable..................... $ 1,167,042 $ 1,170,774
Bank overdraft....................... 167,710 106,332
Accrued expenses..................... 74,726 64,624
------------ ------------
$ 1,409,478 $ 1,341,730
============ ============
5. RELATED-PARTY NOTES RECEIVABLE:
The Company's related-party notes receivable consist of the following:
OCTOBER 31
----------------------
1995 1996
---------- ----------
Unsecured notes receivable from
stockholders, balloon payment,
including accrued interest at prime
(8.25% at October 31, 1996), due
October 1999.......................... $ 306,842 $ 393,440
Note receivable from King-Ries
Partnership ("KRP"), an affiliate
related through common ownership, due
in monthly installments of $2,800
including interest at 12.5%,
collateralized by a second mortgage on
certain real estate, due November
1998.................................. 209,822 202,012
Unsecured note receivable from KRP, due
in monthly installments of $1,370
including interest at prime, due April
2002.................................. 81,876 72,019
Unsecured note receivable from KRP due
in monthly installments of $508
including interest at 6%, due October
1997.................................. 11,457 5,900
---------- ----------
609,997 673,371
Less -- Current portion................. 22,266 25,500
---------- ----------
$ 587,731 $ 647,871
========== ==========
Interest income on these related-party notes totaled $44,000, $54,000 and
$60,000 for fiscal 1994, 1995 and 1996, respectively.
6. PREFERRED STOCK:
Puget has 896 shares of $793 par value cumulative preferred stock
outstanding. The preferred shares yield a 7 percent dividend. The shares are
callable and redeemable at a 10 percent premium over par value. The shares can
be called or redeemed at any time by Puget. The preferred shares have no voting
rights, except in the event of nonpayment of dividends for two years, in which
case the preferred stock shall vote with the common stock on a one share, one
vote basis.
F-70
<PAGE>
STEAM SUPPLY GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
7. DEBT:
SHORT-TERM DEBT
The Company's short-term debt consists of the following:
OCTOBER 31
--------------------------
1995 1996
------------ ------------
Revolving line of credit with Union Bank
of California, N.A. ("Union Bank"),
bearing interest at prime plus 0.50%
(8.75% at October 31, 1996), $2.2
million facility, collateralized by
substantially all the Company's assets
and guaranteed by stockholders,
expired April 1997 (See Note 11)...... $ 1,532,000 $ 2,062,683
Note payable to Union Bank with interest
payable monthly at prime plus 0.75%
(9.00% at October 31, 1996),
collateralized
by real estate and guaranteed by
stockholders, refinanced as
long-term debt during 1996............ 900,000 --
------------ ------------
$ 2,432,000 $ 2,062,683
============ ============
The Company's long-term debt consists of the following:
OCTOBER 31
--------------------------
1995 1996
------------ ------------
Note payable to Union Bank in monthly
installments of $9,640 including
interest at prime plus 0.75% (9.00% at
October 31, 1996), collateralized by
real estate and guaranteed by
stockholders, due May 2003............ $ -- $ 1,094,907
Note payable to Union Bank in monthly
installments of $8,860 plus interest
at prime plus 0.75% (9.00% at October
31, 1996), collateralized by computer
equipment and guaranteed by
stockholders, due July 1, 2000........ -- 398,420
Note payable to Union Bank in monthly
installments of $4,200 plus interest
at prime plus 0.50% (8.75% at October
31, 1996), collateralized by
substantially all assets and
guaranteed by stockholders, due April
1998.................................. 124,800 74,400
Note payable to West One Bank, due in
monthly installments of $3,425
including interest at 9.25%,
collateralized by real estate,
refinanced with Union Bank during
1996.................................. 148,204 --
Note payable to former stockholder in
monthly installments of $9,463
including interest at 10%,
collateralized by common stock,
subordinated to notes payable to Union
Bank, due June 2001................... 484,314 416,124
Unsecured notes payable to stockholders,
subordinated to notes payable to Union
Bank, balloon payment including
interest at prime, due October 1999... 306,842 393,440
------------ ------------
1,064,160 2,377,291
Less -- Current portion................. 148,000 245,400
------------ ------------
$ 916,160 $ 2,131,891
============ ============
F-71
<PAGE>
STEAM SUPPLY GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Maturities of the Company's long-term debt are as follows:
Year ending October 31 --
1997............................... $ 245,400
1998............................... 228,200
1999............................... 607,800
2000............................... 197,840
2001............................... 84,300
Thereafter......................... 1,013,751
------------
$ 2,377,291
============
Interest expense totaled $288,922, $336,041 and $363,030 in fiscal 1994,
1995 and 1996, respectively. Management estimates that the fair value of its
debt obligations approximates the carrying value at October 31, 1996.
At October 31, 1996, the Company's debt with Union Bank was subject to a
credit agreement that included certain restrictive covenants relating to such
matters as dividends and capital expenditures. This credit agreement also
required the Company to maintain minimum levels of profitability, net worth and
working capital ratios. At October 31, 1996, the Company was in compliance with
or had received waivers of noncompliance with respect to all restrictive
covenants.
On May 1, 1997, the Company and Union Bank entered into an amended and
restated credit agreement. The amended and restated credit agreement modified
the repayment terms and covenants of the Company's debt. See Note 11 for
additional information respecting the amended and restated credit agreement.
8. INCOME TAXES:
The Company's income tax provision included the following:
YEAR ENDED OCTOBER 31
---------------------------------
1994 1995 1996
---------- ---------- ---------
Federal, current........................ $ -- $ 88,100 $ 25,900
State, current.......................... 2,185 9,800 7,200
---------- ---------- ---------
$ 2,185 $ 97,900 $ 33,100
========== ========== =========
Actual income tax expense differs from income tax expense computed by
applying the U.S. federal statutory corporate tax rate to income before income
taxes as follows:
YEAR ENDED OCTOBER 31
------------------------
1994 1995 1996
---- ---- ----
Statutory federal income tax rate....... (34 )% 34 % 34 %
Valuation allowance..................... 34 -- --
Effect of federal graduated tax rate.... -- (5 ) (5 )
State and local taxes................... (1 ) 3 5
Effect of nondeductible meals and
entertainment......................... -- 4 11
Effect of excluding S Corporation....... -- 11 (8 )
Other................................... -- (1 ) 2
---- ---- ----
Effective income tax rate............... (1 )% 46 % 39 %
==== ==== ====
F-72
<PAGE>
STEAM SUPPLY GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Deferred income taxes consist of the following:
OCTOBER 31
----------------------
1995 1996
---------- ----------
Current deferred tax assets.......... $ 24,400 $ 29,600
Noncurrent deferred tax assets....... 36,800 33,800
Valuation allowance.................. (52,200) (52,200)
---------- ----------
Total deferred tax
assets.................. 9,000 11,200
---------- ----------
Current deferred tax liabilities..... -- (3,100)
Noncurrent deferred tax
liabilities.......................... (9,000) (8,100)
---------- ----------
Total deferred tax
liabilities............. (9,000) (11,200)
---------- ----------
Net deferred tax
liabilities............. $ -- $ --
========== ==========
9. COMMITMENTS AND CONTINGENCIES:
OPERATING LEASES
The Company leases warehouse space, office facilities and vehicles under
noncancelable operating leases which expire at various dates. Future minimum
lease payments at October 31, 1996 are as follows:
1997................................. $ 247,200
1998................................. 214,700
1999................................. 121,600
2000................................. 114,000
2001................................. 114,000
Rent expense for fiscal 1994, 1995 and 1996 was $247,600, $240,300 and
$259,200, respectively.
The Company leases certain facilities from stockholders and KRP under
operating leases. Rental expense related to these leases was $138,800 for fiscal
1994 and 1995 and $139,200 for fiscal 1996.
EMPLOYEE BENEFIT PLANS
The Company sponsors a 401(k) profit-sharing plan covering all eligible
employees. The plan allows employee contributions, whereby eligible employees
may elect to defer a portion of their annual compensation. The Company matches
50 percent of each employee's contribution up to 4 percent of employee
compensation. Additional contributions by the Company are discretionary. The
Company contributed approximately $50,600, $28,400 and $28,800 for fiscal 1994,
1995 and 1996, respectively.
LITIGATION
In the ordinary course of its business, the Company has become involved in
various legal matters. Management does not believe that the outcome of these
legal matters will have a material effect on the Company's combined financial
position or results of operations.
10. DISTRIBUTION AGREEMENTS:
The Company purchases, sells and services various products under service
and distribution agreements with its major suppliers. Approximately 39 percent
of revenues during each of fiscal 1994, 1995 and 1996 was derived from sales of
products purchased or services rendered under the agreement with one supplier.
The agreements with major suppliers are generally cancelable by the suppliers
upon 30 to 60 days' notice. Management does not anticipate cancellation of these
agreements.
F-73
<PAGE>
STEAM SUPPLY GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
11. SUBSEQUENT EVENTS:
DEBT REFINANCING
On May 1, 1997, the Company entered an agreement to amend and restate its
credit agreement with Union Bank. This new credit facility provides a line of
credit due November 1, 1997, which is subject to a borrowing base with maximum
borrowings of $2,500,000. Interest accrues at Union Bank's reference rate. This
new credit facility has certain restrictive covenants similar to the previous
credit facility.
SALE OF COMMON SHARES
Effective August 1, 1997, the stockholders of the Company sold the common
equity ownership of the Company to Innovative Valve Technologies, Inc. for total
consideration in excess of the recorded amounts of the Company's net assets.
F-74
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To ICE/VARCO Group:
We have audited the accompanying combined balance sheets of ICE/VARCO Group
(as defined in Note 1) as of September 30, 1996 and 1997 and the related
combined statements of operations, stockholder's deficit and cash flows each of
the three years in the period ended September 30, 1997 and for the month 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 combined financial statements referred to above present
fairly, in all material respects, the combined financial position of ICE/VARCO
Group as of September 30, 1996 and 1997, and the combined results of their
operations and their combined cash flows for each of the three years in the
period ended September 30, 1997 and for the month ended October 31, 1997, in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
March 10, 1998
F-75
<PAGE>
ICE/VARCO GROUP
COMBINED BALANCE SHEETS
SEPTEMBER 30
--------------------------
1996 1997
------------ ------------
ASSETS
CURRENT ASSETS:
Cash............................ $ 46,117 $ 136,429
Accounts receivable, net of
allowance of $47,713 and
$38,494........................ 1,747,859 1,600,972
Inventories..................... 1,275,325 1,369,258
Prepaid expenses and other
current assets.................. 16,350 24,738
------------ ------------
Total current assets....... 3,085,651 3,131,397
PROPERTY AND EQUIPMENT, net.......... 979,926 952,760
INTANGIBLES AND OTHER NONCURRENT
ASSETS, net........................ 238,450 212,532
------------ ------------
$ 4,304,027 $ 4,296,689
============ ============
LIABILITIES AND STOCKHOLDER'S DEFICIT
CURRENT LIABILITIES:
Short-term debt................. $ 769,300 $ 1,371,553
Current maturities of long-term
debt............................ 203,961 85,205
Accounts payable and accrued
expenses........................ 1,695,637 1,603,252
------------ ------------
Total current
liabilities.................. 2,668,898 3,060,010
AMOUNTS DUE TO AFFILIATES, net....... 1,284,288 1,136,246
LONG-TERM DEBT, net of current
maturities......................... 457,229 202,144
STOCKHOLDER'S DEFICIT................ (106,388) (101,711)
------------ ------------
$ 4,304,027 $ 4,296,689
============ ============
The accompanying notes are an integral part of these combined financial
statements.
F-76
<PAGE>
ICE/VARCO GROUP
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
ONE MONTH
YEAR ENDED ENDED
SEPTEMBER 30 OCTOBER 31
-------------------------------------------- ----------
1995 1996 1997 1997
------------ -------------- -------------- ----------
<S> <C> <C> <C> <C>
REVENUES................................ $ 9,128,032 $ 12,744,465 $ 14,395,081 $1,390,773
COST OF OPERATIONS...................... 6,517,438 9,452,991 11,075,524 1,125,676
------------ -------------- -------------- ----------
Gross profit....................... 2,610,594 3,291,474 3,319,557 265,097
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES.............................. 2,346,117 2,858,694 3,240,315 225,401
------------ -------------- -------------- ----------
Income (loss) from operations...... 264,477 432,780 79,242 39,696
OTHER INCOME (EXPENSE):
Interest, net...................... (117,886) (112,105) (144,435) (2,917)
Other.............................. 11,123 (13,861) 73,697 6,669
------------ -------------- -------------- ----------
(106,763) (125,966) (70,738) 3,752
------------ -------------- -------------- ----------
INCOME (LOSS) BEFORE INCOME TAXES....... 157,714 306,814 8,504 43,448
PROVISION (BENEFIT) FOR INCOME TAXES.... 70,100 138,359 3,827 19,552
------------ -------------- -------------- ----------
NET INCOME.............................. $ 87,614 $ 168,455 $ 4,677 $ 23,896
============ ============== ============== ==========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-77
<PAGE>
ICE/VARCO GROUP
COMBINED STATEMENTS OF STOCKHOLDER'S DEFICIT
BALANCE, September 30, 1995............. $ (274,843)
Net income......................... 168,455
------------
BALANCE, September 30, 1996............. (106,388)
Net income......................... 4,677
------------
BALANCE, September 30, 1997............. (101,711)
Net income......................... 23,896
------------
BALANCE, October 31, 1997............... $ (77,815)
============
The accompanying notes are an integral part of these combined financial
statements.
F-78
<PAGE>
ICE/VARCO GROUP
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
ONE MONTH
YEAR ENDED ENDED
SEPTEMBER 30 OCTOBER 31
---------------------------------------- -----------
1995 1996 1997 1997
------------ ------------ ------------ -----------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................ $ 87,614 $ 168,455 $ 4,677 $ 23,896
Adjustments to reconcile net income
(loss) to net cash provided by
(used in) operating activities --
Depreciation and amortization.... 131,635 147,011 203,295 16,832
(Increase) decrease in --
Accounts receivable........... (376,087) 60,629 146,887 (397,807)
Inventories................... (433,685) (212,374) (93,933) (122,709)
Prepaid expenses and other
assets..................... (29,490) 2,435 6,751 (3,306)
Increase (decrease) in --
Accounts payable and accrued
expenses................... 446,100 (35,671) (92,385) 252,427
Amounts due to affiliates,
net........................ (254,719) 259,758 (148,042) 2,033,964
------------ ------------ ------------ -----------
Net cash provided by (used
in) operating
activities............... (428,632) 390,243 27,250 1,803,297
------------ ------------ ------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment... (99,181) (214,915) (165,350) (3,233)
Business acquisition, net of cash
acquired........................... -- 45,516 -- --
------------ ------------ ------------ -----------
Net cash used in investing
activities............... (99,181) (169,399) (165,350) (3,233)
------------ ------------ ------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings of debt.................... 552,940 3,856 602,253 (1,371,553)
Repayments of debt.................... (47,721) (198,144) (373,841) (217,824)
------------ ------------ ------------ -----------
Net cash provided by (used
in) financing
activities............... 505,219 (194,288) 228,412 (1,589,377)
------------ ------------ ------------ -----------
NET INCREASE (DECREASE) IN CASH......... (22,594) 26,556 90,312 210,687
CASH, beginning of period............... 42,155 19,561 46,117 136,429
------------ ------------ ------------ -----------
CASH, end of period..................... $ 19,561 $ 46,117 $ 136,429 $ 347,116
============ ============ ============ ===========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-79
<PAGE>
ICE/VARCO GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS
1. BUSINESS, ORGANIZATION AND BASIS OF PRESENTATION:
The accompanying combined balance sheets and related combined statements of
operations, stockholder's deficit and cash flows include Industrial Controls &
Equipment, Inc. ("ICE"), Valve Actuation & Repair Company, Inc. ("VARCO")
and BAS Technical Services Inc. ("BAS"). ICE, VARCO and BAS (collectively,
"ICE/VARCO Group" or the "Company") are wholly owned subsidiaries of
Synergistic Partners Inc. ("SPI"), a Pennsylvania corporation. As ICE/VARCO
Group has common ownership and management, the financial statements of these
entities have been combined for financial reporting purposes. All significant
intercompany transactions and balances have been eliminated in combination.
ICE (a Pennsylvania corporation) and VARCO (a West Virginia corporation)
are principally engaged in the business of repairing, testing and distributing
manual, control and safety relief valves, related parts and instrumentation to
the pulp and paper, chemical, power generation and petrochemical industries in
Pennsylvania and West Virginia. BAS (a West Virginia corporation), acquired in
August 1996 in a purchase transaction, provides value-added electrical and
mechanical engineering services and electrical panel construction, primarily to
the same customer base served by ICE and VARCO.
In July 1997, pursuant to a definitive agreement, SPI agreed to sell the
entire equity ownership of the Company to Innovative Valve Technologies, Inc.
("Invatec"), for total consideration in excess of the recorded amounts of the
Company's net assets. Among other customary matters, the definitive agreement
provides for the removal of the Company's guarantees of debt obligations of SPI,
its affiliates and subsidiaries. The closing of the transaction was completed on
the successful consummation of Invatec's initial public offering in October
1997.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
CASH
Cash payments for interest during fiscal 1995, 1996 and 1997 were
approximately $108,000, $96,000 and $144,000, respectively.
INVENTORIES
Inventories are valued at the lower of cost or market utilizing the
average-cost method applied on a first-in, first-out ("FIFO") basis and
primarily consist of valves, valve parts and related instrumentation.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost, and depreciation is computed
using the straight-line method over the estimated useful lives of the assets.
The costs of major improvements are capitalized. Expenditures for maintenance,
repairs and minor improvements are expensed as incurred. When property and
equipment are sold or retired, the cost and related accumulated depreciation are
removed and the resulting gain or loss is included in results of operations.
INCOME TAXES
The Company was included in SPI's consolidated federal income tax returns
for 1995, 1996, and 1997. 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.
F-80
<PAGE>
ICE/VARCO GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
INTANGIBLES AND OTHER NONCURRENT ASSETS
Intangibles and other noncurrent assets primarily consists of goodwill and
is amortized using the straight-line method over 15 years. Accumulated
amortization at September 30, 1996 and 1997 was $7,883 and $22,811,
respectively. There was no accumulated amortization at September 30, 1995.
REVENUE RECOGNITION
Service revenue is recognized upon performance, and sales revenue is
recognized as products are shipped or delivered.
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.
NEW ACCOUNTING PRONOUNCEMENT
Effective October 1, 1995, the Company adopted SFAS No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of." Accordingly, in the event that facts and circumstances indicate that
property and equipment, and intangible or other noncurrent assets, may be
impaired, an evaluation of recoverability would be performed. If an evaluation
is required, the estimated future undiscounted cash flows associated with the
asset are compared to the asset's carrying amount to determine if a write-down
to market value or discounted cash flow value is necessary. Adoption of this
standard did not have a material effect on the combined financial position or
results of operations of the Company.
3. ACQUISITION OF BAS:
In August 1996, SPI acquired BAS in a purchase transaction. The financial
results of the acquisition have been included in the combined financial
statements of the Company from the date of acquisition. The pro forma effect of
the acquisition was not material to the results of operations or financial
position of the Company. The fair value of assets acquired is summarized as
follows:
Cash.................................... $ 45,516
Accounts receivable..................... 144,869
Property and equipment.................. 57,593
Intangible assets....................... 223,926
Accounts payable........................ (67,707)
Accrued liabilities..................... (86,031)
Debt assumed............................ (218,166)
------------
Net assets acquired................ 100,000
Less -- Debt issued..................... (100,000)
------------
Cash paid for acquisition.......... $ --
============
F-81
<PAGE>
ICE/VARCO GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
4. PROPERTY AND EQUIPMENT:
Property and equipment consists of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30
ESTIMATED ----------------------------------------
USEFUL LIVES 1995 1996 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Buildings............................... 31 years $ 193,047 $ 193,047 $ 193,047
Vehicles................................ 3-5 years 129,295 162,797 211,813
Furniture and fixtures.................. 5-7 years 129,573 148,007 150,352
Office equipment........................ 5-7 years 237,757 344,993 402,612
Machinery and equipment................. 5-7 years 299,163 325,798 345,921
Leasehold improvements.................. 7-31 years 317,456 385,900 422,147
------------ ------------ ------------
1,306,291 1,560,542 1,725,892
Less -- Accumulated depreciation........ (455,806) (580,616) (773,132)
------------ ------------ ------------
Property and equipment, net............. $ 850,485 $ 979,926 $ 952,760
============ ============ ============
</TABLE>
5. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:
Activity in the Company's allowance for doubtful accounts for the years
ended September 30, 1995, 1996 and 1997 consists of the following:
1995 1996 1997
--------- --------- ---------
Balance at beginning of year......... $ 17,000 $ 40,000 $ 47,713
Additions charged to results of
operations........................... 23,000 7,713 (9,219)
--------- --------- ---------
Balance at end of year............... $ 40,000 $ 47,713 $ 38,494
========= ========= =========
Accounts payable and accrued expenses as of September 30, 1995, 1996 and
1997 consist of the following:
1995 1996 1997
------------ ------------ ------------
Accounts payable..................... $ 1,243,559 $ 1,252,390 $ 1,147,221
Accrued salaries, bonuses and
profit-sharing..................... 297,344 335,292 363,153
Income and other taxes payable....... 36,667 107,955 92,878
------------ ------------ ------------
$ 1,577,570 $ 1,695,637 $ 1,603,252
============ ============ ============
6. SHORT-TERM DEBT:
The Company had three revolving credit arrangements. ICE and VARCO had
revolving credit facilities with a bank which was secured by accounts receivable
and inventory. These facilities bore interest, payable monthly, at a rate of
prime plus 0.50% (9.25% at September 30, 1996). A total of approximately
$733,000 and $594,000 was drawn for the two facilities at September 30, 1995 and
1996, respectively. BAS was party to a $200,000 commercial revolving note
agreement, which was secured by accounts receivable and bore interest, due
monthly, at prime plus 1.50% (9.75% at September 30, 1996). At September 30,
1996, approximately $175,000 was drawn on the line.
In July 1997, SPI refinanced its revolving credit arrangements, including
the Company's revolving facilities. The new facilities have terms similar to the
previous revolving credit agreements. The new facilities mature in July 1999,
bear interest at prime plus 0.25% (8.75% at September 30, 1997) and are secured
by accounts receivable and inventory.
F-82
<PAGE>
ICE/VARCO GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
In connection with the purchase of the Company by Invatec in October 1997,
certain debt of the Company was paid and replaced with borrowings from Invatec.
These borrowings with Invatec are classified as amounts due to affiliates at
October 31, 1997.
7. LONG-TERM DEBT:
Long-term debt consists of the following:
SEPTEMBER 30
--------------------------------------
1995 1996 1997
------------ ------------ ----------
Note payable to former SPI
stockholder, monthly installments
of principal and interest in the
amount of $4,805, bearing interest
at 9.50%, secured by general
Company assets..................... $ 150,000 $ 127,861 $ 80,312
Note payable to a bank, monthly
principal installments of $3,300,
bearing interest at 7.75% secured
by general Company assets.......... 192,500 152,900 --
Note payable to a government agency,
monthly installments of principal
and interest of $1,592, bearing
interest at 5.01% secured by
general Company assets............. 139,702 128,643 115,618
Notes payable, due in monthly
installments, bearing interest from
8.00% to 9.50%, secured by certain
vehicles and certain equipment..... 89,308 146,786 23,000
Unsecured note payable to
employee-consultant and former
owner of BAS, annual installments
of principal and interest in the
amount of $13,011, bearing interest
at 8.00%........................... -- 75,000 68,419
Unsecured note payable to former
employee, noninterest-bearing...... -- 30,000 --
------------ ------------ ----------
571,510 661,190 287,349
Less -- Current maturities........... (116,155) (203,961) (85,205)
------------ ------------ ----------
Total long-term debt............ $ 455,355 $ 457,229 $ 202,144
============ ============ ==========
Management estimates that the fair value of its debt obligations
approximates the historical value at September 30, 1995, 1996 and 1997.
Maturities of long-term debt are as follows:
Year ending September 30 --
1998............................ $ 85,205
1999............................ 61,963
2000............................ 23,977
2001............................ 25,463
2002............................ 27,044
Thereafter...................... 63,697
----------
$ 287,349
==========
F-83
<PAGE>
ICE/VARCO GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
8. INCOME TAXES:
The Company is included in the consolidated federal income tax return of
SPI. SPI pays the federal income tax liability for all its subsidiaries for any
period in which an amount is due. Each subsidiary, including each company within
ICE/VARCO Group, pays to SPI the amount of federal income tax liability it would
have owed on a stand-alone basis, and SPI pays to each subsidiary the amount of
any federal income tax benefit attributable to each such subsidiary.
Federal and state income tax provision (benefit) are as follows:
YEAR ENDED SEPTEMBER 30
---------------------------------
1995 1996 1997
---------- ---------- ---------
Federal --
Current............................ $ 69,500 $ 108,592 $ 2,917
Deferred........................... (13,200) 3,157 336
State --
Current............................ 16,600 26,053 515
Deferred........................... (2,800) 557 59
---------- ---------- ---------
$ 70,100 $ 138,359 $ 3,827
========== ========== =========
Actual income tax provision differs from income tax provision computed by
applying the U.S. federal statutory corporate tax rate to income before income
taxes as follows:
YEAR ENDED
SEPTEMBER 30
-------------------------------
1995 1996 1997
--------- --------- ---------
Statutory federal income tax rate....... 34% 34% 34%
State and local taxes................... 6 6 6
Effect of nondeductible meals and
entertainment......................... 4 5 5
--------- --------- ---------
Effective income tax rate............... 44% 45% 45%
========= ========= =========
Deferred income taxes consist of the following:
YEAR ENDED SEPTEMBER 30
----------------------------------
1995 1996 1997
---------- ---------- ----------
Current deferred tax assets............. $ 16,000 $ 12,286 $ 11,891
Noncurrent deferred tax assets.......... -- -- --
---------- ---------- ----------
Net deferred tax assets............ $ 16,000 $ 12,286 $ 11,891
========== ========== ==========
9. COMMITMENTS AND CONTINGENCIES:
LITIGATION
In the ordinary course of its business, the Company has become involved in
various legal matters. Management does not believe that the outcome of these
legal matters will have a material effect on the Company's combined financial
position or results of operations.
GUARANTEES OF AFFILIATED COMPANIES' DEBT
The Company's assets are pledged as collateral under certain credit
arrangements entered into by SPI and certain of its other subsidiaries, and the
Company is jointly and severally liable for any defaults under those
arrangements. SPI's new credit facilities include covenants requiring that
certain financial ratios be maintained. Management does not believe, if the
Company were required to perform under such guarantees,
F-84
<PAGE>
ICE/VARCO GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
any losses from these agreements would be material. To date, the Company has not
been required to perform under these guarantees.
In connection with the purchase of the Company by Invatec in October 1997,
the guarantees referred to above were terminated.
LEASES
Aggregate minimum rental commitments under significant noncancelable
operating leases with lease terms in excess of one year as of September 30, 1997
are as follows:
Year ending September 30 --
1998............................... $ 85,200
1999............................... 85,200
2000............................... 85,200
2001............................... 85,200
2002............................... 85,200
Thereafter......................... 619,300
------------
$ 1,045,300
============
The Company incurred total rental expense of approximately $132,000,
$131,000 and $135,000 for fiscal 1995, 1996 and 1997, respectively.
EMPLOYEE BENEFITS
The Company participates in a profit sharing plan offered by SPI to all
salaried employees who have met certain length-of-service requirements.
Employees can contribute up to 4 percent of their salary, which is matched 100
percent by the Company. For fiscal 1995, 1996 and 1997 the Company also made
discretionary contributions. The Company's total contributions for fiscal 1995,
1996 and 1997 were $92,000, $133,000 and $119,000, respectively.
10. RELATED-PARTY TRANSACTIONS:
As described in Note 1, the Company is a wholly owned part of an affiliated
group of companies owned by SPI operating in the valve repair and distribution
services business. Certain selling, general and administrative expenses incurred
by SPI have been allocated to the Company for fiscal 1995, 1996 and 1997 in the
amounts of approximately $228,000, $263,000 and $548,000, respectively. The
Company also purchases and sells valve and valve repair parts, materials and
services from other subsidiaries of SPI. During fiscal 1996 and 1997, its total
purchases from the other SPI subsidiaries approximated $311,000 and $506,000,
respectively. Total sales by the Company to the other SPI subsidiaries
approximated $1,527,000 and $1,917,000.
11. SIGNIFICANT CUSTOMER:
During fiscal 1995, 1996 and 1997, the Company had one customer that
accounted for approximately 13%, 19% and 13%, respectively, of the Company's
combined revenues.
F-85
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Stockholders of
GSV, Inc.:
We have audited the accompanying balance sheets of GSV, Inc. (the Company)
as of December 31, 1995 and 1996, and the related statements of operations,
stockholders' equity, and cash flows for each of the three years in the period
ended December 31, 1996. We have also audited the statements of operations,
stockholders' equity, and cash flows of GSV, Inc. for the two months ended
February 28, 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 the Company as of December
31, 1995 and 1996, and the results of its operations and its cash flows for each
of the three years in the period ended December 31, 1996, and for the two months
ended February 28, 1997, in conformity with generally accepted accounting
principles.
Deloitte & Touche LLP
Orlando, Florida
February 20, 1998
F-86
<PAGE>
GSV, INC.
BALANCE SHEETS
DECEMBER 31
--------------------------
1995 1996
------------ ------------
ASSETS
CURRENT ASSETS:
Cash............................ $ 11,059 $ 10,084
Accounts receivable............. 1,509,218 1,612,693
Inventories..................... 833,332 1,079,493
Prepaid expenses and other
current assets................. 27,883 32,213
------------ ------------
Total current assets....... 2,381,492 2,734,483
------------ ------------
PROPERTY AND EQUIPMENT -- Net........ 1,058,170 1,177,044
------------ ------------
OTHER NONCURRENT ASSETS.............. 43,976 27,869
------------ ------------
$ 3,483,638 $ 3,939,396
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Note payable to bank............ $ 362,000 $ 426,000
Accounts payable................ 615,484 494,688
Accrued expenses and other
current liabilities............ 402,669 253,444
Stockholders' distributions
payable........................ -- 200,500
Current maturities of long-term
debt........................... 183,378 193,372
------------ ------------
Total current
liabilities.................. 1,563,531 1,568,004
------------ ------------
LONG-TERM DEBT -- Less current
portion.............................. 384,214 267,899
------------ ------------
Total liabilities.......... 1,947,745 1,835,903
------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, $.10 par value,
5,000,000 shares authorized,
3,865,489 shares issued........ 386,549 386,549
Additional paid-in capital...... 765,211 765,211
Retained earnings............... 384,133 951,733
Treasury stock -- at cost,
10,000 shares.................. -- --
------------ ------------
Total stockholders'
equity....................... 1,535,893 2,103,493
------------ ------------
$ 3,483,638 $ 3,939,396
============ ============
See notes to financial statements.
F-87
<PAGE>
GSV, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 TWO MONTHS
------------------------------------------ ENDED
1994 1995 1996 FEBRUARY 28, 1997
------------ ------------ -------------- -----------------
<S> <C> <C> <C> <C>
REVENUES............................. $ 8,922,688 $ 8,653,737 $ 10,227,117 $ 1,636,716
COST OF OPERATIONS................... 7,190,890 6,661,559 7,688,077 1,258,288
------------ ------------ -------------- -----------------
Gross profit............... 1,731,798 1,992,178 2,539,040 378,428
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES........................... 1,521,956 1,481,704 1,276,112 243,132
------------ ------------ -------------- -----------------
INCOME FROM OPERATIONS............... 209,842 510,474 1,262,928 135,296
OTHER INCOME (EXPENSES):
Interest expense................ (92,558) (98,073) (78,365) (17,040)
Other, net...................... 9,740 (31,130) 5,817 (3,209)
------------ ------------ -------------- -----------------
Other income (expenses),
net........................ (82,818) (129,203) (72,548) (20,249)
------------ ------------ -------------- -----------------
NET INCOME........................... $ 127,024 $ 381,271 $ 1,190,380 $ 115,047
============ ============ ============== =================
</TABLE>
See notes to financial statements.
F-88
<PAGE>
GSV, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
ADDITIONAL TOTAL
COMMON PAID-IN RETAINED TREASURY STOCKHOLDERS'
STOCK CAPITAL EARNINGS STOCK EQUITY
---------- ---------- ------------ -------- -------------
<S> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1994................ $ 386,549 $ 765,211 $ 1,162 $ -- $ 1,152,922
Net income......................... -- -- 127,024 -- 127,024
Distributions to stockholders...... -- -- (125,324) -- (125,324)
---------- ---------- ------------ -------- -------------
BALANCE, DECEMBER 31, 1994.............. 386,549 765,211 2,862 -- 1,154,622
Net income......................... -- -- 381,271 -- 381,271
---------- ---------- ------------ -------- -------------
BALANCE, DECEMBER 31, 1995.............. 386,549 765,211 384,133 -- 1,535,893
Net income......................... -- -- 1,190,380 -- 1,190,380
Distributions to stockholders...... -- -- (622,780) -- (622,780)
---------- ---------- ------------ -------- -------------
BALANCE, DECEMBER 31, 1996.............. $ 386,549 $ 765,211 $ 951,733 -- 2,103,493
Net income......................... -- -- 115,047 -- 115,047
Distributions to stockholders...... -- -- (24,500) -- (24,500)
Purchase of treasury stock......... -- -- -- (20,000) (20,000)
---------- ---------- ------------ -------- -------------
BALANCE, FEBRUARY 28, 1997.............. $ 386,549 $ 765,211 $ 1,042,280 $(20,000) $ 2,174,040
========== ========== ============ ======== =============
</TABLE>
See notes to financial statements.
F-89
<PAGE>
GSV, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 TWO MONTHS
----------------------------------- ENDED
1994 1995 1996 FEBRUARY 28, 1997
---------- ---------- ----------- -----------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income....................... $ 127,024 $ 381,271 $ 1,190,380 $ 115,047
Adjustments to reconcile net
income to net cash provided by
operating activities:
Depreciation and
amortization................ 419,723 433,441 186,986 34,106
(Gain) loss on sale of property
and equipment............... 3,504 -- (789) 4,873
(Increase) decrease in accounts
receivable.................. (287,517) 136,231 (103,475) 267,138
(Increase) decrease in
inventories................. 65,160 (58,546) (246,161) (393,423)
(Increase) decrease in prepaid
expenses and other current
assets...................... 9,770 10,700 (4,330) (46,668)
Increase (decrease) in accounts
payable..................... 422,422 (351,578) (2,539) 328,227
Increase (decrease) in accrued
expenses and other current
liabilities................. 85,247 (26,427) 68 24,703
---------- ---------- ----------- -----------------
Net cash provided by
operating activities...... 845,333 525,092 1,020,140 334,003
---------- ---------- ----------- -----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and
equipment...................... (616,772) (143,234) (292,414) (53,003)
Proceeds from sale of property
and equipment.................. 3,596 -- 3,450 --
Purchase of intangible assets.... (32,062) -- -- (3,010)
---------- ---------- ----------- -----------------
Net cash used in investing
activities................ (645,238) (143,234) (288,964) (56,013)
---------- ---------- ----------- -----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in cash
overdrafts..................... (255,355) 232,375 (118,257) 165,243
Loan proceeds.................... 463,115 -- 83,704 --
Principal payments on long-term
debt........................... (165,263) (201,776) (190,025) (36,026)
Payments under covenant
obligations.................... (348,354) (116,118) (149,293) (82,944)
Net change in demand note payable
to bank........................ 181,000 (164,000) 64,000 (86,000)
Stockholder distributions........ (75,194) (125,324) (422,280) (225,000)
Purchase of treasury stock....... -- -- -- (20,000)
---------- ---------- ----------- -----------------
Net cash used in financing
activities................ (200,051) (374,843) (732,151) (284,727)
---------- ---------- ----------- -----------------
NET INCREASE (DECREASE) IN CASH...... 44 7,015 (975) (6,737)
CASH, BEGINNING OF PERIOD............ 4,000 4,044 11,059 10,084
---------- ---------- ----------- -----------------
CASH, END OF PERIOD.................. $ 4,044 $ 11,059 $ 10,084 $ 3,347
========== ========== =========== =================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION -- Cash paid during the
period for interest................ $ 87,465 $ 102,711 $ 78,573 $ 15,008
========== ========== =========== =================
SUPPLEMENTAL DISCLOSURE OF NONCASH
FINANCING AND INVESTING
ACTIVITIES -- Accrual of
distributions payable to
stockholders....................... $ 125,324 $ -- $ 200,500 $ --
========== ========== =========== =================
</TABLE>
See notes to financial statements.
F-90
<PAGE>
GSV, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1994, 1995, AND 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND OPERATIONS
GSV, Inc. (the "Company") is incorporated in the State of Florida and is
comprised of three operating divisions: Gould Machine, Southern Valve, and Ash
Tool. Gould Machine provides contract machining, Southern Valve repairs and
sells valves, and Ash Tool sells certain parts primarily associated with the
industries serviced by the other divisions. All interdivisional transactions and
balances have been eliminated from the financial statements. The Company's main
office is located in Tampa, Florida. On April 26, 1994, the Company purchased a
new facility and moved the Southern Valve Division to this facility in September
of 1994. Costs incurred in moving this division were charged to operations and
amounted to $60,931 for the year ended December 31, 1994. Each division's
business activity is primarily in the State of Florida.
ACCOUNTS RECEIVABLE
There is no allowance for doubtful accounts at December 31, 1995 or 1996.
INVENTORIES
Inventories at December 31, 1995 and 1996 consist of the following:
1995 1996
---------- ------------
Raw materials........................... $ 691,950 $ 791,056
Work-in-process......................... 51,792 206,206
Tool division supplies.................. 89,590 82,231
---------- ------------
Total.............................. $ 833,332 $ 1,079,493
========== ============
Inventories are valued at the lower of cost (first-in, first-out) or
market. Work-in-process inventories are comprised of direct materials, direct
labor, and manufacturing overhead.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is computed using
both accelerated and straight-line methods, using useful lives ranging from 3 to
40 years.
CASH OVERDRAFTS
Accounts payable in the accompanying balance sheets are inclusive of cash
overdrafts of approximately $316,900 and $198,700 as of December 31, 1995 and
December 31, 1996, respectively.
REVENUE RECOGNITION
Revenue is recognized as services are performed and products are shipped.
INCOME TAXES
The stockholders of the Company elected in 1990 to be taxed under the
Subchapter S provisions of the Internal Revenue Code. Under this section,
taxable income and applicable tax credits are deemed to flow to the individual
stockholders, and no state or federal income taxes are imposed on the Company.
Accordingly, no provision has been made for income taxes.
Under current tax law, whenever an enterprise converts from a taxable C
corporation status to S status, the enterprise may be subject to a corporate
level tax if certain built-in gains present at the date of conversion are
realized within a ten-year period following the conversion elections. The
built-in gain remaining as of February 28, 1997 from the Company's conversion to
S status was approximately $907,000. Management does not presently anticipate
that the assets subject to built-in gains tax will be sold or disposed of within
the ten-year period.
F-91
<PAGE>
GSV, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FAIR VALUE OF FINANCIAL INSTRUMENTS
Management of the Company believes that the carrying value of its financial
instruments is a reasonable estimate of their fair value.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
NEW ACCOUNTING PRONOUNCEMENT
Effective January 1, 1995, the Company adopted Statement of Financial
Accounting Standards No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS
AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF. Accordingly, in the event that
facts and circumstances indicate that property and equipment, and intangible or
other assets, may be impaired, an evaluation of recoverability would be
performed. If an evaluation is required, the estimated future undisclosed cash
flows associated with the asset are compared to the asset's carrying amount to
determine if a write-down to market value or discounted cash flow value is
necessary. Adoption of Statement 121 did not have an effect on the financial
position or results of operations of the Company.
2. PROPERTY AND EQUIPMENT
Property and equipment consist of the following at December 31, 1995 and
1996:
1995 1996
-------------- --------------
Land and building.................... $ 384,634 $ 521,918
Machinery and equipment.............. 2,105,916 2,160,202
Vehicles............................. 505,767 536,012
Leasehold improvements............... 349,976 349,976
Office furniture and equipment....... 168,705 175,735
-------------- --------------
Total cost........................... 3,514,998 3,743,843
Less accumulated depreciation........ (2,456,828) (2,566,799)
-------------- --------------
Total........................... $ 1,058,170 $ 1,177,044
============== ==============
Property and equipment depreciation and amortization expense for the years
ended December 31, 1994, 1995, 1996 and for the two months ended February 28,
1997, amounted to $164,631, $180,311, $170,879 and $32,197, respectively.
3. OTHER ASSETS
COVENANTS NOT-TO-COMPETE
On December 19, 1990, the Company entered into four covenants
not-to-compete with four former shareholders, who are also current employees.
Under the terms of the agreements, total noncompete payments amounting to
$1,161,181 are payable to the employees under a cash available formula. Each
agreement was for a sixty-month period which expired December 31, 1995.
Amortization of the covenants, which is included in selling, general, and
administrative expenses in the statements of operations, is computed on the
straight-line method over the covenant period, and amounted to $232,236,
$232,237, $-0-and $-0- for the years ended December 31, 1994, 1995, 1996 and for
the two months ended February 28, 1997, respectively.
F-92
<PAGE>
GSV, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
4. NOTE PAYABLE TO BANK
The Company has available two lines of credit from a financial institution
in the total maximum amount of $600,000, payable on demand and renewable
annually. Draws under the lines are limited to the lesser of 75% of accounts
receivable with balances outstanding less than 90 days or $600,000. The lines
bear interest at the prime rate plus 1% (9.25% at December 31, 1996), with
interest payable monthly. The lines are collateralized by accounts receivable,
inventory, and an unconditional guarantee from the Company's president. The
balances outstanding at December 31, 1995 and 1996 amounted to $362,000 and
$426,000, respectively.
5. LONG-TERM DEBT
Long-term debt at December 31, 1995 and 1996 consists of the following:
1995 1996
---------- ----------
Note payable in the original amount
of $535,000, interest at prime plus
.5% (8.75% at December 31, 1996),
collateralized by all equipment,
inventory, a life insurance policy,
and a cross-collateralization which
was secured in favor of the line of
credit, payable in monthly
principal installments of $8,925
plus interest, final principal
payment due in full on or before
February 15, 1999.................. $ 339,150 $ 232,050
Mortgage note payable in the original
amount of $168,000, interest at 7%,
collateralized by land and
buildings with a carrying amount of
approximately $503,000 at December
31, 1996, payable in monthly
installments of principal and
interest of $3,327 through May
1999............................... 120,994 88,516
Installment loans, interest at
varying rates of 7.5% to 11.3%
collateralized by vehicles with a
carrying amount of approximately
$159,000 at December 31, 1996,
payable in monthly installments of
principal and interest totaling
$7,891 through October 2000, when
final payment is due on the last
installment note................... 107,448 140,705
---------- ----------
567,592 461,271
Less current maturities.............. 183,378 193,372
---------- ----------
$ 384,214 $ 267,899
========== ==========
Maturities of long-term debt are as
follows:
1997............................ $ 193,372
1998............................ 193,033
1999............................ 64,158
2000............................ 10,708
----------
Total........................... $ 461,271
==========
F-93
<PAGE>
GSV, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
6. OPERATING LEASE COMMITMENTS
The Company is obligated under an operating lease agreement for its
facility in Tampa which expires in June 2001. The Company is obligated on
various equipment leases which expire from 1997 to 2000. At December 31, 1996,
the future minimum rental payments required under the leases are as follows:
YEAR ENDING
DECEMBER 31,
---------------
1997.................................. $ 67,711
1998.................................. 68,028
1999.................................. 69,433
2000.................................. 70,006
2001.................................. 34,000
----------
$ 309,178
==========
Total rent expense charged to operations under these agreements amounted to
$64,172, $61,786, $62,634 and $12,253 during 1994, 1995, 1996 and for the two
months ended February 28, 1997, respectively.
7. EMPLOYEE BENEFIT PLANS
401(K) SAVINGS PLAN
The Company sponsors a participant directed cash deferred 401(k) plan (the
Plan). Employees who are employed for one full year and complete 1,000 hours of
service may elect to participate in the Plan. The Company elected to match
employee deferrals at a rate of 40% on the first 6% during 1994, 33 1/3% on the
first 6% during 1995 and 50% on the first 6% deferred during 1996 and 1997,
which amounted to $38,553, $27,046, $45,288 and $8,588 during 1994, 1995, 1996
and for the two months ended February 28, 1997, respectively.
HEALTH INSURANCE PLAN
On November 1, 1995, the Company began providing certain benefits to
employees under a health insurance plan. Prior to November 1, 1995, the Company
provided healthcare benefits under a plan that was primarily self-funded except
for two reinsurance policies. Healthcare expenses incurred under these plans
amounted to $173,254, $234,019, $116,175 and $23,109 during 1994, 1995, 1996 and
for the two months ended February 28, 1997, respectively.
8. COMMITMENTS AND CONTINGENCIES
On November 20, 1992, the Company was notified by the EPA of its potential
liability for the generation of potentially hazardous waste under the Bay Drum
Superfund Site. Management believes that the Company is a de micromis potential
responsible party at the site, and any liability of the Company related to this
matter is insignificant. The Company is one of hundreds of parties which have
been identified with the site. The Company received no correspondence from any
parties regarding this matter during 1994, 1995, 1996 or 1997.
9. SIGNIFICANT CUSTOMERS
No customers generated greater than 10% of the Company's revenue for the
years ended December 31, 1994 and 1995. Two customers generated revenue to the
Company representing 11% and 10%, respectively, of total revenues for the year
ended December 31, 1996. One customer generated revenue to the Company
representing 11.7% of total revenues for the two months ended February 28, 1997.
10. SUBSEQUENT EVENT
Effective March 1, 1997, the entire equity ownership of the Company was
acquired by The Safe Seal Company for total consideration in excess of the
recorded amounts of the Company's net assets.
F-94
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Plant Specialties, Inc.:
We have audited the accompanying balance sheets of Plant Specialties, Inc.
(a Louisiana corporation), as of October 31, 1995 and 1996, and the related
statements of operations, stockholders' equity and cash flows for each of the
three years in the period ended October 31, 1996 and for the period from
November 1, 1996 through May 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 audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Plant Specialties, Inc., as
of October 31, 1995 and 1996, and the results of its operations and its cash
flows for each of the three years in the period ended October 31, 1996 and for
the period from November 1, 1996 through May 31, 1997, in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
March 10, 1998
F-95
<PAGE>
PLANT SPECIALTIES, INC.
BALANCE SHEETS
OCTOBER 31
--------------------------
1995 1996
------------ ------------
ASSETS
CURRENT ASSETS:
Cash............................... $ 6,019 $ 18,811
Accounts receivable, net of
allowance of $24,924 and
$21,168........................... 2,484,846 2,111,448
Inventories........................ 1,485,546 1,681,887
Prepaid expenses and other current
assets............................ 76,220 87,291
------------ ------------
Total current assets.......... 4,052,631 3,899,437
PROPERTY AND EQUIPMENT, net............. 2,102,708 2,003,345
OTHER NONCURRENT ASSETS................. 147,917 160,960
------------ ------------
$ 6,303,256 $ 6,063,742
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued
expenses.......................... $ 1,300,821 $ 1,061,771
Short-term debt.................... 1,809,984 1,428,453
Current maturities of long-term
debt.............................. 163,230 112,392
------------ ------------
Total current liabilities..... 3,274,035 2,602,616
LONG-TERM DEBT, net of current
maturities............................ 579,149 916,332
DEFERRED INCOME TAXES................... 102,830 89,233
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, no par value,
2,000,000 shares authorized,
1,000,000 shares issued and
outstanding....................... 8,500 8,500
Retained earnings.................. 2,338,742 2,447,061
------------ ------------
Total stockholders' equity.... 2,347,242 2,455,561
------------ ------------
$ 6,303,256 $ 6,063,742
============ ============
The accompanying notes are an integral part of these financial statements.
F-96
<PAGE>
PLANT SPECIALTIES, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31 SEVEN MONTHS
------------------------------------------ ENDED
1994 1995 1996 MAY 31, 1997
------------ -------------- ------------ ------------
<S> <C> <C> <C> <C>
REVENUES................................ $ 9,687,963 $ 11,526,424 $ 8,500,741 $6,699,460
COST OF OPERATIONS...................... 6,429,080 7,377,424 5,620,159 4,058,814
------------ -------------- ------------ ------------
Gross profit.................. 3,258,883 4,149,000 2,880,582 2,640,646
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES.............................. 2,590,125 2,991,155 2,489,494 1,659,679
------------ -------------- ------------ ------------
Income (loss) from
operations................. 668,758 1,157,845 391,088 980,967
OTHER INCOME (EXPENSE):
Interest, net...................... (149,556) (186,706) (188,116) (143,638)
Other.............................. 22,010 23,768 29,622 13,892
------------ -------------- ------------ ------------
(127,546) (162,938) (158,494) (129,746)
------------ -------------- ------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES....... 541,212 994,907 232,594 851,221
PROVISION FOR INCOME TAXES.............. 202,590 374,605 124,275 321,612
------------ -------------- ------------ ------------
NET INCOME.............................. $ 338,622 $ 620,302 $ 108,319 $ 529,609
============ ============== ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-97
<PAGE>
PLANT SPECIALTIES, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK
----------------- RETAINED
SHARES AMOUNT EARNINGS TOTAL
------ ------ ---------- ------------
<S> <C> <C> <C> <C>
BALANCE, October 31, 1993............... 1,000 $8,500 $1,379,818 $ 1,388,318
Net income......................... -- -- 338,622 338,622
------ ------ ---------- ------------
BALANCE, October 31, 1994............... 1,000 8,500 1,718,440 1,726,940
Net income......................... -- -- 620,302 620,302
------ ------ ---------- ------------
BALANCE, October 31, 1995............... 1,000 8,500 2,338,742 2,347,242
Net income......................... -- -- 108,319 108,319
------ ------ ---------- ------------
BALANCE, October 31, 1996............... 1,000 8,500 2,447,061 2,455,561
Net income......................... -- -- 529,609 529,609
------ ------ ---------- ------------
BALANCE, May 31, 1997................... 1,000 $8,500 $2,976,670 $ 2,985,170
====== ====== ========== ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-98
<PAGE>
PLANT SPECIALTIES, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE
YEAR ENDED OCTOBER 31 SEVEN MONTHS
----------------------------------------------- ENDED
1994 1995 1996 MAY 31, 1997
-------------- --------------- -------------- -------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................ $ 338,622 $ 620,302 $ 108,319 $ 529,609
Adjustments to reconcile net income
(loss) to net cash provided by
(used in) operating activities --
Depreciation and amortization.... 351,000 384,430 412,725 237,721
(Increase) decrease in --
Accounts receivable, net...... (438,502) (453,231) 373,398 (654,025)
Inventories................... 3,142 (222,584) (196,341) (208,337)
Prepaid expenses and other
assets..................... (151,791) 141,405 (24,114) (189,046)
Increase (decrease) in accounts
payable, accrued expenses and
deferred income taxes......... (42,259) 190,620 (252,647) (93,672)
-------------- --------------- -------------- -------------
Net cash provided by (used in)
operating activities....... 60,212 660,942 421,340 (377,750)
-------------- --------------- -------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment... (571,036) (993,985) (313,564) (166,129)
-------------- --------------- -------------- -------------
Net cash used in investing
activities................. (571,036) (993,985) (313,564) (166,129)
-------------- --------------- -------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings of debt.................... 220,618 651,231 947,966 72,333
Repayments of debt.................... (278,202) (424,756) (661,620) (65,562)
Borrowings (repayments) on line of
credit facility.................... 566,953 107,586 (381,330) 653,406
-------------- --------------- -------------- -------------
Net cash provided by (used in)
financing activities....... 509,369 334,061 (94,984) 660,177
-------------- --------------- -------------- -------------
NET INCREASE (DECREASE) IN CASH......... (1,455) 1,018 12,792 116,298
CASH, beginning of period............... 6,456 5,001 6,019 18,811
-------------- --------------- -------------- -------------
CASH, end of period..................... $ 5,001 $ 6,019 $ 18,811 $ 135,109
============== =============== ============== =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-99
<PAGE>
PLANT SPECIALTIES, INC.
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION:
Plant Specialties, Inc. (the "Company"), was incorporated in the State of
Louisiana in 1972 and is principally engaged in the business of selling new
valves, instrumentation automation, engineering services and repair services for
valves and instrumentation to the petrochemical and oil field industries. The
Company's fiscal year-end is October 31.
On June 16, 1997, the stockholders of the Company sold the entire equity
ownership of the Company to Innovative Valve Technologies, Inc. for total
consideration in excess of the recorded amounts of the Company's net assets.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost, and depreciation is computed
using the straight-line method over the estimated useful lives of the assets.
The costs of major improvements are capitalized. Expenditures for maintenance,
repairs and minor improvements are expensed as incurred. When property and
equipment are sold or retired, the cost and related accumulated depreciation are
removed and the resulting gain or loss is included in results of operations. The
Company capitalized interest related to construction-in-progress projects which
amounted to approximately $39,000 and $21,000 in fiscal 1995 and 1996,
respectively.
INCOME TAXES
The Company follows the liability method of accounting for income taxes in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 109.
Under this method, deferred income taxes are recorded based upon differences
between the financial reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates and laws that will be in effect when the
underlying assets or liabilities are realized or settled.
REVENUE RECOGNITION
Revenue is recognized as services are completed and products are shipped.
INVENTORIES
Inventories are valued at the lower of cost or market utilizing the
last-in, first-out method and primarily consist of raw materials and finished
goods. If the first-in, first-out method had been used for costing inventories,
the valuation assigned to inventories would have been approximately $1,700,000
and $1,902,000 as of October 31, 1995 and 1996, respectively.
CASH
Cash payments for interest during fiscal 1994, 1995 and 1996 were
approximately $155,000, $231,000 and $208,000, respectively. Cash payments for
taxes during fiscal 1994, 1995 and 1996 were approximately $172,000, $206,000
and $159,000, respectively.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
F-100
<PAGE>
PLANT SPECIALTIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NEW ACCOUNTING PRONOUNCEMENT
Effective November 1, 1995, the Company adopted SFAS No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of." Accordingly, in the event that facts and circumstances indicate that
property and equipment, and intangible or other assets, may be impaired, an
evaluation of recoverability would be performed. If an evaluation is required,
the estimated future undiscounted cash flows associated with the asset are
compared to the asset's carrying amount to determine if a write-down to market
value or discounted cash flow value is necessary. Adoption of this standard did
not have a material effect on the financial position or results of operations of
the Company.
3. PROPERTY AND EQUIPMENT:
Property and equipment consists of the following:
<TABLE>
<CAPTION>
ESTIMATED OCTOBER 31
USEFUL ------------------------------
LIVES 1995 1996
----------- -------------- --------------
<S> <C> <C> <C>
Buildings............................... 15-30 years $ 381,056 $ 896,422
Vehicles................................ 5 years 405,073 411,527
Furniture and fixtures.................. 3-5 years 22,957 22,957
Machinery and equipment................. 5 years 1,872,871 2,554,336
Leasehold improvements.................. 20 years 614,615 649,508
Construction in progress................ -- 925,114 --
-------------- --------------
4,221,686 4,534,750
Less -- Accumulated depreciation........ (2,118,978) (2,531,405)
-------------- --------------
Property and equipment, net............. $ 2,102,708 $ 2,003,345
============== ==============
</TABLE>
4. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:
Activity in the Company's allowance for doubtful accounts consists of the
following:
OCTOBER 31
--------------------------------
1994 1995 1996
--------- ---------- ---------
Balance at beginning of year............ $ 16,022 $ 19,728 $ 24,924
Additions (recovery) charged (credited)
to results of operations.............. 3,706 89,654 (1,019)
Deductions for uncollectible accounts
written off........................... -- (84,458) (2,737)
--------- ---------- ---------
$ 19,728 $ 24,924 $ 21,168
========= ========== =========
Inventories at LIFO consist of the following:
OCTOBER 31
--------------------------
1995 1996
------------ ------------
Raw material and work in process........ $ 1,422,617 $ 850,733
Finished goods.......................... 62,929 831,154
------------ ------------
$ 1,485,546 $ 1,681,887
============ ============
F-101
<PAGE>
PLANT SPECIALTIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Accounts payable and accrued expenses consist of the following:
OCTOBER 31
--------------------------
1995 1996
------------ ------------
Accounts payable, trade................. $ 603,877 $ 484,945
Accrued compensation and benefits....... 137,575 69,329
Accrued insurance....................... 49,963 56,463
Income taxes............................ 262,210 195,410
Other accrued expenses.................. 247,196 255,624
------------ ------------
$ 1,300,821 $ 1,061,771
============ ============
5. SHORT- AND LONG-TERM DEBT:
Short-term debt consists of a revolving credit facility with a bank, due
May 20, 1997, with interest due monthly at prime (8.25% at October 31, 1996).
The revolving debt is secured by accounts receivable and inventory. The
available borrowing capacity at October 31, 1996 was $2,000,000.
Long-term debt consists of the following:
OCTOBER 31
--------------------------
1995 1996
------------ ------------
Notes payable, monthly installments of
principal and interest of $34,000,
bearing interest at 7.50% to 11.00%,
collateralized by land, vehicles and
equipment............................. $ 742,379 $ 1,028,724
Less -- Current maturities......... (163,230) (112,392)
------------ ------------
Long-term debt.......................... $ 579,149 $ 916,332
============ ============
Pursuant to the revolving credit facility agreement, the Company is subject
to financial covenants relating to net worth, leverage ratios and debt service
coverage. At October 31, 1995 and 1996, the Company was in compliance with these
covenants.
The aggregate maturities of the long-term debt as of October 31, 1996 are
as follows:
1997................................. $ 112,392
1998................................. 108,358
1999................................. 110,997
2000................................. 86,527
2001................................. 610,450
Thereafter........................... --
------------
$ 1,028,724
============
Interest expense recorded pursuant to these debt agreements totaled
approximately $155,000, $192,000 and $213,000 in fiscal 1994, 1995 and 1996,
respectively. Management estimates that the fair value of its debt obligations
approximates historical value at October 31, 1996.
F-102
<PAGE>
PLANT SPECIALTIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
6. INCOME TAXES:
The Company's provision (benefit) for income taxes is as follows:
YEAR ENDED OCTOBER 31
----------------------------------
1994 1995 1996
---------- ---------- ----------
Federal --
Current......................... $ 190,004 $ 362,993 $ 112,912
Deferred........................ (1,810) (15,138) (11,252)
State --
Current......................... 14,534 27,758 23,679
Deferred........................ (138) (1,008) (1,064)
---------- ---------- ----------
$ 202,590 $ 374,605 $ 124,275
========== ========== ==========
Actual income tax expense differs from income tax expense computed by
applying the U.S. federal statutory corporate tax rate to income before income
tax as follows:
YEAR ENDED OCTOBER 31
-------------------------------
1994 1995 1996
--- --- ---
Statutory federal income tax rate.... 34% 34% 34%
State and local taxes................ 3 3 3
Effect of nondeductible meals and
entertainment........................ -- -- 10
Other................................ -- 1 6
--- --- ---
Effective income tax rate............ 37% 38% 53%
=== === ===
Deferred income taxes consist of the following:
OCTOBER 31
---------------------
1995 1996
---------- ---------
Current deferred tax assets............. $ 8,000 $ 6,403
Noncurrent deferred tax assets.......... -- --
---------- ---------
Total deferred tax assets..... 8,000 6,403
---------- ---------
Current deferred tax liabilities........ -- --
Noncurrent deferred tax liabilities..... 102,830 89,233
---------- ---------
Total deferred tax
liabilities................ 102,830 89,233
---------- ---------
Net deferred tax
liabilities................ $ 94,830 $ 82,830
========== =========
7. EMPLOYEE BENEFIT PLANS:
The Company sponsors a 401(k) profit-sharing plan covering all eligible
employees. The plan allows employee contributions under Section 401(k) of the
Internal Revenue Code. Eligible employees may elect to contribute up to 20
percent of eligible compensation on a pretax basis, subject to IRS limits. The
Company provides matching contributions of 50 percent of employee contributions
up to 6 percent of employee compensation. The Company contributed approximately
$36,000, $39,000 and $38,000 for fiscal 1994, 1995 and 1996, respectively.
F-103
<PAGE>
PLANT SPECIALTIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
8. COMMITMENTS AND CONTINGENCIES:
OPERATING LEASES
The Company leases warehouse, office facilities and vehicles under
operating leases which expire at various dates through 1999. Future minimum
lease payments at October 31, 1996 are as follows:
1997.................................... $ 140,943
1998.................................... 42,535
1999.................................... 24,813
Rent expense for fiscal 1994, 1995 and 1996 was approximately $289,000,
$361,000 and $240,000, respectively.
The Company leases its facilities from its president and majority
stockholder under an operating lease requiring monthly payments of approximately
$16,000 expiring April 30, 1997. The Company is responsible for all taxes,
insurance and maintenance. Rent expense pursuant to this lease for fiscal 1994,
1995 and 1996 was $191,000, $197,000 and $197,000, respectively.
LITIGATION
In the ordinary course of its business, the Company has become involved in
various legal matters. Management does not believe that the outcome of these
legal matters will have a material effect on the Company's financial position or
results of operations.
9. RELATED-PARTY TRANSACTIONS:
As of October 31, 1995 and 1996, the Company had a note receivable from the
president and majority stockholder of the Company in the amount of $80,080 and
$82,237, respectively. The note bears interest at 7 percent, payable in monthly
installments of $1,000.
10. REVENUES FROM SIGNIFICANT CUSTOMERS:
During fiscal 1996, five customers accounted for approximately 54 percent
of the Company's revenues. During fiscal 1995, five customers accounted for
approximately 67 percent of the Company's revenues. During fiscal 1994, four
customers accounted for approximately 77 percent of the Company's revenues.
F-104
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Southern Valve Group:
We have audited the accompanying combined balance sheet of Southern Valve
Group (as defined in Note 1) as of October 31, 1996, and the related combined
statements of operations, stockholders' equity and cash flows for each of the
two years in the period ended October 31, 1997. These combined financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the combined financial position of Southern
Valve Group as of October 31, 1996, and the results of their operations and
their cash flows for each of the two years in the period ended October 31, 1997
in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
March 10, 1998
F-105
<PAGE>
SOUTHERN VALVE GROUP
COMBINED BALANCE SHEETS
OCTOBER 31,
1996
-----------
ASSETS
CURRENT ASSETS:
Cash............................... $ 21,874
Accounts receivable, net of
allowance of $11,861.............. 473,581
Inventories........................ 1,301,987
Notes receivable................... 168,779
Prepaid expenses and other current
assets............................ 22,362
-----------
Total current assets.......... 1,988,583
PROPERTY AND EQUIPMENT, net............. 1,055,716
-----------
$ 3,044,299
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term
debt.............................. $ 517,105
Accounts payable and accrued
expenses.......................... 309,570
Note payable to stockholder........ 76,994
-----------
Total current liabilities..... 903,669
LONG-TERM DEBT, net of current
maturities............................ 1,363,166
DEFERRED INCOME TAXES................... 12,913
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, $10.00 par value,
1,000 shares authorized, 1,000
shares issued and outstanding..... 10,000
Additional paid-in capital......... 5,860
Retained earnings.................. 748,691
-----------
Total stockholders' equity.... 764,551
-----------
$ 3,044,299
===========
The accompanying notes are an integral part of these combined financial
statements.
F-106
<PAGE>
SOUTHERN VALVE GROUP
COMBINED STATEMENTS OF OPERATIONS
YEAR ENDED
OCTOBER 31
----------------------------
1996 1997
------------ -----------
REVENUES............................. $ 4,404,717 $ 4,033,016
COST OF OPERATIONS................... 2,962,337 2,712,458
------------ -----------
Gross profit.................... 1,442,380 1,320,558
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES........................... 1,175,487 1,180,360
------------ -----------
Income from operations.......... 266,893 140,198
OTHER INCOME (EXPENSE), net:
Interest........................... (177,123) (170,790)
Other.............................. 45,571 (38,500)
------------ -----------
(131,552) (209,290)
------------ -----------
INCOME BEFORE INCOME TAXES........... 135,341 (69,092)
PROVISION FOR INCOME TAXES........... 29,056 (14,510)
------------ -----------
NET INCOME (LOSS).................... $ 106,285 $ (54,582)
============ ===========
The accompanying notes are an integral part of these combined financial
statements.
F-107
<PAGE>
SOUTHERN VALVE GROUP
COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
----------------- PAID-IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS TOTAL
------ ------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C>
BALANCE, October 31, 1995............ 1,000 $10,000 $5,860 $ 642,406 $ 658,266
Net income...................... -- -- -- 106,285 106,285
------ ------- ---------- --------- ----------
BALANCE, October 31, 1996............ 1,000 10,000 5,860 748,691 764,551
Net loss........................ -- -- -- (54,582) (54,582)
------ ------- ---------- --------- ----------
BALANCE, October 31, 1997............ 1,000 $10,000 $5,860 $ 694,109 $ 709,969
====== ======= ========== ========= ==========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-108
<PAGE>
SOUTHERN VALVE GROUP
COMBINED STATEMENTS OF CASH FLOWS
YEAR ENDED
OCTOBER 31
--------------------------
1996 1997
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)..................... $ 106,285 $ (54,582)
Adjustments to reconcile net income to
net cash provided by (used in)
operating activities --
Depreciation and amortization.... 155,874 143,750
Loss on disposal of assets....... -- 38,500
Change in deferred income
taxes........................... 2,589 --
(Increase) decrease in --
Accounts receivable........... (188,676) 32,534
Inventories................... 60,920 (320,820)
Notes receivable.............. (10,957) 118,731
Prepaid expenses and other
current assets............ 17,094 (20,658)
Increase (decrease) in --
Accounts payable and accrued
expenses.................. 96,166 (72,238)
------------ ------------
Net cash provided by (used in)
operating activities............ 239,295 (134,783)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment... (308,362) (6,420)
------------ ------------
Net cash used in investing
activities...................... (308,362) (6,420)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings of debt.................... 738,512 482,814
Repayments of debt.................... (752,633) (121,838)
------------ ------------
Net cash provided by (used in)
financing activities............ (14,121) 360,976
------------ ------------
NET INCREASE (DECREASE) IN CASH......... (83,188) 219,773
CASH, beginning of period............... 105,062 21,874
------------ ------------
CASH, end of period..................... $ 21,874 $ 241,647
============ ============
The accompanying notes are an integral part of these combined financial
statements.
F-109
<PAGE>
SOUTHERN VALVE GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION:
The accompanying combined balance sheets and related combined statements of
operations, stockholders' equity and cash flows include Southern Valve Service,
Inc. ("Southern Valve") and 55 Leasing and Sales Company, Inc. ("55
Leasing"). As Southern Valve and 55 Leasing (together, "Southern Valve Group"
or the "Company") have common ownership and management, the financial
statements of each entity have been consolidated for financial reporting
purposes. All intercompany transactions and balances have been eliminated.
Southern Valve was incorporated in the State of Alabama in 1984 and is
principally engaged in the business of repairing, testing and selling manual,
control and safety relief valves to customers in the pulp and paper, chemical,
power generation and petrochemical industries in Alabama, Mississippi and
Georgia.
55 Leasing is an Alabama S Corporation organized in 1995 primarily to lease
equipment to Southern Valve.
In June 1997, pursuant to a definitive agreement, the stockholders of the
Company agreed to sell the entire equity ownership of the Company to Innovative
Valve Technologies, Inc. (Invatec), for total consideration in excess of the
recorded amounts of the Company's net assets. The transaction closed on the
consummation of Invatec's initial public offering.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
PROPERTY AND EQUIPMENT
Property and equipment is recorded at cost, and depreciation is computed
using the straight-line method over the estimated useful lives of the assets.
The costs of major improvements are capitalized. Expenditures for maintenance,
repairs and minor improvements are expensed as incurred. When property and
equipment is sold or retired, the cost and related accumulated depreciation is
removed and the resulting gain or loss is included in results of operations.
INCOME TAXES
The Company follows the liability method of accounting for income taxes in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 109.
Under this method, deferred income taxes are recorded based upon differences
between the financial reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates and laws that will be in effect when the
underlying assets or liabilities are recovered or settled. 55 Leasing is an S
Corporation for federal income tax purposes and, in accordance with the S
Corporation provisions of the Internal Revenue Code, the earnings of 55 Leasing
are included in the personal tax returns of its stockholders. Accordingly, no
federal or state income tax expense is recorded in the accompanying consolidated
financial statements for 55 Leasing.
