UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM __________TO _________
COMMISSION FILE NUMBER: 000-23231
------------------------
INNOVATIVE VALVE TECHNOLOGIES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 76-0530346
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
2 NORTHPOINT DRIVE, SUITE 300 77060
HOUSTON, TEXAS (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (281) 925-0300
------------------------
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
The number of shares of Common Stock of the Registrant, par value $.001
per share, outstanding at August 13, 1999 was 9,664,562.
=============================================================================
<PAGE>
INNOVATIVE VALVE TECHNOLOGIES, INC.
FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 1999
INDEX
PAGE
-----
Part I -- Financial Information...................................... 2
Item 1 -- Financial Statements..................................... 2
Consolidated Balance Sheets as of December 31, 1998 and
June 30, 1999 (Unaudited)....................................... 2
Consolidated Statements of Operations for the Three Months and Six
Months Ended June 30, 1998 and 1999 (Unaudited)................ 3
Consolidated Statements of Cash Flows for the Six Months Ended
June 30, 1998 and 1999 (Unaudited).............................. 4
Notes to Consolidated Financial Statements (Unaudited)............ 5
Item 2 -- Management's Discussion and Analysis of Financial
Condition and Results of Operations............................ 11
Item 3 -- Quantitative and Qualitative Disclosures About Market
Risk............................................................ 17
Part II -- Other Information........................................ 18
Item 3 -- Defaults Upon Senior Securities.......................... 18
Item 6 -- Exhibits and Reports on Form 8-K......................... 19
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1 -- FINANCIAL STATEMENTS
INNOVATIVE VALVE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, JUNE 30,
1998 1999
------------- -------------
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash ...................................... $ -- $ --
Accounts receivable, net of allowance
of $1,562,104 and $1,615,332 ............ 29,634,167 30,936,957
Inventories, net .......................... 26,007,804 27,377,358
Prepaid expenses and other current
assets .................................. 2,366,871 2,595,331
Deferred tax asset ........................ 4,481,256 4,390,737
------------- -------------
Total current assets ................ 62,490,098 65,300,383
PROPERTY AND EQUIPMENT, net .................. 19,469,804 18,283,777
GOODWILL, net ................................ 96,175,294 92,535,167
OTHER NONCURRENT ASSETS, net ................. 5,564,642 6,123,622
------------- -------------
TOTAL ASSETS ........................ $ 183,699,838 $ 182,242,949
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Credit Facility ........................... $ -- $ 72,856,035
Current maturities of long-term debt ...... 580,140 218,270
Accounts payable, accrued expenses and
other liabilities ....................... 19,364,587 24,852,906
------------- -------------
Total current liabilities ........... 19,944,727 97,927,211
CREDIT FACILITY .............................. 70,570,584 --
LONG-TERM DEBT, net .......................... 400,834 244,924
CONVERTIBLE SUBORDINATED DEBT ................ 11,668,875 11,668,875
OTHER LONG-TERM OBLIGATIONS .................. 1,909,774 1,778,399
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, $0.001 par value,
30,000,000 shares authorized,
9,664,562 shares issued
and outstanding ...................... 9,665 9,665
Additional paid-in capital ............. 90,960,972 87,640,672
Retained deficit ....................... (11,765,593) (17,026,797)
------------- -------------
Total stockholders' equity ......... 79,205,044 70,623,540
------------- -------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY ............. $ 183,699,838 $ 182,242,949
============= =============
The accompanying notes are an integral part of these consolidated financial
statements.
2
<PAGE>
INNOVATIVE VALVE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
--------------------------------- ---------------------------------
1998 1999 1998 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
REVENUES ....................................... $ 40,367,440 $ 43,172,453 $ 73,871,477 $ 87,103,006
COST OF OPERATIONS ............................. 27,707,679 30,099,407 50,329,664 60,902,043
------------ ------------ ------------ ------------
Gross profit ............................. 12,659,761 13,073,046 23,541,813 26,200,963
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES ...................... 11,011,603 11,056,836 18,996,608 22,061,704
------------ ------------ ------------ ------------
Income from operations ................... 1,648,158 2,016,210 4,545,205 4,139,259
OTHER INCOME (EXPENSE):
Interest expense, net .................... (1,423,652) (4,265,405) (2,133,142) (6,197,396)
Loss on assets held
for sale ............................... -- (3,809,712) -- (3,809,712)
Other .................................... 75,396 22,250 88,379 60,157
------------ ------------ ------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES .............. 299,902 (6,036,657) 2,500,442 (5,807,692)
PROVISION (BENEFIT) FOR INCOME
TAXES .................................... 128,958 (817,524) 1,075,190 (546,488)
------------ ------------ ------------ ------------
NET INCOME (LOSS) .............................. $ 170,944 $ (5,219,133) $ 1,425,252 $ (5,261,204)
============ ============ ============ ============
EARNINGS (LOSS) PER SHARE -
BASIC .................................... $ 0.02 $ (0.54) $ 0.17 $ (0.54)
============ ============ ============ ============
EARNINGS (LOSS)PER SHARE -
DILUTED .................................. $ 0.02 $ (0.54) $ 0.17 $ (0.54)
============ ============ ============ ============
WEIGHTED AVERAGE SHARES
OUTSTANDING - BASIC .......................... 8,716,415 9,664,562 8,374,666 9,664,562
============ ============ ============ ============
WEIGHTED AVERAGE SHARES
OUTSTANDING - DILUTED ........................ 8,845,210 9,664,562 8,586,051 9,664,562
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE>
INNOVATIVE VALVE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30
-------------------------------------
1998 1999
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ..................................................... $ 1,425,252 $ (5,261,204)
Adjustments to reconcile net income (loss) to
net cash used in operating activities -
Depreciation and amortization ......................................... 1,889,479 2,442,544
Loss on assets held for sale .......................................... -- 3,809,712
Gain on sale of property and equipment ................................ (3,195) (2,550)
Deferred taxes ........................................................ (30,955) (691,066)
Decrease in -
Accounts receivable .............................................. (7,164,853) (1,302,790)
Inventories ...................................................... (2,008,946) (1,853,715)
Prepaid expenses and other current
assets ........................................................ (1,357,280) (494,525)
Other noncurrent assets .......................................... (221,964) (106,348)
Increase (decrease) in -
Accounts payable and accrued expenses ............................ (738,925) 2,239,881
------------ ------------
Net cash used in operating
activities ................................................. (8,211,387) (1,220,061)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property and equipment .......................... 100,515 339,988
Additions to property and
equipment ............................................................. (2,124,341) (863,255)
Business acquisitions, net of cash
acquired of $335,519 and $-- ....................................... (32,122,864) --
------------ ------------
Net cash used in investing
activities ................................................. (34,146,690) (523,267)
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings of long-term debt .......................................... 350,182 --
Repayments of long-term debt .......................................... (199,157) (529,174)
Repayments of short-term debt ......................................... (4,660,924) --
Net borrowings under Credit Facility .................................. 44,327,800 2,285,452
Payments on noncompete obligations .................................... (96,318) (12,950)
Proceeds from exercise of stock
options ............................................................ 208,501 --
------------ ------------
Net cash provided by
financing activities ....................................... 39,930,084 1,743,328
NET DECREASE IN CASH ............................................................. (2,427,993) --
CASH, beginning of period ........................................................ 2,544,450 --
------------ ------------
CASH, end of period .............................................................. $ 116,457 $ --
============ ============
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest ................................................ $ 1,874,374 $ 4,318,646
Cash paid for income taxes ............................................ $ 1,679,152 $ 747,060
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE>
INNOVATIVE VALVE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION:
Innovative Valve Technologies, Inc. ("Invatec") was incorporated in
Delaware in March 1997 to create the leading single-source provider of
comprehensive maintenance, repair, replacement and value-added distribution
services for industrial valves and related process-system components throughout
North America. Except for its purchase of an established business in July 1997,
Invatec conducted no operations of its own prior to the closing on October 28,
1997 of (i) its initial public offering (the "IPO") of its common stock ("Common
Stock"), (ii) its purchase of two established businesses and (iii) a merger (the
"SSI Merger") in which The Safe Seal Company, Inc. ("SSI") became its
subsidiary. Earlier in 1997, SSI had purchased three established businesses. SSI
and its subsidiaries were affiliates of Invatec prior to the SSI Merger.
