AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 5, 1998
REGISTRATION NO. 333-49283
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 3
TO
FORM S-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
------------------------
INNOVATIVE VALVE TECHNOLOGIES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<CAPTION>
<S> <C> <C> <C>
DELAWARE 5085, 7699 76-0530346
(STATE OR OTHER JURISDICTION (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBERS) IDENTIFICATION NUMBER)
</TABLE>
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
------------------------
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.
================================================================================
<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 JUNE 5, 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 June 4, 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 June 4, 1998, the last reported sale price of the Common
Stock on the Nasdaq National Market was $8.75 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.
------------------
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.
----------------------------------
The date of this Prospectus is June , 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.
2
<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 current 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."
3
<PAGE>
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
------------ -------------
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
---------
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.
4
<PAGE>
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 and had net income of
$1,255,000 during the three months ended March 31, 1998. 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
5
<PAGE>
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 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.
SIGNIFICANT GOODWILL
The Company's unaudited balance sheet at March 31, 1998 includes an amount
designated as "goodwill" that represents 52% of assets and 111% of
stockholders' equity. Goodwill arises from an acquisition of a business
accounted for as purchase when the acquirer pays more for that business than the
fair value of its tangible and separately measurable intangible net assets.
Generally accepted accounting principles require that this and all other
intangible assets be amortized over the period benefited. Management has
determined that period to be no less than 40 years. If management were not to
separately recognize a material intangible asset having a benefit period less
than 40 years, or were not to give effect to shorter benefit periods of factors
giving rise to a material portion of the goodwill, earnings reported in periods
immediately following the acquisition would be overstated. In later years, the
Company would be burdened by a continuing charge against earnings without the
associated benefit to income valued by management in arriving at the
consideration paid for the business. Earnings in later years also could be
significantly affected if management determined then that the remaining balance
of goodwill was impaired. Management has reviewed with its independent
accountants all the factors and related future cash flows the Company considered
in arriving at the amount incurred to acquire each of the Acquired Businesses.
Management concluded that the anticipated future cash flows associated with
intangible assets recognized in the acquisitions will continue indefinitely, and
there is no persuasive evidence that any material portion will dissipate over a
period shorter than 40 years.
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
6
<PAGE>
SafeSealtechnology 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 June 4, 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 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 June
4, 1998, the aggregate amount of Senior Indebtedness to which the Convertible
Debt Securities would have been subordinated was approximately $55.7 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.
7
<PAGE>
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 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.
8
<PAGE>
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 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
9
<PAGE>
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.
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 June 4, 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."
10
<PAGE>
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."
11
<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. A description of
each of the Additional Acquired Businesses follows.
On November 14, 1997, the Company acquired Performance Valve and Controls,
Inc. ("Performance Valve"). Performance Valve, located in Tulsa, Oklahoma,
distributes and repairs industrial valves.
On December 11, 1997, the Company acquired L.T. Koppl Industries, Inc.
("Koppl"). Koppl, with its headquarters in Montebello, California, provides
hot tapping, line stopping, line freezing, leak sealing, field machining and
concrete restoration. Koppl has operating locations in Montebello, California,;
Baxley, California; Concord, California; El Dorado, Kansas; Las Vegas, Nevada;
Lubbock, Texas; Vancouver, Washington; and Mesa, Arizona.
On December 17, 1997, the Company acquired Seeley & Jones, Incorporated
("Seeley"). Seeley distributes safety and safety relief valves, related
instrumentation and process system components. Seeley also provides industrial
valve repair services to customers primarily in the power and pulp and paper
markets. Seeley is located in Milford, Connecticut.
On December 17, 1997, the Company acquired Dalco, Inc. ("Dalco"). Dalco
assembles, distributes and repairs a variety of industrial valves (including
pressure relief valves and control valves) and related products (including
pneumatic and electric actuators and controls). Dalco serves customers with a
focus on the following markets: power utility; chemical processing; food and
beverage; pulp and paper; refining; steel processing; and pharmaceutical
manufacturing. Dalco's main office, shop facilities and warehouse are located in
Lousiville, Kentucky, and it has a sales office and a small warehouse in the
Greater Cincinnati area.