REVENUE RECOGNITION
Service revenue is recognized upon completion of the service, and product
sales revenue is recognized as products are shipped or delivered.
CASH
Cash payments for interest during fiscal 1996 were approximately $178,000.
Cash payments for taxes during fiscal 1996 were approximately $15,000.
INVENTORIES
Inventories are valued at the lower of cost or market utilizing the
first-in, first-out method and primarily consist of valves and valve parts.
F-110
<PAGE>
SOUTHERN VALVE GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
NEW ACCOUNTING PRONOUNCEMENT
Effective November 1, 1995, the Company adopted SFAS No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of." Accordingly, in the event that facts and circumstances indicate that
property and equipment, and intangible or other assets, may be impaired, an
evaluation of recoverability would be performed. If an evaluation is required,
the estimated future undiscounted cash flows associated with the asset are
compared to the asset's carrying amount to determine if a writedown to market
value or discounted cash flow value is necessary. Adoption of this standard did
not have a material effect on the financial position or results of operations of
the Company.
3. PROPERTY AND EQUIPMENT:
Property and equipment consists of the following:
ESTIMATED OCTOBER 31,
USEFUL LIVES 1996
------------ -----------
Land.................................... -- $ 171,682
Buildings and improvements.............. 18-40 years 533,015
Vehicles................................ 5 years 433,900
Furniture and fixtures.................. 5-10 years 180,782
Machinery and equipment................. 5-10 years 688,398
-----------
2,007,777
Less -- Accumulated depreciation........ (952,061)
-----------
$ 1,055,716
===========
4. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:
Activity in the Company's allowance for doubtful accounts for the year
ended October 31, 1996, consists of the following:
Balance at beginning of year....... $ 8,759
Additions charged to results of
operations........................ 3,102
---------
Balance at end of year............. $ 11,861
=========
Accounts payable and accrued expenses as of October 31, 1996, consist of
the following:
Accounts payable................... $ 177,383
Customer deposits.................. 30,943
Accrued employee compensation and
benefits........................... 27,447
Other accrued expenses............. 73,797
----------
$ 309,570
==========
F-111
<PAGE>
SOUTHERN VALVE GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
5. DEBT:
As of October 31, 1996, debt consists of the following:
Lines of credit, aggregate borrowing
capacity of $350,000 with a commercial
bank, bearing interest at prime plus
1.00% (9.25% at October 31, 1996),
collateralized by inventory and
accounts receivable................... $ 190,000
Notes payable to banks, monthly
installments of principal and interest
in the amount of $34,264, bearing
interest at 7.00% to 10.00%,
collateralized by accounts receivable,
inventory, land, equipment and
vehicles.............................. 1,690,271
Unsecured demand note, payable to
stockholder, bearing interest at
8.00%................................. 76,994
------------
1,957,265
Less -- Current maturities.............. (594,099)
------------
Total long-term debt, net of
current maturities................ $ 1,363,166
============
In January 1997, the Company refinanced its notes payable to banks. The
refinanced debt is payable to one bank, bearing interest of 8.50% with monthly
installments of principal and interest. There was no significant change in
amount of the debt financed and no gain or loss on debt extinguishment to be
recognized. In addition, the Company's lines of credit have been replaced by a
$300,000 line of credit; as of April 18, 1997, there was no outstanding balance
due under the line of credit.
The aggregate maturities of the refinanced debt and unsecured demand note
are as follows:
For the Year Ending October 31 --
1997............................... $ 105,064
1998............................... 151,856
1999............................... 993,226
2000............................... 92,545
2001............................... 46,637
Thereafter......................... 465,145
------------
$ 1,854,473
============
Interest expense recorded pursuant to these debt agreements totaled
approximately $177,000 in fiscal 1996. Management estimates that the fair value
of its debt obligations approximates the historical value at October 31, 1996.
6. INCOME TAXES:
The income tax provision for fiscal 1996 is as follows:
Federal --
Current............................ $ 22,366
Deferred........................... 2,243
State --
Current............................ 4,101
Deferred........................... 346
---------
$ 29,056
=========
F-112
<PAGE>
SOUTHERN VALVE GROUP
NOTES TO COMBINED 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 for fiscal 1996, as follows:
Statutory federal income tax rate....... 34%
Effect of federal graduated tax rate.... (12)
State and local taxes................... 3
Effect of S Corporation election........ (7)
Effect of nondeductible meals and
entertainment......................... 2
Other................................... 2
---
Effective income tax rate............... 22%
===
Deferred income taxes as of October 31, 1996, consist of the following:
Current deferred tax assets.......... $ 7,143
----------
Total deferred tax
assets................ 7,143
----------
Noncurrent deferred tax
liabilities.......................... (12,913)
----------
Total deferred tax
liabilities........... (12,913)
----------
Net deferred tax
liabilities........... $ (5,770)
==========
7. COMMITMENTS AND CONTINGENCIES:
LITIGATION
In the ordinary course of its business, the Company has become involved in
various legal matters. Management does not believe that the outcome of these
legal matters will have a material effect on the Company's consolidated
financial position or results of operations.
8. RELATED-PARTY TRANSACTIONS:
As of October 31, 1996, the Company had a note receivable from a
stockholder in the amount of $161,279. The note receivable bears interest
equivalent to the short-term federal treasury rate and is payable on demand.
9. SIGNIFICANT CUSTOMERS:
For fiscal 1996, the Company had two customers that comprised approximately
19% and 12%, respectively, of total revenues.
F-113
<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 each of the 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 each
of 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
F-114
<PAGE>
DALCO, INC.
BALANCE SHEETS
OCTOBER 31
--------------------------
1996 1997
------------ ------------
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
============ ============
The accompanying notes are an integral part of these financial statements.
F-115
<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.
F-116
<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.
F-117
<PAGE>
DALCO, INC.
STATEMENTS OF CASH FLOWS
YEAR ENDED OCTOBER 31
--------------------------
1996 1997
------------ ------------
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
The accompanying notes are an integral part of these financial statements.
F-118
<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.
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.
F-119
<PAGE>
DALCO, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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.
F-120
<PAGE>
DALCO, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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
==========
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.
F-121
<PAGE>
DALCO, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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
Thereafter..................... 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.
F-122
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Cypress Industries, Inc.
Schaumburg, Illinois
We have audited the accompanying balance sheet of Cypress Industries, Inc.
as of December 31, 1997 and the related statements of income, shareholders'
equity, and cash flows for the year then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Cypress Industries, Inc. as
of December 31, 1997, and the results of its operations and its cash flows for
the year then ended in conformity with generally accepted accounting principles.
Crowe, Chizek and Company LLP
Oak Brook, Illinois
February 12, 1998
F-123
<PAGE>
CYPRESS INDUSTRIES, INC.
BALANCE SHEET
DECEMBER 31, 1997
ASSETS
Current assets
Cash............................... $ 24,803
Accounts receivable, less allowance
for doubtful accounts of
$165,000........................ 3,198,719
Accounts receivable -- other....... 39,159
Inventories........................ 348,930
Costs in excess of billings on
uncompleted contracts........... 216,499
------------
Total current assets....... 3,828,110
Property and equipment, net (Note
2)................................... 3,602,181
Other assets
Deposits........................... 10,779
Organizational costs, less
accumulated amortization of
$107,661........................ 272,339
------------
283,118
------------
$ 7,713,409
============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Line of credit (Note 3)............ $ 1,800,000
Checks written in excess of bank
balance......................... 88,821
Current portion of long-term debt
(Note 4)........................ 640,029
Accounts payable................... 413,796
Accrued expenses................... 683,659
------------
Total current
liabilities.................. 3,626,305
Long-term debt, less current
maturities (Note 4).................. 2,136,823
Shareholders' equity
Common stock -- no par value; 300
shares authorized; 200 shares
issued and outstanding.......... 1,500,000
Retained earnings.................. 450,281
------------
Total shareholders'
equity....................... 1,950,281
------------
$ 7,713,409
============
See accompanying notes to financial statements.
F-124
<PAGE>
CYPRESS INDUSTRIES, INC.
STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1997
Revenues................................ $ 20,061,164
Cost of services........................ 14,790,576
--------------
GROSS PROFIT............................ 5,270,588
General and administrative expenses..... 4,439,881
--------------
INCOME FROM OPERATIONS.................. 830,707
Other income (expense)
Gain on sale of fixed assets.......... 5,953
Interest expense...................... (477,332)
Interest income....................... 2,728
--------------
(468,651)
--------------
INCOME BEFORE PROVISION FOR STATE
REPLACEMENT TAXES..................... 362,056
Provision for state replacement taxes... 15,000
--------------
Net income.............................. $ 347,056
==============
See accompanying notes to financial statements.
F-125
<PAGE>
CYPRESS INDUSTRIES, INC.
STATEMENT OF SHAREHOLDERS' EQUITY
YEAR ENDED DECEMBER 31, 1997
TOTAL
COMMON RETAINED SHAREHOLDERS'
STOCK EARNINGS EQUITY
---------- --------- -------------
Balance, December 31, 1996........... $1,500,000 $ 266,225 $1,766,225
Distributions to shareholders........ -- (163,000) (163,000)
Net income........................... -- 347,056 347,056
---------- --------- -------------
Balance, December 31, 1997........... $1,500,000 $ 450,281 $1,950,281
========== ========= =============
See accompanying notes to financial statements.
F-126
<PAGE>
CYPRESS INDUSTRIES, INC.
STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1997
Cash flows from operating activities
Net income......................... $ 347,056
Adjustments to reconcile net income
to net cash from operating
activities
Depreciation and amortization... 754,126
Provision for bad debts......... 43,000
Gain on sale of fixed assets.... (5,953)
Net changes in assets and
liabilities
Receivables................... 900,445
Inventories and jobs in
progress....................... (111,513)
Checks written in excess of
bank balance................. (72,627)
Accounts payable.............. (205,671)
Accrued expenses.............. (472,454)
--------------
Net cash from operating
activities................ 1,176,409
Cash flows from investing activities
Capital expenditures............... (161,540)
Proceeds on sale of fixed assets... 13,077
--------------
Net cash from investing
activities................ (148,463)
Cash flows from financing activities
Net payments on lines of credit.... (300,000)
Principal payments on long-term
debt............................... (584,811)
Distributions to shareholders...... (163,000)
--------------
Net cash from financing
activities................ (1,047,811)
--------------
Net change in cash................... (19,865)
Cash, beginning of year.............. 44,668
--------------
Cash, end of year.................... $ 24,803
==============
Supplemental disclosures of cash flow
information
Cash paid during the year for
interest........................ $ 489,958
See accompanying notes to financial statements.
F-127
<PAGE>
CYPRESS INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF COMBINATION: The financial statements of Cypress Industries,
Inc. (the Company) include the divisions of Continental Field Machinery Co.,
Inc. (CFM); New PME, Inc. (PME); and VR-TESCO, Inc. (VR-TESCO) (the Companies).
The nature and summary of the significant accounting policies followed by the
Company are as follows:
NATURE OF OPERATIONS: CFM, located in Schaumburg, Illinois and Atlanta,
Georgia, provides on-site machining for utility, steel mill, and other heavy
industry companies primarily located in the United States. The location in
Atlanta was closed during 1997. PME, which is located in Atlanta, Georgia and
Cincinnati, Ohio, repairs babbitt bearings for utility, steel mill, electric
motor, marine, and other heavy industry companies located primarily in the
eastern half of the United States. VR-TESCO, which is located in Schaumburg,
Illinois, provides valve repair and specialty welding services for utility,
petro chemical, steel, and other heavy industry companies which are primarily
located in the continental United States.
BASIS OF ACCOUNTING: Income from contracts in which the price is firm is
recognized on the completed contract method. This method is used because the
typical firm contract is completed in two months or less and the financial
position and results of operations do not vary significantly from those which
would result from using the percentage-of-completion method. A contract is
considered complete when all costs except insignificant items have been incurred
and the installation is operating according to specifications or has been
accepted by the customer. Income from contracts in which the price is based on
time and materials is recognized on the percentage-of-completion method. Under
this method, revenues are recognized based on contract valuation rates assigned
to the costs incurred. The rates vary depending on the type of cost, such as
labor and materials. Provisions for estimated losses on uncompleted contracts
are made in the period in which such losses are determined. Cost of services
include all direct material and labor costs and those indirect costs related to
contract performance, such as indirect labor, supplies, tools, repairs, and
depreciation costs. Selling, general, and administrative costs are charged to
expense as incurred.
ACCOUNTS RECEIVABLE: Accounts receivable consists primarily of amounts due
on completed contracts.
INVENTORY: The inventory is valued at the lower of cost (determined on a
first-in, first-out method) or market. CFM inventory consists of carbide steel,
cast iron, carbon, and other machine repair materials and supplies. VR-TESCO
inventory consists of safety valve test systems and other valve testing
materials. PME inventory consists of babbitt tin chips and other babbitt
remanufacturing materials.
CONCENTRATION OF CREDIT RISK: For the year ended December 31, 1997, 28% of
the Company's sales were to one customer. At December 31, 1997, 22% of the
Company's accounts receivable were from one customer.
PROPERTY AND EQUIPMENT: Property and equipment (including major renewals
and betterments) are capitalized in the accounts and valued at cost.
Depreciation is computed using both straight-line and accelerated methods over
the estimated useful life of the asset. Leasehold improvements are amortized
over the remaining life of the lease. Depreciation methods are the same for both
financial reporting and income tax purposes.
ORGANIZATIONAL COSTS: Costs incurred in connection with the organization
of the Company are being amortized over a period of sixty months. Amortization
for the year ended December 31, 1997 totaled $75,996.
INCOME TAXES: The Company has elected to be taxed as an S corporation for
federal income tax purposes. Under the small business provisions of the Internal
Revenue Code, the Company's net income is reflected in the shareholders'
individual income tax returns. Consequently, no provision for federal income
taxes has been made.
F-128
<PAGE>
CYPRESS INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
USE OF ESTIMATES: The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
NOTE 2 -- PROPERTY AND EQUIPMENT
Property and equipment is summarized as follows at December 31, 1997:
Machinery and equipment.............. $ 4,211,109
Transportation equipment............. 17,788
Furniture and fixtures............... 118,003
Leasehold improvements............... 120,110
Computer equipment and software...... 61,283
------------
4,528,293
Accumulated depreciation............. 926,112
------------
$ 3,602,181
============
NOTE 3 -- REVOLVING LINE OF CREDIT
The Company has a bank line of credit, which expires May 1, 1998, providing
for maximum borrowings of $4,000,000 secured by accounts receivable,
inventories, and machinery and equipment. Borrowings under the line were
$1,800,000 at December 31, 1997. The notes bear interest at the bank's prime
rate which was 8.5% at December 31, 1997. Borrowings under the line have been
guaranteed by the Company's shareholders.
NOTE 4 -- LONG-TERM DEBT
Long-term debt consists of a 9% term note, payable in quarterly
installments of $217,962 including interest, with a final payment due August 1,
2001. This note is secured by accounts receivable, inventory, and machinery and
equipment as described in the loan and security agreement dated August 1, 1996.
Borrowings under this agreement have been guaranteed by the Company's
shareholders.
Long-term debt payments for the years subsequent to December 31, 1997 are
as follows:
1998................................. $ 640,029
1999................................. 700,461
2000................................. 766,271
2001................................. 670,091
------------
$ 2,776,852
============
The loan agreement contains certain covenants, including provisions setting
forth requirements that the Company maintain tangible net worth plus
subordinated debt of not less than $750,000, an unsubordinated debt to tangible
net worth ratio of not greater than 10 to 1, after-tax net income of not less
than $100,000, a debt coverage ratio of not less than 1.25 to 1, and capital
expenditures of not greater than $1,000,000. At December 31, 1997, the Company
was in compliance with these covenants.
F-129
<PAGE>
CYPRESS INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 5 -- LEASE OBLIGATIONS
At December 31, 1997, the Company was obligated under various operating
leases for office space, shop facilities, and certain equipment which expire on
various dates through 2004. Future minimum lease payments for all leases as of
December 31, 1997 are as follows:
YEAR ENDING
DECEMBER 31,
- -------------------------------------
1998................................. $ 382,585
1999................................. 324,773
2000................................. 258,268
2001................................. 46,720
2002................................. 48,160
Thereafter........................... 85,120
------------
Total minimum lease payments.... $ 1,145,626
============
The Company also leases equipment used on a job-by-job basis. Rent expense,
including short-term equipment leases, for the year ended December 31, 1997 was
$638,343.
NOTE 6 -- 401(K) PLAN
The Company sponsors a 401(k) plan in which all full-time employees are
eligible to participate. Employees may make a voluntary contribution to the plan
as limited by current IRS regulations. The Company contributes 25% of the
employee's contribution up to the first $3,000 contributed for a maximum company
matching of $750 per participant. The Company's contribution for the year ended
December 31, 1997 was $47,395.
NOTE 7 -- WORKERS' COMPENSATION INSURANCE
The Company funds workers' compensation insurance for employee claims
through the use of a third-party administrator who provides aggregate stop loss
coverage. However, the Company is responsible for paying workers' compensation
claims subject to certain maximum aggregate policy limits per claim year.
Provision for losses expected under this program is recorded based upon the
Company's estimates of the aggregate liability for claims incurred. This amount
could vary significantly depending on the actual amount of claim settlements.
NOTE 8 -- COMMITMENTS
The Company has a non-compete/consulting agreement with the former
principal stockholder and chief executive officer of Continental Field Machining
Co., Inc., New PME, Inc., and VR-TESCO, Inc. The agreement provides for monthly
payments of $10,000 through July 31, 2006.
Additionally, the Company is to provide medical and dental coverage to this
individual through July 31, 2006. In consideration, this individual will provide
assistance to the Company through July 31, 2001 with respect to large projects
and to projects wherein his technical expertise or his relationship with
customers will be particularly beneficial to the Company. Additionally, this
individual commits not to directly compete with the Company through July 31,
2006.
NOTE 9 -- SUBSEQUENT EVENT
Subsequent to December 31, 1997, the Company's shareholders began
negotiating the sale of the Company's stock, or all of its net operating assets,
with a third party.
F-130
<PAGE>
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
F-131
<PAGE>
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.
F-132
<PAGE>
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.
F-133
<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.
F-134
<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.
F-135
<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
F-136
<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:
<TABLE>
<CAPTION>
ESTIMATED MARCH 31, FEBRUARY 28,
USEFUL LIVES 1997 1998
-------------- -------------- ------------
<S> <C> <C> <C> <C>
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
============== ============
</TABLE>
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
========== ============
F-137
<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
============== =================
F-138
<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
=============== ==================
F-139
<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
==========
F-140
<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.
F-141
<PAGE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH
THE OFFER CONTAINED HEREIN, AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OF ANY SECURITIES OTHER
THAN THOSE TO WHICH IT RELATES OR AN OFFER TO SELL, OR A SOLICITATION OF AN
OFFER TO BUY, IN ANY STATE TO ANY PERSON TO WHOM IT IS NOT LAWFUL TO MAKE SUCH
OFFER IN SUCH STATE. THE DELIVERY OF THIS PROSPECTUS AT ANY TIME DOES NOT IMPLY
THAT THE INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
----------------------------
TABLE OF CONTENTS
PAGE
-----
Prospectus Summary................... 2
Risk Factors......................... 5
The Company.......................... 11
Price Range of Common Stock.......... 12
Dividend Policy...................... 12
Capitalization....................... 13
Selected Financial Information....... 14
Management's Discussion and
Analysis of Financial Condition
and Results of Operations.......... 16
Business............................. 20
Management........................... 31
Certain Relationships and Related
Transactions....................... 36
Security Ownership of Certain
Beneficial Owners and
Management......................... 38
Description of the Convertible Debt
Securities......................... 39
Description of Capital Stock......... 46
Shares Eligible for Future Sale...... 51
Certain United States Federal Income
Tax Consequences................... 53
Plan of Distribution................. 55
Legal Matters........................ 56
Experts.............................. 56
Additional Information............... 56
Index to Financial Statements........ F-1
[LOGO]
INVATEC
COMMON STOCK
CONVERTIBLE SUBORDINATED
DEBT SECURITIES
------------------------
PROSPECTUS
------------------------
May , 1998
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
DELAWARE GENERAL CORPORATION LAW
Section 145(a) of the General Corporation Law of the State of Delaware (the
"DGCL") provides that a corporation may indemnify any person who was or is a
party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the corporation) by
reason of the fact that he is or was a director, officer, employee or agent of
the corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by him in connection with such action, suit or proceeding if he acted
in good faith and in a manner he reasonably believed to be in or not opposed to
the best interests of the corporation, and, with respect to any criminal action
or proceeding, had no reasonable cause to believe his conduct was unlawful. The
termination of any action, suit or proceeding by judgment, order, settlement,
conviction, or upon a plea of NOLO CONTENDERE or its equivalent, shall not, of
itself, create a presumption that the person did not act in good faith and in a
manner which he reasonably believed to be in or not opposed to the best
interests of the corporation, and, with respect to any criminal action or
proceeding, had reasonable cause to believe that his conduct was unlawful.
Section 145(b) of the DGCL states that a corporation may indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action or suit by or in the right of the
corporation to procure a judgment in its favor by reason of the fact that he is
or was a director, officer, employee or agent of the corporation, or is or was
serving at the request of the corporation as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise against expenses (including attorneys' fees) actually and reasonably
incurred by him in connection with the defense or settlement of such action or
suit if he acted in good faith and in a manner he reasonably believed to be in
or not opposed to the best interests of the corporation and except that no
indemnification shall be made in respect of any claim, issue or matter as to
which such person shall have been adjudged to be liable to the corporation
unless and only to the extent that the Court of Chancery or the court in which
such action or suit was brought shall determine upon application that, despite
the adjudication of liability but in view of all the circumstances of the case,
such person is fairly and reasonably entitled to indemnity for such expenses
which the Court of Chancery or such other court shall deem proper.
Section 145(c) of the DGCL provides that to the extent that a director,
officer, employee or agent of a corporation has been successful on the merits or
otherwise in defense of any action, suit or proceeding referred to in
subsections (a) and (b) of Section 145, or in defense of any claim, issue or
matter therein, he shall be indemnified against expenses (including attorneys'
fees) actually and reasonably incurred by him in connection therewith.
Section 145(d) of the DGCL states that any indemnification under
subsections (a) and (b) of Section 145 (unless ordered by a court) shall be made
by the corporation only as authorized in the specific case upon a determination
that indemnification of the director, officer, employee or agent is proper in
the circumstances because he has met the applicable standard of conduct set
forth in subsections (a) and (b). Such determination shall be made (1) by a
majority vote of the directors who were not parties to such action, suit or
proceeding, even though less than a quorum, or (2) if there are no such
directors, or if such directors so direct, by independent legal counsel in a
written opinion, or (3) by the stockholders.
Section 145(e) of the DGCL provides that expenses (including attorneys'
fees) incurred by an officer or director in defending any civil, criminal,
administrative or investigative action, suit or proceeding may be paid by the
corporation in advance of the final disposition of such action, suit or
proceeding upon receipt of an undertaking by or on behalf of such director or
officer to repay such amount if it shall ultimately be
II-1
<PAGE>
determined that he is not entitled to be indemnified by the corporation as
authorized in Section 145. Such expenses (including attorneys' fees) incurred by
other employees and agents may be so paid upon such terms and conditions, if
any, as the board of directors deems appropriate.
Section 145(f) of the DGCL states that the indemnification and advancement
of expenses provided by, or granted pursuant to, the other subsections of
Section 145 shall not be deemed exclusive of any other rights to which those
seeking indemnification or advancement of expenses may be entitled under any
bylaw, agreement, vote of stockholders or disinterested directors or otherwise,
both as to action in his official capacity and as to action in another capacity
while holding such office.
Section 145(g) of the DGCL provides that a corporation shall have the power
to purchase and maintain insurance on behalf of any person who is or was a
director, officer, employee or agent of the corporation, or is or was serving at
the request of the corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise,
against any liability asserted against him and incurred by him in any such
capacity, or arising out of his status as such, whether or not the corporation
would have the power to indemnify him against such liability under the
provisions of Section 145.
Section 145(j) of the DGCL states that the indemnification and advancement
of expenses provided by, or granted pursuant to, Section 145 shall, unless
otherwise provided when authorized or ratified, continue as to a person who has
ceased to be a director, officer, employee or agent, and shall inure to the
benefit of the heirs, executors and administrators of such a person.
CERTIFICATE OF INCORPORATION
The Restated Certificate of Incorporation of the Company provides that a
director of the Company shall not be personally liable to the Company or its
stockholders for monetary damages for breach of fiduciary duty as a director,
except for liability (i) for any breach of the director's duty of loyalty to the
Company or its stockholders, (ii) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, (iii) under
Section 174 of the DGCL or (iv) or any transaction from which the director
derived an improper personal benefit. If the DGCL is amended to authorize the
further elimination or limitation of the liability of directors, then the
liability of a director of the Company, in addition to the limitation on
personal liability described above, shall be limited to the fullest extent
permitted by the amended DGCL. Further, any repeal or modification of such
provision of the Restated Certificate of Incorporation by the stockholders of
the Company shall be prospective only, and shall not adversely affect any
limitation on the personal liability of a director of the Company existing at
the time of such repeal or modification.
BYLAWS
The Bylaws of the Company provide that the Company will indemnify and hold
harmless any director or officer of the Company to the fullest extent permitted
by applicable law, as in effect as of the date of the adoption of the Bylaws or
to such greater extent as applicable law may thereafter permit, from and against
all losses, liabilities, claims, damages, judgments, penalties, fines, amounts
paid in settlement and expenses (including attorneys' fees) whatsoever arising
out of any event or occurrence related to the fact that such person is or was a
director or officer of the Company and further provide that the Company may, but
is not required to, indemnify and hold harmless any employee or agent of the
Company or a director, officer, employee or agent of any other corporation,
partnership, joint venture, trust employee benefit plan or other enterprise who
is or was serving in such capacity at the written request of the Company;
provided, however, that the Company is only required to indemnify persons
serving as directors, officers, employees or agents of the Company for the
expenses incurred in proceeding if such person is a party to and is successful,
on the merits or otherwise, in such proceeding, or if unsuccessful in the
proceeding, but successful as to a matter in such proceeding, the expenses
attributable to such matter and provided further that the Company may, but is
not required to, indemnify such persons who are serving as a director, officer,
employee or agent of any other corporation, partnership, joint venture, trust,
employee benefit plan or other enterprise at the written request of the Company
for the expenses incurred in a proceeding if such person is a party to and is
successful, on the merits or otherwise, in such proceeding. The Bylaws further
provide that, in the event of
II-2
<PAGE>
any threatened, or pending action, suit or proceeding in which any of the
persons referred to above is a party or is involved and that may give rise to a
right of indemnification under the Bylaws, following written request by such
person, the Company will promptly pay to such person amounts to cover expenses
reasonably incurred by such person in such proceeding in advance of its final
disposition upon the receipt by the Company of (i) a written undertaking
executed by or on behalf of such person providing that such person will repay
the advance if it is ultimately determined that such person is not entitled to
be indemnified by the Company as provided in the Bylaws and (ii) satisfactory
evidence as to the amount of such expenses.
INDEMNIFICATION AGREEMENTS
The Company has entered into Indemnification Agreements with each of its
directors and executive officers. The Indemnification Agreements generally are
to the same effect as the Bylaw provisions described above.
The Company maintains liability insurance for the benefit of its directors
and officers.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------------------------ ------------------------------------------------------------------------------------------
<C> <S>
2.1* -- Stock Purchase Agreement dated as of December 28, 1996 by and among The Safe Seal Company,
Inc. ("SSI"), certain stockholders of Harley Industries, Inc. ("Harley") and Harley
(Form S-1 (Reg. No. 333-31617), Ex. 2.1).
2.2* -- Stock Transfer Agreement dated as of January 24, 1997 by and among SSI, an individual
stockholder of Harley, Harley and Harley Equipment Corporation (Form S-1 (Reg. No.
333-31617), Ex. 2.2).
2.3* -- Stock Purchase Agreement entered into on June 23, 1997 by and among Invatec, Puget
Investments, Inc., Flickinger-Benicia Inc. and the stockholders named therein (Form S-1
(Reg. No. 333-31617), Ex. 2.3).
2.4* -- Stock Purchase Agreement dated as of July 15, 1997 by and among Invatec, Industrial
Controls & Equipment, Inc., Valve Actuation & Repair Co., Rickco Acquisition, Inc., BAS
Technical Employment Placement Company and the stockholders named therein (Form S-1 (Reg.
No. 333-31617), Ex. 2.4).
2.5* -- Stock Purchase Agreement dated as of February 26, 1997 by and among SSI and the
stockholders of GSV, Inc. (Form S-1 (Reg. No. 333-31617), Ex. 2.5).
2.6* -- Stock and Real Estate Purchase Agreement dated as of May 22, 1997 by and among SSI, Plant
Specialties, Inc. and the stockholders named therein (Form S-1 (Reg. No. 333-31617), Ex.
2.6).
2.7* -- Agreement and Plan of Reorganization dated as of June 27, 1997 by and among Invatec, SVSI
Acquisition, Inc., Southern Valve Service, Inc. and the stockholders named therein (Form
S-1 (Reg. No. 333-31617), Ex. 2.7).
2.8* -- Stock Redemption and Purchase Agreement dated as of June 27, 1997 by and among Invatec,
Lee Roy Jordan, Ralph Buffkin and 55 Leasing and Sales, Inc. (Form S-1 (Reg. No.
333-31617), Ex. 2.8).
2.9* -- Agreement and Plan of Merger dated as of June 27, 1997 by and among Invatec, IVT
Acquisition, Inc. and SSI, as amended as of August 15, 1997 (Form S-1 (Reg. No.
333-31617), Ex. 2.9).
2.10* -- Uniform Provisions for Acquisitions (incorporated into the agreements incorporated herein
as Exhibits 2.3, 2.4 and 2.7) (Form S-1 (Reg. No. 333-31617), Ex. 2.10).
2.11* -- Merger Agreement dated as of December 17, 1997 by and among Invatec, DIVT Acquisition,
LLC, Dalco, Inc. and the stockholders named therein (Form 8-K dated December 17, 1997
(File No. 000-23231), Ex. 2).
2.12* -- Stock Purchase Agreement dated as of February 27, 1998 by and among Invatec, Cypress
Industries, Inc. and the Stockholders named therein (Form 8-K dated February 27, 1998
(File No. 000-23231), Ex. 2).
2.13* -- Merger Agreement, dated as of March 16, 1998, by and among Invatec, IPSCO Acquisition,
Inc., IPS Holding, Ltd. ("IPS") and the subsidiaries and stockholders of IPS named
therein (Form 8-K dated March 16, 1998 (File No. 000-23231), Ex. 2).
Pursuant to Item 601(b)(2) of Regulation S-K, certain schedules and exhibits to the
agreements filed or incorporated by reference as Exhibits 2.1 through 2.13 (all of which
are listed therein) have been omitted. Invatec hereby agrees to furnish supplementally a
copy of any such omitted item to the SEC on request.
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------------------------ ------------------------------------------------------------------------------------------
<C> <S>
3.1* -- Certificate of Incorporation of Invatec (Form S-1 (Reg. No. 333-31617), Ex. 3.1).
3.2* -- Bylaws of Invatec (Form S-1 (Reg. No. 333-31617), Ex. 3.2).
4.1* -- Form of Certificate representing Common Stock (Form S-1 (Reg. No. 333-31617), Ex. 4.1).
4.2* -- Rights Agreement by and between the Company and ChaseMellon Shareholder Services, L.L.C.,
including form of Rights Certificate attached as Exhibit B thereto (Form 10-Q for the
quarterly period ended September 30, 1997 (File No. 000-23231), Ex. 4.5).
4.3* -- Loan Agreement among Invatec, Chase Bank of Texas, National Association, as Agent and as a
lender, and the other lenders referred to therein (Form 10-Q for the quarterly period
ended September 30, 1997 (File No. 000-23231), Ex. 4.6).
4.4 -- Form of Indenture dated as of May 15, 1998 from Invatec to U.S. Trust Company of Texas,
N.A., as trustee, relating to the Convertible Debt Securities.
Invatec and certain of its subsidiaries are parties to certain debt instruments under
which the total amount of securities authorized does not exceed 10% of the total assets of
Invatec and its subsidiaries on a consolidated basis. Pursuant to paragraph 4(iii)(A) of
Item 601(b) of Regulation S-K, Invatec agrees to furnish a copy of those instruments to
the SEC on request.
5.1+ -- Opinion of Baker & Botts, L.L.P.
10.1* -- 1997 Incentive Plan of Invatec (Form S-1 (Reg. No. 333-31617), Ex. 10.1).
10.2 -- Employment Agreement entered into as of January 27, 1997 and amended and restated as of
October 15, 1997, between SSI and William E. Haynes (including related promissory note).
10.3 -- Employment Agreement entered into as of January 27, 1997 and amended and restated as of
October 15, 1997, between SSI and Charles F. Schugart (including related promissory note).
10.4 -- Employment Agreement entered into as of May 6, 1997 and amended and restated as of October
15, 1997, between Invatec and Denny A. Rigas (including related promissory note).
10.5* -- Consulting Agreement dated as of March 27, 1997 by and between Wasatch Capital Corporation
and Invatec (Form S-1 (Reg. No. 333-31617), Ex. 10.5).
10.6* -- Form of Indemnification Agreement between Invatec and each of its directors and officers
(Form S-1 (Reg. No. 333-31617), Ex. 10.6).
10.7 -- Promissory Note made by Frank N. Lombard dated April 15, 1998.
10.8 -- Voting Trust Agreement dated May 9, 1997 among SSI, Roger L. Miller
("Miller"), The Roger L. Miller Family Trust ("Miller Trust"), Computerized Accounting
and Tax Services, Inc. ("CATS") and Allwaste, Inc. ("Allwaste").
10.9 -- Amended and Restated Modification and Settlement Agreement dated May 9, 1997 and amended
and restated as of August 15, 1997 among Allwaste, Allwaste Environmental Services, Inc.,
Miller, the Miller Trust and CATS.
12.1 -- Statement regarding Computation of Ratios.
21.1* -- List of Subsidiaries (Form 10-K/A for the year ended December 31, 1997 (File No.
000-23231), Ex. 21.1).
23.1 -- Consent of Arthur Andersen LLP.
23.2 -- Consents of Deloitte & Touche LLP.
23.3 -- Consent of Crowe, Chizek and Company LLP.
23.4+ -- Consent of Baker & Botts, L.L.P. (included in Exhibit 5.1).
24.1 -- Power of Attorney (included on the signature page of this Amendment to Registration
Statement).
26.1 -- Statement of Eligibility and Qualification (Form T-1) under the Trust Indenture Act of
1939 of U.S. Trust Company of Texas, N.A., as Trustee under Exhibit 4.4.
</TABLE>
- ------------
* Incorporated by reference.
+ Previously filed.
(b) Financial Statement Schedules.
All schedules are omitted because they are not applicable or because the
required information is contained in the Financial Statements or Notes thereto.
II-4
<PAGE>
ITEM 22. UNDERTAKINGS.
(a) Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling persons
of the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
(b) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
registration statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering range
may be reflected in the form of prospectus filed with the Commission
pursuant to Rule 424(b) under the Securities Act if, in the aggregate, the
changes in volume and price represent no more than a 20% change in the
maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement;
(2) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
(4) That prior to any public reoffering of the securities registered
hereunder through use of a prospectus which is a part of this registration
statement, by any person or party who is deemed to be an underwriter within the
meaning of Rule 145(c), the issuer undertakes that such reoffering prospectus
will contain the information called for by the applicable registration form with
respect to reofferings by persons who may be deemed underwriters, in addition to
the information called for by the other Items of the applicable form.
(5) That every prospectus (i) that is filed pursuant to the paragraph
immediately preceding, or (ii) that purports to meet the requirements of section
10(a)(3) of the Securities Act and is used in connection with an offering of
securities subject to Rule 415 under the Securities Act, will be filed as part
of an amendment to the registration statement and will not be used until such
amendment is effective, and that, for purposes of determining any liability
under the Securities Act, each such post-effective amendment shall be deemed to
be a new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
(6) To supply by means of a post-effective amendment all information
concerning a transaction, and the Company being acquired involved therein, that
was not subject of and included in the registration statement when it became
effective.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has
caused this Amendment to Registration Statement to be signed on its behalf by
the undersigned, thereunto duly authorized in the City of Houston, State of
Texas on May 21, 1998.
INNOVATIVE VALVE TECHNOLOGIES, INC.
By: /s/WILLIAM E. HAYNES
WILLIAM E. HAYNES
PRESIDENT AND CHIEF EXECUTIVE OFFICER
POWER OF ATTORNEY
Each person whose signature appears below hereby appoints William E. Haynes
and Charles F. Schugart, and each of them severally, either of whom may act with
or without the joinder of the other, as his true and lawful attorneys-in-fact
and agents, with full power of substitution and resubstitution, for him and in
his name, place and stead, in any and all capacities, to sign any and all
amendments (including post-effective amendments) to this Registration Statement
and any registration statement for the same offering that may be filed pursuant
to Rule 462 under the Securities Act of 1933, as amended, and to file the same,
with all exhibits thereto and all other documents in connection therewith, with
the Commission, granting unto said attorneys-in-fact and agents full power and
authority to do and perform each and every act and thing appropriate or
necessary to be done, as fully and for all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents or their substitute or substitutes may lawfully do
or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this Amendment
to Registration Statement has been signed by the following persons in the
capacities indicated on May 21, 1998.
SIGNATURE TITLE
- -----------------------------------------------------------------------------
/s/WILLIAM E. HAYNES Chairman of the Board, President and
WILLIAM E. HAYNES Chief Executive Officer (Principal
Executive Officer)
/s/CHARLES F. SCHUGART Chief Financial Officer and Senior
CHARLES F. SCHUGART Vice President-Corporate Development,
Treasurer and Secretary (Principal
Financial Officer and Principal
Accounting Officer)
MICHAEL A. BAKER Director
/s/ROBERT M. CHISTE Director
ROBERT M. CHISTE
/s/ARTHUR L. FRENCH Director
ARTHUR L. FRENCH
/s/TOMMY E. KNIGHT Director
TOMMY E. KNIGHT
/s/PIERRE R. LATOUR Director
PIERRE R. LATOUR
T. WAYNE WREN Director
II-6
EXHIBIT 4.4
INNOVATIVE VALVE TECHNOLOGIES, INC.
to
U.S. TRUST COMPANY OF TEXAS, N.A.,
as Trustee
------------------
INDENTURE
Dated as of May 15, 1998
------------------
Convertible Subordinated Debt Securities
<PAGE>
TABLE OF CONTENTS
PAGE
ARTICLE I
Definitions and Other Provisions.......................................1
SECTION 1.01. Definitions..........................................1
SECTION 1.02. Compliance Certificates and Opinions.................8
SECTION 1.03. Form of Documents Delivered to Trustee...............9
SECTION 1.04. Acts of Holders; Record Dates........................9
SECTION 1.05. Notices, etc., to Trustee and Company...............11
SECTION 1.06. Notice to Holders; Waiver...........................11
SECTION 1.07. Conflict With Trust Indenture Act...................12
SECTION 1.08. Effect of Headings and Table of Contents............12
SECTION 1.09. Successors and Assigns..............................12
SECTION 1.10. Separability Clause.................................12
SECTION 1.11. Benefits of Indenture...............................12
SECTION 1.12. GOVERNING LAW.......................................12
SECTION 1.13. Legal Holidays......................................13
SECTION 1.14. No Security Interest Created........................13
SECTION 1.15. Limitation on Individual Liability..................13
ARTICLE II
Security Forms........................................................14
SECTION 2.01. Forms Generally.....................................14
SECTION 2.02. Form of Trustee's Certificate of Authentification...14
ARTICLE III
The Securities........................................................15
SECTION 3.01. Amount Unlimited; Issuable in Series................15
SECTION 3.02. Denominations.......................................17
SECTION 3.03. Execution, Authentication, Delivery and Dating......17
SECTION 3.04. Temporary Securities................................19
SECTION 3.05. Registration, Registration of Transfer and Exchange.20
SECTION 3.06. Mutilated, Destroyed, Lost and Stolen Securities....21
SECTION 3.07. Payment of Interest; Interest Rights Preserved......21
SECTION 3.08. Persons Deemed Owners...............................23
SECTION 3.09. Cancellation........................................23
SECTION 3.10. Computation of Interest.............................23
- i -
<PAGE>
ARTICLE IV
Satisfaction and Discharge............................................24
SECTION 4.01. Satisfaction and Discharge of Indenture.............24
SECTION 4.02. Application of Trust Money..........................25
SECTION 4.03. Reinstatement.......................................25
ARTICLE V
Remedies..............................................................26
SECTION 5.01. Events of Default...................................26
SECTION 5.02. Acceleration of Maturity; Rescission and Annulment..28
SECTION 5.03. Collection of Indebtedness and Suits for Enforcement
by Trustee..........................................29
SECTION 5.04. Trustee May File Proofs of Claim....................30
SECTION 5.05. Trustee May Enforce Claims Without Possession of
Securities..........................................31
SECTION 5.06. Application of Money Collected......................31
SECTION 5.07. Limitation on Suits.................................32
SECTION 5.08. Unconditional Right of Holders To Receive Principal,
Premium, Interest and To Convert....................32
SECTION 5.09. Restoration of Rights and Remedies..................33
SECTION 5.10. Rights and Remedies Cumulative......................33
SECTION 5.11. Delay or Omission Not Waiver........................33
SECTION 5.12. Control by Holders..................................33
SECTION 5.13. Waiver of Past Defaults.............................34
SECTION 5.14. Undertaking for Costs...............................34
ARTICLE VI
The Trustee...........................................................35
SECTION 6.01. Certain Duties and Responsibilities.................35
SECTION 6.02. Notice of Defaults..................................36
SECTION 6.03. Certain Rights of Trustee...........................36
SECTION 6.04. Not Responsible for Recitals or Issuance of Securities37
SECTION 6.05. May Hold Securities.................................37
SECTION 6.06. Money Held in Trust.................................38
SECTION 6.07. Compensation and Reimbursement......................38
SECTION 6.08. Disqualification; Conflicting Interests.............39
SECTION 6.09. Corporate Trustee Required; Eligibility.............40
SECTION 6.10. Resignation and Removal; Appointment of Successor...40
SECTION 6.11. Acceptance of Appointment by Successor..............41
SECTION 6.12. Merger, Conversion, Consolidation or Succession
to Business.........................................42
SECTION 6.13. Preferential Collection of Claims Against Company...43
SECTION 6.14. Appointment of Authenticating Agent.................43
- ii -
<PAGE>
ARTICLE VII
Holders' Lists and Reports by Trustee and Company.....................45
SECTION 7.01. Company To Furnish Trustee Names and Addresses
of Holders..........................................45
SECTION 7.02. Preservation of Information; Communication to
Holders.............................................46
SECTION 7.03. Reports by Trustee..................................46
SECTION 7.04. Reports by Company..................................46
ARTICLE VIII
Consolidation, Merger, Conveyance, Transfer or Lease..................47
SECTION 8.01. Company May Consolidate, etc., Only on Certain Terms47
SECTION 8.02. Successor Substituted...............................48
ARTICLE IX
Supplemental Indentures...............................................48
SECTION 9.01. Supplemental Indentures Without Consent of Holders..48
SECTION 9.02. Supplemental Indentures With Consent of Holders.....49
SECTION 9.03. Execution of Supplemental Indentures................51
SECTION 9.04. Effect of Supplemental Indentures...................51
SECTION 9.05. Conformity With Trust Indenture Act.................51
SECTION 9.06. Reference in Securities to Supplemental Indentures..51
SECTION 9.07. Notice of Supplemental Indenture....................51
ARTICLE X
Covenants.............................................................52
SECTION 10.01. Payment of Principal, Premium and Interest..........52
SECTION 10.02. Maintenance of Office or Agency.....................52
SECTION 10.03. Money for Security Payments To Be Held in Trust.....52
SECTION 10.04. Statement by Officers as to Default.................54
SECTION 10.05. Existence...........................................54
SECTION 10.06. Waiver of Certain Covenants.........................54
SECTION 10.07. Additional Amounts..................................54
ARTICLE XI
Redemption of Securities..............................................55
SECTION 11.01. Applicability of Article............................55
SECTION 11.02. Election To Redeem; Notice to Trustee...............55
SECTION 11.03. Selection by Trustee of Securities To Be Redeemed...56
SECTION 11.04. Notice of Redemption................................56
- iii -
<PAGE>
SECTION 11.05. Deposit of Redemption Price.........................57
SECTION 11.06. Securities Payable on Redemption Date...............57
SECTION 11.07. Securities Redeemed in Part.........................58
ARTICLE XII
Subordination of Securities...........................................58
SECTION 12.01. Securities Subordinated to Senior Indebtedness......58
SECTION 12.02. Payment Over of Proceeds Upon Dissolution, etc......59
SECTION 12.03. Prior Payment to Senior Indebtedness On Acceleration
of Securities.......................................60
SECTION 12.04. No Payment When Senior Indebtedness in Default......61
SECTION 12.05. Payment Permitted If No Default.....................62
SECTION 12.06. Subrogation to Rights of Holders of Senior
Indebtedness........................................62
SECTION 12.07. Provisions Solely To Define Relative Rights.........63
SECTION 12.08. Trustee To Effectuate Subordination.................63
SECTION 12.09. No Waiver of Subordination Provisions...............63
SECTION 12.10. Notice to Trustee...................................64
SECTION 12.11. Reliance on Judicial Order or Certificate of
Liquidating Agent...................................65
SECTION 12.12. Trustee Not Fiduciary for Holders of Senior
Indebtedness........................................65
SECTION 12.13. Rights of Trustee as Holder of Senior Indebtedness;
Preservation of Trustee's Rights....................65
SECTION 12.14. Article Applicable to Paying Agents.................66
SECTION 12.15. Certain Conversions Deemed Payment..................66
SECTION 12.16. No Suspension of Remedies...........................66
ARTICLE XIII
Conversion of Securities..............................................67
SECTION 13.01. Conversion Privilege and Conversion Price...........67
SECTION 13.02. Exercise of Conversion Privilege....................67
SECTION 13.03. Fractions of Shares.................................68
SECTION 13.04. Adjustment of Conversion Price......................68
SECTION 13.05. Notice of Adjustments of Conversion Price...........73
SECTION 13.06. Notice of Certain Corporate Action..................73
SECTION 13.07. Company To Reserve Common Stock.....................74
SECTION 13.08. Taxes on Conversions................................75
SECTION 13.09. Covenant as to Common Stock.........................75
SECTION 13.10. Cancellation of Converted Securities................75
SECTION 13.11. Provisions of Consolidation, Merger or Sale of Assets75
SECTION 13.12. Trustee's Disclaimer................................76
- iv -
<PAGE>
ARTICLE XIV
Meetings of Holders of Securities.....................................76
SECTION 14.01. Purposes for Which Meetings May Be Called...........76
SECTION 14.02. Call, Notice and Place of Meetings..................76
SECTION 14.03. Persons Entitled To Vote at Meetings................77
SECTION 14.04. Quorum; Action......................................77
SECTION 14.05. Determination of Voting Rights; Conduct and
Adjournment of Meetings.............................78
SECTION 14.06. Counting Votes and Recording Action of Meetings.....79
- v -
<PAGE>
Certain Sections of this Indenture relating to Sections 310
through 318 of the Trust Indenture Act of 1939:
Section 310(a)(1) 6.09
(a)(2) 6.09
(a)(3) Not Applicable
(a)(4) Not Applicable
(a)(5) 6.09
(b) 6.08
Section 311(a) 6.13
(b) 6.13
Section 312(a) 7.01
7.02(a)
(b) 7.02(b)
(c) 7.02(c)
Section 313(a) 7.03(a)
(b) 7.03(a)
(c) 7.03(a)
(d) 7.03(b)
Section 314(a) 7.04
(a)(4) 10.04
(b) Not Applicable
(c)(1) 1.02
(c)(2) 1.02
(c)(3) Not Applicable
(d) Not Applicable
(e) 1.02
Section 315(a) 6.01
(b) 6.02
(c) 6.01
(d) 6.01
(e) 5.14
Section 316(a)(1)(A) 5.02
5.12
(a)(1)(B) 5.13
(a)(2) Not Applicable
(b) 5.08
(c) 1.04(c)
Section 317(a)(1) 5.03
(a)(2) 5.04
(b) 10.03
Section 318(a) 1.07
- ------------------------
Note: This reconciliation and tie shall not, for any purpose, be deemed to be a
part of the Indenture.
- vi -
<PAGE>
INDENTURE, dated as of May 15, 1998, between INNOVATIVE VALVE
TECHNOLOGIES, INC., a corporation duly organized and existing under the laws of
the State of Delaware (herein called the "Company"), and U.S. TRUST COMPANY OF
TEXAS, N.A., a national banking association, as Trustee (herein called the
"Trustee").
RECITALS OF THE COMPANY
The Company has duly authorized the execution and delivery of this
Indenture to provide for the issuance from time to time of its unsecured
convertible subordinated debentures, notes or other evidences of indebtedness
(herein called the "Securities"), to be issued in one or more series as this
Indenture provides.
This Indenture is subject to the provisions of the Trust Indenture
Act and the rules and regulations of the Commission promulgated thereunder which
are required to be part of this Indenture and, to the extent applicable, will be
governed by such provisions.
All things necessary to make this Indenture a valid agreement of the
Company in accordance with its terms have been done.
NOW, THEREFORE, THIS INDENTURE WITNESSETH:
For and in consideration of the premises and the purchase of the
Securities by the Holders thereof, it is mutually agreed, for the equal and
proportionate benefit of all Holders of the Securities, as follows:
ARTICLE I
DEFINITIONS AND OTHER PROVISIONS
OF GENERAL APPLICATION
SECTION 1.01 DEFINITIONS.
For all purposes of this Indenture, except as this Indenture
otherwise expressly provides or the context otherwise requires:
(a) the terms defined in this Article I have the meanings this
Article I assigns to them and include the plural as well as the singular;
(b) all other terms this Indenture uses which the Trust Indenture
Act defines, either directly or by reference therein, have the meanings
the Trust Indenture Act assigns to them;
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<PAGE>
(c) all accounting terms not otherwise defined herein have the
meanings assigned to them in accordance with generally accepted accounting
principles, and, except as otherwise herein expressly provided, the term
"generally accepted accounting principles" with respect to any computation
required and permitted hereunder means such accounting principles as are
generally accepted and adopted by the Company at the date of this
Indenture; and
(d) the words "herein", "hereof" and "hereunder" and other words of
similar import refer to this Indenture as a whole and not to any
particular Article, Section or other subdivision; and references herein to
"Articles" and "Sections" are to Articles and Sections of this Indenture
unless this Indenture specifies otherwise.
Certain terms used in Articles V, XII and XIII are defined in those
Articles.
"Act," when used with respect to any Holder, has the meaning Section
1.04 specifies.
"Additional Amounts" means any additional amounts that are required
by the express terms of a Security or by or pursuant to a Board Resolution,
under circumstances specified therein or pursuant thereto, to be paid by the
Company with respect to certain taxes, assessments or other governmental charges
imposed on certain Holders and that are owing to those Holders.
"Affiliate" of any specified Person means any other Person directly
or indirectly controlling or controlled by or under direct or indirect common
control with the specified Person. For purposes of this definition, "control"
when used with respect to any specified Person means the power to direct the
management and policies of the specified Person, directly or indirectly, whether
through the ownership of voting securities, by contract or otherwise; and the
terms "controlling" and "controlled" have meanings correlative to the foregoing.
"Authenticating Agent" means any Person the Trustee authorizes
pursuant to Section 6.14 to act on behalf of the Trustee to authenticate
Securities.
"Board of Directors" means either the board of directors of the
Company or any duly authorized committee of that board.
"Board Resolution" means a copy of a resolution the Secretary or an
Assistant Secretary of the Company certifies to have been duly adopted by the
Board of Directors and to be in full force and effect on the date of that
certification and delivered to the Trustee.
"Business Day" means each Monday, Tuesday, Wednesday, Thursday and
Friday which is not a day on which any law or executive order authorizes or
obligates banking institutions in Houston, Texas or New York, New York to close.
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<PAGE>
"Commission" means the Securities and Exchange Commission as from
time to time constituted, created under the Exchange Act, or, if at any time
after the execution of this Instrument that Commission is not existing and
performing the duties the Trust Indenture Act now assigns it, then the body
performing those duties at that time.
"Common Stock" includes any stock of any class of the Company which
(a) has no preference in respect of dividends or of amounts payable in the event
of any voluntary or involuntary liquidation, dissolution or winding-up of the
Company and (b) is not subject to redemption by the Company. Subject to the
provisions of Section 13.11, however, shares issuable on conversion of
Securities will include only shares of the class designated as Common Stock of
the Company at the date of this Indenture or shares of any class or classes
resulting from any reclassification or reclassifications thereof and which have
no preference in respect of dividends or of amounts payable in the event of any
voluntary or involuntary liquidation, dissolution or winding-up of the Company
and which are not subject to redemption by the Company; PROVIDED, that if at any
time there shall be more than one such resulting class, the shares of each such
class then so issuable will be substantially in the proportion which the total
number of shares of such class resulting from all such reclassifications bears
to the total number of shares of all such classes resulting from all such
reclassifications.
"Company" means the Person named as the "Company" in the first
paragraph of this Indenture until a successor Person shall have become such
pursuant to the applicable provisions of this Indenture, and thereafter
"Company" means that successor Person.
"Company Agency" means any office or agency the Company maintains
pursuant to Section 10.02.
"Company Request" or "Company Order" means a written request or
order signed in the name of the Company by its Chairman of the Board, its
President or one of its Vice Presidents, and by its Chief Financial Officer, its
Controller, its Treasurer, one of its Assistant Treasurers, its Secretary or one
of its Assistant Secretaries, and delivered to the Trustee.
"Consolidated Subsidiary" means a Subsidiary whose financial
statements are included in the most recent annual consolidated financial
statements of the Company and its Subsidiaries.
"Convertibility Commencement Date," when used with respect to any
Security, means the date fixed by or pursuant to this Indenture as the first
date on which that Security can be converted pursuant to Article XIII.
"Corporate Trust Office" means the office of the Trustee in New
York, New York at which at any particular time its corporate trust business
principally shall be administered.
- 3 -
<PAGE>
"corporation" means a corporation, association, company, joint-stock
company or business trust.
"Credit Facility" means, in each case as amended, restated,
modified, renewed, extended, increased, refunded, replaced or refinanced in
whole or in part from time to time: (a) the Loan Agreement executed as of
October 23, 1997 and effective as of October 17, 1997, between the Company and
Chase Bank of Texas, National Association as Agent and as a Lender, and the
other lenders party thereto from time to time; and (b) one or more debt
facilities with banks or other lenders providing for revolving credit loans,
term loans, receivables financing (including through the sale of receivables to
those lenders or to special purpose entities formed to borrow from those lenders
against those receivables) or letters of credit.
"Current Market Price" has the meaning Section 13.04 specifies.
"Defaulted Interest" has the meaning Section 3.07 specifies.
"Designated Senior Indebtedness" means (a) the Credit Facility and
(b) any other Senior Indebtedness of the Company the principal amount of which
is $25 million or more and that has been designated by the Company as
"Designated Senior Indebtedness."
"Dollar" or "$" means at any time a dollar or other equivalent unit
in such coin or currency of the United States as at that time is legal tender
for the payment of public and private debts.
"Event of Default" has the meaning Section 5.01 specifies.
"Exchange Act" means the Securities Exchange Act of 1934, as
amended.
"Holder" means a Person in whose name a Security of any series is
registered in the Security Register for that series.
"Indenture" means this instrument as originally executed or as it
may from time to time be supplemented or amended by one or more indentures
supplemental hereto entered into pursuant to the applicable provisions hereof,
including the terms of one or more series of Securities established as Section
3.01 contemplates and, for all purposes of this instrument and any such
supplemental indenture, the provisions of the Trust Indenture Act that are
deemed to be a part of and to govern this instrument and any such supplemental
indenture, respectively.
"Initial Conversion Price," when used with respect to any Security
to be converted, means the initial price per share of Common Stock which is
fixed for the conversion of that Security by or pursuant to this Indenture,
subject to adjustment after its issuance (or the earliest issuance of any of its
Predecessor Securities) pursuant to Article XIII.
- 4 -
<PAGE>
"Interest Payment Date," when used with respect to any Security,
means the Stated Maturity of an installment of interest on that Security.
"Maturity," when used with respect to any Security, means the date
on which the principal of that Security becomes due and payable as therein or
herein provided, whether at the Stated Maturity thereof or by declaration of
acceleration, redemption or otherwise.
"Obligations" in respect of any Senior Indebtedness means any
principal, interest, premiums, fees, indemnifications, reimbursements, damages
and other liabilities payable under the documents governing any that Senior
Indebtedness.
"Officers' Certificate" means a certificate, in form reasonably
satisfactory to the Trustee, signed by the Chairman of the Board, the Chief
Executive Officer, the President, the Chief Financial Officer or a Vice
President, and by the Corporate Controller, the Treasurer or an Assistant
Treasurer, the Secretary or an Assistant Secretary, of the Company, and
delivered to the Trustee.
"Opinion of Counsel" means a written opinion, in form and substance
reasonably satisfactory to the Trustee, of counsel, who may be counsel for or an
employee of the Company and must be reasonably acceptable to the Trustee.
"Original Issue Discount Security" means any Security that provides
for an amount less than the principal amount thereof to be due and payable on a
declaration of acceleration of the Maturity thereof pursuant to Section 5.02.
"Outstanding," when used with respect to Securities, means, as of
the date of determination, all Securities theretofore authenticated and
delivered under this Indenture, except:
(a) Securities theretofore canceled by the Trustee or delivered to
the Trustee for cancellation;
(b) Securities, or portions thereof, for the payment or redemption
of which moneys in the necessary amount have been theretofore deposited
with the Trustee or any Paying Agent (other than the Company) in trust or
set aside and segregated in trust by the Company (if the Company is acting
as its own Paying Agent) for the Holders of those Securities; PROVIDED,
that if those Securities, or portions thereof, are to be redeemed, notice
of that redemption has been duly given pursuant to this Indenture or
provision therefor satisfactory to the Trustee has been made; and
(c) Securities that have been paid pursuant to Section 3.06 or in
exchange for or in lieu of which other Securities have been authenticated
and delivered pursuant to this Indenture, other than any such Securities
in respect of which there shall have been presented to the Trustee proof
satisfactory to it that those Securities are held by a bona fide purchaser
in whose hands those Securities are valid obligations of the Company;
- 5 -
<PAGE>
PROVIDED, HOWEVER, that in determining whether the Holders of the requisite
principal amount of the Outstanding Securities have given any request, demand,
authorization, direction, notice, consent or waiver hereunder, Securities owned
by the Company or any other obligor on the Securities or any Affiliate of the
Company or of such other obligor will be disregarded and deemed not to be
Outstanding, except that, in determining whether the Trustee will be protected
in relying on any such request, demand, authorization, direction, notice,
consent or waiver, only Securities that the Trustee knows to be so owned will be
so disregarded. Securities so owned which have been pledged in good faith may be
regarded as Outstanding if the pledgee establishes to the satisfaction of the
Trustee the pledgee's right so to act with respect to those Securities and that
the pledgee is not the Company or any other obligor on the Securities or any
Affiliate of the Company or of such other obligor.
"Paying Agent" means any Person, which may include the Company, the
Company authorizes to pay the principal of and premium, if any, or interest on
any one or more series of Securities on behalf of the Company.
"Person" means any individual, corporation, limited liability
company, partnership, joint venture, trust, unincorporated organization or
government or any agency or political subdivision thereof.
"Place of Payment," when used with respect to the Securities of any
series, means the place or places where the principal of (and premium, if any)
and interest on the Securities of that series are payable as specified in
accordance with Section 3.01, subject to the provisions of Section 10.02.
"Predecessor Security" of any particular Security means every
previous Security evidencing all or a portion of the same debt as that evidenced
by that particular Security; and, for the purposes of this definition, any
Security authenticated and delivered under Section 3.06 in exchange for or in
lieu of a mutilated, destroyed, lost or stolen Security will be deemed to
evidence the same debt as the mutilated, destroyed, lost or stolen Security.
"Record Date" means either a Regular Record Date or a Special Record
Date, as applicable.
"Redemption Date," when used with respect to any Security to be
redeemed, means the date fixed for that redemption by or pursuant to this
Indenture.
"Redemption Price," when used with respect to any Security to be
redeemed, means the price at which it is to be redeemed pursuant to this
Indenture on the applicable Redemption Date.
"Regular Record Date" for the interest payable on any Interest
Payment Date means the date specified for that purpose as Section 3.01
contemplates, or, if not so specified, the last day of the calendar month
preceding that Interest Payment Date if that Interest Payment Date is the 15th
day of the calendar month or the 15th day of the calendar month preceding that
Interest Payment
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<PAGE>
Date if that Interest Payment Date is the first day of a calendar month, whether
or not that day is a Business Day.
"Representative" means the indenture trustee or other trustee, agent
or representative for any Senior Indebtedness.
"Repurchase Date," when used with respect to any Security to be
repurchased by the Company, means the date fixed for that repurchase by or
pursuant to this Indenture.
"Responsible Officer" means, when used with respect to the Trustee,
the chairman of the Board of Directors, any vice chairman of the Board of
Directors, the chairman of the trust committee, the chairman of the executive
committee, any vice chairman of the executive committee, the president, any vice
president (whether or not designated by numbers or words added before or after
the title "vice president"), the cashier, the secretary, the treasurer, any
trust officer, any assistant trust officer, any assistant cashier, any assistant
secretary, any assistant treasurer, or any other officer or assistant officer of
the Trustee customarily performing functions similar to those performed by the
Persons who at the time shall be such officers, respectively, or to whom any
corporate trust matter is referred because of his or her knowledge of and
familiarity with the particular subject.
"Security Register" and "Security Registrar" have the respective
meanings Section 3.05 specifies.
"Senior Indebtedness" means the principal of and premium, if any,
and interest on (a) all secured indebtedness of the Company for money borrowed
under any Credit Facility, whether outstanding on the date of execution of this
Indenture or thereafter created, incurred or assumed, and (b) all secured
indebtedness of the Company for money borrowed, whether outstanding on the date
of execution of this Indenture or thereafter created, incurred or assumed, and
any amendments, renewals, extensions, modifications, refinancings, replacements
and refundings of any or all thereof. For the purposes of this definition,
"indebtedness for money borrowed" when used with respect to the Company means
(a) any obligation of, or any obligation guaranteed by, the Company for the
repayment of borrowed money (including without limitation fees, penalties or
other obligations in respect thereof), whether or not evidenced by bonds,
debentures, notes or other written instruments, (b) any deferred payment
obligation of, or any such obligation guaranteed by, the Company for the payment
of the purchase price of property or assets evidenced by a note or similar
instrument, and (c) any obligation of, or any such obligation guaranteed by, the
Company for the payment of rent or other amounts under a lease of property or
assets which obligation is required to be classified and accounted for as a
capitalized lease on the balance sheet of the Company under generally accepted
accounting principles.
"Significant Subsidiary" means at any time a Subsidiary that is at
that time a "significant subsidiary" of the Company within the meaning of Rule
1.02(w) of Regulation S-X under the Securities Act of 1933, as amended and in
effect on the date of this Indenture.
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<PAGE>
"Special Record Date" for the payment of any Defaulted Interest on
the Securities of any series means a date the Trustee fixes pursuant to Section
3.07.
"Stated Maturity," when used with respect to any Security or any
installment of interest thereon, means the date specified in that Security as
the fixed date on which the principal of that Security or that installment of
interest is due and payable.
"Subsidiary" means a corporation more than 50% of the outstanding
voting stock of which is owned, directly or indirectly, by the Company or by one
or more other Subsidiaries or by the Company and one or more other Subsidiaries.
For the purposes of this definition, "voting stock" means stock that ordinarily
has voting power in the election of directors, whether at all times or only so
long as no senior class of stock has such voting power by reason of any
contingency.
"Treasury Shares" means shares of Common Stock the Company holds in
its treasury.
"Trust Indenture Act" means the Trust Indenture Act of 1939 as in
force at the date as of which this Indenture was executed; PROVIDED, HOWEVER,
that if the Trust Indenture Act of 1939 is amended after that date, "Trust
Indenture Act" means, to the extent required by any such amendment, the Trust
Indenture Act of 1939 as so amended.
"Trustee" means the Person named as the "Trustee" in the first
paragraph of this Indenture until a successor Trustee shall have become such
pursuant to the applicable provisions of this Indenture, and thereafter
"Trustee" means that successor Trustee.
"Vice President," when used with respect to the Company, means any
vice president, whether or not designated by a number or a word or words added
before or after the title "vice president."
"Yield to Maturity," when used with respect to any Original Issue
Discount Security, means the yield to maturity, if any, set forth on the face
thereof.
SECTION 1.02 COMPLIANCE CERTIFICATES AND OPINIONS.
On any application or request by the Company to the Trustee to take
any action under any provision of this Indenture, the Company will furnish to
the Trustee such certificates and opinions as the Trust Indenture Act requires.
Each such certificate or opinion will be given in the form of an Officers'
Certificate, if to be given by officers of the Company, or an Opinion of
Counsel, if to be given by counsel, and will comply with the requirements of the
Trust Indenture Act and any other requirement this Indenture sets forth.
Every certificate or opinion with respect to compliance with a
condition or covenant provided for in this Indenture must include:
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<PAGE>
(a) a statement that each individual or firm signing that
certificate or opinion has read that covenant or condition and the
definitions herein relating thereto;
(b) a brief statement as to the nature and scope of the examination
or investigation on which the statements or opinions contained in that
certificate or opinion are based;
(c) a statement that, in the opinion of each such individual or
firm, he has or they have made such examination or investigation as is
necessary to enable him or them to express an informed opinion as to
whether or not that covenant or condition has been complied with; and
(d) a statement as to whether, in the opinion of each such
individual or firm, that condition or covenant has been complied with.
SECTION 1.03 FORM OF DOCUMENTS DELIVERED TO TRUSTEE.
In any case where several matters are required to be certified by,
or covered by an opinion of, any specified Person, it is not necessary that all
such matters be certified by, or covered by the opinion of, only one such
Person, or that they be so certified or covered by only one document, but one
such Person may certify or give an opinion with respect to some matters and one
or more other such Persons as to other matters, and any Person may certify or
give an opinion as to such matters in one or several documents.
Any certificate or opinion of an officer of the Company may be
based, insofar as it relates to legal matters, on a certificate or opinion of,
or representations by, counsel, unless that officer knows, or in the exercise of
reasonable care should know, that the certificate or opinion or representations
with respect to the matters on which his certificate or opinion is based are
erroneous. Any such certificate or Opinion of Counsel may be based, insofar as
it relates to factual matters, on a certificate of public officials or on a
certificate or opinion of, or representations by, an officer or officers of the
Company stating that the information with respect to those factual matters is in
the possession of the Company, unless that counsel knows, or in the exercise of
reasonable care should know, that the certificate or opinion or representations
with respect to those matters are erroneous.
Where any Person is required to make, give or execute two or more
applications, requests, consents, certificates, statements, opinions or other
instruments under this Indenture, they may, but need not, be consolidated and
form one instrument.
SECTION 1.04 ACTS OF HOLDERS; RECORD DATES.
(a) Any request, demand, authorization, direction, notice, consent,
waiver or other action this Indenture provides Holders may give or take may be
embodied in and evidenced by one or more instruments of substantially similar
tenor signed by those Holders in person or by their
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<PAGE>
agents duly appointed in writing; and, except as this Indenture otherwise
expressly provides, that action will become effective when such instrument or
instruments are delivered to the Trustee and, where this Indenture expressly
requires, to the Company. Such instrument or instruments (and the action
embodied therein and evidenced thereby) are herein sometimes referred to as the
"Act" of the Holders signing such instrument or instruments. Proof of execution
of any such instrument or of a writing appointing any Holder's agent will be
sufficient for any purpose of this Indenture and (subject to Section 6.01)
conclusive in favor of the Trustee and the Company, if made in the manner this
Section provides. The record of any meeting of Holders will be proved in the
manner Section 14.06 provides.