For financial reporting purposes, SSI is presented as the "accounting
acquirer" of the seven businesses it and Invatec purchased through the IPO
closing date (collectively, the "Initial Acquired businesses"), and, as used
herein, the term "Company" means (i) SSI and its consolidated subsidiaries prior
to October 31, 1997 and (ii) Invatec and its consolidated subsidiaries
(including SSI) on that date and thereafter.
Following the IPO, the Company purchased thirteen businesses (these
businesses, together with the Initial Acquired Businesses, are referred to
herein as the "Acquired Businesses"). The Company is accounting for the
acquisitions of the 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 as additional information concerning the valuation of those
assets and liabilities becomes available. The accompanying historical
consolidated financial statements of operations present historical information
of the Company, which gives effect to the acquisitions as of their respective
acquisition dates.
The consolidated financial statements herein have been prepared by the
Company without audit, pursuant to rules and regulations of the Securities and
Exchange Commission 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
materially 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 June 30, 1998 and 1999. Certain
reclassifications have been made to 1998 amounts to conform with 1999
presentation.
Operating results for interim periods are not necessarily indicative of
the results for full years. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Fluctuations in Operating
Results" in Item 2 of this Part I. Invatec's Annual Report on Form 10-K for the
year ended December 31, 1998, as amended (the "1998 10-K Report"), includes the
Company's consolidated financial statements and related notes for 1998.
5
<PAGE>
RECENT DEVELOPMENTS
The Company's customers consist primarily of petroleum refining, chemical,
petrochemical, power and pulp and paper plants, the businesses of which tend to
be cyclical. Margins in those industries are highly sensitive to demand cycles
and the Company's customers in those industries have historically tended to
delay capital projects, expensive turnarounds and other maintenance projects
during slow periods. Commencing with the second quarter of 1998 and continuing
into 1999, the Company's business has been negatively impacted by significant
slowdowns experienced by its customers in the exploration and production,
petroleum refining, petrochemical, chemical and pulp and paper industries.
As a result of the above-described downturns affecting the Company's
customers, the Company's level of business declined during 1998 and the
Company's earnings for the last three quarters of 1998 fell significantly short
of expectations. Consequently, this decline in earnings resulted in a severe
reduction in the market price of the Company's Common Stock. Declining earnings
also ultimately resulted in the Company defaulting on its credit facility as a
result of failing to meet certain financial covenants which required specific
levels of earnings in relation to debt. This default left the Company unable to
borrow funds for acquisitions thereunder. The Company remained in default under
the loan agreement from July 20, 1998 through March 25, 1999, when the Company
amended its credit facility. The Company is currently in default under its
amended Credit Facility, although the syndicate of lenders has waived the
defaults until August 20, 1999 and to date has continued to permit the
incurrence of debt under that Credit Facility for payroll and working capital
purposes, but not for acquisitions. Company management believes that Invatec
will be in compliance with all covenants under its Credit Facility at the next
measurement date or, if not in compliance, expects to obtain additional waivers.
There can be no assurance that such waivers would be obtained.
Despite cost cuts and the sale of underperforming non-core assets, the
Company anticipates that it will be difficult to improve overall profitability
in 1999 due to the high cost of funds under the Credit Facility unless it
obtains a more favorable credit facility or business improves dramatically. The
Company has not experienced any significant improvement in its business during
1999. The Company cannot predict when or whether its business will rebound. In
addition, there can be no assurance that a further deterioration in the
Company's business will not occur. Any significant additional erosion in the
Company's business could further depress earnings and likely result in
additional defaults under the Credit Facility.
The Company's acquisition program has been effectively suspended since July
1998 as a result of the low price of the Company's Common Stock and its
inability to borrow funds for acquisitions. The Company has been working with an
investment banking firm since April of this year to develop a financial
restructuring plan for the Company and otherwise explore strategic alternatives.
Management has also engaged in preliminary discussions with private investors
regarding an infusion of equity capital, potential acquirers of the Company
regarding a sale of stock or assets of the Company or certain of its
subsidiaries and its banks regarding an improved restructured credit facility.
It is not possible to predict which of these alternatives, if any, will be
implemented or whether any of them will ultimately be successful.
2. GOODWILL
Goodwill represents the excess of the aggregate purchase price paid by the
Company in the acquisition of businesses accounted for using the purchase method
of accounting over the fair market value of the net assets acquired. Goodwill is
amortized on a straight-line basis over 40 years.
6
<PAGE>
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, business
trends and prospects and market and economic conditions, assuming the acquired
business continues to operate as a consolidated subsidiary. Management is
currently evaluating various alternatives, including the potential sale of
certain Company assets, which could result in a potential impairment of the
recorded asset value.
During 1998, Company management designed and implemented a restructuring
plan to reduce the Company's cost structure, streamline operations and divest
the Company of underperforming assets. As part of this initiative, management
decided to divest a portion of one of its acquired businesses that was incurring
significant operating losses. This subsidiary was engaged primarily in the
distribution of commodity valve products and related process system components.
Management determined that the products distributed by the subsidiary did not
fit into its long-term vision of providing high quality repair services and
value-added distribution of engineered products. Accordingly, certain assets of
this subsidiary were sold effective July 31, 1999. The carrying value of these
assets held for sale was reduced to fair value based upon the final negotiated
sales price with the buyer, less costs to sell. The resulting adjustment of
approximately $3.8 million to reduce assets held for sale to fair value and
goodwill related to the assets held for sale was recorded in the June 30, 1999
consolidated statements of operations. The Company applied the proceeds from the
sale of the assets to reduce its outstanding balance under the Credit Facility.
Pro forma net sales for the operations associated with the impaired assets were
approximately $11.3 million, $7.8 million, and $3.1 million in 1997, 1998, and
the six month period ended June 30, 1999, respectively. The pro forma operating
losses allocable to such operations for the applicable periods were
approximately ($0.1), ($0.3), and ($0.4), respectively.