12
<PAGE>
On January 27, 1998, the Company acquired Preventive Maintenance, Inc.
("PMI"). PMI, with its headquarters in Wilmington, North Carolina, provides
on-line leak sealing, in-field machining, hot tapping, line stopping,
environmental monitoring, oil leak repair, line freezing, rotating equipment
base repair and concrete repair services. PMI has operating locations in
Wilmington, North Carolina; Columbia, South Carolina; Fort Mill, South Carolina;
Richmond, Virginia; and Charleston, West Virginia.
On February 27, 1998, the Company acquired Cypress Industries, Inc.
("Cypress"). Cypress, through its three operating divisions, provides field
machining, valve repair, specialized welding and babbit bearing repair services
to its customers, which include the power utility industry, steel mills and
other related industrial markets. Cypress is headquartered in Schaumburg,
Illinois and has operating locations in Cincinnati, Ohio and Atlanta, Georgia.
On March 16, 1998, the Company acquired IPS Holding, Ltd., and its direct
and indirect subsidiaries, International Piping Services Company, IPSCO (U.K.)
Limited, Mid-America Energies, Corp. and IPSCO-Florida, Inc. (collectively,
"IPSCO"). IPSCO, with its headquarters in Downers Grove, Illinois and through
its domestic operating locations in Florida, Illinois, New Jersey, North
Carolina and Texas and its international operations in England, Germany and the
United Arab Emirates, provides on-line piping and valve services, which include
hot tapping, line stopping and leak sealing. In addition, IPSCO manufactures
certain small diameter hot tapping and line stopping machinery for sale to
industrial customers and service companies that provide hot tapping and line
stopping services.
13
<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 June 4, 1998, 8,723,338 shares of Common
Stock were outstanding, and held by approximately 73 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 June
4).............................. $ 18.25 $ 8.75
The last reported closing price of the Common Stock on the Nasdaq National
Market on June 4, 1998 was $8.75 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.
14
<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.
15
<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)
16
<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 $2,705,000,
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.
17
<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.
18
<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.
19
<PAGE>
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
20
<PAGE>
June 4, 1998, $55.7 million of borrowings were outstanding under the Credit
Facility and bore an average interest rate of 8.4%.
At June 4, 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
June 4, 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.
21
<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 3/4 to over 20 feet, serve as
mechanical control, blocking and pressure-relief devices in piping applications
involving a myriad of liquids, gases, dry materials 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, 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
22
<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.
23
<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.
24
<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
June 4, 1998, outstanding borrowings under the Credit Facility totaled $55.7
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.
25
<PAGE>
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."
26
<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.
See "-- Suppliers -- Relationships with OEMs."
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
27
<PAGE>
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.
28
<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
29
<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.
30
<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 May 31, 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 Company believes that, in repair service operations, the rate of
turnover among field service technicians is higher than the rate of turnover of
in-shop 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 with applicable regulatory
requirements relating to its operations, except for possible noncompliances that
would not have a material adverse effect on the Company. 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
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<PAGE>
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.
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.
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<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
33
<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.
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<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.
35
<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
36
<PAGE>
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 June 4, 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. The Company
believes the terms of these loans were more favorable to its officers than the
terms available from disinterested third parties.
37
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
FINANCING ARRANGEMENTS
Invatec was initially capitalized in March 1997 with $216.12 (this and
other monetary amounts set forth in the following discussion are actual dollar
amounts; where dollar amounts are stated in thousands in this Prospectus, the
context so indicates) 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 Company negotiated the funding arrangements with Philip which are
described above and under "-- The SSI Merger" at arm's length, and the
Company's management believes these terms were as favorable as could have been
received from any other disinterested third party. The Company's management also
believes the terms of the stock sales described above and the 1997 Agreement
were fair to the Company.
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
38
<PAGE>
$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 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.