(b) The fact and date of the execution by any Person of any
instrument or writing may be proved by the affidavit of a witness of that
execution or by a certificate of a notary public or other officer authorized by
law to take acknowledgments of deeds, certifying that the individual signing
that instrument or writing acknowledged to him the execution thereof. Where that
execution is by a signer acting in a capacity other than his individual
capacity, such certificate or affidavit will also constitute sufficient proof of
his authority. The fact and date of the execution of any instrument or writing,
or the authority of the Person executing the same, also may be proved in any
other manner the Trustee deems sufficient.
(c) The Company may, in the circumstances the Trust Indenture Act
permits, fix any day as the record date for the purpose of determining the
Holders entitled to give or take any request, demand, authorization, direction,
notice, consent, waiver or other action, or to vote on any action, this
Indenture authorizes or permits Holders to give or take. If not set by the
Company prior to the first solicitation of a Holder made by any Person in
respect of any such action, or, in the case of any such vote, prior to such
vote, the record date for any such action or vote will be the 30th day (or, if
later, the date of the most recent list of Holders Section 7.01 requires to be
provided) prior to such first solicitation or vote, as the case may be. With
regard to any record date, only the Holders on that date (or their duly
designated proxies) will be entitled to give or take, or vote on, the relevant
action. Notwithstanding the foregoing, the Company will not set a record date
for, and the provisions of this paragraph will not apply with respect to, any
Act by the Holders pursuant to Section 5.01, 5.02 or 5.12.
(d) The ownership of Securities of any series will be proved by the
Security Register for that series.
(e) Any Act of the Holder of any Security will bind every future
Holder of the same Security and the Holder of every Security issued on the
registration of transfer therefor or in exchange therefor or in lieu thereof in
respect of anything done, omitted or suffered to be done by the Trustee or the
Company in reliance thereon, whether or not notation of that action is made upon
that Security.
(f) Without limiting the foregoing, a Holder entitled hereunder to
give or take any action hereunder with regard to any particular Security may do
so with regard to all or any part of
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<PAGE>
the principal amount of that Security or by one or more duly appointed agents
each of which may do so pursuant to that appointment with regard to all or any
different part of that principal amount.
SECTION 1.05 NOTICES, ETC., TO TRUSTEE AND COMPANY.
Any Act of Holders or other documents provided or permitted by this
Indenture to be made on, given or furnished to, or filed with,
(a) the Trustee by any Holder or by the Company will be sufficient
for every purpose hereunder if made, given, furnished or filed in writing
to or with the Trustee at its Corporate Trust Office, 2001 Ross Avenue,
Dallas, Texas 75201, Attention: Corporate Trust Administration, or at such
superseding address as the Trustee has previously furnished in writing to
the Holders and the Company; or
(b) the Company by the Trustee or by any Holder will be sufficient
for every purpose hereunder (unless otherwise herein expressly provided)
if in writing and mailed, first-class postage prepaid, to the Company,
addressed to it at 2 Northpoint Drive, Suite 300, Houston, Texas 77060 or
at such superseding address as the Company has previously furnished in
writing to the Trustee.
All such notices and communications will be deemed to have been duly given: at
the time delivered by hand, if personally delivered; five Business Days after
being deposited in the mail, registered or certified with postage prepaid, if
mailed; when answered back, if telexed; when receipt acknowledged, if
telecopied; and the next Business Day after timely delivery to the courier, if
sent by a nationally recognized overnight air courier guaranteeing next day
delivery.
SECTION 1.06 NOTICE TO HOLDERS; WAIVER.
Where this Indenture provides for notice to Holders of Securities of
any series of any event, that notice will be sufficiently given (unless
otherwise herein expressly provided) if made, given, furnished or filed in
writing to each Holder affected by that event, at his address as it appears in
the Security Register for that series, not later than the latest date (if any),
and not earlier than the earliest date (if any), prescribed for the giving of
that notice. Where this Indenture provides for notice in any manner, that notice
may be waived in writing by the Person entitled to receive that notice, either
before or after the event, and that waiver will be the equivalent of that
notice. Any waiver of notice by Holders will be filed with the Trustee, but that
filing will not be a condition precedent to the validity of any action taken in
reliance on that waiver. All such notices and communications will be deemed to
have been duly given: at the time delivered by hand, if personally delivered;
five Business Days after being deposited in the mail, registered or certified
with postage prepaid, if mailed; when answered back, if telexed; when receipt
acknowledged, if telecopied; and the next Business Day after timely delivery to
the courier, if sent by a nationally recognized overnight air courier
guaranteeing next day delivery.
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<PAGE>
In the case of any notice this Indenture provides must be given by
mail, if, by reason of the suspension of regular mail service or by reason of
any other cause it is impracticable to give that notice by mail, then such
notification as shall be made with the approval of the Trustee will constitute a
sufficient notification for every purpose hereunder.
SECTION 1.07 CONFLICT WITH TRUST INDENTURE ACT.
If any provision hereof limits, qualifies or conflicts with a
provision of the Trust Indenture Act or another provision that would be required
or deemed under the Trust Indenture Act to be a part of and govern this
Indenture if this Indenture were subject thereto, the latter provision will
control. If any provision of this Indenture modifies or excludes any provision
of the Trust Indenture Act which may be so modified or excluded, the latter
provision will be deemed to apply to this Indenture as so modified or to be
excluded, as the case may be.
SECTION 1.08 EFFECT OF HEADINGS AND TABLE OF CONTENTS.
The Article and Section headings herein and the Table of Contents
are for convenience only and do not affect the construction hereof.
SECTION 1.09 SUCCESSORS AND ASSIGNS.
All covenants and agreements in this Indenture by the Company and
the Trustee will bind each of their respective successors and assigns, whether
so expressed or not.
SECTION 1.10 SEPARABILITY CLAUSE.
In case any provision in this Indenture or in the Securities is
invalid, illegal or unenforceable, the validity, legality and enforceability of
the remaining provisions will not in any way be affected or impaired thereby.
SECTION 1.11 BENEFITS OF INDENTURE.
Nothing in this Indenture or in the Securities, express or implied,
will give to any Person, other than the parties hereto and their successors
hereunder, the Holders of Securities and, with respect to Article XII, the
holders of Senior Indebtedness, any benefit or any legal or equitable right,
remedy or claim under this Indenture.
SECTION 1.12 GOVERNING LAW.
THIS INDENTURE AND THE SECURITIES SHALL BE GOVERNED BY, AND
CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK,
BUT WITHOUT REGARD TO THE PRINCIPLES OF CONFLICTS OF LAWS THEREOF.
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SECTION 1.13 LEGAL HOLIDAYS.
In any case where any Interest Payment Date, Redemption Date or
Stated Maturity of any Security or the last date on which a Holder has the right
to convert that Security is not a Business Day, then (notwithstanding any other
provision of this Indenture or of the Securities) payment of interest or
principal and premium, if any, or conversion of that Security need not be made
on that date, but may be made on the next succeeding Business Day with the same
force and effect as if made on the Interest Payment Date or Redemption Date, or
at the Stated Maturity, or on that last day for conversion; PROVIDED, that no
interest will accrue for the period from and after that Interest Payment Date,
Redemption Date, Stated Maturity or last date, as the case may be, to the next
succeeding Business Day.
SECTION 1.14 NO SECURITY INTEREST CREATED.
Nothing in this Indenture or in the Securities, express or implied,
constitutes, or may be construed to constitute, a security interest under the
Uniform Commercial Code or similar legislation, as now or hereafter enacted and
in effect in any jurisdiction where property of the Company or its Subsidiaries
is or may be located.
SECTION 1.15 LIMITATION ON INDIVIDUAL LIABILITY.
No recourse under or on any obligation, covenant or agreement
contained in this Indenture or in any Security, or for any claim based thereon
or otherwise in respect thereof, may be had against any incorporator,
stockholder, officer or director, as such, past, present or future, of the
Company or any successor corporation, either directly or through the Company,
whether by virtue of any constitution, statute or rule of law, or by the
enforcement of any assessment or penalty or otherwise; it being expressly
understood that this Indenture and the obligations issued hereunder are solely
corporate obligations, and that no such personal liability whatever will attach
to, or is or will be incurred by, the incorporators, stockholders, officers or
directors, as such, of the Company or any successor Person, or any of them,
because of the creation of the indebtedness hereby authorized, or under or by
reason of the obligations, covenants or agreements in this Indenture or in any
Security or implied therefrom; and that any and all such personal liability of
every name and nature, either at common law or in equity or by constitution or
statute, of, and any and all such rights and claims against, every such
incorporator, stockholder, officer or director, as such, because of the creation
of the indebtedness hereby authorized, or under or by reason of the obligations,
covenants or agreements in this Indenture or in any Security or implied
therefrom, are hereby expressly waived and released as a condition of, and as a
consideration for, the execution of this Indenture and the issuance of that
Security.
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ARTICLE II
SECURITY FORMS
SECTION 2.01 FORMS GENERALLY.
The Securities of each series will be in substantially such form or
forms as shall be established by or pursuant to a Board Resolution or in one or
more indentures supplemental hereto, in each case with such appropriate
insertions, omissions, substitutions and other variations as are required or
permitted by this Indenture and may have such letters, numbers or other marks of
identification and such legends or endorsements placed thereon as may be
required to comply with the rules of any securities exchange or as may,
consistently herewith, be determined by the officers executing such Securities,
as evidenced by their execution of the Securities. A copy of the Board
Resolution establishing the form or forms of Securities of any series of
Securities must be certified by the Secretary or an Assistant Secretary of the
Company and delivered to the Trustee at or prior to the delivery of the Company
Order Section 3.03 contemplates for the authentication and delivery of those
Securities.
The definitive Securities will be printed, lithographed or engraved
on steel engraved borders or may be produced in any other manner, all as
determined by the officers executing those Securities, as evidenced by their
execution thereof.
SECTION 2.02 FORM OF TRUSTEE'S CERTIFICATE OF AUTHENTIFICATION.
The Trustee's certificate of authentification will be in
substantially the following form:
"This is one of the Securities of the series designated, described
or provided for in the within-mentioned Indenture.
U.S. TRUST COMPANY OF TEXAS, N.A.,
AS TRUSTEE
By ___________________________
AUTHORIZED SIGNATORY".
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ARTICLE III
THE SECURITIES
SECTION 3.01 AMOUNT UNLIMITED; ISSUABLE IN SERIES.
The aggregate principal amount of Securities which may be
authenticated and delivered under this Indenture is unlimited.
The Securities may be issued in one or more series. There shall be
established in or pursuant to a Board Resolution, and set forth in an Officers'
Certificate, or established in one or more indentures supplemental hereto, prior
to the issuance of Securities of any series,
(a) the title of the Securities of the series (which will
distinguish the Securities of the series from the Securities of all other
series);
(b) any limit on the aggregate principal amount of the Securities of
the series which may be authenticated and delivered under this Indenture
(except for Securities authenticated and delivered on registration of
transfer of, or in exchange for, or in lieu of, other Securities of the
series pursuant to Section 3.04, 3.05, 3.06, 9.06, 11.07 or 13.02);
(c) the date or dates on which the principal of and any premium on
the Securities of the series is payable or the method of determination
thereof;
(d) the rate or rates (which may vary among Securities of the
series), or the method of determination thereof, at which the Securities
of the series will bear interest, if any, whether and under what
circumstances Additional Amounts with respect to such Securities will be
payable, the date or dates from which that interest will accrue, the
Interest Payment Dates on which that interest will be payable and, if
other than as Section 1.01 sets forth, the Regular Record Date for the
interest payable on those Securities on any Interest Payment Date;
(e) the place or places where, subject to the provisions of Section
10.02, the principal of, any premium or interest on and any Additional
Amounts with respect to the Securities of the series will be payable;
(f) the period or periods within which, the price or prices (whether
denominated in cash, securities or otherwise) at which and the terms and
conditions on which (which period or periods, price or prices and terms
and conditions may vary among Securities of the series) Securities of the
series may be redeemed, in whole or in part, at the option of the
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Company, if the Company is to have that option, and the manner in which
the Company must exercise any such option;
(g) the obligation, if any, of the Company to redeem or purchase
Securities of the series pursuant to any sinking fund or analogous
provisions or at the option of a Holder thereof and the period or periods
within which, the price or prices (whether denominated in cash, securities
or otherwise) at which and the terms and conditions on which (which period
or periods, price or prices and terms and conditions may vary among
Securities of the series) Securities of the series shall be redeemed or
purchased in whole or in part pursuant to that obligation;
(h) the denomination in which any Securities of the series will be
issuable, if other than denominations of $1,000 and any integral multiple
thereof;
(i) the currency or currencies (including composite currencies) in
which payment of the principal of, any premium or interest on and any
Additional Amounts with respect to the Securities of the series will be
payable if other than Dollars;
(j) if the principal of, any premium or interest on or any
Additional Amounts with respect to the Securities of the series are to be
payable, at the election of the Company or a Holder thereof, in a currency
or currencies (including composite currencies) other than that in which
the Securities are stated to be payable, the currency or currencies
(including composite currencies) in which payment of the principal of or
any premium or interest on or any Additional Amounts with respect to
Securities of the series as to which that election is made will be
payable, and the periods within which and the terms and conditions on
which that election is to be made;
(k) if the amount of payments of principal of, any premium or
interest on or any additional amounts with respect to the Securities of
the series may be determined with reference to any commodities, currencies
or indices, or values, rates or prices, the manner in which those amounts
will be determined;
(l) if other than the entire principal amount thereof, the portion
of the principal amount of Securities of the series which will be payable
on declaration of acceleration of the Maturity thereof pursuant to Section
5.02;
(m) any additional means of satisfaction and discharge of this
Indenture with respect to Securities of the series pursuant to Section
4.01 and any additional conditions to discharge pursuant to Section 4.01;
(n) any deletions or modifications of or additions to the Events of
Default Section 5.01 sets forth or covenants of the Company Article X sets
forth pertaining to the Securities of the series;
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(o) if the Securities of the series are to be subordinated pursuant
to Article XII to unsecured indebtedness or other liabilities, the
modification for purposes only of the series of the definition of "Senior
Indebtedness" herein; and
(p) any other terms of the series (which terms must not be
inconsistent with the provisions of this Indenture).
All Securities of any one series will be substantially identical,
except as to denomination and except as is otherwise provided in this Section
3.01 or may otherwise be provided in or pursuant to the Board Resolution
referred to above and (subject to Section 3.03) set forth, or determined in the
manner provided, in the Officers' Certificate referred to above or in any such
indenture supplemental hereto.
At the option of the Company, interest on the Securities of any
series that bears interest may be paid by mailing a check to the address of any
Holder as that address appears in the Security Register.
If any of the terms of the series are established by action taken
pursuant to a Board Resolution, a copy of an appropriate record of that action
together with that Board Resolution must be certified by the Secretary or an
Assistant Secretary of the Company and delivered to the Trustee at or prior to
the delivery of the Officers' Certificate setting forth the terms of the series.
SECTION 3.02. DENOMINATIONS.
The Securities of each series will be issuable in such denominations
as will be specified as Section 3.01 contemplates. In the absence of any such
provisions with respect to the Securities of any series, the Securities of that
series denominated in Dollars will be issuable in denominations of $1,000 and
any integral multiple thereof. Unless otherwise provided as Section 3.01
contemplates with respect to any series of Securities, any Securities of a
series denominated in a currency other than Dollars will be issuable in
denominations that are the equivalent, as determined by the Company by reference
to the noon buying rate in The City of New York for cable transfers for that
currency, as that rate is reported or otherwise made available by the Federal
Reserve Bank of New York, on the applicable issue date for those Securities, of
$1,000 and any integral multiple thereof.
SECTION 3.03. EXECUTION, AUTHENTICATION, DELIVERY AND DATING.
The Securities will be executed on behalf of the Company by its
Chairman of the Board, its Chief Executive Officer, its President, its Chief
Financial Officer or one of its Vice Presidents, under its corporate seal or a
facsimile thereof reproduced thereon attested by its Secretary or one of its
Assistant Secretaries. The signature of any of these officers on the Securities
may be manual or facsimile.
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Securities bearing the manual or facsimile signatures of individuals
who were at any time the proper officers of the Company will bind the Company,
notwithstanding that those individuals or any of them have ceased to hold such
offices prior to the authentication and delivery of those Securities or did not
hold such offices at the date of those Securities.
At any time and from time to time after the execution and delivery
of this Indenture, the Company may deliver Securities of any series it has
executed to the Trustee for authentication, together with a Company Order for
the authentication and delivery of those Securities; and the Trustee in
accordance with that Company Order will either at one time or from time to time
pursuant to such instructions as that Company Order may include authenticate and
deliver those Securities as this Indenture provides and not otherwise. Any such
Company Order will specify (or will state that an Officers' Certificate will
specify) the amount of Securities to be authenticated and the date on which the
original issue of Securities is to be authenticated, and will certify (or a
related Officers' Certificate will certify) that all conditions precedent in
this Indenture to the issuance of those Securities have been complied with.
If the form or terms of the Securities of any series have been
established in or pursuant to one or more Board Resolutions as Sections 2.01 and
3.01 permit, in authenticating those Securities, and accepting the additional
responsibilities under this Indenture in relation to those Securities, the
Trustee will be entitled to receive, and (subject to Section 6.01) will be fully
protected in relying on, an Opinion of Counsel stating:
(a) if the form of those Securities has been established by or
pursuant to Board Resolution as Section 2.01 permits, that form has been
established in conformity with the provisions of this Indenture;
(b) if the terms of those Securities have been established by or
pursuant to Board Resolution as Section 3.01 permits, those terms have
been established in conformity with the provisions of this Indenture; and
(c) those Securities, when authenticated and delivered by the
Trustee and issued by the Company in the manner and subject to any
conditions that Opinion of Counsel specifies, will constitute legal, valid
and binding obligations of the Company, enforceable against the Company in
accordance with their terms, except as that enforcement is subject to the
effect of (i) bankruptcy, insolvency, reorganization, moratorium or
similar laws affecting the enforcement of creditors' rights generally,
(ii) general principles of equity (regardless of whether that enforcement
is considered in a proceeding in equity or at law) and (iii) any implied
covenants of good faith and fair dealing.
If such form or terms have been so established, the Trustee will not be required
to authenticate those Securities if the issue of those Securities pursuant to
this Indenture will affect the Trustee's own rights, duties or immunities under
the Securities and this Indenture or otherwise in a manner which is not
reasonably acceptable to the Trustee.
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Each Security will be dated the date of its authentication.
No Security will be entitled to any benefit under this Indenture or
be valid or obligatory for any purpose unless there appears on that Security a
certificate of authentication substantially in the form provided for herein duly
executed by the Trustee by manual signature, and that certificate on any
Security will be conclusive evidence, and the only evidence, that that Security
has been duly authenticated and delivered hereunder and is entitled to the
benefits of this Indenture. Notwithstanding the foregoing, if any Security shall
have been authenticated and delivered hereunder but never issued and sold by the
Company, and the Company shall deliver such Security to the Trustee for
cancellation pursuant to Section 3.09 together with a written statement (which
need not (a) comply with Section 1.03 or (b) be accompanied by an Opinion of
Counsel) stating that the Company has never issued and sold that Security, that
Security will be deemed for all purposes of this Indenture never to have been
authenticated and delivered hereunder and will never be entitled to the benefits
of this Indenture.
The Trustee may appoint an Authenticating Agent pursuant to Section
6.14.
SECTION 3.04. TEMPORARY SECURITIES.
Pending the preparation of definitive Securities of any series, the
Company may execute, and on Company Order the Trustee will authenticate and
deliver, temporary Securities of that series which are printed, lithographed,
typewritten, mimeographed or otherwise produced, in any authorized denomination,
substantially of the tenor of the definitive Securities in lieu of which they
are issued and with such appropriate insertions, omissions, substitutions and
other variations as the officers executing those Securities may determine, as
evidenced by their execution of those Securities. Every such temporary Security
shall be executed by the Company and will be authenticated and delivered by the
Trustee on the same conditions and in substantially the same manner, and with
the same effect, as the definitive Security or Securities in lieu of which it is
issued.
If temporary Securities of any series are issued, the Company will
cause definitive Securities of that series to be prepared without unreasonable
delay. After the preparation of definitive Securities of any series, the
temporary Securities of that series will be exchangeable for those definitive
Securities on surrender of the temporary Securities at any Company Agency,
without charge to the Holder. On surrender for cancellation of any one or more
temporary Securities of any series, the Company will execute and the Trustee
will authenticate and deliver in exchange therefor one or more definitive
Securities of the same series and of like tenor, of any authorized denominations
and of a like aggregate principal amount. Until so exchanged, the temporary
Securities of any series will be entitled in all respects to the same benefits
under this Indenture as definitive Securities of that series.
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SECTION 3.05. REGISTRATION, REGISTRATION OF TRANSFER AND EXCHANGE.
(a) The Company will cause to be kept for each series of Securities
at one of the Company Agencies a register (the register maintained in that
Company Agency and in any other office or agency of the Company in a Place of
Payment being herein sometimes collectively referred to as the "Security
Register") in which, subject to such reasonable regulations as it may prescribe,
the Company will provide for the registration of Securities and of transfers of
Securities of that series. The Trustee is hereby initially appointed "Security
Registrar" for the purpose of registering Securities and transfers of Securities
as herein provided.
(b) On surrender for registration of transfer of any Security of any
series at the office or agency in a Place of Payment for that series, the
Company will execute, and the Trustee will authenticate and deliver, in the name
of the designated transferee or transferees, one or more new Securities of the
same series and of like tenor, of any authorized denominations and of a like
aggregate principal amount.
At the option of the Holder thereof, Securities of any series may be
exchanged for other Securities of the same series and of like tenor, of any
authorized denominations and of a like aggregate principal amount, on surrender
of the Securities to be exchanged at a Company Agency. Whenever any Securities
are so surrendered for exchange, the Company will execute, and the Trustee will
authenticate and deliver, the Securities that the Holder making the exchange is
entitled to receive.
(c) All Securities issued on any registration of transfer or
exchange of Securities will be the valid obligations of the Company, evidencing
the same debt, and entitled to the same benefits under this Indenture, as the
Securities surrendered on such registration of transfer or exchange.
(d) Every Security presented or surrendered for registration of
transfer or for exchange will (if so required by the Company or the Trustee) be
duly endorsed, or be accompanied by a written instrument of transfer in form
satisfactory to the Company and the Security Registrar duly executed, by the
Holder thereof or his attorney duly authorized in writing.
(e) Except as Section 3.06 provides, no service charge will be made
for any registration of transfer or exchange of Securities. The Company may
require payment of a sum sufficient to cover any tax or other governmental
charge that may be imposed in connection with any registration of transfer or
exchange of Securities, other than exchanges pursuant to Section 3.04, 9.06,
11.07 or 13.02 not involving any transfer.
(f) The Company will not be required (i) to issue, register the
transfer of or exchange Securities of any series during a period beginning at
the opening of business 15 days before the day of the mailing of a notice of
redemption of Securities of that series selected for redemption and ending at
the close of business on the day of the mailing of the relevant notice of
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redemption or (ii) to register the transfer of or exchange any Security so
selected for redemption in whole or in part, except the unredeemed portion of
any Security being redeemed in part.
SECTION 3.06. MUTILATED, DESTROYED, LOST AND STOLEN SECURITIES.
If any mutilated Security of any series is surrendered to the
Trustee, the Company will execute, and the Trustee will authenticate and deliver
in exchange therefor, a new Security of the same series and of like tenor and
principal amount and bearing a number not contemporaneously outstanding.
If there shall be delivered to the Company and the Trustee (a)
evidence to their satisfaction of the destruction, loss or theft of any Security
and (b) such security or indemnity as may be required by them to save each of
them and any agent of either of them harmless, then, in the absence of notice to
the Company or the Trustee that the Security has been acquired by a bona fide
purchaser, the Company will execute, and the Trustee will authenticate and
deliver, in lieu of any such destroyed, lost or stolen Security, a new Security
of the same series and of like tenor and principal amount and bearing a number
not contemporaneously outstanding. The Trustee may charge the Company for the
Trustee's expenses in replacing any destroyed, lost or stolen Security.
In case any mutilated, destroyed, lost or stolen Security has become
or is about to become due and payable, the Company in its discretion may,
instead of issuing a new Security, pay that Security.
On the issuance of any new Security under this Section 3.06, the
Company may require the payment of a sum sufficient to cover any tax or other
governmental charge that may be imposed in relation thereto and any other
expenses (including the fees and expenses of the Trustee) connected therewith.
Every new Security of any series issued pursuant to this Section
3.06 in lieu of any destroyed, lost or stolen Security will constitute an
original additional contractual obligation of the Company, whether or not the
destroyed, lost or stolen Security shall be at any time enforceable by anyone,
and will be entitled to all the benefits of this Indenture equally and
proportionately with any and all other Securities of that series duly issued
hereunder.
The provisions of this Section 3.06 are exclusive and will preclude
(to the extent lawful) all other rights and remedies with respect to the
replacement or payment of mutilated, destroyed, lost or stolen Securities.
SECTION 3.07. PAYMENT OF INTEREST; INTEREST RIGHTS PRESERVED.
Interest on any Security which is payable, and is punctually paid or
duly provided for, on any Interest Payment Date will be paid to the Person in
whose name that Security (or one or more Predecessor Securities) is registered
at the close of business on the Regular Record Date for that
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interest. Unless otherwise provided with respect to the Securities of any
series, payment of interest may be made at the option of the Company by check
mailed or delivered to the address of any Person entitled thereto as that
address then appears in the Securities Register.
Any interest on any Security of any series which is payable, but is
not punctually paid or duly provided for, on any Interest Payment Date (herein
called "Defaulted Interest") will forthwith cease to be payable to the Holder on
the relevant Regular Record Date by virtue of having been such Holder, and such
Defaulted Interest may be paid by the Company, at its election in each case, as
provided in clause (a) or (b) below:
(a) The Company may elect to make payment of any Defaulted Interest
to the Persons in whose names the Securities (or their respective
Predecessor Securities) of that series are registered at the close of
business on a Special Record Date for the payment of that Defaulted
Interest which will be fixed in the following manner. The Company will
notify the Trustee in writing of the amount of Defaulted Interest proposed
to be paid on each Security and the date of the proposed payment, and at
the same time the Company will (i) deposit with the Trustee an amount of
money equal to the aggregate amount proposed to be paid in respect of that
Defaulted Interest or (ii) make arrangements satisfactory to the Trustee
for that deposit prior to the date of the proposed payment, that money
when deposited to be held in trust for the benefit of the Persons entitled
to that Defaulted Interest as this clause (a) provides. Thereupon the
Trustee will fix a Special Record Date for the payment of that Defaulted
Interest which will be not more than 15 days and not less than 10 days
prior to the date of the proposed payment and not less than 10 days after
the receipt by the Trustee of the notice of the proposed payment. The
Trustee will promptly notify the Company of that Special Record Date and,
in the name and at the expense of the Company, will cause notice of the
proposed payment of that Defaulted Interest and the Special Record Date
therefor to be mailed, first-class postage prepaid, to each Holder of
Securities of that series at his address as it appears in the Security
Register, not less than 10 days prior to that Special Record Date. Notice
of the proposed payment of that Defaulted Interest and the Special Record
Date therefor having been so mailed, that Defaulted Interest will be paid
to the Persons in whose names the Securities (or their respective
Predecessor Securities) of that series are registered at the close of
business on that Special Record Date and will no longer be payable
pursuant to the following clause (b).
(b) The Company may make payment of any Defaulted Interest on the
Securities of any series in any other lawful manner not inconsistent with
the requirements of any securities exchange on which those Securities may
be listed, and on such notice as that exchange may require, if, after
notice given by the Company to the Trustee of the proposed payment
pursuant to this clause (b), the Trustee deems that manner of payment to
be practicable.
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Subject to the foregoing provisions of this Section 3.07, each
Security delivered under this Indenture on registration of transfer of or in
exchange for or in lieu of any other Security will carry the rights to interest
accrued and unpaid, and to accrue, which that other Security carried.
In the case of any Security of any series which is converted after
any Regular Record Date and on or prior to the next succeeding Interest Payment
Date (other than any Security whose Maturity is prior to that Interest Payment
Date), interest on that Security whose Stated Maturity is on that Interest
Payment Date will be payable on that Interest Payment Date notwithstanding that
conversion, and that interest (whether or not punctually paid or duly provided
for) will be paid to the Person in whose name that Security (or one or more of
its Predecessor Securities) is registered at the close of business on that
Regular Record Date, PROVIDED, HOWEVER, that Securities of any series so
surrendered for conversion will (except in the case of those Securities or
portions thereof called for redemption) be accompanied by payment in New York
Clearing House funds or other funds acceptable to the Company of an amount equal
to the interest payable on that Interest Payment Date on the principal amount
being surrendered for conversion. Except as the immediately preceding sentence
otherwise expressly provides, in the case of any Security of any series which is
converted, interest whose Stated Maturity is after the date of conversion of
that Security will not be payable.
SECTION 3.08. PERSONS DEEMED OWNERS.
Prior to due presentment of a Security for registration of transfer,
the Company, the Trustee and any agent of the Company or the Trustee may treat
the Person in whose name that Security is registered as the owner of that
Security for the purpose of receiving payment of principal of and premium, if
any, and (subject to Section 3.07) interest on that Security and for all other
purposes whatsoever, whether or not that Security be overdue, and neither the
Company, the Trustee nor any agent of the Company or the Trustee will be
affected by notice to the contrary.
SECTION 3.09. CANCELLATION.
All Securities surrendered for payment, redemption, repurchase,
registration of transfer, exchange or conversion will, if surrendered to any
Person other than the Trustee, be delivered to the Trustee, which will promptly
cancel it. The Company may at any time deliver to the Trustee for cancellation
any Securities previously authenticated and delivered hereunder which the
Company may have acquired in any manner whatsoever, and the Trustee will
promptly cancel all Securities so delivered. The Trustee will not authenticate
in lieu of or in exchange for any Security canceled pursuant to Section 3.09,
except as this Indenture expressly permits. All canceled Securities the Trustee
holds will be disposed of as a Company Order directs.
SECTION 3.10. COMPUTATION OF INTEREST.
Except as otherwise specified as Section 3.01 contemplates for
Securities of any series, interest on the Securities of each series shall be
computed on the basis of a 360-day year of twelve 30-day months.
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ARTICLE IV
SATISFACTION AND DISCHARGE
SECTION 4.01. SATISFACTION AND DISCHARGE OF INDENTURE.
This Indenture will on Company Request cease to be of further effect
(except as this Article IV expressly provides), and the Trustee, at the expense
of the Company, will execute proper instruments acknowledging satisfaction and
discharge of this Indenture, when
(a) either
(i) all Securities theretofore authenticated and delivered
(other than (A) Securities that have been destroyed, lost or stolen
and have been replaced or paid pursuant to Section 3.06 and (B)
Securities for whose payment money has theretofore been deposited in
trust or segregated and held in trust by the Company and thereafter
repaid to the Company or discharged from such trust, pursuant to
Section 10.03) have been delivered to the Trustee for cancellation;
or
(ii) all those Securities not theretofore delivered to the
Trustee for cancellation
(A) have become due and payable, or
(B) will become due and payable at their Stated Maturity
within one year, or
(C) are to be called for redemption within one year
under arrangements satisfactory to the Trustee for the giving
of notice of redemption by the Trustee in the name, and at the
expense, of the Company, or
(D) are delivered to the Trustee for conversion in
accordance with Article XIII,
and the Company, in the case of (A), (B), (C) or (D) above, has
irrevocably deposited or caused to be deposited with the Trustee as trust
funds in trust for the purpose of paying an amount in cash sufficient
(without consideration of any investment of such cash) to pay and
discharge the entire indebtedness on those Securities not theretofore
delivered to the Trustee for cancellation for principal and premium, if
any, and interest and Additional Amounts, if any, to the date of such
deposit (in the case of Securities that have become due and payable) or to
the Stated Maturity or Redemption Date, as the case may be; PROVIDED that
the Trustee
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is irrevocably instructed to apply that amount to those payments with
respect to those Securities;
(b) the Company has paid or caused to be paid all other sums payable
hereunder by the Company; and
(c) the Company has delivered to the Trustee an Officers'
Certificate and an Opinion of Counsel, each stating that all conditions
precedent herein provided for relating to the satisfaction and discharge
of this Indenture have been complied with.
Notwithstanding the satisfaction and discharge of this Indenture,
the following rights or obligations under the Securities and this Indenture will
survive until otherwise terminated or discharged hereunder: (a) Article XIII and
the Company's obligations under Sections 3.04, 3.05, 3.06, 10.02 and 10.03, in
each case with respect to any Securities described in subclause (ii) of clause
(a) of this Section 4.01, (b) this Article IV, (c) the rights, powers, trusts,
duties and immunities of the Trustee hereunder, including the obligations of the
Company to the Trustee under Section 6.07, and the obligations of the Trustee or
the Company to any Authenticating Agent under Section 6.14 and (d) if money
shall have been deposited with the Trustee pursuant to subclause (ii) of clause
(a) of this Section 4.01, the rights of Holders of any Securities described in
that subclause (ii) to receive, solely from the trust fund described in that
subclause (ii), payments in respect of the principal of, and premium (if any)
and interest on and Additional Amounts (if any) with respect to, those
Securities when such payments are due.
SECTION 4.02. APPLICATION OF TRUST MONEY.
Subject to the provisions of the last paragraph of Section 10.03,
the Trustee will hold in trust and apply all money deposited with it pursuant to
Section 4.01, in accordance with the provisions of the Securities and this
Indenture, to the payment, either directly or through any Paying Agent
(including the Company acting as its own Paying Agent) as the Trustee may
determine, to the Persons entitled thereto, of the principal, premium, if any,
interest and Additional Amounts, if any, for whose payment that money has been
deposited with it. All moneys deposited with the Trustee pursuant to Section
4.01 (and held by it or any Paying Agent) for the payment of Securities
subsequently converted will be returned to the Company on Company Request.
SECTION 4.03. REINSTATEMENT.
If the Trustee or the Paying Agent is unable to apply any money in
accordance with this Article IV by reason of any order or judgment of any court
or governmental authority enjoining, restraining or otherwise prohibiting that
application, then the Company's obligations under this Indenture and the
Securities will be revived and reinstated as though no deposit had occurred
pursuant to this Article IV until such time as the Trustee or Paying Agent is
permitted to apply all money held in trust with respect to the Securities;
PROVIDED, HOWEVER, that if the Company makes any payment of principal of, any
premium or interest on or any Additional Amounts with respect to
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any Security following the reinstatement of its obligations, the Company will be
subrogated to the rights of the Holders of the Securities to receive that
payment from the money so held in trust.
ARTICLE V
REMEDIES
SECTION 5.01. EVENTS OF DEFAULT.
"Event of Default," wherever used herein with respect to Securities
of any series, means any one of the following events (whatever the reason for
that Event of Default and whether it shall be occasioned by the provisions of
Article XII or be voluntary or involuntary or be effected by operation of law or
pursuant to any judgment, decree or order of any court or any order, rule or
regulation of any administrative or governmental body), unless it either is
inapplicable to a particular series of Securities or is specifically deleted or
modified in or pursuant to the supplemental indenture or Board Resolution
establishing that series or in the form of the Security for that series;
(a) default in the payment of the principal of or premium, if any,
on any Security of that series at its Maturity, whether or not Article XII
prohibits that payment; or
(b) default in the payment of any interest on or any Additional
Amounts with respect to any Security of that series when it becomes due
and payable, whether or not Article XII prohibits that payment, and
continuance of such default for a period of 30 days; or
(c) default in the performance, or breach, of any covenant or
warranty of the Company in this Indenture (other than a covenant or
warranty a default in whose performance or whose breach is elsewhere in
this Section 5.01 specifically dealt with or which has been expressly
included in this Indenture solely for the benefit of one or more series of
Securities other than that series), and continuance of such default or
breach for a period of 60 days after there has been given, by registered
or certified mail, to the Company by the Trustee or to the Company and the
Trustee by the Holders of at least 25% in principal amount of the
Outstanding Securities of that series a written notice specifying that
default or breach and requiring it to be remedied and stating that notice
is a "Notice of Default" hereunder; or
(d) default under one or more bonds, notes, debentures or other
evidences of indebtedness for money borrowed by the Company or any
Consolidated Subsidiary or under one or more mortgages, indentures or
instruments under which there may be issued or by which there may be
secured or evidenced any indebtedness for money borrowed by the Company or
any Consolidated Subsidiary, whether that indebtedness now exists or shall
hereafter be created, which default individually or in the aggregate
constitutes a failure to pay
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the principal of indebtedness in excess of $10,000,000 when due and
payable after the expiration of any applicable grace period with respect
thereto or shall have resulted in the principal of indebtedness in excess
of $10,000,000 becoming or being declared due and payable prior to the
date on which it would otherwise have become due and payable, without that
indebtedness having been discharged, or that acceleration having been
rescinded or annulled, within a period of 30 days after there shall have
been given, by registered or certified mail, to the Company by the Trustee
or to the Company and the Trustee by the Holders of at least 25% in
principal amount of the Outstanding Securities of that series a written
notice specifying that default and requiring the Company to cause that
indebtedness to be discharged or that acceleration to be rescinded or
annulled and stating that notice is a "Notice of Default" hereunder; or
(e) the filing or commencement of an involuntary case or other
proceeding against the Company or any Significant Subsidiary of the
Company seeking liquidation, reorganization or other relief with respect
to it or its debts under any bankruptcy, insolvency or other similar law
now or thereafter in effect or seeking the appointment of a trustee,
receiver, liquidator, custodian or other similar official of it or any
substantial part of its property, and such involuntary case or other
proceeding shall remain undismissed and unstayed for a period of 90 days;
or an order for relief shall be entered against the Company or any
Significant Subsidiary of the Company under the federal bankruptcy laws as
now or hereafter in effect; or
(f) the filing or commencement by the Company or any Significant
Subsidiary of the Company of a voluntary case or other proceeding seeking
liquidation, reorganization or other similar relief with respect to itself
or its debts under any bankruptcy, insolvency or other similar law now or
hereafter in effect, or seeking the appointment of a trustee, receiver,
liquidator, custodian or other similar official of it or any substantial
part of its property, or the Company or any Significant Subsidiary of the
Company shall consent to any such relief or to the appointment of or
taking possession by any such official in an involuntary case or other
proceeding commenced against it or shall make a general assignment for the
benefit of creditors; or
(g) any other Event of Default provided with respect to Securities
of that series as contemplated by Section 3.01.
Notwithstanding the foregoing provisions of this Section 5.01, if
the principal of, any premium or any interest on or any Additional Amounts with
respect to the Securities of any series is payable in a currency or currencies
(including a composite currency) other than Dollars and such currency (or
currencies) is (or are) not available to the Company for making payment thereof
because of the imposition of exchange controls or other circumstances beyond the
control of the Company (a "Conversion Event"), the Company will be entitled to
satisfy its obligations to Holders of the Securities of that series by making
such payment in Dollars in an amount equal to the Dollar equivalent of the
amount payable in such other currency or currencies, as the Company will
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determine by reference to the noon buying rate in The City of New York for cable
transfers for such currency or currencies ("Exchange Rate"), as such Exchange
Rate is certified for customs purposes by the Federal Reserve Bank of New York
on the date of such payment, or, if such rate is not then available, on the
basis of the most recently available Exchange Rate. Notwithstanding the
foregoing provisions of this Section 5.01, any payment made under such
circumstances in Dollars where the required payment is in a currency or
currencies other than Dollars will not constitute an Event of Default under this
Indenture.
Promptly after the occurrence of a Conversion Event respecting
Securities of any series, the Company must give written notice thereof to the
Trustee; and the Trustee, promptly after receipt of that notice, must give
notice thereof in the manner Section 1.06 provides to the Holders of those
Securities. Promptly after the making of any payment in Dollars as a result of a
Conversion Event respecting Securities of any series, the Company must give
notice in the manner Section 1.06 provides to the Holders of those Securities,
setting forth the applicable Exchange Rate and describing the calculation of
such payments.
SECTION 5.02. ACCELERATION OF MATURITY; RESCISSION AND ANNULMENT.
If an Event of Default with respect to any Outstanding Securities of
any series occurs and is continuing, then in every such case the Trustee or the
Holders of not less than 25% in principal amount of the Outstanding Securities
of (a) the series affected by such default (in the case of an Event of Default
described in clause (a), (b), or (g) of Section 5.01) or (b) all series of
Securities (subject to the immediately following sentence, in the case of other
Events of Default) may declare the principal amount (or, if any such Securities
are Original Issue Discount Securities, such portion of the principal amount as
may be specified in the terms of that series) of all the Securities of the
series affected by such default or all series, as the case may be, to be due and
payable immediately, by a notice in writing to the Company (and to the Trustee
if given by Holders), and on any such declaration that principal amount (or
specified amount) will become immediately due and payable. If an Event of
Default described in clause (e) or (f) of Section 5.01 occurs, the principal
amount of the Outstanding Securities of all series IPSO FACTO will become and be
immediately due and payable without any declaration or other act on the part of
the Trustee or any Holder.
At any time after such a declaration of acceleration with respect to
Securities of any series (or of all series, as the case may be) has been made
and before the Trustee has obtained, as this Article V hereinafter provides, a
judgment or decree for payment of the money due, the Holders of a majority in
principal amount of the Outstanding Securities of that series (or of all series,
as the case may be), by written notice to the Company and the Trustee, may
rescind and annul that declaration and its consequences if
(a) the Company has paid or deposited with the Trustee a sum
sufficient to pay
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(i) all overdue interest on, and any Additional Amounts with
respect to, all Securities of that series (or of all series, as the
case may be),
(ii) the principal of (and premium, if any, on) any Securities
of that series (or of all series, as the case may be) which have
become due otherwise than by such declaration of acceleration and
interest thereon at the rate or rates prescribed therefor in such
Securities (in the case of Original Issue Discount Securities, the
Securities' Yield to Maturity),
(iii) to the extent that payment of such interest is lawful,
interest on overdue interest and any Additional Amounts at the rate
or rates prescribed therefor in such Securities (in the case of
Original Issue Discount Securities, the Securities' Yield to
Maturity) and
(iv) all sums paid or advanced by the Trustee hereunder and
the reasonable compensation, expenses, disbursements and advances of
the Trustee, its agents and counsel;
and
(b) all Events of Default with respect to Securities of that series
(or of all series, as the case may be), other than the non-payment of the
principal of Securities of that series (or of all series, as the case may
be) which have become due solely by such declaration of acceleration, have
been cured or waived as Section 5.13 provides.
No rescission pursuant to this Section 5.02 will affect any subsequent default
or impair any right consequent thereon.
SECTION 5.03. COLLECTION OF INDEBTEDNESS AND SUITS FOR ENFORCEMENT BY TRUSTEE.
The Company covenants that if
(a) default is made in the payment of any interest on or any
Additional Amounts with respect to any Security of any series when such
interest or Additional Amounts shall have become due and payable and such
default continues for a period of 30 days, or
(b) default is made in the payment of the principal of or premium,
if any, on any Security of any series at the Maturity thereof,
the Company will, on demand of the Trustee, pay to it, for the benefit of the
Holders of the Securities of that series, the whole amount then due and payable
on those Securities for principal and premium, if any, and interest and any
Additional Amounts, and, to the extent that payment of such interest shall be
legally enforceable, interest on any overdue principal and premium, if any, and
on any
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overdue interest and Additional Amounts, at the rate borne by those Securities
(or in the case of Original Issue Discount Securities, the Yield to Maturity of
those Securities), and, in addition thereto, such further amount as shall be
sufficient to cover the costs and expenses of collection, including the
reasonable compensation, expenses, disbursements and advances of the Trustee and
each predecessor Trustee, their respective agents and counsel, and any other
amounts due the Trustee or any predecessor Trustee under Section 6.07.
If the Company fails to pay those amounts forthwith on that demand,
the Trustee, in its own name and as trustee of an express trust, may (a)
institute a judicial proceeding for the collection of the sums so due and
unpaid, (b) prosecute any such proceeding to judgment or final decree and (c)
enforce the same against the Company (or any other obligor on those Securities)
and collect the moneys adjudged or decreed to be payable in the manner provided
by law out of the property of the Company (or any other obligor on those
Securities), wherever situated.
If an Event of Default with respect to Securities of any series
occurs and is continuing, the Trustee may in its discretion proceed to protect
and enforce its rights and the rights of the Holders of those Securities by such
appropriate judicial proceedings as the Trustee deems most effectual to protect
and enforce any such rights, whether for the specific enforcement of any
covenant or agreement in this Indenture or in aid of the exercise of any power
granted herein, or to enforce any other proper remedy.
SECTION 5.04. TRUSTEE MAY FILE PROOFS OF CLAIM.
In case of any judicial proceeding relative to the Company (or any
other obligor on the Securities of any series), its property or its creditors,
the Trustee will be entitled and empowered, by intervention in that proceeding
or otherwise, to take any and all actions authorized under the Trust Indenture
Act in order to have the claims of the applicable Holders and the Trustee
allowed in any such proceeding. In particular, the Trustee is authorized to
collect and receive any moneys or other property payable or deliverable on any
such claims and to distribute the same; and any custodian, receiver, assignee,
trustee, liquidator, sequestrator or other similar official in any such judicial
proceeding is hereby authorized by each applicable Holder to make those payments
to the Trustee and, if the Trustee consents to the making of those payments
directly to the applicable Holders, to pay to the Trustee any amount due it and
each predecessor Trustee for the reasonable compensation, expenses,
disbursements and advances of the Trustee and each predecessor Trustee and their
respective agents and counsel, and any other amounts due the Trustee under
Section 6.07.
No provision of this Indenture authorizes, or may be deemed to
authorize, the Trustee to (a) authorize or consent to or accept or adopt on
behalf of any Holder of Securities of any series any plan of reorganization,
arrangement, adjustment or composition affecting those Securities or the rights
of any Holder thereof or (b) vote in respect of the claim of that Holder in any
such proceeding; PROVIDED, HOWEVER, that the Trustee may, on behalf of the
Holders of those Securities, vote for the election of a trustee in bankruptcy or
similar official and may be a member of the creditors' committee.
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SECTION 5.05. TRUSTEE MAY ENFORCE CLAIMS WITHOUT POSSESSION OF SECURITIES.
The Trustee may prosecute and enforce all rights of action and
claims under this Indenture or the Securities of any series without the
possession of any of those Securities or the production thereof in any
proceeding relating thereto. The Trustee will institute any such proceeding in
its own name as trustee of an express trust, and any recovery by it of judgment
will, after provision for the payment of the reasonable compensation, expenses,
disbursements and advances of the Trustee and each predecessor Trustee and their
respective agents and counsel, be for the ratable benefit of the Holders of the
Securities in respect of which that judgment has been recovered.
SECTION 5.06. APPLICATION OF MONEY COLLECTED.
Any money the Trustee collects pursuant to this Article V will be
applied in the following order, on the date or dates the Trustee fixes and, in
case of the distribution of that money on account of principal of, premium, if
any, or interest on or any Additional Amounts with respect to the Securities of
any series, on presentation of those Securities and the notation thereon of the
payment if only partially paid and on surrender thereof if fully paid:
FIRST: Subject to Article XII, to the holders of Senior
Indebtedness;
SECOND: To payment of all amounts due the Trustee under Section
6.07;
THIRD: To the payment of the amounts then due and unpaid for
principal of, premium, if any, and interest on and any Additional Amounts
with respect to the Securities in respect of which or for the benefit of
which such money has been collected, ratably, without preference or
priority of any kind, according to the amounts due and payable on those
Securities for principal, premium, if any, interest and Additional
Amounts, respectively; and
FOURTH: The balance, if any, to the Company or any other Person or
Persons determined to be entitled thereto.
To the fullest extent allowed under applicable law, if for the
purpose of obtaining judgment against the Company in any court it is necessary
to convert the sum due in respect of the principal of or any premium or interest
on or any Additional Amounts with respect to the Securities of any series (the
"Required Currency") into a currency in which a judgment will be rendered (the
"Judgment Currency"), the rate of exchange used will be the rate at which in
accordance with normal banking procedures the Trustee could purchase in The City
of New York the Required Currency with the Judgment Currency on the New York
Business Day next preceding that on which final judgment is given. Neither the
Company nor the Trustee will be liable for any shortfall nor will either the
Company or the Trustee it benefit from any windfall in payments to Holders of
Securities under this Section 5.06 caused by a change in exchange rates between
the time the amount of a judgment against the Company is calculated as above and
the time the Trustee converts the Judgment Currency
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into the Required Currency to make payments under this Section 5.06 to Holders
of Securities, but payment of that judgment will discharge all amounts owed by
the Company on the claim or claims underlying that judgment.
SECTION 5.07. LIMITATION ON SUITS.
No Holder of any Security of any series will have any right to
institute any proceeding, judicial or otherwise, with respect to this Indenture,
or for the appointment of a receiver or trustee, or for any other remedy
hereunder, unless
(a) an Event of Default with respect to Securities of that series
has occurred and is continuing and that Holder has previously given
written notice to the Trustee of that continuing Event of Default;
(b) the Holders of not less than 25% in principal amount of the
Outstanding Securities of that series shall have made written request to
the Trustee to institute proceedings in respect of that Event of Default
in its own name as Trustee hereunder;
(c) such Holder or Holders have offered to the Trustee reasonable
indemnity satisfactory to it against the costs, expenses and liabilities
to be incurred in compliance with such request;
(d) the Trustee for 60 days after its receipt of such notice,
request and offer of indemnity has failed to institute any such
proceeding; and
(e) no direction inconsistent with such written request has been
given to the Trustee during such 60-day period by the Holders of a
majority in principal amount of the Outstanding Securities of that series;
it being understood and intended that no one or more of those Holders will have
any right in any manner whatever by virtue of, or by availing of, any provision
of this Indenture to affect, disturb or prejudice the rights of any other of
those Holders, or to obtain or to seek to obtain priority or preference over any
other of those Holders or to enforce any right under this Indenture, except in
the manner herein provided and for the equal and ratable benefit of all those
Holders.
SECTION 5.08. UNCONDITIONAL RIGHT OF HOLDERS TO RECEIVE PRINCIPAL, PREMIUM,
INTEREST AND TO CONVERT.
Notwithstanding any other provision in this Indenture, the Holder of
any Security will have the right, which is absolute and unconditional, to
receive payment of the principal of and premium, if any, and (subject to Section
3.07) interest on and any Additional Amounts with respect to that Security on
the respective Stated Maturities expressed in that Security (or, in the case of
redemption, on the Redemption Date or, in the case of a repurchase pursuant to
this Indenture, on
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the Repurchase Date) and to convert that Security in accordance with Article
XIII and to institute suit for the enforcement of any such payment and right to
convert, and those rights will not be impaired without the consent of that
Holder.
SECTION 5.09. RESTORATION OF RIGHTS AND REMEDIES.
If the Trustee or any Holder of Securities of any series has
instituted any proceeding to enforce any right or remedy under this Indenture
and that proceeding has been discontinued or abandoned for any reason, or has
been determined adversely to the Trustee or to that Holder, then and in every
such case, subject to any determination in that proceeding, the Company, the
Trustee and the Holders of Securities of that series will be restored severally
and respectively to their former positions hereunder and thereafter all rights
and remedies of the Trustee and those Holders will continue as though no such
proceeding had been instituted.
SECTION 5.10. RIGHTS AND REMEDIES CUMULATIVE.
Except as Section 3.06 otherwise provides with respect to the
replacement or payment of mutilated, destroyed, lost or stolen Securities, no
right or remedy herein conferred on or reserved to the Trustee or to the Holders
is intended to be exclusive of any other right or remedy, and every right and
remedy will, to the extent permitted by law, be cumulative and in addition to
every other right and remedy given hereunder or now or hereafter existing at law
or in equity or otherwise. The assertion or employment of any right or remedy
hereunder, or otherwise, will not prevent the concurrent assertion or employment
of any other appropriate right or remedy.
SECTION 5.11. DELAY OR OMISSION NOT WAIVER.
No delay or omission of the Trustee or of any Holder of any Security
to exercise any right or remedy accruing on any Event of Default with respect to
that Security will impair any such right or remedy or constitute a waiver of any
such Event of Default or an acquiescence therein. Every right and remedy this
Article V or law gives to the Trustee or to the Holders may be exercised from
time to time, and as often as may be deemed expedient, by the Trustee or by the
Holders, as the case may be.
SECTION 5.12. CONTROL BY HOLDERS.
With respect to Securities of any series, the Holders of a majority
in principal amount of the Outstanding Securities of that series will have the
right to direct the time, method and place of conducting any proceeding for any
remedy available to the Trustee or exercising any trust or power conferred on
the Trustee relating to or arising under an Event of Default described in clause
(a), (b) or (h) of Section 5.01, and with respect to all Securities the Holders
of a majority in principal amount of all Outstanding Securities will have the
right to direct the time, method and place of conducting any remedy available to
the Trustee, or exercising any trust or power conferred on the Trustee, not
relating to or arising under such an Event of Default; PROVIDED, that:
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(a) that direction must not conflict with any rule of law or with
this Indenture;
(b) the Trustee may take any other action it deems proper which is
not inconsistent with that direction; and
(c) subject to the provisions of Section 6.01, the Trustee will have
the right to decline to follow any such direction if the Trustee in good
faith determines that the action so directed would involve the Trustee in
personal liability or be unduly prejudicial to Holders not joining in that
direction.
SECTION 5.13. WAIVER OF PAST DEFAULTS.
The Holders of not less than a majority in principal amount of the
Outstanding Securities of any series may on behalf of the Holders of all the
Securities of that series waive any past default hereunder with respect to that
series and its consequences, and the Holders of a majority in principal amount
of all Outstanding Securities may on behalf of the Holders of all Securities
waive any other past default hereunder and its consequences, except in each case
a default
(a) in the payment of the principal of or premium, if any, or
interest on or any Additional Amounts with respect to any Security, or
(b) in respect of a covenant or provision hereof which under Article
IX cannot be modified or amended without the consent of the Holder of each
Outstanding Security affected.
On any such waiver, the waived default will cease to exist, and any
Event of Default arising therefrom will be deemed to have been cured, for every
purpose of this Indenture; but no such waiver will extend to any subsequent or
other default or impair any right consequent thereon.
SECTION 5.14. UNDERTAKING FOR COSTS.
All parties to this Indenture agree, and each Holder of any Security
by his acceptance thereof will be deemed to have agreed, that any court may in
its discretion require, in any suit (a) for the enforcement of any right or
remedy under this Indenture or (b) against the Trustee for any action taken or
omitted by it as Trustee, the filing by any party litigant in that suit of an
undertaking to pay the costs of that suit, and that such court may in its
discretion assess reasonable costs, including reasonable attorneys' fees,
against any party litigant in that suit, having due regard to the merits and
good faith of the claims or defenses made by that party litigant; but the
provisions of this Section 5.14 will not apply to any suit instituted by (a) the
Company, (b) the Trustee, (c) any Holder, or group of Holders, holding in the
aggregate more than 10% in principal amount of the Outstanding Securities of any
series or (d) any Holder for the enforcement of the payment of the principal of,
or premium, if any, or interest on or any Additional Amounts with respect to any
Security on or after
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the Stated Maturity or Maturities expressed in that Security (or, in the case of
redemption, on or after the Redemption Date).
ARTICLE VI
THE TRUSTEE
SECTION 6.01. CERTAIN DUTIES AND RESPONSIBILITIES.
The duties and responsibilities of the Trustee will be as this
Indenture and the Trust Indenture Act provide for securities issued pursuant to
indentures qualified thereunder. Except as this Indenture otherwise provides,
notwithstanding the foregoing, no provision of this Indenture will require the
Trustee to expend or risk its own funds or otherwise incur any financial
liability or risk in the performance of any of its duties hereunder, or in the
exercise of any of its rights or powers, if it has reasonable grounds for
believing that repayment of those funds or adequate indemnity satisfactory to it
against that risk or liability is not reasonably assured to it. Whether or not
therein expressly so provided, every provision of this Indenture relating to the
conduct or affecting the liability of or affording protection to the Trustee
will be subject to the provisions of this Section 6.01. The Trustee will not be
liable (a) for any error of judgment made in good faith by a Responsible Officer
or Responsible Officers of the Trustee, unless it shall be proved that the
Trustee was negligent in ascertaining the pertinent facts or (b) with respect to
any action taken or omitted to be taken by it in good faith in accordance with
the direction of the Holders of not less than a majority in aggregate principal
amount of the then Outstanding Securities of any series or all series,
determined as Section 5.12 provides, relating to the time, method and place of
conducting any proceeding or any remedy available to the Trustee, or exercising
any trust or power conferred on the Trustee, under this Indenture with respect
to those Securities. Prior to the occurrence of an Event of Default with respect
to Securities of any series and after the curing or waiving of all Events of
Default with respect to all series which may have occurred: (a) the duties and
obligations of the Trustee will be determined solely by the express provisions
of this Indenture and in the Trust Indenture Act, and the Trustee will not be
liable except for the performance of such duties and obligations as this
Indenture and the Trust Indenture Act specifically set forth, and no implied
covenants or obligations may be read into this Indenture against the Trustee;
and (b) in the absence of bad faith on the part of the Trustee, the Trustee may
conclusively rely, as to the truth of the statements and the correctness of the
opinions therein, on any statements, certificates or opinions furnished to the
Trustee and conforming to the requirements of this Indenture and believed by the
Trustee to be genuine and to have been signed or presented by the proper party
or parties; but in the case of any such statements, certificates or opinions
which by any provisions hereof are specifically required to be furnished to the
Trustee, the Trustee will be under a duty to examine the same to determine
whether or not they conform on their face to the requirements of this Indenture.
If a default or an Event of Default with respect to Securities of any series has
occurred and is continuing, the Trustee will exercise the rights and powers
vested in it by this Indenture and use the same degree
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of care and skill in its exercise thereof as a prudent person would exercise or
use under the circumstances in the conduct of his own affairs.
SECTION 6.02. NOTICE OF DEFAULTS.
The Trustee will give the Holders of Securities of each series
notice of any default hereunder with respect to the Securities of that series
known to it as and to the extent the Trust Indenture Act provides; PROVIDED,
HOWEVER, that in the case of any default with respect to the Securities of that
series of the character specified in Section 5.01(c), no such notice to those
Holders shall be given until at least 30 days after the occurrence thereof; and
PROVIDED, FURTHER, that, except in the case of a default in payment of principal
of, premium, if any, or interest on or any Additional Amounts with respect to
any Securities of any series, the Trustee may withhold notice to the Holders of
those Securities if and so long as a committee of its Responsible Officers in
good faith determines that withholding the notice is in the interests of those
Holders. For the purpose of this Section 6.02, the term "default" with respect
to the Securities of any series means any event which is, or after notice or
lapse of time or both would become, an Event of Default with respect to those
Securities.
SECTION 6.03. CERTAIN RIGHTS OF TRUSTEE.
Subject to the provisions of Section 6.01:
(a) the Trustee may rely and will be protected in acting or
refraining from acting on any resolution, certificate, statement,
instrument, opinion, report, notice, request, direction, consent, order,
bond, debenture, note, other evidence of indebtedness or other paper or
document believed by it to be genuine and to have been signed or presented
by the proper party or parties;
(b) any request or direction of the Company mentioned herein will be
sufficiently evidenced by a Company Request or Company Order and any
resolution of the Board of Directors will be sufficiently evidenced by a
Board Resolution;
(c) whenever in the administration of this Indenture the Trustee
deems it desirable that a matter be proved or established prior to taking,
suffering or omitting any action hereunder, it (unless this Indenture
specifically prescribes other evidence) may, in the absence of bad faith
on its part, rely on an Officers' Certificate;
(d) the Trustee may consult with counsel and the written advice of
that counsel or any Opinion of Counsel will be full and complete
authorization and protection in respect of any action taken, suffered or
omitted by it hereunder in good faith and in reliance thereon;
(e) the Trustee will be under no obligation to exercise any of the
rights or powers vested in it by this Indenture at the request or
direction of any of the Holders pursuant to this Indenture, unless those
Holders shall have offered to the Trustee reasonable security or
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indemnity satisfactory to it against the costs, expenses and liabilities
it might incur by it in compliance with that request or direction;
(f) before the Trustee acts or refrains from acting with respect to
any matter this Indenture contemplates, it may require an Officers'
Certificate or an Opinion of Counsel, which must conform to the provisions
of Section 1.02, and the Trustee will be protected and will not be liable
for any action it takes or omits to take in good faith and without gross
negligence in reliance on that certificate or opinion;
(g) the Trustee will not be required to give any bond or surety in
respect of the performance of its power and duties hereunder;
(h) the Trustee will not be bound to make any investigation into the
facts or matters stated in any resolution, certificate, statement,
instrument, opinion, report, notice, request, direction, consent, order,
bond, debenture, note, other evidence of indebtedness or other paper or
document, but the Trustee, in its discretion, may make such further
inquiry or investigation into such facts or matters as it may see fit,
and, if the Trustee determines to make such further inquiry or
investigation, it will be entitled to examine the books, records and
premises of the Company, personally or by agent or attorney; and
(i) the Trustee may execute any of the trusts or powers hereunder or
perform any duties hereunder either directly or by or through agents or
attorneys, and the Trustee will not be responsible for any misconduct or
negligence on the part of any agent or attorney it appoints with due care
hereunder.
SECTION 6.04. NOT RESPONSIBLE FOR RECITALS OR ISSUANCE OF SECURITIES.
The statements and recitals contained herein and in the Securities
and in any other document in connection with the sale of the Securities, except
the Trustee's certificate of authentication, are and will be taken as the
statements of the Company, and the Trustee and any Authenticating Agent assume
no responsibility for their correctness. The Trustee makes no representations as
to the validity or sufficiency of this Indenture or of the Securities. The
Trustee and any Authenticating Agent will not be accountable for the use or
application by the Company of Securities or the proceeds thereof.
SECTION 6.05. MAY HOLD SECURITIES.
The Trustee, any Authenticating Agent, any Paying Agent, any
Security Registrar or any other agent of the Company, in its individual or any
other capacity, may become the owner or pledgee of Securities and, subject to
Sections 6.08 and 6.13, may otherwise deal with the Company or any Affiliate of
the Company with the same rights it would have if it were not Trustee,
Authenticating Agent, Paying Agent, Security Registrar or such other agent.
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SECTION 6.06. MONEY HELD IN TRUST.
Money held by the Trustee or any Paying Agent in trust hereunder
need not be segregated from other funds except to the extent required by law.
The Trustee or any Paying Agent will be under no liability for interest on any
money received by it hereunder except as otherwise agreed with the Company.
SECTION 6.07. COMPENSATION AND REIMBURSEMENT.
The Company agrees:
(a) to pay to the Trustee from time to time reasonable compensation
for all services rendered by it hereunder (including its services as
Security Registrar or Paying Agent, if so appointed by the Company) as may
be mutually agreed on in writing by the Company and the Trustee (which
compensation will not be limited by any provision of law in regard to the
compensation of a trustee of an express trust);
(b) except as otherwise expressly provided herein, to reimburse the
Trustee and each predecessor Trustee promptly on its request for all
reasonable expenses, disbursements and advances incurred or made by or on
behalf of it in connection with the performance of its duties under any
provision of this Indenture (including the reasonable compensation and the
expenses and disbursements of its agents and counsel and all other persons
not regularly in its employ) except to the extent any such expense,
disbursement or advance may be attributable to its negligence or bad
faith; and
(c) to indemnify the Trustee and each predecessor Trustee (each, an
"indemnitee") for, and to hold the indemnitee harmless against, any loss,
liability or expense incurred without negligence or bad faith on its part,
arising out of or in connection with the acceptance or administration of
this Indenture or the trusts hereunder and its duties hereunder (including
its services as Security Registrar or Paying Agent, if so appointed by the
Company), including enforcement of this Indenture (including this Section
6.07) and including the costs and expenses of defending itself against or
investigating any claim or liability in connection with the exercise or
performance of any of its powers or duties hereunder. The Company will
defend any claim or threatened claim asserted against an indemnitee for
which it may seek indemnity, and the indemnitee will cooperate in the
defense unless, in the reasonable opinion of the indemnitee's counsel, the
indemnitee has an interest adverse to the Company or a potential conflict
of interest exists between the indemnitee and the Company, in which case
the indemnitee may have separate counsel and the Company will pay the
reasonable fees and expenses of that counsel; PROVIDED that the Company
will only be responsible for the reasonable fees and expenses of one law
firm (in addition to local counsel) in any one action or separate
substantially similar actions in the same jurisdiction arising out of the
same general allegations or circumstances, that law firm to be designated
by the indemnitee.
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As security for the performance of the obligations of the Company
under this Section 6.07, the Trustee will have a lien prior to the Securities
upon all property and funds held or collected by the Trustee as such, except
funds held in trust for the benefit of the Holders of particular Securities, and
the Securities are hereby subordinated to that prior lien. The obligations of
the Company under this Section 6.07 to compensate and indemnify the Trustee and
any predecessor Trustee and to pay or reimburse the Trustee and any predecessor
Trustee for expenses, disbursements and advances, and any other amounts due the
Trustee or any predecessor Trustee under this Section 6.07, will constitute an
additional obligation hereunder and will survive the satisfaction and discharge
of this Indenture.
When the Trustee or any predecessor Trustee incurs expenses or
renders services in connection with the performance of its obligations hereunder
(including its services as Security Registrar or Paying Agent, if so appointed
by the Company) after an Event of Default Section 5.01(f) or (g) specifies
occurs, those expenses and the compensation for those services are intended to
constitute expenses of administration under any applicable bankruptcy,
insolvency or other similar federal or state law to the extent Section 503(b)(5)
of Title 11 of the United States Code, as now or hereafter in effect, provides.
SECTION 6.08. DISQUALIFICATION; CONFLICTING INTERESTS.
(a) If the Trustee has or acquires any conflicting interest, as
defined in this Section 6.08, with respect to the Securities of any series, it
will, within 90 days after ascertaining that it has that conflicting interest,
either eliminate that conflicting interest or resign with respect to the
Securities of that series in the manner and with the effect this Article VI
hereinafter specifies.
(b) If the Trustee fails to comply with the provisions of paragraph
(a) of this Section 6.08 with respect to the Securities of any series, the
Trustee will, within 10 days after the expiration of the 90-day period referred
to in that paragraph (a), transmit by mail to all Holders of Securities of that
series, as their names and addresses appear in the Security Register for that
series, notice of that failure.
(c) For purposes of this Section 6.08, the term "conflicting
interest" has the meaning Section 310(b) of the Trust Indenture Act specifies,
and the Trustee will comply with Section 310(b) of the Trust Indenture Act;
PROVIDED, that there shall be excluded from the operation of Section 310(b)(1)
of the Trust Indenture Act with respect to the Securities of any series any
indenture or indentures under which other securities, or certificates of
interest or participation in other securities, of the Company are outstanding,
if the requirements for such exclusion Section 310(b)(1) of the Trust Indenture
Act sets forth are met. For purposes of the preceding sentence, the optional
provision permitted by the second sentence of Section 310(b)(9) of the Trust
Indenture Act will be applicable.
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SECTION 6.09. CORPORATE TRUSTEE REQUIRED; ELIGIBILITY.
There shall at all times be a Trustee hereunder which is a Person
that (a) is eligible pursuant to the Trust Indenture Act to act as such, (b) has
(or, in the case of a corporation included in a bank holding company system,
whose related bank holding company has) a combined capital and surplus of at
least $50,000,000 and (c) has a Corporate Trust Office in the Borough of
Manhattan, The City of New York, or a designated agent. If that Person publishes
reports of condition at least annually, pursuant to law or to the requirements
of a Federal or state supervising or examining authority, then for purposes of
this Section 6.09, the combined capital and surplus of that Person will be
deemed to be its combined capital and surplus as set forth in its most recent
report of condition so published. If at any time the Trustee ceases to be
eligible in accordance with the provisions of this Section 6.09, it will resign
immediately in the manner and with the effect this Article VI hereinafter
specifies.
SECTION 6.10. RESIGNATION AND REMOVAL; APPOINTMENT OF SUCCESSOR.
(a) No resignation or removal of the Trustee and no appointment of a
successor Trustee pursuant to this Article VI will become effective until the
acceptance of appointment by the successor Trustee in accordance with the
applicable requirements of Section 6.11.
(b) The Trustee may resign at any time with respect to the
Securities of one or more series by giving written notice thereof to the
Company. If the instrument of acceptance by a successor Trustee for those
Securities which Section 6.11 requires shall not have been delivered to the
resigning Trustee within 30 days after the giving of that notice of resignation,
the resigning Trustee may petition any court of competent jurisdiction for the
appointment of a successor Trustee for those Securities.
(c) The Trustee may be removed at any time with respect to the
Securities of any series by an Act of the Holders of a majority in principal
amount of the Outstanding Securities of that series delivered to the Trustee and
to the Company.