3. CREDIT FACILITY:
In March 1999, the Company and its existing syndicate of lenders
restructured the Company's credit facility to provide for a stationary term
component of $35 million and a revolving credit facility of up to $45 million,
up to a maximum aggregate loan amount of $76.5 million, the proceeds of which
may be used only for general corporate and working capital purposes (the "Credit
Facility"). The stationary term loan amount will be reduced to $34 million
beginning August 21, 1999 and to $33 million after January 30, 2000. The
Company's domestic subsidiaries have guaranteed the repayment of all amounts due
under the Credit Facility, and repayment is secured by pledges of the capital
stock, and all or substantially all of the assets, of those subsidiaries. The
Credit Facility prohibits acquisitions and the payment of cash dividends,
restricts the ability of the Company to incur other indebtedness and requires
the Company to comply with certain financial covenants. These financial
covenants include provisions for maintenance of certain levels of earnings
before interest, taxes, depreciation, and amortization ("EBITDA"), certain
levels of cash flows as defined by the Credit Facility and other items specified
in the loan agreement. Additionally, the Credit Facility requires that the
Company complete all required programming changes in connection with the bank's
Year 2000 compliance objective by September 30, 1999. The Company believes that
it will be able to meet this requirement.
The amount of availability under the Credit Facility is governed by a
borrowing base which consists primarily of the accounts receivable and inventory
of the Company and its subsidiaries, although the amount available under the
revolving portion of the Credit Facility will decrease over time and upon the
occurrence of certain specified events, such as a sale of assets outside the
ordinary course of business. In addition, the Company and the subsidiaries are
required to (i) meet stringent reporting covenants, (ii)
7
<PAGE>
submit to collateral audits (iii) deposit all revenues and receipts into lockbox
accounts and (iv) retain a turnaround consultant. Interest accrues at the prime
rate as in effect from time to time, plus 2%, payable monthly. The Credit
Facility provides for increasingly high overall borrowing costs per quarter
equal to 1.5% of the principal balance under the Credit Facility. These fees of
approximately $2.2 million are accrued at June 30, 1999. However, the Company
intends to extinguish such fees in an overall Company-restructuring plan or in
connection with a new restructured credit facility. The entire Credit Facility
matures on April 20, 2000.
The Company is currently in default under its Credit Facility, although the
syndicate of lenders has waived the defaults until August 20, 1999 and to date
has continued to permit the incurrence of debt under the Credit Facility for
payroll and working capital purposes. In addition, the Company is engaged in
preliminary discussions with private investors to obtain a significant equity
infusion to enable it to reduce its debt, negotiate less stringent terms under
its Credit Facility and potentially resume its acquisition program on a scaled
down, strategic basis. The Company also has been working with an investment
banking firm in reviewing financial restructuring alternatives, including
raising additional equity which would likely have a substantially dilutive
impact on existing shareholders. It is uncertain whether the Company's efforts
to find new equity and debt financing will be successful or that if such efforts
are successful the Company will have sufficient resources to resume its
acquisition program. Company management believes that Invatec will be in
compliance with all covenants of its Credit Facility at the next measurement
date or, if not in compliance, expects to obtain additional waivers. There can
be no assurance that such waivers will be obtained.
In connection with the restructuring of the Credit Facility, the syndicate
of lenders was issued warrants to purchase up to 482,262 shares of the Common
Stock of the Company, exercisable at $0.73 per share (10% below the market price
of such Common Stock as of March 25, 1999), and granted certain registration
rights with respect to the shares issuable upon exercise of the warrants. The
warrants do not have an expiration date. The estimated fair value of the
warrants at the date issued was $0.21 per share using a Black-Scholes option
pricing model. The fair value of the warrants was recorded as deferred loan
costs and is being amortized over the term of the Credit Facility.
At August 13, 1999, the Company's net borrowings under the Credit Facility
were approximately $70.2 million bearing interest at 10.0%, excluding the effect
of contingent fees discussed above.
4. INCOME TAXES:
Certain of the Acquired Businesses were subject to the provisions of
Subchapter S of the Internal Revenue Code prior to their acquisition by the
Company. Under these provisions, their former stockholders paid income taxes on
their proportionate share of the earnings of these businesses. Because the
stockholders were taxed directly, their businesses paid no federal income tax
and only certain state income taxes.
The Company files a consolidated federal income tax return that includes the
operations of the Acquired Businesses for periods subsequent to their respective
acquisition dates.
5. EARNINGS (LOSS) PER SHARE:
The computation of earnings (loss) per share of Common Stock for the
interim periods is presented in accordance with SFAS No. 128, "Earnings Per
Share," based on the following shares of Common Stock outstanding:
8
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
---------------------------- ----------------------------
1998 1999 1998 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Issued and outstanding at January 1 ............. 7,890,198 9,664,562 7,890,198 9,664,562
Issued to acquire businesses in 1998
(weighted) ................................ 807,828 -- 473,093 --
Issued for stock options exercised
and warrants exercised ....................... 18,389 -- 11,375 --
--------- --------- --------- ---------
Weighted average shares outstanding -
Basic ........................................ 8,716,415 9,664,562 8,374,666 9,664,562
Dilutive effect of shares issuable on
conversion of convertible notes ............. -- -- -- --
Dilutive effect of shares issuable
on exercise of stock options 138,795 -- 221,385 --
--------- --------- --------- ---------
Weighted average shares outstanding -
Diluted ...................................... 8,845,210 9,664,562 8,586,051 9,664,562
========= ========= ========= =========
</TABLE>
Diluted weighted average shares outstanding for 1999 does not reflect the
effect of certain options and warrants to purchase common stock, convertible
subordinated notes which were outstanding during the period, and the potential
issuance of additional shares provided in connection with certain acquisition
agreements (as discussed in Note 6) as these items were anti-dilutive.
6. CONTINGENT CONSIDERATION
Three of the acquisition agreements for the Acquired Businesses contain
provisions requiring the Company to pay additional amounts (the "Makeup Amount")
to the former shareholders of each acquired business on the first anniversary of
that acquisition if the price of Invatec Common Stock on that anniversary date
is below a certain level. Two of those acquisition agreements were entered into
on July 9, 1998, and give Invatec the option of paying up to one-half of the
Makeup Amount in cash, with the remainder paid in Common Stock valued at the
market price on the anniversary date. The third agreement was entered into on
June 29, 1998 and gives Invatec the option of paying the entire Makeup Amount in
cash or Common Stock valued at the market price on the anniversary date.
The Makeup Amount is approximately $6.5 million. Shares of Invatec Common
Stock have not been issued to the former shareholders of the certain Acquired
Businesses as the Company's management is currently negotiating the Makeup
Amount with the former shareholders as part of an overall restructuring plan.
The Makeup Amount obligation of approximately $3.4 million for the acquisition
entered into as of June 29, 1998 has been accrued at June 30, 1999. The
remaining balance of approximately $3.1 million related to the acquisitions
entered into as of July 9, 1998 was accrued in July 1999.
7. SUBSEQUENT EVENTS:
During 1998, Company management designed and implemented a restructuring
plan to reduce the Company's cost structure, streamline operations and divest
the Company of underperforming assets. As part of this initiative, management
decided to divest a portion of one of its acquired businesses that was incurring
significant operating losses. This subsidiary was engaged primarily in the
distribution of commodity valve products and related process
9
<PAGE>
system components. Management determined that the products distributed by the
subsidiary did not fit into its long-term vision of providing high quality
repair services and value-added distribution of engineered products.
Accordingly, certain assets of this subsidiary were sold effective July 31,
1999. The carrying value of these assets held for sale was reduced to fair value
based upon the final negotiated sales price with the buyer, less costs to sell.
The resulting adjustment of approximately $3.8 million to reduce assets held for
sale to fair value and goodwill related to the assets held for sale was recorded
in the June 30, 1999 consolidated statements of operations.