The Company's management believes the terms of the SSI Merger were
comparable to those it would have obtained had SSI not been a related party.
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." These claims included claims for bonuses and
prepaid consulting fees totaling $300,000 which Philip and Mr. Miller had agreed
in September 1996 Mr. Miller would receive at or prior to the closing of the IPO
and possible claims relating to additional consulting fees.
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. The
Company believes the terms of this agreement were as favorable as could have
been received from any other disinterested third party of comparable stature.
39
<PAGE>
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.
40
<PAGE>
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
41
<PAGE>
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").
42
<PAGE>
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 June 4, 1998, the aggregate amount of Senior
Indebtedness to which the Convertible Securities would have been subordinated
was approximately $55.7 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 June 4, 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.
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SHARES ELIGIBLE FOR FUTURE SALE
At June 4, 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.
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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.
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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
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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).
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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
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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.
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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
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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>
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- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
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.......................... 12
Price Range of Common Stock.......... 14
Dividend Policy...................... 14
Capitalization....................... 15
Selected Financial Information....... 16
Management's Discussion and
Analysis of Financial Condition
and Results of Operations.......... 18
Business............................. 22
Management........................... 33
Certain Relationships and Related
Transactions....................... 38
Security Ownership of Certain
Beneficial Owners and
Management......................... 40
Description of the Convertible Debt
Securities......................... 41
Description of Capital Stock......... 48
Shares Eligible for Future Sale...... 53
Certain United States Federal Income
Tax Consequences................... 55
Plan of Distribution................. 57
Legal Matters........................ 58
Experts.............................. 58
Additional Information............... 58
Index to Financial Statements........ F-1
[LOGO]
INVATEC
COMMON STOCK
CONVERTIBLE SUBORDINATED
DEBT SECURITIES
------------------------
PROSPECTUS
------------------------
June , 1998
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- ------------------------------------------------------
- ------------------------------------------------------
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<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
- ------------------------ ------------------------------------------------------------------------------------------
<S> <C>
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.
II-3
<PAGE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------------------------ ------------------------------------------------------------------------------------------
<S> <C>
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 June 1, 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 Amendment No. 2 to this 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.
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<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 June 4, 1998.
INNOVATIVE VALVE TECHNOLOGIES, INC.
By: /s/WILLIAM E. HAYNES
WILLIAM E. HAYNES
PRESIDENT AND CHIEF EXECUTIVE OFFICER
Pursuant to the requirements of the Securities Act of 1933, this Amendment
to Registration Statement has been signed by the following persons in the
capacities indicated on June 4, 1998.
<TABLE>
<CAPTION>
SIGNATURE TITLE
- -------------------------------------------------------------------------------------------
<S> <C>
/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)
Director
MICHAEL A. BAKER
ROBERT M. CHISTE* Director
ROBERT M. CHISTE
ARTHUR L. FRENCH* Director
ARTHUR L. FRENCH
TOMMY E. KNIGHT* Director
TOMMY E. KNIGHT
PIERRE R. LATOUR* Director
PIERRE R. LATOUR
Director
T. WAYNE WREN
*By:/s/WILLIAM E. HAYNES
WILLIAM E. HAYNES
(ATTORNEY-IN-FACT)
II-6
</TABLE>
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> <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) $ (2,705) $ 2,201
Add back --
Fixed charges less interest
capitalized................ 31 38 38 58 3,209 384 991
--------- --------- --------- --------- --------- --------- ---------
$ (232) $ (243) $ (1,467) $ (357) $ (5,314) $ (2,321) $ 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 ACCOUNTANTS
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
June 4, 1998
EXHIBIT 23.2
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Amendment No. 3 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 a period ended October 31, 1996 appearing in the
Prospectus, which is the part of such Registration Statement, and to the
reference to us under the heading "Experts" in such Prospectus.
DELOITTE & TOUCHE LLP
Tulsa, Oklahoma
June 4, 1998
<PAGE>
EXHIBIT 23.2
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Amendment No. 3 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
June 4, 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
June 4, 1998