(d) If at any time:
(i) the Trustee fails to comply with Section 6.08 with respect
to the Securities of any series after written request therefor by the
Company or by any Holder who has been a bona fide Holder of a Security of
that series for the last six months, or
(ii) the Trustee ceases to be eligible under Section 6.09 with
respect to the Securities of any series and fails to resign after written
request therefor by the Company or by any Holder who has been a bona fide
Holder of a Security of that series for the last six months, or
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(iii) the Trustee becomes incapable of acting or is adjudged a
bankrupt or insolvent or a receiver of the Trustee or of its property is
appointed or any public officer takes charge or control of the Trustee or
of its property or affairs for the purpose of rehabilitation, conservation
or liquidation,
then, in any such case, (i) the Company by a Board Resolution may remove the
Trustee with respect to the Securities of all series, or (ii) subject to Section
5.14, any Holder who has been a bona fide Holder of a Security for at least six
months may, on behalf of himself and all others similarly situated, petition any
court of competent jurisdiction for the removal of the Trustee and the
appointment of a successor Trustee or Trustees.
(e) If the Trustee resigns, is removed or becomes incapable of
acting, or if a vacancy occurs in the office of Trustee for any cause with
respect to the Securities of one or more series, the Company, by a Board
Resolution, will promptly appoint a successor Trustee or Trustees with respect
to those Securities (it being agreed that any such successor Trustee may be
appointed with respect to the Securities of one or more or all of those series
and that at any time there shall be only one Trustee with respect to the
Securities of any particular series) and such successor Trustee or Trustees will
comply with the applicable requirements of Section 6.11. If no successor Trustee
with respect to the Securities of any series shall have been so appointed by the
Company and accepted appointment in the manner Section 6.11 requires, any Holder
who has been a bona fide Holder of a Security of that series for at least six
months may, on behalf of himself and all others similarly situated, petition any
court of competent jurisdiction for the appointment of a successor Trustee with
respect to the Securities of that series.
(f) The Company will give notice of each resignation and each
removal of the Trustee with respect to the Securities of any series and each
appointment of a successor Trustee with respect to the Securities of any series
to all Holders of the Securities of that series in the manner Section 1.06
provides. Each such notice will include the name of the successor Trustee and
the address of its Corporate Trust Office.
SECTION 6.11. ACCEPTANCE OF APPOINTMENT BY SUCCESSOR.
(a) In case of the appointment hereunder of a successor Trustee with
respect to all Securities, every such successor Trustee so appointed will
execute, acknowledge and deliver to the Company and to the retiring Trustee an
instrument accepting such appointment, and thereupon the resignation or removal
of the retiring Trustee will become effective and such successor Trustee,
without any further act, deed or conveyance, will become vested with all the
rights, powers, trusts and duties of the retiring Trustee; but, on request of
the Company or the successor Trustee, that retiring Trustee will, on payment of
its charges, execute and deliver an instrument transferring to that successor
Trustee all the rights, powers and trusts of the retiring Trustee and will duly
assign, transfer and deliver to that successor Trustee all property and money
held by that retiring Trustee hereunder.
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(b) In case of the appointment hereunder of a successor Trustee with
respect to the Securities of one or more (but not all) series, the Company, the
retiring Trustee and each such successor Trustee so appointed will execute and
deliver an indenture supplemental hereto wherein each such successor Trustee
will accept that appointment and which (i) will contain such provisions as are
necessary or desirable to transfer and confirm to, and to vest in, each such
successor Trustee all the rights, powers, trusts and duties of the retiring
Trustee with respect to the Securities of that or those series to which the
appointment of that successor Trustee relates, (ii) if the retiring Trustee is
not retiring with respect to all Securities, will contain such provisions as are
necessary or desirable to confirm that all the rights, powers, trusts and duties
of the retiring Trustee with respect to the Securities of that or those series
as to which the retiring Trustee is not retiring will continue to be vested in
the retiring Trustee and (iii) will add to or change any of the provisions of
this Indenture as is necessary to provide for or facilitate the administration
of the trusts hereunder by more than one Trustee, it being understood that
nothing herein or in that supplemental indenture will constitute those Trustees
co-trustees of the same trust and that each such Trustee will be trustee of a
trust or trusts hereunder separate and apart from any trust or trusts any other
such Trustee administers hereunder; and on the execution and delivery of that
supplemental indenture, the resignation or removal of the retiring Trustee will
become effective to the extent provided therein and each such successor Trustee,
without any further act, deed or conveyance, will become vested with all the
rights, powers, trusts and duties of the retiring Trustee with respect to the
Securities of that or those series to which the appointment of that successor
Trustee relates; but, on request of the Company or any such successor Trustee,
the retiring Trustee will duly assign, transfer and deliver to that successor
Trustee all property and money held by that retiring Trustee hereunder with
respect to the Securities of that or those series to which the appointment of
that successor Trustee relates.
(c) On request of any successor Trustee, the Company will execute
any and all instruments for more fully and certainly vesting in and confirming
to that successor Trustee all the rights, powers and trusts referred to in
paragraph (a) or (b) of this Section 6.11, as the case may be.
(d) No successor Trustee will accept its appointment unless, at the
time of that acceptance, that successor Trustee is qualified and eligible under
this Article VI.
SECTION 6.12. MERGER, CONVERSION, CONSOLIDATION OR SUCCESSION TO BUSINESS.
Any corporation into which the Trustee may be merged or converted or
with which it may be consolidated, or any corporation resulting from any merger,
conversion or consolidation to which the Trustee is a party, or any corporation
succeeding to all or substantially all the corporate trust business of the
Trustee, will be the successor of the Trustee hereunder, if that corporation is
otherwise qualified and eligible under this Article VI, without the execution or
filing of any paper or any further act on the part of any of the parties hereto.
In case any Securities shall have been authenticated, but not delivered, by the
Trustee then in office, any successor by merger, conversion or consolidation to
that authenticating Trustee may adopt that authentication and deliver the
Securities so authenticated with the same effect as if that successor Trustee
had itself authenticated those Securities.
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SECTION 6.13. PREFERENTIAL COLLECTION OF CLAIMS AGAINST COMPANY.
If and when the Trustee is or becomes a creditor of the Company (or
any other obligor on the Securities), the Trustee will be subject to the
provisions of the Trust Indenture Act regarding the collection of claims against
the Company (or any such other obligor).
SECTION 6.14. APPOINTMENT OF AUTHENTICATING AGENT.
The Trustee may appoint an Authenticating Agent or Agents acceptable
to and at the expense of the Company which will be authorized to act on behalf
of the Trustee to authenticate Securities issued on original issue and on
exchange, registration of transfer, partial conversion or partial redemption or
pursuant to Section 3.06, and Securities so authenticated will be entitled to
the benefits of this Indenture and will be valid and obligatory for all purposes
as if authenticated by the Trustee hereunder. Wherever reference is made in this
Indenture to the authentication and delivery of Securities by the Trustee or the
Trustee's certificate of authentication, that reference will be deemed to
include authentication and delivery on behalf of the Trustee by an
Authenticating Agent and a certificate of authentication executed on behalf of
the Trustee by an Authenticating Agent. Each Authenticating Agent must be
acceptable to the Company and must at all times be a Person organized and doing
business under the laws of the United States of America, any State thereof or
the District of Columbia, authorized under such laws to act as Authenticating
Agent, having (or, in the case of a corporation included in a bank holding
company system, whose related bank holding company has) a combined capital and
surplus of not less than $50,000,000 and subject to supervision or examination
by a federal or state supervising or examining authority. If a Person publishes
reports of condition at least annually, pursuant to law or to the requirements
of any such authority, then for purposes of this Section 6.14 the combined
capital and surplus of that Person will be deemed to be its combined capital and
surplus as set forth in its most recent report of condition so published. If at
any time an Authenticating Agent ceases to be eligible in accordance with the
provisions of this Section 6.14, that Authenticating Agent will resign
immediately in the manner and with the effect this Section 6.14 specifies.
Any Person into which an Authenticating Agent may be merged or
converted or with which it may be consolidated, or any Person resulting from any
merger, conversion or consolidation to which that Authenticating Agent is a
party, or any Person succeeding to the corporate agency or corporate trust
business of an Authenticating Agent, will continue to be an Authenticating
Agent, if that Person is otherwise eligible under this Section 6.14, without the
execution or filing of any paper or any further act on the part of the Trustee
or the Authenticating Agent.
An Authenticating Agent may resign at any time by giving written
notice thereof to the Trustee and to the Company. The Trustee may at any time
terminate the agency of an Authenticating Agent by giving written notice thereof
to that Authenticating Agent and to the Company. On receiving such a notice of
resignation or on such a termination, or in case at any time an Authenticating
Agent ceases to be eligible in accordance with the provisions of this Section
6.14, the Trustee may appoint a successor Authenticating Agent acceptable to the
Company The Trustee
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will mail notice of any such appointment by first-class mail, postage prepaid,
to all Holders of Securities for which that successor Authenticating Agent has
been appointed as their names and addresses appear in the Security Register for
those Securities. Any successor Authenticating Agent on acceptance of its
appointment under this Section 6.14 will become vested with all the rights,
powers and duties of its predecessor hereunder, with like effect as if
originally named as an Authenticating Agent. No successor Authenticating Agent
will be appointed unless it is eligible to act as such under the provisions of
this Section 6.14.
Any Authenticating Agent by the acceptance of its appointment will
be deemed to have represented to the Trustee that it is eligible for appointment
as Authenticating Agent under this Section 6.14 and to have agreed with the
Trustee that: it will perform and carry out the duties of an Authenticating
Agent as herein set forth, including, among other duties, the duties to
authenticate Securities when presented to it in connection with the original
issuance and with exchanges, registrations of transfer or redemptions or
conversions thereof or pursuant to Section 3.06; it will keep and maintain, and
furnish to the Trustee from time to time as requested by the Trustee,
appropriate records of all transactions it carries out as Authenticating Agent
and will furnish the Trustee such other information and reports as the Trustee
may reasonably require; and it will notify the Trustee promptly if it shall
cease to be eligible to act as Authenticating Agent in accordance with the
provisions of this Section 6.14. Any Authenticating Agent by the acceptance of
its appointment will be deemed to have agreed with the Trustee to indemnify the
Trustee against any loss, liability or expense the Trustee incurs, and to defend
any claim asserted against the Trustee, by reason of any acts or failures to act
of that Authenticating Agent, but such Authenticating Agent will have no
liability for any action it takes in accordance with the specific written
direction of the Trustee.
The Trustee will not be liable for any act or any failure of the
Authenticating Agent to perform any duty this Indenture either requires or
authorizes to be performed by that Person in accordance with this Indenture.
The Company agrees to pay to each Authenticating Agent from time to
time reasonable compensation for its services under this Section 6.14.
If an appointment is made pursuant to this Section 6.14, the
Securities may have endorsed thereon, in addition to the Trustee's certificate
of authentication, an alternative certificate of authentication in the following
form:
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"This is one of the Securities of the series designated, described
or provided for in the within-mentioned Indenture.
U.S. TRUST COMPANY OF TEXAS, N.A.,
AS TRUSTEE
By_______________________________
AS AUTHENTICATING AGENT
By_______________________________
AUTHORIZED SIGNATORY"
Notwithstanding any provision of this Section 6.14 to the contrary,
if at any time any Authenticating Agent appointed hereunder with respect to any
series of Securities is not also acting as the Security Registrar hereunder with
respect to that series of Securities, then, in addition to all other duties of
an Authenticating Agent hereunder, that Authenticating Agent will also be
obligated: (a) to furnish to the Security Registrar for that series of
Securities promptly all information necessary to enable that Security Registrar
to maintain at all times an accurate and current Security Register for that
series of Securities; and (b) prior to authenticating any Security of that
series denominated in a foreign currency, to ascertain from the Company the
units of that foreign currency which Section 3.02 provides will be determined by
the Company.
ARTICLE VII
HOLDERS' LISTS AND REPORTS BY TRUSTEE AND COMPANY
SECTION 7.01. COMPANY TO FURNISH TRUSTEE NAMES AND ADDRESSES OF HOLDERS.
The Company will furnish or cause to be furnished to the Trustee
with respect to each series of Securities:
(a) semi-annually, not more than 15 days after each Regular Record
Date, a list, in such form as the Trustee may reasonably require, of the
names and addresses of the Holders of the Securities of that series as of
that Regular Record Date; and
(b) at such other times as the Trustee may request in writing,
within 30 days after the receipt by the Company of any such request, a
list of similar form and content as of a date not more than 15 days prior
to the time that list is furnished.
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Notwithstanding the foregoing, so long as the Trustee is the Security Registrar,
the Company will not be required to furnish any such list.
SECTION 7.02. PRESERVATION OF INFORMATION; COMMUNICATION TO HOLDERS.
(a) The Trustee will preserve, in as current a form as is reasonably
practicable, the names and addresses of Holders of Securities of each series
contained in the most recent list furnished to the Trustee pursuant to Section
7.01 and the names and addresses of Holders of those Securities received by the
Trustee in its capacity as Security Registrar. The Trustee may destroy any list
furnished to it pursuant to Section 7.01 on receipt of a new list so furnished.
(b) The rights of Holders to communicate with other Holders with
respect to their rights under this Indenture or under the Securities, and the
corresponding rights and duties of the Trustee, will be as the Trust Indenture
Act provides.
(c) Every Holder of Securities, by receiving and holding the same,
agrees with the Company and the Trustee that neither the Company nor the Trustee
nor any agent of either of them will be held accountable by reason of any
disclosure of information as to names and addresses of Holders made pursuant to
the Trust Indenture Act or otherwise in accordance with this Indenture.
SECTION 7.03. REPORTS BY TRUSTEE.
(a) Not later than 60 days following each May 15, the Trustee will
transmit to Holders such reports concerning the Trustee and its actions under
this Indenture as may be required pursuant to the Trust Indenture Act at the
times and in the manner provided pursuant thereto.
(b) A copy of each such report will, at the time of such
transmission to Holders, be filed by the Trustee with each stock exchange on
which the Securities of any series are listed, with the Commission and with the
Company. The Company will notify the Trustee when the Securities are listed on
any stock exchange.
SECTION 7.04. REPORTS BY COMPANY.
The Company will file with the Trustee and the Commission, and
transmit to Holders, such information, documents and other reports, and such
summaries thereof, as may be required pursuant to the Trust Indenture Act at the
times and in the manner provided pursuant to the Trust Indenture Act; PROVIDED,
that any such information, documents or reports required to be filed with the
Commission pursuant to Section 13 or 15(d) of the Exchange Act will be filed
with the Trustee within 15 days after the same is so required to be filed with
the Commission.
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ARTICLE VIII
CONSOLIDATION, MERGER, CONVEYANCE, TRANSFER OR LEASE
SECTION 8.01. COMPANY MAY CONSOLIDATE, ETC., ONLY ON CERTAIN TERMS.
The Company will not consolidate with or merge into any other Person
or convey, transfer or lease its properties and assets substantially as an
entirety to any Person in one transaction or a series of related transactions,
and the Company will not permit any Person to consolidate with or merge into the
Company, unless:
(a) in case the Company shall consolidate with or merge into another
Person or convey, transfer or lease its properties and assets
substantially as an entirety to any Person in one transaction or a series
of related transactions, the Person formed by that consolidation or into
which the Company is merged or the Person that acquires by conveyance or
transfer, or that leases, the properties and assets of the Company
substantially as an entirety is a corporation, partnership, limited
liability company or trust, is organized and validly existing under the
laws of the United States of America, any State thereof or the District of
Columbia and expressly assumes, by an indenture supplemental hereto,
executed and delivered to the Trustee, in form satisfactory to the
Trustee, the due and punctual payment of the principal of, premium, if
any, and interest on and any Additional Amounts with respect to all the
Securities and the performance or observance of every covenant of this
Indenture on the part of the Company to be performed or observed and shall
have provided for conversion rights in accordance with Section 13.11;
(b) immediately after giving effect to that transaction, no Event of
Default with respect to Securities of any series, and no event which,
after notice or lapse of time or both, would become an Event of Default
with respect to Securities of any series, shall have occurred and be
continuing;
(c) that transaction does not adversely affect the validity or
enforceability of the Securities of any series; and
(d) the Company or the successor Person has delivered to the Trustee
an Officers' Certificate and an Opinion of Counsel, each stating that such
consolidation, merger, conveyance, transfer or lease and, if a
supplemental indenture is required in connection with that transaction,
that supplemental indenture comply with this Article VIII and that all
conditions precedent herein provided for relating to that transaction have
been complied with.
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SECTION 8.02. SUCCESSOR SUBSTITUTED.
On any consolidation of the Company with, or merger of the Company
into, any other Person or any conveyance, transfer or lease of the properties
and assets of the Company substantially as an entirety to any Person in one
transaction or a series of related transactions in accordance with Section 8.01,
the successor Person formed by that consolidation or into which the Company is
merged or to which that conveyance, transfer or lease is made will succeed to,
and be substituted for, and may exercise every right and power of, the Company
under this Indenture with the same effect as if that successor Person had been
named as the Company herein, and thereafter, except in the case of a transfer by
lease, the predecessor Person will be relieved of all obligations and covenants
under this Indenture and the Securities.
ARTICLE IX
SUPPLEMENTAL INDENTURES
SECTION 9.01. SUPPLEMENTAL INDENTURES WITHOUT CONSENT OF HOLDERS.
Without the consent of any Holders, the Company, when authorized by
a Board Resolution, and the Trustee, at any time and from time to time, may
enter into one or more indentures supplemental hereto, in form satisfactory to
the Trustee, for any of the following purposes:
(a) to set forth the terms of the Securities of any unissued series,
including the additional indebtedness or other liabilities to which the
Securities of that series will be subordinated as contemplated by Section
3.01; or
(b) to evidence the succession of another Person to the Company and
the assumption by any such successor of the covenants of the Company
herein and in the Securities; or
(c) for the benefit of the Holders of Securities of any or all
series, to add to the covenants of the Company, add an additional Event of
Default or surrender any right or power conferred herein or in the
Securities of any series on the Company (and if any such covenant, Event
of Default or surrender is to be for the benefit of Holders of Securities
of less than all series, stating that such covenants, Event of Default or
surrender is or are being included solely for the benefit of the Holders
of Securities of those series referred to in the supplemental indenture);
or
(d) to secure the Securities of any or all series; or
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(e) to make provision with respect to the conversion rights of
Holders pursuant to the requirements of Section 13.11; or
(f) to change or eliminate any of the provisions of this Indenture,
PROVIDED that any such change or elimination will become effective only
when there is no Security Outstanding of any series created prior to the
execution of that supplemental indenture which is adversely affected by
that change in or elimination of that provision; or
(g) to supplement any of the provisions of this Indenture to such
extent as is necessary to permit or facilitate the defeasance and
discharge of any series of Securities pursuant to Section 4.01; PROVIDED,
HOWEVER, that any such action must not adversely affect the interest of
the Holders of Securities of that series or any other series of Securities
in any material respect; or
(h) to evidence and provide for the acceptance of appointment
hereunder by a successor Trustee with respect to the Securities of one or
more series and to add to or change any of the provisions of this
Indenture as is necessary to provide for or facilitate the administration
of the trusts hereunder by more than one Trustee, pursuant to the
requirements of Section 6.11(b); or
(i) to cure any ambiguity or omission, to correct or supplement any
provision herein or in the Securities of any or all series which may be
defective or inconsistent with any other provision herein or in the
Securities of any or all series, or to make any other provisions with
respect to matters or questions arising under this Indenture which shall
not be inconsistent with the provisions of this Indenture; PROVIDED, that
any such action pursuant to this clause (i) will not adversely affect the
interests of the Holders of Securities of any series in any material
respect and the Trustee may rely on an Opinion of Counsel to that effect.
SECTION 9.02. SUPPLEMENTAL INDENTURES WITH CONSENT OF HOLDERS.
With the consent of the Holders of not less than a majority in
principal amount of the Outstanding Securities, by Act of those Holders
delivered to the Company and the Trustee, or, if the rights of one or more, but
less than all, series of Outstanding Securities are to be affected, then with
the consent of the Holders of not less than a majority in principal amount of
all the series of Outstanding Securities so to be affected, by Act of those
Holders (acting as one class) delivered to the Company and the Trustee, the
Company, when authorized by a Board Resolution, and the Trustee may enter into
an indenture or indentures supplemental hereto for the purpose of adding any
provisions to or changing in any manner or eliminating any of the provisions of
this Indenture or of modifying in any manner the rights of the Holders under
this Indenture; PROVIDED, HOWEVER, that no such supplemental indenture will,
without the consent of the Holder of each Outstanding Security affected thereby,
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(a) change the Stated Maturity of the principal of, or any
installment of principal of or interest on, any Security, or reduce the
principal amount thereof or the rate of interest thereon, any Additional
Amounts with respect thereto or any premium payable on the redemption or
repurchase thereof, or reduce the amount of the principal of any Original
Issue Discount Security that would be due and payable on a declaration of
acceleration of the Maturity thereof pursuant to Section 5.02, or change
any Place of Payment where, or the coin or currency or currencies
(including composite currencies) in which, any Security or any premium or
any interest thereon or Additional Amount with respect thereto is payable,
or impair the right to institute suit for the enforcement of any such
payment on or after the Stated Maturity thereof (or, in the case of
redemption, on or after the Redemption Date), or adversely affect the
right to convert any Security as Article XIII provides (except as Section
9.01(e) permits), or modify the provisions of this Indenture with respect
to the subordination of the Securities (except as Section 3.01
contemplates and Section 9.01(a) permits), in a manner adverse to the
Holders; or
(b) reduce the percentage in principal amount of Outstanding
Securities the consent of whose Holders is required for any such
supplemental indenture, or the consent of whose Holders is required for
any waiver (of compliance with certain provisions of this Indenture or
certain defaults hereunder and their consequences) provided for in this
Indenture; or
(c) modify any of the provisions of this Section 9.02, Section 5.13
or Section 10.06, except to increase any percentage provided herein or
therein or to provide with respect to any particular series the right to
condition the effectiveness of any supplemental indenture as to that
series on the consent of the Holders of a specified percentage of the
aggregate principal amount of Outstanding Securities of that series (which
provision may be made pursuant to Section 3.01 without the consent of any
Holder) or to provide that certain other provisions of this Indenture
cannot be modified or waived without the consent of the Holder of each
Outstanding Security affected thereby, PROVIDED, HOWEVER, that this clause
(c) will not be deemed to require the consent of any Holder with respect
to changes in the references to "the Trustee" and concomitant changes in
this Section 9.02 and Section 10.06, or the deletion of this proviso, in
accordance with the requirements of Sections 6.11(b) and 9.01(g).
A supplemental indenture that changes or eliminates any covenant or other
provision of this Indenture which has expressly been included solely for the
benefit of one or more particular series of Securities, or which modifies the
rights of the Holders of Securities of that or those series with respect to that
covenant or other provision, will be deemed not to affect the rights under this
Indenture of the Holders of Securities of any other series.
It will not be necessary for any Act of Holders under this Section
9.02 to approve the particular form of any proposed supplemental indenture, but
it will be sufficient if that Act approves the substance thereof.
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The determination of the Trustee as to the series of Securities the
rights of which are to be affected pursuant to this Section 9.02 will be
conclusive, and the Trustee in making that determination will be protected in
relying on an Opinion of Counsel.
SECTION 9.03. EXECUTION OF SUPPLEMENTAL INDENTURES.
In executing, or accepting the additional trusts created by, any
supplemental indenture permitted by this Article IX or the modifications thereby
of the trusts created by this Indenture, the Trustee will be entitled to
receive, and (subject to Section 6.01) will be fully protected in relying on, an
Officers' Certificate and an Opinion of Counsel stating that this Indenture
authorizes or permits the execution of that supplemental indenture. The Trustee
may, but will not be obligated to, enter into any supplemental indenture that
adversely affects the Trustee's own rights, duties or immunities under this
Indenture or otherwise.
SECTION 9.04. EFFECT OF SUPPLEMENTAL INDENTURES.
On the execution of any supplemental indenture under this Article
IX, this Indenture will be modified in accordance therewith, and that
supplemental indenture will form a part of this Indenture for all purposes; and
every Holder of Securities theretofore or thereafter authenticated and delivered
hereunder will be bound thereby.
SECTION 9.05. CONFORMITY WITH TRUST INDENTURE ACT.
Every supplemental indenture executed pursuant to this Article IX
will conform to the requirements of the Trust Indenture Act.
SECTION 9.06. REFERENCE IN SECURITIES TO SUPPLEMENTAL INDENTURES.
Securities of any series authenticated and delivered after the
execution of any supplemental indenture pursuant to this Article IX may, and
will if required by the Trustee, bear a notation in form the Trustee approves as
to any matter for which that supplemental indenture provides. If the Company so
determines, new Securities of any series so modified as to conform, in the
opinion of the Trustee and the Company, to any such supplemental indenture may
be prepared and executed by the Company and (at the specific direction of the
Company) authenticated and delivered by the Trustee in exchange for Outstanding
Securities of that series.
SECTION 9.07. NOTICE OF SUPPLEMENTAL INDENTURE.
Promptly after the execution by the Company and the Trustee of any
supplemental indenture pursuant to Section 9.02, the Company will transmit to
the Holders of Securities of all series affected thereby a notice setting forth
the substance of that supplemental indenture.
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ARTICLE X
COVENANTS
SECTION 10.01. PAYMENT OF PRINCIPAL, PREMIUM AND INTEREST.
The Company covenants and agrees for the benefit of each series of
Securities that it will duly and punctually pay the principal of, premium, if
any, and interest on and any Additional Amounts with respect to the Securities
of that series in accordance with the terms of those Securities and this
Indenture.
SECTION 10.02. MAINTENANCE OF OFFICE OR AGENCY.
The Company will maintain in each Place of Payment for each series
of Securities an office or agency where Securities of that series may be
presented or surrendered for payment, where Securities of that series may be
surrendered for registration of transfer, where Securities of that series may be
surrendered for exchange or conversion and where notices and demands to or on
the Company in respect of the Securities of that series and this Indenture may
be served. The Company will give prompt written notice to the Trustee of the
location, and any change in the location, of any such office or agency. If at
any time the Company fails to maintain any such required office or agency or
fails to furnish the Trustee with the address thereof, those presentations,
surrenders, notices and demands may be made or served at the Corporate Trust
Office of the Trustee, and the Company hereby appoints the Trustee as its agent
to receive all those presentations, surrenders, notices and demands.
The Company may also from time to time designate one or more other
offices or agencies where the Securities of one or more series may be presented
or surrendered for any or all such purposes and may from time to time rescind
those designations; PROVIDED, HOWEVER, that no such designation or rescission
will in any manner relieve the Company of its obligation to maintain an office
or agency in each Place of Payment for Securities of any series for those
purposes. The Company will give prompt written notice to the Trustee of any such
designation or rescission and of any change in the location of any such other
office or agency.
SECTION 10.03. MONEY FOR SECURITY PAYMENTS TO BE HELD IN TRUST.
If the Company at any time acts as its own Paying Agent with respect
to any series of Securities, it will, on or before each due date of the
principal of, premium, if any, or interest on or any Additional Amounts with
respect to any of the Securities of that series, segregate and hold in trust for
the benefit of the Persons entitled thereto a sum sufficient to pay the entire
amount so becoming due until that sum is paid to those Persons or otherwise
disposed of as herein provided and will promptly notify the Trustee of its
action or failure so to act.
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Whenever the Company has one or more Paying Agents for any series of
Securities, it will, on or prior to each due date of the principal of, premium,
if any, or interest on or any Additional Amounts with respect to any Securities
of that series, deposit with a Paying Agent a sum sufficient to pay the entire
amount so becoming due, that sum to be held as provided by the Trust Indenture
Act, and (unless that Paying Agent is the Trustee) the Company will promptly
notify the Trustee of its action or failure so to act.
The Company will cause each Paying Agent other than the Trustee or
the Company for each series of Securities to execute and deliver to the Trustee
an instrument in which that Paying Agent agrees with the Trustee, subject to the
provisions of this Section 10.03, that such Paying Agent will: (a) comply with
the provisions of the Trust Indenture Act and this Indenture applicable to it as
a Paying Agent and hold all sums held by it for the payment of principal of or
any premium or interest on or any Additional Amounts with respect to the
Securities of that series in trust for the benefit of the Persons entitled
thereto until those sums are paid to those Persons or otherwise disposed of as
herein provided; (b) give the Trustee notice of any default by the Company (or
any other obligor on the Securities) in the making of any payment in respect of
the Securities of that series; and (c) at any time during the continuance of any
default by the Company (or any other obligor on the Securities of that series)
in the making of any payment in respect of the Securities of that series, on the
written request of the Trustee, forthwith pay to the Trustee all sums held in
trust by such Paying Agent for payment in respect of the Securities of that
series, and account for any funds disbursed.
The Company may at any time, for the purpose of obtaining the
satisfaction and discharge of this Indenture or for any other purpose, pay, or
by Company Order direct any Paying Agent to pay, to the Trustee all sums held in
trust by the Company or that Paying Agent, those sums to be held by the Trustee
on the same trusts as those on which those sums were held by the Company or that
Paying Agent; and, on that payment by any Paying Agent to the Trustee, that
Paying Agent will be released from all further liability with respect to that
money.
Any money deposited with the Trustee or any Paying Agent, or then
held by the Company, in trust for the payment of the principal of, premium, if
any, or interest on or any Additional Amounts with respect to any Security of
any series and remaining unclaimed for two years after that principal, premium,
if any, interest or Additional Amounts, if any, has become due and payable will
be paid to the Company on Company Request, or (if then held by the Company) will
be discharged from that trust; and the Holder of that Security must thereafter,
as an unsecured general creditor, look only to the Company for payment thereof,
and all liability of the Trustee or that Paying Agent with respect to that trust
money, and all liability of the Company as trustee thereof, will thereon cease;
PROVIDED, HOWEVER, that the Trustee or that Paying Agent, before being required
to make any such repayment, may at the expense of the Company cause to be
published once, in a newspaper published in the English language, customarily
published on each Business Day and of general circulation in New York, New York,
notice that such money remains unclaimed and that, after a date specified
therein, which will not be less than 30 days from the date of that publication,
any unclaimed balance of such money then remaining will be repaid to the
Company.
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SECTION 10.04. STATEMENT BY OFFICERS AS TO DEFAULT.
The Company will deliver to the Trustee, within 120 days after the
end of each fiscal year of the Company ending after the date hereof, an
Officers' Certificate stating whether or not to the best knowledge of the
signers thereof the Company is in default in the performance and observance of
any of the terms, provisions and conditions of this Indenture (without regard to
any period of grace or requirement of notice provided hereunder) and, if the
Company is in such a default, specifying all those defaults and the nature and
status thereof of which they may have knowledge.
SECTION 10.05. EXISTENCE.
Subject to Article VIII, the Company will do or cause to be done all
things necessary to preserve and keep in full force and effect its existence,
rights (charter and statutory) and franchises and the existence, rights (charter
and statutory) and franchises of each Subsidiary; PROVIDED, HOWEVER, that the
Company will not be required to preserve any such right or franchise if the
Board of Directors determines that the preservation thereof is no longer
desirable in the conduct of the business of the Company and that the loss
thereof is not disadvantageous in any material respect to the Holders of
Securities of any series.
SECTION 10.06. WAIVER OF CERTAIN COVENANTS.
The Company may omit in any particular instance to comply with any
covenant or condition Section 10.05 sets forth, or any covenant added for the
benefit of any series of Securities as contemplated by Section 3.01 (unless
otherwise specified pursuant to Section 3.01) if before or after the time for
that compliance the Holders of a majority in principal amount of the Outstanding
Securities of all series affected by that omission (acting as one class) shall,
by Act of such Holders, either waive that compliance in that instance or
generally waive compliance with that covenant or condition, but no such waiver
will extend to or affect that covenant or condition except to the extent so
expressly waived, and, until such waiver becomes effective, the obligations of
the Company and the duties of the Trustee in respect of any such covenant or
condition will remain in full force and effect.
SECTION 10.07. ADDITIONAL AMOUNTS.
If the Securities of a series expressly provide for the payment of
Additional Amounts, the Company will pay to the Holder of any Security of that
series Additional Amounts as expressly provided therein. Whenever in this
Indenture there is mentioned, in any context, the payment of the principal of or
any premium or interest on, or in respect of, any Security of any series or the
net proceeds received on the sale or exchange of any Security of any series,
that mention will be deemed to include mention of the payment of Additional
Amounts provided for in this Section 10.07 to the extent that, in that context,
Additional Amounts are, were or would be payable in respect thereof pursuant to
the provisions of this Section 10.07 and express mention of the payment of
Additional
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Amounts (if applicable) in any provisions hereof will not be construed as
excluding Additional Amounts in those provisions hereof where such express
mention is not made.
If the Securities of a series provide for the payment of Additional
Amounts, at least 10 days prior to the first Interest Payment Date with respect
to that series of Securities (or if the Securities of that series will not bear
interest prior to Maturity, the first day on which a payment of principal and
any premium is made), and at least 10 days prior to each date of payment of
principal and any premium or interest if there has been any change with respect
to the matters set forth in the below-mentioned Officers' Certificate, the
Company will furnish the Trustee and the Company's principal Paying Agent or
Paying Agents, if other than the Trustee, with an Officers' Certificate
instructing the Trustee and such Paying Agent or Paying Agents whether that
payment of principal of and any premium or interest on the Securities of that
series shall be made to Holders of Securities of that series who are United
States Aliens without withholding for or on account of any tax, assessment or
other governmental charge described in the Securities of that series. If any
such withholding is required, then that Officers' Certificate will specify by
country the amount, if any, required to be withheld on those payments to those
Holders of Securities and the Company will pay to that Paying Agent the
Additional Amounts this Section 10.07 requires. The Company covenants to
indemnify the Trustee and any Paying Agent for, and to hold them harmless
against, any loss, liability or expense they reasonably incur without negligence
or bad faith on their part arising out of or in connection with actions taken or
omitted by any of them in reliance on any Officers' Certificate furnished
pursuant to this Section 10.07.
ARTICLE XI
REDEMPTION OF SECURITIES
SECTION 11.01. APPLICABILITY OF ARTICLE.
Securities of any series which are redeemable before their Stated
Maturity will be redeemable in accordance with their terms and (except as
otherwise specified as contemplated by Section 3.01 for Securities of any
series) in accordance with this Article XI.
SECTION 11.02. ELECTION TO REDEEM; NOTICE TO TRUSTEE.
The election of the Company to redeem any Securities will be
evidenced by a Board Resolution. In case of any redemption at the election of
the Company of less than all the Securities of any series, the Company will, at
least 60 days prior to the Redemption Date fixed by the Company (unless a
shorter period is satisfactory to the Trustee), notify the Trustee of that
Redemption Date and of the principal amount of Securities of that series to be
redeemed. In case of any redemption at the election of the Company of all the
Securities of any series, the Company will, at least 45 days prior to the
Redemption Date fixed by the Company (unless a shorter period is satisfactory to
the Trustee), notify the Trustee of that Redemption Date.
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SECTION 11.03. SELECTION BY TRUSTEE OF SECURITIES TO BE REDEEMED.
If less than all the Securities of any series are to be redeemed,
the Trustee will select the particular Securities of that series to be redeemed
not more than 60 days prior to the Redemption Date from the Outstanding
Securities of that series not previously called for redemption, by lot or pro
rata or by such other method as the Trustee deems fair and appropriate and which
may provide for the selection for redemption of portions (equal to the minimum
authorized denomination for Securities of that series or any integral multiple
thereof) of the principal amount of Securities of that series of a denomination
larger than the minimum authorized denomination for Securities of that series.
If any Security selected for partial redemption is converted in part
before termination of the conversion right with respect to the portion of the
Security so selected, the converted portion of such Security will be deemed (so
far as may be) to be the portion selected for redemption. Securities of any
series which have been converted during a selection of Securities of that series
to be redeemed will be treated by the Trustee as Outstanding for the purpose of
that selection. In any case where more than one Security of the same series is
registered in the same name, the Trustee in its discretion may treat the
aggregate principal amount so registered as if it were represented by one
Security of that series.
The Trustee will promptly notify the Company and each Security
Registrar in writing of the Securities selected for redemption and, in the case
of any Securities selected for partial redemption, the principal amount thereof
to be redeemed.
For all purposes of this Indenture, unless the context otherwise
requires, all provisions relating to the redemption of Securities will relate,
in the case of any Securities redeemed or to be redeemed only in part, to the
portion of the principal amount of such Securities which has been or is to be
redeemed.
SECTION 11.04. NOTICE OF REDEMPTION.
Notice of redemption will be given by first-class mail, postage
prepaid, mailed not less than 15 nor more than 60 days prior to the Redemption
Date, to the Trustee and to each Holder of Securities to be redeemed, at his
address appearing in the Security Register.
All notices of redemption will state:
(a) the Redemption Date,
(b) the Redemption Price,
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(c) if less than all the Outstanding Securities of any series are to
be redeemed, the identification (and, in the case of partial redemption of
any Securities, the principal amounts) of the particular Securities to be
redeemed,
(d) that on the Redemption Date the Redemption Price will become due
and payable on each such Security to be redeemed and that (unless the
Company defaults in payment of the Redemption Price) interest thereon will
cease to accrue on and after said date,
(e) that the redemption is for a sinking fund, if that is the case,
(f) the conversion price, the date on which the right to convert the
Securities to be redeemed will terminate and the place or places where
those Securities may be surrendered for conversion, and
(g) the place or places where those Securities are to be surrendered
for payment of the Redemption Price.
Notice of redemption of Securities to be redeemed at the election of
the Company will be given by the Company or, at the Company's request received
by the Trustee at least 25 days prior to the Redemption Date, by the Trustee in
the name and at the expense of the Company.
SECTION 11.05. DEPOSIT OF REDEMPTION PRICE.
At or prior to 10:00 a.m. (Houston, Texas time) on any Redemption
Date, the Company will deposit with the Trustee or with a Paying Agent (or, if
the Company is acting as its own Paying Agent, segregate and hold in trust as
Section 10.03 provides) an amount of money sufficient to pay the Redemption
Price of, and (except if the Redemption Date is an Interest Payment Date)
accrued interest on, and any Additional Amounts with respect to, all the
Securities or portions thereof which are to be redeemed on that date other than
any Securities called for redemption on that date which have been converted
prior to the date of that deposit.
If any Security called for redemption is converted, any money
deposited with the Trustee or with any Paying Agent or so segregated and held in
trust for the redemption of that Security will (subject to any right of the
Holder of that Security or any Predecessor Security to receive interest as the
last paragraph of Section 3.07 provides) be paid to the Company on Company
Request or, if then held by the Company, will be discharged from such trust.
SECTION 11.06. SECURITIES PAYABLE ON REDEMPTION DATE.
Notice of redemption having been given as aforesaid, the Securities
so to be redeemed will, on the Redemption Date, become due and payable at the
Redemption Price therein specified, and from and after that date (unless the
Company defaults in the payment of the Redemption Price and accrued interest and
any Additional Amounts) those Securities will cease to bear interest or be
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entitled to any Additional Amounts. On surrender of any such Security for
redemption in accordance with that notice, that Security will be paid by the
Company at the Redemption Price, together with accrued interest and any
Additional Amounts to the Redemption Date; PROVIDED, HOWEVER, that installments
of interest whose Maturity is on or prior to the Redemption Date will be payable
to the Holders of those Securities, or one or more Predecessor Securities,
registered as such at the close of business on the relevant Record Dates
according to their terms and the provisions of Section 3.07.
If any Security called for redemption is not so paid on surrender
thereof for redemption, the principal of and premium, if any, on that Security
will, until paid, bear interest from the Redemption Date at the rate borne by
the Security.
SECTION 11.07. SECURITIES REDEEMED IN PART.
Any Security that is to be redeemed only in part must be surrendered
at Company Agency or agency of the Company maintained for that purpose (with, if
the Company or the Trustee so requires, due endorsement by, or a written
instrument of transfer in form satisfactory to the Company and the Trustee duly
executed by, the Holder thereof or his attorney duly authorized in writing), and
the Company will execute, and the Trustee will authenticate and deliver to the
Holder of that Security without service charge, a new Security or Securities of
the same series, of any authorized denomination as requested by that Holder, in
an aggregate principal amount equal to and in exchange for the unredeemed
portion of the principal of the Security so surrendered.
ARTICLE XII
SUBORDINATION OF SECURITIES
SECTION 12.01. SECURITIES SUBORDINATED TO SENIOR INDEBTEDNESS.
The Company covenants and agrees, and each Holder of a Security, by
his acceptance thereof, likewise covenants and agrees, that, at all times and in
all respects, the indebtedness represented by the Securities and the payment of
the principal of, premium, if any, and interest on and any Additional Amounts
with respect to each and all of the Securities are hereby expressly made
subordinate and subject in right of payment to the prior payment in full of all
Senior Indebtedness. Obligations in respect of Senior Indebtedness will not be
deemed to have been paid in full unless the holders thereof shall have received
payment in full in cash or cash equivalents with respect thereto.
Each Holder of the Securities by its acceptance thereof acknowledges
and agrees that the subordination provisions included herein are, and are
intended to be, an inducement and a consideration to each holder of any Senior
Indebtedness, whether such Senior Indebtedness was created or acquired before or
after the issuance of Securities, to acquire and/or continue to hold such Senior
Indebtedness, and such holder of Senior Indebtedness shall be deemed
conclusively to have
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relied on such subordination provisions in acquiring and/or continuing to hold
such Senior Indebtedness.
SECTION 12.02. PAYMENT OVER OF PROCEEDS UPON DISSOLUTION, ETC.
In the event of (a) any insolvency or bankruptcy case or proceeding,
or any receivership, liquidation, reorganization or other similar case or
proceeding, relative to the Company or to its creditors, as such, or to a
substantial part of its assets, or (b) any proceeding for the liquidation,
dissolution or other winding up of the Company, whether voluntary or involuntary
and whether or not involving insolvency or bankruptcy, or (c) any general
assignment for the benefit of creditors or any other marshaling of assets and
liabilities of the Company, then and in any such event the holders of Senior
Indebtedness shall be entitled to receive payment in full of all Obligations due
or to become due on or in respect of all Senior Indebtedness before the Holders
of the Securities are entitled to receive any payment or distribution of any
kind or character, whether in cash, property or securities, on account of
principal of, premium, if any, or interest on or any Additional Amounts with
respect to the Securities, and to that end the holders of Senior Indebtedness
shall be entitled to receive, for application to the payment thereof, any
payment or distribution of any kind or character, including any such payment or
distribution which may be payable or deliverable by reason of the payment of any
other indebtedness of the Company being subordinated to the payment of the
Securities, which may be payable or deliverable in respect of the Securities in
any such case, proceeding, dissolution, liquidation or other winding up or
event. In furtherance of the foregoing, but not by way of limitation thereof, in
the event of any case or proceeding described in clause (a) above in or as a
result of which the Company is excused from the obligation to pay all or any
part of the interest otherwise payable in respect of any Senior Indebtedness
during the period subsequent to the commencement of any such case or proceeding,
all or such part, as the case may be, of such interest shall be payable out of,
and to that extent shall diminish and be at the expense of, reorganization
dividends or other distributions in respect of the Securities.
In the event that, notwithstanding the foregoing provisions of this
Section 12.02, the Trustee or the Holder of any Security shall have received any
payment or distribution of any kind or character in respect of the Securities,
whether in cash, property or securities, including any such payment or
distribution which may be payable or deliverable by reason of the payment of any
other indebtedness of the Company being subordinated to the payment of the
Securities, before all Senior Indebtedness is paid in full, such payment or
distribution shall be held by the Trustee (if the Trustee has knowledge that
such payment or distribution is prohibited by this Section 12.02) or by such
Holder (in trust) for the holders of Senior Indebtedness, and shall be paid
forthwith over and delivered to, the trustee in bankruptcy, receiver,
liquidating trustee, custodian, assignee, agent or other Person making payment
or distribution of assets of the Company for application to the payment of all
Senior Indebtedness remaining unpaid, to the extent necessary to pay all Senior
Indebtedness in full, after giving effect to any concurrent payment or
distribution to or for the holders of Senior Indebtedness.
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To the extent any payment of or distribution in respect of Senior
Indebtedness (whether by or on behalf of the Company, as proceeds of security or
enforcement of any right of set off or otherwise) is declared to be fraudulent
or preferential, set aside or required to be paid to any receiver, trustee in
bankruptcy, liquidating trustee, agent or other similar Person under any
bankruptcy, insolvency, receivership, fraudulent conveyance or similar law, then
if such payment or distribution is recovered by, or paid over to, such receiver,
trustee in bankruptcy, liquidating trustee, agent or other similar Person, the
Senior Indebtedness or part thereof originally intended to be satisfied shall be
deemed to be reinstated and outstanding as if such payment has not occurred.
For purposes of this Article XII only, (a) a "distribution" may
consist of cash, securities or other property, by set-off or otherwise, and (b)
the words "cash, property or securities" shall not be deemed to include
securities of the Company as reorganized or readjusted or securities of the
Company or any other corporation provided for by a plan of reorganization or
readjustment, which securities are subordinated in right of payment to all
Senior Indebtedness which may at the time be outstanding to substantially the
same extent as, or to a greater extent than, the Securities are so subordinated
as provided in this Article XII. The consolidation of the Company with, or the
merger of the Company into, another Person or the liquidation or dissolution of
the Company following the conveyance or transfer of its properties and assets
substantially as an entirety to another Person on the terms and conditions set
forth in Article VIII shall not be deemed a dissolution, winding up,
liquidation, reorganization, general assignment for the benefit of creditors or
marshaling of assets and liabilities of the Company for the purposes of this
Section 12.02 if the Person formed by such consolidation or into which the
Company is merged or which acquires by conveyance or transfer such properties
and assets substantially as an entirety, as the case may be, shall, as a part of
such consolidation, merger, conveyance or transfer, comply with the conditions
set forth in Article VIII.
SECTION 12.03. PRIOR PAYMENT TO SENIOR INDEBTEDNESS ON ACCELERATION OF
SECURITIES.
If any Securities are declared due and payable before their Stated
Maturity, the Company shall promptly notify all holders of Senior Indebtedness
of such event. In the event that any Securities are declared due and payable
before their Stated Maturity, then and in such event the holders of Senior
Indebtedness shall be entitled to receive payment in full of all Obligations in
respect of Senior Indebtedness before the Holders of the Securities are entitled
to receive any payment or other distribution (including any payment which may be
payable by reason of the payment of any other indebtedness of the Company being
subordinated to the payment of the Securities) on account of the principal of,
premium, if any, or interest on or any Additional Amounts with respect to the
Securities or on account of the purchase or other acquisition of Securities, and
on any such event the Holders of the Securities shall, to the extent permitted
by law, be prohibited for a period of 180 days thereafter from making any
bankruptcy filing with respect to the Company or from filing suit to enforce
their rights under this Indenture (PROVIDED, HOWEVER, that if the acceleration
of Securities is rescinded or annulled prior to the expiration of such 180-day
period, such prohibition shall terminate on such earlier date as the
acceleration of such Securities is rescinded or annulled), subject to the
rights, if any, under this Article XII of the holders, from time
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to time, of Senior Indebtedness to receive the cash, property or securities
receivable on the exercise of such rights.
In the event that, notwithstanding the foregoing, the Company shall
make any payment or distribution to the Trustee or the Holder of any Security
prohibited by the foregoing provisions of this Section 12.03, such payment or
distribution shall be held by the Trustee (if the Trustee has knowledge that
such payment or distribution is so prohibited) or by such Holder (in trust) for
the holders of Senior Indebtedness, and shall be paid forthwith over and
delivered (a) to the holders of Senior Indebtedness or their respective
Representatives as their respective interests may appear or (b) as a court of
competent jurisdiction shall direct, in each case, for application to the
payment of all Obligations with respect to Senior Indebtedness remaining unpaid
to the extent necessary to pay such Obligations in full in accordance with their
terms, after giving effect to any concurrent payment or distribution to or for
the holders of Senior Indebtedness.
The provisions of this Section 12.03 shall not apply to any payment
with respect to which Section 12.02 would be applicable.
SECTION 12.04. NO PAYMENT WHEN SENIOR INDEBTEDNESS IN DEFAULT.
The Company may not make any payment (whether by redemption,
purchase, retirement, defeasance or otherwise) to the Trustee or any Holder on
account of the principal of, premium, if any, or interest on or any Additional
Amounts with respect to the Securities and may not acquire from the Trustee or
any Holder any Securities (other than payments and other distributions made from
any defeasance trust created pursuant to Section 4.01 if the applicable deposit
does not violate Article IV or this Article XII) until all principal and other
Obligations with respect to the Senior Indebtedness of the Company have been
paid in full if:
(a) a default in the payment of any principal of, premium, if any,
or interest on Designated Senior Indebtedness occurs; or
(b) a default, other than a payment default, on Designated Senior
Indebtedness occurs and is continuing that then permits holders of the
Designated Senior Indebtedness as to which such default relates to
accelerate its maturity and the Trustee receives a notice of the default
(a "Payment Blockage Notice") from a Person who is a Representative of the
holders of such Designated Senior Indebtedness, PROVIDED, that if such
Designated Senior Indebtedness is of the type referred to in clause (b) of
the definition thereof, the Payment Blockage Notice shall be given by a
Representative of the holders of at least 20% of such Designated Senior
Indebtedness.
The Company shall resume payments on and distributions in respect of
the Securities and may acquire Securities on:
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(a) in the case of a default referred to in subparagraph (a) of the
preceding paragraph, the date on which the default is cured or waived, or
(b) in the case of a default referred to in subparagraph (b) of the
preceding paragraph, the earliest of (i) the date on which such nonpayment
default is cured or waived and (ii) the date the applicable Payment
Blockage Notice is retracted by written notice to the Trustee from the
Person who is a Representative of the holders of the relevant Designated
Senior Indebtedness,
if this Article XII otherwise permits the payment, distribution or acquisition
at the time of such payment or acquisition.
In the event that, notwithstanding the foregoing, the Company shall
make any payment or distribution to the Trustee or the Holder of any Security
prohibited by the foregoing provisions of this Section 12.04, such payment or
distribution shall be held by the Trustee (if the Trustee has knowledge that
such payment or distribution is so prohibited) or by such Holder (in trust) for
the holders of Senior Indebtedness, and shall be paid forthwith over and
delivered (a) to the holders of Senior Indebtedness or their respective
Representatives as their respective interests may appear or (b) as a court of
competent jurisdiction shall direct, in each case for application to the payment
of all Obligations with respect to Senior Indebtedness remaining unpaid to the
extent necessary to pay such Obligations in full in accordance with their terms,
after giving effect to any concurrent payment or distribution to or for the
holders of Senior Indebtedness.
The provisions of this Section 12.04 shall not apply to any payment
with respect to which Section 12.02 would be applicable.
SECTION 12.05. PAYMENT PERMITTED IF NO DEFAULT.
Nothing contained in this Article XII or elsewhere in this Indenture
or in any of the Securities shall prevent (a) the Company, at any time except
under the circumstances referred to in Section 12.02 or under the conditions
described in Section 12.03 or 12.04, from making payments at any time of
principal of, premium, if any, or interest on or any Additional Amounts with
respect to the Securities, or (b) the application by the Trustee of any money
deposited with it hereunder to the payment of or on account of the principal of,
premium, if any, or interest on or any Additional Amounts with respect to the
Securities if, at the time of such application by the Trustee, it did not have
knowledge within the meaning of Section 12.10 that such payment would have been
prohibited by the provisions of this Article XII.
SECTION 12.06. SUBROGATION TO RIGHTS OF HOLDERS OF SENIOR INDEBTEDNESS.
Subject to the payment in full of all Obligations in respect of
Senior Indebtedness, the Holders of the Securities shall be subrogated to the
extent of the payments or distributions made to the holders of Senior
Indebtedness pursuant to the provisions of this Article XII (equally and
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ratably with the holders of all indebtedness of the Company which by its express
terms is subordinated to other indebtedness of the Company to substantially the
same extent as the Securities are subordinated and is entitled to like rights of
subrogation) to the rights of the holders of Senior Indebtedness to receive
payments and distributions applicable to the Senior Indebtedness until the
principal of, premium, if any, and interest on and any Additional Amounts with
respect to the Securities shall be paid in full. For purposes of such
subrogation, no payments or distributions to the holders of the Senior
Indebtedness to which the Holders of the Securities or the Trustee would be
entitled except for the provisions of this Article XII, and no payments over
pursuant to the provisions of this Article XII to the holders of Senior
Indebtedness by Holders of the Securities or the Trustee, shall, as among the
Company, its creditors other than holders of Senior Indebtedness and the Holders
of the Securities, be deemed to be a payment or distribution by the Company to
or on account of the Senior Indebtedness.
SECTION 12.07. PROVISIONS SOLELY TO DEFINE RELATIVE RIGHTS.
The provisions of this Article XII are and are intended solely for
the purpose of defining the relative rights of the Holders of the Securities on
the one hand and the holders of Senior Indebtedness on the other hand. Nothing
contained in this Article XII or elsewhere in this Indenture or in the
Securities is intended to or shall: (a) impair, as among the Company, its
creditors other than holders of Senior Indebtedness and the Holders of the
Securities, the obligation of the Company, which is absolute and unconditional,
to pay to the Holders of the Securities the principal of, premium, if any, and
interest on and any Additional Amounts with respect to the Securities as and
when the same shall become due and payable in accordance with their terms; (b)
affect the relative rights against the Company or the Holders of the Securities
and creditors of the Company other than the holders of Senior Indebtedness; or
(c) prevent the Trustee or the Holder of any Security from exercising all
remedies otherwise permitted by applicable law on default under this Indenture,
subject to the rights, if any, under this Article XII of the holders of Senior
Indebtedness to receive distributions otherwise payable or deliverable to the
Trustee or such Holder.
SECTION 12.08. TRUSTEE TO EFFECTUATE SUBORDINATION.
Each holder of a Security by his acceptance thereof authorizes and
directs the Trustee on his behalf to take such action as may be necessary or
appropriate to effectuate the subordination provided in this Article XII and
appoints the Trustee his attorney-in-fact for any and all such purposes.
SECTION 12.09. NO WAIVER OF SUBORDINATION PROVISIONS.
No right of any present or future holder of any Senior Indebtedness
to enforce subordination as herein provided shall at any time in any way be
prejudiced or impaired by any act or failure to act on the part of the Company
or by any act or failure to act by any such holder, or by any noncompliance by
the Company with the terms, provisions and covenants of this Indenture,
regardless of any knowledge thereof any such holder may have or be otherwise
charged with.
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Without in any way limiting the generality of the preceding
paragraph, the holders of Senior Indebtedness may, at any time and from time to
time, without the consent of or notice to the Trustee or the Holders of the
Securities, without incurring responsibility to the Trustee or the Holders of
the Securities and without impairing or releasing the subordination provided in
this Article XII or the obligations hereunder of the Trustee or the Holders of
the Securities to the holders of Senior Indebtedness, do any one or more of the
following: (a) change the manner, place or terms of payment or extend the time
of payment of, or renew or alter, Senior Indebtedness, or otherwise amend or
supplement in any manner Senior Indebtedness or any instrument evidencing the
same or any agreement under which Senior Indebtedness is outstanding; (b) sell,
exchange, release or otherwise deal with any property pledged, mortgaged or
otherwise securing Senior Indebtedness; (c) release any Person liable in any
manner for the collection of Senior Indebtedness; and (d) exercise or refrain
from exercising any rights against the Company and any other Person.
SECTION 12.10. NOTICE TO TRUSTEE.
The Company shall give prompt written notice to the Trustee of any
fact known to the Company which would prohibit the making of any payment to or
by the Trustee in respect of the Securities. Notwithstanding the provisions of
this Article XII or any other provision of this Indenture, the Trustee shall not
be charged with knowledge of the existence of any facts that would prohibit the
making of any payment to or by the Trustee in respect of the Securities, unless
and until the Trustee shall have received written notice thereof from the
Company or a holder of Senior Indebtedness or from any Representative therefor;
and, prior to the receipt of any such written notice, the Trustee, subject to
the provisions of Section 6.01, shall be entitled in all respects to assume that
no such facts exist; PROVIDED, HOWEVER, that if the Trustee shall not have
received the notice provided for in this Section 12.10 at least two Business
Days prior to the date on which by the terms hereof any money may become payable
for any purpose (including, without limitation, the payment of the principal of,
premium, if any, or interest on or any Additional Amounts with respect to any
Security), then, anything herein contained to the contrary notwithstanding, the
Trustee shall have full power and authority to receive such money and to apply
the same to the purpose for which such money was received and shall not be
affected by any notice to the contrary which may be received by it within two
Business Days prior to such date.
Subject to the provisions of Section 6.01, the Trustee shall be
entitled to rely on the delivery to it of a written notice by a Person
representing himself to be a holder of Senior Indebtedness (or a Representative
therefor) to establish that such notice has been given by a holder of Senior
Indebtedness (or a Representative therefor). In the event that the Trustee
determines in good faith that further evidence is required with respect to the
right of any Person as a holder of Senior Indebtedness to participate in any
payment or distribution pursuant to this Article XII, the Trustee may request
such Person to furnish evidence to the reasonable satisfaction of the Trustee as
to the amount of Senior Indebtedness held by such Person, the extent to which
such Person is entitled to participate in such payment or distribution and any
other facts pertinent to the rights of such Person under this Article XII, and
if such evidence is not furnished, the Trustee may defer any
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payment to such Person pending judicial determination as to the right of such
Person to receive such payment.
SECTION 12.11. RELIANCE ON JUDICIAL ORDER OR CERTIFICATE OF LIQUIDATING AGENT.
On any payment or distribution in respect of the Securities or
Senior Indebtedness referred to in this Article XII, the Trustee, subject to the
provisions of Section 6.01, and, so long as the provisions of this Article XII
have been brought to the attention of the court, tribunal, trustee or other
Person making the payment or distribution, the Holders of the Securities shall
be entitled to rely on any order or decree entered by any court of competent
jurisdiction in which such insolvency, bankruptcy, receivership, liquidation,
reorganization, dissolution, winding up or similar case or proceeding is
pending, or a certificate of the trustee in bankruptcy, receiver, liquidating
trustee, custodian, assignee for the benefit of creditors, agent or other Person
making such payment or distribution, delivered to the Trustee or to the Holders
of Securities, for the purpose of ascertaining the Persons entitled to
participate in such payment or distribution, the holders of the Senior
Indebtedness and other indebtedness of the Company, the amount thereof or
payable thereon, the amount or amounts paid or distributed thereon and all other
facts pertinent thereto or to this Article XII.
SECTION 12.12. TRUSTEE NOT FIDUCIARY FOR HOLDERS OF SENIOR INDEBTEDNESS.
The Trustee shall not be deemed to owe any fiduciary duty to the
holders of Senior Indebtedness and shall not be liable to any such holders if it
shall, absent gross negligence or wilful misconduct, mistakenly pay over or
distribute to Holders of Securities or to the Company or to any other Person
cash, property or securities to which holders of Senior Indebtedness shall be
entitled by virtue of this Article XII or otherwise. With respect to the holders
of Senior Indebtedness, the Trustee undertakes to perform or to observe only
such of its covenants and obligations as are specifically set forth in this
Article XII, and no implied covenants or obligations with respect to the holders
of Senior Indebtedness shall be read into this Article XII against the Trustee.
SECTION 12.13. RIGHTS OF TRUSTEE AS HOLDER OF SENIOR INDEBTEDNESS; PRESERVATION
OF TRUSTEE'S RIGHTS.
The Trustee in its individual capacity shall be entitled to all the
rights set forth in this Article XII with respect to any Senior Indebtedness
which may at any time be held by it, to the same extent as any other holder of
Senior Indebtedness, and nothing in this Indenture shall deprive the Trustee of
any of its rights as such holder.
Nothing in this Article XII shall apply to claims of, or payments
to, the Trustee under or pursuant to Section 6.07.
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SECTION 12.14. ARTICLE APPLICABLE TO PAYING AGENTS.
In case at any time any Paying Agent other than the Trustee shall
have been appointed by the Company and be then acting hereunder, the term
"Trustee" as used in this Article XII shall in such case (unless the context
otherwise requires) be construed as extending to and including such Paying Agent
within its meaning as fully for all intents and purposes as if such Paying Agent
were named in this Article XII in addition to or in place of the Trustee;
PROVIDED, HOWEVER, that Section 12.13 shall not apply to the Company or any
Affiliate of the Company if it or such Affiliate acts as Paying Agent.
SECTION 12.15. CERTAIN CONVERSIONS DEEMED PAYMENT.
For the purposes of this Article XII only, (a) the issuance and
delivery of junior securities on conversion of Securities in accordance with
Article XIII shall not be deemed to constitute a payment or distribution on
account of the principal of, premium, if any, or interest on or any Additional
Amounts with respect to Securities or on account of the purchase or other
acquisition of Securities, and (b) the payment, issuance or delivery of cash,
property or securities (other than junior securities) on conversion of a
Security shall be deemed to constitute payment on account of the principal of
such Security. For the purposes of this Section 12.15, the term "junior
securities" means (a) shares of any class of capital stock of the Company and
(b) securities of the Company which are subordinated in right of payment to all
Senior Indebtedness which may be outstanding at the time of issuance or delivery
of such securities to substantially the same extent as, or to a greater extent
than, the Securities are so subordinated as provided in this Article XII.
Nothing contained in this Article XII or elsewhere in this Indenture or in the
Securities is intended to or shall impair, as among the Company, its creditors
other than holders of Senior Indebtedness and the Holders of the Securities, the
right, which is absolute and unconditional, of the Holder of any Security to
convert such Security in accordance with Article XIII.
SECTION 12.16. NO SUSPENSION OF REMEDIES.
Except as provided in Section 12.03, nothing contained in this
Article XII shall limit the right of the Trustee or the Holders of the
Securities of any series to take any action to accelerate the maturity of the
Securities of that series pursuant to the provisions described under Article V
and as set forth in this Indenture or to pursue any rights or remedies hereunder
or under applicable law, subject to the rights, if any, under this Article XII
of the holders, from time to time, of Senior Indebtedness to receive the cash,
property or securities receivable on the exercise of such rights or remedies.
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ARTICLE XIII
CONVERSION OF SECURITIES
SECTION 13.01. CONVERSION PRIVILEGE AND CONVERSION PRICE.
Subject to and on compliance with the provisions of this Article
XIII, at the option of the Holder thereof, any Security of any series or any
portion of the principal amount thereof which equals $1,000 or any integral
multiple thereof may be converted at any time on or following the Convertibility
Commencement Date for that Security at the principal amount thereof, or of such
portion thereof, into fully paid and nonassessable shares (calculated as to each
conversion to the nearest 1/100 of a share) of Common Stock, at the conversion
price for that Security, determined as hereinafter provided, in effect at the
time of conversion. That conversion right will expire at the close of business
on the Stated Maturity of the final payment of principal of that Security. In
case a Security or portion thereof is called for redemption, that conversion
right in respect of the Security or portion so called will expire at the close
of business on the second business day preceding the applicable Redemption Date,
unless the Company defaults in making the payment due on redemption.
The price at which shares of Common Stock will be delivered on
conversion of any Security (herein called the "conversion price") will be
initially the Initial Conversion Price per share of Common Stock which is fixed
for that Security by or pursuant to this Indenture. The conversion price will be
adjusted in certain instances as paragraphs (a), (b), (c), (d) and (g) of
Section 13.04 provide.
SECTION 13.02. EXERCISE OF CONVERSION PRIVILEGE.
In order to exercise the conversion privilege, the Holder of any
Security of any series must surrender that Security, duly endorsed or assigned
to the Company or in blank, at any Company Agency for that series, accompanied
by written notice to the Company in the form that Security provides (or such
other notice as is acceptable to the Company) at that Company Agency that the
Holder elects to convert that Security or, if less than the entire principal
amount thereof is to be converted, the portion thereof to be converted. Any
Security surrendered for conversion during the period from the opening of
business on any Regular Record Date for that Security next preceding any
Interest Payment Date for that Security to the close of business on that
Interest Payment Date (except in the case of Securities or portions thereof
which have been called for redemption on a Redemption Date, or which are
repurchaseable on a Repurchase Date, occurring, in either case, within that
period) must be accompanied by payment in New York Clearing House funds or other
funds acceptable to the Company of an amount equal to the interest payable on
that Interest Payment Date on the principal amount of Securities being
surrendered for conversion. Except as the immediately preceding sentence
provides and subject to the last paragraph of Section 3.07, no payment or
adjustment will be made on any conversion on account of any interest accrued on
the
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Securities surrendered for conversion or on account of any dividends on the
Common Stock issued on conversion.
Securities will be deemed to have been converted immediately prior
to the close of business on the day of their surrender for conversion at any
Company Agency for those Securities in accordance with the foregoing provisions,
and at that time the rights of the Holders of those Securities as Holders will
cease, and the Person or Persons entitled to receive the Common Stock issuable
on conversion of those Securities will be treated for all purposes as having
become the record holder or holders of that Common Stock as and after that time.
As promptly as practicable on or after the conversion date, the Company will
issue and deliver at the applicable Company Agency a certificate or certificates
for the number of full shares of Common Stock issuable on conversion, together
with payment in lieu of any fraction of a share, as Section 13.03 provides.
In the case of any Security of any series which is converted in part
only, on that conversion the Company will execute and the Trustee will
authenticate and deliver to the Holder thereof, at the expense of the Company, a
new Security or Securities of the same series and like tenor and of authorized
denominations in an aggregate principal amount equal to the unconverted portion
of the principal amount of that Security.
SECTION 13.03. FRACTIONS OF SHARES.
No fractional share of Common Stock will be issued on conversion of
Securities of any series. If more than one Security of the same series is
surrendered for conversion at one time by the same Holder, the number of full
shares which will be issuable on conversion thereof will be computed on the
basis of the aggregate principal amount of the Securities (or specified portions
thereof) so surrendered. Instead of any fractional share of Common Stock which
would otherwise be issuable on conversion of any Security or Securities (or
specified portions thereof), the Company will pay a cash adjustment in respect
of that fraction in an amount equal to the same fraction of the Closing Price
(as defined in paragraph (f) of Section 13.04) at the close of business on the
day of conversion (or, if that day is not a Trading Day (as defined in paragraph
(f) of Section 13.04), on the Trading Day immediately preceding that day).
SECTION 13.04. ADJUSTMENT OF CONVERSION PRICE.
(a) In case the Company shall pay or make a dividend or other
distribution on the Common Stock exclusively in Common Stock or shall pay or
make a dividend or other distribution on any other class of capital stock of the
Company which dividend or distribution includes Common Stock, each conversion
price in effect for the Securities of each series at the opening of business on
the day following the date fixed for the determination of stockholders entitled
to receive that dividend or other distribution will be reduced by multiplying
that conversion price by a fraction of which the numerator is the number of
shares of Common Stock outstanding at the close of business on the date fixed
for that determination and the denominator is the sum of such number of shares
and the total number of shares constituting that dividend or other distribution,
that reduction to become
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effective immediately after the opening of business on the day following the
date fixed for that determination. For the purpose of this paragraph (a), the
number of shares of Common Stock at any time outstanding will not include shares
held in the treasury of the Company ("Treasury Shares"). The Company will not
pay any dividend or make any distribution on Treasury Shares.
(b) Subject to paragraph (e) of this Section 13.04, in case the
Company shall pay or make a dividend or other distribution on the Common Stock
consisting exclusively of, or shall otherwise issue to all holders of the Common
Stock, rights or warrants entitling the holders thereof to subscribe for or
purchase shares of Common Stock at a price per share less than the Current
Market Price (determined as paragraph (f) of this Section 13.04 provides) on the
date fixed for the determination of stockholders entitled to receive those
rights or warrants, each conversion price in effect for the Securities of each
series at the opening of business on the day following the date fixed for that
determination will be reduced by multiplying that conversion price by a fraction
of which the numerator is the number of shares of Common Stock outstanding at
the close of business on the date fixed for that determination plus the number
of shares of Common Stock which the aggregate of the offering price of the total
number of shares of Common Stock so offered for subscription or purchase would
purchase at that Current Market Price and the denominator is the number of
shares of Common Stock outstanding at the close of business on the date fixed
for that determination plus the number of shares of Common Stock so offered for
subscription or purchase, that reduction to become effective immediately after
the opening of business on the day following the date fixed for that
determination. For the purposes of this paragraph (b), the number of shares of
Common Stock at any time outstanding will not include Treasury Shares. The
Company will not issue any rights or warrants in respect of Treasury Shares.