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following discussion should be read in conjunction with the
consolidated financial statements and the notes thereto which are included in
Item 1 of this Part I. This report contains "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. See "Factors That May Affect Future Results" in Item
1 of the Company's Annual Report on Form 10-K for the year ended December 31,
1998.
OVERVIEW
The Company derives its revenues principally from (i) sales of industrial
valves and related process-system components to its process-industry customers
and commissions paid by the manufacturers of these products in connection with
the Company's direct sales of these products and (ii) performance of
comprehensive maintenance repair services of industrial valves and related
process-system components for its customers. Costs of operations consist
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 sales, management and administrative personnel, insurance,
depreciation and amortization and other related expenses.
The Company's customers consist primarily of petroleum refining,
petrochemical, chemical, power and pulp and paper plants, the businesses of
which tend to be cyclical. Margins in those industries are highly sensitive to
demand cycles, and the Company's customers in those industries have historically
tended to delay capital projects, expensive turnarounds and other maintenance
projects during slow periods. Commencing with the second quarter of 1998 and
continuing into 1999, the Company's business was negatively impacted by
significant slowdowns experienced by its customers in the exploration and
production, petroleum refining, petrochemical, chemical, and pulp and paper
industries.
As a result of the above-described downturns affecting the Company's
customers, the Company's level of business declined during 1998 and the
Company's earnings for the last three quarters of 1998 fell significantly short
of expectations. Consequently, this decline in earnings resulted in a severe
reduction in the market price of the Company's Common Stock. Declining earnings
also ultimately resulted in the Company defaulting on its credit facility as a
result of failing to meet certain financial covenants which required specific
levels of earnings in relation to debt. This default left the Company unable to
borrow funds for acquisitions thereunder. The Company remained in default under
the loan agreement from July 20, 1998 through March 25, 1999 when the Company
amended its Credit Facility. The Company is currently in default under its
Credit Facility, although the syndicate of lenders has waived the defaults
until August 20, 1999 and to date has continued to permit the incurrence of
debt under that Credit Facility for payroll and working capital purposes, but
not for acquisitions.
The Company's acquisition program has been effectively suspended since
July 1998 as a result of the low price of the Company's Common Stock and its
inability to borrow funds for acquisitions. The Company has been working with an
investment banking firm since April of this year to develop a financial
restructuring plan for the Company. Management has also engaged in preliminary
discussions with private investors regarding an infusion of equity capital,
potential acquirers of the Company regarding a sale of stock or assets of the
Company or certain of its subsidiaries and its
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<PAGE>
banks regarding an improved restructured credit facility. It is not possible to
predict which of these alternatives, if any, will ultimately be implemented or
whether any such alternatives, if implemented, will be successful.
The Company's Credit Facility, expiring on April 20, 2000, consists of a
$35 million stationary term component and up to a $45 million revolving line of
credit from its existing bank group. The stationary term component will be
reduced to $34 million beginning August 21, 1999 and to $33 million after
January 31, 2000. The Credit Facility prohibits the Company from making
acquisitions and provides for increasingly high borrowing costs. As a result,
the Company is currently seeking a significant equity infusion to enable it to
reduce its debt, obtain a new credit facility on better terms and potentially
resume its acquisition program on a scaled down, strategic basis. A significant
equity infusion would likely have a substantially dilutive impact on existing
shareholders.
Since the suspension of the Company's acquisition program, the Company has
focused on efforts to cut costs and otherwise improve profitabilty. During 1998,
the Company eliminated in excess of $5 million in annualized costs, including
substantial corporate overhead. In 1999, the Company has continued its cost
cutting program and sold non-core, underperforming assets of certain
subsidiaries. The Company intends to continue its program of downsizing certain
of its operations to fit the current level of business, consolidating certain
locations and consolidating the marketing efforts currently conducted by
different subsidiary companies and other potential improvements to increase
operational efficiency.
Despite cost cuts and the sale of underperforming non-core assets, the
Company anticipates that it will be difficult to improve overall profitability
in 1999 due to the high cost of funds under the Credit Facility unless it
obtains a more favorable credit facility or business improves dramatically. The
Company has not experienced any significant improvement in its business during
1999. The Company cannot predict when or whether its business will rebound. In
addition, there can be no assurance that a further deterioration in the
Company's business will not occur. Any significant additional erosion in the
Company's business would further depress earnings and likely result in
additional defaults under the Credit Facility.
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RESULTS OF OPERATIONS -- HISTORICAL (Unaudited)
The following table sets forth for the Company certain selected
consolidated financial data and that data as a percentage of consolidated
revenues for the periods indicated:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
--------------------------------------------- ---------------------------------------------
1998 1999 1998 1999
-------------------- -------------------- -------------------- --------------------
(IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues ...................... $ 40,368 100% $ 43,172 100% $ 73,872 100% $ 87,103 100%
Cost of operations ............ 27,708 69 30,099 70 50,330 68 60,902 70
-------- -------- -------- -------- -------- -------- -------- --------
Gross profit .................. 12,660 31 13,073 30 23,542 32 26,201 30
Selling, general and
administrative expenses ..... 11,012 27 11,057 26 18,997 26 22,062 25
-------- -------- -------- -------- -------- -------- -------- --------
Income from
operations ................. 1,648 4 2,016 4 4,545 6 4,139 5
Interest expense, net ......... (1,424) (4) (4,265) (10) (2,133) (3) (6,197) (7)
Loss) on assets held
for sale ...................... -- -- (3,810) (9) -- -- (3,810) (4)
Other income (expense) ........ 76 -- 22 -- 88 -- 60 --
-------- -------- -------- -------- -------- -------- -------- --------
Income (loss)from
operations before income
taxes ...................... $ 300 --% $ (6,037) (15)% $ 2,500 3% $ (5,808) (6)%
======== ======== ======== ======== ======== ======== ======== ========
</TABLE>
THREE MONTHS ENDED JUNE 30
REVENUES -- Revenues increased $2.8 million, or 7%, from $40.4 million in
the three months ended June 30, 1998 to $43.2 million in the corresponding
period in 1999. This increase primarily resulted from the full inclusion in the
1999 period of the results of the business acquired during 1998, offset by
downturns previously described.
GROSS PROFIT -- Gross profit increased $0.4 million, or 3%, from $12.7
million in the three months ended June 30, 1998 to $13.1 million in the
corresponding period in 1999. This increase occurred principally as a result of
the inclusion in the 1999 period of the incremental gross profit of the
businesses acquired during 1998. Gross margin as a percentage of revenues
decreased from 31% to 30%, primarily resulting from lower sales volumes
associated with the downturns previously described.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES -- Selling, general and
administrative expenses increased $0.1 million, or 1%, from $11.0 million in the
three months ended June 30, 1998 to $11.1 million in the corresponding period in
1999. This increase primarily reflected the incremental selling, general and
administrative expenses in the 1999 period of the businesses acquired during
1998. As a percentage of revenues, these expenses decreased from 27% to 26% due
to the cost reductions described above.
INTEREST EXPENSE, NET - Interest expense, net increased $2.8 million, or
200% from $1.4 million in the three months ended June 30, 1998, to $4.2 million
in the corresponding period in 1999. This increase is due to the increased
borrowings under the Credit Facility primarily for 1998 acquisitions and the
accrued contingent fees of approximately $2.2 million due under the Credit
Facility.