(c) In case outstanding shares of Common Stock shall be subdivided
into a greater number of shares of Common Stock, each conversion price in effect
for the Securities of each series at the opening of business on the day
following the day on which that subdivision becomes effective will be
proportionately reduced, and, conversely, in case outstanding shares of Common
Stock shall be combined into a smaller number of shares of Common Stock, each
conversion price in effect for the Securities of each series at the opening of
business on the day following the day on which that combination becomes
effective will be proportionately increased, that reduction or increase, as the
case may be, to become effective immediately after the opening of business on
the day following the day on which that subdivision or combination, as the case
may be, becomes effective.
(d) Subject to the last sentence of this paragraph (d) and to
paragraph (e) of this Section 13.04, in case the Company shall, by dividend or
otherwise, distribute to all holders of the Common Stock evidences of its
indebtedness, shares of any class of its capital stock, cash or other assets
(including securities, but excluding any rights or warrants referred to in
paragraph (b) of this Section 13.04, excluding any dividend or distribution paid
exclusively in cash and excluding any dividend or distribution referred to in
paragraph (a) of this Section 13.04), each conversion price for the Securities
of each series will be reduced by multiplying that conversion price as it was in
effect immediately prior to the close of business on the date fixed for the
determination of stockholders entitled to that distribution by a fraction of
which the numerator is the Current Market Price
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(determined as paragraph (f) of this Section 13.04 provides) on that date less
the fair market value (as determined by the Board of Directors, whose
determination shall be conclusive and described in a Board Resolution) on that
date of the portion of the evidences of indebtedness, shares of capital stock,
cash and other assets to be distributed applicable to one share of Common Stock
and the denominator is that Current Market Price, that reduction to become
effective immediately prior to the opening of business on the day following that
date. If the Board of Directors determines the fair market value of any
distribution for purposes of this paragraph (d) by reference to the actual or
when-issued trading market for any securities comprising part or all of that
distribution, it must in doing so consider the prices in that market over the
same period used in computing the Current Market Price pursuant to paragraph (f)
of this Section 13.04, to the extent possible. For purposes of this paragraph
(d), any dividend or distribution that includes shares of Common Stock, rights
or warrants to subscribe for or purchase shares of Common Stock or securities
convertible into or exchangeable for shares of Common Stock will be deemed to be
(i) a dividend or distribution of the evidences of indebtedness, cash, assets or
shares of capital stock other than those shares of Common Stock, those rights or
warrants or those convertible or exchangeable securities (making any conversion
price reduction required by this paragraph (d)) immediately followed by (ii) in
the case of those shares of Common Stock or those rights or warrants, a dividend
or distribution thereof (making any further conversion price reduction required
by paragraphs (a) and (b) of this Section 13.04, except any shares of Common
Stock included in that dividend or distribution will not be deemed "outstanding
at the close of business on the date fixed for that determination" within the
meaning of paragraph (a) of this Section 13.04), or (iii) in the case of those
convertible or exchangeable securities, a dividend or distribution of the number
of shares of Common Stock as would then be issuable on the conversion or
exchange thereof, whether or not the conversion or exchange of those securities
is subject to any conditions (making any further conversion price reduction
required by paragraph (a) of this Section 13.04, except the shares deemed to
constitute that dividend or distribution will not be deemed "outstanding at the
close of business on the date fixed for that determination" within the meaning
of paragraph (a) of this Section 13.04).
(e) The reclassification of Common Stock into securities that
include securities other than Common Stock (other than any reclassification in a
consolidation or merger to which Section 13.11 applies) will be deemed to
involve (i) a distribution of those securities other than Common Stock to all
holders of Common Stock (and the effective date of that reclassification will be
deemed to be "the date fixed for the determination of stockholders entitled to
that distribution" within the meaning of paragraph (d) of this Section 13.04),
and (ii) a subdivision or combination, as the case may be, of the number of
shares of Common Stock outstanding immediately prior to that reclassification
into the number of shares of Common Stock outstanding immediately thereafter
(and the effective date of that reclassification will be deemed to be "the day
on which that subdivision becomes effective" or "the day on which that
combination becomes effective", as the case may be, and "the day on which that
subdivision or combination, as the case may be, becomes effective" within the
meaning of paragraph (c) of this Section 13.04).
Rights or warrants issued by the Company to all holders of the
Common Stock entitling the holders thereof to subscribe for or purchase shares
of Common Stock (either initially
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or under certain circumstances), which rights or warrants (i) are deemed to be
transferred with those shares of Common Stock, (ii) are not exercisable and
(iii) are also issued in respect of future issuances of Common Stock, in each
case in clauses (i) through (iii) until the occurrence of a specified event or
events ("Trigger Event"), will for purposes of this Section 13.04 not be deemed
issued until the occurrence of the earliest Trigger Event. If any such rights or
warrants, including any such existing rights or warrants distributed prior to
the date of this Indenture, are subject to subsequent events, on the occurrence
of each of which such rights or warrants shall become exercisable to purchase
different securities, evidences of indebtedness or other assets, then the
occurrence of each such event will be deemed to be such date of issuance and
record date with respect to new rights or warrants (and a termination or
expiration of the existing rights or warrants without exercise by the holder
thereof). In addition, in the event of any distribution (or deemed distribution)
of such rights or warrants, or any Trigger Event with respect thereto, that was
counted for purposes of calculating a distribution amount for which an
adjustment to any conversion price under this Section 13.04 was made, (i) in the
case of any such rights or warrants that shall all have been redeemed or
repurchased without exercise by any holders thereof, that conversion price shall
be readjusted on such final redemption or repurchase to give effect to such
distribution or Trigger Event, as the case may be, as though it were a cash
distribution, equal to the per share redemption or repurchase price received by
a holder or holders of Common Stock with respect to such rights or warrants
(assuming such holder had retained such rights or warrants), made to all holders
of Common Stock as of the date of such redemption or repurchase, and (ii) in the
case of such rights or warrants that shall have expired or been terminated
without exercise by any holders thereof, that conversion price shall be
readjusted as if such rights and warrants had not been issued.
Notwithstanding any other provision of this Section 13.04 to the
contrary, rights, warrants, evidences of indebtedness, other securities, cash or
other assets (including, without limitation, any rights distributed pursuant to
any stockholder rights plan) will be deemed not to have been distributed for
purposes of this Section 13.04 if the Company makes proper provision so that
each holder of Securities of each series who converts a Security (or any portion
thereof) of that series after the date fixed for determination of stockholders
entitled to receive that distribution will be entitled to receive on that
conversion, in addition to the shares of Common Stock issuable on that
conversion, the amount and kind of such distributions which that holder would
have been entitled to receive if such holder had, immediately prior to such
determination date, converted that Security into Common Stock.
(f) For the purpose of any computation under this paragraph (f) and
paragraphs (b) and (d) of this Section 13.04, the current market price per share
of Common Stock (the "Current Market Price") on any date will be deemed to be
the average of the daily Closing Prices for the five consecutive Trading Days
selected by the Company commencing not more than 20 Trading Days before, and
ending not later than, the date in question; PROVIDED, HOWEVER, that (i) if the
"ex" date for any event (other than the issuance or distribution requiring such
computation) that requires an adjustment to any conversion price pursuant to
paragraph (a), (b), (c) or (d) of this Section 13.04 occurs on or after the 20th
Trading Day prior to the date in question and prior to the "ex" date for the
issuance or distribution requiring that computation, the Closing Price for each
Trading Day prior
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to the "ex" date for such other event will be adjusted by multiplying that
Closing Price by the same fraction by which that conversion price is so required
to be adjusted as a result of such other event, (ii) if the "ex" date for any
event (other than the issuance or distribution requiring that computation) that
requires an adjustment to the conversion price pursuant to paragraph (a), (b),
(c) or (d) of this Section 13.04 occurs on or after the "ex" date for the
issuance or distribution requiring that computation and on or prior to the date
in question, the Closing Price for each Trading Day on and after the "ex" date
for such other event will be adjusted by multiplying that Closing Price by the
reciprocal of the fraction by which that conversion price is so required to be
adjusted as a result of such other event, and (iii) if the "ex" date for the
issuance or distribution requiring that computation is on or prior to the date
in question, after taking into account any adjustment required pursuant to
clause (ii) of this proviso, the Closing Price for each Trading Day on or after
that "ex" date will be adjusted by adding thereto the amount of any cash and the
fair market value on the date in question (as determined by the Board of
Directors in a manner consistent with any determination of such value for
purposes of paragraph (d) of this Section 13.04, whose determination shall be
conclusive and described in a Board Resolution) of the evidences of
indebtedness, shares of capital stock or assets being distributed applicable to
one share of Common Stock as of the close of business on the day before that
"ex" date. The closing price for any Trading Day (the "Closing Price") will be
the last reported sales price regular way or, in case no such reported sale
takes place on such day, the average of the reported closing bid and asked
prices regular way, in either case on the New York Stock Exchange or, if the
Common Stock is not listed or admitted to trading on such exchange, on the
principal national securities exchange on which the Common Stock is listed or
admitted to trading or, if not listed or admitted to trading on any national
securities exchange, on the Nasdaq National Market or, if the Common Stock is
not listed or admitted to trading on any national securities exchange or quoted
on the Nasdaq National Market, the average of the closing bid and asked prices
in the over-the-counter market as furnished by any New York Stock Exchange
member firm selected from time to time by the Company for that purpose. For
purposes of this paragraph (f), the term "Trading Day" means each Monday,
Tuesday, Wednesday, Thursday and Friday, other than any day on which securities
are generally not traded on the applicable securities exchange or in the
applicable securities market and the term "`ex' date," (i) when used with
respect to any issuance or distribution, means the first date on which the
Common Stock trades regular way on the relevant exchange or in the relevant
market from which the Closing Prices were obtained without the right to receive
that issuance or distribution, and (ii) when used with respect to any
subdivision or combination of shares of Common Stock, means the first date on
which the Common Stock trades regular way on that exchange or in that market
after the time at which that subdivision or combination becomes effective.
(g) The Company may make such reductions in any conversion price for
any Security, in addition to those paragraphs (a), (b), (c) and (d) of this
Section 13.04 require, as it considers to be advisable (as evidenced by a Board
Resolution) in order that any event treated for federal income tax purposes as a
dividend of stock or stock rights will not be taxable to the recipients or, if
that is not possible, to diminish any income taxes that are otherwise payable
because of that event.
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(h) No adjustment in any conversion price for any Security will be
required unless that adjustment (plus any other adjustments not previously made
by reason of this paragraph (h)) would require an increase or decrease of at
least 1% in that conversion price; PROVIDED, HOWEVER, that any adjustments that
by reason of this paragraph (h) are not required to be made will be carried
forward and taken into account in any subsequent adjustment of that conversion
price.
(i) Notwithstanding any other provision of this Section 13.04, no
adjustment to any conversion price for any Security will reduce that conversion
price below the then par value per share of the Common Stock, and any such
purported adjustment instead will reduce that conversion price to that par
value. The Company hereby covenants not to take any action to increase the par
value per share of the Common Stock.
SECTION 13.05. NOTICE OF ADJUSTMENTS OF CONVERSION PRICE.
Whenever any conversion price is adjusted pursuant to Section 13.04:
(a) the Company will compute the adjusted conversion price in
accordance with Section 13.04 and prepare an Officers' Certificate signed
by the Controller of the Company which sets forth the adjusted conversion
price and shows in reasonable detail the facts on which that adjustment is
based, and that certificate will forthwith be filed (with a copy to the
Trustee) at each Company Agency maintained for the purpose of conversion
of the Securities to which the adjusted conversion price applies; and
(b) a notice stating that the conversion price has been adjusted and
setting forth the adjusted conversion price forthwith will be prepared,
and as soon as practicable after it is prepared, the Company will cause
the mailing of that notice to all Holders of Securities to which the
adjusted conversion price applies at their last addresses as they appear
in the Security Register.
SECTION 13.06. NOTICE OF CERTAIN CORPORATE ACTION.
In case:
(a) the Company shall declare a dividend (or any other distribution)
on the Common Stock payable otherwise than exclusively in cash; or
(b) the Company shall authorize the granting to the holders of the
Common Stock of rights or warrants to subscribe for or purchase any shares
of capital stock of any class or of any other rights (excluding shares of
capital stock or options for capital stock issued pursuant to a benefit
plan for employees, officers, directors or independent contractors of the
Company); or
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(c) of any reclassification of the Common Stock (other than a
subdivision or combination of the outstanding shares of Common Stock), or
of any consolidation, merger or share exchange to which the Company is a
party and for which approval of any stockholders of the Company is
required, or of the sale or transfer of all or substantially all the
assets of the Company; or
(d) of the voluntary or involuntary dissolution, liquidation or
winding up of the Company; or
(e) the Company or any Subsidiary shall commence a tender offer for
all or a portion of the outstanding shares of Common Stock (or shall amend
any such tender offer to change the maximum number of shares being sought
or the amount or type of consideration being offered therefor);
then the Company will cause to be (i) filed at each Company Agency and (ii)
mailed to all Holders at their last addresses as they appear in the Security
Register, at least 21 days (or 11 days in any case specified in clause (a), (b)
or (e) above) prior to the applicable record, effective or expiration date
hereinafter specified, a notice stating (A) the date on which a record is to be
taken for the purpose of such dividend, distribution or granting of rights or
warrants, or, if a record is not to be taken, the date as of which the holders
of Common Stock of record who will be entitled to such dividend, distribution,
rights or warrants are to be determined, (B) the date on which such
reclassification, consolidation, merger, share exchange, sale, transfer,
dissolution, liquidation or winding up is expected to become effective, and the
date as of which it is expected that holders of Common Stock of record will be
entitled to exchange their shares of Common Stock for securities, cash or other
property deliverable on such reclassification, consolidation, merger, share
exchange, sale, transfer, dissolution, liquidation or winding up, or (C) the
date on which such tender offer commenced, the date on which such tender offer
is scheduled to expire unless extended, the consideration offered and the other
material terms thereof (or the material terms of any amendment thereto). Neither
the failure to give any such notice nor any defect therein will affect the
legality or validity of any action clauses (a) through (e) of this Section 13.06
describe.
SECTION 13.07. COMPANY TO RESERVE COMMON STOCK.
The Company will at all times reserve and keep available, free from
preemptive and other rights, out of the authorized but unissued Common Stock or
out of the Treasury Shares, for the purpose of effecting the conversion of
Securities, the full number of shares of Common Stock then issuable on the
conversion of all outstanding Securities. The Company will issue shares of
Common Stock issuable on conversion of outstanding Securities out of the
Treasury Shares to the extent available.
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SECTION 13.08. TAXES ON CONVERSIONS.
The Company will pay any and all taxes that may be payable in
respect of the issue or delivery of shares of Common Stock on conversion of
Securities pursuant hereto. The Company will not, however, be required to pay
any tax that may be payable in respect of any transfer involved in the issue and
delivery of shares of Common Stock in a name other than that of the Holder of
the Security or Securities to be converted, and no such issue or delivery will
be made unless and until the Person requesting such issue has paid to the
Company the amount of any such tax, or has established to the satisfaction of
the Company that such tax has been paid.
SECTION 13.09. COVENANT AS TO COMMON STOCK.
The Company covenants that all shares of Common Stock which may be
issued on conversion of Securities will on issue be fully paid and nonassessable
and, except as Section 13.08 provides, the Company will pay all taxes, liens and
charges with respect to the issue thereof.
SECTION 13.10. CANCELLATION OF CONVERTED SECURITIES.
All Securities delivered for conversion will be delivered to the
Trustee to be canceled by or at the direction of the Trustee, which will dispose
of the same as Section 3.09 provides.
SECTION 13.11. PROVISIONS OF CONSOLIDATION, MERGER OR SALE OF ASSETS.
In case of any consolidation of the Company with, or merger of the
Company into, any other Person, any merger of another Person into the Company
(other than a merger which does not result in any reclassification, conversion,
exchange or cancellation of outstanding shares of Common Stock) or any sale or
transfer of all or substantially all the assets of the Company (other than to a
wholly-owned Subsidiary), the Person formed by such consolidation or resulting
from such merger or which acquires such assets, as the case may be, will execute
and deliver to the Trustee a supplemental indenture providing that the Holder of
each Security then Outstanding will have the right thereafter, during the period
that Security is convertible as specified in or pursuant to this Indenture, to
convert that Security only into the kind and amount of securities, cash and
other property, if any, receivable on that consolidation, merger, sale or
transfer by a holder of the number of shares of Common Stock into which that
Security might have been converted immediately prior to that consolidation,
merger, sale or transfer, assuming that holder of Common Stock (a) is not a
Person with which the Company consolidated or into which the Company merged or
which merged into the Company or to which that sale or transfer was made, as the
case may be (a "Constituent Person"), or an Affiliate of a Constituent Person
and (b) failed to exercise his rights of election, if any, as to the kind or
amount of securities, cash and other property receivable on that consolidation,
merger, sale or transfer (provided that if the kind or amount of securities,
cash and other property receivable on that consolidation, merger, sale or
transfer is not the same for each share of Common Stock held immediately prior
to that consolidation, merger, sale or transfer by other than a Constituent
Person or an Affiliate thereof and in respect of which those rights of election
shall not
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have been exercised ("nonelecting share"), then for the purpose of this Section
13.11 the kind and amount of securities, cash and other property receivable on
that consolidation, merger, sale or transfer by each nonelecting share will be
deemed to be the kind and amount so receivable per share by a plurality of the
nonelecting shares). Any such supplemental indenture will provide for
adjustments that, for events subsequent to the effective date of that
supplemental indenture, will be as nearly equivalent as may be practicable to
the adjustments this Article XIII provides. The above provisions of this Section
13.11 will similarly apply to successive consolidations, mergers, sales or
transfers.
SECTION 13.12. TRUSTEE'S DISCLAIMER.
The Trustee has no duty to determine when an adjustment under this
Article XIII should be made, how it should be made or what that adjustment
should be, but may accept as conclusive evidence of the correctness of any such
adjustment, and will be protected in relying on, the Officers' Certificate with
respect thereto which Section 13.05 obligates the Company to file with the
Trustee. The Trustee makes no representation as to the validity or value of any
securities or assets issued on conversion of Securities, and the Trustee will
not be responsible for the Company's failure to comply with any provisions of
this Article XIII.
The Trustee will not be under any responsibility to determine the
correctness of any provisions contained in any supplemental indenture executed
pursuant to Section 13.11, but may accept as conclusive evidence of the
correctness thereof, and will be protected in relying on, the Officers'
Certificate with respect thereto which Section 1.02 obligates the Company to
file with the Trustee in connection with that supplemental indenture.
ARTICLE XIV
MEETINGS OF HOLDERS OF SECURITIES
SECTION 14.01. PURPOSES FOR WHICH MEETINGS MAY BE CALLED.
A meeting of Holders of Securities of any or all series may be
called at any time and from time to time pursuant to this Article XIV to make,
give or take any request, demand, authorization, direction, notice, consent,
waiver or other action this Indenture provides the Holders of Securities of that
series may make, give or take.
SECTION 14.02. CALL, NOTICE AND PLACE OF MEETINGS.
(a) The Trustee may at any time call a meeting of Holders of
Securities of any series for any purpose Section 14.01 specifies, to be held at
such time and at such place in Houston, Texas, or in any other location, as the
Trustee determines. Notice of every meeting of Holders of Securities of any
series, setting forth the time and the place of that meeting and in general
terms the
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action proposed to be taken at that meeting, will be given, in the manner
Section 1.06 provides, not less than 20 nor more than 180 days prior to the date
fixed for that meeting.
(b) In case at any time the Company, pursuant to a Board Resolution,
or the Holders of at least 10% in aggregate principal amount of the Outstanding
Securities of any series, shall have requested the Trustee for that series to
call a meeting of the Holders of Securities of that series for any purpose
Section 14.01 specifies, by written request setting forth in reasonable detail
the action proposed to be taken at the meeting, and the Trustee shall not have
made the first publication of the notice of that meeting within 30 days after
its receipt of that request or does not thereafter proceed to cause the meeting
to be held as provided herein, then the Company or the Holders of Securities of
that series in the amount above specified, as the case may be, may determine the
time and the place in Houston, Texas, for that meeting and may call that meeting
for such purposes by giving notice thereof as paragraph (a) of this Section
14.02 provides.
SECTION 14.03. PERSONS ENTITLED TO VOTE AT MEETINGS.
To be entitled to vote at any meeting of Holders of Securities of
any series, a Person must be (a) a Holder of one or more Outstanding Securities
of that series or (b) a Person appointed by an instrument in writing as proxy
for a Holder or Holders of one or more Outstanding Securities of that series by
such Holder or Holders. The only Persons who will be entitled to be present or
to speak at any meeting of Holders of Securities of any series will be the
Persons entitled to vote at that meeting and their counsel, any representatives
of the Trustee and its counsel and any representatives of the Company and its
counsel.
SECTION 14.04. QUORUM; ACTION.
The Persons entitled to vote a majority in aggregate principal
amount of the Outstanding Securities of a series will constitute a quorum for a
meeting of Holders of Securities of that series. In the absence of a quorum
within 30 minutes of the time appointed for any such meeting, the meeting will,
if convened at the request of Holders of Securities of that series, be
dissolved. In any other case, the meeting may be adjourned for a period of not
less than 10 days as determined by the chairman of the meeting prior to the
adjournment of that meeting. In the absence of a quorum at any such adjourned
meeting, that adjourned meeting may be further adjourned for a period of not
less than 10 days as determined by the chairman of the meeting prior to the
adjournment of that adjourned meeting. Subject to Section 14.05(d), notice of
the reconvening of any adjourned meeting will be given as provided in Section
14.02(a), except that such notice need be given only once not less than five
days prior to the date on which the meeting is scheduled to be reconvened.
Notice of the reconvening of an adjourned meeting will state expressly that
Persons entitled to vote a majority in principal amount of the Outstanding
Securities of that series will constitute a quorum.
Except as limited by the proviso to Section 9.02, any resolution
presented to a meeting or adjourned meeting duly reconvened at which a quorum is
present as aforesaid may be
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adopted by the affirmative vote of the Holders of a majority in aggregate
principal amount of the Outstanding Securities of that series; PROVIDED,
HOWEVER, that, except as limited by the proviso to Section 9.02, any resolution
with respect to any request, demand, authorization, direction, notice, consent
or waiver which this Indenture expressly provides may be made, given or taken by
the Holders of a specified percentage that is less than a majority in aggregate
principal amount of the Outstanding Securities of a series may be adopted at a
meeting or an adjourned meeting duly reconvened and at which a quorum is present
as aforesaid by the affirmative vote of the Holders of such specified percentage
in aggregate principal amount of the Outstanding Securities of that series.
Except as limited by the proviso to Section 9.02, any resolution
passed or decision taken at any meeting of Holders of Securities of any series
duly held in accordance with this Section 14.04 will be binding on all the
Holders of Securities of that series, whether or not present or represented at
the meeting.
SECTION 14.05. DETERMINATION OF VOTING RIGHTS; CONDUCT AND ADJOURNMENT OF
MEETINGS.
(a) The holding of Securities will be proved in the manner Section
1.04 specifies. The appointment of any proxy will be proved in the manner
Section 1.04 specifies or by having the signature of the Person executing the
proxy witnessed or guaranteed by any trust company, bank or banker the Trustee
deems to be satisfactory. The Trustee may presume that written instruments
appointing proxies, regular on their face, are valid and genuine without the
proof Section 1.04 specifies or other proof.
(b) The Trustee will, by an instrument in writing, appoint a
temporary chairman of the meeting, unless the meeting shall have been called by
the Company or by Holders of Securities pursuant to Section 14.02(b), in which
case the Company or the Holders of Securities of the series calling the meeting,
as the case may be, will appoint a temporary chairman. A permanent chairman and
a permanent secretary of the meeting will be elected by vote of the Persons
entitled to vote a majority in aggregate principal amount of the Outstanding
Securities of all series represented at the meeting.
(c) At any meeting, each Holder of a Security of each series
represented at the meeting and each proxy will be entitled to one vote for each
$1,000 principal amount of the Outstanding Securities of that series held or
represented by him; PROVIDED, HOWEVER, that no vote will be cast or counted at
any meeting in respect of any Security challenged as not Outstanding and ruled
by the chairman of the meeting to be not Outstanding. The chairman of the
meeting will have no right to vote, except as a Holder of a Security of a series
represented at the meeting or as a proxy.
(d) Any meeting of Holders of Securities of any series duly called
pursuant to Section 14.02 at which a quorum is present may be adjourned from
time to time by Persons entitled to vote a majority in aggregate principal
amount of the Outstanding Securities of all series represented at the meeting;
and the meeting may be held as so adjourned without further notice.
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SECTION 14.06. COUNTING VOTES AND RECORDING ACTION OF MEETINGS.
The vote on any resolution submitted to any meeting of Holders of
Securities of any series will be by written ballots on which will be subscribed
the signatures of the Holders of Securities of that series or of their
representatives by proxy and the principal amounts and serial numbers of the
Outstanding Securities of that series held or represented by them. The permanent
chairman of the meeting will appoint two inspectors of votes who will count all
votes cast at the meeting for or against any resolution and who will make and
file with the secretary of the meeting their verified written reports in
duplicate of all votes cast at the meeting. A record, at least in duplicate, of
the proceedings of each meeting of Holders of Securities of any series will be
prepared by the secretary of the meeting and there will be attached to that
record the original reports of the inspectors of votes on any vote by ballot
taken thereat and affidavits by one or more persons having knowledge of the
facts setting forth a copy of the notice of the meeting and showing that such
notice was given as provided in Section 14.02 and, if applicable, Section 14.04.
Each copy will be signed and verified by the affidavits of the permanent
chairman and secretary of the meeting and one such copy will be delivered to the
Company and another to the Trustee to be preserved by the Trustee, the latter to
have attached thereto the ballots voted at the meeting. Any record so signed and
verified will be conclusive evidence of the matters therein stated.
------------------------
This Indenture may be executed in any number of counterparts, each
of which when so executed shall be deemed to be an original, but all such
counterparts will together constitute but one and the same instrument.
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IN WITNESS WHEREOF, the parties hereto have caused this Indenture to
be duly executed, and their respective corporate seals to be hereunto affixed
and attested, all as of the day and year first above written.
INNOVATIVE VALVE TECHNOLOGIES, INC.
By________________________________
William E. Haynes
President and Chief Executive Officer
Attest:
____________________________________
Charles F. Schugart
Chief Financial Officer, Senior Vice
President - Corporate Development,
Treasurer and Secretary
U.S. TRUST COMPANY OF TEXAS, N.A.,
as Trustee
By________________________________
Attest:
_____________________________________
Name:
Title:
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STATE OF TEXAS )
) ss.
COUNTY OF HARRIS )
On the ___ day of ___________ 1998, before me personally came William E.
Haynes, to me known, who, being by me duly sworn, did depose and say that he is
President and Chief Executive Officer of Innovative Valve Technologies, Inc.,
one of the corporations described in and which executed the foregoing
instrument; that he knows the seal of said corporation; that the seal affixed to
said instrument is such corporate seal; that it was so affixed by authority of
the Board of Directors of said corporation; and that he signed his name thereto
by like authority.
_______________________________
Notary Public
STATE OF ___________ )
) ss.:
COUNTY OF _________ )
On the __ day of _______, 1998, before me personally came _______________,
to me known, who, being by me duly sworn, did depose and say that he is a
________________ of U.S. Trust Company of Texas, N.A., a national banking
association, described in and which executed the foregoing instrument; that he
knows the seal of said corporation; that the seal affixed to said instrument is
such seal; that it was so affixed by authority of the Board of Directors of said
corporation; and that he signed his name thereto by like authority.
_______________________________
Notary Public
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EXHIBIT 10.2
William E. Haynes
AMENDED AND RESTATED EMPLOYMENT AGREEMENT
This Employment Agreement (the "Agreement") is entered into as of
January 27, 1997 (the "Effective Date"), by and between The Safe Seal Company,
Inc., a Texas corporation, and William E. Haynes (the "Executive") and is
amended and restated as of October 15, 1997.
RECITAL:
WHEREAS, the Company desires to employ the Executive, and the
Executive agrees to work in the employ of the Company, and
WHEREAS, the parties hereto desire to set forth the terms of
Executive's Employment with the Company,
NOW, THEREFORE, the parties hereto agree as follows:
1. EMPLOYMENT. The Company hereby employs the Executive, and the
Executive hereby accepts Employment, on the terms and
conditions herein set forth.
2. DUTIES. (a) The Company will employ the Executive as Chairman
of the Board, President and Chief Executive Officer ("CEO") of
the Company, (b) the Executive will serve in the Company's
employ in that position and (c) under the direction of the
Board of Directors of the Company (the "Board"), the Executive
shall perform such duties, and have such powers, authority,
functions, duties and responsibilities for the Company and
corporations and other entities affiliated with the Company as
are commensurate and consistent with his employment in the
position of CEO. The Executive also shall have such additional
powers, authority, functions, duties and responsibilities as
may be assigned to him by the Board; provided that, without
the Executive's written consent, those additional powers,
authority, functions, duties and responsibilities shall not be
inconsistent or interfere with, or detract from, those herein
vested in, or otherwise then being performed for the Company
by, the Executive. In the event of an increase in the
Executive's duties, the Compensation Committee of the Board
(the "Compensation Committee") shall review the Executive's
compensation and benefits to determine if an adjustment in
compensation and employee benefits commensurate with the
Executive's new duties is warranted, in accordance with the
Company's compensation policies.
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3. TERM OF EMPLOYMENT. Subject to the provisions of Section 8,
the term of the Executive's Employment hereunder shall
commence on May 15, 1997, for a continually renewing term of
three years commencing on that date and renewing each day
thereafter for an additional day without any further action by
either the Company or the Executive, it being the intention of
the parties that there shall be continuously a remaining term
of three years' duration of the Executive's Employment until
an event has occurred as described in, or one of the parties
shall have made an appropriate election pursuant to, the
provisions of Section 8. When the termination date of the
Executive's Employment shall have occurred and the Company
shall have paid to the Executive all the applicable amounts
that Section 9 provides the Company shall pay as a result of
the termination of the Executive's Employment, this Agreement
will terminate and have no further force or effect, except
that Sections 15 through 29 shall survive that termination
indefinitely and Section 11 shall survive for the period of
time provided for therein.
4. EXTENT OF SERVICES. The Executive shall not at any time during
his Employment engage in any other activities unless those
activities do not interfere materially with the Executive's
duties and responsibilities to the Company at that time. The
foregoing, however, shall not preclude the Executive from
engaging in appropriate civic, charitable, professional or
trade association activities or from serving on one or more
boards of directors of public or private companies, as long as
such activities and services do not conflict with his
responsibilities to the Company. In addition, it is recognized
that the Executive has an equity interest in Oiltanking
Infrastructure Management Co. which will require some of his
time and services, but will not materially affect the
performance by the Executive of his services hereunder.
5. NO FORCED RELOCATION. The Executive shall not be required to
move his principal place of residence from the Houston, Texas
area or to perform regular duties that could reasonably be
expected to require either such move against his wish or to
spend amounts of time each week outside the Houston, Texas
area which are unreasonable in relation to the duties and
responsibilities of the Executive hereunder, and the Company
agrees that, if it requests the Executive to make such a move
and the Executive declines that request, (a) that declination
shall not constitute any basis for a termination of the
Executive's Employment and (b) no animosity or prejudice will
be held against Executive.
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6. COMPENSATION.
(a) SALARY. An annual base salary shall be payable to the
Executive by the Company as a guaranteed minimum amount
under this Agreement for each calendar year during the
period from May 15, 1997 to the termination date of the
Executive's Employment. That annual base salary shall
(i) accrue daily on the basis of a 365-day year, (ii) be
payable to the Executive in the intervals consistent
with the Company's normal payroll schedules (but in no
event less frequently than semi-monthly) and (iii) be
payable at an initial annual rate of $200,000. The
Executive's annual base salary shall not be decreased,
but shall be adjusted annually in each December to
reflect such adjustments, if any, as the Compensation
Committee determines appropriate based on the
Executive's performance during the most recent
performance period, in accordance with the Company's
compensation policies. A failure of the Company to
increase the Executive's annual base salary would not
constitute a breach or violation of this Agreement by
the Company.
(b) HIRING BONUS, STOCK AWARD AND STOCK OPTIONS. The Company
shall pay the Executive on the IPO Closing Date a hiring
bonus of $300,000. The Company shall pay the Executive
as of the Effective Date a stock award (the "Stock
Award") consisting of 212,348 shares (the "Award
Shares") of the Company's authorized and unissued common
stock (the "Common Stock"). The Company shall also grant
to the Executive effective as of the Effective Date (i)
a nonqualified stock option to purchase 125,000 shares
of Common Stock from the Company at an exercise price
per share equal to the IPO Price and (ii) a nonqualified
option to purchase 125,000 shares of Common Stock from
the Company at an exercise price per share equal to the
lesser of (A) $9.00 and (B) the IPO Price (each option
being an "Option"). The term of each Option shall be
seven years from the IPO Closing Date. Each Option will
become exercisable with respect to 25% of the shares of
Common Stock covered thereby on each of the IPO Closing
Date and the first three anniversaries of the IPO
Closing Date, subject to acceleration as provided in
this Section 6(b). Neither the number of shares of
Common Stock subject to, nor the exercise price
established by, either Option will be subject to any
adjustment by reason of any direct or indirect
combination of the outstanding Common Stock prior to the
IPO Closing Date. The Executive agrees that the Company
may exchange for the Options nonqualified stock options
having the same terms and issued pursuant to the
Innovative Valve Technologies, Inc. 1997 Incentive Plan
(the
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"1997 Incentive Plan"). If the Executive's Employment is
terminated under Section 8(a), (b) or (d) prior to the
fifth anniversary of the IPO Closing Date, the Options
will, notwithstanding any contrary provision of any
Incentive Plan or any award agreement evidencing the
Options thereunder, (i) become, to the extent not
already exercisable, exercisable in whole on the
termination date of the Executive's Employment and (ii)
remain exercisable at least until the date that is the
second anniversary of that termination date. If the
Executive's Employment is terminated under Section 8(e)
prior to the fifth anniversary of the IPO Closing Date,
the Options will, notwithstanding any contrary provision
of any Incentive Plan or any award agreement evidencing
the Options thereunder, (i) become, to the extent not
already exercisable, exercisable on each anniversary of
the IPO Closing Date, as provided above, and (ii) remain
exercisable (to the extent then and thereafter. If the
Executive's Employment is terminated under Section 8(c)
or (f), the Options, to the extent they are outstanding
and exercisable as of the time immediately prior to the
termination date of the Executive's Employment, will
remain outstanding and continue to be exercisable until
the date that is 10 days after that termination date (or
such later date, if any, as the Incentive Plan covering
the Options or any award agreement evidencing the
Options shall prescribe in the case of the termination
of the Executive's Employment under the circumstances
covered by Section 8(c) or (f), as the case may be).
(c) OTHER COMPENSATION. The Executive shall be entitled to
participate in all Compensation Plans from time to time
in effect while in the Employment of the Company,
regardless of whether the Executive is an Executive
Officer. All awards to the Executive under all Incentive
Plans shall take into account the Executive's positions
with and duties and responsibilities to the Company and
its subsidiaries and affiliates. Without limiting the
generality of the foregoing, the Executive shall be
eligible for an annual incentive award in accordance
with the Annual Incentive Plan (the "AIP") currently
being developed as a part of the 1997 Incentive Plan, or
such other plan as may be substituted for the AIP, and
subject to the approval of the Compensation Committee.
The actual target amount of the Executive's annual bonus
under the AIP is currently unknown, although the Company
and the Executive contemplate it will be 100% of the
Executive's annual salary under Section 6(a). The
Executive's rights to benefits at the termination of his
Employment under the Compensation Plans shall be
governed by the provisions of those plans.
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(d) EXPENSES. The Executive shall be entitled to prompt
reimbursement of all reasonable business expenses
incurred by him in the performance of his duties during
the term of this Agreement, subject to the presenting of
appropriate vouchers and receipts in accordance with the
Company's policies.
7. OTHER BENEFITS.
(a) EMPLOYEE BENEFITS AND PROGRAMS. During the term of this
Agreement, the Executive and the members of his
immediate family shall be entitled to participate in any
employee benefit plans or programs of the Company to the
extent that his position, tenure, salary, age, health
and other qualifications make him or them, as the case
may be, eligible to participate, subject to the rules
and regulations applicable thereto.
(b) SUBSCRIPTIONS AND MEMBERSHIPS. The Company shall pay
periodical subscription costs and membership fees and
dues for the Executive to join professional
organizations appropriate for the CEO.
(c) LOANS TO PAY FEDERAL TAXES. The Company shall loan to
the Executive sufficient funds to pay all federal income
and Medicare tax liability ("Tax Liability") due by
reason of the issuance of the Award Shares to the
Executive (which liability is estimated to be 41.05% of
the "fair market value of the Award Shares," as defined
below). The fair market value of the Award Shares shall
be the fair market value of the Award Shares as of
January 27, 1997, as determined on or prior to April 10,
1997 by Hill Valuation Group, taking into account any
applicable discount for lack of marketability or
minority interest of such shares as of January 27, 1997.
Such loan shall be noninterest- bearing and shall be
evidenced by an unsecured promissory note (the "Tax
Note"). The Tax Note shall be prepayable at any time and
mature in full three years from the date any funds were
first advanced to the Executive under this Section 7(c).
If the Executive sells any Award Shares (or any
securities into which Award Shares have been converted)
for cash while the Tax Note remains outstanding and
unpaid, the Executive shall prepay the Tax Note within
five business days after the Executive receives the
proceeds from that sale in the amount equal to the
lesser of (i) the then unpaid balance of the Tax Note or
(ii) the cash proceeds, net of any applicable commission
and other sale expense and any applicable capital gain
or other income tax, the Executive receives from that
sale. The Tax Note shall be payable either in cash or,
in the event that on any date the Executive
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makes any payment thereon the Common Stock is listed on
the New York Stock Exchange or another national
securities exchange or is quoted through the NASDAQ
National Market System (the "NMS") and the Executive
desires to pay such loan by delivery of shares of Common
Stock, in shares of Common Stock valued at the closing
price of the Common Stock on (i) the national securities
exchange on which the Common Stock is listed (or, if
there is more than one, the national securities exchange
the Company has designated as the principal market for
the Common Stock) or (ii) the NMS, as the case may be,
on the then most recent day on which the Common Stock
traded on such national securities exchange or the NMS,
as the case may be; provided, however, that in the event
the IPO is not completed, payment of the Tax Note may be
made by the Executive tendering all the Award Shares to
the Company in exchange for cancellation of the Tax
Note.
.
(d) VACATION. The Executive shall be entitled to four weeks
of vacation leave with full pay during each year of this
Agreement (each such year being a 12-month period ending
on May 15). The times for such vacations shall be
selected by the Executive, subject to the prior approval
of the Company. The Executive may accrue up to eight
weeks of vacation time from year to year, but vacation
time otherwise shall not accrue from year to year.
8. TERMINATION. The Executive's Employment hereunder may be
terminated prior to the term provided for in Section 3 only
under the following circumstances:
(a) DEATH. The Executive's Employment shall terminate
automatically on the date of his death.
(b) DISABILITY. If a Disability occurs and is continuing,
the Executive's Employment shall terminate 30 days after
the Company gives the Executive written notice that it
intends to terminate his Employment on account of that
Disability or on such later date as the Company
specifies in such notice. If the Executive resumes the
performance of substantially all his duties under this
Agreement before the termination becomes effective, the
notice of intent to terminate shall be deemed to have
been revoked.
(c) VOLUNTARY TERMINATION. The Executive may terminate his
Employment at any time and without Good Cause with 30
days' prior written notice to the Company.
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(d) TERMINATION FOR GOOD CAUSE. The Executive may terminate
his Employment for Good Cause at any time within 180
days (730 days if the Good Cause is the occurrence of a
Change of Control) after the Executive becomes
consciously aware that the facts and circumstances
constituting that Good Cause exist and are continuing by
giving the Company 14 days' prior written notice that
the Executive intends to terminate his Employment for
Good Cause, which notice will identify that Good Cause;
provided, however, that if a Change of Control occurs,
the Executive shall not have Good Cause to terminate his
Employment solely by reason of the occurrence of that
event until 270 days after that occurrence.
(e) INVOLUNTARY TERMINATION. The Executive's Employment is
at will. The Company reserves the right to terminate the
Executive's Employment at anytime whatsoever, without
cause, with 14 days' prior written notice to the
Executive.
(f) INVOLUNTARY TERMINATION FOR CAUSE. The Company reserves
the right to terminate the Executive's Employment for
Cause. In the event that the Company determines that
Cause exists under Section 10(f)(i) for the termination
of the Executive's Employment, the Company shall provide
in writing (the "Notice of Cause") the basis for that
determination and the manner, if any, in which the
breach or neglect can be cured. If either the Company
has determined that the breach or neglect cannot be
cured, as set forth in the Notice of Cause, or has
advised the Executive in the Notice of Cause of the
manner in which the breach or neglect can be cured, but
the Executive fails to effect that cure within 30 days
after his receipt of the Notice of Cause, the Company
shall be entitled to give the Executive written notice
of his termination for Cause. In the event that the
Company determines that Cause exists under Section
10(f)(ii) for the termination of the Executive's
Employment, it shall be entitled to terminate the
Executive's Employment without providing a Notice of
Cause or any opportunity prior to that termination to
contest that determination. Any termination of the
Executive's Employment for Cause pursuant to this
Section 8(f) shall be effective immediately upon the
Executive's receipt of the Company's written notice of
that termination and the Cause therefor.
(g) TERMINATION FOR IPO FAILURE. If the IPO Closing Date
does not occur on or before December 31, 1997, the
Executive may terminate his Employment at any time
thereafter with 14 days' prior written notice to the
Company.
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9. SEVERANCE PAYMENTS. If the Executive's Employment is
terminated during the term of this Agreement, the Executive
shall be entitled to receive severance payments as follows:
(a) If the Executive's Employment is terminated under
Section 8(a), (b), (d) or (e), the Company will pay or
cause to be paid to the Executive (or, in the case of a
termination under Section (a), the beneficiary the
Executive has designated in writing to the Company to
receive payment pursuant to this Section 9(a) or, in the
absence of such designation, the Executive's estate):
(i) the Accrued Salary;
(ii) the Other Earned Compensation;
(iii) the Reimbursable Expenses; and
(iv) the Severance Benefit.
(b) If the Executive's Employment is terminated under
Section 8(c) or (f), the Company will pay or cause to be
paid to the Executive:
(i) the Accrued Salary determined as of the
termination date of the Executive's Employment;
(ii) the Other Earned Compensation; and
(iii) the Reimbursable Expenses.
(c) Any payments to which the Executive (or his designated
beneficiary or estate, if Section 8(a) applies) is
entitled pursuant to paragraph (i) and (iv) of
subsection (a) of this Section 9 or paragraph (i) of
subsection (b) of this Section 9, as applicable, will be
paid in a single lump sum within five days after the
termination date of the Executive's Employment;
provided, however, that if Section 8(a) applies and the
Executive's designated beneficiary or estate is the
beneficiary of one or more insurance policies purchased
by the Company and then in effect the proceeds of which
are payable to that beneficiary by reason of the
Executive's death, then (i) the Company, at its option,
may credit the amount of those proceeds, as and when
paid by the insurer to that beneficiary, against the
payment to which the Executive's designated beneficiary
or estate is entitled pursuant to paragraph (iv) of
subsection (a) of this Section 9 and, if it exercises
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that option, (ii) the payment otherwise due pursuant to
that paragraph (iv) will bear interest on the
outstanding balance thereof from and including the fifth
day after that termination date to the date of payment
by the insurer to that beneficiary at the rate of
interest specified in Section 29; and provided, further,
that if Section 8(b) applies and the Executive is the
beneficiary of disability insurance purchased by the
Company and then in effect, the Company, at its option,
may credit the proceeds of that insurance which are
payable to the Executive, valued at their present value
as of that termination date using the interest rate
specified in Section 29 and then in effect as the
discount rate, against the payment to which the
Executive is entitled pursuant to paragraph (iv) of
subsection (a) of this Section 9. Any payments to which
the Executive (or his designated beneficiary or estate,
if Section 8(a) applies) is entitled pursuant to
paragraphs (ii) and (iii) of subsection (a) or (b) of
this Section 9, as applicable, will be paid in a single
lump sum within five days after the termination date of
the Executive's Employment or as soon thereafter as is
administratively feasible, together with interest
accrued thereon from and including the fifth date after
that termination date to the date of payment at the rate
of interest specified in Section 29.
(d) Except as provided in Sections 13 and 23 and this
Section, the Company will have no payment obligations
under this Agreement to the Executive (or his designated
beneficiary or estate, if Section 8(a) applies) after
the termination date of the Executive's Employment.
10. DEFINITION OF TERMS. The following terms used in this
Agreement when capitalized shall have the following meanings:
(a) ACCRUED SALARY. "Accrued Salary" shall mean the salary
that has accrued, and the salary that would accrue
through and including the last day of the pay period in
which the termination date of the Executive's Employment
occurs, under Section 6(a) which has not been paid to
the Executive as of that termination date.
(b) ACQUIRING PERSON. "Acquiring Person" shall mean any
person who or which, together with all Affiliates and
Associates of such person, is or are the Beneficial
Owner of 15% or more of the shares of Common Stock then
outstanding; provided, however, that a person shall not
be or become an Acquiring Person if such person,
together with its Affiliates and Associates, shall
become the Beneficial Owner of 15% or more of the shares
of Common Stock then outstanding solely as a result of a
reduction in the number of shares of Common
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<PAGE>
Stock outstanding due to the repurchase of Common Stock
by the Company, unless and until such time as such
person or any Affiliate or Associate of such person
shall purchase or otherwise become the Beneficial Owner
of additional shares of Common Stock constituting 1% or
more of the then outstanding shares of Common Stock or
any other person (or persons) who is (or collectively
are) the Beneficial Owner of shares of Common Stock
constituting 1% or more of the then outstanding shares
of Common Stock shall become an Affiliate or Associate
of such person, unless, in either such case, such
person, together with all Affiliates and Associates of
such person, is not then the Beneficial Owner of 15% or
more of the shares of Common Stock then outstanding.
Notwithstanding anything in this definition of
"Acquiring Person" to the contrary, no Exempt Person
shall be deemed to be or become an "Acquiring Person" or
an Affiliate or Associate of any other person for
purposes of this definition.
(c) AFFILIATE. "Affiliate" has the meaning ascribed to that
term in Exchange Act Rule 12b-2.
(d) ASSOCIATE. "Associate" shall mean, with reference to any
person, (i) any corporation, firm, partnership,
association, unincorporated organization or other entity
(other than the Company or a subsidiary of the Company)
of which that person is an officer or general partner
(or officer or general partner of a general partner) or
is, directly or indirectly, the Beneficial Owner of 10%
or more of any class of its equity securities, (ii) any
trust or other estate in which that person has a
substantial beneficial interest or for or of which that
person serves as trustee or in a similar fiduciary
capacity and (iii) any relative or spouse of that
person, or any relative of that spouse, who has the same
home as that person.
(e) BENEFICIAL OWNER. A specified person shall be deemed the
"Beneficial Owner" of, and shall be deemed to
"beneficially own," any securities:
(i) of which that person or any of that person's
Affiliates or Associates, directly or indirectly,
is the "beneficial owner" (as determined pursuant
to Rule 13d-3 under the Securities Exchange Act of
1934, as amended (the "Exchange Act"), or
otherwise has the right to vote or dispose of,
including pursuant to any agreement, arrangement
or understanding (whether or not in writing);
provided, however, that a person shall not be
deemed the "Beneficial Owner" of, or to
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"beneficially own," any security under this
subparagraph (i) as a result of an agreement,
arrangement or understanding to vote that security
if that agreement, arrangement or understanding:
(A) arises solely from a revocable proxy or
consent given in response to a public (that is,
not including a solicitation exempted by Exchange
Act Rule 14a-2(b)(2)) proxy or consent
solicitation made pursuant to, and in accordance
with, the applicable provisions of the Exchange
Act; and (B) is not then reportable by such person
on Exchange Act Schedule 13D (or any comparable or
successor report);
(ii) which that person or any of that person's
Affiliates or Associates, directly or indirectly,
has the right or obligation to acquire (whether
that right or obligation is exercisable or
effective immediately or only after the passage of
time or the occurrence of an event) pursuant to
any agreement, arrangement or understanding
(whether or not in writing) or on the exercise of
conversion rights, exchange rights, other rights,
warrants or options, or otherwise; provided,
however, that a person shall not be deemed the
"Beneficial Owner" of, or to "beneficially own,"
securities tendered pursuant to a tender or
exchange offer made by that person or any of that
person's Affiliates or Associates until those
tendered securities are accepted for purchase or
exchange; or
(iii) which are beneficially owned, directly or
indirectly, by (A) any other person (or any
Affiliate or Associate thereof) with which the
specified person or any of the specified person's
Affiliates or Associates has any agreement,
arrangement or understanding (whether or not in
writing) for the purpose of acquiring, holding,
voting (except pursuant to a revocable proxy or
consent as described in the proviso to
subparagraph (i) of this definition) or disposing
of any voting securities of the Company or (B) any
group (as that term is used in Exchange Act Rule
13d-5(b)) of which that specified person is a
member;
provided, however, that nothing in this definition shall
cause a person engaged in business as an underwriter of
securities to be the "Beneficial Owner" of, or to
"beneficially own," any securities acquired through that
person's participation in good faith in a firm
commitment underwriting until the expiration of 40 days
after the
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date of that acquisition. For purposes of this
Agreement, "voting" a security shall include voting,
granting a proxy, acting by consent, making a request or
demand relating to corporate action (including, without
limitation, calling a stockholder meeting) or otherwise
giving an authorization (within the meaning of Section
14(a) of the Exchange Act) in respect of such security.
(f) CAUSE. "Cause" shall mean that the Executive has
(i) willfully breached or habitually neglected
(otherwise than by reason of injury or physical or
mental illness) the duties which he was required
to perform under the terms of this Agreement, or
(ii) committed act(s) of dishonesty, fraud or
misrepresentation or other act(s) of moral
turpitude that would prevent the effective
performance of his duties under this Agreement.
(g) CHANGE OF CONTROL. "Change of Control" shall mean the
occurrence of any of the following events that occurs
after the IPO Closing Date: (i) any person becomes an
Acquiring Person; (ii) a merger of the Company with or
into, or a sale by the Company of its properties and
assets substantially as an entirety to, another person
occurs and, immediately after that occurrence, any
person, other than an Exempt Person, together with all
Affiliates and Associates of such person, shall be the
Beneficial Owner of 15% or more of the total voting
power of the then outstanding Voting Shares of the
person surviving that transaction (in the case or a
merger or consolidation) or the person acquiring those
properties and assets substantially as an entirety; or
(iii) Philip Services Corp., together with all its
Affiliates (collectively, "Philip"), shall become the
Beneficial Owner of 50% or more of the shares of Common
Stock then outstanding.
(h) COMPANY. "Company" shall mean (i) The Safe Seal Company,
Inc., a Texas corporation, and (ii) any person that
assumes the obligations of "the Company" hereunder, by
operation of law, pursuant to Section 16 or otherwise.
(i) COMPENSATION PLAN. "Compensation Plan" shall mean any
compensation arrangement, plan, policy, practice or
program established, maintained or sponsored by the
Company or any subsidiary of the Company, or to which
the Company or any subsidiary of the Company
contributes, on behalf of any Executive
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Officer or any member of the immediate family of any
Executive Officer by reason of his status as such, (i)
including (A) any "employee pension benefit plan" (as
defined in Section 3(2) of the Employee Retirement
Income Security Act of 1974, as amended ("ERISA")) or
other "employee benefit plan" (as defined in Section
3(3) of ERISA), (B) any other retirement or savings
plan, including any supplemental benefit arrangement
relating to any plan intended to be qualified under
Section 401(a) of the Internal Revenue Code of 1986, as
amended (the "Code"), or whose benefits are limited by
the Code or ERISA, (C) any "employee welfare plan" (as
defined in Section 3(1) of ERISA), (D) any arrangement,
plan, policy, practice or program providing for
severance pay, deferred compensation or insurance
benefit, (E) any Incentive Plan and (F) any arrangement,
plan, policy, practice or program (1) authorizing and
providing for the payment or reimbursement of expenses
attributable to air travel and hotel occupancy while
traveling on business for the Company or (2) providing
for the payment of business luncheon and country club
dues, long-distance charges, mobile phone monthly air
time or other recurring monthly charges or any other
fringe benefit, allowance or accommodation of
employment, but (ii) excluding any compensation
arrangement, plan, policy, practice or program to the
extent it provides for annual base salary.
(j) DISABILITY. "Disability" shall mean that the Executive
has been unable to perform his essential duties under
this Agreement for a period of at least six consecutive
months as a result of his incapacity due to injury or
physical or mental illness.
(k) EMPLOYMENT. "Employment" shall mean the salaried
employment of the Employee by the Company or a
subsidiary of the Company hereunder.
(l) EXECUTIVE OFFICER. "Executive Officer" shall mean any of
the chairman of the board, the chief executive officer,
the chief operating officer, the chief financial
officer, the president, any executive, regional or other
group or senior vice president or any vice president of
the Company.
(m) EXEMPT PERSON. "Exempt Person" shall mean: (i)(A) the
Company, any subsidiary of the Company, any employee
benefit plan of the Company or any subsidiary of the
Company and (B) any person organized, appointed or
established by the Company for or pursuant to the terms
of any such plan or for the purpose of funding any such
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plan or funding other employee benefits for employees of
the Company or any subsidiary of the Company; (ii) the
Executive, any Affiliate of the Executive which the
Executive controls or any group (as that term is used in
Exchange Act Rule 13d-5(b)) of which the Executive or
any such Affiliate is a member; and (iii) so long as
Philip remains the Beneficial Owner of 15% or more of
the outstanding shares of Common Stock, Philip.
(n) GOOD CAUSE. "Good Cause" for the Employee's termination
of his Employment shall mean: (i) any decrease in the
annual base salary under Section 6(a) or any other
violation hereof in any material respect by the Company;
(ii) any material reduction in the Executive's
compensation under Section 6; (iii) the assignment to
the Employee of duties inconsistent in any material
respect with the Employee's then current positions
(including status, offices, titles and reporting
requirements), authority, duties or responsibilities or
any other action by the Company which results in a
material diminution in those positions, authority,
duties or responsibilities; (iv) the occurrence of a
Change of Control; (v) the occurrence of the Abandonment
Date; (vi) the IPO Closing Date continues not to have
occurred past December 31, 1997 and Innovative Valve
Technologies, Inc. ("Invatec") has not filed a
registration statement relating to the IPO (the
"Registration Statement") under the Securities Act of
1933, as amended (the "Securities Act"), on or before
December 31, 1997; or (vii) Invatec has filed the
Registration Statement under the Securities Act on or
before December 31, 1997 and the IPO Closing Date
continues not to have occurred past May 31, 1998. As
used herein, "Abandonment Date" shall mean the first to
occur of (i) the "Abandonment Date" (as defined in the
Modification and Settlement Agreement dated as of May 9,
1997 by and among the Company, Allwaste, Inc., Allwaste
Environmental Services, Inc., Roger L. Miller and the
other parties thereto, (ii) the date Invatec withdraws
the Registration Statement pursuant to Rule 477 under
the Securities Act or (iii) the date the Registration
Statement is abandoned pursuant to Rule 479 under the
Securities Act.
(o) INCENTIVE PLAN. "Incentive Plan" shall mean any
compensation arrangement, plan, policy, practice or
program established, maintained or sponsored by the
Company or any subsidiary of the Company, or to which
the Company or any subsidiary of the Company
contributes, on behalf of any Executive Officer and
which provides for incentive, bonus or other
performance-based awards of
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cash, securities, the phantom equivalent of securities
or other property, including any stock option, stock
appreciation right and restricted stock plan, but
excluding any plan intended to qualify as a plan under
any one or more of Sections 401(a), 401(k) or 423 of the
Code.
(p) IPO. "IPO" shall mean the first time a registration
statement filed under the Securities Act and respecting
an underwritten primary offering by Invatec of shares of
its common stock (the "IVT Common Stock") is declared
effective under that act and the shares registered by
that registration statement are issued and sold by
Invatec (otherwise than pursuant to the exercise of any
over-allotment option).
(q) IPO CLOSING DATE. "IPO Closing Date" shall mean the date
on which Invatec first receives payment for the shares
of IVT Common Stock it sells in the IPO.
(r) IPO PRICE. "IPO Price" shall mean the price per share at
which the IVT Common Stock is initially offered to the
public in the IPO.
(s) OTHER EARNED COMPENSATION. "Other Earned Compensation"
shall mean all the compensation earned by the Executive
prior to the termination date of his Employment as a
result of his Employment (including compensation the
payment of which has been deferred by the Executive, but
excluding Accrued Salary and compensation to be paid to
the Executive in accordance with the terms of any
Compensation Plan), together with all accrued interest
or earnings, if any, thereon, which has not been paid to
the Executive as of that date.
(t) REIMBURSABLE EXPENSES. "Reimbursable Expenses" shall
mean the expenses incurred by the Executive on or prior
to the termination date of his Employment which are to
be reimbursed to the Executive under Section 6(c) and
which have not been reimbursed to the Executive as of
that date.
(u) SEVERANCE BENEFIT. "Severance Benefit" shall mean the
sum of: (i) the amount equal to the product of (A) the
Applicable Monthly Salary Rate multiplied by (B) 36; and
(ii) the amount equal to the product of (A) 3 multiplied
by (B) (1) the greater of (a) the target amount of all
incentive awards or payments that would have been owing
to the Executive for the Company's fiscal year in which
the termination date of the Executive's Employment
occurs were the Executive's
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Employment to have continued to the end of that fiscal
year, regardless of the level of attainment of the
performance objectives for that fiscal year, or (b) the
amount of the highest aggregate amount of all incentive
awards and payments made to the Executive for any fiscal
year of the Company prior to that fiscal year or, if the
Executive's Employment is terminated prior to the
payment of any incentive payment or award to the
Executive for his services hereunder during the
Company's fiscal year ended December 31, 1997, (2)
$200,000; provided, however, if the Executive terminates
his Employment for the Good Cause specified in clause
(v) of the definition thereof after December 31, 1997
and prior to the IPO Closing Date, the Severance Benefit
shall be $400,000. As used herein, "Applicable Monthly
Salary Rate" shall mean 1/12th of the higher of (i) the
annual salary rate in effect under Section 6(a)
immediately prior to the termination date of the
Executive's Employment and (ii) the highest annual
salary rate theretofore in effect under Section 6(a) for
any period.
11. NON-COMPETITION CLAUSE. In addition to his obligations as an
executive and whether or not he remains an executive of the Company,
the Executive agrees that during the period commencing with the
Effective Date and ending upon the second anniversary of the
termination date of his Employment following termination of his
Employment under any of Section 8(b), (c), (e) or (f), he will not,
without the prior written consent of the Company, engage, directly
or indirectly, in any business that sells any industrial valves or
performs any industrial-valve services in competition with the
Company or any subsidiary of the Company in any area within any
"Territory" surrounding any service facility of the Company or any
subsidiary of the Company (determined as of that termination date).
For purposes of this Section 11, the "Territory" surrounding any
service facility will be: (i) the city, town or village in which
that service facility is located; (ii) the county or parish in which
that service facility is located; (iii) the counties or parishes
contiguous to the county or parish in which that service facility is
located; (iv) the area located within 50 miles of that service
facility; (v) the area located within 100 miles of that service
area; and (vi) the area in which that service facility regularly
provides services at the locations of its customers.
12. REGISTRATION RIGHTS; LEGEND.
(a) As used in this Section 12, the term "Registrable Stock" shall
mean the Award Shares and the shares of Common Stock issuable
on the exercise of the Options (the "Option Shares").
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(b) As soon as is practicable following the IPO Closing Date, the
Company will file a registration statement on Form S-8 under
the Securities Act to register the Option Shares (which
registration statement may be the registration statement that
registers all the shares of Common Stock reserved or to be
available for issuance pursuant to the 1997 Incentive Plan).
(c) Prior to July 15, 1997, the Company will execute and deliver
to the Executive a registration rights agreement in
substantially the form delivered to the Executive.
(d) The Executive represents that the Registrable Stock and the
Options are being acquired for investment only and not with a
view toward the resale or distribution thereof. The Executive
is willing and able to bear the economic risk of an investment
in the Registrable Stock, has no need for liquidity with
respect thereto and is able to sustain a complete loss of his
investment. The Executive agrees and understands that the
shares of Registrable Stock are restricted securities as
defined in Rule 144 promulgated under the Securities Act and
may not be sold, assigned or transferred except in a
registered offering under the Securities Act and applicable
blue sky laws, or pursuant to an exemption therefrom. The
following legend shall be set forth on each certificate
representing the Award Shares:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, NOR
THE SECURITIES LAWS OF ANY STATE. SUCH SECURITIES CANNOT BE
OFFERED, SOLD, PLEDGED, HYPOTHECATED OR OTHERWISE TRANSFERRED
EXCEPT UPON (1) SUCH REGISTRATION, OR (2) DELIVERY TO THE
ISSUER OF THESE SECURITIES OF AN OPINION OF COUNSEL,
REASONABLY ACCEPTABLE TO THE ISSUER, THAT REGISTRATION IS NOT
REQUIRED FOR SUCH TRANSFER OR (3) SUBMISSION TO THE ISSUER OF
THESE SECURITIES OF OTHER EVIDENCE, REASONABLY ACCEPTABLE TO
THE ISSUER, TO THE EFFECT THAT ANY SUCH SALE, PLEDGE,
HYPOTHECATION OR TRANSFER SHALL NOT BE IN VIOLATION OF THE
SECURITIES ACT OF 1933, AS AMENDED, APPLICABLE STATE
SECURITIES LAWS OR ANY RULES OR REGULATIONS PROMULGATED
THEREUNDER."
13. TAX INDEMNITY. Should any of the payments of salary, other incentive
or supplemental compensation, benefits, allowances, awards,
payments, reimbursements or other perquisites, or any other payment
in the nature of compensation, singly, in any combination or in the
aggregate, that are provided for hereunder to be paid to or for the
benefit of the Executive be determined or alleged to be subject to
an excise
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or similar purpose tax pursuant to Section 4999 of the Code, or any
successor or other comparable federal, state or local tax law by
reason of being a "parachute payment" (within the meaning of Section
280G of the Code), the Company shall pay to the Executive such
additional compensation as is necessary (after taking into account
all federal, state and local taxes payable by the Executive as a
result of the receipt of such additional compensation) to place the
Executive in the same after-tax position (including federal, state
and local taxes) he would have been in had no such excise or similar
purpose tax (or interest or penalties thereon) been paid or
incurred. The Company hereby agrees to pay such additional
compensation within the earlier to occur of (i) five business days
after the Executive notifies the Company that the Executive intends
to file a tax return taking the position that such excise or similar
purpose tax is due and payable in reliance on a written opinion of
the Executive's tax counsel (such tax counsel to be chosen solely by
the Executive) that it is more likely than not that such excise tax
is due and payable or (ii) 24 hours of any notice of or action by
the Company that it intends to take the position that such excise
tax is due and payable. The costs of obtaining the tax counsel
opinion referred to in clause (i) of the preceding sentence shall be
borne by the Company, and as long as such tax counsel was chosen by
the Executive in good faith, the conclusions reached in such opinion
shall not be challenged or disputed by the Company. If the Executive
intends to make any payment with respect to any such excise or
similar purpose tax as a result of an adjustment to the Executive's
tax liability by any federal, state or local tax authority, the
Company will pay such additional compensation by delivering its
cashier's check payable in such amount to the Executive within five
business days after the Executive notifies the Company of his
intention to make such payment. Without limiting the obligation of
the Company hereunder, the Executive agrees, in the event the
Executive makes any payment pursuant to the preceding sentence, to
negotiate with the Company in good faith with respect to procedures
reasonably requested by the Company which would afford the Company
the ability to contest the imposition of such excise or similar
purpose tax; provided, however, that the Executive will not be
required to afford the Company any right to contest the
applicability of any such excise or similar purpose tax to the
extent that the Executive reasonably determines (based upon the
opinion of his tax counsel) that such contest is inconsistent with
the overall tax interests of the Executive.
14. LOCATIONS OF PERFORMANCE. The Executive's services shall be
performed primarily in the vicinity of Houston, Texas. The parties
acknowledge, however, that the Executive may be required to travel
in connection with the performance of his duties hereunder.
15. PROPRIETARY INFORMATION.
(a) The Executive agrees to comply fully with the Company's
policies relating to non-disclosure of the Company's trade
secrets and proprietary information
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and processes. Without limiting the generality of the
foregoing, the Executive will not, during the term of his
Employment, disclose any such secrets, information or
processes to any person, firm, corporation, association or
other entity for any reason or purpose whatsoever except as
may be required by law or governmental agency or legal
process, nor shall the Executive make use of any such property
for his own purposes or for the benefit of any person, firm,
corporation or other entity (except the Company or any of its
subsidiaries) under any circumstances during or after the term
of his Employment, provided that after the term of his
Employment this provision shall not apply to secrets,
information and processes that are then in the public domain
(provided that the Executive was not responsible, directly or
indirectly, for such secrets, information or processes
entering the public domain without the Company's consent).
(b) The Executive hereby sells, transfers and assigns to the
Company all the entire right, title and interest of the
Executive in and to all inventions, ideas, disclosures and
improvements, whether patented or unpatented, and
copyrightable material, to the extent (i) made or conceived by
the Executive solely or jointly with others during the term of
this Agreement and (ii) relating to or used or useful in the
design, manufacture, assembly, operation, maintenance, repair,
reconditioning or remanufacturing of batch or continuous
process systems or units and their component parts and related
equipment and tools, including, without limitation, industrial
valves and their component parts and packing materials and
other process system components (collectively "Valve
Technology"). The Executive shall communicate promptly and
disclose to the Company, in such form as the Company requests,
all information, details and data pertaining to the
aforementioned Valve Technology; and, whether during the term
hereof or thereafter, the Executive shall execute and deliver
to the Company such formal transfers and assignments and such
other papers and documents as may be required of the Executive
to permit the Company to file and prosecute any patent
applications relating to such Valve Technology and, as to
copyrightable material, to obtain copyright thereon.
(c) Trade secrets, proprietary information and processes shall not
be deemed to include information which is:
(i) known to the Executive at the time it is disclosed to
him;
(ii) publicly known (or becomes publicly known) without the
fault or negligence of Executive;
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<PAGE>
(iii) received from a third party without restriction and
without breach of this Agreement;
(iv) approved for release by written authorization of the
Company; or
(v) required to be disclosed by law or legal process;
provided, however, that in the event of a proposed
disclosure pursuant to this subsection (c)(v), the
Executive shall give the Company prior written notice
before such disclosure is made.
16. ASSIGNMENT. This Agreement may not be assigned by any party hereto;
provided that the Company may assign this Agreement, in connection
with a merger or consolidation involving the Company or a sale of
its business, properties and assets substantially as an entirety to
the surviving corporation or purchaser as the case may be, so long
as such assignee assumes the Company's obligations hereunder. The
Company shall require any successor (direct or indirect (including,
without limitation, by becoming the sole stockholder of the Company)
and whether by purchase, merger, consolidation, share exchange or
otherwise) to the business, properties and assets of the Company
substantially as an entirety expressly to assume and agree to
perform this Agreement in the same manner and to the same extent the
Company would have been required to perform it had no such
succession taken place. This Agreement shall be binding upon all
successors and assigns.
17. NOTICES. Any notice required or permitted to be given under this
Agreement shall be sufficient if in writing and sent by registered
mail to the Executive at his residence maintained on the Company's
records, or to the Company at its address at 14900 Woodham Drive,
Suite A-125, Houston, Texas, 77073, Attention: Corporate Secretary,
or such other addresses as either party shall notify the other in
accordance
with the above procedure.
18. FORCE MAJEURE. Neither party shall be liable to the other for any
delay or failure to perform hereunder, which delay or failure is due
to causes beyond the control of said party, including, but not
limited to: acts of God; acts of the public enemy; acts of the
United States of America or any state, territory or political
subdivision thereof or of the District of Columbia; fires; floods;
epidemics; quarantine restrictions; strikes; or freight embargoes;
provided, however, that this Section 18 will not relieve the Company
of any of its payment obligations to the Executive under this
Agreement. Notwithstanding the foregoing provisions of this Section
18, in every case the delay or failure to perform must be beyond the
control and without the fault or negligence of the party claiming
excusable delay.