LOSS ON ASSETS HELD FOR SALE - A loss on assets held for sale of $3.8
million for the three months ended June 30, 1999, reflects the reduction of the
carrying value of assets of one of its subsidiaries sold in the third
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<PAGE>
quarter to their fair value based on the final sales price to the buyer, less
selling costs.
SIX MONTHS ENDED JUNE 30
REVENUES - Revenues increased $13.2 million, or 18%, from $73.9 million in
the six months ended June 30, 1998 to $87.1 million in the corresponding period
in 1999. This increase primarily resulted from the full inclusion in the 1999
period of the results of the business acquired during 1998, offset by downturns
previously described.
GROSS PROFIT - Gross profit increased $2.7 million, or 11% from $23.5
million in the six months ended June 30, 1998 to $26.2 million in the
corresponding period in 1999. This increase occurred principally as a result of
the inclusion in the 1999 period of the incremental gross profit of the
businesses acquired during 1998. Gross margin as a percentage of revenues
decreased from 32% to 30%, primarily resulting from lower sales volumes
associated with the downturns previously described.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES - Selling, general and
administrative expenses increased $3.1 million, or 16% from $19.0 million in the
six months ended June 30, 1998 to $22.1 million in the corresponding period in
1999. This increase primarily reflected the incremental selling, general and
administrative expenses in the 1999 period of the businesses acquired during
1998. As a percentage of revenues, these expenses decreased from 26% to 25% due
to the cost reductions describe above.
INTEREST EXPENSE, NET - Interest expense, net increased $4.1 million, or
191%, from $2.1 million in the six months ended June 30, 1998 to $6.2 million in
the corresponding period in 1999. This increase is due to the increased
borrowings under the Credit Facility primarily for 1998 acquisitions and the
accrued contingent fees of approximately $2.2 million due under the Credit
Facility.
LOSS ON ASSETS HELD FOR SALE - A loss on assets held for sale of $3.8
million for the six months ended June 30, 1999, reflects the reduction of the
carrying value of assets of one of its subsidiaries sold in the third quarter to
their fair value based on the final sales price to the buyer, less selling
costs.
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 acquisitions, seasonal and cyclical fluctuations in the demand for the
Company's services 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.
LIQUIDITY AND CAPITAL RESOURCES
For the six months ended June 30, 1999, the Company's operations used $1.2
million in cash. Capital expenditures totaled $0.9 million and net borrowings of
debt amounted to $1.8 million.
In March 1999, the Company and its existing syndicate of lenders amended
the Credit Facility to provide for a stationary term component of $35 million
and a revolving credit facility of up to $45 million, up to a maximum aggregate
loan amount of $76.5 million, the proceeds of which may be used only for general
corporate and working capital purposes. The stationary term loan amount will be
reduced to $34 million beginning August 21, 1999 and to $33 million after
January 30, 2000.
14
<PAGE>
The Company's domestic subsidiaries have guaranteed the repayment of all amounts
due under the facility, and repayment is secured by pledges of the capital
stock, and all or substantially all of the assets, of those subsidiaries. The
Credit Facility prohibits acquisitions and the payment of cash dividends,
restricts the ability of the Company to incur other indebtedness and requires
the Company to comply with certain financial covenants. These financial
covenants include provisions for maintenance of certain levels of EBITDA and
other items specified in the loan agreement. Additionally, the Credit Facility
requires that the Company complete all required programming changes in
connection with the bank's Year 2000 compliance objective by September 30, 1999.
The Company believes that it will be able to meet this requirement. See "Year
2000 Issue."
The amount of availability under the Credit Facility is governed by a
borrowing base which consists primarily of the accounts receivable and inventory
of the Company and its subsidiaries, although the amount available under the
revolving portion of the Credit Facility will decrease over time and upon the
occurrence of certain specified events, such as a sale of assets outside the
ordinary course of business. Interest accrues at the prime rate as in effect
from time to time, plus 2%, payable monthly. In addition, fees accrue each
quarter at the rate of 1.5% of the unpaid principal balance under the Credit
Facility. These fees of approximately $2.2 million are accrued at June 30, 1999.
However, the Company's management is optimistic that payment of the fees will
not ultimately be required as these fees will be considered as part of an
overall restructuring plan. The entire Credit Facility matures on April 20,
2000.
The Company is currently in default under its Credit Facility, although
the syndicate of lenders has waived the defaults until August 20, 1999 and to
date has continued to permit the incurrence of debt for payroll and working
capital purposes. Company management believes that Invatec will be in compliance
with all covenants of the Credit Facility at the next measurement date or, if
not in compliance, expects to obtain additional waivers. There can be no
assurance that such waivers will be obtained.
Due to (i) the high borrowing costs associated with the Credit Facility if
it is not restructured or replaced prior to September 30, 1999, (ii) the
Company's high level of debt and (iii) the Company's belief that it would be
advantageous to resume its acquisition program on a scaled-down, strategic basis
if it had sufficient resources, the Company retained an investment banking firm
in April 1999 to assist it in seeking a significant equity infusion to enable
the Company to reduce its debt, obtain a new credit facility to reduce its
borrowing costs and potentially resume its acquisition program on a scaled down,
strategic basis. A significant equity infusion would likely have a substantially
dilutive impact on existing shareholders. It is uncertain whether those efforts
to find new equity and debt financing will be successful or that, if successful,
the Company will have sufficient resources to resume its acquisition program.
At June 30, 1999, the Company's outstanding borrowings under the Credit
Facility were $72.9 million, bearing interest at 9.75%. At August 13, 1999, the
Company's outstanding borrowings under the Credit Facility were $70.2 million,
bearing interest at 10.0% per annum, excluding the effect of the fees discussed
above.
During 1998, Company management designed and implemented a restructuring
plan to reduce the Company's cost structure, streamline operations and divest
the Company of underperforming assets. As part of this initiative, management
decided to divest a portion of one of its acquired businesses that was incurring
significant operating losses. This subsidiary was engaged primarily in the
distribution of commodity valve products and related process system components.
Management determined that the products distributed by the subsidiary did not
fit into its long-term vision of providing high
15
<PAGE>
quality repair services and value-added distribution of engineered products.
Accordingly, certain assets of this subsidiary were sold effective July 31, 1999
for $550,000 in cash. The Company applied the proceeds from the sale of the
assets to reduce its outstanding balance under the Credit Facility.
At June 30, 1999, the Company's capitalization included approximately
$11.7 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 partial consideration in acquisitions of certain Acquired
Businesses. These notes are convertible into Common Stock at initial conversion
prices ranging from $16.90 to $22.20 per share.
Three of the acquisition agreements for the Acquired Businesses contain
provisions requiring the Company to pay additional amounts (the "Makeup Amount")
to the former shareholders of each acquired business on the first anniversary of
that acquisition if the price of Invatec Common Stock on that anniversary date
is below a certain level. Two of those acquisition agreements were entered into
on July 9, 1998, and give Invatec the option of paying up to one-half of the
Makeup Amount in cash, with the remainder paid in Common Stock valued at the
market price on the anniversary date. The third agreement was entered into on
June 29, 1998 and gives Invatec the option of paying the entire Makeup Amount in
cash or Common Stock valued at the market price on the anniversary date.
The Makeup Amount is approximately $6.5 million. Shares of Invatec Common
Stock have not been issued to the former shareholders of the certain Acquired
Businesses as the Company's management is currently negotiating the Makeup
Amount with the former shareholders as part of an overall restructuring plan.
The Makeup Amount obligation of approximately $3.4 million for the acquisition
entered into as of June 29, 1998 has been accrued at June 30, 1999. The
remaining balance of approximately $3.1 million related to the acquisitions
entered into as of July 9, 1998 was accrued in July 1999.
In the event additional cash is needed to support the Company's working
capital requirements, the Company may need to seek additional financing by
increasing the borrowing capacity under the 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.
YEAR 2000 ISSUE
The Company has assessed its Year 2000 issues and has developed a plan to
address both the information technology ("IT") and non-IT systems issues. The
plan involves the replacement or modification of some of the existing operating
and financial computer systems utilized by the Company's operating subsidiaries.
The Company has not developed any computer systems for use in its business;
consequently, it believes its Year 2000 issues relate to systems that different
vendors have developed and sold to the Company for which modifications are or
will be available.
The Company has contacted the vendors that provide its telephone systems
and computer systems, as well as its OEMs. The Company has received confirmation
from its major vendors of new valves and other process system components,
telephone systems, and computer systems that their products are Year 2000
compliant. Further, the Company has replaced many computer systems that are not
Year 2000 compliant in the normal course of updating various systems used at the
operating subsidiaries. At this time, the replacement of the systems which are
not Year 2000 compliant is over eighty percent complete and the amount expended
to date is approximately $100,000. The Company believes that the cost to replace
the remaining non-compliant systems or the cost to update the systems in 1999
should not exceed $350,000, which costs will be paid for with cash flows from
operations. The Credit Facility requires that such programming be completed by
September 30, 1999. The Company believes that it can meet the requirement.
16
<PAGE>
The Company believes that any temporary disruptions would not be material
to its overall business or results of operations. As a contingency plan,
immediately prior to January 1, 2000, the Company intends to print all inventory
listings in its systems and take other reasonably necessary steps so that the
Company can operate "manually" until such time as any temporary Year 2000
problems related to its operations are cured.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Revolving credit borrowings under the Company's Credit Facility contain
certain market risk exposure. The Company's outstanding borrowings under the
Credit Facility were $72.9 million at June 30, 1999. A change of one percent in
the interest rate would cause a change in interest expense of approximately
$729,000 or $0.08 per share, on an annual basis. The Credit Facility was not
entered into for trading purposes and carries interest at a pre-agreed upon
percentage point spread from the prime interest rate.
17
<PAGE>
PART II - OTHER INFORMATION
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
The Company has been operating since June 1999 under waivers for defaults
in various covenants in its Credit Facility. The waivers are through August 20,
1999. The Company intends to negotiate new waivers thereafter and potentially a
new restructured credit facility on less stringent terms. At August 13, 1999,
the Company's net borrowings under the Credit Facility were $70.2 million. See
Note 3 to Notes to "Consolidated Financial Statements" in Item 1 and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources" in Item 2 of Part I of this
report.
18
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
EXHIBIT
NUMBER DESCRIPTION
2.1(a)* -- Merger Agreement dated June 29, 1998 among Invatec, Plant
Maintenance, Inc. and the former shareholders thereof (Form
10-K for the year ended December 31, 1998 (File No.
000-23231) Ex. 2.1(a)).
2.1(b)* -- Amendment to Merger Agreement dated as of September 25,
1998 among Invatec, Plant Maintenance, Inc. and the former
shareholders thereof (Form 10-K for the year ended December
31, 1998 (File No. 000-23231) Ex. 2.1(b)).
2.2(a)* -- Merger Agreement dated July 9, 1998 among Invatec, Collier
Equipment Corporation and the former shareholders thereof
(Form 10-K for the year ended December 31, 1998 (File No.
000-23231) Ex. 2.2(a))
2.2(b)* -- Amendment to Merger Agreement dated as of August 20, 1998
among Invatec, CECorp, Inc. (the successor corporation to
Collier Equipment Corporation), and the former shareholders
thereof (Form 10-K for the year ended December 31, 1998
(File No. 000-23231) Ex. 2.2(b)).
2.3(a)* -- Merger Agreement dated as of July 9, 1998 among Invatec,
Colonial Process Equipment Co., Inc. and Colonial Service
Company, Inc. and the former shareholders thereof (Form
10-K for the year ended December 31, 1998 (File No.
000-23231) Ex. 2.3(a)).
2.3(b)* -- Amendment to Merger Agreement dated as of September 22,
1998 among Invatec, Colonial Process Service and Equipment
Co., Inc. (the successor corporation to Colonial Process
Equipment Co. Inc. and Colonial Service Company, Inc.) and
the former shareholders thereof (Form 10-K for the year
ended December 31, 1998 (File No. 000-23231) Ex. 2.3(b)).
3.1* -- Certificate of Incorporation of Invatec, as amended (Form
10-Q for the quarterly period ended September 31, 1998
(File No. 000-23231) Ex. 3.1).
3.2* -- Amended and Restated Bylaws of Invatec (Form 10-Q for the
quarterly period ended September 30, 1998 (File No.
000-23231) Ex. 3.2).
4.1(a)* -- Loan Agreement dated July 7, 1998 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, 1998 (File No.
000-23231), Ex. 4.1).
4.1(b)* -- Amendment to Loan Agreement dated March 21, 1999 among
Invatec, Chase Bank of Texas and the other lenders (Form
10-K for the year ended December 31, 1998 (File No.
000-23231) Ex. 4.6(b)).
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<PAGE>
4.2 * -- Registration Rights Agreement dated as of March 21, 1999 by
and among Invatec, Chase Bank of Texas and the other
lenders (Form 10-K for the year ended December 31, 1998
(File No. 000-23231) Ex. 4.8).
4.3* -- Form of Warrants dated as of March 21, 1999 to purchase
an aggregate of 482,262 shares of Invatec Common Stock
issued by Invatec to Chase Bank of Texas, and the other
lenders (Form 10-K for the year ended December 31, 1998
(File No. 000-23231) Ex. 4.9).
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.
4.4 -- Second Amendment to Loan Agreement dated as of April 21,
1999 among Invatec, Chase Bank of Texas and the other
lenders.
10.1* -- 1997 Incentive Plan of Invatec, as amended (Form 10-K for
the year ended December 31, 1998 (File No. 000-23231) Ex.
10.1).
27.1 -- Financial Data Schedule.
- - - - - - - - - - - - - - - -
* Incorporated by reference to the filing indicated.
(b) Reports on Form 8-K.
None.
20
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant, Innovative Valve Technologies, Inc., has duly caused this Report to
be signed on its behalf by the undersigned, thereunto duly authorized.
INNOVATIVE VALVE TECHNOLOGIES, INC.
DOUGLAS R. HARRINGTON, JR.
VICE PRESIDENT
CHIEF FINANCIAL OFFICER
Dated: August 13, 1999
21
EXHIIBIT 4.4
SECOND AMENDMENT TO LOAN AGREEMENT
THIS SECOND AMENDMENT TO LOAN AGREEMENT (this "AMENDMENT") is made and
entered into as of April 21, 1999 by and among INNOVATIVE VALVE TECHNOLOGIES,
INC., a Delaware corporation (the "BORROWER"); each of the Lenders which is or
may from time to time become a party to the Loan Agreement (as defined below)
(individually, a "LENDER" and, collectively, the "LENDERS") and CHASE BANK OF
TEXAS, N. A., a national banking association (previously known as Texas Commerce
Bank National Association), acting as agent for the Lenders (in such capacity,
together with its successors in such capacity, the "AGENT").