19. INTEGRATION. This Agreement represents the entire agreement and
understanding between the parties as to the subject matter hereof
and supersedes all prior or
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<PAGE>
contemporaneous agreements whether written or oral. No waiver,
alteration or modification of any of the provisions of this
Agreement shall be binding unless in writing and signed by duly
authorized representatives of the parties hereto.
20. WAIVER. Failure or delay on the part of either party hereto to
enforce any right, power or privilege hereunder shall not be deemed
to constitute a waiver thereof. Additionally, a waiver by either
party of a breach of any promise herein by the other party shall not
operate as or be construed to constitute a waiver of any subsequent
breach by such other party.
21. SAVINGS CLAUSE. If any term, covenant or condition of this Agreement
or the application thereof to any person or circumstance shall to
any extent be invalid or unenforceable, the remainder of this
Agreement, or the application of such term, covenant or condition to
persons or circumstances other than those as to which it is held
invalid or unenforceable shall not be affected thereby, and each
term, covenant or condition of this Agreement shall be valid and
enforced to the fullest extent permitted by law.
22. AUTHORITY TO CONTRACT. The Company warrants and represents to the
Executive that the Company has full authority to enter into this
Agreement and to consummate the transactions contemplated hereby and
that this Agreement is not in conflict with any other agreement to
which the Company is a party or by which it may be bound. The
Company further warrants and represents to the Executive that the
individual executing this Agreement on behalf of the Company has the
full power and authority to bind the Company to the terms hereof and
has been authorized to do so in accordance with the Company's
articles or certificate of incorporation and bylaws.
23. PAYMENT OF EXPENSES. If at any time during the term hereof or
afterwards: (a) there should exist a dispute or conflict between the
Executive and the Company or another Person as to the validity,
interpretation or application of any term or condition hereof, or as
to the Executive's entitlement to any benefit intended to be
bestowed hereby, which is not resolved to the satisfaction of the
Executive, (b) the Executive must (i) defend the validity of this
Agreement or (ii) contest any determination by the Company
concerning the amounts payable (or reimbursable) by the Company to
the Executive or (c) the Executive must prepare responses to an
Internal Revenue Service ("IRS") audit of, or otherwise defend, his
personal income tax return for any year the subject of any such
audit, or an adverse determination, administrative proceedings or
civil litigation arising therefrom, which is occasioned by or
related to an audit by the IRS of the Company's income tax returns,
then the Company hereby unconditionally agrees: (a) on written
demand of the Company by the Executive, to provide sums sufficient
to advance and pay on a current basis (either by paying directly or
by reimbursing the Executive) not less than 30 days after a written
request therefor is submitted by the Executive, the Executive's out
of pocket costs and
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<PAGE>
expenses (including attorney's fees, expenses of investigation,
travel, lodging, copying, delivery services and disbursements for
the fees and expenses of experts, etc.) incurred by the Executive in
connection with any such matter; (b) the Executive shall be
entitled, upon application to any court of competent jurisdiction,
to the entry of a mandatory injunction without the necessity of
posting any bond with respect thereto which compels the Company to
pay or advance such costs and expenses on a current basis; and (c)
the Company's obligations under this Section 23 will not be affected
if the Executive is not the prevailing party in the final resolution
of any such matter unless it is determined pursuant to Section 25
that, in the case of one or more of such matters, the Executive has
acted in bad faith or without a reasonable basis for his position,
in which event and, then only with respect to such matter or
matters, the successful or prevailing party or parties shall be
entitled to recover from the Executive reasonable attorneys' fees
and other costs incurred in connection with that matter or matters
(including the amounts paid by the Company in respect of that matter
or matters pursuant to this Section 23), in addition to any other
relief to which it or they may be entitled.
24. REMEDIES. In the event of a breach by the Executive of Section 11 or
15 of this Agreement, in addition to other remedies provided by
applicable law, the Company will be entitled to issuance of a
temporary restraining order or preliminary injection enforcing its
rights under such Section.
25. ARBITRATION. Any and all disputes or controversies whether of law or
fact and of any nature whatsoever arising from or respecting this
Agreement shall be decided by arbitration by the American
Arbitration Association in accordance with its Commercial Rules,
except as modified herein.
(a) The arbitrator shall be selected as follows: in the event the
Company and the Executive agree on one arbitrator, the
arbitration shall be conducted by such arbitrator. In the
event the Company and the Executive do not so agree, the
Company and the Executive shall each select one independent,
qualified arbitrator, and the two arbitrators so selected
shall select the third arbitrator. The arbitrator(s) are
herein referred to as the "Panel." The Company reserves the
right to object to any individual arbitrator who shall be
employed by or affiliated with a competing organization.
(b) Arbitration shall take place at Houston, Texas, or any other
location mutually agreeable to the parties. At the request of
either party, arbitration proceedings will be conducted in the
utmost secrecy; in such case all documents, testimony and
records shall be received, heard and maintained by the Panel
in secrecy, available for inspection only by the Company or
the Executive and their respective attorneys and their
respective experts, who shall agree in advance and in writing
to receive all such information
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<PAGE>
confidentially and to maintain such information in secrecy
until such information shall become generally known. The Panel
shall be able to award any and all relief, including relief of
an equitable nature. The award rendered by the Panel may be
enforceable in any court having jurisdiction thereof.
(c) Reasonable notice of the time and place of arbitration shall
be given to all parties and any interested persons as shall be
required by law.
(d) The Company will pay all the fees and out-of-pocket expenses
of each arbitrator selected pursuant to this Section 25.
26. GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of Texas without regard to its
conflicts of law principles.
27. COUNTERPARTS. This Agreement may be executed in counterparts, each
of which shall be deemed an original, but all of which together
shall constitute one and the same instrument.
28. INDEMNIFICATION. The Executive shall be indemnified by the Company
to the maximum permitted by the law of the state of the Company's
incorporation, and by the law of the state of incorporation of any
subsidiary of the Company of which the Executive is a director or an
officer or employee, as the same may be in effect from time to time.
29. INTEREST. If any amounts required to be paid or reimbursed to the
Executive hereunder are not so paid or reimbursed at the times
provided herein (including amounts required to be paid by the
Company pursuant to Sections 6, 13 and 23), those amounts shall
accrue interest compounded daily at the annual percentage rate which
is three percentage points above the interest rate shown as the
Prime Rate in the Money Rates column in the then most recently
published edition of THE WALL STREET JOURNAL (Southwest Edition),
or, if such rate is not then so published, on at least a weekly
basis, the interest rate announced by Chase Manhattan Bank (or its
successor), from time to time, as its Base Rate (or prime lending
rate), from the date those amounts were required to have been paid
or reimbursed to the Executive until those amounts are finally and
fully paid or reimbursed; provided, however, that in no event shall
the amount of interest contracted for, charged or received hereunder
exceed the maximum non-usurious amount of interest allowed by
applicable law.
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement
as of the date hereinabove first written.
THE SAFE SEAL COMPANY, INC.
By: /s/ CHARLES F. SCHUGART
Charles F. Schugart
Senior Vice President
EXECUTIVE:
/s/ WILLIAM E. HAYNES
William E. Haynes
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<PAGE>
PROMISSORY NOTE
$174,338.00 Houston, Texas January 27, 1997
FOR VALUE RECEIVED, WILLIAM E. HAYNES, an individual whose address is
14900 Woodham Dr., Suite A-125, Houston, Texas 77073 (hereinafter referred to as
"Maker'), promises to pay to the order of INNOVATIVE VALVE TECHNOLOGIES, INC., a
Delaware corporation (hereinafter referred to as "Invatec" or "Payee"), at 14900
Woodham Dr., Suite A-125, Houston, Texas 77073, or at such other place and to
such other party or parties as the owner and holder hereof may from time to time
designate in writing, the sum of ONE-HUNDRED THOUSAND, THREE HUNDRED THIRTY
EIGHT AND NO/100 DOLLARS ($174,338.00), in either (i) lawful money of the United
States of America which shall be legal tender for the payment of debts from time
to time or (ii) shares of common stock, par value $.001 per share, of Invatec
("Common Stock") if the conditions set forth below are satisfied. No interest
shall be due and payable under this Note prior to the maturity hereof.
This Note shall be paid as follows: The entire outstanding principal
amount hereof shall mature and become due and payable, without notice or demand,
on December 31, 2000. This Note constitutes the Tax Note, as such term is
defined in the Employment Agreement entered into as of January 27, 1997, by and
between Maker and Payee (the "Employment Agreement"). As set forth in the
Employment Agreement, if the Maker sells any Award Shares (as such term is
defined in the Employment Agreement) or any securities into which Award Shares
have been converted for cash while this Note remains outstanding and unpaid,
Maker will prepay this Note within five business days after the Maker receives
the proceeds from that sale in the amount equal to the lesser of (i) the then
unpaid balance of this Note or (ii) the cash proceeds, net of any applicable
commission and other sale expense and any applicable capital gain or other
income tax, the Maker receives from that sale. This Note shall be payable either
in cash or, in the event that on any date the Maker makes any payment thereon
the Common Stock is listed on the New York Stock Exchange or another national
securities exchange or is quoted through the NASDAQ National Market System (the
"NMS") and the Maker desires to pay the principal amount outstanding under this
Note by delivery of shares of Common Stock, in shares of Common Stock valued at
the closing price of the Common Stock on (i) the national securities exchange on
which the Common Stock is listed (or, if there is more than one, the national
securities exchange the Company has designated as the principal market for the
Common Stock) or (ii) the NMS, as the case may be, on the then most recent day
on which the Common Stock traded on such national securities exchange or the
NMS, as the case may be; provided, however, that in the event the IPO (as such
term is defined in the Employment Agreement) is not completed, payment of this
Note may be made by the Maker tendering all the Award Shares to the Payee in
exchange for cancellation of this Note. The covenants and obligations of Maker
are intended by Maker and Payee to, and shall, be construed as covenants
independent of the covenants and agreements of Payee under the Employment
Agreement, and the existence of any claim or cause of action of Maker against
Payee, whether predicated on the Employment Agreement or otherwise, shall not
constitute a defense to payment hereunder.
<PAGE>
Maker shall have the privilege to prepay at any time, and from time to
time, all or any part of the principal amount of this Note, without notice,
penalty or fee. Any check, draft, money order, or other instrument given in
payment of all or any portion of this Note may be accepted by Payee and handled
in collection in the customary manner, but the same shall not constitute payment
hereunder or diminish any rights of Payee except to the extent that actual cash
proceeds of such instruments are unconditionally received by Payee.
To the extent permitted by applicable law, Maker hereby waives demand or
presentment for payment of this Note, notice of nonpayment, protest, notice of
protest, suit, notice of intention of accelerate, notice of acceleration,
diligence or any notice of or defense on account of the extension of time of
payments or change in the method of payments.
All past due principal on this Note shall bear interest from and after
maturity until paid at a per annum rate equal to the lesser of (i) the Prime
Rate (as hereinafter defined), or (ii) the maximum nonusurious rate allowed
under applicable law. As used herein, the term "Prime Rate" means, on any day,
the prime rate for that day as determined from time to time by Texas Commerce
Bank National Association. Payments will be credited first to the accrued but
unpaid interest, and then to principal.
In the event default is made in the prompt payment of this Note when due
in accordance with the terms set forth above, and the same is placed in the
hands of an attorney for collection, or suit is brought on same, or the same is
collected through any judicial proceeding whatsoever, or if any action be had
hereon, then the undersigned agrees and promises to pay an additional amount as
reasonable, calculated and foreseeable attorneys' and collection fees incurred
by Payee in connection with enforcing its rights herein contemplated, all of
which amounts shall become part of the principal hereof.
No failure to exercise and no delay on the part of Payee in exercising
any power or right in connection herewith shall operate as a waiver thereof, nor
shall any single or partial exercise of any such right or power, or any
abandonment or discontinuance of steps to enforce such a right or power,
preclude any other or further exercise thereof or the exercise of any other
right or power. No course of dealing between Maker and Payee shall operate as a
waiver of any right of Payee. No modification or waiver of any provision of this
Note nor any consent to any departure therefrom shall in any event be effective
unless the same shall be in writing and signed by the person against whom
enforcement thereof is to be sought, and then such waiver or consent shall be
effective only in the specific instance and for the purpose for which given.
This Note has been executed and delivered and shall be construed in
accordance with and governed by the laws of the State of Texas and of the United
States of America applicable in Texas.
Whenever possible, each provision of this Note shall be interpreted in
such manner as to be effective, valid and enforceable under applicable law, but
if any provision of this Note shall be prohibited by, or invalid or
unenforceable under, applicable law, then (i) Maker and Payee shall
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<PAGE>
amend such provisions by the minimal amount necessary to bring such provisions
within the ambit of enforceability, and (ii) a court may, at the request of
either Maker or Payee, revise, reform or reconstruct such provisions in a manner
sufficient to cause them to be enforceable. In no event shall any prohibition
against, or the invalidity or unenforceability of, any provision hereof affect
the validity or enforceability of any other provision hereof.
THIS NOTE AND THE EMPLOYMENT AGREEMENT REPRESENT THE FINAL AGREEMENT
BETWEEN MAKER AND PAYEE AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR,
CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS BETWEEN MAKER AND PAYEE. THERE
ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN MAKER AND PAYEE.
/s/ WILLIAM E. HAYNES
WILLIAM E. HAYNES
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EXHIBIT 10.3
Charles F. Schugart
AMENDED AND RESTATED EMPLOYMENT AGREEMENT
This Employment Agreement (the "Agreement") is entered into as of
January 27, 1997 (the "Effective Date"), by and between The Safe Seal Company,
Inc., a Texas corporation, and Charles F. Schugart (the "Executive") and is
amended and restated as of October 15, 1997.
RECITAL:
WHEREAS, the Company desires to employ the Executive, and the
Executive agrees to work in the employ of the Company, and
WHEREAS, the parties hereto desire to set forth the terms of
Executive's Employment with the Company,
NOW, THEREFORE, the parties hereto agree as follows:
1. EMPLOYMENT. The Company hereby employs the Executive, and the
Executive hereby accepts Employment, on the terms and
conditions herein set forth.
2. DUTIES. (a) The Company will employ the Executive as Senior
Vice President and Chief Financial Officer ("CFO") of the
Company, (b) the Executive will serve in the Company's employ
in that position and (c) under the direction of the Board of
Directors of the Company (the "Board") or the Chief Executive
Officer of the Company (the "CEO"), the Executive shall
perform such duties, and have such powers, authority,
functions, duties and responsibilities for the Company and
corporations and other entities affiliated with the Company as
are commensurate and consistent with his employment in the
position of CFO. The Executive also shall have such additional
powers, authority, functions, duties and responsibilities as
may be assigned to him by the Board or the CEO; provided that,
without the Executive's written consent, those additional
powers, authority, functions, duties and responsibilities
shall not be inconsistent or interfere with, or detract from,
those herein vested in, or otherwise then being performed for
the Company by, the Executive. In the event of an increase in
the Executive's duties, the CEO shall review the Executive's
compensation and benefits to determine if an adjustment in
compensation and employee benefits commensurate with the
Executive's new duties is warranted, in accordance with the
Company's
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compensation policies and subject to approval by the
Compensation Committee of the Board (the "Compensation
Committee").
3. TERM OF EMPLOYMENT. Subject to the provisions of Section 8,
the term of the Executive's Employment hereunder shall
commence on February 3, 1997, for a continually renewing term
of two years commencing on that date and renewing each day
thereafter for an additional day without any further action by
either the Company or the Executive, it being the intention of
the parties that there shall be continuously a remaining term
of two years' duration of the Executive's Employment until an
event has occurred as described in, or one of the parties
shall have made an appropriate election pursuant to, the
provisions of Section 8. When the termination date of the
Executive's Employment shall have occurred and the Company
shall have paid to the Executive all the applicable amounts
that Section 9 provides the Company shall pay as a result of
the termination of the Executive's Employment, this Agreement
will terminate and have no further force or effect, except
that Sections 15 through 29 shall survive that termination
indefinitely and Section 11 shall survive for the period of
time provided for therein.
4. EXTENT OF SERVICES. The Executive shall not at any time during
his Employment engage in any other activities unless those
activities do not interfere materially with the Executive's
duties and responsibilities to the Company at that time. The
foregoing, however, shall not preclude the Executive from
engaging in appropriate civic, charitable, professional or
trade association activities or from serving on one or more
boards of directors of public companies, as long as such
activities and services do not conflict with his
responsibilities to the Company. In addition, it is realized
that the Executive has school aged children and from time to
time the Executive will attend activities in which the
children participate.
5. NO FORCED RELOCATION. The Executive shall not be required to
move his principal place of residence from the Houston, Texas
area or to perform regular duties that could reasonably be
expected to require either such move against his wish or to
spend amounts of time each week outside the Houston, Texas
area which are unreasonable in relation to the duties and
responsibilities of the Executive hereunder, and the Company
agrees that, if it requests the Executive to make such a move
and the Executive declines that request, (a) that declination
shall not constitute any basis for a termination of the
Executive's Employment and (b) no animosity or prejudice will
be held against Executive.
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6. COMPENSATION.
(a) SALARY. An annual base salary shall be payable to the
Executive by the Company as a guaranteed minimum amount
under this Agreement for each calendar year during the
period from the Effective Date to the termination date
of the Executive's Employment. That annual base salary
shall (i) accrue daily on the basis of a 365-day year,
(ii) be payable to the Executive in the intervals
consistent with the Company's normal payroll schedules
(but in no event less frequently than semi-monthly) and
(iii) be payable at an initial annual rate of $150,000.
The Executive's annual base salary shall not be
decreased, but shall be adjusted annually in each
December to reflect such adjustments, if any, as the CEO
determines appropriate based on the Executive's
performance during the most recent performance period,
in accordance with the Company's compensation policies
and subject to the approval of the Compensation
Committee. A failure of the Company to increase the
Executive's annual base salary would not constitute a
breach or violation of this Agreement by the Company.
(b) HIRING BONUS, STOCK AWARD AND STOCK OPTIONS. The Company
shall pay the Executive as of the Effective Date a
hiring bonus of $50,000. The Company shall pay the
Executive as of the Effective Date a stock award (the
"Stock Award") consisting of 50,000 shares (the "Award
Shares") of the Company's authorized and unissued common
stock (the "Common Stock"). The Company shall also grant
to the Executive effective as of the Effective Date (i)
a nonqualified stock option to purchase 50,000 shares of
Common Stock from the Company at an exercise price per
share equal to the IPO Price and (ii) a nonqualified
option to purchase 50,000 shares of Common Stock from
the Company at an exercise price per share equal to the
lesser of (A) $9.00 and (B) the IPO Price (each option
being an "Option"). The term of each Option shall be
seven years from the IPO Closing Date. Each Option will
become exercisable with respect to 25% of the shares of
Common Stock covered thereby on each of the IPO Closing
Date and the first three anniversaries of the IPO
Closing Date, subject to acceleration as provided in
this Section 6(b). Neither the number of shares of
Common Stock subject to, nor the exercise price
established by, either Option will be subject to any
adjustment by reason of any direct or indirect
combination of the outstanding Common Stock prior to the
IPO Closing Date. The Executive agrees that the Company
may exchange for the Options nonqualified stock options
having the same terms and issued pursuant to the
Innovative Valve Technologies, Inc. 1997 Incentive Plan
(the "1997 Incentive
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Plan"). If the Executive's Employment is terminated
under Section 8(a), (b) or (d) prior to the fifth
anniversary of the IPO Closing Date, the Options will,
notwithstanding any contrary provision of any Incentive
Plan or any award agreement evidencing the Options
thereunder, (i) become, to the extent not already
exercisable, exercisable in whole on the termination
date of the Executive's Employment and (ii) remain
exercisable at least until the date that is the second
anniversary of that termination date. If the Executive's
Employment is terminated under Section 8(e) prior to the
fifth anniversary of the IPO Closing Date, the Options
will, notwithstanding any contrary provision of any
Incentive Plan or any award agreement evidencing the
Options thereunder, (i) become, to the extent not
already exercisable, exercisable on each anniversary of
the IPO Closing Date, as provided above, and (ii) remain
exercisable (to the extent then and thereafter
exercisable) at least until the date that is the seventh
anniversary of the IPO Closing Date. If the Executive's
Employment is terminated under Section 8(c) or (f), the
Options, to the extent they are outstanding and
exercisable as of the time immediately prior to the
termination date of the Executive's Employment, will
remain outstanding and continue to be exercisable until
the date that is 10 days after that termination date (or
such later date, if any, as the Incentive Plan covering
the Options or any award agreement evidencing the
Options shall prescribe in the case of the termination
of the Executive's Employment under the circumstances
covered by Section 8(c) or (f), as the case may be).
(c) OTHER COMPENSATION. The Executive shall be entitled to
participate in all Compensation Plans from time to time
in effect while in the Employment of the Company,
regardless of whether the Executive is an Executive
Officer. All awards to the Executive under all Incentive
Plans shall take into account the Executive's positions
with and duties and responsibilities to the Company and
its subsidiaries and affiliates.
Without limiting the generality of the foregoing, the
Executive shall be eligible for an annual incentive
award in accordance with the Annual Incentive Plan (the
"AIP") currently being developed as a part of the 1997
Incentive Plan, or such other plan as may be substituted
for the AIP, and subject to the approval of the
Compensation Committee. The actual target amount of the
Executive's annual bonus under the AIP is currently
unknown, although the Company and the Executive
contemplate it will be 70% of the Executive's annual
salary under Section 6(a). The Executive's rights to
benefits at the termination of his Employment under the
Compensation Plans shall be governed by the provisions
of those plans.
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(d) EXPENSES. The Executive shall be entitled to prompt
reimbursement of all reasonable business expenses
incurred by him in the performance of his duties during
the term of this Agreement, subject to the presenting of
appropriate vouchers and receipts in accordance with the
Company's policies.
7. OTHER BENEFITS.
(a) EMPLOYEE BENEFITS AND PROGRAMS. During the term of this
Agreement, the Executive and the members of his
immediate family shall be entitled to participate in any
employee benefit plans or programs of the Company to the
extent that his position, tenure, salary, age, health
and other qualifications make him or them, as the case
may be, eligible to participate, subject to the rules
and regulations applicable thereto.
(b) MEMBERSHIPS. The Company shall pay membership fees for
the Executive to join professional organizations
mutually agreed to by the Executive and the CEO and
shall pay for licenses and fees required for maintaining
financial credentials as required to perform the duties
of CFO.
(c) LOANS TO PAY FEDERAL TAXES. The Company shall loan to
the Executive sufficient funds to pay all federal income
and Medicare tax liability ("Tax Liability") due by
reason of the issuance of the Award Shares to the
Executive (which liability is estimated to be 41.05% of
the "fair market value of the Award Shares," as defined
below). The fair market value of the Award Shares shall
be the fair market value of the Award Shares as of
January 27, 1997, as determined on or prior to April 10,
1997 by Hill Valuation Group, taking into account any
applicable discount for lack of marketability or
minority interest of such shares as of January 27, 1997.
Such loan shall be noninterest- bearing and shall be
evidenced by an unsecured promissory note (the "Tax
Note"). The Tax Note shall be prepayable at any time and
mature in full three years from the date any funds were
first advanced to the Executive under this Section 7(c).
If the Executive sells any Award Shares (or any
securities into which Award Shares have been converted)
for cash while the Tax Note remains outstanding and
unpaid, the Executive shall prepay the Tax Note within
five business days after the Executive receives the
proceeds from that sale in the amount equal to the
lesser of (i) the then unpaid balance of the Tax Note or
(ii) the cash proceeds, net of any applicable commission
and other sale expense and any applicable capital gain
or other income
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tax, the Executive receives from that sale. The Tax Note
shall be payable either in cash or, in the event that on
any date the Executive makes any payment thereon the
Common Stock is listed on the New York Stock Exchange or
another national securities exchange or is quoted
through the NASDAQ National Market System (the "NMS")
and the Executive desires to pay such loan by delivery
of shares of Common Stock, in shares of Common Stock
valued at the closing price of the Common Stock on (i)
the national securities exchange on which the Common
Stock is listed (or, if there is more than one, the
national securities exchange the Company has designated
as the principal market for the Common Stock) or (ii)
the NMS, as the case may be, on the then most recent day
on which the Common Stock traded on such national
securities exchange or the NMS, as the case may be;
provided, however, that in the event the IPO is not
completed, payment of the Tax Note may be made by the
Executive tendering all the Award Shares to the Company
in exchange for cancellation of the Tax Note.
.
(d) VACATION. The Executive shall be entitled to four weeks
of vacation leave with full pay during each year of this
Agreement (each such year being a 12-month period ending
on February 3). The times for such vacations shall be
selected by the Executive, subject to the prior approval
of the Company. The Executive may accrue up to eight
weeks of vacation time from year to year, but vacation
time otherwise shall not accrue from year to year.
8. TERMINATION. The Executive's Employment hereunder may be
terminated prior to the term provided for in Section 3 only
under the following circumstances:
(a) DEATH. The Executive's Employment shall terminate
automatically on the date of his death.
(b) DISABILITY. If a Disability occurs and is continuing,
the Executive's Employment shall terminate 30 days after
the Company gives the Executive written notice that it
intends to terminate his Employment on account of that
Disability or on such later date as the Company
specifies in such notice. If the Executive resumes the
performance of substantially all his duties under this
Agreement before the termination becomes effective, the
notice of intent to terminate shall be deemed to have
been revoked.
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(c) VOLUNTARY TERMINATION. The Executive may terminate his
Employment at any time and without Good Cause with 30
days' prior written notice to the Company.
(d) TERMINATION FOR GOOD CAUSE. The Executive may terminate
his Employment for Good Cause at any time within 180
days (730 days if the Good Cause is the occurrence of a
Change of Control) after the Executive becomes
consciously aware that the facts and circumstances
constituting that Good Cause exist and are continuing by
giving the Company 14 days' prior written notice that
the Executive intends to terminate his Employment for
Good Cause, which notice will identify that Good Cause;
provided, however, that if a Change of Control occurs,
the Executive shall not have Good Cause to terminate his
Employment solely by reason of the occurrence of that
event until 270 days after that occurrence.
(e) INVOLUNTARY TERMINATION. The Executive's Employment is
at will. The Company reserves the right to terminate the
Executive's Employment at anytime whatsoever, without
cause, with 14 days' prior written notice to the
Executive.
(f) INVOLUNTARY TERMINATION FOR CAUSE. The Company reserves
the right to terminate the Executive's Employment for
Cause. In the event that the Company determines that
Cause exists under Section 10(f)(i) for the termination
of the Executive's Employment, the Company shall provide
in writing (the "Notice of Cause") the basis for that
determination and the manner, if any, in which the
breach or neglect can be cured. If either the Company
has determined that the breach or neglect cannot be
cured, as set forth in the Notice of Cause, or has
advised the Executive in the Notice of Cause of the
manner in which the breach or neglect can be cured, but
the Executive fails to effect that cure within 30 days
after his receipt of the Notice of Cause, the Company
shall be entitled to give the Executive written notice
of his termination for Cause. In the event that the
Company determines that Cause exists under Section
10(f)(ii) for the termination of the Executive's
Employment, it shall be entitled to terminate the
Executive's Employment without providing a Notice of
Cause or any opportunity prior to that termination to
contest that determination. Any termination of the
Executive's Employment for Cause pursuant to this
Section 8(f) shall be effective immediately upon the
Executive's receipt of the Company's written notice of
that termination and the Cause therefor.
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9. SEVERANCE PAYMENTS. If the Executive's Employment is
terminated during the term of this Agreement, the Executive
shall be entitled to receive severance payments as follows:
(a) If the Executive's Employment is terminated under
Section 8(a), (b), (d) or (e), the Company will pay or
cause to be paid to the Executive (or, in the case of a
termination under Section (a), the beneficiary the
Executive has designated in writing to the Company to
receive payment pursuant to this Section 9(a) or, in the
absence of such designation, the Executive's estate):
(i) the Accrued Salary;
(ii) the Other Earned Compensation;
(iii) the Reimbursable Expenses; and
(iv) the Severance Benefit.
(b) If the Executive's Employment is terminated under
Section 8(c) or (f), the Company will pay or cause to be
paid to the Executive:
(i) the Accrued Salary determined as of the
termination date of the Executive's Employment;
(ii) the Other Earned Compensation; and
(iii) the Reimbursable Expenses.
(c) Any payments to which the Executive (or his designated
beneficiary or estate, if Section 8(a) applies) is
entitled pursuant to paragraph (i) and (iv) of
subsection (a) of this Section 9 or paragraph (i) of
subsection (b) of this Section 9, as applicable, will be
paid in a single lump sum within five days after the
termination date of the Executive's Employment;
provided, however, that if Section 8(a) applies and the
Executive's designated beneficiary or estate is the
beneficiary of one or more insurance policies purchased
by the Company and then in effect the proceeds of which
are payable to that beneficiary by reason of the
Executive's death, then (i) the Company, at its option,
may credit the amount of those proceeds, as and when
paid by the insurer to that beneficiary, against the
payment to which the Executive's designated beneficiary
or estate is entitled pursuant to paragraph (iv) of
subsection (a) of this Section 9 and, if it exercises
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that option, (ii) the payment otherwise due pursuant to
that paragraph (iv) will bear interest on the
outstanding balance thereof from and including the fifth
day after that termination date to the date of payment
by the insurer to that beneficiary at the rate of
interest specified in Section 29; and provided, further,
that if Section 8(b) applies and the Executive is the
beneficiary of disability insurance purchased by the
Company and then in effect, the Company, at its option,
may credit the proceeds of that insurance which are
payable to the Executive, valued at their present value
as of that termination date using the interest rate
specified in Section 29 and then in effect as the
discount rate, against the payment to which the
Executive is entitled pursuant to paragraph (iv) of
subsection (a) of this Section 9. Any payments to which
the Executive (or his designated beneficiary or estate,
if Section 8(a) applies) is entitled pursuant to
paragraphs (ii) and (iii) of subsection (a) or (b) of
this Section 9, as applicable, will be paid in a single
lump sum within five days after the termination date of
the Executive's Employment or as soon thereafter as is
administratively feasible, together with interest
accrued thereon from and including the fifth date after
that termination date to the date of payment at the rate
of interest specified in Section 29.
(d) Except as provided in Sections 13 and 23 and this
Section, the Company will have no payment obligations
under this Agreement to the Executive (or his designated
beneficiary or estate, if Section 8(a) applies) after
the termination date of the Executive's Employment.
10. DEFINITION OF TERMS. The following terms used in this
Agreement when capitalized shall have the following meanings:
(a) ACCRUED SALARY. "Accrued Salary" shall mean the salary
that has accrued, and the salary that would accrue
through and including the last day of the pay period in
which the termination date of the Executive's Employment
occurs, under Section 6(a) which has not been paid to
the Executive as of that termination date.
(b) ACQUIRING PERSON. "Acquiring Person" shall mean any
person who or which, together with all Affiliates and
Associates of such person, is or are the Beneficial
Owner of 15% or more of the shares of Common Stock then
outstanding; provided, however, that a person shall not
be or become an Acquiring Person if such person,
together with its Affiliates and Associates, shall
become the Beneficial Owner of 15% or more of the shares
of Common Stock then outstanding solely as a result of a
reduction in the number of shares of Common
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<PAGE>
Stock outstanding due to the repurchase of Common Stock
by the Company, unless and until such time as such
person or any Affiliate or Associate of such person
shall purchase or otherwise become the Beneficial Owner
of additional shares of Common Stock constituting 1% or
more of the then outstanding shares of Common Stock or
any other person (or persons) who is (or collectively
are) the Beneficial Owner of shares of Common Stock
constituting 1% or more of the then outstanding shares
of Common Stock shall become an Affiliate or Associate
of such person, unless, in either such case, such
person, together with all Affiliates and Associates of
such person, is not then the Beneficial Owner of 15% or
more of the shares of Common Stock then outstanding.
Notwithstanding anything in this definition of
"Acquiring Person" to the contrary, no Exempt Person
shall be deemed to be or become an "Acquiring Person" or
an Affiliate or Associate of any other person for
purposes of this definition.
(c) AFFILIATE. "Affiliate" has the meaning ascribed to that
term in Exchange Act Rule 12b-2.
(d) ASSOCIATE. "Associate" shall mean, with reference to any
person, (i) any corporation, firm, partnership,
association, unincorporated organization or other entity
(other than the Company or a subsidiary of the Company)
of which that person is an officer or general partner
(or officer or general partner of a general partner) or
is, directly or indirectly, the Beneficial Owner of 10%
or more of any class of its equity securities, (ii) any
trust or other estate in which that person has a
substantial beneficial interest or for or of which that
person serves as trustee or in a similar fiduciary
capacity and (iii) any relative or spouse of that
person, or any relative of that spouse, who has the same
home as that person.
(e) BENEFICIAL OWNER. A specified person shall be deemed the
"Beneficial Owner" of, and shall be deemed to
"beneficially own," any securities:
(i) of which that person or any of that person's
Affiliates or Associates, directly or indirectly,
is the "beneficial owner" (as determined pursuant
to Rule 13d-3 under the Securities Exchange Act of
1934, as amended (the "Exchange Act"), or
otherwise has the right to vote or dispose of,
including pursuant to any agreement, arrangement
or understanding (whether or not in writing);
provided, however, that a person shall not be
deemed the "Beneficial Owner" of, or to
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"beneficially own," any security under this
subparagraph (i) as a result of an agreement,
arrangement or understanding to vote that security
if that agreement, arrangement or understanding:
(A) arises solely from a revocable proxy or
consent given in response to a public (that is,
not including a solicitation exempted by Exchange
Act Rule 14a-2(b)(2)) proxy or consent
solicitation made pursuant to, and in accordance
with, the applicable provisions of the Exchange
Act; and (B) is not then reportable by such person
on Exchange Act Schedule 13D (or any comparable or
successor report);
(ii) which that person or any of that person's
Affiliates or Associates, directly or indirectly,
has the right or obligation to acquire (whether
that right or obligation is exercisable or
effective immediately or only after the passage of
time or the occurrence of an event) pursuant to
any agreement, arrangement or understanding
(whether or not in writing) or on the exercise of
conversion rights, exchange rights, other rights,
warrants or options, or otherwise; provided,
however, that a person shall not be deemed the
"Beneficial Owner" of, or to "beneficially own,"
securities tendered pursuant to a tender or
exchange offer made by that person or any of that
person's Affiliates or Associates until those
tendered securities are accepted for purchase or
exchange; or
(iii) which are beneficially owned, directly or
indirectly, by (A) any other person (or any
Affiliate or Associate thereof) with which the
specified person or any of the specified person's
Affiliates or Associates has any agreement,
arrangement or understanding (whether or not in
writing) for the purpose of acquiring, holding,
voting (except pursuant to a revocable proxy or
consent as described in the proviso to
subparagraph (i) of this definition) or disposing
of any voting securities of the Company or (B) any
group (as that term is used in Exchange Act Rule
13d-5(b)) of which that specified person is a
member;
provided, however, that nothing in this definition shall
cause a person engaged in business as an underwriter of
securities to be the "Beneficial Owner" of, or to
"beneficially own," any securities acquired through that
person's participation in good faith in a firm
commitment underwriting until the expiration of 40 days
after the
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date of that acquisition. For purposes of this
Agreement, "voting" a security shall include voting,
granting a proxy, acting by consent, making a request or
demand relating to corporate action (including, without
limitation, calling a stockholder meeting) or otherwise
giving an authorization (within the meaning of Section
14(a) of the Exchange Act) in respect of such security.
(f) CAUSE. "Cause" shall mean that the Executive has
(i) willfully breached or habitually neglected
(otherwise than by reason of injury or physical or
mental illness) the duties which he was required
to perform under the terms of this Agreement, or
(ii) committed act(s) of dishonesty, fraud or
misrepresentation or other act(s) of moral
turpitude that would prevent the effective
performance of his duties under this Agreement.
(g) CHANGE OF CONTROL. "Change of Control" shall mean the
occurrence of any of the following events that occurs
after the IPO Closing Date: (i) any person becomes an
Acquiring Person; (ii) a merger of the Company with or
into, or a sale by the Company of its properties and
assets substantially as an entirety to, another person
occurs and, immediately after that occurrence, any
person, other than an Exempt Person, together with all
Affiliates and Associates of such person, shall be the
Beneficial Owner of 15% or more of the total voting
power of the then outstanding Voting Shares of the
person surviving that transaction (in the case or a
merger or consolidation) or the person acquiring those
properties and assets substantially as an entirety; or
(iii) Philip Services Corp., together with all its
Affiliates (collectively, "Philip"), shall become the
Beneficial Owner of 50% or more of the shares of Common
Stock then outstanding.
(h) COMPANY. "Company" shall mean (i) The Safe Seal Company,
Inc., a Texas corporation, and (ii) any person that
assumes the obligations of "the Company" hereunder, by
operation of law, pursuant to Section 16 or otherwise.
(i) COMPENSATION PLAN. "Compensation Plan" shall mean any
compensation arrangement, plan, policy, practice or
program established, maintained or sponsored by the
Company or any subsidiary of the Company, or to which
the Company or any subsidiary of the Company
contributes, on behalf of any Executive
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<PAGE>
Officer or any member of the immediate family of any
Executive Officer by reason of his status as such, (i)
including (A) any "employee pension benefit plan" (as
defined in Section 3(2) of the Employee Retirement
Income Security Act of 1974, as amended ("ERISA")) or
other "employee benefit plan" (as defined in Section
3(3) of ERISA), (B) any other retirement or savings
plan, including any supplemental benefit arrangement
relating to any plan intended to be qualified under
Section 401(a) of the Internal Revenue Code of 1986, as
amended (the "Code"), or whose benefits are limited by
the Code or ERISA, (C) any "employee welfare plan" (as
defined in Section 3(1) of ERISA), (D) any arrangement,
plan, policy, practice or program providing for
severance pay, deferred compensation or insurance
benefit, (E) any Incentive Plan and (F) any arrangement,
plan, policy, practice or program (1) authorizing and
providing for the payment or reimbursement of expenses
attributable to air travel and hotel occupancy while
traveling on business for the Company or (2) providing
for the payment of business luncheon and country club
dues, long-distance charges, mobile phone monthly air
time or other recurring monthly charges or any other
fringe benefit, allowance or accommodation of
employment, but (ii) excluding any compensation
arrangement, plan, policy, practice or program to the
extent it provides for annual base salary.
(j) DISABILITY. "Disability" shall mean that the Executive
has been unable to perform his essential duties under
this Agreement for a period of at least six consecutive
months as a result of his incapacity due to injury or
physical or mental illness.
(k) EMPLOYMENT. "Employment" shall mean the salaried
employment of the Employee by the Company or a
subsidiary of the Company hereunder.
(l) EXECUTIVE OFFICER. "Executive Officer" shall mean any of
the chairman of the board, the chief executive officer,
the chief operating officer, the chief financial
officer, the president, any executive, regional or other
group or senior vice president or any vice president of
the Company.
(m) EXEMPT PERSON. "Exempt Person" shall mean: (i)(A) the
Company, any subsidiary of the Company, any employee
benefit plan of the Company or any subsidiary of the
Company and (B) any person organized, appointed or
established by the Company for or pursuant to the terms
of any such plan or for the purpose of funding any such
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<PAGE>
plan or funding other employee benefits for employees of
the Company or any subsidiary of the Company; (ii) the
Executive, any Affiliate of the Executive which the
Executive controls or any group (as that term is used in
Exchange Act Rule 13d-5(b)) of which the Executive or
any such Affiliate is a member; and (iii) so long as
Philip remains the Beneficial Owner of 15% or more of
the outstanding shares of Common Stock, Philip.
(n) GOOD CAUSE. "Good Cause" for the Employee's termination
of his Employment shall mean: (i) any decrease in the
annual base salary under Section 6(a) or any other
violation hereof in any material respect by the Company;
(ii) any material reduction in the Executive's
compensation under Section 6; (iii) the assignment to
the Employee of duties inconsistent in any material
respect with the Employee's then current positions
(including status, offices, titles and reporting
requirements), authority, duties or responsibilities or
any other action by the Company which results in a
material diminution in those positions, authority,
duties or responsibilities; (iv) William E. Haynes
ceases for any reason to be the CEO at any time prior to
the IPO Closing Date; or (v) the occurrence of a Change
of Control.
(o) INCENTIVE PLAN. "Incentive Plan" shall mean any
compensation arrangement, plan, policy, practice or
program established, maintained or sponsored by the
Company or any subsidiary of the Company, or to which
the Company or any subsidiary of the Company
contributes, on behalf of any Executive Officer and
which provides for incentive, bonus or other
performance-based awards of cash, securities, the
phantom equivalent of securities or other property,
including any stock option, stock appreciation right and
restricted stock plan, but excluding any plan intended
to qualify as a plan under any one or more of Sections
401(a), 401(k) or 423 of the Code.
(p) IPO. "IPO" shall mean the first time a registration
statement filed under the Securities Act of 1933, as
amended (the "Securities Act"), and respecting an
underwritten primary offering by Innovative Valve
Technologies, Inc. ("Invatec") of shares of its Common
Stock ("IVT Common Stock") is declared effective under
that act and the shares registered by that registration
statement are issued and sold by Invatec (otherwise than
pursuant to the exercise of any over-allotment option).
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<PAGE>
(q) IPO CLOSING DATE. "IPO Closing Date" shall mean the date
on which Invatec first receives payment for the shares
of IVT Common Stock it sells in the IPO.
(r) IPO PRICE. "IPO Price" shall mean the price per share at
which the IVT Common Stock is initially offered to the
public in the IPO.
(s) OTHER EARNED COMPENSATION. "Other Earned Compensation"
shall mean all the compensation earned by the Executive
prior to the termination date of his Employment as a
result of his Employment (including compensation the
payment of which has been deferred by the Executive, but
excluding Accrued Salary and compensation to be paid to
the Executive in accordance with the terms of any
Compensation Plan), together with all accrued interest
or earnings, if any, thereon, which has not been paid to
the Executive as of that date.
(t) REIMBURSABLE EXPENSES. "Reimbursable Expenses" shall
mean the expenses incurred by the Executive on or prior
to the termination date of his Employment which are to
be reimbursed to the Executive under Section 6(c) and
which have not been reimbursed to the Executive as of
that date.
(u) SEVERANCE BENEFIT. "Severance Benefit" shall mean the
sum of: (i) the amount equal to the product of (A) the
Applicable Monthly Salary Rate multiplied by (B) the
greater of (1) 24 and (2) the sum of 12 plus the number
(rounded to the next highest whole number, if not a
whole number) equal to the quotient of (a) the number of
whole and partial months during which the Executive has
remained in his Employment prior to the end of the month
in which the termination date of his Employment occurs
divided by (b) 12 (provided, however, that if the
Executive's Employment is terminated pursuant to Section
8(d) because a Change of Control has occurred, the sum
determined pursuant to this clause (2) shall not exceed
36); and (ii) the amount equal to the greater of (A)
twice the target amount of all incentive awards or
payments that would have been owing to the Executive for
the Company's fiscal year in which the termination date
of the Executive's Employment occurs were the
Executive's Employment to have continued to the end of
that fiscal year, regardless of the level of attainment
of the performance objectives for that fiscal year, (B)
twice the amount of the highest aggregate amount of all
incentive awards and payments made to the Executive for
any fiscal year of the Company prior to that fiscal year
or (C) if the Executive's Employment is terminated prior
to the payment of any incentive
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payment or award to the Executive for his services
hereunder during the Company's fiscal year ended
December 31, 1997, $245,000. As used herein, "Applicable
Monthly Salary Rate" shall mean 1/12th of the higher of
(i) the annual salary rate in effect under Section 6(a)
immediately prior to the termination date of the
Executive's Employment and (ii) the highest annual
salary rate theretofore in effect under Section 6(a) for
any period.
11. NON-COMPETITION CLAUSE. In addition to his obligations as an
executive and whether or not he remains an executive of the Company,
the Executive agrees that during the period commencing with the
Effective Date and ending upon the second anniversary of the
termination date of his Employment following termination of his
Employment under any of Section 8(b), (c), (e) or (f), he will not,
without the prior written consent of the Company, engage, directly
or indirectly, in any business that sells any industrial valves or
performs any industrial-valve services in competition with the
Company or any subsidiary of the Company in any area within any
"Territory" surrounding any service facility of the Company or any
subsidiary of the Company (determined as of that termination date).
For purposes of this Section 11, the "Territory" surrounding any
service facility will be: (i) the city, town or village in which
that service facility is located; (ii) the county or parish in which
that service facility is located; (iii) the counties or parishes
contiguous to the county or parish in which that service facility is
located; (iv) the area located within 50 miles of that service
facility; (v) the area located within 100 miles of that service
area; and (vi) the area in which that service facility regularly
provides services at the locations of its customers.
12. REGISTRATION RIGHTS; LEGEND.
(a) As used in this Section 12, the term "Registrable Stock" shall
mean the Award Shares and the shares of Common Stock issuable
on the exercise of the Options (the "Option Shares").
(b) As soon as is practicable following the IPO Closing Date, the
Company will file a registration statement on Form S-8 under
the Securities Act to register the Option Shares (which
registration statement may be the registration statement that
registers all the shares of Common Stock reserved or to be
available for issuance pursuant to the 1997 Incentive Plan).
(c) Prior to July 15, 1997, the Company will execute and deliver
to the Executive a registration rights agreement in
substantially the form delivered to the Executive.
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<PAGE>
(d) The Executive represents that the Registrable Stock and the
Options are being acquired for investment only and not with a
view toward the resale or distribution thereof. The Executive
is willing and able to bear the economic risk of an investment
in the Registrable Stock, has no need for liquidity with
respect thereto and is able to sustain a complete loss of his
investment. The Executive agrees and understands that the
shares of Registrable Stock are restricted securities as
defined in Rule 144 promulgated under the Securities Act and
may not be sold, assigned or transferred except in a
registered offering under the Securities Act and applicable
blue sky laws, or pursuant to an exemption therefrom. The
following legend shall be set forth on each certificate
representing the Award Shares:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, NOR
THE SECURITIES LAWS OF ANY STATE. SUCH SECURITIES CANNOT BE
OFFERED, SOLD, PLEDGED, HYPOTHECATED OR OTHERWISE TRANSFERRED
EXCEPT UPON (1) SUCH REGISTRATION, OR (2) DELIVERY TO THE
ISSUER OF THESE SECURITIES OF AN OPINION OF COUNSEL,
REASONABLY ACCEPTABLE TO THE ISSUER, THAT REGISTRATION IS NOT
REQUIRED FOR SUCH TRANSFER OR (3) SUBMISSION TO THE ISSUER OF
THESE SECURITIES OF OTHER EVIDENCE, REASONABLY ACCEPTABLE TO
THE ISSUER, TO THE EFFECT THAT ANY SUCH SALE, PLEDGE,
HYPOTHECATION OR TRANSFER SHALL NOT BE IN VIOLATION OF THE
SECURITIES ACT OF 1933, AS AMENDED, APPLICABLE STATE
SECURITIES LAWS OR ANY RULES OR REGULATIONS PROMULGATED
THEREUNDER."
13. TAX INDEMNITY. Should any of the payments of salary, other incentive
or supplemental compensation, benefits, allowances, awards,
payments, reimbursements or other perquisites, or any other payment
in the nature of compensation, singly, in any combination or in the
aggregate, that are provided for hereunder to be paid to or for the
benefit of the Executive be determined or alleged to be subject to
an excise or similar purpose tax pursuant to Section 4999 of the
Code, or any successor or other comparable federal, state or local
tax law by reason of being a "parachute payment" (within the meaning
of Section 280G of the Code), the Company shall pay to the Executive
such additional compensation as is necessary (after taking into
account all federal, state and local taxes payable by the Executive
as a result of the receipt of such additional compensation) to place
the Executive in the same after-tax position (including federal,
state and local taxes) he would have been in had no such excise or
similar purpose tax (or interest or penalties thereon) been paid or
incurred. The Company hereby agrees to pay such additional
compensation within the earlier to occur of (i) five business days
after the Executive notifies the Company that the
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Executive intends to file a tax return taking the position that such
excise or similar purpose tax is due and payable in reliance on a
written opinion of the Executive's tax counsel (such tax counsel to
be chosen solely by the Executive) that it is more likely than not
that such excise tax is due and payable or (ii) 24 hours of any
notice of or action by the Company that it intends to take the
position that such excise tax is due and payable. The costs of
obtaining the tax counsel opinion referred to in clause (i) of the
preceding sentence shall be borne by the Company, and as long as
such tax counsel was chosen by the Executive in good faith, the
conclusions reached in such opinion shall not be challenged or
disputed by the Company. If the Executive intends to make any
payment with respect to any such excise or similar purpose tax as a
result of an adjustment to the Executive's tax liability by any
federal, state or local tax authority, the Company will pay such
additional compensation by delivering its cashier's check payable in
such amount to the Executive within five business days after the
Executive notifies the Company of his intention to make such
payment. Without limiting the obligation of the Company hereunder,
the Executive agrees, in the event the Executive makes any payment
pursuant to the preceding sentence, to negotiate with the Company in
good faith with respect to procedures reasonably requested by the
Company which would afford the Company the ability to contest the
imposition of such excise or similar purpose tax; provided, however,
that the Executive will not be required to afford the Company any
right to contest the applicability of any such excise or similar
purpose tax to the extent that the Executive reasonably determines
(based upon the opinion of his tax counsel) that such contest is
inconsistent with the overall tax interests of the Executive.
14. LOCATIONS OF PERFORMANCE. The Executive's services shall be
performed primarily in the vicinity of Houston, Texas. The parties
acknowledge, however, that the Executive may be required to travel
in connection with the performance of his duties hereunder.
15. PROPRIETARY INFORMATION.
(a) The Executive agrees to comply fully with the Company's
policies relating to non-disclosure of the Company's trade
secrets and proprietary information and processes. Without
limiting the generality of the foregoing, the Executive will
not, during the term of his Employment, disclose any such
secrets, information or processes to any person, firm,
corporation, association or other entity for any reason or
purpose whatsoever except as may be required by law or
governmental agency or legal process, nor shall the Executive
make use of any such property for his own purposes or for the
benefit of any person, firm, corporation or other entity
(except the Company or any of its subsidiaries) under any
circumstances during or after the term of his Employment,
provided that after the term of his Employment this provision
shall not apply to secrets, information and processes that are
then
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<PAGE>
in the public domain (provided that the Executive was not
responsible, directly or indirectly, for such secrets,
information or processes entering the public domain without
the Company's consent).
(b) The Executive hereby sells, transfers and assigns to the
Company all the entire right, title and interest of the
Executive in and to all inventions, ideas, disclosures and
improvements, whether patented or unpatented, and
copyrightable material, to the extent (i) made or conceived by
the Executive solely or jointly with others during the term of
this Agreement and (ii) relating to or used or useful in the
design, manufacture, assembly, operation, maintenance, repair,
reconditioning or remanufacturing of batch or continuous
process systems or units and their component parts and related
equipment and tools, including, without limitation, industrial
valves and their component parts and packing materials and
other process system components (collectively "Valve
Technology"). The Executive shall communicate promptly and
disclose to the Company, in such form as the Company requests,
all information, details and data pertaining to the
aforementioned Valve Technology; and, whether during the term
hereof or thereafter, the Executive shall execute and deliver
to the Company such formal transfers and assignments and such
other papers and documents as may be required of the Executive
to permit the Company to file and prosecute any patent
applications relating to such Valve Technology and, as to
copyrightable material, to obtain copyright thereon.
(c) Trade secrets, proprietary information and processes shall not
be deemed to include information which is:
(i) known to the Executive at the time it is disclosed to
him;
(ii) publicly known (or becomes publicly known) without the
fault or negligence of Executive;
(iii) received from a third party without restriction and
without breach of this Agreement;
(iv) approved for release by written authorization of the
Company; or
(v) required to be disclosed by law or legal process;
provided, however, that in the event of a proposed
disclosure pursuant to this subsection (c)(v), the
Executive shall give the Company prior written notice
before such disclosure is made.
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<PAGE>
16. ASSIGNMENT. This Agreement may not be assigned by any party hereto;
provided that the Company may assign this Agreement, in connection
with a merger or consolidation involving the Company or a sale of
its business, properties and assets substantially as an entirety to
the surviving corporation or purchaser as the case may be, so long
as such assignee assumes the Company's obligations hereunder. The
Company shall require any successor (direct or indirect (including,
without limitation, by becoming the sole stockholder of the Company)
and whether by purchase, merger, consolidation, share exchange or
otherwise) to the business, properties and assets of the Company
substantially as an entirety expressly to assume and agree to
perform this Agreement in the same manner and to the same extent the
Company would have been required to perform it had no such
succession taken place. This Agreement shall be binding upon all
successors and assigns.
17. NOTICES. Any notice required or permitted to be given under this
Agreement shall be sufficient if in writing and sent by registered
mail to the Executive at his residence maintained on the Company's
records, or to the Company at its address at 14900 Woodham Drive,
Suite A-125, Houston, Texas, 77073, Attention: Chief Executive
Officer, or such other addresses as either party shall notify the
other in
accordance with the above procedure.
18. FORCE MAJEURE. Neither party shall be liable to the other for any
delay or failure to perform hereunder, which delay or failure is due
to causes beyond the control of said party, including, but not
limited to: acts of God; acts of the public enemy; acts of the
United States of America or any state, territory or political
subdivision thereof or of the District of Columbia; fires; floods;
epidemics; quarantine restrictions; strikes; or freight embargoes;
provided, however, that this Section 18 will not relieve the Company
of any of its payment obligations to the Executive under this
Agreement. Notwithstanding the foregoing provisions of this Section
18, in every case the delay or failure to perform must be beyond the
control and without the fault or negligence of the party claiming
excusable delay.
19. INTEGRATION. This Agreement represents the entire agreement and
understanding between the parties as to the subject matter hereof
and supersedes all prior or contemporaneous agreements whether
written or oral. No waiver, alteration or modification of any of the
provisions of this Agreement shall be binding unless in writing and
signed by duly authorized representatives of the parties hereto.
20. WAIVER. Failure or delay on the part of either party hereto to
enforce any right, power or privilege hereunder shall not be deemed
to constitute a waiver thereof. Additionally, a waiver by either
party of a breach of any promise herein by the other party shall not
operate as or be construed to constitute a waiver of any subsequent
breach by such other party.
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<PAGE>
21. SAVINGS CLAUSE. If any term, covenant or condition of this Agreement
or the application thereof to any person or circumstance shall to
any extent be invalid or unenforceable, the remainder of this
Agreement, or the application of such term, covenant or condition to
persons or circumstances other than those as to which it is held
invalid or unenforceable shall not be affected thereby, and each
term, covenant or condition of this Agreement shall be valid and
enforced to the fullest extent permitted by law.
22. AUTHORITY TO CONTRACT. The Company warrants and represents to the
Executive that the Company has full authority to enter into this
Agreement and to consummate the transactions contemplated hereby and
that this Agreement is not in conflict with any other agreement to
which the Company is a party or by which it may be bound. The
Company further warrants and represents to the Executive that the
individual executing this Agreement on behalf of the Company has the
full power and authority to bind the Company to the terms hereof and
has been authorized to do so in accordance with the Company's
articles or certificate of incorporation and bylaws.
23. PAYMENT OF EXPENSES. If at any time during the term hereof or
afterwards: (a) there should exist a dispute or conflict between the
Executive and the Company or another Person as to the validity,
interpretation or application of any term or condition hereof, or as
to the Executive's entitlement to any benefit intended to be
bestowed hereby, which is not resolved to the satisfaction of the
Executive, (b) the Executive must (i) defend the validity of this
Agreement or (ii) contest any determination by the Company
concerning the amounts payable (or reimbursable) by the Company to
the Executive or (c) the Executive must prepare responses to an
Internal Revenue Service ("IRS") audit of, or otherwise defend, his
personal income tax return for any year the subject of any such
audit, or an adverse determination, administrative proceedings or
civil litigation arising therefrom, which is occasioned by or
related to an audit by the IRS of the Company's income tax returns,
then the Company hereby unconditionally agrees: (a) on written
demand of the Company by the Executive, to provide sums sufficient
to advance and pay on a current basis (either by paying directly or
by reimbursing the Executive) not less than 30 days after a written
request therefor is submitted by the Executive, the Executive's out
of pocket costs and expenses (including attorney's fees, expenses of
investigation, travel, lodging, copying, delivery services and
disbursements for the fees and expenses of experts, etc.) incurred
by the Executive in connection with any such matter; (b) the
Executive shall be entitled, upon application to any court of
competent jurisdiction, to the entry of a mandatory injunction
without the necessity of posting any bond with respect thereto which
compels the Company to pay or advance such costs and expenses on a
current basis; and (c) the Company's obligations under this Section
23 will not be affected if the Executive is not the prevailing party
in the final resolution of any such matter unless it is determined
pursuant to Section 25 that, in the case of one or more of such
matters, the Executive has acted in bad faith or without a
reasonable basis for
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<PAGE>
his position, in which event and, then only with respect to such
matter or matters, the successful or prevailing party or parties
shall be entitled to recover from the Executive reasonable
attorneys' fees and other costs incurred in connection with that
matter or matters (including the amounts paid by the Company in
respect of that matter or matters pursuant to this Section 23), in
addition to any other relief to which it or they may be entitled.
24. REMEDIES. In the event of a breach by the Executive of Section 11 or
15 of this Agreement, in addition to other remedies provided by
applicable law, the Company will be entitled to issuance of a
temporary restraining order or preliminary injection enforcing its
rights under such Section.
25. ARBITRATION. Any and all disputes or controversies whether of law or
fact and of any nature whatsoever arising from or respecting this
Agreement shall be decided by arbitration by the American
Arbitration Association in accordance with its Commercial Rules,
except as modified herein.
(a) The arbitrator shall be selected as follows: in the event the
Company and the Executive agree on one arbitrator, the
arbitration shall be conducted by such arbitrator. In the
event the Company and the Executive do not so agree, the
Company and the Executive shall each select one independent,
qualified arbitrator, and the two arbitrators so selected
shall select the third arbitrator. The arbitrator(s) are
herein referred to as the "Panel." The Company reserves the
right to object to any individual arbitrator who shall be
employed by or affiliated with a competing organization.
(b) Arbitration shall take place at Houston, Texas, or any other
location mutually agreeable to the parties. At the request of
either party, arbitration proceedings will be conducted in the
utmost secrecy; in such case all documents, testimony and
records shall be received, heard and maintained by the Panel
in secrecy, available for inspection only by the Company or
the Executive and their respective attorneys and their
respective experts, who shall agree in advance and in writing
to receive all such information confidentially and to maintain
such information in secrecy until such information shall
become generally known. The Panel shall be able to award any
and all relief, including relief of an equitable nature. The
award rendered by the Panel may be enforceable in any court
having jurisdiction thereof.
(c) Reasonable notice of the time and place of arbitration shall
be given to all parties and any interested persons as shall be
required by law.
(d) The Company will pay all the fees and out-of-pocket expenses
of each arbitrator selected pursuant to this Section 25.
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<PAGE>
26. GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of Texas without regard to its
conflicts of law principles.
27. COUNTERPARTS. This Agreement may be executed in counterparts, each
of which shall be deemed an original, but all of which together
shall constitute one and the same instrument.
28. INDEMNIFICATION. The Executive shall be indemnified by the Company
to the maximum permitted by the law of the state of the Company's
incorporation, and by the law of the state of incorporation of any
subsidiary of the Company of which the Executive is a director or an
officer or employee, as the same may be in effect from time to time.
29. INTEREST. If any amounts required to be paid or reimbursed to the
Executive hereunder are not so paid or reimbursed at the times
provided herein (including amounts required to be paid by the
Company pursuant to Sections 6, 13 and 23), those amounts shall
accrue interest compounded daily at the annual percentage rate which
is three percentage points above the interest rate shown as the
Prime Rate in the Money Rates column in the then most recently
published edition of THE WALL STREET JOURNAL (Southwest Edition),
or, if such rate is not then so published, on at least a weekly
basis, the interest rate announced by Chase Manhattan Bank (or its
successor), from time to time, as its Base Rate (or prime lending
rate), from the date those amounts were required to have been paid
or reimbursed to the Executive until those amounts are finally and
fully paid or reimbursed; provided, however, that in no event shall
the amount of interest contracted for, charged or received hereunder
exceed the maximum non-usurious amount of interest allowed by
applicable law.
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement
as of the date hereinabove first written.
THE SAFE SEAL COMPANY, INC.
By: /s/ WILLIAM E. HAYNES
William E. Haynes
President and Chief Executive Officer
EXECUTIVE:
/s/ CHARLES F. SCHUGART
Charles F. Schugart
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PROMISSORY NOTE
$41,050.00 Houston, Texas January 27, 1997
FOR VALUE RECEIVED, CHARLES F. SCHUGART, an individual whose address is
14900 Woodham Dr., Suite A-125, Houston, Texas 77073 (hereinafter referred to as
"Maker'), promises to pay to the order of INNOVATIVE VALVE TECHNOLOGIES, INC., a
Delaware corporation (hereinafter referred to as "Invatec" or "Payee"), at 14900
Woodham Dr., Suite A-125, Houston, Texas 77073, or at such other place and to
such other party or parties as the owner and holder hereof may from time to time
designate in writing, the sum of FOURTY-ONE THOUSAND, FIFTY AND NO/100 DOLLARS
($41,050.00), in either (i) lawful money of the United States of America which
shall be legal tender for the payment of debts from time to time or (ii) shares
of common stock, par value $.001 per share, of Invatec ("Common Stock") if the
conditions set forth below are satisfied. No interest shall be due and payable
under this Note prior to the maturity hereof.
This Note shall be paid as follows: The entire outstanding principal
amount hereof shall mature and become due and payable, without notice or demand,
on December 31, 2000. This Note constitutes the Tax Note, as such term is
defined in the Employment Agreement entered into as of January 27, 1997, by and
between Maker and Payee (the "Employment Agreement"). As set forth in the
Employment Agreement, if the Maker sells any Award Shares (as such term is
defined in the Employment Agreement) or any securities into which Award Shares
have been converted for cash while this Note remains outstanding and unpaid,
Maker will prepay this Note within five business days after the Maker receives
the proceeds from that sale in the amount equal to the lesser of (i) the then
unpaid balance of this Note or (ii) the cash proceeds, net of any applicable
commission and other sale expense and any applicable capital gain or other
income tax, the Maker receives from that sale. This Note shall be payable either
in cash or, in the event that on any date the Maker makes any payment thereon
the Common Stock is listed on the New York Stock Exchange or another national
securities exchange or is quoted through the NASDAQ National Market System (the
"NMS") and the Maker desires to pay the principal amount outstanding under this
Note by delivery of shares of Common Stock, in shares of Common Stock valued at
the closing price of the Common Stock on (i) the national securities exchange on
which the Common Stock is listed (or, if there is more than one, the national
securities exchange the Company has designated as the principal market for the
Common Stock) or (ii) the NMS, as the case may be, on the then most recent day
on which the Common Stock traded on such national securities exchange or the
NMS, as the case may be; provided, however, that in the event the IPO (as such
term is defined in the Employment Agreement) is not completed, payment of this
Note may be made by the Maker tendering all the Award Shares to the Payee in
exchange for cancellation of this Note. The covenants and obligations of Maker
are intended by Maker and Payee to, and shall, be construed as covenants
independent of the covenants and agreements of Payee under the Employment
Agreement, and the existence of any claim or cause of action of Maker against
Payee, whether predicated on the Employment Agreement or otherwise, shall not
constitute a defense to payment hereunder.
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<PAGE>
Maker shall have the privilege to prepay at any time, and from time to
time, all or any part of the principal amount of this Note, without notice,
penalty or fee. Any check, draft, money order, or other instrument given in
payment of all or any portion of this Note may be accepted by Payee and handled
in collection in the customary manner, but the same shall not constitute payment
hereunder or diminish any rights of Payee except to the extent that actual cash
proceeds of such instruments are unconditionally received by Payee.
To the extent permitted by applicable law, Maker hereby waives demand or
presentment for payment of this Note, notice of nonpayment, protest, notice of
protest, suit, notice of intention of accelerate, notice of acceleration,
diligence or any notice of or defense on account of the extension of time of
payments or change in the method of payments.
All past due principal on this Note shall bear interest from and after
maturity until paid at a per annum rate equal to the lesser of (i) the Prime
Rate (as hereinafter defined), or (ii) the maximum nonusurious rate allowed
under applicable law. As used herein, the term "Prime Rate" means, on any day,
the prime rate for that day as determined from time to time by Texas Commerce
Bank National Association. Payments will be credited first to the accrued but
unpaid interest, and then to principal.
In the event default is made in the prompt payment of this Note when due
in accordance with the terms set forth above, and the same is placed in the
hands of an attorney for collection, or suit is brought on same, or the same is
collected through any judicial proceeding whatsoever, or if any action be had
hereon, then the undersigned agrees and promises to pay an additional amount as
reasonable, calculated and foreseeable attorneys' and collection fees incurred
by Payee in connection with enforcing its rights herein contemplated, all of
which amounts shall become part of the principal hereof.
No failure to exercise and no delay on the part of Payee in exercising
any power or right in connection herewith shall operate as a waiver thereof, nor
shall any single or partial exercise of any such right or power, or any
abandonment or discontinuance of steps to enforce such a right or power,
preclude any other or further exercise thereof or the exercise of any other
right or power. No course of dealing between Maker and Payee shall operate as a
waiver of any right of Payee. No modification or waiver of any provision of this
Note nor any consent to any departure therefrom shall in any event be effective
unless the same shall be in writing and signed by the person against whom
enforcement thereof is to be sought, and then such waiver or consent shall be
effective only in the specific instance and for the purpose for which given.
This Note has been executed and delivered and shall be construed in
accordance with and governed by the laws of the State of Texas and of the United
States of America applicable in Texas.
Whenever possible, each provision of this Note shall be interpreted in
such manner as to be effective, valid and enforceable under applicable law, but
if any provision of this Note shall be prohibited by, or invalid or
unenforceable under, applicable law, then (i) Maker and Payee shall
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<PAGE>
amend such provisions by the minimal amount necessary to bring such provisions
within the ambit of enforceability, and (ii) a court may, at the request of
either Maker or Payee, revise, reform or reconstruct such provisions in a manner
sufficient to cause them to be enforceable. In no event shall any prohibition
against, or the invalidity or unenforceability of, any provision hereof affect
the validity or enforceability of any other provision hereof.
THIS NOTE AND THE EMPLOYMENT AGREEMENT REPRESENT THE FINAL AGREEMENT
BETWEEN MAKER AND PAYEE AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR,
CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS BETWEEN MAKER AND PAYEE. THERE
ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN MAKER AND PAYEE.
/s/ CHARLES F. SCHUGART
CHARLES F. SCHUGART
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EXHIBIT 10.4
D. A. Rigas
AMENDED AND RESTATED EMPLOYMENT AGREEMENT
This Employment Agreement (the "Agreement") is entered into as of
May 6, 1997 (the "Effective Date"), by and between Innovative Valve
Technologies, Inc., a Delaware corporation (the "Company"), and D. A. Rigas (the
"Executive") and is amended and restated as of October 15, 1997.
RECITAL:
WHEREAS, the Company desires to employ the Executive, and the
Executive agrees to work in the employ of the Company, and
WHEREAS, the parties hereto desire to set forth the terms of
Executive's Employment with the Company,
NOW, THEREFORE, the parties hereto agree as follows:
1. EMPLOYMENT. The Company hereby employs the Executive, and the
Executive hereby accepts Employment, on the terms and
conditions herein set forth.
2. DUTIES. (a) The Company will employ the Executive as Senior
Vice President -- Technology & Marketing ("SVP") of the
Company, (b) the Executive will serve in the Company's employ
in that position and (c) under the direction of the Board of
Directors of the Company (the "Board") or the Chief Executive
Officer of the Company (the "CEO"), the Executive shall
perform such duties, and have such powers, authority,
functions, duties and responsibilities for the Company and
corporations and other entities affiliated with the Company as
are commensurate and consistent with his employment in the
position of SVP. The Executive also shall have such additional
powers, authority, functions, duties and responsibilities as
may be assigned to him by the Board or the CEO; provided that,
without the Executive's written consent, those additional
powers, authority, functions, duties and responsibilities
shall not be inconsistent or interfere with, or detract from,
those herein vested in, or otherwise then being performed for
the Company by, the Executive. In the event of an increase in
the Executive's duties, the CEO shall review the Executive's
compensation and benefits to determine if an adjustment in
compensation and employee benefits commensurate with the
Executive's new duties is warranted, in accordance with the
Company's
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compensation policies and subject to approval by the
Compensation Committee of the Board (the "Compensation
Committee").
3. TERM OF EMPLOYMENT. Subject to the provisions of Section 8,
the term of the Executive's Employment hereunder shall
commence on June 9, 1997, for a continually renewing term of
two years commencing on that date and renewing each day
thereafter for an additional day without any further action by
either the Company or the Executive, it being the intention of
the parties that there shall be continuously a remaining term
of two years' duration of the Executive's Employment until an
event has occurred as described in, or one of the parties
shall have made an appropriate election pursuant to, the
provisions of Section 8. When the termination date of the
Executive's Employment shall have occurred and the Company
shall have paid to the Executive all the applicable amounts
that Section 9 provides the Company shall pay as a result of
the termination of the Executive's Employment, this Agreement
will terminate and have no further force or effect, except
that Sections 15 through 29 shall survive that termination
indefinitely and Section 11 shall survive for the period of
time provided for therein.
4. EXTENT OF SERVICES. The Executive shall not at any time during
his Employment engage in any other activities unless those
activities do not interfere materially with the Executive's
duties and responsibilities to the Company at that time. The
foregoing, however, shall not preclude the Executive from
engaging in appropriate civic, charitable, professional or
trade association activities or from serving on one or more
boards of directors of public companies, as long as such
activities and services do not conflict with his
responsibilities to the Company.
5. RELOCATION. In consideration of the Executive's Employment
hereunder, the Executive will move his principal place of
residence from California to the Houston, Texas area. The
Executive estimates that the cost of this relocation will be
from $100,000 to $110,000, and the Company will, on the
Executive's submission of appropriate invoices and receipts,
pay directly or reimburse the Executive for all the reasonable
costs and expenses the Executive incurs in moving his
household from California to the Houston, Texas area, provided
that the Company's liability therefor shall not exceed
$130,000. The Company agrees to advance to the Executive prior
to the date of that moving up to $100,000 for which the
Executive may provide appropriate invoices or receipts at a
later date. Once the Executive has relocated his principal
place of residence to the Houston, Texas area, the Executive
shall not be required to move his principal place of residence
from the Houston, Texas area or to perform regular duties that
could reasonably be expected to require either such move
against his wish or to spend amounts of
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time each week outside the Houston, Texas area which are
unreasonable in relation to the duties and responsibilities of
the Executive hereunder, and the Company agrees that, if it
requests the Executive to make such a move and the Executive
declines that request, (a) that declination shall not
constitute any basis for a termination of the Executive's
Employment and (b) no animosity or prejudice will be held
against Executive.
6. COMPENSATION.
(a) SALARY. An annual base salary shall be payable to the
Executive by the Company as a guaranteed minimum amount
under this Agreement for each calendar year during the
period from the Effective Date to the termination date
of the Executive's Employment. That annual base salary
shall (i) accrue daily on the basis of a 365-day year,
(ii) be payable to the Executive in the intervals
consistent with the Company's normal payroll schedules
(but in no event less frequently than semi-monthly) and
(iii) be payable at an initial annual rate of $175,000.
The Executive's annual base salary shall not be
decreased, but shall be adjusted annually in each
December to reflect such adjustments, if any, as the CEO
determines appropriate based on the Executive's
performance during the most recent performance period,
in accordance with the Company's compensation policies
and subject to the approval of the Compensation
Committee. A failure of the Company to increase the
Executive's annual base salary would not constitute a
breach or violation of this Agreement by the Company.
(b) STOCK SALE AND STOCK OPTIONS. The Company shall sell to
the Executive, and the Executive shall purchase from the
Company, effective as of the Effective Date, 50,000
shares of the Company's authorized and unissued common
stock, par value $.001 per share (the "Common Stock"),
for a cash purchase price of $.001 per share. The
Company shall also grant to the Executive effective as
of the Effective Date (i) a nonqualified stock option to
purchase 50,000 shares of Common Stock from the Company
at an exercise price per share equal to the IPO Price
and (ii) a nonqualified option to purchase 50,000 shares
of Common Stock from the Company at an exercise price
per share equal to the lesser of (A) $9.00 and (B) the
IPO Price (each option being an "Option"). The term of
each Option shall be seven years from the IPO Closing
Date. Each Option will become exercisable with respect
to 25% of the shares of Common Stock covered thereby on
each of the IPO Closing Date and the first three
anniversaries of the IPO Closing Date, subject to
acceleration
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as provided in this Section 6(b). Neither the number of
shares of Common Stock subject to, nor the exercise
price established by, either Option will be subject to
any adjustment by reason of any direct or indirect
combination of the outstanding Common Stock prior to the
IPO Closing Date. The Executive agrees that the Options
shall be evidenced by award agreements under the
Innovative Valve Technologies, Inc. 1997 Incentive Plan
(the "1997 Incentive Plan"). If the Executive's
Employment is terminated under Section 8(a), (b) or (d)
prior to the fifth anniversary of the IPO Closing Date,
the Options will, notwithstanding any contrary provision
of any Incentive Plan or any award agreement evidencing
the Options thereunder, (i) become, to the extent not
already exercisable, exercisable in whole on the
termination date of the Executive's Employment and (ii)
remain exercisable at least until the date that is the
second anniversary of that termination date. If the
Executive's Employment is terminated under Section 8(e)
prior to the fifth anniversary of the IPO Closing Date,
the Options will, notwithstanding any contrary provision
of any Incentive Plan or any award agreement evidencing
the Options thereunder, (i) become, to the extent not
already exercisable, exercisable on each anniversary of
the IPO Closing Date, as provided above, and (ii) remain
exercisable (to the extent then and thereafter
exercisable) at least until the date that is the seventh
anniversary of the IPO Closing Date. If the Executive's
Employment is terminated under Section 8(c) or (f), the
Options, to the extent they are outstanding and
exercisable as of the time immediately prior to the
termination date of the Executive's Employment, will
remain outstanding and continue to be exercisable until
the date that is 10 days after that termination date (or
such later date, if any, as the Incentive Plan covering
the Options or any award agreement evidencing the
Options shall prescribe in the case of the termination
of the Executive's Employment under the circumstances
covered by Section 8(c) or (f), as the case may be).
(c) OTHER COMPENSATION. The Executive shall be entitled to
participate in all Compensation Plans from time to time
in effect while in the Employment of the Company,
regardless of whether the Executive is an Executive
Officer. All awards to the Executive under all Incentive
Plans shall take into account the Executive's positions
with and duties and responsibilities to the Company and
its subsidiaries and affiliates.
Without limiting the generality of the foregoing, the
Executive shall be eligible for an annual incentive
award in accordance with the Annual Incentive Plan (the
"AIP") currently being developed as a part of the 1997
Incentive Plan, or such other plan as may be substituted
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for the AIP, and subject to the approval of the
Compensation Committee. The actual target amount of the
Executive's annual bonus under the AIP is currently
unknown, although the Company and the Executive
contemplate it will be 70% of the Executive's annual
salary under Section 6(a). The Executive's rights to
benefits at the termination of his Employment under the
Compensation Plans shall be governed by the provisions
of those plans.
(d) EXPENSES. The Executive shall be entitled to prompt
reimbursement of all reasonable business expenses
incurred by him in the performance of his duties during
the term of this Agreement, subject to the presenting of
appropriate vouchers and receipts in accordance with the
Company's policies.
7. OTHER BENEFITS.
(a) EMPLOYEE BENEFITS AND PROGRAMS. During the term of this
Agreement, the Executive and the members of his
immediate family shall be entitled to participate in any
employee benefit plans or programs of the Company to the
extent that his position, tenure, salary, age, health
and other qualifications make him or them, as the case
may be, eligible to participate, subject to the rules
and regulations applicable thereto.
(b) COUNTRY CLUB MEMBERSHIPS. The Company shall pay the
first $15,000 of any initial membership fee for the
Executive to join a country club in the Houston, Texas
area, plus the monthly membership fee (up to $300 per
month) with respect thereto throughout the term of this
Agreement.
(c) BRIDGE LOANS. The Company shall extent an interest-free
loan to the Executive of up to $100,000 (the "Bridge
Loan") on (i) at least 10 business days prior written
notice from the Executive and (ii) execution by the
Executive of a mutually acceptable unsecured promissory
note evidencing the Bridge Loan. The entire amount of
the Bridge Loan shall mature and become due and payable
upon the earlier of (i) June 9, 1999 or (ii) termination
of the Executive's Employment hereunder for any reason.
At the option of the Executive or the Company, the
Bridge Loan may be repaid in accordance with the terms
hereof out of, or offset against, any bonus or other
amount payable to the Executive hereunder.. .
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(d) VACATION. The Executive shall be entitled to four weeks
of vacation leave with full pay during each year of this
Agreement (each such year being a 12-month period ending
on May 6). The times for such vacations shall be
selected by the Executive, subject to the prior approval
of the Company. The Executive may accrue up to eight
weeks of vacation time from year to year, but vacation
time otherwise shall not accrue from year to year.
(e) CAR ALLOWANCE. The Executive shall be furnished with an
automobile allowance in the aggregate amount of (i) $800
per month, for payment of all costs and expenses
incurred by the Executive relating to the purchase,
lease or operation of an automobile by the Executive
(other than fuel expenses), including but not limited to
oil, repair and maintenance costs and expenses, plus
(ii) the actual amount of the fuel expenses incurred by
the Executive in operating such automobile.
8. TERMINATION. The Executive's Employment hereunder may be
terminated prior to the term provided for in Section 3 only
under the following circumstances:
(a) DEATH. The Executive's Employment shall terminate
automatically on the date of his death.
(b) DISABILITY. If a Disability occurs and is continuing,
the Executive's Employment shall terminate 30 days after
the Company gives the Executive written notice that it
intends to terminate his Employment on account of that
Disability or on such later date as the Company
specifies in such notice. If the Executive resumes the
performance of substantially all his duties under this
Agreement before the termination becomes effective, the
notice of intent to terminate shall be deemed to have
been revoked.
(c) VOLUNTARY TERMINATION. The Executive may terminate his
Employment at any time and without Good Cause with 30
days' prior written notice to the Company.
(d) TERMINATION FOR GOOD CAUSE. The Executive may terminate
his Employment for Good Cause at any time within 180
days (730 days if the Good Cause is the occurrence of a
Change of Control) after the Executive becomes
consciously aware that the facts and circumstances
constituting that Good Cause exist and are continuing by
giving the Company 14 days' prior written notice that
the
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Executive intends to terminate his Employment for Good
Cause, which notice will identify that Good Cause;
provided, however, that if a Change of Control occurs,
the Executive shall not have Good Cause to terminate his
Employment solely by reason of the occurrence of that
event until 270 days after that occurrence.
(e) INVOLUNTARY TERMINATION. The Executive's Employment is
at will. The Company reserves the right to terminate the
Executive's Employment at anytime whatsoever, without
cause, with 14 days' prior written notice to the
Executive.
(f) INVOLUNTARY TERMINATION FOR CAUSE. The Company reserves
the right to terminate the Executive's Employment for
Cause. In the event that the Company determines that
Cause exists under Section 10(f)(i) for the termination
of the Executive's Employment, the Company shall provide
in writing (the "Notice of Cause") the basis for that
determination and the manner, if any, in which the
breach or neglect can be cured. If either the Company
has determined that the breach or neglect cannot be
cured, as set forth in the Notice of Cause, or has
advised the Executive in the Notice of Cause of the
manner in which the breach or neglect can be cured, but
the Executive fails to effect that cure within 30 days
after his receipt of the Notice of Cause, the Company
shall be entitled to give the Executive written notice
of his termination for Cause. In the event that the
Company determines that Cause exists under Section
10(f)(ii) for the termination of the Executive's
Employment, it shall be entitled to terminate the
Executive's Employment without providing a Notice of
Cause or any opportunity prior to that termination to
contest that determination. Any termination of the
Executive's Employment for Cause pursuant to this
Section 8(f) shall be effective immediately upon the
Executive's receipt of the Company's written notice of
that termination and the Cause therefor.
9. SEVERANCE PAYMENTS. If the Executive's Employment is
terminated during the term of this Agreement, the Executive
shall be entitled to receive severance payments as follows:
(a) If the Executive's Employment is terminated under
Section 8(a), (b), (d) or (e), the Company will pay or
cause to be paid to the Executive (or, in the case of a
termination under Section (a), the beneficiary the
Executive has designated in writing to the Company to
receive payment pursuant to this Section 9(a) or, in the
absence of such designation, the Executive's estate):
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(i) the Accrued Salary;
(ii) the Other Earned Compensation;
(iii) the Reimbursable Expenses; and
(iv) the Severance Benefit.
(b) If the Executive's Employment is terminated under
Section 8(c) or (f), the Company will pay or cause to be
paid to the Executive:
(i) the Accrued Salary determined as of the
termination date of the Executive's Employment;
(ii) the Other Earned Compensation; and
(iii) the Reimbursable Expenses.
(c) Any payments to which the Executive (or his designated
beneficiary or estate, if Section 8(a) applies) is
entitled pursuant to paragraph (i) and (iv) of
subsection (a) of this Section 9 or paragraph (i) of
subsection (b) of this Section 9, as applicable, will be
paid in a single lump sum within five days after the
termination date of the Executive's Employment;
provided, however, that if Section 8(a) applies and the
Executive's designated beneficiary or estate is the
beneficiary of one or more insurance policies purchased
by the Company and then in effect the proceeds of which
are payable to that beneficiary by reason of the
Executive's death, then (i) the Company, at its option,
may credit the amount of those proceeds, as and when
paid by the insurer to that beneficiary, against the
payment to which the Executive's designated beneficiary
or estate is entitled pursuant to paragraph (iv) of
subsection (a) of this Section 9 and, if it exercises
that option, (ii) the payment otherwise due pursuant to
that paragraph (iv) will bear interest on the
outstanding balance thereof from and including the fifth
day after that termination date to the date of payment
by the insurer to that beneficiary at the rate of
interest specified in Section 29; and provided, further,
that if Section 8(b) applies and the Executive is the
beneficiary of disability insurance purchased by the
Company and then in effect, the Company, at its option,
may credit the proceeds of that insurance which are
payable to the Executive, valued at their present value
as of that termination date using the interest rate
specified in Section 29 and then in effect as the
discount rate, against the payment to which the
Executive is
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entitled pursuant to paragraph (iv) of subsection (a) of
this Section 9. Any payments to which the Executive (or
his designated beneficiary or estate, if Section 8(a)
applies) is entitled pursuant to paragraphs (ii) and
(iii) of subsection (a) or (b) of this Section 9, as
applicable, will be paid in a single lump sum within
five days after the termination date of the Executive's
Employment or as soon thereafter as is administratively
feasible, together with interest accrued thereon from
and including the fifth date after that termination date
to the date of payment at the rate of interest specified
in Section 29.
(d) Except as provided in Sections 13 and 23 and this
Section, the Company will have no payment obligations
under this Agreement to the Executive (or his designated
beneficiary or estate, if Section 8(a) applies) after
the termination date of the Executive's Employment.
10. DEFINITION OF TERMS. The following terms used in this
Agreement when capitalized shall have the following meanings:
(a) ACCRUED SALARY. "Accrued Salary" shall mean the salary
that has accrued, and the salary that would accrue
through and including the last day of the pay period in
which the termination date of the Executive's Employment
occurs, under Section 6(a) which has not been paid to
the Executive as of that termination date.
(b) ACQUIRING PERSON. "Acquiring Person" shall mean any
person who or which, together with all Affiliates and
Associates of such person, is or are the Beneficial
Owner of 15% or more of the shares of Common Stock then
outstanding; provided, however, that a person shall not
be or become an Acquiring Person if such person,
together with its Affiliates and Associates, shall
become the Beneficial Owner of 15% or more of the shares
of Common Stock then outstanding solely as a result of a
reduction in the number of shares of Common Stock
outstanding due to the repurchase of Common Stock by the
Company, unless and until such time as such person or
any Affiliate or Associate of such person shall purchase
or otherwise become the Beneficial Owner of additional
shares of Common Stock constituting 1% or more of the
then outstanding shares of Common Stock or any other
person (or persons) who is (or collectively are) the
Beneficial Owner of shares of Common Stock constituting
1% or more of the then outstanding shares of Common
Stock shall become an Affiliate or Associate of such
person, unless, in either such case, such person,
together with all Affiliates and Associates of such
person, is not then the Beneficial Owner of 15% or more
of the shares of Common Stock
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then outstanding. Notwithstanding anything in this
definition of "Acquiring Person" to the contrary, no
Exempt Person shall be deemed to be or become an
"Acquiring Person" or an Affiliate or Associate of any
other person for purposes of this definition.
(c) AFFILIATE. "Affiliate" has the meaning ascribed to that
term in Exchange Act Rule 12b-2.
(d) ASSOCIATE. "Associate" shall mean, with reference to any
person, (i) any corporation, firm, partnership,
association, unincorporated organization or other entity
(other than the Company or a subsidiary of the Company)
of which that person is an officer or general partner
(or officer or general partner of a general partner) or
is, directly or indirectly, the Beneficial Owner of 10%
or more of any class of its equity securities, (ii) any
trust or other estate in which that person has a
substantial beneficial interest or for or of which that
person serves as trustee or in a similar fiduciary
capacity and (iii) any relative or spouse of that
person, or any relative of that spouse, who has the same
home as that person.
(e) BENEFICIAL OWNER. A specified person shall be deemed the
"Beneficial Owner" of, and shall be deemed to
"beneficially own," any securities:
(i) of which that person or any of that person's
Affiliates or Associates, directly or indirectly,
is the "beneficial owner" (as determined pursuant
to Rule 13d-3 under the Securities Exchange Act of
1934, as amended (the "Exchange Act"), or
otherwise has the right to vote or dispose of,
including pursuant to any agreement, arrangement
or understanding (whether or not in writing);
provided, however, that a person shall not be
deemed the "Beneficial Owner" of, or to
"beneficially own," any security under this
subparagraph (i) as a result of an agreement,
arrangement or understanding to vote that security
if that agreement, arrangement or understanding:
(A) arises solely from a revocable proxy or
consent given in response to a public (that is,
not including a solicitation exempted by Exchange
Act Rule 14a-2(b)(2)) proxy or consent
solicitation made pursuant to, and in accordance
with, the applicable provisions of the Exchange
Act; and (B) is not then reportable by such person
on Exchange Act Schedule 13D (or any comparable or
successor report);
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(ii) which that person or any of that person's
Affiliates or Associates, directly or indirectly,
has the right or obligation to acquire (whether
that right or obligation is exercisable or
effective immediately or only after the passage of
time or the occurrence of an event) pursuant to
any agreement, arrangement or understanding
(whether or not in writing) or on the exercise of
conversion rights, exchange rights, other rights,
warrants or options, or otherwise; provided,
however, that a person shall not be deemed the
"Beneficial Owner" of, or to "beneficially own,"
securities tendered pursuant to a tender or
exchange offer made by that person or any of that
person's Affiliates or Associates until those
tendered securities are accepted for purchase or
exchange; or
(iii) which are beneficially owned, directly or
indirectly, by (A) any other person (or any
Affiliate or Associate thereof) with which the
specified person or any of the specified person's
Affiliates or Associates has any agreement,
arrangement or understanding (whether or not in
writing) for the purpose of acquiring, holding,
voting (except pursuant to a revocable proxy or
consent as described in the proviso to
subparagraph (i) of this definition) or disposing
of any voting securities of the Company or (B) any
group (as that term is used in Exchange Act Rule
13d-5(b)) of which that specified person is a
member;
provided, however, that nothing in this definition shall
cause a person engaged in business as an underwriter of
securities to be the "Beneficial Owner" of, or to
"beneficially own," any securities acquired through that
person's participation in good faith in a firm
commitment underwriting until the expiration of 40 days
after the date of that acquisition. For purposes of this
Agreement, "voting" a security shall include voting,
granting a proxy, acting by consent, making a request or
demand relating to corporate action (including, without
limitation, calling a stockholder meeting) or otherwise
giving an authorization (within the meaning of Section
14(a) of the Exchange Act) in respect of such security.
(f) CAUSE. "Cause" shall mean that the Executive has
(i) willfully breached or habitually neglected
(otherwise than by reason of injury or physical or
mental illness) the duties
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which he was required to perform under the terms
of this Agreement, or
(ii) committed act(s) of dishonesty, fraud or
misrepresentation or other act(s) of moral
turpitude that would prevent the effective
performance of his duties under this Agreement.
(g) CHANGE OF CONTROL. "Change of Control" shall mean the
occurrence of any of the following events that occurs
after the IPO Closing Date: (i) any person becomes an
Acquiring Person; (ii) a merger of the Company with or
into, or a sale by the Company of its properties and
assets substantially as an entirety to, another person
occurs and, immediately after that occurrence, any
person, other than an Exempt Person, together with all
Affiliates and Associates of such person, shall be the
Beneficial Owner of 15% or more of the total voting
power of the then outstanding Voting Shares of the
person surviving that transaction (in the case or a
merger or consolidation) or the person acquiring those
properties and assets substantially as an entirety; or
(iii) Philip Services Corp., together with all its
Affiliates (collectively, "Philip"), shall become the
Beneficial Owner of 50% or more of the shares of Common
Stock then outstanding.
(h) COMPANY. "Company" shall mean (i) Innovative Valve
Technologies, Inc., a Delaware corporation, and (ii) any
person that assumes the obligations of "the Company"
hereunder, by operation of law, pursuant to Section 16
or otherwise.
(i) COMPENSATION PLAN. "Compensation Plan" shall mean any
compensation arrangement, plan, policy, practice or
program established, maintained or sponsored by the
Company or any subsidiary of the Company, or to which
the Company or any subsidiary of the Company
contributes, on behalf of any Executive Officer or any
member of the immediate family of any Executive Officer
by reason of his status as such, (i) including (A) any
"employee pension benefit plan" (as defined in Section
3(2) of the Employee Retirement Income Security Act of
1974, as amended ("ERISA")) or other "employee benefit
plan" (as defined in Section 3(3) of ERISA), (B) any
other retirement or savings plan, including any
supplemental benefit arrangement relating to any plan
intended to be qualified under Section 401(a) of the
Internal Revenue Code of 1986, as amended (the "Code"),
or whose benefits are limited by the Code or ERISA, (C)
any "employee welfare plan" (as defined in Section 3(1)
of ERISA), (D) any arrangement, plan, policy,
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practice or program providing for severance pay,
deferred compensation or insurance benefit, (E) any
Incentive Plan and (F) any arrangement, plan, policy,
practice or program (1) authorizing and providing for
the payment or reimbursement of expenses attributable to
air travel and hotel occupancy while traveling on
business for the Company or (2) providing for the
payment of business luncheon and country club dues,
long-distance charges, mobile phone monthly air time or
other recurring monthly charges or any other fringe
benefit, allowance or accommodation of employment, but
(ii) excluding any compensation arrangement, plan,
policy, practice or program to the extent it provides
for annual base salary.
(j) DISABILITY. "Disability" shall mean that the Executive
has been unable to perform his essential duties under
this Agreement for a period of at least six consecutive
months as a result of his incapacity due to injury or
physical or mental illness.
(k) EMPLOYMENT. "Employment" shall mean the salaried
employment of the Employee by the Company or a
subsidiary of the Company hereunder.
(l) EXECUTIVE OFFICER. "Executive Officer" shall mean any of
the chairman of the board, the chief executive officer,
the chief operating officer, the chief financial
officer, the president, any executive, regional or other
group or senior vice president or any vice president of
the Company.
(m) EXEMPT PERSON. "Exempt Person" shall mean: (i)(A) the
Company, any subsidiary of the Company, any employee
benefit plan of the Company or any subsidiary of the
Company and (B) any person organized, appointed or
established by the Company for or pursuant to the terms
of any such plan or for the purpose of funding any such
plan or funding other employee benefits for employees of
the Company or any subsidiary of the Company; (ii) the
Executive, any Affiliate of the Executive which the
Executive controls or any group (as that term is used in
Exchange Act Rule 13d-5(b)) of which the Executive or
any such Affiliate is a member; and (iii) so long as
Philip remains the Beneficial Owner of 15% or more of
the outstanding shares of Common Stock, Philip.
(n) GOOD CAUSE. "Good Cause" for the Employee's termination
of his Employment shall mean: (i) any decrease in the
annual base salary
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under Section 6(a) or any other violation hereof in any
material respect by the Company; (ii) any material
reduction in the Executive's compensation under Section
6; (iii) the assignment to the Employee of duties
inconsistent in any material respect with the Employee's
then current positions (including status, offices,
titles and reporting requirements), authority, duties or
responsibilities or any other action by the Company
which results in a material diminution in those
positions, authority, duties or responsibilities; or
(iv) the occurrence of a Change of Control.
(o) INCENTIVE PLAN. "Incentive Plan" shall mean any
compensation arrangement, plan, policy, practice or
program established, maintained or sponsored by the
Company or any subsidiary of the Company, or to which
the Company or any subsidiary of the Company
contributes, on behalf of any Executive Officer and
which provides for incentive, bonus or other
performance-based awards of cash, securities, the
phantom equivalent of securities or other property,
including any stock option, stock appreciation right and
restricted stock plan, but excluding any plan intended
to qualify as a plan under any one or more of Sections
401(a), 401(k) or 423 of the Code.
(p) IPO. "IPO" shall mean the first time a registration
statement filed under the Securities Act of 1933, as
amended (the "Securities Act"), and respecting an
underwritten primary offering by the Company of shares
of the Common Stock is declared effective under that act
and the shares registered by that registration statement
are issued and sold by the Company (otherwise than
pursuant to the exercise of any over-allotment option).
(q) IPO CLOSING DATE. "IPO Closing Date" shall mean the date
on which the Company first receives payment for the
shares of the Common Stock it sells in the IPO.
(r) IPO PRICE. "IPO Price" shall mean the price per share at
which the Common Stock is initially offered to the
public in the IPO.
.
(s) OTHER EARNED COMPENSATION. "Other Earned Compensation"
shall mean all the compensation earned by the Executive
prior to the termination date of his Employment as a
result of his Employment (including compensation the
payment of which has been deferred by the Executive, but
excluding Accrued Salary and compensation to be paid to
the Executive in accordance with the terms of any
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Compensation Plan), together with all accrued interest
or earnings, if any, thereon, which has not been paid to
the Executive as of that date.
(t) REIMBURSABLE EXPENSES. "Reimbursable Expenses" shall
mean the expenses incurred by the Executive on or prior
to the termination date of his Employment which are to
be reimbursed to the Executive under Section 6(c) and
which have not been reimbursed to the Executive as of
that date.
(u) SEVERANCE BENEFIT. "Severance Benefit" shall mean the
sum of: (i) the amount equal to the product of (A) the
Applicable Monthly Salary Rate multiplied by (B) the
greater of (1) 24 and (2) the sum of 12 plus the number
(rounded to the next highest whole number, if not a
whole number) equal to the quotient of (a) the number of
whole and partial months during which the Executive has
remained in his Employment prior to the end of the month
in which the termination date of his Employment occurs
divided by (b) 12 (provided, however, that if the
Executive's Employment is terminated pursuant to Section
8(d) because a Change of Control has occurred, the sum
determined pursuant to this clause (2) shall not exceed
36); and (ii) the amount equal to the greater of (A)
twice the target amount of all incentive awards or
payments that would have been owing to the Executive for
the Company's fiscal year in which the termination date
of the Executive's Employment occurs were the
Executive's Employment to have continued to the end of
that fiscal year, regardless of the level of attainment
of the performance objectives for that fiscal year, (B)
twice the amount of the highest aggregate amount of all
incentive awards and payments made to the Executive for
any fiscal year of the Company prior to that fiscal year
or (C) if the Executive's Employment is terminated prior
to the payment of any incentive payment or award to the
Executive for his services hereunder during the
Company's fiscal year ended December 31, 1997, $210,000.
As used herein, "Applicable Monthly Salary Rate" shall
mean 1/12th of the higher of (i) the annual salary rate
in effect under Section 6(a) immediately prior to the
termination date of the Executive's Employment and (ii)
the highest annual salary rate theretofore in effect
under Section 6(a) for any period.
11. NON-COMPETITION CLAUSE. In addition to his obligations as an
executive and whether or not he remains an executive of the Company,
the Executive agrees that during the period commencing with the
Effective Date and ending upon the second anniversary of the
termination date of his Employment following termination of his
Employment under any of Section 8(b), (c), (e) or (f), he will not,
without the prior written consent
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of the Company, engage, directly or indirectly, in any business that
sells any products or performs any services in competition with the
Company or any subsidiary of the Company in any area within any
"Territory" surrounding any service facility of the Company or any
subsidiary of the Company (determined as of that termination date).
For purposes of this Section 11, the "Territory" surrounding any
service facility will be: (i) the city, town or village in which
that service facility is located; (ii) the county or parish in which
that service facility is located; (iii) the counties or parishes
contiguous to the county or parish in which that service facility is
located; (iv) the area located within 50 miles of that service
facility; (v) the area located within 100 miles of that service
area; and (vi) the area in which that service facility regularly
provides services at the locations of its customers.
12. REGISTRATION RIGHTS; LEGEND.
(a) As used in this Section 12, the term "Registrable Stock" shall
mean the Award Shares and the shares of Common Stock issuable
on the exercise of the Options (the "Option Shares").
(b) As soon as is practicable following the IPO Closing Date, the
Company will file a registration statement on Form S-8 under
the Securities Act to register the Option Shares (which
registration statement may be the registration statement that
registers all the shares of Common Stock reserved or to be
available for issuance pursuant to the 1997 Incentive Plan).
(c) Prior to July 15, 1997, the Company will execute and deliver
to the Executive a registration rights agreement in
substantially the form delivered to the Executive.
(d) The Executive represents that the Registrable Stock and the
Options are being acquired for investment only and not with a
view toward the resale or distribution thereof. The Executive
is willing and able to bear the economic risk of an investment
in the Registrable Stock, has no need for liquidity with
respect thereto and is able to sustain a complete loss of his
investment. The Executive agrees and understands that the
shares of Registrable Stock are restricted securities as
defined in Rule 144 promulgated under the Securities Act and
may not be sold, assigned or transferred except in a
registered offering under the Securities Act and applicable
blue sky laws, or pursuant to an exemption therefrom. The
following legend shall be set forth on each certificate
representing the Award Shares:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE
NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, NOR THE SECURITIES LAWS OF ANY STATE. SUCH
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<PAGE>
SECURITIES CANNOT BE OFFERED, SOLD, PLEDGED, HYPOTHECATED OR
OTHERWISE TRANSFERRED EXCEPT UPON (1) SUCH REGISTRATION, OR
(2) DELIVERY TO THE ISSUER OF THESE SECURITIES OF AN OPINION
OF COUNSEL, REASONABLY ACCEPTABLE TO THE ISSUER, THAT
REGISTRATION IS NOT REQUIRED FOR SUCH TRANSFER OR (3)
SUBMISSION TO THE ISSUER OF THESE SECURITIES OF OTHER
EVIDENCE, REASONABLY ACCEPTABLE TO THE ISSUER, TO THE EFFECT
THAT ANY SUCH SALE, PLEDGE, HYPOTHECATION OR TRANSFER SHALL
NOT BE IN VIOLATION OF THE SECURITIES ACT OF 1933, AS AMENDED,
APPLICABLE STATE SECURITIES LAWS OR ANY RULES OR REGULATIONS
PROMULGATED THEREUNDER."
13. TAX INDEMNITY. Should any of the payments of salary, other incentive
or supplemental compensation, benefits, allowances, awards,
payments, reimbursements or other perquisites, or any other payment
in the nature of compensation, singly, in any combination or in the
aggregate, that are provided for hereunder to be paid to or for the
benefit of the Executive be determined or alleged to be subject to
an excise or similar purpose tax pursuant to Section 4999 of the
Code, or any successor or other comparable federal, state or local
tax law by reason of being a "parachute payment" (within the meaning
of Section 280G of the Code), the Company shall pay to the Executive
such additional compensation as is necessary (after taking into
account all federal, state and local taxes payable by the Executive
as a result of the receipt of such additional compensation) to place
the Executive in the same after-tax position (including federal,
state and local taxes) he would have been in had no such excise or
similar purpose tax (or interest or penalties thereon) been paid or
incurred. The Company hereby agrees to pay such additional
compensation within the earlier to occur of (i) five business days
after the Executive notifies the Company that the Executive intends
to file a tax return taking the position that such excise or similar
purpose tax is due and payable in reliance on a written opinion of
the Executive's tax counsel (such tax counsel to be chosen solely by
the Executive) that it is more likely than not that such excise tax
is due and payable or (ii) 24 hours of any notice of or action by
the Company that it intends to take the position that such excise
tax is due and payable. The costs of obtaining the tax counsel
opinion referred to in clause (i) of the preceding sentence shall be
borne by the Company, and as long as such tax counsel was chosen by
the Executive in good faith, the conclusions reached in such opinion
shall not be challenged or disputed by the Company. If the Executive
intends to make any payment with respect to any such excise or
similar purpose tax as a result of an adjustment to the Executive's
tax liability by any federal, state or local tax authority, the
Company will pay such additional compensation by delivering its
cashier's check payable in such amount to the Executive within five
business days after the Executive notifies the Company of his
intention to make such payment. Without limiting the obligation of
the Company hereunder, the Executive
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<PAGE>
agrees, in the event the Executive makes any payment pursuant to the
preceding sentence, to negotiate with the Company in good faith with
respect to procedures reasonably requested by the Company which
would afford the Company the ability to contest the imposition of
such excise or similar purpose tax; provided, however, that the
Executive will not be required to afford the Company any right to
contest the applicability of any such excise or similar purpose tax
to the extent that the Executive reasonably determines (based upon
the opinion of his tax counsel) that such contest is inconsistent
with the overall tax interests of the Executive.
14. LOCATIONS OF PERFORMANCE. The Executive's services shall be
performed primarily in the vicinity of Houston, Texas. The parties
acknowledge, however, that the Executive may be required to travel
in connection with the performance of his duties hereunder.
15. PROPRIETARY INFORMATION.
(a) The Executive agrees to comply fully with the Company's
policies relating to non-disclosure of the Company's trade
secrets and proprietary information and processes. Without
limiting the generality of the foregoing, the Executive will
not, during the term of his Employment, disclose any such
secrets, information or processes to any person, firm,
corporation, association or other entity for any reason or
purpose whatsoever except as may be required by law or
governmental agency or legal process, nor shall the Executive
make use of any such property for his own purposes or for the
benefit of any person, firm, corporation or other entity
(except the Company or any of its subsidiaries) under any
circumstances during or after the term of his Employment,
provided that after the term of his Employment this provision
shall not apply to secrets, information and processes that are
then in the public domain (provided that the Executive was not
responsible, directly or indirectly, for such secrets,
information or processes entering the public domain without
the Company's consent).
(b) The Executive hereby sells, transfers and assigns to the
Company all the entire right, title and interest of the
Executive in and to all inventions, ideas, disclosures and
improvements, whether patented or unpatented, and
copyrightable material, to the extent (i) made or conceived by
the Executive solely or jointly with others during the term of
this Agreement and (ii) relating to or used or useful in the
design, manufacture, assembly, operation, maintenance, repair,
reconditioning or remanufacturing of batch or continuous
process systems or units and their component parts and related
equipment and tools, including, without limitation, industrial
valves and their component parts and packing materials and
other process system components (collectively "Valve
Technology"). The Executive shall communicate
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<PAGE>
promptly and disclose to the Company, in such form as the
Company requests, all information, details and data pertaining
to the aforementioned Valve Technology; and, whether during
the term hereof or thereafter, the Executive shall execute and
deliver to the Company such formal transfers and assignments
and such other papers and documents as may be required of the
Executive to permit the Company to file and prosecute any
patent applications relating to such Valve Technology and, as
to copyrightable material, to obtain copyright thereon.
(c) Trade secrets, proprietary information and processes shall not
be deemed to include information which is:
(i) known to the Executive at the time it is disclosed to
him;
(ii) publicly known (or becomes publicly known) without the
fault or negligence of Executive;
(iii) received from a third party without restriction and
without breach of this Agreement;
(iv) approved for release by written authorization of the
Company; or
(v) required to be disclosed by law or legal process;
provided, however, that in the event of a proposed
disclosure pursuant to this subsection (c)(v), the
Executive shall give the Company prior written notice
before such disclosure is made.
16. ASSIGNMENT. This Agreement may not be assigned by any party hereto;
provided that the Company may assign this Agreement, in connection
with a merger or consolidation involving the Company or a sale of
its business, properties and assets substantially as an entirety to
the surviving corporation or purchaser as the case may be, so long
as such assignee assumes the Company's obligations hereunder. The
Company shall require any successor (direct or indirect (including,
without limitation, by becoming the sole stockholder of the Company)
and whether by purchase, merger, consolidation, share exchange or
otherwise) to the business, properties and assets of the Company
substantially as an entirety expressly to assume and agree to
perform this Agreement in the same manner and to the same extent the
Company would have been required to perform it had no such
succession taken place. This Agreement shall be binding upon all
successors and assigns.
17. NOTICES. Any notice required or permitted to be given under this
Agreement shall be sufficient if in writing and sent by registered
mail to the Executive at his residence maintained on the Company's
records, or to the Company at its address at
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<PAGE>
14900 Woodham Drive, Suite A-125, Houston, Texas, 77073, Attention:
Chief Executive Officer, or such other addresses as either party
shall notify the other in accordance with the above procedure.
18. FORCE MAJEURE. Neither party shall be liable to the other for any
delay or failure to perform hereunder, which delay or failure is due
to causes beyond the control of said party, including, but not
limited to: acts of God; acts of the public enemy; acts of the
United States of America or any state, territory or political
subdivision thereof or of the District of Columbia; fires; floods;
epidemics; quarantine restrictions; strikes; or freight embargoes;
provided, however, that this Section 18 will not relieve the Company
of any of its payment obligations to the Executive under this
Agreement. Notwithstanding the foregoing provisions of this Section
18, in every case the delay or failure to perform must be beyond the
control and without the fault or negligence of the party claiming
excusable delay.
19. INTEGRATION. This Agreement represents the entire agreement and
understanding between the parties as to the subject matter hereof
and supersedes all prior or contemporaneous agreements whether
written or oral. No waiver, alteration or modification of any of the
provisions of this Agreement shall be binding unless in writing and
signed by duly authorized representatives of the parties hereto.
20. WAIVER. Failure or delay on the part of either party hereto to
enforce any right, power or privilege hereunder shall not be deemed
to constitute a waiver thereof. Additionally, a waiver by either
party of a breach of any promise herein by the other party shall not
operate as or be construed to constitute a waiver of any subsequent
breach by such other party.
21. SAVINGS CLAUSE. If any term, covenant or condition of this Agreement
or the application thereof to any person or circumstance shall to
any extent be invalid or unenforceable, the remainder of this
Agreement, or the application of such term, covenant or condition to
persons or circumstances other than those as to which it is held
invalid or unenforceable shall not be affected thereby, and each
term, covenant or condition of this Agreement shall be valid and
enforced to the fullest extent permitted by law.
22. AUTHORITY TO CONTRACT. The Company warrants and represents to the
Executive that the Company has full authority to enter into this
Agreement and to consummate the transactions contemplated hereby and
that this Agreement is not in conflict with any other agreement to
which the Company is a party or by which it may be bound. The
Company further warrants and represents to the Executive that the
individual executing this Agreement on behalf of the Company has the
full power and authority to bind the Company to the terms hereof and
has been authorized to do so in accordance with the Company's
articles or certificate of incorporation and bylaws.
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<PAGE>
23. PAYMENT OF EXPENSES. If at any time during the term hereof or
afterwards: (a) there should exist a dispute or conflict between the
Executive and the Company or another Person as to the validity,
interpretation or application of any term or condition hereof, or as
to the Executive's entitlement to any benefit intended to be
bestowed hereby, which is not resolved to the satisfaction of the
Executive, (b) the Executive must (i) defend the validity of this
Agreement or (ii) contest any determination by the Company
concerning the amounts payable (or reimbursable) by the Company to
the Executive or (c) the Executive must prepare responses to an
Internal Revenue Service ("IRS") audit of, or otherwise defend, his
personal income tax return for any year the subject of any such
audit, or an adverse determination, administrative proceedings or
civil litigation arising therefrom, which is occasioned by or
related to an audit by the IRS of the Company's income tax returns,
then the Company hereby unconditionally agrees: (a) on written
demand of the Company by the Executive, to provide sums sufficient
to advance and pay on a current basis (either by paying directly or
by reimbursing the Executive) not less than 30 days after a written
request therefor is submitted by the Executive, the Executive's out
of pocket costs and expenses (including attorney's fees, expenses of
investigation, travel, lodging, copying, delivery services and
disbursements for the fees and expenses of experts, etc.) incurred
by the Executive in connection with any such matter; (b) the
Executive shall be entitled, upon application to any court of
competent jurisdiction, to the entry of a mandatory injunction
without the necessity of posting any bond with respect thereto which
compels the Company to pay or advance such costs and expenses on a
current basis; and (c) the Company's obligations under this Section
23 will not be affected if the Executive is not the prevailing party
in the final resolution of any such matter unless it is determined
pursuant to Section 25 that, in the case of one or more of such
matters, the Executive has acted in bad faith or without a
reasonable basis for his position, in which event and, then only
with respect to such matter or matters, the successful or prevailing
party or parties shall be entitled to recover from the Executive
reasonable attorneys' fees and other costs incurred in connection
with that matter or matters (including the amounts paid by the
Company in respect of that matter or matters pursuant to this
Section 23), in addition to any other relief to which it or they may
be entitled.
24. REMEDIES. In the event of a breach by the Executive of Section 11 or
15 of this Agreement, in addition to other remedies provided by
applicable law, the Company will be entitled to issuance of a
temporary restraining order or preliminary injection enforcing its
rights under such Section.
25. ARBITRATION. Any and all disputes or controversies whether of law or
fact and of any nature whatsoever arising from or respecting this
Agreement shall be decided by arbitration by the American
Arbitration Association in accordance with its Commercial Rules,
except as modified herein.
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<PAGE>
(a) The arbitrator shall be selected as follows: in the event the
Company and the Executive agree on one arbitrator, the
arbitration shall be conducted by such arbitrator. In the
event the Company and the Executive do not so agree, the
Company and the Executive shall each select one independent,
qualified arbitrator, and the two arbitrators so selected
shall select the third arbitrator. The arbitrator(s) are
herein referred to as the "Panel." The Company reserves the
right to object to any individual arbitrator who shall be
employed by or affiliated with a competing organization.
(b) Arbitration shall take place at Houston, Texas, or any other
location mutually agreeable to the parties. At the request of
either party, arbitration proceedings will be conducted in the
utmost secrecy; in such case all documents, testimony and
records shall be received, heard and maintained by the Panel
in secrecy, available for inspection only by the Company or
the Executive and their respective attorneys and their
respective experts, who shall agree in advance and in writing
to receive all such information confidentially and to maintain
such information in secrecy until such information shall
become generally known. The Panel shall be able to award any
and all relief, including relief of an equitable nature. The
award rendered by the Panel may be enforceable in any court
having jurisdiction thereof.
(c) Reasonable notice of the time and place of arbitration shall
be given to all parties and any interested persons as shall be
required by law.
(d) The Company will pay all the fees and out-of-pocket expenses
of each arbitrator selected pursuant to this Section 25.
26. GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of Texas without regard to its
conflicts of law principles.
27. COUNTERPARTS. This Agreement may be executed in counterparts, each
of which shall be deemed an original, but all of which together
shall constitute one and the same instrument.
28. INDEMNIFICATION. The Executive shall be indemnified by the Company
to the maximum permitted by the law of the state of the Company's
incorporation, and by the law of the state of incorporation of any
subsidiary of the Company of which the Executive is a director or an
officer or employee, as the same may be in effect from time to time.
29. INTEREST. If any amounts required to be paid or reimbursed to the
Executive hereunder are not so paid or reimbursed at the times
provided herein (including amounts required to be paid by the
Company pursuant to Sections 6, 13 and 23), those
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amounts shall accrue interest compounded daily at the annual
percentage rate which is three percentage points above the interest
rate shown as the Prime Rate in the Money Rates column in the then
most recently published edition of THE WALL STREET JOURNAL
(Southwest Edition), or, if such rate is not then so published, on
at least a weekly basis, the interest rate announced by Chase
Manhattan Bank (or its successor), from time to time, as its Base
Rate (or prime lending rate), from the date those amounts were
required to have been paid or reimbursed to the Executive until
those amounts are finally and fully paid or reimbursed; provided,
however, that in no event shall the amount of interest contracted
for, charged or received hereunder exceed the maximum non-usurious
amount of interest allowed by applicable law.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement
as of the date hereinabove first written.
INNOVATIVE VALVE TECHNOLOGIES, INC.
By:/s/ WILLIAM E. HAYNES
William E. Haynes
President and Chief Executive Officer
EXECUTIVE:
/s/ D. A. RIGAS
D. A. Rigas
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<PAGE>
PROMISSORY NOTE
$100,000.00 Houston, Texas October 31, 1997
FOR VALUE RECEIVED, D.A. RIGAS, an individual whose address is 14900
Woodham Dr., Suite A-125, Houston, Texas 77073 (hereinafter referred to as
"Maker'), promises to pay to the order of INNOVATIVE VALVE TECHNOLOGIES, INC., a
Delaware corporation (hereinafter referred to as "Payee"), at 14900 Woodham Dr.,
Suite A-125, Houston, Texas 77073, or at such other place and to such other
party or parties as the owner and holder hereof may from time to time designate
in writing, the sum of ONE HUNDRED THOUSAND AND NO/100 DOLLARS ($100,000.00), in
lawful money of the United States of America which shall be legal tender for the
payment of debts from time to time. No interest shall be due and payable under
this Note prior to the maturity hereof.
This Note shall be paid as follows: The entire outstanding principal
amount hereof shall mature and become due and payable, without notice or demand,
on the earlier of (i) June 9, 1999, or (ii) termination of Maker's employment
under that certain Employment Agreement entered into as of May 6, 1997, by and
between Maker and Payee (the "Employment Agreement"). This Note evidences the
Bridge Loan, as such term is defined in the Employment Agreement. As set forth
in the Employment Agreement, at the option of Maker or Payee, the indebtedness
evidenced hereby may be repaid in accordance with the terms hereof out of, or
offset against, any bonus or other amount payable to Maker under the Employment
Agreement. But for these rights of repayment and offset, Payee would not have
extended the Bridge Loan to Maker. The covenants and obligations of Maker are
intended by Maker and Payee to, and shall, be construed as covenants independent
of the covenants and agreements of Payee under the Employment Agreement, and the
existence of any claim or cause of action of Maker against Payee, whether
predicated on the Employment Agreement or otherwise, shall not constitute a
defense to payment hereunder.
Maker shall have the privilege to prepay at any time, and from time to
time, all or any part of the principal amount of this Note, without notice,
penalty or fee. Any check, draft, money order, or other instrument given in
payment of all or any portion of this Note may be accepted by Payee and handled
in collection in the customary manner, but the same shall not constitute payment
hereunder or diminish any rights of Payee except to the extent that actual cash
proceeds of such instruments are unconditionally received by Payee.
To the extent permitted by applicable law, Maker hereby waives demand or
presentment for payment of this Note, notice of nonpayment, protest, notice of
protest, suit, notice of intention of accelerate, notice of acceleration,
diligence or any notice of or defense on account of the extension of time of
payments or change in the method of payments.
All past due principal on this Note shall bear interest from and after
maturity until paid at a per annum rate equal to the lesser of (i) the Prime
Rate (as hereinafter defined), or (ii) the maximum nonusurious rate allowed
under applicable law. As used herein, the term "Prime Rate" means, on
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<PAGE>
any day, the prime rate for that day as determined from time to time by Texas
Commerce Bank National Association. Payments will be credited first to the
accrued but unpaid interest, and then to principal.
In the event default is made in the prompt payment of this Note when due
in accordance with the terms set forth above, and the same is placed in the
hands of an attorney for collection, or suit is brought on same, or the same is
collected through any judicial proceeding whatsoever, or if any action be had
hereon, then the undersigned agrees and promises to pay an additional amount as
reasonable, calculated and foreseeable attorneys' and collection fees incurred
by Payee in connection with enforcing its rights herein contemplated, all of
which amounts shall become part of the principal hereof.
No failure to exercise and no delay on the part of Payee in exercising
any power or right in connection herewith shall operate as a waiver thereof, nor
shall any single or partial exercise of any such right or power, or any
abandonment or discontinuance of steps to enforce such a right or power,
preclude any other or further exercise thereof or the exercise of any other
right or power. No course of dealing between Maker and Payee shall operate as a
waiver of any right of Payee. No modification or waiver of any provision of this
Note nor any consent to any departure therefrom shall in any event be effective
unless the same shall be in writing and signed by the person against whom
enforcement thereof is to be sought, and then such waiver or consent shall be
effective only in the specific instance and for the purpose for which given.
This Note has been executed and delivered and shall be construed in
accordance with and governed by the laws of the State of Texas and of the United
States of America applicable in Texas.
Whenever possible, each provision of this Note shall be interpreted in
such manner as to be effective, valid and enforceable under applicable law, but
if any provision of this Note shall be prohibited by, or invalid or
unenforceable under, applicable law, then (i) Maker and Payee shall amend such
provisions by the minimal amount necessary to bring such provisions within the
ambit of enforceability, and (ii) a court may, at the request of either Maker or
Payee, revise, reform or reconstruct such provisions in a manner sufficient to
cause them to be enforceable. In no event shall any prohibition against, or the
invalidity or unenforceability of, any provision hereof affect the validity or
enforceability of any other provision hereof.
THIS NOTE AND THE EMPLOYMENT AGREEMENT REPRESENT THE FINAL AGREEMENT
BETWEEN MAKER AND PAYEE AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR,
CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS BETWEEN MAKER AND PAYEE. THERE
ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN MAKER AND PAYEE.
/s/ D.A. RIGAS
D.A. RIGAS
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EXHIBIT 10.7
PROMISSORY NOTE
$ 30,600.00 Houston, Texas April 15, 1998
FOR VALUE RECEIVED, FRANK L. LOMBARD, an individual whose address is
14900 Woodham Dr., Suite A-125, Houston, Texas 77073 (hereinafter referred to as
"Maker'), promises to pay to the order of INNOVATIVE VALVE TECHNOLOGIES, INC., a
Delaware corporation (hereinafter referred to as "Invatec" or "Payee"), at 14900
Woodham Dr., Suite A-125, Houston, Texas 77073, or at such other place and to
such other party or parties as the owner and holder hereof may from time to time
designate in writing, the sum of THIRTY THOUSAND SIX HUNDRED AND NO/100 DOLLARS
($30,600.00), in either (i) lawful money of the United States of America which
shall be legal tender for the payment of debts from time to time or (ii) shares
of common stock, par value $.001 per share, of Invatec ("Common Stock") if the
conditions set forth below are satisfied. No interest shall be due and payable
under this Note prior to the maturity hereof.
This Note shall be paid as follows: The entire outstanding principal
amount hereof shall mature and become due and payable, without notice or demand,
on December 31, 2000. This Note constitutes the Tax Note, as such term is
defined in the Employment Agreement entered into as of April 15, 1998, by and
between Maker and Payee (the "Employment Agreement"). As set forth in the
Employment Agreement, if the Maker sells any Award Shares (as such term is
defined in the Employment Agreement) or any securities into which Award Shares
have been converted for cash while this Note remains outstanding and unpaid,
Maker will prepay this Note within five business days after the Maker receives
the proceeds from that sale in the amount equal to the lesser of (i) the then
unpaid balance of this Note or (ii) the cash proceeds, net of any applicable
commission and other sale expense and any applicable capital gain or other
income tax, the Maker receives from that sale. This Note shall be payable either
in cash or, in the event that on any date the Maker makes any payment thereon
the Common Stock is listed on the New York Stock Exchange or another national
securities exchange or is quoted through the NASDAQ National Market System (the
"NMS") and the Maker desires to pay the principal amount outstanding under this
Note by delivery of shares of Common Stock, in shares of Common Stock valued at
the closing price of the Common Stock on (i) the national securities exchange on
which the Common Stock is listed (or, if there is more than one, the national
securities exchange the Company has designated as the principal market for the
Common Stock) or (ii) the NMS, as the case may be, on the then most recent day
on which the Common Stock traded on such national securities exchange or the
NMS, as the case may be; provided, however, that in the event the IPO (as such
term is defined in the Employment Agreement) is not completed, payment of this
Note may be made by the Maker tendering all the Award Shares to the Payee in
exchange for cancellation of this Note. The covenants and obligations of Maker
are intended by Maker and Payee to, and shall, be construed as covenants
independent of the covenants and agreements of Payee under the Employment
Agreement, and the existence of any claim or cause of action of Maker against
Payee, whether predicated on the Employment Agreement or otherwise, shall not
constitute a defense to payment hereunder.
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Maker shall have the privilege to prepay at any time, and from time to
time, all or any part of the principal amount of this Note, without notice,
penalty or fee. Any check, draft, money order, or other instrument given in
payment of all or any portion of this Note may be accepted by Payee and handled
in collection in the customary manner, but the same shall not constitute payment
hereunder or diminish any rights of Payee except to the extent that actual cash
proceeds of such instruments are unconditionally received by Payee.
To the extent permitted by applicable law, Maker hereby waives demand or
presentment for payment of this Note, notice of nonpayment, protest, notice of
protest, suit, notice of intention of accelerate, notice of acceleration,
diligence or any notice of or defense on account of the extension of time of
payments or change in the method of payments.
All past due principal on this Note shall bear interest from and after
maturity until paid at a per annum rate equal to the lesser of (i) the Prime
Rate (as hereinafter defined), or (ii) the maximum nonusurious rate allowed
under applicable law. As used herein, the term "Prime Rate" means, on any day,
the prime rate for that day as determined from time to time by Texas Commerce
Bank National Association. Payments will be credited first to the accrued but
unpaid interest, and then to principal.
In the event default is made in the prompt payment of this Note when due
in accordance with the terms set forth above, and the same is placed in the
hands of an attorney for collection, or suit is brought on same, or the same is
collected through any judicial proceeding whatsoever, or if any action be had
hereon, then the undersigned agrees and promises to pay an additional amount as
reasonable, calculated and foreseeable attorneys' and collection fees incurred
by Payee in connection with enforcing its rights herein contemplated, all of
which amounts shall become part of the principal hereof.
No failure to exercise and no delay on the part of Payee in exercising
any power or right in connection herewith shall operate as a waiver thereof, nor
shall any single or partial exercise of any such right or power, or any
abandonment or discontinuance of steps to enforce such a right or power,
preclude any other or further exercise thereof or the exercise of any other
right or power. No course of dealing between Maker and Payee shall operate as a
waiver of any right of Payee. No modification or waiver of any provision of this
Note nor any consent to any departure therefrom shall in any event be effective
unless the same shall be in writing and signed by the person against whom
enforcement thereof is to be sought, and then such waiver or consent shall be
effective only in the specific instance and for the purpose for which given.
This Note has been executed and delivered and shall be construed in
accordance with and governed by the laws of the State of Texas and of the United
States of America applicable in Texas.
Whenever possible, each provision of this Note shall be interpreted in
such manner as to be effective, valid and enforceable under applicable law, but
if any provision of this Note shall be prohibited by, or invalid or
unenforceable under, applicable law, then (i) Maker and Payee shall
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amend such provisions by the minimal amount necessary to bring such provisions
within the ambit of enforceability, and (ii) a court may, at the request of
either Maker or Payee, revise, reform or reconstruct such provisions in a manner
sufficient to cause them to be enforceable. In no event shall any prohibition
against, or the invalidity or unenforceability of, any provision hereof affect
the validity or enforceability of any other provision hereof.
THIS NOTE AND THE EMPLOYMENT AGREEMENT REPRESENT THE FINAL AGREEMENT
BETWEEN MAKER AND PAYEE AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR,
CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS BETWEEN MAKER AND PAYEE. THERE
ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN MAKER AND PAYEE.
/s/ FRANK L. LOMBARD
FRANK L. LOMBARD
- 3 -
EXHIBIT 10.8
THIS VOTING TRUST AGREEMENT dated as of the 9th day of May, 1997 (this
"Agreement") is made by and among The Safe Seal Company, Inc., a Texas
corporation (the "Company"), Roger L. Miller, an individual resident in the
State of Texas ("Miller"), The Roger L. Miller Family Trust, a trust established
pursuant to the laws of the State of Texas (the "Miller Trust"), and
Computerized Accounting & Tax Services, Inc., a Florida corporation ("CATS";
each of CATS, Miller and the Miller Trust being hereinafter referred to as a
"Shareholder"), and Allwaste, Inc., a Delaware corporation ("AWI"), as Voting
Trustee (hereinafter referred to as the "Voting Trustee").
RECITALS
1. As of the date hereof, Miller, the Miller Trust and CATS own 150,000
shares, 2,850,000 shares and 367,230 shares, respectively, of the issued and
outstanding common stock, par value $.01 per share, of the Company ("Common
Stock").
2. Pending the sale or other disposition by each Shareholder of all the
Common Stock and all the shares of the common stock, par value, $.001 per share,
of Innovative Valve Technologies, Inc., a Delaware corporation (the "IVT Common
Stock") he or it owns or hereafter acquires, each Shareholder has agreed in the
Modification and Settlement Agreement dated as of May 9, 1997 by and among the
Company, each Shareholder and the other parties thereto (the "Modification
Agreement") that the right to vote all shares of Common Stock owned by each
Shareholder should be vested in AWI.
3. Capitalized terms used and not otherwise defined in this Agreement
have the meanings given to them in the Modification Agreement, and references in
this Agreement to "Articles" are to Articles of this Agreement unless otherwise
indicated.
AGREEMENT
In consideration of the premises and of the mutual undertakings of the
parties hereinafter set forth, a voting trust in respect of the Common Stock and
IVT Common Stock owned or hereafter acquired by each Shareholder is hereby
created and established, subject to the following terms and conditions, to all
and every one of which the parties hereto expressly assent and agree:
FIRST
Each Shareholder, concurrently with the execution and delivery of this
Agreement, will transfer and assign, or cause to be transferred and assigned, to
the Voting Trustee all the shares of Common Stock now owned by him or it and
will deposit or cause to be deposited hereunder, with the Voting Trustee, the
certificate or certificates for all those shares. Each of those certificates, if
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not registered in the name of the Voting Trustee, will be duly endorsed in
blank, or accompanied by proper instruments of assignment and transfer thereof
duly executed in blank, by the Shareholder in whose name it is registered.
SECOND
The Voting Trustee will from time to time issue in respect of the Common
Stock and IVT Common Stock so deposited hereunder a voting trust certificate or
voting trust certificates for a like or like aggregate number of shares of the
Common Stock or the IVT Common Stock, as the case may be. Each voting trust
certificate will (i) incorporate or refer to the provisions of this Agreement,
(ii) otherwise be substantially in the form of voting trust certificate attached
hereto as Annex A-1 (in the case of Common Stock represented thereby) or A-2 (in
the case of IVT Common Stock represented thereby), with the blanks appropriately
filled, and (iii) be registered in the name of the applicable Shareholder or in
such name as is specified in writing by the applicable Shareholder. Each voting
trust certificate so issued by the Voting Trustee is hereinafter referred to as
a "Voting Trust Certificate."
THIRD
Voting Trust Certificates will be signed by the Voting Trustee and will
be transferable only on the books of the Voting Trustee at the principal office
of the Voting Trustee in the City of Houston, Texas, in accordance with the
rules from time to time established for that purpose by the Voting Trustee. All
Voting Trust Certificates issued hereunder will be issued, received and held
subject to all the terms of this Agreement. Every person entitled or becoming
entitled to receive Voting Trust Certificates representing shares of Common
Stock or IVT Common Stock (collectively, "Deposited Shares") and their
transferees and assigns, upon accepting any of the Voting Trust Certificates
issued under this Agreement, shall become parties to and be bound by the
provisions of this Agreement with the same effect as if they had executed this
Agreement.
FOURTH
In case any Voting Trust Certificate becomes mutilated, lost, destroyed
or stolen, the Voting Trustee may, in its sole discretion, issue and deliver in
exchange therefor and on cancellation of the mutilated Voting Trust Certificate,
or in lieu of the lost, destroyed or stolen Voting Trust Certificate, a new
Voting Trust Certificate representing the same number and kind of Deposited
Shares, upon the production of evidence of such loss, destruction or theft,
satisfactory to the Voting Trustee, and upon receipt of indemnity satisfactory
to him and compliance with such other reasonable regulations as the Voting
Trustee may prescribe.
FIFTH
Each certificate for Common Stock or IVT Common Stock deposited with the
Voting Trustee will, if not registered in the name of the Voting Trustee, be
surrendered and cancelled and a new
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certificate therefor issued to the Voting Trustee. In all certificates issued in
the name of the Voting Trustee it will appear that they are issued pursuant to
this Agreement, and in the entry of such ownership in the stock ledger or books
of the Company or Invatec, as applicable, that fact will also be noted.
The Voting Trustee will hold, use and apply the shares of Common Stock
and IVT Common Stock deposited hereunder for the purposes of and in accordance
with this Agreement. The Voting Trustee may cause any stock at any time held by
it under this Agreement to be transferred to any name or names other than the
name of the Voting Trustee herein named, if such transfer becomes necessary by
reason of any change in the person holding the office of Voting Trustee as
hereinafter provided.
SIXTH
Each Shareholder represents that he or it is acquiring Voting Trust
Certificates under this Agreement for his or its own account and not with a view
to the distribution thereof, and consents that there will be placed on each
Voting Trust Certificate, or any substitution therefor, a legend stating in
substance that such Voting Trust Certificate has not been registered under the
Securities Act and may not be sold or transferred unless that sale or transfer
is in accordance with the registration requirements of the Securities Act, as at
the time amended, or unless some exemption from the registration requirements of
the Securities Act is available with respect thereto. The Voting Trustee will
deliver in exchange for any Voting Trust Certificate bearing such a legend a new
Voting Trust Certificate not bearing such a legend if the Voting Trustee has
received an opinion of counsel in form and substance satisfactory to him that
such legend is not required for purposes of the Securities Act, as at the time
amended.
SEVENTH
The Company and the Voting Trustee agree, and the Company will cause
Invatec to agree, that, so long as any Shareholder holds any Voting Trust
Certificate representing shares of Common Stock or IVT Common Stock, the Company
or Invatec, as applicable, will make all dividend and other payments and
distributions on those shares by check payable to the order of that Shareholder,
duly mailed or delivered to that Shareholder at his or its address set forth in
Article FOURTEENTH, or such other place (or by crediting such account) as that
Shareholder may designate in a written notice to the Company or Invatec, as
applicable, notwithstanding that those shares shall be registered in the name of
the Voting Trustee as provided in Article FIFTH and without any requirement for
the presentation or surrender of the certificates for those shares. If any
dividends or other distributions upon Deposited Shares are declared and paid or
made in voting securities of the Company or Invatec, each Shareholder holding
any Voting Trust Certificate representing those shares will deposit or cause to
be deposited hereunder, with the Voting Trustee, the certificates for such
securities, and such securities will be deemed to have been deposited under the
terms of this Agreement; PROVIDED that the Voting Trustee will, within 30 days
after the receipt by it of such securities, issue an additional Voting Trust
Certificate or Voting Trust Certificates to that Shareholder to reflect the
rights of that
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Shareholder in such securities. If any Shareholder obtains the right to receive
shares of IVT Common Stock, pursuant to the Acquisition Transaction or
otherwise, that Shareholder will deposit or cause to be deposited hereunder and,
in the case of shares of IVT Common Stock to be acquired from Invatec, hereby
directs Invatec to deposit hereunder, with the Voting Trustee, the certificates
for those shares, and those shares will be deemed to have been deposited under
the terms of this Agreement; PROVIDED, that the Voting Trustee will, within 30
days after the receipt by it of those shares, issue an additional Voting Trust
Certificate or Voting Trust Certificates to that Shareholder to reflect the
rights of that Shareholder in those shares.
EIGHTH
The Voting Trustee may adopt its own rules of procedure and may vote or
act by its proxy given to any person or persons or to its or their substitute or
substitutes. If the Voting Trustee is a stockholder of the Company or Invatec in
any capacity otherwise than as Voting Trustee under this Agreement, or controls
or holds with power to vote stock in the Company or Invatec otherwise than under
this Agreement, it will be able to vote all the stock which it owns or controls
or holds with power to vote otherwise than under this Agreement, and will not
have any of its rights, titles or interests with respect to or on account of
such stock so owned, controlled or held with power to vote impaired or limited
in any way because it is the Voting Trustee under this Agreement.
NINTH
THE VOTING TRUSTEE ASSUMES NO LIABILITY AS A STOCKHOLDER OF EITHER THE
COMPANY OR INVATEC, ITS INTEREST HEREUNDER BEING THAT OF TRUSTEE MERELY. IN
VOTING THE STOCK REPRESENTED BY THE STOCK CERTIFICATES HELD BY IT HEREUNDER
(WHICH IT MAY DO BY PROXY TO ANY PERSON OR PERSONS OR TO ITS OR THEIR SUBSTITUTE
OR SUBSTITUTES, THE VOTING TRUSTEE WILL VOTE AND ACT IN ALL MATTERS IN
ACCORDANCE WITH ITS JUDGMENT, BUT IT ASSUMES NO RESPONSIBILITY IN RESPECT OF ANY
ACTION TAKEN BY IT OR TAKEN IN PURSUANCE OF ITS VOTE SO CAST, AND THE VOTING
TRUSTEE WILL NOT INCUR ANY RESPONSIBILITY AS TRUSTEE OR OTHERWISE BY REASON OF
ANY ERROR OR MISTAKE OF JUDGMENT, OR OF ANY MATTER OR THING DONE OR SUFFERED OR
OMITTED TO BE DONE UNDER THIS AGREEMENT BY REASON OF THE VOTING TRUSTEE'S
ORDINARY NEGLIGENCE OR OTHERWISE, EXCEPT FOR ITS OWN GROSS NEGLIGENCE, WILLFUL,
WANTON MISCONDUCT OR MALFEASANCE.
The reasonable expenses made or incurred by the Voting Trustee in the
administration of its trust hereunder, including particularly, but not
exclusively, all taxes or other governmental charges involved in the transfer or
issuance of any stock or Voting Trust Certificates or in respect of the
ownership of the stock held by it as trustee or in respect of any dividends,
distributions or other rights in respect of such stock and the expenses of
printing the Voting Trust Certificates, and the reasonable fees and expenses of
any special counsel retained by the Voting Trustee in connection with the
performance by the Voting Trustee of its duties hereunder, shall be borne and
promptly paid by the Company, and the Company hereby agrees to pay or advance
the same forthwith from time to time promptly following the demand of the Voting
Trustee. No provision of this Agreement shall require the Voting Trustee to
advance or expend or risk its own funds or otherwise incur personal
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financial liability in the performance of any of its duties or in the exercise
of any of its rights or powers if there is reasonable ground for believing that
the repayment of such funds or adequate indemnity against such risk or liability
is not reasonably assured to it. The Voting Trustee will serve hereunder without
compensation.
TENTH
Until the termination of this Agreement and the actual delivery of stock
certificates in exchange for Voting Trust Certificates hereunder, the Voting
Trustee will possess and be entitled in its sole discretion, not subject to any
review, to exercise in person or by its proxy eligible under Article EIGHTH, in
respect of any and all shares of Common Stock or IVT Common Stock at any time
deposited under this Agreement, all rights and powers of every name and nature,
including the right to vote on or to consent to (or withhold consent from) any
and every act of the Company and Invatec including, without limitation, the
Acquisition Transaction; PROVIDED, HOWEVER, that the Voting Trustee is
authorized to, and shall, vote the shares of Common Stock deposited under this
Agreement in favor of the Acquisition Transaction.
Except as provided in the first paragraph of this Article TENTH, the
Voting Trustee is specifically authorized in the exercise of its sole and
absolute discretion in respect of any and all shares of Common Stock or IVT
Common Stock at any time deposited under this Agreement to vote with respect to:
any increase, reduction or reclassification of the capital stock of, or any
reduction of the capital of, the Company or Invatec; any changes or amendments
in or to the articles or certificate of incorporation or the bylaws of the
Company or Invatec; the sale or disposal in any manner of all or any part or
parts of the property, assets or business of the Company or Invatec; any merger
or consolidation of the Company or Invatec with any other corporation; the
filing or making of any petition under the Federal Bankruptcy Code or any other
act of similar character; and any reorganization of the Company or Invatec, and
any action with respect to any of the foregoing which any stockholder might
lawfully take, and upon any such increase, reduction or reclassification of
stock, reduction of capital or merger, consolidation or reorganization becoming
effective, to make such surrender of Common Stock or IVT Common Stock deposited
under this Agreement as, in its judgment, may be proper or expedient, and to
receive and hold under this Agreement in lieu thereof any and all stock issued
in exchange for such surrendered stock, and thereafter, in the discretion of the
Voting Trustee, it may receive and appropriately issue Voting Trust Certificates
against other stock issued pursuant to any such corporate change. For all
purposes of this Agreement, any such stock so received by the Voting Trustee in
exchange for stock so surrendered which constitutes "voting securities" will
take the place of the stock so surrendered by it, but any such stock which does
not constitute "voting securities" shall be released from the terms hereof and,
as to the shares thereof, the trust created hereby shall terminate. As used
herein, "voting securities" shall mean any security presently entitling the
owner or holder thereof to vote in the direction or management of the affairs of
a person or entity, or any security issued under or pursuant to any trust,
agreement or arrangement whereby a trustee or trustees or agent or agents for
the owner or holder of such security are presently entitled to vote in the
direction or management of the affairs of a person or entity.