RECITALS
A. The Borrower, the Lenders and the Agent executed and delivered that
certain Loan Agreement dated as of July 7, 1998, as amended by instrument dated
as of March 21, 1999. Said Loan Agreement, as amended, supplemented and
restated, is herein called the "LOAN AGREEMENT". Any capitalized term used in
this Amendment and not otherwise defined shall have the meaning ascribed to it
in the Loan Agreement.
B. The Borrower, the Lenders and the Agent desire to amend the Loan
Agreement in certain respects.
NOW, THEREFORE, in consideration of the premises and the mutual
agreements, representations and warranties herein set forth, and further good
and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the Borrower, the Lenders and the Agent do hereby agree as
follows:
SECTION 1. AMENDMENTS TO LOAN AGREEMENT.
(a) The definitions of "MAXIMUM REVOLVING LOAN AVAILABLE AMOUNT" and
"OVER/UNDER ADVANCE AMOUNT" set forth in SECTION 1.1 of the Loan Agreement are
hereby amended to read in their entireties as follows:
MAXIMUM REVOLVING LOAN AVAILABLE AMOUNT means, at any date, an
amount equal to the least of (i) the aggregate of the Revolving Loan
Commitments or (ii) the then effective Borrowing Base or (iii) for any
period, the amount set forth in the table below opposite such period (as
such amounts set forth in the table below may be adjusted from time to
time by the Majority Lenders):
PERIOD AMOUNT
4/21/99 through 5/20/99 $75,500,000
5/21/99 through 6/20/99 $76,500,000
6/21/99 through 7/20/99 $75,000,000
7/21/99 through 8/20/99 $74,000,000
8/21/99 through 9/20/99 $73,500,000
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9/21/99 through 10/20/99 $74,000,000
10/21/99 through 11/20/99 $74,500,000
11/21/99 through 12/20/99 $75,000,000
12/21/99 through 1/20/2000 $74,500,000
1/21/2000 through 2/20/2000 $73,000,000
2/21/2000 through 3/20/2000 $70,500,000
3/21/2000 through the Revolving Loan
Maturity Date $70,500,000
OVER/UNDER ADVANCE AMOUNT means, for any period, the amount set
forth in the table below opposite such period:
PERIOD OVER/UNDER ADVANCE AMOUNT
4/21/99 through 5/20/99 $1,500,000
5/21/99 through 6/20/99 $900,000
6/21/99 through 7/20/99 ($2,100,000)
7/21/99 through 8/20/99 ($300,000)
8/21/99 through 9/20/99 $500,000
9/21/99 through 10/20/99 $2,400,000
10/21/99 through 11/20/99 $1,300,000
11/21/99 through 12/20/99 $1,500,000
12/21/99 through 1/20/2000 $600,000
1/21/2000 through 2/20/2000 $2,000,000
2/21/2000 through 3/20/2000 $1,100,000
3/21/2000 through the Revolving Loan
Maturity Date $0
(b) SECTION 3.2(B)(2)(II) of the Loan Agreement is hereby amended to read
in its entirety as follows:
(ii) Borrower shall from time to time on demand by Agent
prepay the Loans (or provide Cover for Letter of Credit
Liabilities) in such amounts as shall be necessary so that on
each date set forth in the table below the ratio of (x) the
Primary Borrowing Base shown on the most recent Borrowing Base
Certificate delivered pursuant to SECTION 7.2 hereof to (y)
the unpaid principal balance of the Obligations as of such
date is equal to or greater than the percentage specified
opposite such date in the table below:
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DATE MINIMUM PERCENTAGE
4/30/99 51.00%
5/31/99 52.60%
6/30/99 55.80%
7/31/99 54.10%
8/31/99 52.50%
9/30/99 50.40%
10/31/99 52.00%
11/30/99 52.30%
12/31/99 53.30%
1/31/2000 51.70%
2/29/2000 51.30%
3/31/2000 51.30%
(c) SECTION 7.13 of the Loan Agreement is hereby amended to read in its
entirety as follows:
7.13 TURNAROUND CONSULTANT. Borrower shall retain a turnaround
consultant satisfactory to the Majority Lenders, under an acceptable scope
of work, such turnaround consultant to be retained by Borrower within
twenty-one (21) days after the Agent shall have approved the applicable
scope of work. The Agent and the Lenders will be provided access to all
consultant generated information and reports and the applicable consultant
shall report on a semi-monthly basis to Borrower, with a copy to the Agent
and each Lender.
(d) EXHIBIT J to the Loan Agreement (Borrowing Base Certificate) is hereby
amended to read in its entirety as set forth on EXHIBIT J hereto.
SECTION 2. APPROVAL OF PERSON TO PROVIDE VALUATIONS. Borrower has
nominated and Lenders hereby approve Simmons & Co. as the Person to perform the
valuations required under SECTION 7.2(S) of the Loan Agreement.
SECTION 3. RATIFICATION. Except as expressly amended by this Amendment,
the Loan Agreement and the other Loan Documents shall remain in full force and
effect. None of the rights, title and interests existing and to exist under the
Loan Agreement are hereby released, diminished or impaired, and the Borrower
hereby reaffirms all covenants, representations and warranties in the Loan
Agreement.
SECTION 4. EXPENSES. The Borrower shall pay to the Agent all reasonable
fees and expenses of Agent's legal counsel (pursuant to Section 11.3 of the Loan
Agreement) incurred in connection with the execution of this Amendment.
SECTION 5. CERTIFICATIONS. The Borrower hereby certifies that (a) no
material adverse change in the assets, liabilities, financial condition,
business or affairs of the Borrower has occurred since December 31, 1998 and (b)
except as previously disclosed to Agent and the Lenders in writing,
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no Default or Event of Default has occurred and is continuing or will occur as a
result of this Amendment.
SECTION 6. EFFECTIVENESS. The effectiveness of this Amendment is
contingent upon (a) execution and delivery to each of the Approving Lenders of
certain warrants and registration rights agreements.
SECTION 7. MISCELLANEOUS. This Amendment (a) shall be binding upon and
inure to the benefit of the Borrower, the Lenders and the Agent and their
respective successors, assigns, receivers and trustees; (b) may be modified or
amended only by a writing signed by the required parties; (c) shall be governed
by and construed in accordance with the laws of the State of Texas and the
United States of America; (d) may be executed in several counterparts by the
parties hereto on separate counterparts, and each counterpart, when so executed
and delivered, shall constitute an original agreement, and all such separate
counterparts shall constitute but one and the same agreement and (e) together
with the other Loan Documents, embodies the entire agreement and understanding
between the parties with respect to the subject matter hereof and supersedes all
prior agreements, consents and understandings relating to such subject matter.
The headings herein shall be accorded no significance in interpreting this
Amendment.
NOTICE PURSUANT TO TEX. BUS. & COMM. CODE SS.26.02
THE LOAN AGREEMENT, AS AMENDED BY THIS AMENDMENT, AND ALL OTHER LOAN
DOCUMENTS EXECUTED BY ANY OF THE PARTIES PRIOR HERETO OR SUBSTANTIALLY
CONCURRENTLY HEREWITH CONSTITUTE A WRITTEN LOAN AGREEMENT WHICH REPRESENTS THE
FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF
PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE
NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.