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ELEVENTH
Except as provided below, AWI will at all times be the Voting Trustee.
The Voting Trustee may at any time resign by filing at the principal executive
offices of Invatec and the Company in the City of Houston, Texas, its
resignation in writing, and that resignation shall be effective upon the
appointment of a successor Voting Trustee and such successor's acceptance of
such appointment.
In the event of the resignation or inability to act of the Voting
Trustee, a vacancy shall be deemed to exist in its office, and that vacancy
shall be filled promptly by the appointment of a successor in the manner
hereinafter provided.
Any successor to the Voting Trustee (and such successor's successor and
so on in line of succession) will be appointed by Invatec by an instrument
signed by or on behalf of Invatec and filed at the principal executive offices
of Invatec and the Company in the City of Houston, Texas; PROVIDED, HOWEVER,
that any such successor, in order to qualify hereunder, must be designated as
the Voting Trustee by a majority of the board of directors of Invatec.
In addition, Invatec may remove the Voting Trustee and its respective
successor or successors by an instrument signed by or on behalf of Invatec and
filed at the principal executive offices of Invatec and the Company in the City
of Houston, Texas; PROVIDED, HOWEVER, that in order to be effective, any
instrument of removal must also appoint a successor Voting Trustee who or which
is qualified to serve hereunder in accordance with the provisions of the
immediately preceding paragraph of this Article ELEVENTH and who or which has
accepted such appointment.
As promptly as possible after the filing at the principal executive
offices of Invatec and the Company of any such instrument of resignation or
removal of any Voting Trustee or any such instrument appointing a Voting
Trustee, the Company or Invatec shall mail notice thereof to each Shareholder.
Any successor Voting Trustee appointed as herein provided shall indicate
his or its acceptance of such appointment by signing the counterpart of this
Agreement on file at the principal executive offices of the Company and Invatec
in the City of Houston, Texas, and thereupon such successor will be vested with
all the rights, powers, duties and immunities herein conferred upon the Voting
Trustee as though such successor had been originally a party to this Agreement
as Voting Trustee. The term "Voting Trustee" as used in this Agreement and in
the Voting Trust Certificates issued hereunder shall apply to and mean the party
originally signatory hereto as Voting Trustee and its successors.
TWELFTH
This Agreement will terminate on the first to occur of (i) the IPO
Closing Date, (ii) the Abandonment Date or (iii) January 1, 1998; provided,
however, that if January 1, 1998 is the first of those dates to occur, but
Invatec has filed a registration statement relating to the IPO under the
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Securities Act on or before December 31, 1997 and is then pursuing the IPO, this
Agreement will continue in full force and effect until the first to occur of (i)
the IPO Closing Date, (ii) the Abandonment Date, (iii) the date Invatec
withdraws that registration statement pursuant to Rule 477 under the Securities
Act, (iv) the date that registration statement is abandoned pursuant to Rule 479
under the Securities Act or (v) May 31, 1998.
On the due presentation to the Voting Trustee of evidence satisfactory
to it of the sale or transfer by any Shareholder to any person who is not a
Shareholder or (a) any immediate family member of or any entity controlled
directly or indirectly by Miller or any immediate family member of Miller, (b)
any beneficiary of the Miller Trust or any immediate family member of or any
entity controlled directly or indirectly by any such beneficiary or (c) any
subsidiary or parent corporation of CATS of any Voting Trust Certificate, the
shares of stock represented by such Voting Trust Certificate shall be released
from the terms hereof and, as to such shares, the trust created hereby shall
terminate.
THIRTEENTH
Upon the termination of this Agreement, the Voting Trustee in exchange
for and upon surrender of any Voting Trust Certificate then outstanding shall,
in accordance with the terms hereof, deliver certificates for the shares of
Common Stock or IVT Common Stock, as the case may be, in the amount called for
by such Voting Trust Certificate, and the Voting Trustee may require the holder
of such Voting Trust Certificate to surrender the same for such exchange.
Subject to the express provisions of Article TENTH, nothing in this Article
THIRTEENTH or elsewhere in this Agreement contained shall, however, be construed
to deprive the Voting Trustee, or his substitute, of the right as record holder
of the deposited shares to vote the same and to execute consents with respect
thereto, notwithstanding the termination of this Agreement, so long as it shall
continue to be the record holder thereof.
After any termination of this Agreement as above provided, and delivery
by the Voting Trustee of any stock or other property then held hereunder in
exchange for outstanding Voting Trust Certificates as provided in this Article
THIRTEENTH, all further obligations or duties of the Voting Trustee under this
Agreement or any provision thereof shall cease.
FOURTEENTH
All notices to be given to the holders of Voting Trust Certificates
shall be given by mailing or delivering the same to the registered owners of
Voting Trust Certificates addressed to or at, as the case may be, their
respective addresses as shown on the registry books of the Voting Trustee
maintained pursuant to Article THIRD.
All notices and other communications hereunder shall be in writing and
shall be deemed delivered and received (a) if personally delivered or if
delivered by telex, telegram, facsimile or courier service, when actually
received by the party to whom the notice or communication is sent
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or (b) if delivered by mail (whether actually received or not), at the close of
business on the third business day next following the day when placed in the
mail, postage prepaid, certified or registered, addressed to the appropriate
party or parties at the address of such party set forth or referred to below (or
at such other address as such party may designate by written notice to each
other party in accordance herewith):
(i) if to the Company, at the following address:
14900 Woodham Drive, Suite A-125
Houston, Texas 77073
Attention: Chief Executive Officer
(ii) if to Miller, the Miller Trust or CATS, at the following
address:
P.O. Box 572843
Houston, Texas 77257
Attention: Roger L. Miller
(iii) if to the Voting Trustee, at the following address:
5151 San Felipe, Suite 1600
Houston, Texas 77056-3609
Attention: General Counsel
FIFTEENTH
This Agreement may be executed in several counterparts, each of which
when so executed shall be deemed to be an original, and all of which shall
together constitute but one and the same instrument.
SIXTEENTH
Until the termination of this Agreement, original counterparts hereof
shall be filed at the registered offices of the Company and Invatec in the
States of Texas and Delaware, respectively, and at the principal executive
offices of the Company and Invatec. Each such counterpart shall be open to the
inspection of any stockholder of the Company or Invatec or any holder of any
Voting Trust Certificate daily during business hours.
SEVENTEENTH
This Agreement and the voting trust hereby created shall be governed by
and construed in accordance with the laws of the State of Texas, and the
validity and effect thereof shall be determined in accordance with the laws of
that State and, to the extent applicable, the State of
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Delaware. If a court of competent jurisdiction shall adjudge to be invalid any
article, clause, sentence, subparagraph, paragraph or section of this Agreement,
such judgment or decree shall not affect, impair, invalidate or nullify the
remainder of this Agreement, but the effect thereof shall be confined to the
article, clause, sentence, subparagraph, paragraph or section so adjudged to be
invalid. Nothing in this Agreement, express or implied, is intended to confer
upon any security holder, creditor, customer or any other person, directly,
derivatively or otherwise, other than the parties hereto and Invatec and their
respective successors, any rights, remedies or obligations under or by reason of
this Agreement.
IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement
as of the day and year first above written.
THE SAFE SEAL COMPANY, INC.
By: /s/ CHARLES F. SCHUGART
---------------------------------
Charles F. Schugart
Senior Vice President--Chief
Financial Officer
ROGER L. MILLER
/s/ ROGER L. MILLER
---------------------------------
THE ROGER L. MILLER FAMILY TRUST
By: /s/ ROGER L. MILLER
---------------------------------
Roger L. Miller
Trustee
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COMPUTERIZED ACCOUNTING & TAX
SERVICES, INC.
By: /s/ ROGER L.MILLER
---------------------------------
Roger L. Miller
President
ALLWASTE, INC., as Voting Trustee
By: /s/ WILLIAM L. FIEDLER
---------------------------------
William L. Fiedler
Vice President, General Counsel
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ANNEX A-1
TO
VOTING TRUST AGREEMENT
THE SAFE SEAL COMPANY, INC.
VOTING TRUST CERTIFICATE
No. ______ Shares ______
THIS CERTIFIES that ___________ has deposited _____ shares of the Common
Stock, par value $.01 per share, of THE SAFE SEAL COMPANY, INC., a Texas
corporation (the "Company"), with the Voting Trustee hereinafter named, under a
Voting Trust Agreement dated as of May __, 1997 (the "Agreement"). This
certificate and the interest represented thereby are transferable only on the
books of the Voting Trustee, upon the presentation and surrender hereof. The
holder of this certificate takes the same subject to all the terms and
conditions of the aforesaid Agreement among the Voting Trustee, the Company and
certain stockholders of the Company, and becomes a party to the Agreement
entitled to the benefit thereof. The holder hereof, by accepting this
certificate, ratifies and adopts the Agreement.
IN WITNESS WHEREOF, the Voting Trustee has caused this certificate to be
signed this ___ day of __________, 19___.
ALLWASTE, INC., VOTING TRUSTEE
By___________________________________
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ANNEX A-2
TO
VOTING TRUST AGREEMENT
INNOVATIVE VALVE TECHNOLOGIES, INC.
VOTING TRUST CERTIFICATE
No. ______ Shares ______
THIS CERTIFIES that ___________ has deposited _____ shares of the Common
Stock, par value $.001 per share, of INNOVATIVE VALVE TECHNOLOGIES, INC., a
Delaware corporation (the "Company"), with the Voting Trustee hereinafter named,
under a Voting Trust Agreement dated as of May __, 1997 (the "Agreement"). This
certificate and the interest represented thereby are transferable only on the
books of the Voting Trustee, upon the presentation and surrender hereof. The
holder of this certificate takes the same subject to all the terms and
conditions of the aforesaid Agreement among the Voting Trustee, the Company and
certain stockholders of the Company, and becomes a party to the Agreement
entitled to the benefit thereof. The holder hereof, by accepting this
certificate, ratifies and adopts the Agreement.
IN WITNESS WHEREOF, the Voting Trustee has caused this certificate to be
signed this ___ day of __________, 19___.
ALLWASTE, INC., VOTING TRUSTEE
By______________________________
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EXHIBIT 10.9
AMENDED AND RESTATED
MODIFICATION AND SETTLEMENT AGREEMENT
This Modification and Settlement Agreement (this "Agreement") dated as
of May 9, 1997, as amended and restated as of August 15, 1997, by and among The
Safe Seal Company, Inc., a Texas corporation (the "Company"), Allwaste, Inc., a
Delaware corporation ("AWI"), Allwaste Environmental Services, Inc., a Delaware
corporation and a wholly owned subsidiary of AWI ("AES"), Roger L. Miller,
individually ("Miller"), The Roger L. Miller Family Trust (the "Miller Trust")
and Computerized Accounting & Tax Services, Inc., a Florida corporation
controlled by Miller ("CATS").
W I T N E S S E T H:
WHEREAS, Miller, the Miller Trust and CATS own of record (after giving
effect to the issuance to CATS effective January 27, 1997 of 345,730 shares of
the common stock, par value $0.01 per share of the Company ("Common Stock")),
and the issuance to CATS of 21,740 shares of Common Stock in connection with the
exercise of the Hemker options) 150,000 shares, 2,850,000 shares and 367,470
shares, respectively, of Common Stock; and
WHEREAS, the Company, AES and the Miller Trust are parties to a
Shareholders' Agreement dated as of October 13, 1995 (the "Shareholders'
Agreement"); and
WHEREAS, the Company, Miller and AWI are parties to a letter agreement
dated September 18, 1996 (the "Letter Agreement"); and
WHEREAS, the respective parties to the Shareholders' Agreement and the
Letter Agreement now desire to modify those agreements, as hereinafter provided,
and, in connection therewith, all the parties hereto desire to formalize certain
related agreements, as hereinafter provided;
NOW, THEREFORE, in consideration of the premises, the mutual covenants
and agreements herein contained and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto
agree as follows:
1. DEFINITIONS. The following capitalized terms shall have the meanings
assigned to them in this Section 1 or in the parts of this Agreement referred to
below:
ABANDONMENT DATE: as defined in Section 7(a).
ACQUISITION TRANSACTION: as defined in Section 7(c).
AES: as defined in the preamble.
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AWI: as defined in the preamble.
AWI PRE-SETTLEMENT MATTERS: as defined in Section 12(b).
AWI RELEASED PARTIES: as defined in Section 12(a).
AWI RELEASING PARTY: as defined in Section 12(b).
CATS: as defined in the preamble.
CLAIMS: as defined in Section 12(a).
COMMON STOCK: as defined in the recitals.
COMPANY: as defined in the preamble.
CONVERTIBLE NOTE: as defined in Section 7(c).
ESTIMATED IPO PRICE: the midpoint of the estimated initial public
offering price range, which will be determined by Invatec and the
Managing Underwriter and reflected in the Preliminary Prospectus.
ESTIMATED IPO PRICE NOTICE: as defined in Section 6(a).
FINAL PROSPECTUS: the prospectus relating to the IPO which is first
furnished to the Managing Underwriter after the registration statement
relating to the IPO becomes effective under the Securities Act.
INVATEC: Innovative Valve Technologies, Inc., a Delaware corporation
that, as currently proposed, will hereafter become a holding company of
which the Company will be a wholly owned subsidiary.
IPO: the first time a registration statement filed under the Securities
Act and respecting an underwritten primary offering by Invatec of shares
of IVT Common Stock is declared effective under the Securities Act and
any shares registered by that registration statement are issued and sold
by Invatec (otherwise than pursuant to the exercise of any
over-allotment option).
IPO CLOSING DATE: the date on which Invatec first receives payment for
the shares of IVT Common Stock it sells in the IPO.
IPO PRICE: the price per share at which the IVT Common Stock is
initially offered to the public in the IPO.
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IVT COMMON STOCK: the common stock, par value $.001 per share, of
Invatec.
LETTER AGREEMENT: as defined in the recitals.
LOCKUP PERIOD: as defined in Section 7(b).
MANAGING UNDERWRITER: shall mean the underwriting firm designated by
Invatec to act as lead manager for the IPO.
MILLER: as defined in the preamble.
MILLER PRE-SETTLEMENT MATTERS: as defined in Section 12(a).
MILLER RELEASED PARTIES: as defined in Section 12(b).
MILLER RELEASING PARTY: as defined in Section 12(a).
MILLER SHARES: all the shares of Common Stock owned of record by Miller,
the Miller Trust and CATS, as reflected in the recitals to this
Agreement, and any other shares of Common Stock or shares of IVT Common
Stock of which Miller, the Miller Trust or CATS is or may become the
"beneficial owner," as that term is defined in Rule 13d-3 under the
Securities Exchange Act of 1934, as amended. Any such shares of Common
Stock or IVT Common Stock shall cease to be "Miller Shares" when they
are no longer beneficially owned by any of Miller, the Miller Trust or
CATS.
MILLER TRUST: as defined in the preamble.
PRELIMINARY PROSPECTUS: the prospectus subject to completion first used
in "roadshow" presentations made by Invatec to potential investors in
connection with the IPO.
SECURITIES ACT: the Securities Act of 1933, as amended.
SHAREHOLDERS' AGREEMENT: as defined in the recitals.
STOCK PURCHASE AGREEMENT: the Stock Purchase Agreement dated as of
October 13, 1995 by and among AWI, AES, the Company, Miller and the
Miller Trust.
VALVE TECHNOLOGY: as defined in Section 10(b).
VOTING TRUST AGREEMENT: as defined in Section 8.
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2. SUSPENSION OF CERTAIN PROVISIONS OF SHAREHOLDERS' AGREEMENT;
TERMINATION OF SHAREHOLDERS' AGREEMENT. Effective from May 9, 1997 and
continuing for so long as the Voting Trust Agreement continues in effect as
provided in Section 8, the provisions of Article II of the Shareholders'
Agreement shall not be operative or have any force or effect. If the Voting
Trust Agreement terminates because the IPO Closing Date occurs, the
Shareholders' Agreement will terminate in its entirety and be of no further
force or effect, effective on the IPO Closing Date. If the Voting Trust
Agreement terminates for any other reason, the provisions of Article II of the
Shareholders' Agreement will again become operative effective as of the date of
that termination.
3. RESIGNATION; TERMINATION OF EMPLOYMENT ARRANGEMENTS. Effective as of
12:01 a.m., Houston, Texas time, May 10, 1997, Miller hereby resigns from any
and all directorships, offices and other positions with the Company and each
subsidiary of the Company, if any, and Invatec, except that Miller will remain a
director of the Company for the remaining unexpired portion of the term for
which he has been elected and until his successor shall be elected and qualified
(or until his earlier resignation or removal in accordance with the provisions
of the Company's Bylaws), and any and all agreements pursuant to which Miller
has been employed by the Company or any subsidiary of the Company are
terminated. Effective as of 12:01 a.m., Houston, Texas time, on June 1, 1997,
Miller's participation in all Company compensation arrangements, plans, policies
and programs, including without limitation those providing for severance pay,
deferred compensation, insurance benefits or the payment or provision of any
fringe benefit, allowance or accommodation of employment, in which he has been
participating also is terminated. Within three business days after May 9, 1997,
the Company will pay $300,000 to CATS in full and complete satisfaction of all
obligations the Company and its subsidiaries and Invatec owe or may owe to CATS
or to Miller, directly or indirectly through CATS or any other entity owned or
controlled by Miller, the Miller Trust or any member of Miller's family,
respecting accrued or unaccrued salary, bonuses, consulting fees or management
or other service fees, whether pursuant to any existing employment or other
agreement, Paragraph 5 of the Letter Agreement or otherwise. When that payment
is made, none of the Company and its subsidiaries or Invatec will have any
further or other obligations to pay Miller any amount in respect of any past,
present or future services by him, including without limitation under Paragraph
5 of the Letter Agreement.
4. TERMINATION OF ARRANGEMENTS WITH CATS. Except for the payment owing
to CATS pursuant to Section 3, effective as of May 9, 1997 any obligation,
written or oral, the Company or any of its subsidiaries may have to compensate
CATS for any past, present or future services of any kind or character is
terminated, and CATS hereby releases the Company and each of its subsidiaries
and Invatec from any liability the released parties, or any of them, otherwise
might have by reason of this termination, but for this release.
5. CONTINUED FUNDING BY AWI. The various modifications, terminations,
waivers and other matters reflected in this Agreement are being agreed to by
Miller, the Miller Trust and CATS on the basis of the understanding that AWI is
committing to (a) fund the legal, accounting and other costs of Invatec and the
Company associated with the IPO and their other working capital needs through
December 31, 1997 and (b) use commercially reasonable efforts to fund the cash
portion of the purchase price for any acquisition proposed to be effected prior
to the IPO Closing Date by the
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executive management of Invatec, subject to AWI's covenants and other
obligations under its agreements with Philip Services Corp., which commitments
will be provided on terms acceptable to the Company. The Company's acceptance of
those terms will be conclusively evidenced by its execution of a funding
agreement or similar agreement to be entered into between AWI, the Company and
Invatec effective within 30 days of May 9, 1997.
6. SALE OF MILLER SHARES TO AWI. (a) The Company shall provide each of
Miller, the Miller Trust, CATS and AWI with a written notice specifying the
Estimated IPO Price (the "Estimated IPO Price Notice") promptly on the
determination thereof by Invatec and the Managing Underwriter (and in any event
at least two business days prior to the distribution of the Preliminary
Prospectus to prospective investors).
(b) Miller, the Miller Trust, CATS and AWI agree that: (i) the
Miller Trust will sell to AWI, and AWI will purchase from the Miller Trust, the
number of shares of IVT Common Stock which equals 25% (rounded up or down to the
nearest whole share) of the total number of shares of IVT Common Stock
collectively owned of record by Miller, the Miller Trust and CATS (after giving
effect to the Acquisition Transaction) immediately prior to the closing of the
IPO; and (ii) Miller, the Miller Trust and CATS will have the option to sell to
AWI, and if they exercise that option, AWI will purchase from them, up to an
additional 50% (rounded up or down to the nearest whole share) of the total
number of shares of IVT Common Stock collectively owned of record by them (after
giving effect to the Acquisition Transaction) immediately prior to the closing
of the IPO by jointly providing the Company and AWI with written notice, no
later than one business day after their receipt of the Estimated IPO Price
Notice, of the aggregate number of additional shares of IVT Common Stock, if
any, they desire to sell to AWI; provided, however, if they exercise the option
referred to in clause (ii) of this sentence and the IPO Price is less than the
low point of the estimated per share initial public offering price range set
forth in the Preliminary Prospectus, then Miller, the Miller Trust and CATS
shall have the option (which, in order to be exercised, must be exercised
unanimously) to reduce the total number of shares being sold by them to AWI
pursuant to that option to zero, so long as, after giving effect to that
reduction, the Company will be able to distribute the Final Prospectus in
connection with the IPO without first having to circulate another preliminary
prospectus or file an amendment to the registration statement filed under the
Securities Act with respect thereto.
(c) The provisions of Article III of the Shareholders' Agreement
shall not be applicable to any sale by Miller, the Miller Trust or CATS of IVT
Common Stock pursuant to this Section 6.
(d) The per share purchase price to be paid by AWI for all shares
purchased by AWI pursuant to this Section 6 shall be equal to 96.5% of the IPO
Price. The closing of that purchase will take place at the principal offices of
AWI in Houston, Texas on the date of the closing of the IPO. At this closing,
each of Miller, the Miller Trust and CATS will deliver to AWI the certificate or
certificates representing any shares of IVT Common Stock being sold by him or it
under this Section 6, duly endorsed for transfer or accompanied by one or more
stock powers duly completed and executed in blank, together with a written
representation to the effect that those shares
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are owned by him or it, as the case may be, free and clear of any lien,
encumbrance, adverse claim, security interest, restriction on transfer or other
defect of title whatsoever, in each case against receipt of a cashier's check or
wire transfer of funds equal to the aggregate purchase price for those shares as
provided herein.
7. COOPERATION IN CONNECTION WITH THE IPO; ACKNOWLEDGMENT OF PLANNED
RECAPITALIZATION AND OTHER MATTERS. (a) Each of AWI, AES, Miller, the Miller
Trust and CATS agrees to cooperate with and take all reasonable steps to assist
Invatec and the Company in facilitating the completion of the IPO. Each of these
parties also agrees that he or it will not, in his or its capacity as a holder
of Common Stock, take any action or omit to take any action the effect of which
action if taken or which omission to act would interfere with the completion of
the IPO; provided, however, that Allwaste and the Miller Trust will be entitled
at any time prior to the execution and delivery by Invatec and the Managing
Underwriter of the underwriting agreement relating to the IPO (including any
related pricing agreement), by a written notice duly executed by both AWI and
The Miller Trust and delivered to Invatec, to direct Invatec to abandon the IPO,
and the Company agrees that it will cause Invatec to agree to follow that
direction. The date on which Invatec receives that notice is the "Abandonment
Date."
(b) Without limiting the generality of the provisions of Section
7(a), each of Miller, the Miller Trust and CATS hereby irrevocably agrees that,
without the prior consent of the Company, it will not (and, in the case of
Miller, he will not permit any member of his immediate family to) sell, offer to
sell, solicit an offer to buy, contract to sell, grant any option to purchase or
otherwise transfer or dispose of (collectively, "transfer") any shares of IVT
Common Stock, or any securities convertible into or exercisable or exchangeable
for IVT Common Stock currently held or hereafter acquired by him or it for a
period of two years after the IPO Closing Date (the "Lockup Period"), except for
transfers of shares of IVT Common Stock pursuant to the provisions of Section 6.
Notwithstanding the foregoing, during the period from the date that is 180 days
after the IPO Closing Date through the end of the Lockup Period, each of Miller,
the Miller Trust and CATS (or any combination of them) may transfer any of his
or its shares of IVT Common Stock with the prior written consent of the Managing
Underwriter (which consent may be contingent on Miller, the Miller Trust and/or
CATS agreeing to enter into a block trade or other transaction coordinated by
the Managing Underwriter or a securities brokerage firm approved by the Managing
Underwriter).
(c) Each of Miller, the Miller Trust and CATS acknowledges that
it is currently contemplated that, in connection with the IPO: (i) Invatec has
been organized in accordance with applicable Delaware law and has issued and
should or will issue and sell shares of IVT Common Stock to William E. Haynes,
Charles F. Schugart, certain other officers of Invatec and CATS (an aggregate of
291,409 shares in the case of Messrs. Haynes, Schugart, Denny Rigas, Frank
Lombard, Douglas R. Harrington, Jr. and John L. King and 65,705 shares in the
case of CATS) at a price per share equal to the par value thereof; (ii) prior to
the IPO, the Company will become a wholly owned subsidiary of Invatec in a
transaction (the "Acquisition Transaction") pursuant to which (A) each
outstanding share of Common Stock will be converted into one-half of a share of
IVT Common Stock, (B) all outstanding options, warrants or other rights to
acquire unissued shares of Common Stock (other than options held by William E.
Haynes, Charles F. Schugart, Joe Cheatham, Pliney
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Olivier, Charles Olivier, Mark Chronister, John L. King and Douglas R.
Harrington, Jr.) will be proportionally adjusted on the same two-for-one basis
and (C) the Company's 20,000 outstanding shares of preferred stock will be
converted collectively into such number of whole shares of IVT Common Stock as
shall most nearly equal, but not exceed, the quotient obtained by dividing (1)
the sum of $2,000,000 plus dividends accrued on those shares of preferred stock
through the day preceding the IPO Closing Date at the rate of $190,000 per annum
and which remain unpaid divided by (2) the IPO Price; (iii) Invatec will issue a
convertible note (the "Convertible Note") to AWI (A) the accrued interest on
which and $500,000 of the unpaid principal amount of which (or, if less, the
entire unpaid principal amount of which) will be convertible into 618,571 shares
(before giving effect to the combination referred to in the last sentence of
Section 7(d)) of IVT Common Stock and (B) the remaining unpaid principal amount
of which, if any, will be convertible into such number of whole shares of IVT
Common Stock as shall most nearly equal, but not exceed, the quotient obtained
by dividing (1) that remaining unpaid principal amount by (2) the IPO Price; and
(iv) Invatec may, at its option exercisable on the IPO Closing Date, satisfy the
payment obligations it owes to AWI on the IPO Closing Date, in an aggregate
principal amount not to exceed the amount by which $10,000,000 exceeds the
unpaid principal amount of the Convertible Note immediately before its
conversion, with shares of IVT Common Stock valued at the IPO Price for purposes
of satisfying those payment obligations. Each of Miller, the Miller Trust and
CATS agrees that he or it will not exercise any right to dissent from the
Acquisition Transaction pursuant to Article 5.12 of the Texas Business
Corporation Act or otherwise. Each party to the Shareholders' Agreement agrees
that the provisions of Article III of the Shareholders' Agreement shall not be
applicable to the Acquisition Transaction.
(d) Each party hereto acknowledges and agrees that the number of
presently outstanding shares of Common Stock (including shares for which
certificates may not have been issued) total 7,115,679 shares, including
2,502,517 shares owned by AES or AWI. The Company agrees with each other party
hereto that it will not issue any additional shares of Common Stock, except on
the exercise of presently outstanding options or warrants or to Invatec in the
Acquisition Transaction, unless either Miller or the Miller Trust consents in
writing thereto. The Company also agrees that it will cause Invatec to agree
that, except for the shares of IVT Common Stock referred to in Section 7(c) and
shares to be issued (i) to its officers hired after the date hereof, (ii) in the
Acquisition Transaction, (iii) in the acquisition of businesses or (iv) in the
IPO, it will not issue additional shares of IVT Common Stock on or before the
IPO Closing Date unless either Miller or the Miller Trust consents thereto. Each
party hereto agrees that the outstanding shares of Common Stock and IVT Common
Stock may be combined on a 0.68-for-1 basis (rounded upward to the nearest whole
share in the case of each holder thereof) or on any other basis that applies to
both the Common Stock and the IVT Common Stock.
8. VOTING TRUST. Contemporaneously with the original execution and
delivery of this Agreement, Miller, the Miller Trust and CATS will enter into
the voting trust agreement attached as Exhibit B to this Agreement (the "Voting
Trust Agreement") pursuant to which AWI, as Voting Trustee, or William E.
Haynes, as the successor Voting Trustee, will vote all the Miller Shares on all
matters submitted to the stockholders of the Company as the Voting Trustee
determines in its sole discretion. Any shares of IVT Common Stock acquired by
Miller, the Miller Trust or CATS in
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connection with the Acquisition Transaction shall be deposited into the voting
trust established by the Voting Trust Agreement. When shares of Common Stock or
IVT Common Stock cease to be Miller Shares, they will be released from the
voting trust established by the Voting Trust Agreement. The Voting Trust
Agreement will terminate on the first to occur of (i) the IPO Closing Date, (ii)
the Abandonment Date or (iii) January 1, 1998; provided, however, that if
January 1, 1998 is the first of those dates to occur, but Invatec has filed a
registration statement relating to the IPO under the Securities Act on or before
December 31, 1997 and is then pursuing the IPO, the Voting Trust Agreement will
continue in full force and effect until the first to occur of (i) the IPO
Closing Date, (ii) the Abandonment Date, (iii) the date Invatec withdraws that
registration statement pursuant to Rule 477 under the Securities Act, (iv) the
date that registration statement is abandoned pursuant to Rule 479 under the
Securities Act or (v) May 31, 1998.
9. LIMITATIONS ON COMPETITION. (a) Miller agrees that he will not,
during the period beginning on May 9, 1997 and ending on the second anniversary
of the IPO Closing Date, directly or indirectly, for any reason, for his own
account or on behalf of or together with any other person:
(i) engage as an officer, director or in any other managerial
capacity or as an owner, co-owner or other investor of or in, whether as
an employee, independent contractor, consultant or advisor, or as a
sales representative or distributor of any kind, in any business selling
any products or providing any services in competition with the Company
or any subsidiary of the Company or Invatec (the Company and its
subsidiaries and Invatec collectively being the "Company" for purposes
of this Section 9) within any Territory surrounding any service facility
in which the Company was engaged in business on the date hereof or
immediately prior to the IPO Closing Date (for purposes of this Section
9, the "Territory" surrounding any service facility will be: (A) the
city, town or village in which that service facility is located, (B) the
county or parish in which that service facility is located, (C) the
counties or parishes contiguous to the county or parish in which that
service facility is located, (D) the area located within 50 miles of
that service facility, (E) the area located within 100 miles of that
service facility, and (F) the area in which that service facility
regularly provides services at the locations of its customers);
(ii) call on any natural person who is at that time employed by
the Company in any managerial capacity with the purpose or intent of
attracting that person from the employ of the Company, provided that
Miller may call on and hire any of his immediate family members;
(iii) call on any person that at that time is, or at any time
within one year prior to that time was, a customer of the Company within
any Territory (A) for the purpose of soliciting or selling any product
or service in competition with the Company in that Territory and (B)
with the knowledge of that customer relationship; or
(iv) call on any entity which has been called on by the Company
or Invatec in connection with a possible acquisition by the Company or
Invatec, with the knowledge of
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that entity's status as such an acquisition candidate, for the purpose
of acquiring that entity or arranging the acquisition of that entity by
any person other than the Company or Invatec.
(b) Because of the difficulty of measuring economic losses to the
Company as a result of any breach by Miller of his covenants in Section 9(a),
and because of the immediate and irreparable damage that could be caused to the
Company for which it would have no other adequate remedy, Miller agrees that the
Company may enforce the provisions of Section 9(a) by injunctions and
restraining orders against Miller if he breaches any of those provisions.
(c) Miller agrees that Sections 9(a) and (b) impose a reasonable
restraint on Miller in light of the activities and business of the Company on
the date hereof, the current business plans of the Company and the investment by
the Miller Trust in the Company
(d) The covenants in this Section 9 are severable and separate,
and the unenforceability of any specific covenant in this Section 9 is not
intended by any party hereto to, and shall not, affect the provisions of any
other covenant in this Section 9. If any court of competent jurisdiction shall
determine that the scope, time or territorial restrictions set forth in Section
9(a) are unreasonable as applied to Miller, the parties hereto, including
Miller, acknowledge their mutual intention and agreement that those restrictions
be enforced to the fullest extent the court deems reasonable, and thereby shall
be reformed to that extent as applied to Miller.
(e) All the covenants in this Section 9 are intended by each
party hereto to be, and shall be construed as, an agreement independent of any
other provision in this Agreement, and the existence of any claim or cause of
action of Miller against any other party hereto, whether predicated on this
Agreement or otherwise, shall not constitute a defense to the enforcement by the
Company of any covenant in this Section 9. It is specifically agreed that the
period specified in Section 9(a) shall be computed by excluding from that
computation any time during which Miller is in violation of any provision of
Section 9(a). The covenants contained in this Section 9 shall not be affected by
any breach of any other provision hereof by any party hereto.
(f) Miller hereby agrees that this Section 9 is a material and
substantial part of the transactions contemplated by this Agreement.
10. PROPRIETARY INFORMATION. (a) Each of Miller, the Miller Trust and
CATS agrees to comply fully with the Company's policies relating to
nondisclosure of the Company's trade secrets and proprietary information and
processes and, without limiting the generality of the foregoing, will not (i)
disclose any such secrets, information or processes to any person, firm,
corporation, association or other entity for any reason or purpose whatsoever
except as may be required by law or governmental agency or legal process or (ii)
make use of any such property for his or its own purposes or for the benefit of
any person, firm, corporation or other entity (except the Company or any of its
subsidiaries or Invatec) under any circumstances, provided that this provision
shall not apply to secrets, information and processes that are then in the
public domain (provided that neither Miller, the Miller Trust nor CATS was
responsible, directly or indirectly, for such secrets, information or processes
entering the public domain without the Company's consent).
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(b) Each of Miller, the Miller Trust and CATS hereby sells,
transfers and assigns to the Company all his or its entire right, title and
interest in and to all inventions, ideas, disclosures and improvements, whether
patented or unpatented, and copyrightable material, to the extent (i) made or
conceived by Miller or CATS solely or jointly with others since January 1, 1991
and (ii) relating to or used or useful in the design, manufacture, assembly,
operation, maintenance, repair, reconditioning or remanufacturing of batch or
continuous process systems or units and their component parts and related
equipment and tools, including, without limitation, industrial valves and their
component parts and packing materials and other process system components and
friction-welding equipment (collectively "Valve Technology"). Each of Miller,
the Miller Trust and CATS shall (i) communicate promptly and disclose to the
Company, in such form as the Company requests, all information, details and data
pertaining to the aforementioned Valve Technology and (ii) execute and deliver
to the Company such formal transfers and assignments and such other papers and
documents as may be required of him or it to permit the Company to file and
prosecute any patent applications relating to such Valve Technology and, as to
copyrightable material, to obtain copyright thereon.
11. NO INTERFERENCE. Following the date of this Agreement: (i) neither
Miller, the Miller Trust nor CATS will maintain an office in any facility of the
Company or any of its subsidiaries and neither the Company nor any of its
subsidiaries or Invatec will have any obligation to provide Miller, the Miller
Trust or CATS with or pay for any office space, furnishings, facilities,
secretarial or other administrative assistance, supplies or support (including
without limitation any computer, telephone or facsimile machine or any telephone
line) Miller, the Miller Trust or CATS does maintain; (ii) neither Miller, the
Miller Trust nor CATS will be authorized to incur any meal, travel or
entertainment expenses, or any other expense of any kind or character, for which
the Company will be liable, either directly or by means of any reimbursement
obligation, without the prior written approval of the chief executive officer of
the Company (or his designee); and (iii) except as required by applicable law,
neither Miller, the Miller Trust nor CATS or any of their respective agents or
other representatives shall be afforded access to any facility of the Company or
any of its subsidiaries without the prior written consent of the chief executive
officer of the Company. Each of Miller, the Miller Trust and CATS agrees to
refrain from making any public statement that has or may reasonably be expected
to have the effect of disparaging the reputation or business of the Company,
AWI, AES or Invatec or any of their respective subsidiaries, affiliates,
officers, directors, employees, agents or counsel.
12. GENERAL RELEASE. (a) Each of Miller, the Miller Trust and CATS (each
a "Miller Releasing Party") hereby unconditionally and irrevocably releases and
forever discharges, to the fullest extent permitted by applicable law, the
Company, AWI, AES and Invatec and each of their respective subsidiaries,
affiliates, officers, directors, employees, agents and counsel other than
Miller, the Miller Trust and CATS (collectively, the "AWI Released Parties")
from any and all debts, liabilities, obligations, claims, demands, actions or
causes of action, suits, judgments or controversies of any kind whatsoever
(collectively, "Claims") against the AWI Released Parties, or any of them, that
arises out of or is based on any act or failure to act (INCLUDING ANY ACT OR
FAILURE TO ACT THAT CONSTITUTES ORDINARY OR GROSS NEGLIGENCE OR RECKLESS OR
WILLFUL, WANTON MISCONDUCT), misrepresentation, omission, transaction, fact,
event or other matter occurring prior to the date hereof
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(whether based on any governmental requirement or right of action, at law or in
equity or otherwise, foreseen or unforeseen, matured or unmatured, known or
unknown, accrued or not accrued) (collectively, "Miller Pre-settlement
Matters"), including without limitation: (i) claims by the Miller Releasing
Party with respect to repayment of loans or indebtedness; (ii) any rights,
titles and interests in, to or under any agreements, arrangements or
understandings to which the Miller Releasing Party is a party; and (iii) claims
by the Miller Releasing Party with respect to dividends, violation of preemptive
rights, or payment of salaries or other compensation or in any way arising out
of or in connection with the Miller Releasing Party's employment, if any, with
the Company or any of its subsidiaries, the cessation of that employment, the
Miller Releasing Party's status, if any, as an officer, director or stockholder
of the Company or otherwise. Each Miller Releasing Party further agrees not to
file or bring any litigation on the basis of or respecting any Claim concerning
any Miller Pre-settlement Matter against any AWI Released Party. Notwithstanding
anything to the contrary contained in this Section 12(a), this Section 12 (a)
shall not affect the rights of any Miller Releasing Party under this Agreement,
the Voting Trust Agreement, the Stock Purchase Agreement or, except as
specifically provided herein, the Shareholders' Agreement.
(b) Each of AWI and AES (each an "AWI Releasing Party") hereby
unconditionally and irrevocably releases and forever discharges, to the fullest
extent permitted by applicable law, Miller, the Miller Trust and CATS
(collectively, the "Miller Released Parties") from any and all Claims against
the Miller Released Parties, or any of them, that arises out of or is based on
any act or failure to act (INCLUDING ANY ACT OR FAILURE TO ACT THAT CONSTITUTES
ORDINARY OR GROSS NEGLIGENCE OR RECKLESS OR WILLFUL, WANTON MISCONDUCT),
misrepresentation, omission, transaction, fact, event or other matter occurring
prior to the date hereof (whether based on any governmental requirement or right
of action, at law or in equity or otherwise, foreseen or unforeseen, matured or
unmatured, known or unknown, accrued or not accrued) (collectively, "AWI
Pre-settlement Matters"), including without limitation: (i) claims by the AWI
Releasing Party with respect to repayment of loans or indebtedness; (ii) any
rights, titles and interests in, to or under any agreements, arrangements or
understandings to which the AWI Releasing Party is a party; and (iii) claims by
the AWI Releasing Party with respect to dividends or violation of preemptive
rights or in any way arising out of or in connection with the AWI Releasing
Party's status as a stockholder of the Company or otherwise. Each AWI Releasing
Party further agrees not to file or bring any litigation on the basis of or
respecting any Claim concerning any AWI Pre-settlement Matter against any Miller
Released Party. Notwithstanding anything to the contrary contained in this
Section 12(b), this Section 12(b) shall not affect the rights of any AWI
Releasing Party under this Agreement, the Voting Trust Agreement, the Stock
Purchase Agreement or, except as specifically provided herein, the Shareholders'
Agreement.
(c) Each Miller Releasing Party and each AWI Releasing Party :
(i) acknowledges that he or it fully comprehends and understands all the terms
of this Agreement and their legal effects and (ii) expressly represents and
warrants that (A) he or it has executed this Agreement voluntarily and without
reliance on any statement or representation of any other party hereto or his or
its representatives and (B) he or it had the opportunity to consult with an
attorney of his or its choice regarding this Agreement.
11
<PAGE>
13. REPRESENTATIONS AND WARRANTIES OF THE COMPANY, AWI, AES AND CATS.
Each of the Company, AWI, AES and CATS represents and warrants to the other
parties to this Agreement as follows:
(a) ORGANIZATION AND QUALIFICATION. It is a corporation duly
organized, validly existing and in good standing under the laws of its
jurisdiction of incorporation, as set forth in the preamble to this
Agreement.
(b) AUTHORITY. It has the requisite corporate power and authority
to enter into this Agreement and to consummate the transactions
contemplated hereby. The execution and delivery of this Agreement by it
have been duly authorized by all necessary corporate action on its part.
(c) ENFORCEABILITY. This Agreement has been duly executed and
delivered by it and constitutes its legal, valid and binding obligation,
enforceable against it in accordance with the terms hereof, except as
that enforceability may be limited by any applicable bankruptcy,
insolvency, reorganization, moratorium or similar laws affecting the
enforcement of creditors' rights generally.
14. REPRESENTATIONS AND WARRANTIES OF MILLER. Miller represents and
warrants to the other parties to this Agreement as follows:
(a) AUTHORITY. He has the legal capacity and all requisite power
and authority to enter into this Agreement and to consummate the
transactions contemplated hereby.
(b) ENFORCEABILITY. This Agreement has been executed and
delivered by him and constitutes his legal, valid and binding
obligation, enforceable against him in accordance with the terms hereof,
except as that enforceability may be limited by any applicable
bankruptcy, insolvency, reorganization, moratorium or other similar laws
affecting the enforcement of creditors' rights generally.
15. REPRESENTATIONS AND WARRANTIES OF THE MILLER TRUST. The Miller Trust
represents and warrants to the other parties to this Agreement as follows:
(a) AUTHORITY. It has all requisite trust power and authority to
enter into this Agreement and to consummate the transactions
contemplated hereby. The execution and delivery of this Agreement by it
have been duly authorized by all necessary trust action on its part.
(b) ENFORCEABILITY. This Agreement has been executed and
delivered by it and constitutes its valid and binding obligation,
enforceable against it in accordance with the terms hereof, except as
that enforceability may be limited by any applicable bankruptcy,
insolvency, reorganization, moratorium or other similar laws affecting
the enforcement of creditors' rights generally.
12
<PAGE>
16. MISCELLANEOUS. (a) AMENDMENTS AND WAIVERS. The provisions of this
Agreement may not be amended, modified or supplemented except by an instrument
in writing signed by the parties hereto. The failure of any party at any time or
times to require performance of any provision hereof shall in no manner affect
its rights at a later time to enforce the same. No waiver by any party of the
breach of any term or condition contained in this Agreement in any one or more
instances shall be deemed to be, or construed as, a further or continuing waiver
of any breach, or a waiver of the breach of any other term or condition
contained herein.
(b) NOTICES. All notices and other communications provided for or
permitted hereunder shall be in writing and shall be deemed delivered and
received (i) if personally delivered or if delivered by telex, telegram,
facsimile or courier service, when actually received by the party to whom the
notice or communication is sent or (ii) if delivered by mail (whether actually
received or not), at the close of business on the third business day next
following the day when placed in the mail, postage prepaid, certified or
registered, addressed to the appropriate party or parties at the address of such
party set forth or referred to below (or at such other address as such party may
designate by written notice to each other party in accordance herewith):
(i) if to the Company, at the following address:
14900 Woodham Drive, Suite A-125
Houston, Texas 77073
Attention: Chief Executive Officer
with copies to:
Baker & Botts, L.L.P.
3000 One Shell Plaza
Houston, Texas 77002-4995
Attn: James L. Leader, Esq.
Telecopy: (713) 229-1522
(ii) if to AWI or AES, at the following address:
5151 San Felipe, Suite 1600
Houston, Texas 77056-3609
Attention: General Counsel
13
<PAGE>
(iii) if to Miller, the Miller Trust or CATS, at the following
address:
P.O. Box 572843
Houston, Texas 77257
Attention: Roger L. Miller
(c) SUCCESSORS AND ASSIGNS; ASSIGNMENT. This Agreement shall
inure to the benefit of and be binding upon the heirs, executors,
administrators, successors and assigns of each of the parties, and nothing in
this Agreement, express or implied, is intended to or shall confer upon any
other person any right, benefit, or remedy of any nature whatsoever under or by
reason of this Agreement. No party hereto shall assign this Agreement or any
part hereof without the prior written consent of the other party.
(d) COUNTERPARTS. This Agreement may be executed in any number of
counterparts and by the parties hereto in separate counterparts, each of which
when so executed shall be deemed to be an original and all of which taken
together shall constitute one and the same agreement.
(e) HEADINGS; REFERENCES TO BUSINESS DAYS AND SECTIONS. The
headings in this Agreement are for convenience of reference only and shall not
limit or otherwise affect the meaning of the provisions hereof. As used in this
Agreement, the term "business day" means a day on which banks are open for
business in Houston, Texas. References in this Agreement to "Sections" are to
Sections of this Agreement unless otherwise indicated.
(f) GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS APPLICABLE TO
CONTRACTS MADE AND TO BE PERFORMED WHOLLY WITHIN THAT STATE.
(g) SEVERABILITY. In the event that any one or more of the
provisions contained herein, or the application thereof in any circumstances, is
held invalid, illegal or unenforceable in any respect for any reason, the
validity, legality and enforceability of any such provision in every other
respect and of the remaining provisions contained herein shall not be in any way
impaired thereby.
(h) ENTIRE AGREEMENT. This Agreement is intended by the parties
as a final expression of their agreement and a complete and exclusive statement
of the agreement and understanding of the parties hereto in respect of the
subject matter contained herein. This Agreement
14
<PAGE>
supersedes all prior agreements and understandings between the parties with
respect to such subject matter.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
THE SAFE SEAL COMPANY, INC.
By: /s/ CHARLES F. SCHUGART
------------------------------------
Charles F. Schugart
Senior Vice President--Chief
Financial Officer
ALLWASTE, INC.
By: /s/ ROBERT M. CHISTE
------------------------------------
Name: Robert M. Chiste
Title:
ALLWASTE ENVIRONMENTAL
SERVICES, INC.
By: /s/ ROBERT M. CHISTE
------------------------------------
Name: Robert M. Chiste
Title:
/s/ ROGER L. MILLER
------------------------------------
ROGER L. MILLER
15
<PAGE>
THE ROGER L. MILLER FAMILY TRUST
By: /s/ ROGER L. MILLER
Roger L. Miller
Trustee
COMPUTERIZED ACCOUNTING & TAX
SERVICES, INC.
By: /s/ ROGER L. MILLER
Roger L. Miller
President
16
EXHIBIT 12.1
STATEMENT REGARDING COMPUTATION OF RATIOS(1)
(IN THOUSANDS, EXCEPT RATIO AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31 MARCH 31,
----------------------------------------------------- ----------------------
1993 1994 1995 1996 1997 1997 1998
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Fixed Charges--
Interest on debt and capitalized
leases (including
$--capitalized)............... $ 1 $ 7 $ 8 $ 4 $ 2,901 $ 348 $ 780
Amortization of debt discount
and expense................... -- -- -- -- 34 -- 28
Interest element of rentals..... 30 31 30 54 274 36 183
--------- --------- --------- --------- --------- --------- ---------
Total...................... $ 31 $ 38 $ 38 $ 58 $ 3,209 $ 384 $ 991
========= ========= ========= ========= ========= ========= =========
Preferred Dividends--
Amount declared................. $ 12 $ 12 $ 41 $ 192 $ 157 $ 48 $ --
========= ========= ========= ========= ========= ========= =========
Earnings--
Consolidated income (loss)
before income taxes .......... $ (263) $ (281) $ (1,505) $ (415) $ (8,523) $ (962) $ 2,201
Add back--
Fixed charges less interest
capitalized................ 31 38 38 58 3,209 384 991
--------- --------- --------- --------- --------- --------- ---------
$ (232) $ (243) $ (1,467) $ (357) $ (5,314) $ (578) $ 3,192
========= ========= ========= ========= ========= ========= =========
Ratio of Earnings to Fixed Charges... -- -- -- -- -- -- 3.2x
</TABLE>
- ------------
(1) In computing the ratio of earnings to fixed charges: (a) earnings have been
based on income from continuing operations before income taxes and fixed
charges (exclusive of interest capitalized) and (b) fixed charges consist of
interest and amortization of debt issuance costs (including amounts
capitalized) and the estimated interest portion of rents.
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANT
As independent public accountants, we hereby consent to the use of our
reports (and to all references to our firm) included in or made a part of this
Registration Statement (No. 333-49283).
ARTHUR ANDERSEN LLP
Houston, Texas
May 21, 1998
EXHIBIT 23.2
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Amendment No. 2 to Registration Statement No.
333-49283 of Innovative Valve Technologies, Inc. of our report dated January 17,
1997 (January 31, 1997 as to Notes 2 and 7) on the consolidated financial
statements of Harley Industries, Inc. as of October 31, 1995 and 1996 and for
each of the three years in the period ended October 31, 1996 appearing in the
Prospectus, which is a part of such Registration Statement, and to the
reference to us under the heading "Experts" in such Prospectus.
DELOITTE & TOUCHE LLP
Tulsa, Oklahoma
May 21, 1998
<PAGE>
EXHIBIT 23.2
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Amendment No. 2 to the Registration Statement
of Innovative Valve Technologies, Inc. on Form S-4 of our report dated February
20, 1998 relating to the financial statements of GSV, Inc., appearing in the
Prospectus, which is part of this Registration Statement.
We also consent to the reference to us under the heading "Experts" in
such Prospectus.
DELOITTE & TOUCHE LLP
Orlando, Florida
May 20, 1998
EXHIBIT 23.3
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
report dated February 12, 1998 with respect to the December 31, 1997 financial
statements of Cypress Industries, Inc. and to reference to our firm, under the
heading "Experts", included in this registration statement.
CROWE, CHIZEK AND COMPANY LLP
Oak Brook, Illinois
May 21, 1998
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM T-1
STATEMENT OF ELIGIBILITY AND QUALIFICATION UNDER THE TRUST
INDENTURE ACT OF 1939 OF A CORPORATION DESIGNATED TO ACT AS TRUSTEE
CHECK IF AN APPLICATION TO DETERMINE ELIGIBILITY OF A
TRUSTEE PURSUANT TO SECTION 305(b)(2)_________
---------------
U.S. TRUST COMPANY OF TEXAS, N.A.
(Exact name of trustee as specified in its charter)
75-2353745
(State of incorporation (I.R.S. employer
if not a national bank) identification No.)
2001 Ross Ave, Suite 2700
Dallas, Texas
(Address of trustee's 75201
principal executive offices) (Zip Code)
Compliance Officer
U.S. Trust Company of Texas, N.A.
2001 Ross Ave, Suite 2700
Dallas, Texas 75201
(214) 754-1200
(Name, address and telephone number of agent for service)
---------------
Innovative Valve Technologies, Inc.
(Exact name of obligor as specified in its charter)
Delaware 76-0530346
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification No.)
2 Northpoint Drive, Suite 300
Houston, Texas 77060
(Address of principal executive offices) (Zip Code)
---------------
Convertible Senior Subordinated Notes, Series A
(Title of the indenture securities)
<PAGE>
GENERAL
1. GENERAL INFORMATION.
Furnish the following information as to the Trustee:
(a) Name and address of each examining or supervising authority to
which it is subject.
Federal Reserve Bank of Dallas (11th District), Dallas, Texas
(Board of Governors of the Federal Reserve System)
Federal Deposit Insurance Corporation, Dallas, Texas
The Office of the Comptroller of the Currency, Dallas, Texas
(b) Whether it is authorized to exercise corporate trust powers.
The Trustee is authorized to exercise corporate trust powers.
2. AFFILIATIONS WITH OBLIGOR AND UNDERWRITERS.
If the obligor or any underwriter for the obligor is an affiliate of the
Trustee, describe each such affiliation.
None.
3. VOTING SECURITIES OF THE TRUSTEE.
Furnish the following information as to each class of voting securities
of the Trustee:
As of May 6, 1998
Col A. Col B.
Title of Class Amount Outstanding
-------------- ------------------
Capital Stock - par value $100 per share 5,000 shares
4. TRUSTEESHIPS UNDER OTHER INDENTURES.
Not Applicable
5. INTERLOCKING DIRECTORATES AND SIMILAR RELATIONSHIPS WITH THE OBLIGOR OR
UNDERWRITERS.
Not Applicable
<PAGE>
6. VOTING SECURITIES OF THE TRUSTEE OWNED BY THE OBLIGOR OR ITS OFFICIALS.
Not Applicable
7. VOTING SECURITIES OF THE TRUSTEE OWNED BY UNDERWRITERS OR THEIR
OFFICIALS.
Not Applicable
8. SECURITIES OF THE OBLIGOR OWNED OR HELD BY THE TRUSTEE.
Not Applicable
9. SECURITIES OF UNDERWRITERS OWNED OR HELD BY THE TRUSTEE.
Not Applicable
10. OWNERSHIP OR HOLDINGS BY THE TRUSTEE OF VOTING SECURITIES OF CERTAIN
AFFILIATES OR SECURITY HOLDERS OF THE OBLIGOR.
Not Applicable
11. OWNERSHIP OR HOLDINGS BY THE TRUSTEE OF ANY SECURITIES OF A PERSON
OWNING 50 PERCENT OR MORE OF THE VOTING SECURITIES OF THE OBLIGOR.
Not Applicable
12. INDEBTEDNESS OF THE OBLIGOR TO THE TRUSTEE.
Not Applicable
13. DEFAULTS BY THE OBLIGOR.
Not Applicable
14. AFFILIATIONS WITH THE UNDERWRITERS.
Not Applicable
15. FOREIGN TRUSTEE.
Not Applicable
16. LIST OF EXHIBITS.
T-1.1 -- A copy of the Articles of Association of U.S. Trust Company
of Texas, N.A.; incorporated herein by reference to Exhibit
T-1.1 filed with Form T-1 Statement, Registration No.
22-21897.
<PAGE>
16. (con't.)
T-1.2 -- A copy of the certificate of authority of the Trustee to
commence business; incorporated herein by reference to Exhibit
T-1.2 filed with Form T-1 Statement, Registration No.
22-21897.
T-1.3 -- A copy of the authorization of the Trustee to exercise
corporate trust powers; incorporated herein by reference to
Exhibit T-1.3 filed with Form T-1 Statement, Registration No.
22-21897.
T-1.4 -- A copy of the By-laws of the U.S. Trust Company of Texas,
N.A., as amended to date; incorporated herein by reference to
Exhibit T-1.4 filed with Form T-1 Statement, Registration No.
22-21897.
T-1.6 -- The consent of the Trustee required by Section 321(b) of the
Trust Indenture Act of 1939.
T-1.7 -- A copy of the latest report of condition of the Trustee
published pursuant to law or the requirements of its
supervising or examining authority.
NOTE
As of May 6, 1998, the Trustee had 5,000 shares of Capital Stock outstanding,
all of which are owned by U.S. T.L.P.O. Corp. As of May 6, 1998, U.S. T.L.P.O.
Corp. had 35 shares of Capital Stock outstanding, all of which are owned by U.S.
Trust Corporation. U.S. Trust Corporation had outstanding 19,142,000.00 shares
of $5 par value Common Stock as of May 6, 1998.
The term "Trustee" in Items 2, 5, 6, 7, 8, 9, 10 and 11 refers to each of U.S
Trust Company of Texas, N.A., U.S. T.L.P.O. Corp. and U.S. Trust Corporation.
In as much as this Form T-1 is filed prior to the ascertainment by the Trustee
of all the facts on which to base responsive answers to Items 2, 5, 6, 7, 9, 10
and 11, the answers to said Items are based upon incomplete information. Items
2, 5, 6, 7, 9, 10 and 11 may, however, be considered correct unless amended by
an amendment to this Form T-1.
In answering any items in this Statement of Eligibility and Qualification which
relates to matters peculiarly within the knowledge of the obligors or their
directors or officers, or an underwriter for the obligors, the Trustee has
relied upon information furnished to it by the obligors and will rely on
information to be furnished by the obligors or such underwriter, and the Trustee
disclaims responsibility for the accuracy or completeness of such information.
---------------
<PAGE>
SIGNATURE
Pursuant to the requirements of the Trust Indenture Act of 1939 the Trustee, U.S
Trust Company of Texas, N.A., a national banking association organized under the
laws of the United States of America, has duly caused this statement of
eligibility and qualification to be signed on its behalf by the undersigned,
thereunto duly authorized, all in the City of Dallas, and State of Texas on the
6th day of May, 1998.
U.S. Trust Company
of Texas, N.A., Trustee
By: /s/John C. Stohlmann
John C. Stohlmann
Vice President
<PAGE>
Exhibit T-1.6
CONSENT OF TRUSTEE
Pursuant to the requirements of Section 321(b) of the Trust Indenture Act of
1939 as amended in connection with the proposed issue of Innovative Valve
Technologies, Inc. Convertible Senior Subordinated Notes, Series A, we hereby
consent that reports of examination by Federal, State, Territorial or District
authorities may be furnished by such authorities to the Securities and Exchange
Commission upon request therefore.
U.S. Trust Company
of Texas, N.A., Trustee
By: /s/John C. Stohlmann
John C. Stohlmann
Vice President
<PAGE>
OMB Number: 7100-0036
Federal Deposit Insurance Corporation
OMB Number: 3064-0052
Office of the Comptroller of the Currency
Federal Financial Institutions OMB Number: 1557-0081
Examination Council Expires March 31, 2000
- --------------------------------------------------------------------------------
(1)
Please Refer to Page I,
Table of Contents, for
the required disclosure
(LOGO) of estimated burden.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
<S> <C>
CONSOLIDATED REPORTS OF CONDITION AND INCOME FOR A (980331)
BANK WITH DOMESTIC OFFICES ONLY AND TOTAL ASSETS OF (RCRI 9999)
LESS THAN $100 MILLION - - FFIEC 033
This report form is to be filed by banks with
REPORT AT THE CLOSE OF BUSINESS MARCH 31, 1998 domestic offices only. Banks with branches and
consolidated subsidiaries in U.S. territories
This report is required by law: 12 U.S.C. Section ss. and possessions, Edge or Agreement subsidiaries,
324 (State member banks); 12 U.S. c. Section ss. 1817 foreign branches, consolidated foreign
(State nonmember banks); and 12 U.S. C. Section ss. subsidiaries, or International Banking
161 (National banks). Facilities must file FFIEC 031.
- --------------------------------------------------------------------------------------------------------
NOTE: The Reports of Condition and Income must be The Reports of Condition and Income are to be
signed by an authorized officer and the Report of prepared in accordance with Federal regulatory
Condition must be attested to by not less than two authority instructions. NOTE: these instructions
directors (trustees) for State nonmember banks and may in some cases differ from generally accepted
three directors for State member and National Banks. accounting principles.
We, the undersigned directors (trustees), attest
I, ALFRED B. CHILDS, SVP & CASHIER to the correctness of this Report of Condition
Name and Title of Officer Authorized to Sign Report (including the supporting schedules) and declare
that it has been examined by us and to the best
of our knowledge and belief has been prepared in
of the named bank do hereby declare that these conformance with the instructions issued by the
Reports of Condition and Income (including the appropriate Federal regulatory authority and is
supporting schedules) have been prepared in true and correct.
conformance with the instructions issued by the
appropriate Federal regulatory authority and are /s/ STUART M. PEARMAN
true to the best of my knowledge and belief. Director (Trustee)
/s/ ALFRED B. CHILDS /s/ J. T. MOORE JR.
Signature of Officer Authorized to Sign Report Director (Trustee)
4/14/98 /s/ PETER DENKER
Date of Signature Director (Trustee)
- --------------------------------------------------------------------------------------------------------
(b) in hard-copy (paper) form and arrange for
another party to convert the paper report to
SUBMISSION OF REPORTS electronic form. That party (if other than
EDS) must transmit the bank's computer data
Each bank must prepare its Reports of Condition and file to EDS.
Income either: To fulfill the signature and attestation
(a) in electronic form and then file the computer requirement for the Reports of Condition and
data file directly with the banking agencies' Income for this report date, attach this
collection agent, Electronic Data Systems signature page to the hard-copy record of the
Corporation (EDS), by modem or on computer completed report that the bank places in
diskette; or its files.
- --------------------------------------------------------------------------------------------------------
Call No. 203 33 03-31-98
FDIC Certificate Number ____________
(RCRI 9050) STBK: 48-6797 13264 STCERT: 48-33217
US Trust Company of Texas, National Association
2001 Ross Avenue, Suite 2700
Dallas, TX 75201
Board of Governors of the Federal Reserve System, Federal Deposit Insurance Corporation, Office of the Comptroller of the Currency
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
U.S. TRUST COMPANY OF TEXAS, N.A. Call Date: 03/31/98 State #: 48-6797 FFIEC 033
2100 ROSS AVENUE, SUITE 2700 Vendor ID: D Cert #: 13264 Page RC-1
DALLAS, TX 75201 Transit #: 11101765
-------------
| 9 |
-------------
</TABLE>
CONSOLIDATED REPORT OF CONDITION FOR INSURED COMMERCIAL
AND STATE-CHARTERED SAVINGS BANKS FOR MARCH 31, 1998
All schedules are to be reported in thousands of dollars. Unless otherwise
indicated, report the amount outstanding as of the last business day of the
quarter.
SCHEDULE RC - BALANCE SHEET
<TABLE>
<CAPTION>
C200
DOLLAR AMOUNTS IN THOUSANDS
<S> <C> <C> <C> <C>
ASSETS
1. Cash and balances due from depository institutions: RCON
--------
a. Noninterest-bearing balances and currency and coin (1,2)_______________________ ______ _______ 0081 1,143 1.a
b. Interest bearing balances(3)___________________________________________________ ______ _______ 0071 1,138 1.b
2. Securities:
a. Held-to-maturity securities (from Schedule RC-B, column A)_____________________ ______ _______ 1754 0 2.a
b. Available-for-sale securities (from Schedule RC-B, column D)___________________ ______ _______ 1773 121,248 2.b
3. Federal funds sold (4) and securities purchased under agreements to resell: 1350 5,000 3
RCON
4. Loans and lease financing receivables: ------
a. Loans and leases, net of unearned income (from 2122 18,091 4.a
Schedule RC-C)_____________________________________________________________________
b. LESS: Allowance for loan and lease losses_______________________________________ 3123 225 4.b
c. LESS: Allocated transfer risk reserve___________________________________________ 3128 0 4.c
RCON
d. Loans and leases, net of unearned income, allowance, and --------
reserve (item 4.a minus 4.b and 4.c)____________________________________________ ______ _______ 2125 17,866 4.d
5. Trading assets_____________________________________________________________________ ______ _______ 3545 0 5.
6. Premises and fixed assets (including capitalized
leases)____________________________________________________________________________ ______ _______ 2145 743 6.
7. Other real estate owned (from Schedule RC-M)_______________________________________ ______ _______ 2150 0 7.
8. Investments in unconsolidated subsidiaries and associated companies
(from Schedule RC-M)_______________________________________________________________ ______ _______ 2130 0 8.
9. Customers' liability to this bank on acceptances
outstanding________________________________________________________________________ ______ _______ 2155 0 9.
10. Intangible assets (from Schedule RC-M)_____________________________________________ ______ _______ 2143 0 10.
11. Other assets (from Schedule RC-F)__________________________________________________ ______ _______ 2160 1,902 11.
12. Total assets (sum of items 1 through 11)___________________________________________ ______ _______ 2170 149,040 12.
(1) Includes cash items in process of collection and unposted debits.
(2) Included time certificates of deposit not held for trading.
<PAGE>
U.S. TRUST COMPANY OF TEXAS, N.A. Call Date: 03/31/98 State #: 48-6797 FFIEC 033
2100 ROSS AVENUE, SUITE 2700 Vendor ID: D Cert #: 13264 Page RC-2
DALLAS, TX 75201 Transit #: 11101765
-------------
| 10 |
-------------
SCHEDULE RC - CONTINUED
- ------------------------------------------------------------------------------------------------------------------------
DOLLAR AMOUNTS IN THOUSANDS
LIABILITIES
13. Deposits: RCON
a. In domestic offices (sum of totals of --------
columns A and C from Schedule RC-E)__________________________________ RCON 2200 120,298 13.a
--------
(1) Noninterest-bearing(1)_________________________________________ 6631 10,817 13.a.1
(2) Interest-bearing_______________________________________________ 6636 109,481 13.a.2
b. In foreign offices, Edge and Agreement subsidiaries, and IBFs
(1) Noninterest-bearing____________________________________________
(2) Interest-bearing_______________________________________________
RCON
14. Federal funds purchased(2) and securities sold under agreements to -------
repurchase: 2800 0 14
15. a. Demand notes issued to the U.S. ______ _______
Treasury_________________________________________________________________ 2840 0 15.a
b. Trading liabilities___________________________________________________ ______ _______ 3548 0 15.b
16. Other borrowed money:
A. WITH A REMAINING MATURITY OF ONE YEAR OR LESS ________________________ ______ _______ 2332 2,000 16.a
B. WITH A REMAINING MATURITY OF MORE THAN ONE YEAR THROUGH ______ _______
THREE YEARS______________________________________________________________ A547 2,000 16.b
C. WITH A REMAINING MATURITY OF MORE THAN THREE YEARS ___________________ ______ _______ A548 1,000 16.c
17. Not applicable
18. Bank's liability on acceptances executed and outstanding_________________ ______ _______ 2920 0 18.
19. Subordinated notes and debentures________________________________________ ______ _______ 3200 0 19.
20. Other liabilities (from Schedule RC-G)___________________________________ ______ _______ 2930 2,225 20.
21. Total liabilities (sum of items 13 through 20)___________________________ ______ _______ 2948 127,523 21.
22. Not applicable
EQUITY CAPITAL
RCON
23. Perpetual preferred stock and related surplus____________________________ ______ ______ ------
24. Common stock_____________________________________________________________ ______ ______ 3230 500 24.
25. Surplus (exclude all surplus related to preferred stock)_________________ ______ ______ 3839 8,384 25.
26. a. Undivided profits and capital reserves________________________________ ______ ______ 3632 5,277 26.a
b. Net unrealized holding gains (losses) on
available-for-sale securities____________________________________________ ______ ______ 8434 356 26.b
27. Cumulative foreign currency translation adjustments______________________
28. Total equity capital (sum of items 23 through 27)________________________ ______ ______ 3210 21,517 28.
29. Total liabilities and equity capital (sum of items 21 and 28)____________ ______ ______ 2257 149,040 29.
MEMORANDUM
TO BE REPORTED ONLY WITH THE MARCH REPORT OF CONDITION. NUMBER
--------
1. Indicate in the box at the right the number of the statement below that | |
best describes the mostcomprehensive level of auditing work performed for the bank | |
by independent external auditors as of any date during 1997 ______________________ | 1 |
6724 -------- M.1
6724 1 M.1
1 = Independent audit of the bank conducted in
accordance with generally accepted auditing standards by 4 = Directors' examination of the bank performed by other
certified public accounting firm which submits a report on external auditors (may be required by state chartering
the bank authority)
2 = Independent audit of the bank's parent holding company 5 = Review of the bank's financial statements by external
conducted in accordance with generally accepted auditors
auditing standards by a certified public accounting firm 6 = Compilation of the bank's financial statements by external
which submits a report on the consolidated holding auditors
company (but not on the bank separately) 7 = Other audit procedures (excluding tax preparation work)
3 = Directors' examination of the bank conducted in 8 = No external audit work
accordance with generally accepted auditing standards by a
certified public accounting firm (may be required by
state chartering authority)
(1) Includes total demand deposits and noninterest-bearing time and savings deposits.
(2) Includes limited-life preferred stock and related surplus.
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