4
<PAGE>
IN WITNESS WHEREOF, the Borrower, the Lenders and the Agent have caused
this Amendment to be signed by their respective duly authorized officers,
effective as of the date first above written.
INNOVATIVE VALVE TECHNOLOGIES, INC.,
a Delaware corporation
By:/s/DOUGLAS R. HARRINGTON, JR.,
Douglas R. Harrington, Jr.,
Vice President
5
<PAGE>
CHASE BANK OF TEXAS, N. A.,
as Agent and as a Lender
By:/s/ EDWARD E. STRINGER
Name: Edward E. Stringer
Title: Vice President
6
<PAGE>
WELLS FARGO BANK (TEXAS), NATIONAL
ASSOCIATION
By:/s/ ROGER FREUNDT
Name: Roger Freundt
Title: Vice President
7
<PAGE>
NATIONSBANK, N.A., dba Bank of America,
National Association
By:/s/MARK L. HENZE
Name: Mark L. Henze
Title: Vice President
8
<PAGE>
COMERICA BANK-TEXAS
By:
Name:
Title:
9
<PAGE>
NATIONAL CITY BANK OF KENTUCKY
By:
Name:
Title:
10
<PAGE>
The undersigned hereby join in this Amendment to evidence their consent to
execution by Borrower of this Amendment, to confirm that each Loan Document now
or previously executed by the undersigned applies and shall continue to apply to
the Loan Agreement, as amended hereby, to acknowledge that without such consent
and confirmation, Lender would not execute this Amendment and to join in the
notice pursuant to Tex. Bus. & Comm. Code ss.26.02 set forth above.
EACH OF THE SUBSIDIARIES OF
INNOVATIVE VALVE TECHNOLOGIES,
INC.
By:/s/DOUGLAS R. HARRINGTON, JR.,
Douglas R. Harrington, Jr.,
Vice President
11
<PAGE>
BORROWING BASE CERTIFICATE
The undersigned hereby certifies that he is the _______________________ of
INNOVATIVE VALVE TECHNOLOGIES, INC., a Delaware corporation (the "BORROWER"),
and that as such he is authorized to execute this Borrowing Base Certificate on
behalf of the Borrower pursuant to the Loan Agreement (as it may be amended,
supplemented or restated from time to time, the "AGREEMENT") dated as of July 7,
1998, by and among the Borrower, Chase Bank of Texas, National Association, as
Agent, and the Lenders therein named. The undersigned further certifies,
represents and warrants that to his knowledge, after due inquiry, that SCHEDULE
1 attached hereto has been duly completed and is true and correct in all
material respects.
Dated ________________, 199____.
____________________________________
[SIGNATURE OF AUTHORIZED OFFICER]
EXHIBIT J
<PAGE>
Borrowing Base Certificate
Dated ________________
Gross Accounts Receivable ______________
Plus:
Costs in excess of billi______________ Less:
Over 90 days Old (_____________)
Foreign (_____________)
Total Eligible A/R ______________
Advance Rate 80%
A/R Borrowing Amount _____________
Gross Inventory ______________
Less:
Foreign (______________)
Costs in excess of
Billings (WIP) (______________)
Total Eligible Inventory _______________
Advance Rate 50%
Inventory Borrowing Amount ______________
Add or Subtract: Allowed Over/(under) Advance ______________
Add: Allowed Stationary Balance ______________
Total Borrowing Base ______________
Total Outstanding including L/C's (____________)
Availability/(required paydown) ______________
SCHEDULE 1
<PAGE>
<TABLE>
<CAPTION>
ALLOWED OVER OR ALLOWED REQUIRED OUTSTANDING MAXIMUM
BORROWING (UNDER) ADVANCE STATIONARY LOANS TO BB COVERAGE OBLIGATION
BASE DATE AMOUNTS BALANCE % AND "AS OF" DATE PERIOD AMOUNT
- --------- ---------------- ------------- ---------------------- ---------------- -----------
<S> <C> <C> <C> <C> <C>
1/31/99 $2.5MM $35,000,000 BEGINNING $71,000,000
2/28/99 $1.7MM $35,000,000 49.24% on 2/28/99 2/21/99 - 3/20/99 $73,800,000
3/31/99 $1.5MM $35,000,000 50.60% on 3/31/99 3/21/99 - 4/20/99 $74,000,000
4/30/99 $.9MM $35,000,000 51.00% on 4/30/99 4/21/99 - 5/20/99 $75,500,000
5/31/99 ($2.1MM) $35,000,000 52.60% on 5/31/99 5/21/99 - 6/20/99 $76,500,000
6/30/99 ($.3MM) $35,000,000 55.80% on 6/30/99 6/21/99 - 7/20/99 $75,000,000
7/31/99 $.5MM $34,000,000 54.10% on 7/31/99 7/21/99 - 8/20/99 $74,000,000
8/31/99 $2.4MM $34,000,000 52.50% on 8/31/99 8/21/99 - 9/20/99 $73,500,000
9/30/99 $1.3MM $34,000,000 50.40% on 9/30/99 9/21/99 - 10/20/99 $74,000,000
10/31/99 $1.5MM $34,000,000 52.00% on 10/31/99 10/21/99 - 11/20/99 $74,500,000
11/30/99 $.6MM $34,000,000 52.30% on 11/30/99 11/21/99 - 12/20/99 $75,000,000
12/31/99 $2.0MM $34,000,000 53.30% on 12/31/99 12/21/99 - 1/20/00 $74,500,000
1/31/00 $1.1MM $33,000,000 51.70% on 1/31/00 1/21/00 - 2/20/00 $73,000,000
2/28/00 ($0MM) $33,000,000 51.30% on 2/28/00 2/21/00 - 3/20/00 $70,500,000
3/31/00 ($0MM) $33,000,000 51.30% on 3/31/00 3/21/00 - 4/20/00 $70,500,000
</TABLE>
* Calculated by using the current borrowing base as a percent of the total
outstanding credit facility at the end of the indicated month, (e.g. The March
31, 1999 number of 50.6% is calculated using the 2/28 borrowing base of $37,056
divided by the total outstandings including L/C's under the credit facility of
$73,227.)
SCHEDULE 1
2
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM INNOVATIVE VALVE TECHNOLOGIES, INC. AND SUBSIDIARIES FORM 10-Q FOR THE
QUARTERLY PERIOD ENDED JUNE 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 32,552,289
<ALLOWANCES> 1,615,332
<INVENTORY> 27,377,358
<CURRENT-ASSETS> 65,300,383
<PP&E> 39,380,036
<DEPRECIATION> 21,096,259
<TOTAL-ASSETS> 182,242,949
<CURRENT-LIABILITIES> 97,927,211
<BONDS> 0
0
0
<COMMON> 9,665
<OTHER-SE> 70,613,875
<TOTAL-LIABILITY-AND-EQUITY> 182,242,949
<SALES> 87,103,006
<TOTAL-REVENUES> 87,103,006
<CGS> 60,902,043
<TOTAL-COSTS> 60,902,043
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,197,396
<INCOME-PRETAX> (5,807,692)
<INCOME-TAX> (546,488)
<INCOME-CONTINUING> (5,261,204)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,261,204)
<EPS-BASIC> (0.54)
<EPS-DILUTED> (0.54)
</TABLE>
